羅致恆富 (RHI) 2003 Q4 法說會逐字稿

Good afternoon and welcome to the Robert Half International fourth quarter, 2003 earnings conference call. [OPERATOR INSTRUCTIONS]. I would now like to introduce Mr. Max Messmer, Chairman and Chief Executive Officer. Sir, you may begin.

Well, thank you and good afternoon everyone. Here with me today is Keith Waddell, our Vice-Chairman and Chief Financial Officer. Keith and I will be reviewing our company's fourth quarter financial results. And in accordance with regulation FD, we will provide some general guidance as to our expectations for the first quarter of 2004. We will have time after our prepared remarks to answer some of your questions. Before we get started, I would like to remind everyone that our presentation contains predictions, estimates and other forward-looking statements that represent our current judgment of what the future holds. These include words such as forecast, estimate, project, expect, believe and similar expressions. We believe these remarks to be reasonable but, as we've noted on prior conference calls, they are subject to risks and uncertainties that can cause actual results to differ materially from the forward-looking statements. We've described some of these risks and uncertainties in today's press release and in our Form-10K and other filings with the SEC. We cannot undertake the obligation to update the statements made in this conference call. Now, let's review the fourth quarter.

Revenues for the quarter were $518 million, up 8% versus the fourth quarter of 2002. On a sequential basis, revenues were up 3% from the third quarter of 2003. Overall earnings per share were 3 cents compared with negative 4 cents for the fourth quarter of 2002 and positive 3 cents last quarter. Our staffing operations had earnings of 4 cents per share for the fourth quarter and other Protiviti subsidiary had negative earnings of 1 cent per share. Recall that is the last quarter we incur the amortization charge for Protiviti, which was $1.9 million for the quarter. We were pleased with the company's consistently strong cash flow in 2003. During the fourth quarter, RHI's cash flow from operations was $36 million before capital expenditures of $7 million. We did not purchase any RHI's shares in the open market during the quarter. We have the authority to repurchase approximately 9.6 million shares under the stock repurchase program, previously approved by our board of directors. We ended the year with $377 million in cash and equivalents and at a minimus level of debt. We were encouraged by the positive signs that began a margin for US staffing firms in the third and fourth quarters of 2003. Historically, the staffing industry has fared well coming out of a downturn as, firms of all sizes resume hiring efforts to keep pace with growing business and productivity demands.

One of the bright spots in the labor market has been the growth in temporary services and we saw this in our own business during the fourth quarter. Particularly, at the high end of the accounting sector. We were also pleased with the performance of Protiviti, our internal audit and risk consulting subsidiary. This unit has benefited from increased demand for internal audit and other services related to Sarbanes-Oxley Act Compliance as well as the growing need by company's for business and technology risk consulting services.

We recognize there has been significant discussion in the press in recent weeks about the quality of financial reporting in the staffing industry. As we noted in last year's annual report, we believe you will continue to find RHI's statements to be simple, direct and straightforward. At this time, I'd like to turn the call over to Keith for a more detailed overview of RHI's fourth quarter financial results.

Thank you, Max. As a reminder, you can obtain a copy of today's press release at our Web site, which is www.rhi.com. Let's begin with revenues. For the fourth quarter, overall revenues for the company were 518 million, up 8% from the fourth quarter of 2002. There were 61 billing days in the quarter, down one day from the fourth quarter of 2002 and down three days sequentially, from the third quarter of 2003. Revenues for Accountemps were 210 million, up 2% from Q4, 2002 and up 6%, sequentially on a same day basis. Accountemps is our largest division with 331 locations worldwide. This business represents 41% of total revenues. Fourth quarter revenues for OfficeTeam were 126 million, down 1% from Q4, 2002 and up 3% sequentially on a same day basis. OfficeTeam began operations in 1991 and has 310 offices worldwide. It is our high end administrative staffing division in accounts for 24% of total revenues.

Revenues for Robert Half Technology were 58 million for the quarter, up 10% compared to Q4, 2002 and up 11% sequentially on the same day basis. This division specializes in placing IT professionals on a consulting and full-time basis and represents 11% of revenues. Robert Half Technology was launched 10 years ago and has a 102 locations worldwide. Robert Half Management Resources have revenues of 58 million, up 10% from Q4 last year and up 18% on a same day sequential basis. Robert Half Management Resources was introduced in 1997 and specializes in placing senior level accounting finance professionals on a project basis. This business operates in 98 offices worldwide and accounts for 11% of revenues. Although not reflected in the revenue figures, Robert Half Management Resources also has significant intracompany sales to Protiviti, while they supply project staff for Protiviti engagements. Robert Half Finance & Accounting, our permanent placement division had revenues for the quarter of 25 million, up 8% from the fourth quarter of 2002 and up 6% sequentially. Established in 1948, this business operates in 331 offices worldwide and accounts for 5% of total revenues.

International revenues for RHI staffing operations were 92 million for the fourth quarter, up 13% from last year and up 7% sequentially. On a constant currency basis, revenues grew sequentially by 2%. Our professional staffing divisions operated in 60 locations in 10 countries outside the US, international staffing operations account for 19% of total staffing revenues. Fourth quarter revenues for Protiviti, our internal audit risk consulting business were 40 million and comprised 8% of RHI revenues. Established in May 2002, Protiviti currently has 32 locations in the US, Europe and Asia. Engagements with clients on Sarbanes-Oxley Act section-404 Compliance and the establishment of new internal audit functions continue to drive demand.

Turning to gross margin, temporary and consulting staffing gross margins were 157 million for the quarter representing 34.6% of applicable revenues. This compares to 35.1% of revenues for Q4, 2002 and the same 35.1% of revenues for Q3, 2003. A decline during the quarter is the result of higher workers' compensation and state unemployment costs. Overall staffing gross margin was a 182 million for the quarter or 38% of staffing revenues. This compares to 38.3% of revenues in Q4, 2002 and 38.4% of revenues in Q3, 2003. The overall decline is due to the temporary and consulting gross margin declines just mentioned. Gross margin for our Protiviti subsidiary was a 11 million for the quarter, and 27% of Protiviti revenues. This is a sequential improvement of 1.6 million, versus the third quarter. Turning to selling general and administrative costs. Staffing SG&A costs for the quarter were a 172 million, representing 36% of staffing revenues. This compares to 37.1% of revenues for Q4, 2002 and 35.8% of revenues for Q3 2003. The higher sequential SG&A percentage for the quarter relates primarily to higher advertising costs, principally in international locations. Protiviti SG&A costs were 11.5 million for the quarter representing 28.5% of Protiviti revenues. This compares to 54.7% of revenues for Q4 2002 and 27.1% of revenues for Q3 2003.

The sequentially higher percentage for the quarter relates primarily to higher recruiting costs and international start-up costs. Turning to operating income, operating income from our staffing divisions was 9.7 million for the quarter. The temporary consulting divisions contributed 8.4 million of this amount while the permanent placement division had operating income of 1.3 million. Protiviti had negative operating income of 0.5 million for the quarter, a 0.4 million improvement from the third quarter. Protiviti's domestic operations had a small operating profit for the quarter, which was offset by international losses. This marks the first quarter of profitability for Protiviti's domestic operations. Intangibles amortization was 1.9 million for the quarter as Max noted, this charge ended in December 2003 and will not impact future results. We ended the year with cash and equivalents of 377 million; this was after funding 7 million in capital expenditures for the quarter. For the past three recession impacted years, we have generated 565 million in cash flow from operations and funded 169 million in capital expenditures resulting in free cash flow of $396 million during this period. Accounts receivable were 242 million at the end of the fourth quarter, with implied days outstanding of 43 days. This compares to 43 days at the end of Q4 2002 and 42 days at the end of Q3 2003. As we've noted in prior calls, we've been very pleased with the management of accounts receivable during this downturn.

Now, let's turn to guidance. Following are the business trends we saw during the course of the fourth quarter of 2003 and the first weeks of January 2004. On a same day sequential basis, temporary and consulting revenues were up in October, November, and December. Permanent placement revenues were up in October and down slightly in November and December. During the first 2 1/2 weeks of 2004, revenues from our temporary and consulting businesses were up 5% versus the same period last year. For the first 3 1/2 weeks of January, revenues from our permanent placement division were up 11%, versus the same period last year. As many of you know, it's difficult to gauge product revenue trends when viewing them over such short periods of time. Based on these business trends, we offer the following quarter 1 estimates, which include both staffing and Protiviti operations and revenues 520- to 540- million for the quarter, earnings per share 4- to 6- cents. Of course, these estimates are subject to risks mentioned in today's release. It is our policy to limit guidance to one quarter. And as you know, we do not assist analysts with detailed financial models. Now I'll turn it back over to Max for comments.

Thank you, Keith. We were pleased with our financial results for the fourth quarter and are encouraged by 8 consecutive months of modest but improving job growth in the temporary services industry. On the last conference call, I characterized our mood as cautiously optimistic and this is still true. We have seen three straight quarters of sequential revenue growth in our professional staffing divisions and our staffing operations as a group had year-over-year growth for the first time in 11 quarters. We hope and believe it's a signal the industry may have rounded the quarter. RHI has successfully navigated 9 prior recessions in our 56-year history. And if the past is any indication, we hope the investments we have made in maintaining our local networks and retaining our best total will pay off as the labor markets recover. In Protiviti we also see opportunities ahead and just 19 months Protiviti has introduced industry-leading tools and methodologies to assist clients with the manning compliance work related to Sarbanes-Oxley and the establishment of internal audit functions for clients. And we continue to broaden the scope of our services and business and technology risk consulting with expanding work in regulatory and forensic investigations, I.T. security, and other areas. Also encouraging are the cross sale opportunities between Protiviti and our professional staffing divisions. We have always managed the business for the long-term. And as a result, we are confident about our future prospects. Our success in the near term will depend on whether or not the employment markets continue to improve. But as our financial results indicate, RHI remains in excellent financial condition with de- minimis debt and a very strong cash position. I do have confidence in our field management team and our staffing operations and in Protiviti. I also believe we benefit from respected brand names and a proven track record of success. At this time, Keith and I will be happy to answer your questions to allow as mean people as possible to participate, we kindly ask that you limit yourself to one question and the follow-up as needed. If you have additional questions, we will certainly do our best to return to you later in the call, time permitting.

Thank you sir.[OPERATOR INSTRUCTIONS]. Our first question is from Andrew Steinerman with Bear Stearns.

Hi, guys. My question has to do with SG&A. When you think about the fourth quarter, you commented that yesterday it did ramp quite a bit sequentially, as did revenues grow. When you look at the first quarter where you we're looking for growth again, how do you, you know, envision sort of SG&A shaping up with the guidance that you gave with the 4- to 6- cents?

Andrew, I guess we've consistently been on record that if you kind of look backwards and find a quarter most closely related to the quarter just ended and look at its SG&A, I thought I'll give us some idea of how we think we can ramp it going forward. And in fact, if you look at the current quarter, the quarter that most resembles it looking backward is the first quarter of 2002 and the SG&A percentage is pretty much in line. Short story is we do expect to lever SG&A as we discussed. During the quarter, we had higher advertising costs internationally. It was principally timing. They under spent their budget the first part of the year. They kind of caught it up in the latter part and that's what you're seeing there. Furthermore, just sheer currency translation alone added more than $2 million of SG&A to our SG&A reported costs for the quarter. Again, long story short, we do expect to continue to leverage SG&A as a percentage of revenue, it should decline. We had those, somewhat unusual items I just described. But again, we're sticking to look backwards at similar revenue levels as an indication of what we should be able to achieve.

Right, so SG&A as a percentage of revenue in the first quarter should come down sequentially?

If we grow revenues to the extent that we believe we can, and to the extent that are embedded in this forecast, it would be our estimate that SG&A as a percent of revenue would come down.

Even if you have to hire people to meet the growth?

Well, again there is some unused capacity remaining in the staff we now have, so we don't need to hire in total lock step as we begin to grow.

That sounds great. Thanks.

Our next question is from Brandt Sakakeeny with Deutsche Bank.

Thanks. Hi, Keith. Just a quick question with respect to the issues at adeco. Have you seen in the last couple of weeks or quarters any spill out in terms of market share gain or anything from customers that may have been there at adeco, but may have perhaps migrated to you? Thanks

Given our focus principally on middle-market companies, there isn't much adeco spill over to Robert Half quite frankly.

And we don't know if there has been spill over or not. We heard the speculation about that that we really don't have any information to provide with respect to adeco?

OK. Can you just update to --on your marketing and advertising strategy for this year?

Well, I mean, it isn't significantly different than in the past. We aggressively promoted our brands historically. We anticipate continuing to aggressively promote those brands as revenues grow. That will fund additional advertising dollars. And we certainly don't expect to leverage those as we go forward. But we have had a long, long, long history of aggressive advertising support of all of our brands. And most recently with Protiviti and frankly we don't plan much change in that.

I think you'll continue to see a lot of WallSteet journal advertising for Protiviti, you'll continue to see a fair amount of drive time radio for Accountemps. And the other forms of marketing, which we've engaged over the years will continue for all the different divisions. And so as Keith put it, I wouldn't anticipate material changes in terms of the approach that we've taken historically. We've typically spent more than most competitors and that probably will continue to be the case.

OK, great. Thank you Max and Keith.

Our next question is from Greg Cappelli with Credit Suisse First Boston.

Hi guys, it's Greg and Josh.

Hi Greg, how are you?

Good, thanks. I wanted to follow up on Protiviti for our question. You mentioned in the U.S. possible overall. Should we expect overall profitability to be pretty consistent here going forward? Or and I guess I'd like to tie that in. If you have the opportunity, might you decide to be more aggressive in going to additional countries and not hesitate to actually take it unprofitable again?

We've certainly taken a long-term view to this point. And I'm not sure we would change taking a long-term view so that if a country that's on our short list -- if an opportunity presented itself, we would probably go for it. That said, I am not aware of anything, as we speak, that would have a materially diluted impact to Protiviti results.

OK. Can I just follow up on that. Can you also just comment on other potential consulting services you might add to Protiviti?

And we've also said consistently that we view Protiviti as a platform for many professional consulting services. It's widely known in the marketplace that the big four will probably not be able to add or offer all of the services going forward that they have traditionally, which will create opportunities. We're aware of some, if not many of those opportunities. And we'll continue to study them. But again, there's no -- there's nothing imminent as we sit here today.

Would you give us a head Count number for Protiviti.

What we will do in our K when we release it in a few weeks. We'll give you head count numbers for everything on an annual basis. And again I'd like to just to stick to that policy which we've had for several years.

OK. Thanks a lot.

I can say, Greg, that we have added to staff in Protiviti in the fourth quarter, that the recruiting costs that we talked about in SG&A were directly related to Protiviti's adding to staff. We said on the last call that Protiviti's pyramid needs filling out at the bottom meaning seniors and staff level people. And so Protiviti is in the midst of adding to people primarily at that level.

Got you. Thanks a lot. I appreciate the update.

Next question is from Jeff Silber with Harris Nesbitt.

Hey guy's, good afternoon. I wanted to follow up with a couple of Protiviti questions. I think in prior quarters you've been kind enough as part of your guidance to break out Protiviti revenues or estimated Protiviti revenues. I was wondering if you can do the same thing and if you can talk about the seasonality by quarter of the business. Thanks.

I guess, Jeff, our belief or maybe a better word is hope was that kind of given the Protiviti is approaching break even, that given its size relative to the size of the all our other divisions that we should treat it accordingly when we give guidance. And therefore the guidance numbers we gave were overall. So just like we don't give specific guidance on management resources revenues, we weren't going to give specific guidance on Protiviti revenues. That said, we do plan to continue to break out the actual results of Protiviti in our segment reporting and there will be no change there. But it just seemed odd to us, kind of given where Protiviti is today versus where it started, that we would continue to break out separate guidance for it when we didn't do such for our other divisions. On the seasonality, clearly the fourth quarter in Protiviti is holiday impacted, probably more so than the staffing operations as clients encourage their staff, which our Protiviti staff mirrors, to take additional time off. The early part of a new year, an internal audit is typically crowded out a little bit by external audit. But other than those kind of themes, we don't have enough track records yet to give you kind of statistically what seasonality trends would look like.

OK. That's fair. If I could do a quick follow up. It looks like you closed a couple of Protiviti offices in the quarter. Is that correct? And if so, if you can provide a little more color on that.

We had a couple of satellite locations that were on month to month executive suite leases that were kind of part of what we inherited in the original Anderson transaction. And we decided we could conduct those operations from nearby locations that were much larger.

So It was not that you exited any markets?

Oh, no.

OK. Just wanted to double-check. Thanks.

Our next question is from Randy Mehl with Robert W Baird.

Yeah, good afternoon, Max and Keith. A couple of questions, related questions, of course. You mentioned that payroll taxes had an impact on gross margin or temp gross margin sequentially. What's your outlook for temp gross margin and may be particularly, how you expect the payroll taxes to impact them in '04?

That's a good question, Randy. So, for the quarter just ended, we had a 43 basis points sequential decline in gross margins, which principally this time was actually more workers' comp-oriented than unemployment. Annually, we get an outside third party actuary to come in to look at our workers' comp experience, to look at our accruals, to look at our go-forward rate and based on that independent input, we established those numbers. Our expectation for the first quarter of next year is that, we actually recapture 25 to 30 basis points of the 43 we just lost with rate increases, bill rate increases that we've begun to establish toward the end of the year. Beginning the first of year, we will get new state unemployment increases and we've banked that in and considered that in giving the guidance of we still believe relative to the quarter 4 number we just reported, which for temp was 34.6%, we think we can do 25 to 30 basis points better than that in the first quarter, even after considering that state unemployment costs are going to be higher in the first quarter because of rate increase notices than they were before.

So, were you able to widen the gap in the quarter between average billing rate and wage rates?

We were just a little bit. And we expect to do more so in the quarter that we're actually in.

And then conversion experience, as it relates to that number?

Conversion experience in the fourth quarter was just a little better. Nothing major and significant. But, clearly the hiring of full-time people, be it term or be it conversions, firmed during the fourth quarter.

Thank you very much. I appreciate it.

Our next question is from Martin Nichols with Bank of America.

Hi, this is Jason Shoe for Martin Nichols. I just want to follow up on Randy's question, may be in the different format. Your operating margins are clearly going to benefit when the number of workers you place increases but can you give us a sense of like other factors that may influence your margins? For example, on volume, do you typically see average hours per temporary worker increase as your business increases?

Well, you've got a lot of things go on here. As far as margins, the unemployment and workers' comp rates that are established in a downturn are with you in ever decreasing numbers as you come out of a downturn. So, it's a drag to some degree, but an ever decreasing drag. From the standpoint of number of hours worked by temporaries, all of that kind of translates itself to what's the impact on the need for internal staff and their productivity and the capacity they have. And we can say that we do have unused capacity and considering how things change in an up turn, we believe they still have unused capacity which is why I made the comments to Andrew earlier that we think we'll get some leverage even at that line as things move forward. The bigger drivers to profitability, at least in the early parts of the up cycle are the mix of full-time hiring that we have, both in perm placement and in conversions. As you know, those are much higher margin activities. You see even during this quarter, there was quite a bit of operating leverage on perm placement for the incremental revenues they reported. And as we move out of this down cycle, at least to date, perm is actually firmed a little more quickly than we traditionally see it firm.

Just one last follow-up. Can you give us a sense then of what percentage of your temporary placement workers are full-time versus part-time and then can you give us a sense if duration of workers assignments have increased in this period.

I guess we publicly disclosed that conversions or the conversion of temporary to full-time runs 3% to 5% of revenues traditionally and during a downturn, that they are clearly at or below the low end of that range. And so, there's upside there. As to the number of hours worked, that gets complicated because you have to look what are the full-time alternatives to temporary work.

And frankly, as the economy improves and the full time alternatives improve, the length of stay with your average temporary worker actually declines because it's easier and quicker for them to find a full-time job.

That's Great. Thank you.

Our next question is from Matt Litfin with William Blair and Company.

Good afternoon. I wondered how your employee turnover was tracking in the longer standing temp business as well as in Protiviti. And how does that experience of employee turnover experience compare to your history and budget or plans?

I'd say it's not significantly different, Matt. If anything, it's probably a little bit better. We don't have a long-term history on Protiviti. And it's my understanding that the turnover rates we're having in Protiviti are kind of consistent with big four turnover rates, although I can assure you, particularly at the staff level in Protiviti, there's an all out war among the big four and anybody else in the Sarbanes-Oxley 404 compliance area for staff people up to seniors.

So short answer is not a lot of change in turnover if anything mildly positive.

Just a quick follow-up on that if I could key it. Just after that turnover, I think you said the net head count actually did increase at Protiviti by the end of the fourth quarter compared to the end of the third quarter.

That's correct.

Okay. Thanks very much.

Our next question is from Chris Gutek with Morgan Stanley.

Thanks. Hi, Messmer and Keith just a couple of questions on the revenue growth drivers it does seem as the Sarbanes-Oxley continues to drives secular driven demand for productivity into loss of Sarbanes some other business units, would you characterize that secular driven demand as still growing as peaking or may be even a little bit past the peak at this point?

I would describe it as still growing. My guess is most people in accounting finance are coming off their 2003 year-end audit experience. And I would predict that year-end audit experience was a little more difficult for most than it's been in the past because external auditors are just doing a whole lot more work in the Sarbanes 404 world than they were doing in the past. That coupled with inside 404 itself, there's kind of movement thematically from design and documentation, to testing of those controls that have been designed and documented. I think most people have under estimated most companies have underestimated the amount of work involved in testing their internal controls. And I would hasten to add that it's our belief that much, if not most of that testing effort, is effort that will be required and reoccur post the 404 deadline at the end of this year.

If it were possible to put aside the incremental demand you're getting from the secular drivers as well as putting aside the seasonal increase in demand going into the first quarter, when you talk to your customers and what you hear from them from a macro recovery perspective, what kind of impression do you get from the customers? Do they want to hire but are reluctant? Are they starting to get confident the businesses are picking up? Do you have a feel.

You cannot well see it when you compare Accountemps versus management resources. You've got Accountemps at the transactional level, with accounts payables, accounts receivables, payroll, etc. So the driver there is levels of business activities of our clients. Were management resources, it has that plus the Sarbanes-Oxley 404 additional accounting, external accounting audit work, etc, and so you can kind of see the difference when you look at those two divisions.

Chris, we talked about this in the last conference call to some extent. And I think I noted at the time that there's an awful lot of pent up demand at a lot of businesses. They have been working their workforces to a fairly great extent. And it is only so long that you can do that without having to bring in additional help. I'd say the general mood of the small to mid-sized clientele that we typically work with is clearly more bullish today than it was a few months ago. We're cautiously optimistic that will reflect in more job activity. But we'll see.

Okay. Great. Thanks.

The next question is from Kelly Flynn with UBS.

Thanks. It's actually sort of a follow-up to Chris's question but relates to the rest of the business outside Protiviti. Maybe a question for Max. How do you think about the penetration rate within accounting and finance and the other niches that you focus on in the U.S.? And as an offshoot to that, what do you think the secular growth rate of the company will be on the top line over the next three to five years? Maybe just walk us through your thinking there. Thanks.

Let's take the first part first, since Keith is going to get upset if I try to respond to the second.

Okay.

We said several times that based on our own marketing research, that we estimate that we do business with probably no more than about 10 to 15% of what we might call a typical target client, that is what we would describe as a small to mid-sized company or business proprietorship. Much of our marketing is dined to attract new business. We holistically that last hours is very much half full and not half empty. Now much of marketing is designed to new business, we treat all of the clients out there as potentially from Missouri. They have to be shown. We try to get a temporary worker in the door. And that usually leads to more business. But our belief is that roughly half of the audience I just described has never really used a professional temporary from anybody of us or any of our competitors. That may seem very surprising, but we think that's the case. But as to what are the growth opportunities in the temporary staffing business, as accounting and otherwise, we think it's huge. We think it's hard to describe how big we really think it is, and that's why we're determined to answer in reference to the other gentleman's question about our levels of advertising and so forth. I think the marketing will pay off over the long-term, which is our orientation. I think that at the end of the day, secular trends bode well for long-term growth. The simple economic fact is that it makes a lot of sense to use qualified temporary worker. It is very easy for people to understand the use of a light industrial worker, blue-collar workers. They can understand if they need a certain assembly other jobs taken care of, it's easy to do that. Why have a full-time worker if you don't generally have a full-time job for them. At professional levels you have to have credibility. People have to believe that you can provide the quality they require quickly, consistently and so forth. That is what we are attempting to do, provide high level service on a quality basis across a broad array of office on a very consistent basis. We think the market opportunity is huge. We think the secular growth trends will go our way. And we also think that the more effective we are in attracting new clients, the more we'll help those growth trends accelerate.

Thanks. Keith could you comment on the actual growth rates?

You know, our long-term belief has been that a 10% to 15% secular and long-term growth rate is something that we'd be comfortable with.

OK. Can I ask one follow-up? Could you just maybe give us some color and update on the end markets that you are selling to? You know, what industries do you currently have the most exposure to? And if you could quantify that in the financial services, etc, however you are comfortable with, that would be great. Thanks.

I'll let Keith respond. But I would say at the outset I think one of the shrinks of our business is we don't have the level of concentration you might expect.

It's very broad-based Kelly. We've never broken out what percentage by industry. We don't have a huge concentration in any industry. Again, our middle market focus -- many times people misunderstand Robert Half to be very financial services oriented. And in fact what you should think about is we're in the accounting department of any company, manufacturing, services, finance, real estate, healthcare. You name it, if they have an accounting department with 8 or 10 people or more, it's a prime candidate for one of our divisions.

That's great color. Thanks all you guys.

Thank you.

Our next question is from Paul Carter with Wachovia.

Hi. This is Paul Carter from Mark Marcon. Just a quick question. Has there been any changes in the competitive environment as it relates to Accountemps and OfficeTeam specifically?

Not dramatically, so again our middle market focus, we've always had tough middle market regional competitors in virtually every market. Go to your yellow pages, look under accounting and you'll see 15 or 20 providers. Those are our real competition. The major national firms clearly as part of their major national account work, they will capture some of that fortune 1,000 companies accounting as part of that. That's never really been our focus and sweet spot. So in the area that is our focus and sweet spot, I would argue the competitive landscape certainly hasn't changed negatively. If anything, it's changed a bit positively because not all of them made it through the downturn.

In every recession an awful lot of the smaller firms struggle financially and many of them are swept to sea. Typically coming out of a downturn, we probably enjoy something of an advantage. We may have picked up a little market share in various markets. As Keith noted, our toughest competitors tend to be the small privately owned firms in different markets. I think we're in a great position to compete with them given our brand recognition, advertising side and so forth, but typically that's for landscape that we are studying.

OK. Thanks. Just one quick follow-up on Starbox. Is that still about a 40% to 50% Protiviti.

It's less than half.

Less than half. OK. Thank you.

The next question is from Adam Waldo from Lehman Brothers.

Hi, good afternoon, Max and Keith. Given the strong growth opportunities that you articulate in response to Kelly's question, Max and Keith, I was interested to note that in the first three quarters of 2003, you only bought back 1.6 million shares or about 1% of total at an average price of $15.38 and you re-purchased no shares in the fourth quarter when the share price ranged between $19.50 and $26. To that end I wonder if you can comment on given your strong cash position, why no more meaningful share re-purchases in the last year. Is that do you need the cash to fund the working capital cycle into an up turn or is there some comment around a share price valuation.

Adam, I guess, A, we're not perfect. And B, is subjective in judgmental. C, we don't need our cash for working capital purposes. We have talked about how we generated over $500 million of cash flow in the worst labor market downturn this country seen in probably 40- or 50- years. We also talked about on the last conference call that we are beginning preliminary discussions about the thought of maybe initiating a dividend. So I think if you put all of those things in the mix together with the fact that the price did run up pretty significantly from most of the corner, we decided to stay out of the market. But again, I wouldn't over read everything into that.

Well, we're certainly not experts in how to value the securities, Adam. We'll leave that to others. As to how we allocate our capital, that's something we're talking to our board about on a regular basis. As Keith mentioned, we'll be doing so this year as well. A posture of a dividend is on the table and we'll continue to study that just as we will continue to look at stock repurchases.

That's helpful. There is my quick follow-up, with respect to M&A, Max on the last quarter in the conference call you left open the door of interest in looking at practices coming out of the big four as they continue to de-conglomerate. Can you update us around your thinking on that.

Well I think Keith just responded to that indirectly in response to someone else's question, Adam. We obviously know and have great respect for big four firms and we are aware of various conflict issues they have. And it's probably fair to say we have an interest in certain parts of their business. Whether any of that will result in a transaction remains to be seen. We're conscious of our returns on capital and what we think is in the best long-term interest of our stockholders. And so we'll see. We also commented in the press release that we're continuing to expand different parts of Protiviti's business. There's a lot of work in the forensic area, there is a lot of work in the I.T. security area. Again, we'll be deploying our capital and our time and resources in such a way that we think it will do the best job of building long-term value.

I guess I would add too, Adam that it's not just about finances and returns when you're talking about parts of the big four. There are culture and people issues you've got to consider very significantly as well. When you talk about bringing in any of those pieces of any of those firms into Protiviti.

Certainly, thank you, gentlemen. That was very helpful.

Thank you.

Our next question is from Jim Janesky with Janney Montgomery Scott.

Hi, yes good afternoon. I wanted to talk to you, if I may, a question around the magnitude of recovery, you know, primarily in permanent placement this time versus, you know, let's say the last cycle. You know, if I recall on the last conference call you had said -- and I know perm does move around quite a bit. You entered the quarter with it being down in the first couple of weeks and then it recovered. And then, you know, seasonally it was down in both November and December. As you entered 2004 you know up a 11% although on a very limited basis, could you just give us a little bit more color as to you said it firmed up this time versus past recoveries?

I'd say, first of all, that 11% was year-over-year. If you look sequentially, as is typically the case, perm starts the year pretty slowly after the new year. And in fact, this year, perm started the new year at a lower rate than it ended the prior year, which is typical.

Right.

That said, it's certainly our sense, somewhat supported by the numbers we just reported, that things are different right now, particularly in the higher end of accounting and finance because of Sarbanes-Oxley, because of the focus on internal audit, because of the additional work being done by external audit. Clearly, most fortune 1,000 maybe 3,000 firms you would talk to if you got to their accounting department, they would probably tell you, they need more people. And they probably need more full-time people. That's a phenomena we've not had the benefit of certainly, in the last downturn. And so, therefore I think, we're little more optimistic on perm in the early part of this up cycle than we've been in the past.

OK and then, in Protiviti, when you look at less than 50% of the work in Sarbanes-Oxley, you know, I would imagine some of that would be if you want to diversify, you know, due to the, may be somewhat initial one time pop or bubble from there, but do you also see any other opportunities from, you know, just mutual fund investigations or you know, just the heightened amount of scrutiny from companies in general?

Clearly, the gem part of that, the other part of the business other than 404, is in the forensics area. And, we've already had some significant forensics engagements are not necessarily related to mutual funds directly. But, that is an area where we continue to be aggressive in seeking out other work. And, as to the bubble point in 404, and as we said last time, nobody knows how much will reoccur and won't reoccur. I'd say that our people are getting increasingly optimistic that, there will be other opportunities beyond 404. As I mentioned earlier, the thinking currently is that the testing effort, which is significant, will be an effort that's required every year to support management's contention about their internal controls, which every year the external auditor will have to give a separate attestation report on. I take the other thing that Protiviti is particularly excited about is this requirement of NYSE that, all NYSE companies have to have internal audit and quite frankly, many don't. And even those that do, for the most part, traditionally, they've had an operational focus where they are looking for efficiencies and cost savings, rather than better internal accounting controls. So, even when a larger company has its own department, it focus traditionally hasn't been internal accounting controls related. So, the thought there is that they are going to need some supplemental assistance, even if they've had an internal capability in the past for the combination of follow-on testing work, the establishment and support of the internal audit departments, our people believe will be a fairly significant opportunity.

Could you just quantify your own, Keith, spending? I mean, are you having, is Robert Half having to spend more than you originally thought when Sarbanes came out? Is it bigger than you originally expected?

Well, I can't just, given that it's all internal on our part, we're probably not as cost conscious in how we manage this effort, as we might otherwise be. But, I can assure you that significant numbers of hours have been spent documenting our internal controls. We're just ourselves beginning to move into the testing phase because, it's one thing to say, this is what you intend to be your control environment. You now also have to prove through testing that it in fact exist. And my point is that a very significant activity is (inaudible) significant activity that Robert have. We've always had a very strong focus on controls. Our documentation could be better. It's being improved. But, we feel good about where we are with respect to our 404 compliance, with respect to our controls environment generally.

OK. Thanks a lot.

Our next question is from Fred McCrea with Thomas Weisel Partners.

Good afternoon, gentlemen.

Good afternoon.

A quick follow-up actually to Jim and may be some of Max's comments earlier in the call. Keith, may be you could walk us through a little bit in terms of your internal revenue recognition controls for the trigger points are for revenue resignation, contract are signed as time cards go through. May be you could walk us through the typical engagement on the temp side?

Sure, on the temp side, it's actually fairly simple in that we require a signed timecard from the client before we recognize revenue and that signed timecard signs off as to the hours worked by the temporary employee, and also confirms the prior verbal arrangement we had as to the rate. And I can add that the subsequent adjustments we have to make to our billing, either as to hours or as to bill rate, are very di minimus percentages, significantly less than even 1%. So, on the temporary side, quite frankly, it's very straightforward and all entails getting the client to sign off on the time that the temporary submits to them.

Would there be a signed contract or lettered contract as well? Or it just simply be the timecard?

We internally send out kind of our terms and conditions, when an assignment begins. We verbally have a discussion about the rate. But as I said, that signed time sheet we get not only do they sign off as to the hours reported by the temporary, but they are also signing off to the prior verbal arrangement we had as to the rate. And to need the proofs in the pudding and how the pudding is, how often do you have to adjust what you do in the first case. And my point is, we have very, very, very nominal adjustment as to their impact after the fact.

Remember, that our typical client involves two or three temporary workers at a time. We don't have any clients that typically would represent more than 1/4th or 1/5th of 1% of revenues. If you had large major accounts and large national accounts and large national contracts, as some of the larger firms in the industry do, presumably their procedures might be a little different.

Great. Very helpful. Thank you both.

Our next question is from Brad Saffalow (ph) with JP Morgan.

Hi, good afternoon. My first question had to do with the strength you saw once again in RH technology. I think, you commented last quarter that, more of the strength was on the support side. Can you comment whether that trend continued and if not what the differences were?

I've said that support continued strong. The viruses that were experienced as late as today clearly drive some demand for help desk as well, we see a lot of desktop hardware replacement that requires your system server IP operations people, which is also helping the support side of our business. We've seen some pickup on the development side as well. I'd say that's probably more kind of web application and dot net related. But the bigger of the two driver is the support area, but clearly the development area had a better quarter sequentially than they did in the fourth.

And would you expect development to continue to accelerate into this quarter? Or is it too hard to tell at this stage?

Well I can say that our people in our technology division on both the support and the development side are actually pretty optimistic. The environment there is clearly better than they have seen in quite a while on both sides of our business.

Hey, thanks a lot.

Our next question is from Chandy Smith with CIBC World Markets.

Thanks. My question relates to the opportunity to cross sell to Protiviti clients that you have mentioned. Clearly those are not your typical small to mid-sized clients. So, I'm just wondering about your desire to provide your more traditional services to this larger client.

Well, to date, the cross selling has been more related to Protiviti has an engagement that it uses management resources help in support of a staffing of that engagement. So, it's a larger company where Protiviti has the relationship, where it brings Management Resources in to help staff that engagement. There is lesser activity, where you take a middle market firm, that where Management Resources has the relationship, where you bring Protiviti in, for internal audit. It's not that it doesn't exist, but clearly there's more of the former than the latter. And I would add, that even on the staffing side, even though our sweet spot and middle market firms, we do have relationships with larger firms because, we have long provided people to them outside their national account for those positions where their national account provider couldn't fill them.

OK. And can you provide some type of market share metric for Protiviti, you know, whether it's the number of fortune 1,000 clients or something like that?

you know, that's not something we break out. We're actually very proud of our client list. We're very proud of the wins that Protiviti has had with household names that everybody on this call would recognize and understand. But, that's not data that we've broken out publicly.

OK. Thanks.

And our final question today is from Jim Wilson with JM Securities.

Thanks. Good afternoon. Just one quick question. Could you give any color on the bill rates on Sarbanes-Oxley related work, as it might compare to other parts of billing activity for Protiviti?

Let's see. Sarbanes rates versus non-Sarbanes rates, inside of Protiviti. I'm not sure there's a huge difference, as we speak. It's more kind of client and situation specific. We may, for whatever reason, decide to price client-A differently than client-B, for reasons unrelated to Sarbanes. But, I don't think, as a general proposition, we've got a Sarbanes rate sheet and a non-Sarbanes rate sheet or translated. We're not trying to premium price Sarbanes at the moment, just because we can.

OK. So, it's just really all volume and demand related?

Yeah. And it's who is the client, what's the opportunities, what's the, is this a one-time thing, is this annual annuity. There are lot of factors that go into the pricing decision. There's probably more subjectivity that goes into the pricing in Protiviti than it does in staffing.

All right. Very good. Thanks.

Thank you. It looks like this is all the time we have for today. I'd like to thank all of you for joining us. This call will be archived later today in the investor center of our Web site at www.rhi.com. Thank you very much for joining us.