羅致恆富 (RHI) 2003 Q3 法說會逐字稿

All sites please stand by; today's conference is ready to begin. Good afternoon, and welcome to the Robert Half International third-quarter 2003 earnings conference call. All participants will be in a listen-only mode until the question-and-answer portion of today's call. (OPERATOR INSTRUCTIONS) At the request of Robert Half International, today's conferences being recorded for instant replay purposes. I would now like to introduce Mr. Harold Messmer, Chairman and Chief Executive Officer. Sir, you may begin when ready.

Thank you, and thank you for joining us. Here with me today is Keith Waddell, our Vice Chairman and Chief Financial Officer. Keith and I will be reviewing our third-quarter financial results, and in accordance with regulation FD, we'll also provides some general guidance regarding our expectations for the fourth quarter. As always, after our prepared remarks Keith and I will be happy to respond to your questions to the best of our abilities.

I would like to remind everyone as required by our counsel that our presentation contains predictions, estimates and other forward-looking statements that represent our current judgment on what the future holds. These include words such as "forecast," "estimate," "project," "expect," "believe," and similar expressions. While we believe these remarks to be reasonable, they are subject to risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. Some of these risks and uncertainties are described in today's press release and in our Form 10-K and other filings with the SEC. We undertake no obligation to update the statements made in this conference call.

Now let's review the third quarter. Revenues for the quarter were $501 million, up 3 percent from the third-quarter of 2002. On a sequential basis, revenues were up 4 percent from the second quarter of this year. Overall, earnings per share were 3 cents compared with negative 2 cents for the third quarter of 2002, and earnings that were break even last quarter. Our staffing operations had earnings of 4 cents per share for the quarter, and Protiviti had negative earnings of 1 cent per share.

RHI's cash flow from operations was $36 million for the quarter before capital expenditures of $10 million. As is obvious, continue to generate strong cash flow. We ended the third quarter with $344 million in cash and equivalents in the bank after the repurchase of approximately 400,000 shares of our company's common stock during the period. This leaves approximately 9.6 million shares available for repurchase under our stock repurchase program previously approved by our Board of Directors.

We were encouraged by the improving economic conditions during the quarter, including the growth in the temporary services sector. In addition, our Protiviti subsidiary had particularly strong performance, exceeding both the revenue and earnings guidance we provided you last quarter.

Keith will now provide you a more detailed overview of our third-quarter financial results, after which I'll make some additional comments.

Thanks, Max. Before I begin, I'd like to remind everyone that a copy of our press release is on our website at rhi.co

As Max indicated, revenues for the third quarter were 501 million, up 3 percent from last year. There were 64 billing days in the quarter -- it's the same as Q3 last year, and also the same as Q2 this year.

Third-quarter revenues for Accountemps were 206 million, down 2 percent from last year, and up 1 percent sequentially on a same-day basis. Accountemps is our largest staffing division, with 330 locations worldwide. This business represents 41 percent of total revenues.

OfficeTeam had revenues of 128 million, up 4 percent from last year, and up 2 percent sequentially on a same-day basis. OfficeTeam began operations in 1991, has 310 offices worldwide, and is our high-end administrative staffing division. It accounts for 25 percent of revenues.

Robert Half Technology revenues were 55 million for the quarter, flat compared to last year and up 6 percent sequentially on a same-day basis. Launched in 1994, this division specializes in placing IT professionals on a consulting and full-time basis. It has 104 locations worldwide, and represents 11 percent of revenues.

Our Robert Half Management Resources division had revenues of 51 million, down 4 percent from last year and up fractionally on a same-day sequential basis. As we noted on our last conference call, these revenues do not include the benefit of intracompany revenues to Protiviti where Robert Half Management Resources supplies project staff for Protiviti's engagements. Robert Half Management Resources was introduced in '97, specializes in placing senior-level accounting and finance professionals on a project basis. It operates in 97 offices worldwide, and accounts for 10 percent of revenues.

Our permanent placement division, Robert Half Finance and Accounting, reported revenues for the quarter of 24 million, down 5 percent from last year and down 2 percent sequentially. This business accounts for 5 percent of total revenues. It was established in 1948, and operates 330 offices worldwide.

Protiviti had revenues of 38 million for the quarter, comprising 8 percent of RHI revenues. This business offers companies full outsourcing, co-sourcing and consulting services in the area of internal audit and risk consulting. Protiviti has 34 offices in the United States, Europe and Asia. As we discussed on last quarter's call, we're working with a growing roster of clients in such areas as Sarbanes-Oxley Section 404 compliance, regulatory and forensic investigations, technology security, and the establishment of new internal audit functions.

International staffing revenues were 86 million for the third-quarter, up 2 percent from last year and down 1 percent sequentially. Our staffing divisions currently operate in 60 (ph) locations in 10 countries outside the U.S. International staffing operations account for 18 percent of total staffing revenues.

Turning to gross margin -- temporary and consulting staffing gross margin was 154 million for the quarter, representing 35.1 percent of applicable revenues. This compares to 35.3 percent of revenues for Q3 last year, and 35.2 percent of revenues for Q2 this year. The 14 basis point sequential decline is due primarily to continuing higher cost for state unemployment insurance.

Overall, staffing gross margin was 178 million for the quarter, or 38.4 percent of staffing revenues. This compares to 38.7 percent of revenues for Q3 last year, and 38.7 percent of revenues in Q2 this year. In addition to the temporary consulting gross margin declines just mentioned, overall staffing gross margins also declined sequentially due to a lower mix of permanent placement revenues.

Gross margin for our Protiviti subsidiary was 9.4 million for the quarter, and 24.7 percent of Protiviti revenues. This is a sequential improvement of 6.8 million versus the second quarter, and was driven primarily by higher revenues.

Staffing selling, general and administrative cost for the quarter were 166 million, representing 35.8 percent of staffing revenues. This compares to 36.3 percent of staffing revenues for Q3 2002, and 36.2 percent (ph) for Q2 2003. The lower SG&A percentage for the quarter resulted from the higher sequential revenues leveraging fixed operating costs.

Protiviti SG&A costs were 10.3 million for the quarter, down `1 million sequentially from the second-quarter. The reduction relates primarily to lower international startup cost during the quarter.

Operating income from our staffing divisions was 11.9 million for the quarter. The temporary consulting divisions contributed 11.4 million of this amount, while the current placement division had operating income of 0.5 million.

Protiviti had negative operating income of 0.9 million for the quarter, which was a 7.9 million improvement from the second quarter. Intangibles amortization was 2.7 million for the quarter -- and remember that this charge ends in December of this year.

Cash and equivalents were 344 million at the end of the quarter. This was after funding 10 million in capital expenditures and repurchasing approximately 400,000 RHI shares in the open market during the quarter.

Accounts receivable were 233 million at the end of the quarter but implied (ph) days outstanding of 42 days. This compares to 45 days at the end of Q3 last year and 42 days at the end of Q2 this year. We continue to be pleased with the management of our accounts receivable.

Turning to guidance -- this time, we'll offer general guidance for the fourth quarter of 2003. As you know, we do not assist analysts with our detailed models.

Our guidance is based on the following business trends. On a same-day sequential basis during the third quarter, temporary and consulting revenues were flat in July, down in August, and up in September. Permanent placement revenues were down in July, and up in August and September. For the first week of October, revenues from our temporary consulting businesses were up 1 percent versus September. For the first two weeks of October, revenues from our perm placement division were down 8 percent sequentially versus the first two weeks of September. As we have emphasized before, perm revenue trends are difficult to measure over such short periods of time.

Based on these trends -- plus the expected holiday impact usually experienced in the fourth quarter, where there are at least two fewer billing days -- we offer the following Q4 guidance. Staffing revenues -- 445 million to 465 million. Protiviti revenues -- 34 million to 38 million. Staffing earnings per share -- 2 cents to 4 cents. Protiviti earnings per share -- negative 2 cents to negative 1 cents for the quarter. As always, these estimates are subject to the risks mentioned in today's release. I'll turn the call back over to Max now for additional comments.

Thank you, Keith. I would characterize our overall mood as cautiously optimistic. As Keith noted, the holidays in the fourth quarter do add an additional element of uncertainty to our efforts to provide you with sound earnings guidance. While business trends have certainly improved since early summer -- and this was especially evident in September -- we still would like to see a stronger labor market. While the unemployment rate held steady in September, initial and continuing unemployment claims remained relatively high.

On the positive side, however, temporary industry employment is at its highest level in two years after five straight months of job growth. In fact, this is the first time since the third quarter of 2000 that every one of our temporary staffing and consulting divisions experienced sequential revenue growth. And this of course gives us some optimis

Taking a somewhat longer-term perspective, we have weathered nine recessions in our company's 55 year history, and we do believe we are well prepared to rebound strongly as hiring demand strengthens. RHI has an extraordinarily team of seasoned field managers in place, and they have worked hard to prepare offices for a strong recovery. We have maintained our local networks, and we believe we have retained our best talent.

We are particularly proud of the progress made by our Protiviti subsidiary (technical difficulty) From our launch in May of last year, Protiviti has become a well-recognized and highly respected source for internal audit and business and technology risk consulting services. We continue to benefit from increased demand in the marketplace for an alternative to the Big Four, and are competing effectively for new clients. With respect to the Sarbanes-Oxley Act, Protiviti has distinguished itself as a thought leader with deep skills and industry-leading tools and methodologies to assist clients with demanding compliance work.

Although Sarbanes-Oxley is an important source of demand, our project portfolio remains diversified, with expanding work in regulatory and forensic investigations, IT security, and the establishment of internal audit functions for our clients. We are also benefiting from cross-sell opportunities between Protiviti and our professional staffing divisions.

We continue to be confident about our long-term prospects. RHI is an excellent financial condition, with no debt, a strong cash position, an excellent team of field leaders, strong brand names, and a long history of success.

At this time, Keith and I will be happy to respond to questions. We also would like to allow as many people as possible to participate, so we ask that you please limit yourself to one question and a single follow-up as needed. If you have additional questions, we'll certainly try to return to you later in the call.

I think we're ready for questions, operator.

Greg Cappelli, Credit Suisse First Boston.

Yes, thanks, it's Greg and Josh at CSFB. Congratulations on the continued progress, particularly at Protiviti, guys. Just -- most interested in the 6 percent sequential improvement at -- on the IT side. Just curious as to what's behind that, if there's any regional strength there? Just a little more color would be helpful.

As you know our Robert Half technology division has two components -- tech development and tech support. The strength we saw during the quarter was primarily in the tech support area. Within tech support there were a couple of drivers. First of all, you see a fair number of clients upgrading from Windows 98 to Windows Server 2003. Evidently, free support for Win98 ran out on July 1st of 2003. I'd say the other driver was the viruses that have occurred during the quarter -- and to some extent, prior to that. When there are these big viruses, there's help-desk demand. There's demand for people to go in and put the patches, installed the patches on the desktops. So although of viruses are certainly unwelcome, they do drive a little extra demand.

Okay. And then a follow-up just related to the tax rate, which is bouncing around obviously as profitability has bounced around a little bit. Any guidance there for the fourth quarter, and year sort of going forward from there?

We've talked about this on several calls in a row. We kind of got the cumulative effect of certain states where you're a separate corporation with Protiviti, where those losses can't offset Robert Half income. You've got some international losses in countries where Robert Half doesn't have a presence where you can't offset that income. And furthermore, you have got certain nondeductible expenses like meals, etc., that at small income levels seem to have an exacerbated impact on the tax rate.

So we did have a higher rate this quarter. We coached that in the last conference call. I'd say on a go-forward basis that it's probably 40 to 45 percent as a range for the fourth quarter, and as we return to higher levels of income, that range should normalize back out to in the mid '30s.

We said on the last call the rate could very anywhere from 25 to 60 percent because of the reasons Keith indicated. In fact, if you look at this quarter, there is about a half a penny negative impact from the higher tax rate relative to the rate we traditionally have.

Jeff Silber, Harris Nesbitt Gerard.

Good afternoon. My question deals with Protiviti. Now that you've been in this business for a little over a year, I was wondering if you can tell us -- one, in terms of I guess the normal seasonal trends you think we should expect going forward, and if you have more color or further guidance on where you think the business is heading in terms of, quote-unquote, normalized margins, both on a gross margin and operating margin side?

As to seasonality, clearly there's an expectation that there would be a seasonal impact from the holidays in the fourth quarter that is probably more pronounced than the seasonal impact you see in staffing. Many of our clients have forced or highly encouraged vacations in and around Thanksgiving, Christmas and New Year's, and our people are expected to do the same. So even last year when we were just ramping up, we went down sequentially in the fourth quarter. And the expectation is that that will happen again, and that is incorporated into our guidance.

As to the margins, I think you can see from the results of this quarter the unbelievable impact of operating leverage as you ramp up the revenues with a fairly stable base of employees on the Protiviti side. So our guidance continues to be one quarter at a time, but we have said many times that both at the gross margin line and at the operating margin line at steady state, Protiviti should have margins that are higher that staffing.

Okay, just a follow-up on the seasonality -- and again, I'll just talk about the fourth quarter. It looks like you might be looking for a slight sequential decline in non-Protiviti revenues. Do you expect to see it in one division as opposed to others, or just all across the board?

Remember, Jeff, that at least a two-and-a-half day negative impact you have got to grow to revenues 4 percent just to come back to the same spot. And 4 percent sequential growth would actually be more sequential growth than we just reported. So my point is, we gave a range, the top of which assumed 4 percent sequential growth, but the same kind of sequential progress would actually give you a down sequential revenue quarter.

Great, thanks a lot.

Andrew Steinerman, Bear Stearns.

Hi guys, could you just talk to us, sort of -- SG&A levels into the fourth quarter? Obviously, as you keep on pointing out, the leverage factor -- you have been able to increase revenues maybe 6 percent into the first quarter, with keeping SG&A only increasing 2 percent. But if revenues do go down sequentially, is SG&A going to stay the same, or might it go down?

The natural buffer in our incentive compensation plan says that if (ph) revenues and gross margins go down, there will be a corresponding impact to our compensation cost. So on down revenues, all things being equal, there ought to be some savings in SG&A just because of the natural playout of our comp plans.

And do you have a sense of what operating margins assumptions are embedded in the guidance that you gave?

They don't change dramatically. You lose a little bit of fixed cost leverage if you have got less Q4 revenues due to the shorter quarter. But at similar revenue levels, the projection is that the margin structure doesn't change much.

Matt Litfin, William Blair.

Hi, good afternoon, gentlemen. I wondered about the sequential growth in Protiviti revenue. Was that purely -- well, did that have to do more with the number of consultants, as far as the headcount? Or was it the utilization rate from the -- a more stable headcount across the quarter that contributed to the strength?

Matt, you can look at the fact that virtually all of our incremental revenue fell into gross margin, save some extra reimbursable expenses. What that says is that on essentially the same headcount we had 7-plus million more in revenue. So it was increased utilization of the staff we already had, rather than an increase in net staff.

I was interested because of the changes in the compensation plan that you guys have made at the one-year anniversary. Maybe if you could just address those changes?

As we said last time, we tweaked to fixed versus variable component of comp, and as you get to higher levels in Protiviti, that variable component gets more equity-oriented. But there aren't -- there weren't huge orders of magnitude impact to the P&L cost for the MD (ph) group before or after the change.

Great. Thanks, and congratulations again.

Marta Nichols, Banc of America Securities.

Thanks. Another question maybe on the SG&A leverage side. You mentioned that if you see some deleveraging on the revenue side in the fourth quarter, comp will help make up to that. But I' m curious -- given that your temp revenue, for example, was up as much as it was -- kind of sequentially, say 11 or 12 -- I guess roughly $11 million -- your SG&A was only up say a million to 2 million. Is that the kind of leverage we should be assuming in SG&A? That for a kind of $10 or $12 million revenue increase, you only have to go up that much on SG&A, and that's -- assuming that's primarily incremental comps to your internal consultants?

Well, clearly, there are fixed costs that you do lever. And over $10 million increments, those are not huge increases such that you don't have to gear up a whole different infrastructure level to deal with. So -- plus $10 million -- I don't think it's out of the question that what you saw, we could repeat.

Okay. And can you give us some sense of where you are at in terms of utilization on Protiviti, just as a follow-up to what Matt was asking? Are you at the point where you feel like you need to actually start adding incremental people there? Or are you still at relatively low levels of utilization (multiple speakers) what you brought on a year ago.

We're certainly approaching a level where we're going to have to begin to add people to continue the growth of Protiviti. As you know, for 16 months, we've been working very hard to utilize the people that we brought over from Anderson. And this past quarter kind of the shows you the power of leverage by getting better utilization of the staff.

As we move forward, we've also talked about on several calls that our pyramid is a bit top-heavy relative to a steady state expectation. Translated, that means the additional hiring we need to do to fuel Protiviti's growth will be weighted toward the bottom part of the pyramid, or new staff or senior-level staff, rather than manager and partner-level people, so that the incremental revenue will carry a lighter-than-steady-state incremental cost, because it's going to be primarily filling out the bottom of the pyramid -- bottom in terms of tenure, not in terms of quality.

Okay. And then just a quick follow-up on the Protiviti question. You had mentioned on the last couple of calls that your Protiviti works was significantly less (ph) than -- I want to say, 40 -- 50 percent Sarbanes-Oxley. Is that still the case?

It is very much still the case. They've had a very diversified set of winds in the marketplace, and we're very happy about that.

Randell Mehl, RW Baird.

Good afternoon, Max and Keith. I want to follow-up on the seasonality questioned asked earlier. Seems like before the past two years, you've shown good sequential increase in Q4, particular in the Accountemps. You don't expect -- you don't seem to be expecting that to happen this year. So I just want to better understand your response to that?

The distinguishment I would make, Randell, is kind of momentum (technical difficulty) going into prior fourth quarters was different than the momentum going into this fourth quarter. Clearly, we've been bumping along the bottoWe have seen some signs of improvement now the last couple of quarters, but it's nothing to write home about. And therefore, you can't avoid the fact that we have a shorter quarter. And so the thought is, as we're just coming out of this downturn, hopefully, we needed to moderate our expectation yet another quarter.

Randell, we hope we're being conservative, but I think Keith stated it pretty well. It just seems prudent to take a somewhat more conservative stance, given where we are in the economy.

On the momentum point, if you kind of reflect on what we said about the intra-quarter impact, we were essentially flat the first two months of the quarter, and all our sequential growth occurred in September. So if you grew 2 percent for the quarter, and all that happened in the third of the quarter, pretty simple math shows what kind of growth you had during the month. And that's a good thing.

Absolutely, and I understand now. Now in terms of the Protiviti -- same question around seasonality in Protiviti. I understand why you would expect that to fall off a bit. But what does the current pipeline indicate about activity going into early next year?

The pipeline is very good, the pipeline is very strong, and we feel good about that. But we've got this holiday impact, which -- the belief inside Protiviti is will be a little more significant than the typical holiday impact we see in staffing. Since we've got a grand total of one historical data point, it is hard for us to have a lot of unique knowledge on the point.

I think on the pipeline point, Randell, all I would add is something I've said in the past. It's really difficult to exaggerate the acceptance that Protiviti is finding in the marketplace. This is a very strong group of professionals, and they're being very, very well received. And the longer they operate, and the more exposure they get, it seems the greater acceptance they have. So we continue to be optimistic about what you described as the pipeline.

Thank you very much.

Chris Gutek, Morgan Stanley.

Hi, Max and Keith. Max, in your prepared comments, you talked about the lingering weakness in the labor markets and the fact that labor products really (ph) growth is correspondingly high. I know you guys aren't economists necessarily, but you do have a good view on the labor market. Is it your impression based on the feedback you hear from your customers that labor productivity can stay fairly high driven by IT investments within corporate America? Or conversely, do you think there's a lot of pent-up demand that -- corporations are working their workforce too hard, and once GDP growth states relatively high for a few more quarters, that pent-up demand will get unleashed? Or is it somewhere in the middle?

I think in short, we'd say the latter of the two alternatives you outlined -- and you're certainly right that we're not economists, something I've noted probably in every conference call.

We said we're cautiously optimistic. We actually do see attitudes of clients -- particularly small- to midsize clients, I think, changing as we sit here today on the call. They are clearly becoming more optimistic. They're cautious about permanent hiring, and that of course is a good thing for the temporary staffing business -- less so for the perm division. But it also follows a very typical pattern coming out of the last nine recessions. In almost every case those companies led first with temporary and then moved to permanent.

So at the end of the day, I would say the typical small- to midsize clients we have probably is somewhat more optimistic today. They're still very cautious and tentative, but they are more open to the use of temporaries. You want to add anything to that, Keith?

There's been -- a little follow-up here -- there's been quite a bit of talk in the media about financial jobs being outsourced to India and elsewhere. Is this something that would have the potential to move the needle in terms of impact on your demand? Or, because your customers are smaller businesses, this is something you're not really concerned about?

I really think, Chris, that applies -- to the extent it applies at all, because my own view is that the press is -- there's perhaps some hyperbole at work in the press, which I know will be a surprise to you, but -- I think it's a factor more with large companies than with typical small- to midsize companies. I think that outsourcing may make sense at certain job levels for certain companies, but is certainly not the panacea that you might conclude it is in the press, and we have a lot of experiences with clients that could attest to the fact is not as easy or as inexpensive as you might think. And I think the more midsize to small company you are, the less sense it tends to make.

You'd be surprised at the number of engagements we get where they outsource something to India, and now they are dual-sourcing, which is a euphemism for -- they sent too much overseas, and they need to bring some of it back over here. And you'd be surprised how many engagements we have gotten around that driver.

Interesting. Great, thanks guys.

Brandt Sakakeeny, Deutsche Bank.

Good evening. One question on the pricing environment, Keith and Max. Do you mind just talking about how pricing environment I guess has changed, if at all from the second quarter? And if you think things have gotten more competitive or less competitive? Thanks.

I'd say there's very little change. Our state unemployment cost rose a little bit. Every state isn't on a calendar year basis. You've got on kind of midyear basis, and some of those midyear states raise their rates effective July 1st. So you saw that play through our gross margin. But from a pricing standpoint and a pay level standpoint to our temporary employees, there's very little change.

Okay. If I could just sneak in a quick detail question. The fourth quarter '02 versus fourth quarter '03 -- could you just reconcile the number of billing days and holidays? I thought they were pretty similar.

I think that's right. Year-over-year, Q4 looks about the same in terms of billing days. Again, that is staffing as opposed to Protiviti. (technical difficulty)

It's actually 2 and a half, but we've rounded a full day for what we put in our releases. (multiple speakers) (technical difficulty)

On your pricing question -- just a footnote to what Keith said -- if you think about the fact that our typical client in our staffing divisions is less than probably one-fourth or even one-fifth of 1 percent of our revenues -- that is, there are typically two to three workers on an assignment at a given time, the focus of our clients is much more on what the cost will be to get a particular job done or a particular project. It's less on the hourly rate. Everybody says their concern is price, but more often than not, it's really the value proposition. So again, I don't think the pricing environment has changed. And I think the quality consciousness is always going to be there. And that's something we've worked with well in the past.

Mark Marcon, Wachovia Securities.

Good afternoon, and congratulations on the return to profitability. With regards to the outlook -- I was wondering if we could look a little bit forward out to next year. Can you give us a feel in terms of -- you know, let's say we end up with a 15 percent type of increase in terms of your revenues on the staffing and perm side. What sort of margins could we get out of something like that?

Well, Mark, as you know, we limit our specific guidance to one quarter out. So we can't get real specific. We have said that our gross margins are intact through this downturn. There's no reason to believe, as we grow out of this downturn, that we could maintain those gross margins. So you can plug that into your model. As to your operating margins, which those are -- been driven by SG&A, have negatively levered fixed cost during the downturn -- we would expect that to reverse itself as we start to add revenues. And we've also talked with a few calls now be that you can kind of reverse-engineer what it looked like coming down and get yourself in the ballpark for what it should look like coming out.

Those costs that created in their negative leverage are costs that ought to be leverageable as we move back up. We have carried a physical footprint infrastructure cost higher than our revenues would supported during this downturn, such that we would be well-positioned should -- when things get better, and therefore, those are costs that ought be leveraged as we add revenues.

So we can just basically look at the old revenue levels and kind of reverse back into that.

The only caveat I would give you is that you have to mix-adjust between perm and temp. And typically, perm takes a little longer to come back than does temp. So that mix element is an important element when you do your go-forward models.

What is your sense in terms of perm declining a little bit here in the third quarter, relative to the second quarter?

Well -- a, it's not a very large decline; b, as we've talked about before, perm, by its nature, jumps around a little more. So I wouldn't read much into it at all. Remember (multiple speakers) remember, too -- you had a little stronger second quarter in perm than you did in the staffing side.

And with regards to your comments in terms of the monthly trends. You've indicated that on the temp side that things were flat in July, and then down in August, and then back up in September. Was the level you reached in September higher than what you had in August?

Higher than what we had in August?

Or higher than where you --

We ended -- because we had sequentially growth, and all of that growth occurred in September, we ended higher than where we started.

Okay, great. Thank you.

Kelly Flynn, UBS.

Thanks. Keith, we told you we were going to try this question, so here we go -- about how many temps on average did you have during the quarter?

That is something that we have never disclosed publicly. We have given orders of magnitude if you're trying to back into bill rates. And we have given orders of magnitude kind of bill rates by division. But showing how many people out on assignment -- that is not something we've ever disclosed.

Okay, fair enough. I'll move on to another question. Last quarter I was surprised when you mentioned workers' comp as an issue you were facing. Could you just speak to that? First of all, why would you guys have any exposure there, and is there anything going on this quarter?

The answer is -- there's not really any exposure. Our people are all white-collar people. To the extent there's workers' comp issues, it's usually more back problems or falls, that type of issue. Sometimes there are stress claims in a downturn that end up in workers' comp. But we tend to group conversationally workers' comp with unemployment, and unemployment is much more the bigger issue with us. And that is simply a state-by-state revenue generation activity. Their unemployment funds have been depleted during this downturn, and they've raised the rates. And the only reason it was mentioned was because conversationally we tend to put workers' comp and unemployment together when we talk about the

Okay. Actually back to the last question -- can you give us any kind of order of magnitude numbers on bill rates?

Yes, I kind of set myself up -- (multiple speakers)

Yes, you did.

Okay, Accountemps is mid-20s; OfficeTeam is high-teens; the consulting side is mid- to high-40s, and that's blended between development and support; management resources is the low-70s -- and I think that's it.

Okay.

Fred McCrea, Thomas Weisel Partners.

In terms of the OfficeTeam business -- looks like it showed about 2 percent sequential upticks. Was there a geographic spread on that? Or was that pretty much across the board? We've heard in the Bay Area that things were -- (multiple speakers)

There was no geography differences that just scream at you. There are always minor differences here and there, but nothing that just beats you over the head.

Okay. And then in terms of the DLS (ph) data -- how closely do you guys track that, or does it correlate to your direct business, in terms of -- quarter-to-quarter, in terms of the number of temps that are out there.

We've had this discussion over many years, too. We believe that DLS data is very light-industrial, blue-collar, and low-end clerical-oriented. And so there is some meaning there obviously, to kind of where the industry generally is headed. But it hasn't correlated that closely with the professional side of the staffing business.

Jim Janesky, Janney Montgomery Scott.

Yes, good afternoon. I noticed in your permanent placement division that the amount of SG&A in the division was higher by quite a bit sequentially than while revenues were down. Did you -- I mean, are you gearing up for an expected hiring recovery next year by hiring more people who are not hitting their peak productivity, or if you could just give us some color there?

We identified three or four markets where we thought there was particular upside. And based on what we were seeing in those markets, we decided to add that staff. And its those additions to staff that are driving the profitability impact that you're talking about.

But clearly, just based upon normal seasonality in the fourth quarter -- you would not even expect a big uptick in the fourth quarter -- or would you?

7 of the last 10 years, we've had a negative seasonal impact in perm in the fourth quarter. The month of December typically is a nail-biter in the perm business. It's feast or famine. 7 of the last 10 years, it's been more of the latter.

Right. And did you say that in permanent placement for October, it was -- while it is lumpy, which you have stated consistently -- for the first two weeks of October, it was down 8 percent?

Right.

Okay. And then a follow-up on Protiviti's SG&A level. You said less investment in the international offices, but you had also said, you know, in order historically that there was some, I guess (technical difficulty) over a normal dollars that you would spend on advertising and name branding and those sorts of things you know to get the Protiviti name out there. And we still see pretty large ads in the Wall Street Journal, for example.

Could you kind of classify where you are in that process? Do you think that the bulk of that is behind us, or will there still be more spending going forward?

I think the question is -- and this discussion happens every quarter, and it's evolving, and -- do you grow into what you are already spending, or do you reduce in absolute terms what you're now spending? And those discussions continue.

But we believe our ad campaigns -- particularly the Wall Street Journal -- have been very effective. We also are very active with direct mail. We updated our Sarbanes-Oxley 404 FAQs for the final regs during this quarter, and we mailed out thousands of those to our client list. So I think the returns to date have been that we're very pleased with the impact of the advertising, and that if you had to ask us this second, we're more likely to kind of grow into what we're now spending than we are to cut it back in absolute terms. But again, we're 16 months into this business, so nothing is cut in stone.

In the early stages, it's obviously important to have the new name understood and appreciated and so forth. And longer-term, we'll just have to see what we do. And it's possible it won't be as important to do the same level of advertising. But in general, if you look at our history in staffing, we've always been fairly committed to what a lot of people think is a large advertising budget.

At a minimum, you ought (ph) to leverage what you are now spending.

(OPERATOR INSTRUCTIONS) Leon Young (ph), Smith Barney.

Hi, this is actually Tracy Braes (ph). Just following up on the positive growth in the OfficeTeam division. I'm just wondering if that is -- if it's normal at this point in the cycle to be seeing that recover before, say, the Accountemps division.

Clearly the classical pattern in the staffing business is for the blue-collar and clerical or pink-collar part of the sector to grow first. So, to the extent you kind of subscribe to the classical recovery theory, our OfficeTeam being an earlier participant than the higher professional levels would confirm that.

Historically the large generalist firms will come out of such a recession somewhat earlier than we will. They'll also go into the recession earlier and we did. And that's pretty much what happened this last time around.

Okay, but -- so then, comparing to some of the other industry players who have said their office segments are weak. Is your -- why do you think yours is stronger than them? Is it a different niche, or --?

Well, you've also got a different client base -- that we're dealing more with middle market companies than we are with Fortune 1000 companies. I'd say that, with the Fortune 1000 companies, there's more Sarbanes-Oxley-related accounting demand than there is with the middle market companies. But it's not clear to me why at the office level there would be that big a difference between the trends we're seeing and the other firms.

Okay, and then just also on the international -- can you just give a little bit more color on where you're seeing strength and weakness now, and what your plans are?

Well, there wasn't much change, quite frankly, internationally one quarter to the next. There was very little currency impact on a sequential basis, as well. So I'm not sure there's anything particularly noteworthy to talk about internationally.

Adam Waldo, Lehman Brothers.

Max and Keith, thanks for letting me ask my questions. You know, you made relatively few share buybacks again in the current quarter just ended, and with the Big Four de-conglomeration (ph) process accelerating and a number of the Big Four firms having pieces of their financial advisory services business effectively up for sale -- I wonder how we should think going forward about call on capital -- as between acquisitions and share buybacks as you think about corporate development?

Well, it's a very good question, Adam, and we have attempted to be opportunistic in the past, and I'm sure we will be in the future. I guess I'd add one more element to potential calls on capital that is always under discussion, but perhaps more so since the tax law changes than before, and that would be dividends. We get some inquiries about -- would you pay a dividend, etc. No decisions have been made, but we are obviously looking at that.

As for the Big Four, I think we enjoy good relationships with those firms. We've said before that we think Protiviti provides a potential platform for further expansion into services we now offer and services we would like to offer. And so all I can say is that we have those things in mind, and we're looking at various things from time to time. It's hard to sit here today and give you an estimate as to what the appropriate level of capital would be required for any of the above. I have always liked the fact that we're a good cash flow business, even in tough economic times. So we would like to think that we're not going to be capital-constrained with respect to any significant opportunities that should arise.

I would say, too, Adam -- the question would be to what extent we can lever internally the Protiviti staff we already have to expand into some of those other areas. And you do the classical make-versus-buy analysis to determine where you get your better returns. Even though Protiviti has been painful from the standpoint we've had to run our investment through the P&L, the facts are our cumulative investment to date in Protiviti is $63 million, and I don't think there would be many opportunities in the Big Four today were we could buy similar-sized businesses for $63 million.

I've always like that venture capital bet, gents (ph). Could you also comment on your thought process around expensing options in '04?

Well, the issues with options in our judgment has always been difficult from a valuation standpoint. Options have been offered to all of our employees for 15-plus years. We feel like they have been an integral part of -- all of our staff feeling they have a piece of the rock. And given that they're our principal revenue drivers, we always thought it important to their compensation to be -- to have equity as part of that.

That said, our current plan is to kind of wait and see. We don't have a current plan to expense options in '04. It is our understanding that there's a lot of discussion at the FASB level about how options are going to be valued -- and we could spend an hour on the pros and cons of black shoals (ph) and the binomial (ph) method -- but the short answer is, we don't have a current plan to expense options in '04.

Okay, that's very helpful. And finally, just -- I know this has been asked a lot of different ways, but you posted a 7.9 million sequential increase at EBITA at Protiviti on a $7.4 million sequential increase in revenue. And, obviously, that's counterintuitive to everybody on this call. So I wonder how we should think about variable contribution margin at the EBITA line with incremental revenue going forward at Protiviti?

Well, you're not going to see much more of that, because what happened was -- on essentially the same level of direct cost or staff, you added revenues. And further, because you had less startup cost internationally, you had less SG&A. So what you did was you better utilize your existing staff, and essentially all of your revenues fell to the bottom line -- which is a wonderful thing to happen.

As we talked about earlier, as we go forward, we're going to have to add staff at the more junior levels, which will still drive a very lucrative, or very -- relative to staffing, a better incremental contribution margin. But we have never gotten specific as precisely what percentage that would be. I still come back to -- blended with what we now have at steady state, Protiviti should have better margins -- at the gross line and at the operating line.

Keith, I'm not questioning that I think your margin targets, long-term, that you have set for that are conservative. I was just trying to think about more in the near-ter

Again, our near-term guidance is kind of limited to fourth quarter, and the fourth quarter, at best, is going to look like the third because of the seasonal patterns that we have talked about.

Chandy Smith, CIBC World Markets.

Yes, can you comment generally on your plans for office expansion at Protiviti, both domestic and international, and give the breakout of where the 34 offices are currently domestic and international?

Well, I believe you can get the location of each of our offices if you go to protiviti.com, and it breaks out those locations. The near-term plans, as we have talked before -- there are a handful of different -- of additional countries internationally that we would like to be. We have some global clients that would like us to have some coverage that we don't now have. We have active discussions going in a couple of those countries.

Domestically, there is probably three to five places we would also like to be where we are not. But Protiviti expansion isn't necessarily going to be about numbers of locations. It's going to be people per location. And as you know, the Big Four firms have never had the kind of office count that staffing firms have.

Okay, thanks.

(OPERATOR INSTRUCTIONS) Chris Gutek, Morgan Stanley.

Hi, thanks -- I had one follow-up question regarding Protiviti. As we get towards the next summer implementation deadline for Sarbanes-Oxley, and certainly recognizing that's only one of many drivers for the Protiviti business -- how much of that business would you expect to go away -- the Sarbanes-Oxley business in particular? And conversely, how much recurring annual maintenance work would you expect to come out of that -- from that area?

Chris, it's a great question, and the answer is we don't really know. But we are very mindful of that -- currently, at the end of 2004, everybody has to be in compliance, and the pure compliance work would end. There is, I would say, a growing optimism that remediation work would follow from that, further process control work would follow from that. But nobody knows precisely what is going to happen post Sarbanes.

The sense is, this isn't a year-2000 type phenomenon, where it just dies the next day. But clearly, there's some risk to the revenue stream post-404 -- and believe me, we are mindful of that. As we said earlier, less than half of our revenues are 404-related. We have got internal audit, what we hope to be annuities, and what history would say act like annuities, that are in the mix. And it is our objective to add more and more of that recurring-type work into the portfolio.

Mark Marcon, Wachovia.

One follow-up to Chris's question and a few others. With regards to the drop-off -- how are you the managing for that? Are you putting some -- are you assigning some of the Sarbanes-Oxley work to some of the people that are coming in through management recruiters who are more on a temp basis? Or -- how do you manage the head count for that?

Clearly, part of the solution is to have just-in-time staff, and that just-in-time staff comes principally from Management Resources -- Robert Half Management Resources. So part of what we are doing is saying, let's have a layer of compensation cost that is variable at the Protiviti level in the form of Management Resources, and part of it is just kind of gauging the confidence level that we'll have work beyond the Sarbanes-Oxley period to keep those people busy. And all I can say is -- kind of from where we started with 404 to where we are today, there is more optimism post-Sarbanes then there was when we started.

The only comment I would add is that there's tremendous sensitivity in the boardroom and the audit committee meetings that our professionals attend to potential conflicts of interest. There's been a lot of discussion, for example, very recently about documentation work that might be done by a Big Four firm or another audit firm that also does the external attestation (ph) work. A lot of people think that violates independence rules, and so forth. The SEC has had a lot to say about it.

The environment is one which is going to encourage the use of other professional firms, alternatives to the Big Four, that have excellent reputations and good relations. And I would say our primary focus right now, as we discussed in prior conference calls, is on building relationships with the many, many, many new clients -- particularly public company clients -- that Protiviti has attracted in the hopes that that will lead to additional follow-on work of various types. Once you've formed a strong relationship and established your credibility, I don't think it's too big a jump to think you'll get follow-on work.

So we're cautiously optimistic that we will weather the -- any falloff that might occur in the Sarbanes work. And remember, as Keith said before, the current level of that 404 work is significantly less than the majority of the work.

Clearly, the world has forever changed in that five years ago, your outside audit firms provided all types of consulting services. At many companies it was a one-stop shop. And there's no question that that has changed, and there are going to be multiple vendors where there used to be one. And I don't think anybody is better positioned than Protiviti, with its Big Four heritage, to step in and benefit from that trend -- which it's doing as we speak.

With all that opportunity, I imagine it's got to be a challenge just to think about how to manage that towards profitability in terms of gauging the revenue opportunity vis-a-vis getting profits. And you'd mentioned that at some point, it's going to be more profitable than the staffing business.

Is there any sort of like guideline that you can help us with in terms of thinking (multiple speakers) at a certain revenue level, it will be profitable? Or what (multiple speakers) do you think about that?

I will say this -- that, a, we're going to take a long-term view. B, it's easier to invest when you are above breakeven than when you are below breakeven. And based on the numbers this quarter, that day's sooner rather than later.

And I guess remember, too -- the intangibles charge goes away beginning December of this quarter, in fact. And that will also take some pressure off the reported earnings.

December will be the last quarter that that is in place.

Correct.

One last question. With regards to the share count -- obviously, your share price has gone up and your share count's gone up alongside with it. What should we use for a Q4 share count?

The rule of thumb is -- for every dollar improvement in the share price, there's about a 400,000 share impact to fully-diluted shares. So you do your -- you first figure out what you think the average share price would be for the fourth quarter; then you can figure out how many shares to use.

It appears at this time we have no time for more questions today. I will turn to call back over to Mr. Messmer.

Thank you. This concludes our teleconference. A taped recording of the call will be available for replay later today at the following number -- 1-800-272-5958. You can also listen to this call online. It will be archived in the Investors' Center of our website at rhi.com. Thank you again for your time today.

Thank you very much. This does conclude today's conference call. We appreciate your participation, and have a good day. You may disconnect at this time.