羅致恆富 (RHI) 2004 Q1 法說會逐字稿

All lines please standby, today's teleconference is about to begin. Good afternoon and welcome to the Robert Half International first quarter 2004 earnings conference call. All participants will be in a listen-only mode until the question and answer portion of this call. At that time, simply press star one on your phone if you have a question. At the request of Robert Half International, today's conference is being recorded for instant replay purposes. I would now like to introduce Mr. Mac Messmer, Chairman and Chief Executive Officer. Sir, you may begin.

Thank you and good afternoon everyone and thank you for joining us. I'm sorry, we're a few minutes late. There were a few technical problems with the conference call. As you know, we scheduled this call to discuss our first quarter 2004 financial results. Keith Waddel, our Vice Chairman, President, and CFO is with me today and we've some brief remarks we'd like to make, after which we look forward to responding to questions you may have. Before we get started, our lawyers have asked me 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 some other expressions.

We believe these remarks to be reasonable, but as we noted on prior conference calls, they're subject to risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. We've described some of these risks and uncertainties in today's press release and in our filings with the SEC. We do not assume the obligation to update these statements, which were made in today's conference call. Now, I will discuss the first quarter. Revenues were $572m up 21% from the first quarter of 2003 on a sequential basis. Revenues were up 11% in the fourth quarter of 2003. Overall earnings per share were $0.09 compared with the negative $0.02 for the first quarter of 2003 and $0.03 last quarter. Our staffing operations had earnings of $0.08 per share for the quarter and our Protiviti subsidiary rate earned $0.01 per share. RHI's cash flow from operations for the quarter was $25m before capital expenditures of $9m. We repurchased approximately 900,000 shares where company's first quarter and ended the quarter with $368m in cash and equivalents in the bank. This released approximately 8.7m shares available under the stock repurchase program previously approved by our Board of Directors.

As noted in today's press release, the US labor market showed signs of continued improvement during the quarter. This resulted in sequential and year-over-year revenue growth in our staffing operations and in our Protiviti subsidiary rate. Our financial staffing divisions in addition to Protiviti continue to benefit from demand for services related to be increased focus on internal accounting controls and other corporate governance requirements. Protiviti, our internal audit and business risk consulting unit more than doubled its revenues were over the same period last year and achieved its first quarter of profitability. We believe this demonstrates the market acceptance of Protiviti's sweep of risk consulting services including Sarbanes-Oxley Section 404 compliance, co-sourse and outsource, internal audit, information technology audit, information technology security and other areas. As we announced in today's press release, our Board of directors has approved the initiation of quarter dividend of $0.06 per share. This reflects our continuing confidence in the company's cash flow and our strong balance sheet. Decision also reflects our belief with the company, can continue the support, future growth, as well as pay the dividend to the stockholders. At This point, I'll turn the call over to Keith.

Thanks, Mac. As a reminder, a copy of today's press release is available on our Web site at rhi.com. Turning now to revenues. For the first quarter, overall revenues for the company were $572m up 21% in the first quarter of 2003. There were 63-bulding days in this quarter, the same as first quarter of last year and up two days sequentially from fourth quarter of last year. Conference revenues were $228m, up 12% from last year and up 6% sequentially on the same-day basis. The 332 locations worldwide, our conference are our staffing division. It represents 40% of total revenues. First quarter revenues for Office were $132m, up 9% from first quarter last year and up 2% sequentially on the same days basis. Office teams are high and administrative staffing division that began operations in 1991 and has 310 offices worldwide. This division accounts for 23% of total revenues.

Revenues for Robert Half Technology were $59m for the quarter, up 17% compared to Q1 2003 and down 1% sequentially on the same-day basis after a solid start in January. This division specializes in placing IT professionals on a consulting and fulltime basis, and represents 10% of revenues. Robert Half Technology was launched a little more than ten years ago and has 104 locations worldwide. Robert Half Management Resources have revenues of $71m up 38% from first quarter 2003 and up 20% on a same day sequential basis. Robert Half Management Resources specializes in placing senior level accounting and finance professionals on a project basis.

The business was introduced in 1997 and now operates in a 102 offices worldwide accounting for 12% of revenues. As we discussed on the last call, Robert Half Management Resources continues to benefit from intra company sales to Protiviti for where they supply project staff for Protiviti engagements. These two business units are complementary and have allowed us to by our clients with a broad range of consulting and staff augmentation solutions for their businesses. Robert Half Finance and Accounting a permanent placement division have revenues for the quarter of $29m up 29% from the first quarter of last year and up 16% sequentially. This business operates in 332 offices worldwide and accounts for 5% of total revenues. It was established in 1948. International revenues for RHI staffing operations were a $105m for the first quarter up 24% from last year and up 14% sequentially. On a constant currency basis these growth rates were 7% year-over-year and 9% sequentially. Our professional staffing division operates in 62 locations in 10 countries outside the US. International staffing operations account for 20% of total staffing revenues. First quarter revenues for Protiviti our internal audit and risk-consulting business were $54m and comprise 9% of RHI revenues. Established in May of 2002 Protiviti currently has 34 locations in North America, Europe and Asia.

Turning now to gross margin. Temporary consulting, staffing gross margins were $171m for the quarter representing 35% of applicable revenues. This compares to 34.8% of revenues for Q1 last year and 34.6% for Q4 2003. The sequential percentage improvement during the quarter was primarily due to better pricing which was instituted to offset higher unemployment and workers' compensation cost. Overall staffing gross margins were $200m for the quarter or 38.6% of staffing revenues. This compares to 38.1% of revenues in Q1 2003 and 38% of revenues in Q4 2003. Overall gross margins benefited from a higher mix of permanent placement revenues as well as the higher temporary and consulting gross margins just noted. Gross margins for our Protiviti subsidiary was $16m for the quarter or 29.8% of Protiviti revenues. This is a sequential improvement of $5m versus the fourth quarter when the gross margin percentage was 27.3%. Staffing, selling, general and administrative cost for the quarter were a $178m representing 34.4% of staffing revenues. This compares to 36.3% of revenues for Q1 last year and 36.0% of revenues for Q4 2003. The percentage decline reflects better leveraging of fixed operating costs derived from higher revenue levels during the quarter. Protiviti SG&A costs were $12.8m for the quarter representing 23.8% of revenues. This compares to 40.9% in Q1 2003 and 28.5% in Q4 2003. The percentage decline also represents better leveraging of fixed operating cost.

Operating income from our Staffing division was $21.7m for the quarter; Temporary and consulting divisions contributed $19m to this amount while Permanent placement had operating income of $2.7m. Protiviti had operating income of $3.2m for the quarter, a $3.7m improvement from the fourth quarter. This is Protiviti's first full quarter of positive operating income. We ended the quarter with cash and equivalents of $368m, this was after funding $9m in capital expenditures and repurchasing approximately 900,000 shares in the open market. Accounts receivable were $284m at the end of the quarter with implied DSO of 45 days. This compares to 43 days at the end of Q1 2003 and 43 days at the end of Q4 2003. The DSO increase reflects the strong revenue gains during the latter part of the quarter which impacts the mechanics of the DSO computation. The aging of accounts receivable actually improved during the quarter. Now let's turn to guidance. Following are some of the trends we saw during the first quarter and the first weeks of April 2004. On a same day sequential basis, temporary consulting revenues were down in January, up in February and up again in March. Firm placement revenues were flat in January, up in February, up again in March.

During the first two weeks of April, revenues from our temporary consulting business were up 22% versus the same period last year. For the first three weeks of April revenues from our permanent placement division were up 50% versus last year. Of course it's difficult to assess firm revenue trends over such short periods of time. Based on these business trends we offer the following Q2 guidance. Revenues $575m to $600m for the quarter, earnings per share, $0.09 to 0.11. As you know these estimates are subject to the risk mentioned in today's release, it is our policy to limit guidance to one quarter. Now I'll turn the call back over to Mac for additional comments.

Thank you Keith. We are pleased with the results for our first quarter, this was our third straight quarter of sequential revenue growth in our professional staffing and consulting divisions and as noted each of our business units also grew year-over-year. The first quarter was a strong one, positive signs began emerging for US staffing firms in the second half of 2003 and this trend continued into the first quarter of 2004. The most recent department of labor reports shows the nation added more than 300,000 new jobs, the largest increase in four years, this of course is encouraging news and we are hopeful that we will continue to see improvement in the labor markets in the months ahead. As Keith discussed, we are also pleased with the performance of Protiviti, our internal audit and risk-insulting subsidiary. This business has built the reputation as a partly hereon-corporate governance, particularly the Sarbanes-Oxley Act of 2002 and related regulations from the stock exchanges and the SEC.

We are also seeing an expanding mix of business in internal audit and business in technology risk consulting and the cross sell opportunities between Protiviti and our professional staffing divisions are encouraging. Particularly given the focus, public and private companies alike, have placed on improving internal accounting controls and their corporate governance. Heading out of this link we recessionally expect to capitalize on the investments we've made in maintaining our local office networks and retaining our best talent. We have built a loyal client base over our 56-year history and we believe they will turn to us first for their specialized staffing and consulting needs. We believe we are well positioned to take advantage of improving hiring conditions. The company remains in excellent finance condition with virtually no debt and a very strong cash position. Keith and I will now be happy to respond to questions. As usual to allow as many callers as possible to participate, we ask that you please limit yourself to one question and a single follow up as needed. If you have additional questions, we will certainly try to return to you later in the call.

Thank you and at this time if you will like to ask a question, simply press star one on your telephone touch pad. If you are using speaker equipment please lift your handset prior to pressing star one. To cancel your question is star two. Once again that is star one to ask a question and star two to cancel. Our first question comes from Andrew Steinerman with Bear Sterns.

Good afternoon. What I feel was particularly noteworthy was SG&A leveraging, you've mentioned in your prepared remarks, do you feel like we are at a point were SG&A as a percentage of revenue will only continue to come down as revenue picks up, could you give us a sense of what SG&A leverage you're assuming in the guidance that you just gave for second quarter?

Yes, thanks Andrew. As we talked about on the last call our kind of general guidance as to look backwards at the same time we had same revenue levels, see what that percentage was and kind of target that for what you do now. We actually are ahead of the game on that basis. Our guidance for the coming quarter does assume a little bit of continued SG&A leverage as a percent to revenue and we hope there is some upside in that. That's clearly we would expect to leverage our SG&A at least to the extent that we de leveraged on the way down and hopefully we do better than that as we did this quarter.

Right and just in that John, could you just give us a sense of the types of course that you might be adding here, are we hiring rapidly, are we picking up our advertisement, what sort of in that SG&A?

Well, I say hiring levels, staffing levels are clearly we've had unused capacity for some time, we carry our best people to this downturn that clearly we have unused capacity as we speak this moment, with that said, with the kind of momentum we are seeing in the business, to get ahead of that momentum we are going to begin to hire on the staffing side. So, some of the leverage you'd otherwise see is going to be spent on adding to headcount in the staffing divisions and that's something we plan to do and still leverage on overall basis the SG&A.

Thanks for the clarification.

Thank you. Your next question comes from Jeff Silber with Harris Nesbitt.

Thanks a lot, just kind of a follow-up that, I noticed you added a few offices during the quarter, if you kind of tell us what's your plans are for additional office openings and as well as capital expenditures for the year?

On office openings, we will do a handful, it's not going to be a huge part of our story this year, we carried our physical footprint throughout the downturn, we have a fairly significant amount of unused real estate as we speak, square footage in locations where we currently exist. So, will there we a few offices added each quarter, yes, but it's not going to be a huge number. On the Capex front, our estimate for the year is something to the $240m to $245m for Capex, and the biggest piece of that is we've got a fairly large Voice over IP project, it's kind of in the early stages that we think will save the company quite a bit of money and its voice and data telecommunication cost but $40m to $45m is the number.

Okay great. Just a follow-up to that, the dividend that you announced today is that something that you think will be continuing after this quarter?

Look, Jeff, obviously our Board considers the dividend as is legally required each and every quarter, we would certainly hope that the dividend would continue for the indefinite future. I don't think the Board declared the dividend with expectations of stopping it anytime soon.

Okay, great, just wanted to double-check that.

Sure.

Thank you. Our next question comes from Greg Cappelli with Credit Suisse First Boston.

Hi guys, it's Greg. Congratulations, nice job.

Thank you.

Can you give us an idea of the scope of hiring; that might be going out of Protiviti, how much you are adding to headcount there? And I have just got a quick follow-up.

I guess it has two dimensions. On the one hand, their ever more successful in utilizing contract staff that come form RHI management resources, so to the extent prudent and appropriate there is a layer of variable cost labor that's been quite effective on Protiviti engagements and that's an ever growing percentage of, kind of the Protiviti effort if you will. In addition to that Protiviti is in the process of hiring full-time people. As we said before, the pyramid that we started with a couple of years ago was somewhat top-heavy relative to a typical consulting firm pyramid and therefore over time we would be filling out the lesser experienced positions and that's what we are in a process of doing. I would add that it's certainly a war for those people, we are not the only people out there, looking for those types of people but I would add yet again that having the world's largest finance and accounting recruiting operation, it's a huge benefit in times like this.

Okay. Then clearly the Sarbanes business is driving -- Sarbanes is driving a lot of business, just an idea of how much is end-market driven versus maybe taking share from the Big Four? Thanks.

Well you know that's an interesting question. In many cases -- in most cases these days the big four firm has the external auditor is conflicted out but you are typically two or three of the big four that are not conflicted out, they were eager to propose we are competing against two or three of the big four and a huge percentage of the time we are beating the big four when we win in the marketplace. So, we would argue that, we are not necessarily just an alternative to the big four but we are viewed as a very effective competitor to the big four because at least one or two of the big four are virtually always at the table when we compete. So how you crystallize what I've just said into an answer to your question maybe you'll have to figure out.

Sound like there is some market share shift there as well, if you are competing that well with them.

It's helpful. Thanks very much.

Thank you. Our next question comes from Randy Mehl with Robert W. Baird.

Good afternoon Mac, Keith, and great job across the board here. I knew the leverage was there somewhere, just want to pursue the gross margin. You guys have done a good job in managing pricing and gross margins through the down cycle, and it looks like you have some success now in passing through some of the higher payroll costs. I guess, just two questions here, number one, is your outlook that we see stable to improving gross margins as we move through the year, given what the actions you have taken and then number two, you know how did conversion experience end up in the quarter?

I would say outlook is stable to improving gross margins. They have improved throughout the quarter. Our guidance kind of assumed flat gross margins in the next quarter. So, with a little luck there will be some upside there. So, we are pretty positive about the outlook on gross margins, as to conversions, I would say they were a little bit stronger for the quarter, but it wasn't a huge thing relative to the overall staffing gross margins.

Okay. Great. Thank you very much. I appreciate it.

Thank you. Our next question comes from Marta Nichols with Banc of America.

Good afternoon and thanks. Congratulations on a great quarter. I am wondering if you can talk a little bit -- I am intrigued by your comments that it's a war out there for accounting finance professionals, it seems like eons ago that we were talking about sort of a sematic drumbeat in the staffing industry and in accounting and finance specifically of a war for talent. Do you perceive that being kind of a long-term issue or is the real aggressive war you think more of a short-term issue as company struggle to sort of get in compliance with Sarbanes-Oxley between now and mid-year next year?

Well, I think short-term clearly, the intensity of the war is pretty much dictated by Sarbanes-Oxley. However, I think if you kind of look at accounting graduates coming out today, that is a concern to everybody in the profession as well as kind of -- kind of a huge mind shift in the importance of accounting controls. I don't think that goes away in a year or two. So, I think the demand for accounting is going to be quite robust for sometime and net -- net talent is going to be short not the officers.

I agree with that Marta. Just one comment, that is I would like to make in response to your question. You noted that the Sarbanes-Oxley issues, which you noted would run through the middle of next year. I think, I'd Keith to comment, because my own feeling is that Sarbanes-Oxley work is going to run well past the middle of next year for a variety reasons and may be we ought just pick a couple of reasons off now.

Right.

Let's talk about that. First of all, during the quarter, our Sarbanes-Oxley percentage of revenues and productivity passed 50%. There is a lot of discussion about so what kind of legs does that have. How long does it last? What is the fall off etcetera? The short answer is nobody knows, that said -- consider the following items. First of all in February, the PCAOB extended the deadline for June 30, September 30, August 31, all large companies that didn't have a December 31 year-end that deadline got extended a year. Furthermore, the small companies and the foreign issuers, that has always been a year out. So, there is still some documentation testing demand there that hasn't been addressed in a significant way. Secondly, we were finding that there are typically gaps that companies in the controls they need and those they have and many times you put a Band-Aid in, to get yourself through the first time. Thereafter, you need circle back and make permanent those controls. There is fair amount of remediation work we are already seeing for the companies that got started early. We think that will have legs into the future. Remember too, the Sarbanes-Oxley is an ongoing annual certification. Every year, there will have to be testings on, to document that your controls are still active. Therefore, there will be ongoing annual testing work and demand. Also, remember as part of that ongoing annual certification to the extent you made a major acquisition, to the extent you made system changes. You got to have documentation in testing of those controls to the extent companies go public. There is going to be demand for those, for Sarbanes-Oxley, I think further that much of what is being spent this year for Sarbanes-Oxley is in fact being funded by that company's internal audit budget. So, whereas next year, maybe they won't spend dollar for dollar on Sarbanes-Oxley. Their internal audit budget will return to more traditional internal auditing, which is our sweet spot as well and also don't forget this New York Stock Exchange requirement for the first time ever that every NYSE company have internal audit function. That is probably more than one you wanted to know but the point is there are a lot of demand drivers here that we believe will take this beyond certainly a couple of quarters. Will it happen in the straight line? It may or may not, probably not but the point is the relationships we are making now and the demand drivers we've talked about here we think has more lags than one might first think.

Not to the point is that was a great answer with a lot of detail but something in particular that you said, you said that Sarbanes-Oxley obviously is ongoing annual certification that you have to go back and do this testing on a regular basis. Is that something that in your experience companies are going to be asking whoever their internal auditors are, whether it is you at some level, or one of the big 4, or is that something that that most companies are intending to do separate from their internal-audit work?

It's a good question and I think first of all there is a lot of debate about whether the internal audit group versus another group ought to be doing that testing. Our belief is that there is going to be a fair amount of outsourced testing work. Remember that most companies' internal audit skills traditionally are more operationally audit oriented than control of audit oriented. So this whole focus on internal accounting controls for many pre-existing internal audit departments wasn't their sweet spot to begin with.

Right. And maybe just a final question, does Protiviti in the mix of your overall total change the mix of companies that you are intending to targeting. One of the sweet spots that has historically was dealing primarily with smaller companies where you might only place one or two or a handful of accountants. But it sounds from a lot of what you say like the target clients for Protiviti is typically a larger company and may be that's by virtue of the fact that you are talking about public companies?

I'd say that's true. Fairly their target is a larger company not that we haven't done a limited amount of business for larger companies even within Staffing. We never had a problem doing business on the Staffing side with larger companies if they'd pay our rates. We are in the retail business in staffing not at a wholesale level. So if big companies would pay retail rates we would love to do business with them and what's changed here is on the Protiviti side we can get staffing or better margins working with a large company. The other point I would make the kind of interesting opportunity with the combination of staffing in Protiviti is that Protiviti can kind of move to smaller companies that it has traditionally done business with. Staffing can kind of move up the size of company it does business by blending a combination of consultants, contractors from our staffing divisions with the project supervision skills of Protiviti.

Okay. They were helpful. Thank you.

Thank you. Our next question comes from Chris Gutek with Morgan Stanley.

Thanks. Hi Mac and Keith, great quarter. If you look relative to the 40% or so the growth rate the company had in the mid 1990's are there any structural impediments whether that be supply of labor or anything else you might identify that would prevent the company from achieving those kind of growth rates given sufficiently strong demand?

Without actually sitting here forecasting that we are going to have that kind of growth, which we certainly hope will happen. We are not aware of any structural reason why it couldn't reoccur and in fact all of the severity of this downturn was much greater than the one that preceded the last recovery.

And specifically the supply of labor issue may be a few years down the road it seems like to be as that of a growth limiting factor, but I guess in the next couple of years you don't see that being an issue?

We don't and I think you would find if you look back to the late '90s, we had a little pause for a quarter or two but we were pretty successful competing for talent even at a time when unemployment rates were at 40-year lows.

I would add to that Chris but I think as the labor market tightens it is in f act that goes the way we suspect it will over the next couple of years. Your ability to recruit talent is going to be a huge competitive issue, and we liked our chances before and we like them going forward because we have a large recruitment firm, we are well known, we are the oldest and largest in the accounting and finance arena. So we would like to think that puts us in the best position to compete. But there is no question, your ability to attract the talent will be a major competitive factor. I think it favors a firm like ours versus so many of our small to mid-size competitors who otherwise do find job in many markets, but I do think they will be at a disadvantage. So again if it goes that way we will be preparing to compete aggressively for the talent.

As a follow up to that, I guess I'm looking at consensus GDP growth forecast of 4.7% this year and 3.8% in 2005. You guys got to have some guess to what kind of growth that could translate into for Robert Half?

Our forecast always go out of quarter and we've given that quarter, but those kinds of GDP rates, I guess they would not have add things.

Okay and one more quick follow up. Did you mean to imply that the unemployment tax cost increases and the workers' comp cost increases are not being fully passed through to the customers?

Well, we are getting close. We aren't quite there, as I recall we were down like 40 basis points between the third quarter and fourth quarter, 30 of which we caught back up on this quarter. So we've got a little way to go, but clearly yes the objective is to pass it through, and so far so good.

Great. Thank you.

Thank you. Your next question comes from Mark Marcon with Wachovia.

Good afternoon and congratulations terrific. Questions are on Protivit9. You had tremendous, you know, SG&A leverages this quarter on Protiviti, is that something we can that's sort of pattern continue going forward here as the year progresses?

Well there is more operating leverage in that business and therefore there certainly have a possibility of that since we never account of being with this operating model, kind of at this point of their profitability it's hard to say for sure but we are reasonably optimistic there.

I guess what I'm asking is do you have the expense space -- kind of set up the way you like it in terms just on the SG&A side at this point?

Clearly we continue to add locations, particularly international one. In fact during this quarter we added them along Italy and Canada. We've got a handful of other countries we targeted as we talk to many calls so there is going to be an SG&A component of that as we continue to recruit more staff particularly as competitive it is. We've recruiting cost so the payroll cost of the RHI recruiters, that work on Protiviti assignments, that's considered a Protiviti SG&A cost, not of staffing SG&A cost. So you've got those costs to consider. But all of those things said, I think there is a decent chance since you are going to have pretty good leverage in SG&A as it relates to Protiviti.

Right and then with regards to the gross margins on Protiviti, how quickly can you get those up to the staffing margins.

Well, we are getting close, we provide at 30% this quarter, we believe long term that can be either better than staffing margins, wherein we still have a pyramid shape that's top heavy relative to our goal and as we properly shape that pyramid by adding people at the less experienced levels, we are going to see those gross margins benefit from that.

And in terms of the revenue jump that you experience relative to the prior quarter, did you have just a ton of business that started up right at the beginning of the year or was it a steady build, as the year unfolded or as the quarter unfolded and therefore we should probably expect that sort of carry through -- would filter through into the second quarter at a minimum?

It's actually a pretty steady build and the issue currently is more -- do you have the capacity to service their work, rather than can you sell work. I mean I certainly in my accounting career, I've never seen the kind of demand that exists right now in the marketplace.

From that perspective is there an opportunity across the system across all accounting related functions to take margins up?

Well, that's an interesting question particularly at Protiviti where what you really want is annuity relationship not a one-time project. And I cannot tell you if there are different philosophies even among the big four as to how they price. And our philosophy is let's be fair, let's not , let us not get last dollar, let's be fair to the extent we have to pay more for talent because its competitive. We'll pass that through or attempt to do so, but let's not -- was not to try to get the last dollar because we can. The ultimate goal to develop a relationship.

Yes, I was also wondering just in terms of taking a look at the account terms and also management resources in terms of potentially taking up the gross margins there as well?

Well, again. I am not talking about .

Management resources have very good gross margins. They are the highest and our sweetest staffing services. We feel pretty good about that and again our clients appreciate that we're being reasonable in times when we don't necessarily have to be, the people have long memories.

Okay. And then last question. Account terms frequently on these calls, remember in Q1 you mentioned it as we go into Q2 there is usually or sometimes a fall of. What do you think?

Clearly a factor in our guidance. The low end of the guidance is basically flat, outstanding the kind of trajectory we are on in the first quarter, and so a typical pattern would be as year end work subsides, that would actually be a seasonal slowdown of a few percentage points in the second quarter. That may occur, we don't know, our sense is that probably won't, but the low end of our guidance assumed flat rather than down that we might have given based on traditional seasonal patterns, the package you have got, the Sarbanes-Oxley demand, and two we are early in the cyclical rebound, those two factors, our hope is carry the day and more than offset any seasonal impact. That's why the low end of our range was flat.

Right, thank you.

Thank you. Our next question comes from Kelly Flynn with UBS.

Hi. This is Andrew Kelly. You saw 8% year-over-year growth in Q4, 29% year-over-year growth in Q1. You said that growth had reached 50% in the first three weeks of April. I was wondering if there is anything notable that you could pull out from the demand growth there. You know by vertical or you know Sarbanes-Oxley.

I think Sarbanes-Oxley and the focus on internal accounting controls have created a very broad demand for accountants today and clearly people want to commit to those on a full-time basis and Robert Half Division is right in the middle of that and benefiting significantly from it.

And could you perhaps quantify the impact on that division at all, and the percentage you know may have come from Sarbanes-Oxley.

I couldn't, it's clearly a factor. The fact that you see accountants picking up, it's not as much a factor there. But there the story is just as much that the activity levels of our clients are picking up. Therefore, they need more accounts payable, accounts receivable, payroll type people, and that's probably more indicative of a broad base activity level pickup than it is necessarily Sarbanes-Oxley internal accounting controls, corporate governance, not that there isn't some impact to accountants.

Okay, thank you.

Thank you. Our next question comes from Matt Litfin with William Blair.

Good afternoon. So, your dividend is $0.06 per share for the second quarter. What are your targets for the growth in that dividend over time, and also I wonder will you be scaling back at all your share repurchase activity as a result.

Matt, there are no targets for growing the dividend, and if they are going to be and they will be set by the board. As I mentioned earlier, the board will discuss the dividend in each quarter that's required to do before referring it. But we would not want to leave you with the impression that we have some planned growth rate at $0.06. I am sure it will be reviewed from time-to-time. There is no target radar as such at which it is anticipated to be grown.

impact of the purchase of program, we'll continue to be opportunistic, might we be a bit more opportunistic and a little less routine because of this, maybe. But just as in the fourth quarter, we bought no shares. In this quarter there were a few weeks for the stock to lift, and we jumped into a tune of 900,000 shares. So, I'll say we certainly will continue to be opportunistic, we've the ongoing cash flow, we've the balance sheet to do so, and that will be our plan.

Great, thanks very much.

Thank you. Our next question comes from Adam Waldo with Lehman Brothers.

Good afternoon. Really great to see the synergies working on productivity so well.

Thank you.

I wanted to come back to this topic a bit, how fast these apparent recommendation binomial latest model for option expensing starting in '05. With effect to your thought process going forward, with respect to compensation plan changes you might make as between mix of option and cash. Is compensation of the company given the historic relatively high-level option grants, and secondly how might that also cover buyback and dividend policy going forward.

Adam, we, going all the way back, I think 1990 has provided option grants for all employees of the company and I've been a big believer in sharing the equity with everyone as we anticipated that was the best way to compensate them for building stockholder value. As to evaluation models and so forth, we'll see how the final rules come out and we will make decisions at that time with our board, but realistically, I would just say that we think equity is an important incentive for our people and we would expect it to be a factor going forward, the exact mix of option versus restricted stock versus something else will have be decided as we go forward. But again I would say that I hope our decisions we made based on what is the best way to incentivize and retain the best people in the industry are and while accounting is important, it's not as important as the former. So, that will be the guiding tool. We did cut options this time by roughly half, a little more than half of the executive group. And so, we'll see, there will be something that we will be working on with our board as we go forward in terms of what the policy would be based on accounting rules. The earnings per share impact we've broken out in the foot note forever. The current run rate is about $0.03 per quarter impact from options and whether the latus binomial is going to have a very different impact in Black-Scholes, we can debate. We've actually studied that a fair amount. The probable largest difference would be, we studied our history and on an average, our employees exercise options or hold options for five and a half years, you input that into Black-Scholes. Under latus binomial, what you incurred or the exercise behaviors of your employees in the past with respect to how deep in the money were there options when they exercised and coupled with your volatility rate, latus binomial kind of confused what that average life is. Our hunch is they are not going to be that different, but there is certainly a lot in the press that latus binomial result in a lower valuation in Black-Scholes, it may be so, we don't know that yet, but I think I've tried to articulate kind of the essence of what the difference may be.

Yes, that's very helpful. Keith, sticking with this topic, if you think about the client facing side at Robert Harford and obviously internal operations, are you all doing a fair amount of work within your higher end divisions like Productivity in RHI management resources around these issues now where historically the promise of the executive compensation consults like ?

The short answer is no Adam, and the truth is I think a lot of people have no clue what the latus binomial model is and so I think there is a huge learning curve by many, many people about what that means, but it typically is not our sweet spot, it is the sweet spot of the , etc.

Thanks gentlemen.

Thank you.

Thank you. Our next question comes from Fred McCrea with Thomas Weisel & Partners.

Mac & Keith, good afternoon. Great job.

Fine, thank you.

Question in terms of going back to your discussion of the unused capacity right now, and looking at that historically in the '99 time frame when you were at the kick off at marginally 11%, what type of capacity were you at then? Were you pretty well matched out at that point, and how does that compare to run rate now? Just trying to get to what is the potential for peak margins?

Clearly, we have less unused capacity and we were very much in a hiring mood, and I guess the only thing I would caution is that leveraging the compensation of our field staff isn't necessarily the largest level point in our SG&A. It's more like the fixed cost of occupancy. It's general insurance, it's those kind of costs, more so than it is what we pay for our field staff, it's our back office costs that we would leverage. So, I guess I wouldn't get too carried away thinking that the biggest issue we have is getting our field compensation cost as a percentage of revenue to be a major contributor toward operating leverage.

So, think about it more on a volume perspective than a capacity perspective?

I think that's right.

Okay, great. Thanks very much.

Thank you. Our next question comes from Craig Pecham with Jeffries.

Good afternoon. In late January, when you talked about your guidance for the first quarter, you've given a range of $520m to $540m, obviously -- and I subside to that. I wonder if you could just help me understand a bit where the pockets of strength were that were unanticipated that drove the revenues about that range by business lines?

I guess my answer and that's your answer as well. It wasn't necessarily a surprise in the source of it, it was the amount of it or the intensity of it that was a surprise. I mean clearly in Protiviti, we knew we had a huge amount of demand in Sarbanes-Oxley, in management resources we knew we had a huge amount of demand for companies that wanted to do it themselves or companies that wanted to augment the staff of the other providers that they used. We knew that, but kind of the extent of that was more the issue or more the surprise and there were some new driver that snuck out on us, that we didn't anticipate.

I think that's well said. The accounting and finance divisions obviously are very busy. We've said for several calls, maybe multiple calls that it's not going to be raining forever and we kept saying that it just seemed that eventually the job demand would pick up. Well, it certainly has. Some of that's driven by Sarbanes-Oxley but the facts are, it still it came almost as a surprise and it was more intense than we expected and hopefully it's a good sign for the overall economy.

I'll just leave you one footnote. If you look at Accountemps again, I think that's more indicative of say general broader based pickup than you see in our other divisions because that kind of mirrors activity levels at our middle market clients.

Okay and if I may follow on with a question on gross margins, you made some comments earlier addressing the levels of gross margin. I guess I wondered specifically, were there lines of business that have might have seen improvement or expansion, offset by others which might have seen declines?

The biggest issue we have is that in some divisions the length of assignment is shorter, which allows us to reprice more quickly than with other divisions where the length of the assignment is longer because we didn't typically try to reprice during the middle of an assignment but wait for that one to end and have a higher price on the next assignment. But for that phenomenon there's not a big difference.

Okay thanks for the insight.

Thank you. Your next question comes from Kurt Moller with RCM.

Good afternoon.

Hi

Pardon me. Could you just help understand a little better between January and February?

Demand clearly picked up probably across the board.

What was your customers thinking? What inspired them to have more demand in the last two months of the quarter than they previously had?

Well I actually think a lot of the January slow start was holiday impacted. Traditionally, particularly in technology and in the Office Team, you can look back four and five years and January always gets off to a slow start. I think that it's just kind of people getting back to work and engaged more than there were some huge surge in demand. That somebody got an epiphany sometime in January that crystallized in February.

If I were to take your customers by the vertical or geography or size of the company? Where would you say the strongest areas of demand are?

Well, we've never gotten to that level of disclosure much. Clearly we have locations better -- some better than others. Some of that internal execution as well as market demand but as we said in the past, we are very diversified from an end market point of view, we're diversified kind of based on relative population from a geography point of view, where we skew on the staffing side particularly into smaller companies and at Protiviti to larger companies but nothing just screams at you. And I know we have used that term before, but do we have some operations doing better than others, yes, as part of that internal execution, yes. So I don't think there's anything noteworthy enough to single it out.

Finally an SG&A cost on the temporary staff inside. You just mentioned earlier that the field compensation is not as big as other costs there?

We are not leveraging the percentage. In absolute dollars, clearly they are the largest dollars but our back office cost, our occupancy cost, those cost that aren't variable cost are what is delevered during the downturn and we are relevering as we improve.

If we were to think about SG&A cost from a temporary staffing side as compensation benefits and that kind of compensation versus non-compensation cost, how would that break out in that division?

Its about two-thirds of our SG&A is compensation.

Thank you very much.

Thank you.

Thank you. There is an additional question from Andrew Steinerman with Bear Stearns.

Hi, it's Andrew. Could you just give a comment for how you think perm placement will do in the second quarter?

Our guidance Andrew for perm is not that to similar from that on the low end of guidance, we don't think it will do any worse in adjusted, now in the high-end guidance we take a gross, but...

Same as to.

Essentially, the same as to because it means the trajectory there as we just disclosed is pretty good.

Great, and could you give us just Protiviti performance in second quarter?

Similarly, the low end is same to up a little a bit and the high end is up from there, but we definitely have very good momentum in Protiviti.

Right. Could you just give us a reason why it might only be saying like, what would be the justification for Protiviti being flat sequentially?

That the -- our capacity got constrained to the point, where we couldn't deal with anymore demand.

Okay, thanks for the clarifications. I appreciate it.

Thank you. We have time for one more question, and our last question comes from Jeffrey Silber with Harris Nesbitt.

Thanks for letting me sneak in. Can you just remind us on Protiviti, are there any lockup agreements or any expirations that we need to be worried about with some of the senior partners in the group?

Lockup agreements or expirations, no. There aren't any, there are non-competes, evergreen non- competes which are the same non-competes that exist throughout the big four, so there is nothing unusual there. We have compensation plans that periodically requires us to set goals and that's something we've done every six months so far whether we do it every six months or twelve months, is something yet to be decided. But there is no major fundamental, structural any of those kind of changes out here.

Jeff, I just add that I think the core within Protiviti is excellent, and needless to say we are very proud of the job they've done and hopefully they are proud of what they have achieved themselves. So, I think they are performing well and we are not aware of any problems along the lines here outlining or inquiring about.

Okay, great. And just a quick follow-up on tax rate, it was a little bit higher than we have modeled, which we should be modeling in going forward?

You know, it's going to jump around a bit for a few quarters. You know 40-ish percent is probably safe, could it be 39.5%, could it be 40.5% or 41, yes. It's going to be in that range.

Okay, great. That's helpful. Thanks again.

Thank you. Thanks everyone for your time this afternoon. This call conference call will be archived in audio format on our Web site at rhi.com. This concludes today's teleconference. Thank you again for participating.

Thank you. And as a reminder, today's conference will be available via instant replay through and including April 28, to access the recording you may dial toll free 800-339-2290 domestically or 402-998-0585 internationally. Those numbers once again are 800-339-2290 and 402-998-0585. Ladies and gentlemen, thank you for attending today's Robert Half International first quarter 2004 conference call, and have a good day. You may disconnect at this time. Thank you.