羅致恆富 (RHI) 2004 Q3 法說會逐字稿

Good afternoon and welcome to the Robert Half International third quarter 2004 earnings conference call. All participants will be a listen-only mode until the question-and-answer portion of the call. At that time if you have a question simply press star 1on your touchtone phone. At the request of Robert Half International, today's conference is being recorded for instant replay purposes. I would now like to introduce Mr. Max Messmer, chairman and chief executive officer. Sir, you may begin when ready.

Thank you. Good afternoon, everyone. With me is Keith Waddell, our vice chairman, president, and CFO. We would like to thank you for joining us today to go over our third quarter 2004 financial results. A copy of our press release containing these results is available on our website at rhi.com. As is customary, I would like to remind listeners that our comments on today's call contain predictions, estimates, and other forward-looking statements representing our current judgment of what the future holds. Among these statements are words such as "forecast," "estimate," "project," "expect," "believe," and similar such expressions. We believe these remarks to be reasonable, but they are subject to risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. We have 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 the statements made in the conference call.

Now let's discuss the third quarter. After our prepared remarks, Keith and I will be happy to respond to your questions. Revenues for the quarter were $708 million, an increase of 41 percent from the third quarter of 2003. On a sequential basis, revenues rose 10 percent from the prior quarter. These increases represent all organic growth. Income per share was 24 cents compared with 3 cents for the third quarter of 2003 and 18 cents last quarter. Our staffing operations had third quarter income of 18 cents per share, and our Protiviti subsidiary had income of 6 cents per share.

Cash flow from operations for the quarter was $39 million before capital expenditures of $10 million. We ended the quarter with $413 million in cash and equivalents after paying a $10 million cash dividend to shareholders and after repurchasing 1.3 million RHI shares in the open market. We were pleased with the performance of our staffing operations and the performance of Protiviti during the quarter. We estimate that 15 percent to 20 percent of our consolidated revenues related directly to Sarbanes-Oxley, which continued to grow significantly during the quarter. The remaining 80 percent to 85 percent of revenues, which are not directly related to Sarbanes-Oxley reflected organic gains of more than 20 percent on a year-over-year basis. This broad-based improvement was particularly noteworthy in our Accountemps office team and Robert Half Technology staffing divisions.

Now I'd like to turn the call over to Keith, who will review our earnings report in detail after which I'll have some additional remarks.

Thank you, Max. I'll start with revenues. As Max said, overall revenues for the company were $708 million. This is an increase of 41 percent from the third quarter of last year and 10 percent sequentially. As Max also noted, all growth was organic. There were 64 billing days in the quarter, the same as last year, and also the same sequentially.

Accountemps revenues were $257 million, an increase of 25 percent from the third quarter of 2003 and an increase of 5 percent sequentially. Accountemps is our largest staffing division with 334 locations worldwide. It accounts for 36 percent of total revenues. OfficeTeam revenues for the third quarter were $149 million, up 17 percent from the third quarter of 2003 and up 2 percent sequentially. OfficeTeam is our high-end administrative staffing division. It began operations in 1991 and has 310 offices worldwide. This division represents 21 percent of total revenues. Robert Half Technology revenues were $71 million for the quarter, up 29 percent from Q3 in 2003 and up 7 percent sequentially. This division places IT professionals on a consulting and full-time basis. It was launched 10 years ago and represents 10 percent of revenues. There are 105 Robert Half Technology locations worldwide. Robert Half Management Resources had third quarter revenues of $95 million, up 87 percent from Q3 2003 and up 19 percent sequentially. Robert Half Management Resources places senior-level accounting and finance professionals on a project basis. It was introduced in '97, operates in 109 offices worldwide, and accounts for 13 percent of revenues. Our permanent placement division, Robert Half Finance and Accounting, had revenues of $36 million in the quarter, up 52 percent from the third quarter of 2003 and up 4 percent sequentially. This business was established in 1948 and operates in 334 offices worldwide. It accounts for 5 percent of total revenues.

International revenues for RHI staffing operations were $118 million for the third quarter, up 38 percent from last year and up 10 percent sequentially. On a constant-currency basis, these growth rates were 26 percent year-over-year and up 8 percent sequentially. Our professional staffing divisions operate in 66 locations in 10 countries outside the U.S. International staffing operations account for 19 percent of total staffing revenues. Third quarter revenues for Protiviti were $100 million and comprised 14 percent of RHI revenues. Revenues for Protiviti were up 163 percent year-over-year and up 37 percent sequentially. Established in May of 2002, Protiviti currently has 36 locations in North America, Europe, Asia, and Australia.

Turning to gross margin, temporary and consulting staffing gross margin was $207 million for the quarter. This represents 36.2 percent of applicable revenues compared with 35.1 percent of revenues for Q3 2003 and 36.0 percent of revenues for Q2 2004. The sequential percentage improvement relates primarily to widening spreads between bill rates and pay rates. Overall staffing gross margin was $243 million for the quarter, or 40 percent of staffing revenues. This compares to 38.4 percent of revenues in Q3 last year, and 39.9 percent of revenues in Q2 2004. Gross margin for our Protiviti subsidiary was $40 million for the quarter, representing 39.4 percent of Protiviti revenues. This compares to 38.4 percent of Protiviti revenues in Q2 2004.

Staffing, selling, general, and administrative costs for the quarter were $192 million, or 31.6 percent of staffing revenues. This compares to 35.8 percent of revenues for Q3 last year and 32.3 percent of revenues for Q2 2004. The percentage decline reflects further leverage of our fixed operating costs primarily rent, depreciation, and administrative compensation. This again resulted in lower SG&A percentage levels than those reported in 2001 when RHI generated comparable amounts of revenues. Protiviti SG&A costs were $20 million for the quarter, representing 20 percent of revenues. This compares to 27.1 percent of revenues in Q3 last year and 20.9 percent of revenues in Q2 2004.

Operating income from our staffing divisions was $50.7 million for the quarter, up 18.5 percent on a sequentially basis from last year and represents 80.3 percent of staffing revenues. Temporary and consulting divisions contributed $46.4 million of this amount, or 8.1 percent of applicable revenues while Perm Placement division had operating income of $4.3 million or 12.2 percent of placement revenues. Operating income for Protiviti was $19.5 million for the quarter or 19.4 percent of divisional revenues. This was an improvement of $6.6 million or 52 percent from the second quarter of 2004 when operating margin was 17.5 percent of divisional revenues.

We end the quarter with cash and equivalents of $413 million. As Max noted earlier, this was after funding $10 million in capex and paying a cash dividend to shareholders of $10 million. During the quarter, the company repurchased approximately 1.3 million RHI shares on the open market. There remain approximately 7.4 million shares available under our board-approved stock repurchase program. Accounts receivable were $369 million at the end of the third quarter with implied dates, sales outstanding of 47 days. This compares to 43 days at the end of Q3 last year and 46 days at the end of Q2 2004. DSO was once again impacted by strong revenue gains during the latter part of the quarter.

Now let's turn to guidance. Following are some of the business trends we witnessed during the third quarter and the first weeks of October. On a same-day sequential basis, temporary and consulting revenues were up in July, up in August, and up again in September. Permanent placement revenues were down in July, up in August, and up in September. During the first two weeks of October, revenues from our temporary and consulting businesses were up 31 percent versus the same period last year. For the first three weeks of October, revenues from our permanent placement division were also up 31 percent versus last year. As we've noted many times, it's not possible to gauge perm trends over such short periods of time.

During the fourth quarter our staffing operations will have two fewer billing days on a sequential basis. We believe Protiviti will also be impacted as many of its employees take days off that have been largely deferred because of their tremendous workloads during the year. This could result in an impact to Protiviti of as many as seven billing days. Based on these observations, we offer the following Q4 guidance -- revenues, $698 million to $727 million for the quarter; income per share, 23 cents to 26 cents. As you know, these estimates are subject to risks mentioned in today's release. It is our policy to limit guidance to one quarter. Now I'll turn it back over to Max.

Thank you, Keith. We are optimistic about the opportunities for growth within each of our lines of business. In fact, this is our six consecutive quarter of broad-based sequential revenue increases in our staffing operations. The most recent Bureau of Labor statistics report shows that the staffing industry grew 9.4 percent year-over-year and added 200,000 new temporary workers in the past 12 months. Obviously, we view this as a positive sign. We are also encouraged by year-over-year growth in our Accountemps, OfficeTeam, and Robert Half Technology staffing divisions. As you know, these businesses target the middle market, and we believe they are benefiting from increased confidence among companies in this segment. The job statistics reported by the National Federal of Independent Business have been very solid over the past six months. RHI has been in business a long time, and it's been our experience that a rebound in the overall job market has been historically preceded by a recovery in the temporary services sector. If this proves to be the case, we are looking forward to continued strong growth in 2005.

The results in our staffing operations are due not only to increase demand by companies of all sizes for interim professionals, but also to very capable execution by our field offices. We have positioned ourselves to benefit directly from the improved economy. We've kept our office network intact and invested in training during the downturn. We have a high skilled and enthusiastic workforce in place at this point with an experienced team of managers at the branch and the regional levels.

In just two-and-a-half years of operation, Protiviti has built significant momentum and surpassed the $100 million milestone in revenues for the quarter. We hired an outstanding group of seasoned professionals to launch this business, and we have continued to add to great people to fuel Protiviti's growth. They are establishing many new relationships with major corporations around the world. Our international offices are expanding rapidly, and we are pleased with their ability to achieve profitability. Our global footprint extends to North America, Europe, Australia, and Asia. Protiviti has demonstrated its ability to deliver its suite of consulting services and highly sought-after specialty areas such as internal audit, co-sourcing and outsourcing, business process improvement, business continuity, information technology audit security, and many other areas. Protiviti is well regarded for its expertise in internal audit, corporate governance, and Sarbanes-Oxley-related initiatives. While we cannot predict what level of Sarbanes-Oxley-related work will continue past the initial compliance period, we do offer a few observations, just as we did on our last call, that we believe are worth noting again.

There is a subset of companies that are not required to comply with Sarbanes-Oxley until 2005 and, therefore, must go through the entire cycle of initial controls documentation, design effectiveness, remediation, and testing. These include non-calendar year-end businesses, small cap companies, and foreign issuers listed on U.S. exchanges. New issuers are also included in this group. Companies that initially comply in 2004 must support ongoing compliance efforts by identifying and evaluating any current business or process changes that impact their financial statements or disclosures. They must then ensure these changes are subjected to the aforementioned cycle of documentation through testing. Companies will be implementing business process and control improvements to ensure continued compliance. Recurring annual testing of controls will be required for companies to confirm that these controls are in place.

We believe some companies underestimated the amount of effort and the breadth of skills needed to achieve initial compliance as well as ongoing compliance with Sarbanes-Oxley. Many companies that reduced their annual internal audit budget to partially fund Sarbanes-Oxley efforts will end up reinstating these budgets particularly in light of the New York Stock Exchange requirement that all listed companies have an internal audit function.

As you can see, this is a complex and fluid process that is literally changing the way companies in the U.S. and worldwide view and manage their accounting and financial reporting processes. The heightened focus on internal controls and the need to institutionalize initial compliance efforts is changing the accounting landscape and for many companies around the globe will require a new layer of controls infrastructure. We believe this will continue to create demand for deep skills and expertise in all areas of internal controls and accounting. Protiviti is well positioned to take advantage of this new environment, and the trend in corporate America toward using multiple suppliers of audit-related services should benefit Protiviti, as it will our financial staffing divisions.

None of us can predict the future impact of this emphasis on corporate governance, but we felt these trends were worth noting again on this call. Keith and I will now be happy to answer your questions. To allow as many callers as possible to participate, we ask that you please limit yourself to one question and a single follow-up, if needed. If you have additional questions, we'll certainly try to return to you later in the call.

Our first question is from Randall Mehl with Robert W. Baird.

Thank you. Outstanding results, Max and Keith, and I appreciate the clarity on fourth quarter guidance. As you've gotten this momentum in Protiviti clearly built, you know, throughout the year, how much of the Protiviti cost structure now is variable?

If you look at our above-the-line cost in Protiviti, over 40 percent of those are variable, kind of consisting of three components. You've got the variable compensation to our full-time staff; you've got the use of contract staff source principally from RHI Management Resources; and you've got reimbursable expenses, which, by definition, are variable. So the sum total of those three put over 40 percent of Protiviti's direct cost in the variable category.

Okay, very good. And just a follow-on to that same question -- what was the contribution that Protiviti made to Management Resources in the quarter -- or I guess there wasn't -- let me phrase that differently -- how much Management Resources did Protiviti use in the quarter?

The Protiviti continued to use Management Resources significantly during the quarter. Those are reported in our financials as Protiviti revenues because Protiviti bills the client. The revenues you see under Management Resources are non-Protiviti clients of Management Resources. We haven't broken out a specific percentage that Protiviti uses from Management Resources, but it's significant, and it grew during the quarter, and it's a component of that variability that I just talked about.

Thank you.

And for participants wishing to ask a question, simply press star 1 on your phone keypads. Our next question comes from Greg Cappelli of Credit Suisse First Boston.

Hi, guys, it's Greg and Josh, nice job. Is there any way that you can quantify or just give us an idea -- I appreciate the data you gave out about Protiviti. We're trying to figure out if you can quantify or give us some idea of how many clients visually came to you just for Sarbanes work, have hired you for other assignments as well, outside of that?

Well, as we mentioned on the last call, many times when we were initially engaged to do Sarbanes-Oxley work we also got a commitment to continue thereafter as their internal audit co-sourcer or outsourcer. The truth is, particularly for the major projects that are calendar year-end companies, your kind of in crunch-time now to get Sarbanes-Oxley done by the end of the year. Therefore, it's somewhat early to talk about the major follow-up work you've gotten to initial compliance when, frankly, you're just now finishing initial compliance.

Okay. The one follow-up I have on that is you talked about the widening spreads between the bill and pay rates -- how much of that would you attribute to Sarbanes-related business?

Not significant. It's more broad-based across our divisions. Our larger divisions that only have a small Sarbanes impact.

Okay, thank you.

Our next question comes from Andrew Steinerman of Bear Stearns.

Good afternoon, gentlemen. The perm placement operating margins were a little suppressed compared to last quarter. You talked about SG&A leverage being in the organization. You really only see that most clearly in the staffing business and in the Protiviti business. What's happening with the operating margins in perm placement?

Andrew, what you're seeing there is the result of some investment hiring we're doing on the perm side. As we've seen more and more perm demand, and I would offer that perm has recovered pretty much concurrently with rather than on a delayed basis as it has in prior recoveries such that we've decided to invest more in perm staff that, in the short term, suppresses margins, as you mentioned.

Right. How much are you hiring in perm?

We don't break out our staff by division, as you know. But, again --

The answer is we've been hiring aggressively, Andrew, and we certainly hope to improve the margins.

Right, and so you aggressively, during the quarter, particularly not last quarter?

We hired in the latter part of the prior quarter -- that continued into this quarter and, clearly, there will be a time when you get payback from that. But in perm placement we did make investments this quarter, which we think were wisely made.

Right, that makes a lot of sense, and just lastly on perm -- typically, the perm business is down maybe 5 percent sequentially in the fourth quarter. Is the momentum of perm, as such, that you'd be down less than that within the guidance that you gave just on perm?

Well, as you state, perm is usually a little softer in the fourth quarter. Frankly, clients run out of budget typically in the fourth quarter. Whether Sarbanes-Oxley impacts perm hiring in the fourth quarter such that the seasonal impact will be different than traditionally experienced, I can't speak to. But we did consider the factors you just mentioned in the guidance that we gave.

Very clear, thank you.

Thank you. Our next question comes from Jeff Silber of Harris Nesbitt.

Thanks, good afternoon. I was curious if any of your Protiviti consultants have been hired by your clients and, if so, if you charge any type of conversion fee on those?

Well, let's see, certainly no managing directors. If we've had one or two, it could have happened. It certainly hasn't gotten a lot of visibility if it has happened, and I'm not aware that we charged any fee, either. Protiviti is very different than the staffing business, as you know, where conversions of contractor status to full-time are common, but that's certainly not near the case in Protiviti.

So that's not something in terms of ongoing strategy, something you'd be looking at, going forward?

No.

Okay, and then just one quick follow-up -- can you give us the increase in average billing rates and average wage rates for the quarter?

The billing rates went up kind of low single-digits on a sequential basis, and pay rates went up just a hair less than that. But it was nothing dramatic, but it was low single digits.

And that's sequentially -- how about year-over-year?

Year-over-year -- I think that might have gotten you to -- let me just check for a second here -- maybe high single digits right into low double digits on a year-over-year basis. I think it's 9 or 10 percent.

Okay, that's very helpful. Thanks, Keith.

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

Thanks, a couple of questions -- kind of look beyond the Sarbanes-Oxley bubble and in that context I'm wondering if you guys have done an assessment or an updated assessment of what you view as the overall market size for risk consulting and internal audit type work that would be addressable by Protiviti. In other words, beyond the Sarbanes bubble, what's the size of the market, what, roughly, percent of that is held by the Big Four versus smaller competitors and, several years down the road, how much do you already think Protiviti can pick up?

That was several questions. First is the kind of the size of the market. I think the market has tended to kind of overlook this New York Stock Exchange requirement that all public -- all NYSE companies have an internal audit function, many of which did not, particularly the mid-cap and smaller cap companies. We see that trend kind of spilling over into NASDAQ companies, even though that firm requirement doesn't exist. Therefore, it's our belief that the overall market for internal audit services -- forget ongoing compliance with SOA -- is much, much larger than it traditionally has been, which is an opportunity for Protiviti. As to the Big Four share of that, clearly, traditionally, there weren't the prohibitions about their providing internal and external audit services for the same clients that now exist, which certainly pave the way for multiple vendors to provide services to companies that didn't exist historically. And so we're bullish not only about the ongoing effort needed to comply with Sarbanes-Oxley -- you used the word "bubble" a couple of times there -- clearly, there is some initial effort that won't repeat, but our sense is that there has been a fair underestimation of the requirement on an ongoing basis to comply with Sarbanes-Oxley.

Chris, at the end of the day, no one knows, as I said in the prepared remarks, what the market will be, down the road, related to Sarbanes-Oxley. But, as Keith noted, the legal environment has changed to dramatically that I guess you'd have to count Keith and me as being somewhat more optimistic than those who really do think there's a bubble, particularly if you're trying to compare the bubble to Y2K or the Internet bubble. These requirements are not going away anytime soon, and so I think the environment for sophisticated knowledgeable experts in this field, and we are fortunate to have the benefit of a lot of those people who joined us from Andersen and other firms at this point -- I think it's going to remain strong, so we'll see.

Well, thanks for that. That was very helpful. And if I could sneak in a question about the typical environment as well -- obviously, your recent demand trends early into the fourth quarter look pretty strong, but I'm curious -- when you talk to your bigger customers, and I guess recognizing on the core side of the business you don't have a lot of big customers, but when you talk to your customers, what are you hearing from them about their mood, their desire to hire aggressively or not so aggressively? Obviously, there are a lot of uncertainties out there in the economy.

What's kind of interesting this quarter for the first time in many, many quarters that I can remember -- one of the hottest areas talked about in Accountemps, as an example, was cost accountants in manufacturing firms. That's a new phenomenon for many, many quarters, and we are quite encouraged by that. And I think it also kind of speaks to the broad-based nature of the demand pickup that we're seeing. Even with the six consecutive quarters of sequential growth, we're still 15 percent below peaks on the temp side and 45 percent below peak on the perm side. So there's still a fair amount of upside just to get back to where we were.

I'd add one comment, Keith. It's obviously and election year, and I think comments we've had from clients large, small, and medium, is that it's a very negative environment right now, and the two parties are clashing, and one is attempting to convince you the job market is weak, the other is trying to say it's coming back. All we know is our own business, and as I said in the earlier remarks, the temporary help business has been very strong. That's usually been a precursor of a strong labor market. We looked at the data from the Small Business Optimism Index that the National Federation of Independent Businesses publishes, and we come away feeling much more bullish than I think current sentiment would indicate about the job market, in general.

Thank you.

And our next question comes from Marta Nichols, Banc of America Securities.

Good afternoon, thanks, and congratulations as well on the quarter. Can you talk a little bit, Keith, you mentioned that typically Protiviti is going to see a substantial seasonal impact in the fourth quarter, maybe as much as seven billing days equivalent. Is it possible, given that you've got these deadlines upcoming that those people continue to work at very high utilization rates all the way through the end of the quarter such that you don't see the seasonal fall-off this year?

It's certainly possible. We hope, for the sake of our people, that they get to take the time off. That said, if a client needs them toward the end of the year, clearly, our people will work. And so there is uncertainty as to just what those needs are going to be. They'll be, in part, dictated by what the external auditors are requiring with respect to the work that's already been done. The hope and the plan is that they take the time off. Given the uncertainties, the fact that this is the first time SOA has ever happened, we clearly don't know to what extent that will be successful.

In general, though, companies don't need to have the work done essentially 12/31, right? They need to have it done during the reporting period, while they're assembling their year-end financials so that people could conceivable take the time off, come back, and still have January and part of February to help people get the final i's dotted and t's crossed?

I think that's right, and I think to the extent the external auditors find deficiencies before the end of the year, you're still better to remediate and correct and prove that they are corrected by testing in the first quarter before you release your earnings than to have a non-remediated deficiency. So, the shorter answer is yes, some work will continue into the first quarter for calendar-year companies.

Okay, and we -- separately, on SOX we had heard that there were some companies out there that were actually gunning to report early to go on what the original SOX deadlines were, for example. I'm wondering, are you aware of any companies that are fully in SOX compliance now and whether or not their auditors have signed off? I'm just wondering if we have any view yet into how the process is going and whether companies will actually be able to prove that they're in compliance?

Well, I'm not aware of any early compliers. I can tell you this, most of the accounting firms, the external audit firms, are sending letters to their clients saying, "You better stay on your timetables, because if you fall behind, we're going to have a problem, because, we, the external auditors, have limited resources, and if you fall behind, we're not going to be able to catch up." So, generally speaking, I think there's a general nervousness about the deadlines and all the work that has to happen and how tight the tolerances are to make that happen.

Okay, that's helpful, and just one final question on SOX -- I hate to beat the SOX horse so much, but your comments about the NYSE-listed companies, and that you think there has been some under-estimation of how many companies may need help there -- I thought I actually read an internal -- or -- Protiviti document on one of their websites indicating that most companies, most large companies, actually already do have an internal audit function. Do you have any estimate for how many of the NYSE-listed companies may need remediation in that area?

Well, I guess all functions aren't created equal, and having a small function versus having a function staff commensurate with other companies of your size and breadth is another thing. So I guess my point is -- the whether you do or don't statistic may not accurately show the potential there for additional work with internal audit.

Well, and just to supplement that, we've had a number of calls in Protiviti from clients that are urgently requesting assistance, and it's late in the day, and while they may have had an internal audit department, frankly, it was just not adequate to the task -- they had a small department, and I think people underestimated, in some cases, the amount of work and the complexity of the work.

Another point, and maybe this is more detail than you want to hear, but traditionally internal audit departments were more operationally focused -- how do you save money in the supply chain -- those types of things. Whereas, with Sarbanes-Oxley the last couple of years, it's more financial controls-oriented. And so there's been some deferred attention to operational controls that needs to be re-looked at that I think many internal audit departments will return to, and there will be demand from that.

Thank you, and our next question comes from Mark Marcon of Wachovia.

Good afternoon and let me add my congratulations -- terrific quarter. I was wondering, with regard to -- just to understand the Sarbox thing for one last moment -- can you tell us how much of either the Protiviti divisions or management resources divisions revenues are emanating from providing supplementary work to the Big Four?

Where the Big Four is the actual client?

Well, or where they're asking you to co-source or bringing you onto a project -- things of that nature.

Clearly, the Big Four has referred work to Protiviti and Management Resources --

But those were outright referrals, I mean, we're really alone.

Right, and so do we have a statistic of what amount of our Sarbanes-Oxley work got referred to us by the Big Four or whether the Big Four, in fact, is the client? No, I don't. But, clearly, a very fertile referral source, particularly to Protiviti, are the other Big Four.

Right, but not -- I meant more in terms of like being broad end -- just like, "We can't handle the work. We need you to supplement us."

No, no, it's more in terms of "We're conflicted from doing the work and want you to come in here because we can't do it," rather than "We, the Big Four, have the project, and we don't have the necessary resources, and we want you to come and supplement our resources." There is very little of that, particularly in Protiviti.

And then with regards to the -- you know, thanks for the detailed explanation up front in terms of explaining the cycles, in terms of the controls documentation and design effectiveness. In terms of those initial stages, do you have any stats in terms of how much of either the Protiviti work or, along the same lines, the Management Resources work, is really associated with those very, very early stages of Sarbox compliance as opposed to the more sustained, you know, we're already starting to set up, you know, controls and audits.

Now, we have not captured our Sarbox revenues by documentation versus design effectiveness versus testing versus remediation versus retesting.

Any feel?

Well, clearly, as we've gotten later into the year, as you would naturally expect, we've evolved from initial documentation design effectiveness to, right now, it's heavily testing remediation and retesting. And the good news about testing is companies will have to test every year to prove that their controls are still in place.

I mean, when we look at this quarter's revenues, we could say a lot of that is remediation or testing, and therefore that's stuff that should be sustainable.

But you also have non-calendar year-end filers where you're beginning the documentation cycle.

Okay, right. And then on -- switching gears over to RHI finance and accounting -- you know, one thing that's a little curious -- most of the divisions are showing very strong sequential growth. With everything that's going on, I'm a little surprised that the sequential growth wasn't a little bit stronger in RHI finance and accounting. Is that because you were at capacity and that's why you're hiring so many people in that division now? What's the situation there?

Well, I think if you look back traditionally, the summer months into the end of the year have never been the strongest quarters seasonally for perm placement -- Robert Half Finance and Accounting. I'm looking back here -- if you look back a few years, typically, the summer is not a big hiring time -- full-time hiring time -- for our clients.

I went back and looked at '95 through '99, and some years it wasn't, but there's lots of years where it was sequentially up (audio break).

Well, I guess I'm looking at 2000. It was down sequentially, or the rate of growth was 2.8 percent. Six percent in '98, again, summertime is never that strong seasonally, and I guess I wouldn't read anything necessarily. On a year-over-year basis, our perm placement revenues were up, what, 50-some percent for the quarter?

Fifty-two percent for the quarter, 4 percent sequentially. You have high standards, Mark.

Thank you, and our next question comes from Kelly Flynn of UBS.

Thanks. It's actually sort of similar to what Mark just asked, but I'm wondering, just from a different angle -- can you give us an idea of what you're hearing from your clients in terms of their estimates of what level of Sarbox spending will be sustainable? In other words, how much of what they spend this year is likely to recur next year?

I think what they hope and what actually happens may be two different things. I think if you would look today at companies' initial estimates of what would be required versus what actually happened, there is a huge, huge delta there. There are Big Four reports out there, Ernst & Young's comes to mind, that says 60 percent to 75 percent will recur. Some people want to slash that even deeper to say, "Well, how much of that would be internally spent versus how much would be provided to an outsourcer?" I think another thing here that may be lost on some people is that whether companies do it themselves or whether they co-source and outsource, there is this permanent layer of controls infrastructure that's going to exist that never existed before. That's going to put pressure on supply, particularly for the next few years. And that pressure on supply is probably a good thing for all service providers in this space.

But have our clients -- do we have some composite estimate of what percentage of their initial spending they will spend on a recurring basis? We don't have that.

Okay, thanks. Just to follow-up -- you did effectively about the internal audit needs, you know, that will result from the New York Stock Exchange ruling. I'm wondering -- can you give some color on what you think about Protiviti's role in the internal audit process for clients? One could argue that clients might hire permanent people to work in their internal audit department, if it's going to be an ongoing need and rely less on consultants. What feel are you getting on that front?

I think what you've got to understand that internal audit is more a channel than a product, and what I mean by that is that in a given year, different types of specialists are needed to execute an internal audit plan. Maybe this year I'll look at cash management, I'll look at supply chain, I look at IT controls. Maybe next year I'll look at the financial book closing process. My point is you need different types of skills to execute in each of those areas. Many companies have decided it doesn't make sense to keep a bench of those skills all the time when those aren't part of their ongoing internal audit plan. So we believe, and I think it's already been shown, and it's shown in Andersen's past when they were doing internal audit, that clearly having a stable of deep skills in certain areas is very in-demand for clients who don't want to keep those, and it doesn't make economic sense to keep on an ongoing basis.

Okay, that makes a lot of sense, actually. Just one last one -- as far as the other temp businesses that typically provide accounting and finance professionals but not related to Sarbox, is there any way that clients have been so focused on Sarbox that they've been neglecting hiring needs in other areas and that once the initial stages of Sarbox die down, you may see, sort of, the result of some pent-up demand in the other businesses?

There's a fair amount of discussion on that very point in the IT area. I think many companies are deciding, "I want to minimize the IT changes I make until we get Sarbanes-compliant, because any change I make has to be put through the whole Sarbanes cycle. Therefore, let's minimize those, let's get through Sarbanes, and once we're through Sarbanes, then let's talk about what we need to do from an IT perspective. So more than any other area, there is discussion in the IT area that IT spending has been deferred pending initial SOA compliance.

Thank you, and now our next question comes from Matt Litfin of William Blair and Company.

Hi, good afternoon. The question is on Protiviti's gross margin. You are now running in the high 30s, which is pretty typical for a consulting company. Are you running at peak utilization levels there? And I think you referenced Andersen's past in your response to Kelly's question just now -- give us a sense of where that gross margin was at the prior peak when the company was under the Andersen umbrella?

We said before that in the Andersen days the gross margins were high 30s, low 40s. So the margins we're seeing today are very much in line with that. We have also said in the past that the operating margins in Protiviti are inherently higher than staffing, which affords us the budget to be generous with our Protiviti people such that we can pay above market to our Protiviti staff and still report higher-than-staffing gross margins and operating margins in Protiviti.

Great, and the other one I had as a follow-up is what has the hiring been like at Protiviti maybe during the September quarter and are you still hiring into Protiviti at this point?

We're doing two things -- we do continue to hire full-time into Protiviti as we speak, and we're also aggressively using contractors for our management resources division. We're doing both.

Okay, one more, if I could -- what kind of tax rate is implied in the fourth quarter guidance and where do you see that going over the long term, for modeling purposes?

It's actually going to settle down. It's been kind of crazy the last few quarters. It should be settling down in the 38, 39, maybe even 37 as we move forward. But it's been high over the last few quarters and should begin to moderate a bit. So I'd use 38 or 39 in the fourth quarter.

Our next question comes from Brad Safalow of JP Morgan.

Hi, good afternoon. I was wondering if you could comment on what you'd think, at this point, could be an international opportunity for you if the markets over there decide to go with similar filing requirements and how you are positioning Protiviti for any opportunities?

Good question. First of all, we're already seeing where foreign companies are listen on U.S. exchanges, they are being required to go through the processes, and we have significant engagements today along those lines. We have also have expanded Protiviti's footprint internationally. We're in London, we're in Paris, we're in Italy, we're in Tokyo, we're in Singapore, we're in Australia. We have some affiliates in China and in Latin America. So, clearly, we've filled out our footprint internationally with Protiviti. We are very pleased with the progress we've made both in terms of revenues and their ability to achieve profitability as well. So we're very bullish on our Protiviti international operations. We've spent time with those managing directors and their staff, and they're of the same high quality of the people we have in the United States, and we actually feel very good about the opportunity and about our delivery ability internationally.

And I know you don't provide anything beyond a quarter-forward look, but do you think that '05, your growth from international could be a significant driver of profitability? Do you see momentum in that direction?

Well, given it is coming off a much smaller base, you would think it would make a proportionately larger contribution, but we'll probably limit our comments to that.

Okay, fair enough. I'll turn it over.

And our next question comes from Brandt Sakakeeny of Deutsche Bank.

Thanks, good evening. Keith, two questions -- I guess the first one is with respect to supply of folks -- and I apologize, because I actually did join late -- but could you comment on the supply of individuals and any regions where you're bumping up against supply constraints? Thanks.

The only real supply issue we have is in the accounting/finance area, where they relate to internal controls, internal audit audit. So Protiviti is certainly having challenges getting additional people. Management Resources is having challenges getting the talent needed to fulfill demand in the Sarbanes-Oxley space. But other than that one somewhat isolated area, supply is actually pretty good across our other divisions. It's tightening, but it's not yet what we would call tight.

Okay, great, and the next question is, again, because I did join late, but with respect to the fourth quarter guidance, did you say that there were going to be a fewer number of billable days for Protiviti because of holidays and can you just elaborate on that?

We talked about how it may be as many as seven fewer days because people are going to take time off, which they've deferred, so far, this year, because they've had to work so many hours. The unknown being to what extent they will be required to work because their clients need them as they come down to the end with Sarbanes-Oxley compliance. But I think we'll see, over time, over the years, as we move forward, that there will clearly be a larger seasonal billing day impact in Protiviti than what we see in staffing.

Okay, great, thank you.

Thank you. And our next question comes from Toby Sommer of SunTrust Robinson Humphrey.

Thank you, good afternoon. One question, also, on supply. You mentioned that IT projects have been put off this year relative to compliance and testing. Is supply in the IT space, in particular, good at this time, or is that also tightening? And then I was hoping you could comment on the good leverage you've been seeing from your SG&A and sort of where you think that could go, over time?

On the supply point, particularly in IT, remember that our weak spots are network management, help desk, IT security. I'd say we see the supply, again, tightening but hardly tight at this point. On the SG&A leverage point, as we continue to grow revenues, we should continue to leverage our fixed cost, principally administrative compensation, rent, and depreciation. We've said many times on these calls, we kind of look backwards, find similar revenue levels. Our target is to do at least that well with SG&A as a percent of revenue. We've been ahead of that pace for the last couple of quarters, and we hope to continue to be ahead of that pace as we continue to grow.

Then one last question, and I'll turn it over. Regarding uses of cash, you bought back some shares. I'm curious what your thoughts are regarding cash uses, going forward?

Well, the whole capital allocation questions kind of evolve around dividends, share repurchases, and acquisitions, and our strong cash flow kind of affords us the luxury of doing some of each, pretty much none to the detriment of the others. Our style, traditionally, is to look for small, medium-size acquisitions that fit strategically and serve as a platform to roll out throughout our branch network. We're always looking for those, but that doesn't preclude us from buying back stock, it doesn't preclude us from paying dividends, which we did during the quarter.

Thank you.

Thank you, and our next question comes from Jim Janesky of Ryan Beck and Company.

Yes, thank you. Historically, Keith and Max, of course, the first quarter of every year has been positively impacted by work to help out with year-end closings. Can you give us a sense of how you think, you know, just the overall work will be affected by Sarbanes-Oxley work? I mean, could people plan on using some people they already have onsite to help out there? Or do you think that would be incremental?

I think, if anything, they would have a greater need for outside resources this year than they would in a typical year, just because there is so much going on around Sarbanes-Oxley.

By this year you mean 2005?

Correct. And it's not like there is this magic date -- December 31, 2004 -- where you're in compliance, and you're done. Remember that if there is any magic, it's when that external auditor issues their opinion that you get not only your clean opinion on your financial statements, but your clean opinion on your internal controls as well, so if that doesn't happen January 1, 2005, and therefore work will continue into early 2005 on 2004 Sarbanes-Oxley engagements.

Okay, then, as a follow-up, you made a comment about the supply issue specifically within (technical difficulties) to the extent that you have permanent work and expect additional work because you've invested in the area, additional placements or job orders, how is the supply environment of permanent people in the accounting and finance area?

Oh, it's actually quite tight, because that's the principal market Protiviti is recruiting in, and it's having our Robert Half Finance and Accounting Division recruit for them. So not only is the market for contractors in that space tight, the market for full-time employees is particularly tight. And you can ask virtually anybody working in and around Sarbanes-Oxley today, and they'll tell you how tight it is.

Okay, so that's actually, you know, I mean, that's positive for your permanent placement area, going forward? Would you look at it that way?

We would, indeed.

And we mentioned earlier, Jim, that we've been adding, you know, a considerable number of new staff in that division. The reason being because we think business, obviously, is there.

Okay, terrific, thank you.

Thank you, our next question comes from Kurt Moeller of RCM.

Good afternoon. You mentioned buying back stock. I was curious the average price paid during the quarter for stock you bought back.

You know, traditionally, we don't actually get specific, but since now you have to break it out in the 10-Q, I think it's between $25 and $25.50 is what we paid. It's in that range.

And can you help me understand a little bit better how you decide when to buy stock versus not, given the huge cash you have and the chance of doing it all the time?

Well, it's certainly an art and not a science, and you kind of look at how are you doing, what are your prospects short and long term, what other acquisition opportunities appear to be on the horizon and, again, it's more art form than science, and maybe there ought to be more science, but that's how it is.

Thank you very much.

Thank you, and our final question will be coming from Mr. Jeff Silber of Harris Nesbitt.

Thanks for letting me sneak in for one more -- just real quick -- capex budget -- I believe at the beginning of the year you were looking for something about $40 million to $45 million for '04. Can you just give us an update on that?

We're probably going to come in a little under that, more for timing reasons. This voice over IP project -- my guess is there will be more of that spin in 2005 that we originally targeted for 2004. But still, the kind of 40-ish million on an annual basis is not a bad number. It's just I don't think we're going to get there this year more for timing reasons.

Okay, great, thanks a lot.

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

Thank you. As a reminder today's conference will be available via instant replay through and including October 27th and to access the recording you may dial 866-495-2424 or 203-369-1761 if you are calling from outside the U.S. Thank you and have a good day.