羅致恆富 (RHI) 2004 Q4 法說會逐字稿

Good afternoon and welcome to the Robert Half International fourth quarter 2004 earnings conference call. All participants will be in a listen-only mode until the question and answer portion of the call. At that time, if you have a question, simply press star, 1 on 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.

Thank you and hello everyone. Thank you for joining us.

With me is Keith Waddell, our Vice Chairman, President and CFO.

The purpose of today's call is to review Robert Half International's fourth quarter 2004 financial results. A copy of today's press release is available on our web site at rhi.com.

As is our custom, 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, guidance, and similar 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'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 the statements made in this conference call.

Now let's discuss the fourth quarter. After our opening remarks, Keith and I will be happy to respond to your questions.

Record revenues for the quarter were $754 million, an increase of 46 percent from the fourth quarter of 2003. On a sequential basis, revenues rose 7 percent from the prior quarter.

Income per share was $0.28, compared with $0.03 for the fourth quarter of 2003, and $0.24 last quarter.

$0.28 is the highest level of earnings per share RHI has achieved during a single quarter.

Cash flow from operations for the quarter was 100 -- excuse me, was $45 million before capital expenditures of $10 million. We ended the quarter with $435 million in cash and eqivalents, after paying a $10 million cash dividend to shareholders and after repurchasing approximately 500,000 RHI shares in the open market.

We continue to be pleased with the momentum in our staffing operations and in Protiviti. Both saw year-over-year and sequential revenue growth across the board. Protiviti in particular experienced demand from companies working to meet the initial Sarbanes-Oxley section 404 compliance deadline.

We estimate that 17 to 20 percent of RHI's consolidated revenues during the quarter related directly to Sarbanes-Oxley compliance work. The balance of our revenues reflected organic growth of more than 20 percent on a year-over-year basis.

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

Thanks, Max.

Now I'll start with revenues.

Overall revenues for the Company were 754 million, as Max said. This is an increase of 46 percent from the fourth quarter of last year, and up 7 percent sequentially. There were 62 billing days in the quarter, up one day from the prior fourth quarter and down two days on a sequential basis.

Accountemps revenues were 265 million, an increase of 26 percent from the prior fourth quarter and an increase of 3 percent sequentially.

Accountemps is our largest staffing division, with 331 locations worldwide. It accounts for 35 percent of total revenues.

Office Team revenues for the fourth quarter were 154 million, up 22 percent from the prior fourth quarter, and up 3 percent sequentially. Office Team is our high end administrative staffing division. It began operations in 1991, has 307 offices worldwide. This division represents 20 percent of total revenues.

Robert Half Management Resources had fourth quarter revenues of 103 million, up 79 percent from the prior fourth quarter, and up 8 percent sequentially. Robert Half Management Resources places senior-level accounting and finance professionals on a project basis. Introduced in '97, it operates in 109 offices worldwide and accounts for 14 percent of total revenue.

Robert Half Technology revenues were 70 million for the quarter, up 21 percent from W4 2003 and flat sequentially. This division places IT professionals on a consulting and full-time basis. It was launched 10 years ago and represents 9 percent of revenues. There are 107 Robert Half Technology locations worldwide.

Our permanent placement division, Robert Half Finance and Accounting, had revenues of 37 million in the fourth quarter, up 48 percent from the fourth quarter of 2003 and up 3 percent sequentially. This business was established in 1948 and operates in 331 offices worldwide. It accounts for 5 percent of total revenues.

International revenues for RHI staffing operations were 129 million for the fourth quarter, up 40 percent from last year, and up 10 percent sequentially. On a constant currency basis, these growth rates were 29 percent year-over-year and up 4 percent sequentially. Our professional staffing division is operated in 67 locations in 10 countries outside the U.S. International staffing operations account for 20 percent of total staffing revenues.

Fourth quarter revenues for Protiviti were 125 million and comprised 17 percent of RHI revenues. Revenues for Protiviti were up 209% year-over-year and up 25 percent sequentially. Established in May 2002, Protiviti currently has 39 locations in North America, Europe, Asia, and Australia.

Turning to gross margins, temporary and consulting staffing gross margins were 217 million for the quarter. This represents 36.6 percent of applicable revenues, compared with 34.6 percent of revenues for the prior fourth quarter, and 36.2 percent of revenues for Q3, 2004.

The sequential percentage improvement relates primarily to higher conversion revenues and lower Workers' Compensation costs. Overall, staffing gross margin was 254 million for the quarter, or 40.3 percent of staffing revenues. This compares to 38 percent of revenues in Q4, 2003. And 40.0 percent of revenues in Q3, 2004.

Gross margin for our Protiviti subsidiary was 50 million for the quarter and represented 39.8 percent of Protiviti revenues. This compares to 39.4 percent of Protiviti revenues in Q3, 2004.

Turning to selling general and administrative costs, staffing SG&A costs for the quarter were 200 million, or 31.8 percent of staffing revenues. This compares to 36.0 percent of revenues for Q4 last year, and 31.6 percent of revenues for Q3, 2004.

The sequential percentage increase relates primarily to the hiring of additional sales staff in anticipation of future growth.

Our SG&A percentage for the quarter was lower than the SG&A percentage in 2001, at similar levels of revenue.

Protiviti SG&A costs were 22 million for the quarter, representing 17.6 percent of revenues. This compares to 28.5 percent in Q4, 2003 and 20.0 percent in Q3, 2004. The percentage decline reflects further leverage to fixed operating costs.

Turning to operating income, operating income from our staffing divisions was 53 million for the quarter. This is up 450 percent from Q4, 2003 and represents 8.5 percent of staffing revenues.

The temporary consulting division has contributed 49 million of this amount, or 8.3 percent of applicable revenues, while the perm placement had operating income of 4 million, or 11.7 percent of placement revenues.

Operating income for Protiviti was 28 million for the quarter. This is a 42 percent sequential increase from the third quarter, and represents 22.1 percent of applicable revenues.

We ended the quarter with cash in equivalence of 435 million. As Max noted earlier, this was after funding CapEx of 10 million and paying a cash dividend -- a quarterly cash dividend to shareholders of 10 million.

During the quarter we repurchased 500,000 RHI shares in the open market. There remain approximately 6.9 million shares available under our board-approved stock repurchase program.

Accounts receivable were 392 million at the end of the fourth quarter, with implied days outstanding or DSO of 47 days. This is the same as the 47 days DSO at the end of Q3, 2004.

Now let's talk about guidance. Following are some of the business trends we witnessed during the first quarter and the first three weeks of January. On a same-day, sequential basis, temporary and consulting revenues were up in October, up in November, and down in December.

Perm placement revenues were down in October, up in November, and down in December.

During the first two weeks of January, revenues from our temporary and consulting businesses were up 32 percent, versus the same period last year. For the first three weeks of January, revenues from our perm placement division were up 107 percent, versus last year.

As we've noted many times, it's not possible to gauge perm trends over such short time periods.

Based on these observations, we offer the following Q-1 guidance.

Revenues; 755 million to 785 million for the quarter. Income per share; $0.27 to $0.30 per share.

As you know, these estimates are subject to the risks mentioned in today's release. It is our policy to limit guidance to one quarter.

Now I'll turn the call back over to Max.

Thank you, Keith.

As I noted earlier on the call, we continue to be pleased with the momentum seen in our staffing operations and in Protiviti. This is our 7th consecutive quarter of broad-based sequential revenue increases in our staffing operations.

Protiviti has seen sequential revenue growth in excess of 20 percent in every quarter during 2004. Fourth quarter revenues for Protiviti were more than triple those of last year.

Protiviti continued to benefit from demand by companies for support and guidance with Sarbanes-Oxley and other compliance efforts, and we believe there will be ongoing compliance demands.

This includes remediation efforts to improve controls, annual testing to support ongoing compliance, initial efforts by nonaccelerated filers, such as noncalendar year-end businesses, small-cap companies, new issuers and foreign issuers, and the development of long-term compliance processes and programs for companies.

Keith and I commented in prior conference calls that we believe major changes are underway with respect to how companies in the U.S., and worldwide for that matter, both view and manage their accounting and financial reporting processes.

The heightened focus on internal controls and the need to institutionalize compliance efforts is changing the accounting landscape and for many companies will require a whole 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. And we believe Protiviti is well positioned to take advantage of this new environment.

Protiviti has also been steadily expanding its business and technology risk consulting services in areas such as forensic and fraud investigations, litigation consulting, information technology security, financial process improvement, business continuity, and enterprise-wide risk management.

We're optimistic about Protiviti's potential for continued expansion. We have a group of experienced and highly respected professionals who are building strong relationships with top executives and boards of directors at major companies throughout the world.

Protiviti's footprint extends to North America, Europe, Australia, and Asia. Most recently we expanded to China, with new locations in Beijing, Shenzhen, Shanghai and Hong Kong.

We are also optimistic about the positive trends we've seen in our staffing operations and within the staffing industry as a whole. In 2004, the industry added 206,000 new jobs.

The rate of growth in the industry has been more moderate than we've seen following past recessions. In our view, this is a reflection of a of more cautious hiring environment overall, particularly among larger businesses, which economists tell us have been slower to add full-time staff.

As many of you know already, the majority of our staffing clients are small and mid-size companies, so we read with interest the small business optimism index issued each month by the National Federation of Independent Business.

Business optimism reached its highest level in 21 years in the month of November and remained strong through the end of the year.

These are small companies not necessarily involved with Sarbanes-Oxley compliance, but rather, in need of good people to help them manage and grow their businesses. This demand was seen throughout or staffing operations during the quarter and fueled year-over-year growth in all lines of business.

The strong results in our staffing operations are also the product of outstanding work from our professionals in the field. Our field management team is experienced and executing well at the branch and regional levels.

We have always managed RHI's business for the long term and we are confident about our future prospects. RHI remains in excellent financial condition with virtually no debt and a very strong cash position, and we continue to benefit from our respected brand names and proven track record of success.

Keith and I will 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, as needed. If you have additional questions we will certainly try to return to you later in the call.

Thank you. If you would like to ask a question at this time, simply press star, 1 on your touchtone telephone key pad.

Our first question comes from Greg Cappelli with Credit Suisse First Boston. You may begin.

Hi Max and Keith. It's Greg and Jeremy.

Hi.

It was interesting to see you guys are starting to branch more into additional services aside from Sarbanes at Protiviti, and just wondering what kind of traction you're getting so far, and if you've actually had any larger clients sign up for some of the other services.

In fact, one kind of feeds to the other.

As an example, we had a situation where a Sarbanes-Oxley client, one of their control deficiencies related to their management of user passwords and identity management, if you will, with their IT systems. So as a follow-up project that we got that's performed principally by those with deep IT skills, we have a project to deal with the management of user passcodes for that client.

And in that particular case, frankly, the follow-up engagement is about the same size as the SOA engagement we had previously.

Clearly, Greg, the thing the marketplace is buying at the moment is principally Sarbanes-Oxley. So you can come with your list of 36 solutions all day long, but at the end of the day, they're trying to get through this initial compliance.

That said, we are seeing signs already that they're dealing with either year 2 or probably the biggest deal is remediating and improving those controls that they kind of hobbled through with in year one. I think it's kind of hard to overestimate the amount of work to be done dealing with the remediation of getting through year one.

Many companies have pages and pages and pages of control deficiencies, some of which are significant, some of which are material, frankly, all of which have to be addressed.

Okay. I understand.

Just as my follow-up, your -- just, I guess your [inaudible] you touched on in your comments, but the level of testing of controls companies are going to have to undertake in year two, do you think that's somewhere between 75 and 100 percent?

It's anybody's speculation. I think there was a PWC survey in the last few days that was reported that 80 percent of the respondents thought they would spend at least as much if not more in year two as they spent in year one. So anybody's percentage is a guess.

I guess the point I'm making is that inclusive of the remediation work that has to take place, year two is going to be a significant year from the demand standpoint as it relates to Sarbanes-Oxley.

You add to that, you've got all the nonaccelerated filers coming on stream for the first time, you add to that the normal internal audit work that has nothing to do with Sarbanes-Oxley, we're actually pretty bullish as we sit here looking forward in 2005.

Got it. Thanks a lot. Appreciate it.

Thank you.

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

Good afternoon, Max and Keith, and congratulations on outstanding execution again.

I want to pursue the temp gross margin, which improved again in the quarter. How sustainable is the current level of temp gross margin?

Well, the pay bill rate spread I think is very sustainable. We got a little boost this quarter from conversions being a little heavier than they had been in the past, which helps margins.

As you see the general jobs market improving, you would expect both perm placement and conversions to improve. But as we said many times, conversions are a little on the lumpy side, as is perm.

The other factor for the quarter is that we got a little help on the Workers' Comp side. You might remember last year at this time we were kind of moaning about we had to take some reserves for Workers' Comp because of the ultra conservative environment we found ourselves in at the time.

Well, with the benefit of one year's hind sight, it appears some of those reserves that we had to take last year weren't needed, so we got to release a little bit of that this quarter.

So maybe there's a little bit of the gross margin improvement relating to that that won't reoccur. But most of it is conversions.

And again, one could draw a picture that they could actually get even stronger.

Okay. And you commented on buyback activity. Were you active or have you been active in January?

Again, I think our policy has been to kind of report once a quarter our activities. Remember, there's a quiet period from the end of the year until a few days after we report. So legally, I don't think we're even allowed to be active early January.

Okay. Thank you. I appreciate it.

Thank you. Our next question is from Jeff Silber with Harris Nesbitt. You may begin.

Thanks and good afternoon.

Keith, in your comments you were talking on the SG&A side on the staffing area about the hiring of some sales staff for some future growth. Can you tell us on a relative basis, were more of those folks hired on the temp side or the perm side? I know perm is a lot smaller, but just on a relative basis.

Well, on a relative basis, perm got the largest percentage increase of its staff for the quarter. We did hire across the board, and in fact, when you get the 10-K, you're going to see our head count numbers as follows: for staffing as of the end of the year, we had 7,600 full-time employees, versus 6,500 the year before. For Protiviti we ended the year with 1,500 full-time employees, versus 800 a year ago.

The staffing additions were kind of back-weighted to the second half of the year, whereas the Protiviti additions kind of occurred throughout.

Great. And since you took my follow-up question, I'm going to ask another one. In terms of pricing trends, can you tell us how average billing rates are doing on the temp side and also in terms of perm pricing trends as well.

The pricing increased low single digits on a sequential basis, which gets you 9 or 10 percent year-over-year.

Perm, not much change. I mean, the perm -- the perm market is clearly firming somewhat, particularly as it relates to accounting finance, internal audit, SOA-related skill sets.

I'm sorry, just to clarify. The 9 to 10 percent year-over-year increase, that's your average billing rate increase, year-over-year in temp?

Correct.

Great. Thanks.

Thank you. Our next question comes from Andrew Steinerman with Bear Stearns. You may begin.

Hi. Just to clarify that, when you said 10 -- 9 percent year-over-year, temp pricing growth, does that include Protiviti or not include Protiviti, and could you just give us a flavor on what Protiviti pricing has been like?

The 9 percent year-over-year is staffing only. Does not include Protiviti.

Protiviti has passed through its cost increases to the extent it's had to pay its staff more, which it has. But other than that, there hasn't been major pricing changing within Protiviti.

Is that a year-over-year comment or a sequential comment?

I guess it would actually relate to both. I mean, every time you hire somebody in Protiviti, there's a cost adjustment, if you will, to some degree.

Right. And just lastly, could you just go over, I think you gave everything in av -- in sequential growth numbers, in absolute, but we had two days less outstanding. What would have been the sequential growth if we were on the average day sales outstanding basis?

So, in other words, what's the sequential growth on a same-day base?

That's right.

I think if you'd add, like, 3.5 percent to the numbers we gave you, you convert true sequential to same-day sequential.

Sounds good. Thanks for the help.

Thank you. Our next question comes from Matt Litfin with William Blair and Company. You may begin.

Hey, good afternoon. Keith, just, those numbers you gave on Protiviti's head count, if you -- if you do some back of the envelope -- you know, this may be a little off, but it looks like if you annualize your fourth quarter Protiviti revenue, you're doing about 330,000 in annual revenue per consultant there, up from maybe 200 a year ago. How much --

Matt, what -- other factor you've got to think through is their use of contractors from Management Resources, which are significant. And so what I gave you was the full-time staff.

In addition to that, there is a significant component of contractor staff sourced through Management Resources, and that's not a number we've disclosed.

Oh, I see. Okay. So, I guess the main question I'm trying to get at is, you know, how much of the year-over-year improvement, whatever that is, has come from, you know, better utilization versus pricing. And what I'm really getting to is, as you look out, you know, over the next year, can we continue at this recent pace or are you kind of maxed out on utilization and therefore have to depend more on pricing?

Well, clearly, utilization is at a very high level. During the quarter, where we talked about how we thought there may be as much as 7 billing days down time from vacations, et cetera, the facts are even though they took some time off, they had to essentially replace that time off in overtime they worked prior to that, so that utilization was tremendous in the fourth quarter.

It seems to me, net it boils down to are the 20 to 22 percent operating margins sustainable over future periods of time. And a s we've said, even when we look back at Anderson's records, when we were doing our due diligence for Protiviti, the mid-teens to 20 percent operating margins were commonly achieved inside Anderson's internal audit risk consulting practice. So we see no reason why we why we can't achieve those going forward as well.

We've also stated, which was, again, the case this quarter, there are significant variable costs in Protiviti. The use of those contractors is a variable cost. The variable proportion of the compensation we pay the MDs and their staff is variable, and then the reimbursable expenses are obviously variable.

So we feel pretty good about the sustainability of operating margins in the 15 to 20 percent rage.

Great. And as a follow-up to that, sometimes I've noticed there is a correlation between employee turnover and higher utilization levels.

Can you just comment on what you're consultant turnover looks like in Protiviti and is it a level that you're happy with and think can be sustained also?

I think industry-wide, if you talk to any big 4 person, principally due to burnout, everybody's seeing more turnover than they would traditionally see going back ten years. And Protiviti is not exempt from that.

That said, we certainly are not seeing a lot of turnover, other than from people deciding they just don't want to do this for a living, don't want to be in this business. We're certainly not losing them to competitors, but we're losing them to people that say, wow, this pace, it's more than I can deal with.

All right. Thank you.

Thank you. Our next question comes from Marta Nichols with Banc of America Securities. You may begin.

Good afternoon. Thanks. I'm wondering, just on the point of burnout, I guess, as well as your comments about increased pricing, bill, and pay rates. Can you talk about what kind of terms you're having to offer people, particularly your senior folks at Protiviti to get them in the door with you? Are you having to offer things like long-term contracts or stocks or cash bonuses upfront or guaranteed bonuses in order to attract people right now?

Actually, I would say at the senior levels, at the managing director level, Marta, remember there's this huge Anderson Partner network that got split up a couple, three years ago, and the more successful Protiviti is, the more inquiries we get from former Anderson Partners wanting to come home.

And so, if anything, there are more former Partners seeking to join us than the other way around at the moment.

At the lower -- you know, at the staff levels, we have to be competitive in the marketplace, and yes, we're paying signing bonuses, yes, we're paying higher compensation, yes, giving away iPods, we're doing all kinds of things to be competitive at the staff level.

Okay. And I guess on that point, at this point you've essentially been able pass all of that through. Is there anything -- it sounds like. Is there anything that's back-end loaded that could bite you, for example, if your productivity levels went down significantly?

I would say, no. And again, we've been very mindful to have a variable trench of compensation, even at the staff level. We have variable compensation plans related directly to their activity levels.

Okay. Then just one follow-up, if I may, on Max's comments. I think you mentioned that you feel as though there are clear shifts going on in the market about companies changing the way they're managing their accounting processes.

I'm wondering if you can flesh this out a little bit more, maybe talk about the shifts that you perceive in the market particularly that may be occurring away from the Big 4 and into the hands of companies like Protiviti and other independent accounting firms. Is that --

I think you've got two kind of overarching themes. One theme is that for independence reasons, companies are more willing than ever to have multiple service providers, and that certainly plays into the hand of Protiviti.

Further, there is a recognition in the marketplace that it's a resource constrained market place, and that also makes companies willing to go to vendors they may otherwise not have gone to, simply in search of resources. Again, that theme plays very well into Protiviti.

I think the point we were trying to make, though, overall is that it's a new time, it's a new day. The -- you need a controls and compliance infrastructure permanently, that you didn't have to have before.

I think we saw some Deutsche survey today or yesterday that said something like 15 percent of their staff were dedicated to compliance efforts. And for most companies, that's a 15 percent that didn't exist three years ago.

The point is, there is a significant ongoing compliance need that has to be dealt with, and even to the extent companies do that internally, that still puts pressure on resources and makes those resources scarce in the marketplace. And to the extent Protiviti has resources, those are valuable resources.

Great. Thank you very much.

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

Hi, Max and Keith. Couple of questions.

Keith, I thought I'd push you a little bit further on the temporary staffing business, looking back historically, you know, in the current quarter the temp business had 595 million of revenue and an 8.3 percent margin. And if you back up to the second quarter of '01, you had about the same revenue and the same margin.

But I would think that when your revenues are declining, your capacity utilization would be falling, and that wouldn't be a great comparison to the current situation. And therefore, if I go back to the first half of 2000, where the revenues were comparable, the temp operating margin was actually 9.4, not 8.4.

What's wrong with my logic and why shouldn't the margins be a bit higher at this point?

Well, the biggest reconciling item is revenue mix. And back in those times, conversions and perm placement were a much bigger part of the total than is the case today.

They were more in the 7 to 9 percent of revenues, versus the 5 percent they are today. And that entire differential shows up in operating margins.

I'd also say, on the SG&A side, our physical footprint is much expanded today versus what it was back then, which also impacts margins.

But again, the single largest reconciling item at the operating margin line between today and then at same revenues, is revenue mix.

Is there anything you could say, based on the technology spending you guys did, 3, 4, 5 years ago, to say that the productivity of your internal staff should be better or maybe not better than what it was in the previous cycle?

Well, it's kind of comical. We've commented on this for years. On the one hand, we would certainly say that the productivity could be better because of the technology tools we've given them and the spending that we've done.

But with a sales force, it's very hard to measure productivity and it's very hard to measure the impact of giving them tools and what that does to their productivity

But suffice to say, Chris, one of our goals is to increase productivity and we work at it constantly. But it's a little bit like trying to measure the effectiveness of your advertising. You can get as many opinions of the people you talk to about the subject. But we are working on it.

Right. And then finally, on a kind of a related question, if I'm looking at your cash flow statement, the CapEx has declined pretty dramatically in the last, I guess, two, three, years. Again, I guess, primarily it's that technology spending. Payments for the pipe, if you will. But -- or, the pipeline.

But on a going forward basis, can you guys comment, at least generally, about the outlook for capital spending over the next couple of years? Does it ramp back up? Is there another technology spending cycle?

A couple of important points. This year it was only 33 million, and we said it was going to be mid-40s or higher.

And there was some delayed spending this year. We piloted our voice-over IP network project, which is a 15-plus million dollar project. We weren't happy with some of the initial vendor results with that, such we've moved that expenditure, we've changed vendors. We are happy with the replacement vendor.

So, that money will be shifted into '05 rather than '04. So, together with what you would have normally spent in '05, the '05 number is looking like mid-50s rather than the mid-40s that we talked about. But those numbers are small compared to the 70s and 80s millions we were spending a few years ago.

So, long story short, it's kind of the 40s millions that would kind of be a maintenance level. It will be higher this year because of the carry-over of the '04 project into '05.

Great. Thank you.

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

Hi. This is Andrew, for Kelly.

I was wondering if you could give us a sense of the demographics for your Protiviti business. I think you've said in the past that the clients, they tend to be larger. So I was wondering if you could give us any sense of the breakout, you know, in terms of revenue from the --

Well, clearly, they tend to be more fortune 1,000 focused than is the case in staffing. It's not pure, and because of our relationships in staffing, we do some business inside of Protiviti that we might not otherwise have done.

And clearly, vice versa, there are a lot of people and contractors, management resources is placing to Protiviti that are ultimately lending up at these Fortune 1,000 companies.

But I think, generally speaking, when you think of our staffing operations, you think of middle market companies, and generally speaking when you think of Protiviti, you think of Fortune 1,000 companies.

Okay. Thanks.

And then as a follow-up question, I wanted to ask, in Q3 you started adding stocks to your perm business. I was wondering if you could talk about kind of productivity levels there versus past peaks and how long you think it will take for new staff to kind of reach peak productivity levels?

Clearly it takes six months and longer, depending on the person, to get somebody up to speed. You never see a pure picture to the extent we continue to add, while some are coming up to speed you've got others just beginning up that curve.

There's no question the -- there is capacity of our current perm sales force, once it came up to normal productivity.

But as we've said, and with the comments Max made about our bullishness about the improvement in the labor markets, we're clearly making an investment in our head count generally, and that's particularly true in perm, which generally participates kind of most heavily in the labor mark upcycle.

In terms of the productivity of your perm staff, the beginning of Q3 before you started to add people more aggressively, could you just give me a sense there, where that was versus past peak?

Well, versus past peak. I mean, I don't have it on the top of my head exactly what our productivity level. Clearly they are down from what they were at past peak, both in absolute terms as well as in productivity terms. But remember as well, there is a huge component of variable compensation on the perm side, so all of that capacity utilization doesn't result in lower cost to us. The person themself participates heavily as their productivity rises.

Okay. Thanks.

Thank you. Our next question comes from Michel with Merrill Lynch. You may begin.

Yes, I was wondering if you can talk about Protiviti and the international opportunity that you see there. Maybe, I don't know if you can talk about the level of business that you're -- that is coming from international at Protiviti today, the outlook and your positioning.

We are actually very pleased about how Protiviti international operations have come along. International Protiviti is just under 15 percent of Protiviti's revenues. And that's in a very short period of time.

And we're further pleased that the profitability model of our international operations is very similar to the profitability model here in the states.

The -- as Max said in his remarks, during the quarter we added China, and China is kind of very interesting story. We were approached over a year ago by three or four former Anderson managers who had left Anderson, gone to another Big 4 firm in China, were not happy with that other Big 4 firm, wanted us to start in those locations in China.

At the time, we had our hands full looking at other things. We said it was too early. They side, fine, we'll go anyway. So they formed their own firm and they named it, by the way, Pro-I, and you can -- don't have to have much of an imagination as to how they got that.

They, over the course of a year, were quite successful. So at the end of that period of a year, they came back to us, very desirous to join Protiviti.

We essentially reimbursed them their startup cost and we now have four locations doing very well, which we're very proud of in China.

We were referring business to them during that period, so we obviously gave them an assist.

Right. And if I can with the follow-up, can you talk a bit about your hiring plans at Protiviti? Obviously it's seen fabulous growth this year.

Are you starting the year with the same kind of plans in mind in terms of hiring, perhaps to replace some of the temp staff that you've been relying on. Just wondering if you could give us color there? Thank you.

I'd say that the view inside Protiviti, it is and will remain to be a very resource constrained market place. They are very actively recruiting additional full-time staff.

The fact that they're using a very significant cadre of contractor staff at the moment certainly gives them a cushion to be even more aggressive on the full-time side, because to the extent that they are more successful on the full-time side than they think, there's a buffer with the use of contractors.

And is there a specific target, in terms of the ratio of partners to consultants that you're going after?

I think the -- you know, traditionally, one partner to 12 to 15 nonpartners is kind of a Big 4 ratio that's commonly bantied around. I think the thought inside Protiviti is it can do that well or better, from a leverage point of view.

Great. Thank you.

Thank you. Our next question comes from Mark Marcon with Wachovia Securities.

Good afternoon and congratulations on the results. I've been bouncing between a couple of conference calls so I apologize if this was already asked. I wanted to follow up on the international opportunity, both for Protivity as well as Rober Half. Starting with Protiviti.

Keith, can you tell us, how big was Anderson's internal audit practice internationally? Where did you see Protiviti being in terms of domestic versus international, three, five years down the road?

My recollection is, Mark, and it's been a while since I've looked at this specifically, but international was at least as large as it was domestically for risk consulting in Anderson.

Now clearly, they had a a much larger footprint internationally than we have currently, but we are very bullish and, frankly, constrained most by getting people that we're comfortable with. And the nice thing on the international side with Protiviti is you've got that former Anderson and to some degree former Big 4 network out that that, , as I said earlier, the more successful Protiviti is, the more people that want to join it.

So where could you see Robert H alf's Protiviti division being, international versus --

You know, there's -- we certainly don't manage to a magic mix. We'd like to grow the international portion of Protiviti as quickly as is practical. We'd like to do the same domestically.

Again, I told you that in Anderson's former world, international was as large. But from a profitability standpoint, frankly, there isn't much difference. You don't have to be that sensitive to is one -- is the international getting outsized, relative to domestic from a margin pressure point of view.

Great. How about in terms of your non-Protiviti divisions? It looks like you're having quite a bit of success internationally. Historically it's not been much of a focus, but it seems like it's certainly been gaining traction. Should we envision a greater emphasis on international operations over the next three to five years?

Well, I'm not sure I wouldn't say it's not a focus. We clearly see additional staffing growth internationally. We're focused particularly at the moment in the U.K. and France.

I think the addition of Protiviti in other markets also gives us a toehold we can leverage on to get staffing operations in countries where we weren't otherwise.

As an example, we're looking very heavily at the moment in Italy where we have the Protiviti operation and we're looking to have staffing in part because there's some built-in demand for staffing just by reason of having Protiviti in Italy.

International's about 20 percent of our staffing revenues, Mark, and it represents a significant opportunity.

I think in the early days that you may have been referring to earlier when you referred to focus, you have to have a certain critical mass to really have the infrastructure you need to expand aggressively. I would like to think we have that now internationally and we'll continue to pay attention to it.

Great.

In terms of the market, in terms of demand for people, I'm wondering if you can address, if you haven't already, the demand just in terms of finding highly qualified recruiters, account managers, et cetera, for your line divisions. What are you seeing there and related to that, if it hasn't been asked already, you know, now that we're going into options expensing, is there going to be any change with regards to your philosophy on that?

A couple of comments, Mark. We -- or the most part, we plan to train our own people. We devote a lot of energy and effort to that. We have something called RHI University, and it has various stages of training for people at the entry level, advanced levels, and so forth. And we rely heavily on that for the managers to help us grow the business. That's an important and constant focus and we continue to work on it.

As for compensation, we've said in the past that we're a personal services business. We feel that equity compensation, or putting it differently, having our people own part of the business is perhaps even more important in our type of business than in many others. And as a practical matter, we hope that we'll always make decisions with reference to what's the appropriate motivational incentive for our employees, rather than what is the accounting treatment.

That having been said, as I think Keith noted in a prior call, given the developments of the last, oh, year or two, we will probably tend toward more use of restricted stock than options, but we would expect to continue to use both to some extent going forward.

And just from a quantification standpoint, Mark, when you see our 10-K, we'll have about $0.08 delusion from options in '04. We think in that order of magnitude would be the same number in '05. Some of which may be converted to restricted stock, but when you put the two together, there's about $0.08 there.

It's our understanding that most companies are going to adopt this prospectively starting July 1, which is the date it's required, and that they'll restate their first two quarters, but only their first two quarters, so they have a consistent full year '05, and as it stands now, that's our plan as well.

Great.

One last question, just in terms of, you know, the demand and the resource constraint that's out there. In terms of talking to your clients, do you have a sense for, you know, as people are -- and obviously not everybody is on the same deadline. But the bigger companies are -- and most companies are on a December fiscal year, so they're basically going to be meeting the deadline in Q1 in terms of at least having to have attest to things.

Do you have a sense in terms of when things are going to kind of peak in terms of the short-term? I know long-term, continue to expect growth. But just in the short-term, when demand would peak?

the current expectation is that, to the the extent there's staff rolling off accelerated filer engagements, which are the December 31 companies, that they then get redeployed either on the nonaccelerated filer engagements and the foreign ones can be particularly large and I wouldn't underestimate. Or they would be redeployed to remediation efforts to improve controls for those accelerated filers.

In addition to that, you've still got your ongoing internal audit requirements that are many times are operationally focused rather than financially focused.

So it's our expectation that the -- there will be a supply scarcity throughout 2005 in this space.

And I take that to mean that your expectation would be that you would follow kind of your normal seasonal pattern in terms of revenues throughout 2005 then?

Well, no. As it relates to Protiviti, I'm not sure we've established any normal seasonal pattern and this whole SOA overlay makes it less -- makes it even more difficult to figure seasonal patterns.

But on the finance and accounting staffing side, we would expect typical seasonal patterns. I mean, clearly, if you look at Accountemps right now, there's a lot of work related to year-end audit. There's tax work. That seasonally levels out, or actually even goes down a couple of percent in the second quarter sequentially.

So absent Protiviti, we would expect to see pretty much normal seasonality. Maybe to Sarbanes-Oxley modifies that a little bit. But not near to the degree it does at Protiviti.

And in Protiviti I guess you're expecting things to basically stay fairly steady through the year after Q1?

Well, because officially we only give guidance for one quarter, I'll say that our Q1 guidance for Protiviti, notwithstanding the fact that they had what we consider a blow-out fourth quarter, that our Q1 guidance in Protiviti is that it would be flattish, even given that very high base for the first quarter.

Without commenting on precisely where we think the following quarters will be, all I can say is, and I'll reiterate what I've said earlier, is that we're actually quite bullish on Protiviti's prospects throughout 2005.

Thank you.

Thank you, sir.

Our next question is from Jim Janesky with Ryan Beck & Company. You may begin.

Yes. Keith and Max, when you look within your permanent placement division, obviously the margins have been kept in check the last two quarters because of your investments.

Is there any reason to believe that the margins could not go back to, you know, where they were during the last, you know, let's say peak of the employment cycle in the 20-plus percent range?

We would expect that over time we get back to those kind of margins in perm placement. It's that anticipation that in part fuels our appetite to add to resources in that division.

Yes, that's certainly the goal, Jim. You have to be a little bit of a surgeon in determining when to add additional staff. As Keith has already noted, if we weren't fairly optimistic about the -- what we see in the future, we wouldn't be adding so many staff at this time. But obviously our goal is to get back to the type of margins you're referring to.

Okay. Now, switching from margins to revenues, would the fact that, you know, you've been talking about now for several quarters and I think we're aware that there is a shortage of professionals in the accounting and finance areas, although the margins would get back to that area, do you think that the absolute dollars and operating income could go higher just because salaries are being pushed up by the shortage of professionals?

Well, it's interesting, Jim, that it seems that every -- after every down-cycle we're asking perm, will it ever get back to prior levels? And I guess our answer is not only do we believe it will get back to prior levels, we think it will exceed that. And I think if you look back through many, many recessions, as we have access to those records, that in fact has been the case.

I think, again, if you want to really step back from all this, the baby boomers are aging. There are a lot of people exiting the work place. As they get to retirement age, we think net-net, over the long-term, there's going to be a shortage of people, which is a very good thing for perm placement.

Right. Okay.

And then as a quick follow-up, it's really just to clarify two comments that you made. Did you say in the short three weeks that you've tracked in January, perm was up 107 percent, Keith?

Year-over-year, correct.

Yes. And then on the options expensing, that was $0.08 annually?

$0.08 annually. $0.02 per quarter.

Great. Thank you.

Thank you, sir. Our next question is from Thatcher Thompson with CIBC. You may begin.

Good afternoon, guys. There's been some concern in the market the last 12 months that Sarbanes-Oxley is a surface bubble that pops at some point. Obviously you're saying you don't see that. There's a heck of a lot of other work to do.

I guess my question would be, what -- Keith, you mentioned a little bit about the behavior in December with people taking vacation, but the demand was so great they had to make it up with overtime.

Can you tell us the behavior of the clients that are December 31 year-ends that need to have this done by the end of March? What are they asking you to do right now, particularly in December and so far in January?

Remember, now, the real deadline is March 15, which is the date you have to file your 10-K by. So there are many companies out there burning the midnight oil as we speak, trying to get their auditors through their 404 compliance. So there -- as we speak, there's a lot of work still going on December 31, first time 404 work.

We believe most of those companies are going to end that period totally worn out and they're not going to have anything to do with Sarbanes-Oxley for a little while, including the remeditation, unless and except to the extent they've got material issues to deal with.

That then becomes the source, if you will, for the non-accelerated filer, initial efforts, that can begin thereafter.

Okay. Thank you.

Thank you. Once again, that is star, 1 to ask a question.

Our next question comes from Toby Summer with SunTrust Robinson Humphrey. You may begin.

Thank you. I have a question regarding IT staffing. If you could talk about the opportunity you see in terms of remeditation in -- regarding Sarbanes-Oxley work, and what the market looks like in terms of demand and supply kind of coming into this quarter in terms of your ability to find and attract candidates in bill pay rate spreads? Thanks.

Yes, in IC, ironically, whereas Q4 benefited by Sarbanes-Oxley, and management resources in Protiviti, in fact, it probably crowded out some demand in IT, which was flat sequentially.

There is no question there is a huge amount of remediation, in internal controls improvement work coming out of Sarbanes-Oxley that relates to IT. There is a huge opportunity, we believe, in IT, just with those remediation efforts alone.

As I spoke to earlier, the user account password configuration project we got, which is major, is a project just on point to what you speak to.

From supply and demand, we certainly don't see the craziness with IT professionals today that we do with accounting, finance, internal audit type professionals. But probably over time that will firm somewhat.

Thank you very much.

Thank you. That concludes the question and answer portion of today's conference. I'd like to turn it back to Mr. Messmer for any closing remarks.

Thank you.

We appreciate your time this afternoon.

This conference call will be archived in audio format at our website at rhi.com.

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