羅致恆富 (RHI) 2005 Q3 法說會逐字稿

please stand by for real-time transcript. The Robert Half International conference call will begin momentarily. We would like to announce to all sites on hold for today 's conference that we are currently checking in additional participants at this time. We thank you for your patience and please continue to stand by. Please stand by. Your conference is about to begin. Welcome to the robert Half International conference call to discuss third quarter 2005 financial results. Our host for today's call is Mr. Max Messmer. Chairman and CEO of Robert Half International. Mr. Messmer, you may begin.

Thank you, and hello everyone. Joining me today is Keith Waddell, our Vice Chairman and President and Chief Financial Officer. In a few moments we will review our third quarter 2005 financial results. First I would like to remind everyone that comments made on today's call contain predictions estimates and other forward-looking statements representing our current judgment of what the future holds. These include words such as forecast, estimate, project, expect, believe, guidance, and similar such expressions. We believe there is 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. Some of these risks and uncertainty rs described in today's press release and in our files with the SCC. We assume no obligation to update the statements made in this conference call. Now let's discuss third quarter.

After our prepared remarks, Keith and I will be happy to respond to questions. As a reminder you can obtain a copy of today's press release on our website at www.Rhi.Com. We were pleased with our financial results for the fourth quarter. Revenues were $867 million, and an crease of 22% from the third quarter of last year. Income per share was 37 cents compared with 24 cents in the third quarter of 2004. This is an increase of 52% versus last year. Quarterly revenues and earnings again reached record levels. Cash flow from operations was $54 million before capital expenditures of $20 million during the quarter. We ended the quarter with dmrr 421 million in cash and cash equivalence after paying a $12 million cash dividend to shareholders and after spending $59 million to repurchase 1.8 million RHI shares in the open market. In August, we announced that our board of directors authorized the repurchase of up to an additional 10 million shares of the company's common stock on the open market and privately negotiated transactions. That 10 million share authorizations was in addition to the approximately 2 million shares that remained under our prior share repurchase plan. After our quarter of 1.8 million shares during the quarter there are approximately 10.2 million RHI shares still available.

Looking at our staffing operations, we were pleased with the company's performance across-the-board. All divisions contributed to the sequential and year-over-year revenue growth rates of 5% and 22% respectively. Robert Half Technology and Robert mav Management Resources led the way in terms of sequential revenue growth. Robert Half financial and accounting was the revenue growth leader on a year-over-year basis. Protiviti, our internal audit and risk consultant subsidiary also had an excellent quarter. Revenues were up 28% year-over-year and up 15% sequentially. Initially Sarbanes-Oxley compliance work represented 12-13% of RHI consolidated revenue for the quarter. We continue to be pleased with our progress in extending Sarbanes-Oxley relationships to internal audit and other risk consulting engagements. At this time I'll turn the call over to Keith.

Thank you, Max. As Max noted overall revenues for the company were $867 million. This is an increase of 22% from the third quarter of last year, and increase of 6% sequentially. There were 64 billing Days Inn the quarter the same as the prior year's third quarter and also the same as the second quarter. Accountemps revenues were 316 million, an increase of 23% from the prior years third quarter, at an increase of 4% sequentially question shallly. s Is our largest staffing division with 336 locations worldwide. It accounts for 36% of total revenues. OfficeTeam rev thank yous for the third quarter wwere 175 million, up 18% from the prior year's third quarter and up 4 % sequentially. OfficeTeam is our high end add mivrn it straight ever staffing division. It began operations in 1991. It has has 301 offices worldwide. This division represents 20% of total revenues. Robert Half Management Resources had third quarter revenues of 110 million, up 15% from the prior years third quarter and up 7% sequentially. Robert Half Management Resources places senior level accounting and financial professionals on a project basis. It was introduced in 1997. Operates at 121 offices worldwide, and accounts for 13% of revenues.

Robert Half Technology revenues were 80 million for the quarter, up 14% from Q3, 2004, and up 9% sequentially. This division places IT professionals and consulting and full-time basis. It was launched 11 years ago and represents 9% of revenues. There are 112 Robert Half Technology locations worldwide. Affirmative placement division Robert Half finance and accounting had revenues of 57 million in the third quarter up 60% from the third quarter of last year and up 3% sequentially. This business was established in 1948 and it operates in 336 offices worldwide. It accounts for 7% of total revenues. International revenues for the staffing operations were 142 million for the third quarter, up 23% from last year, and up 2% sequentially. On a constant currency basis, these growth rates were 21% year-over-year and up 4% sequentially. We opened our first staffing operations in Italy during the quarter bringing our international office count to 78 locations in 12 countries outside of the U.S. International staffing operations account for 19% of total staffing revenues. Third quarter rev thank yous for Protiviti were 128 million and comprised 15% of RHI revenues. Established in may, 2002, Protiviti has 40 locations in north America, Europe, Asia, and Australia. Subsequent to the end of the third quarter, we opened a Protiviti office in amsterdam.

Turning to gross margin, temporary and consulting staffing gross margin was 248 million for the quarter. This represents 36.3% of applicable revenues compared with 36.2% of revenues for both the prior years third quarter as well as Q2, 2005. Overall staffing gross margin was 305 million for the quarter or 41.3% of staffing revenues. This compares to 40.O% of revenues in Q3 last year and 41.2% of revenues last quarter. The year-over-year percentage improvement is due to the higher mix of permanent placement revenues. Gross margin for Protiviti was 51 million for the quarter of 40% of Protiviti revenues. This compares to 39.4% of Protiviti revenues in Q3, 2004 and 40.8% of its revenues in the second quarter of this year. Staffing selling general administrative costs for the quarter were 226 million, or 30.6% of staffing revenues. This compares to 31.6% of revenues for quu three, 2004, and 31.1% of revenues for Q2, 2005. The sequential percentage decline is the result of better leverage of fixed operating costs.

Protiviti SG&A costs were 28 million for the quarter representing 21.5% of revenues. This compares to 20% of revenues in Q3, 2004, and 22.1% of revenues in Q2, 2005. Operating income from our staffing divisions was 79 million for the quarter, and represented 10.7% of staffing revenues. A temporary and consulting divisions contributed 67 million of this amount or 9.9% of applicable revenues. The permanent placement division had operating income of 12 million or 20.2% of applicable revenues. Operating income for Protiviti was 24 million for the quarter and represented 18.4% of revenues for this business unit. Accounts receivable were 456 million at the end of the third quarter with implied day sales outstanding or DSO of 47.9 days. This compares with 46.5 days at the end of Q2, 2005. The increase is due in part to a higher mix of permanent placement and Protiviti receivables which have longer collection cycles.

Now, turning to guidance. The following are some of the business trends we witnessed during the third quarter and the first two weeks of October. On a same day sequential basis, temporary and consulting revenues increased every month during the third quarter. Permanent placement revenues were down in July but up in August and up again in September. During the first week of October, revenues from our temporary consulting businesses were up 15% versus the same period last year. For the first two weeks of October, revenues from a permanent placement division were up 112%, versus last year. We would caution that it's very difficult to gauge perm trends over such a short period of time. Based on these observations, we would offer the following fourth quarter guidance. Revenues are a range of 850 million to 880 million for the quarter. Income per share is 35-37 cents. This guidance implies fourth quarter year-over-year revenue growth of 13-17% and EPS growth of 25-32%. This is not withstanding the fewer number, excuse me, the fewer number of fourth quarter billing days. The holidays and related vacations are expected to have a sequential impact of 3-6 days. As you know, these estimates are subject to the risk mentioned in today's release. It's our policy to limit guidance to one quarter. Now, I'll turn it back over to Max.

Thank you, Keith. We were pleased to see such strong financial results in all lines of business during the third quarter. Our operations were effected in only a minor way by hurricanes Katrina and Rita. Our New Orleans branch is closed but expected to reopen next week. Our company sponsored a corporate matching gifts program for hurricane reloaf that raised more than $300,000 to the American red cross thank toss contribution from our employees worldwide. Even with hurricanes and rising gas prices the U.S. Job market remained strong during the third quarter and this contributed to the broad based growth within our staffing operations. The most recent small business optimism index was also encouraging. Job creation plans among small businesses remain strong according to the September report. Last quarter, we talked about the secular trends we we believe are impacts our staffing operations and Protiviti in a positive way. I think some of these points bear repeating.

The accounting industry's focus on enhanced and internal controls combined with the market's acceptance of service providers beyond the traditional accounting firms has created many new opportunities to develop and build upon our relationships with new and existing clients. The demand for experienced accountants and other skilled professionals places a premium on the services of those who are able to identify and recruit talent. RHI pioneered financial recruiting in 1948 and has long established and well respected networks in the accounting and finance communities that allow us to recruit and hire highly skilled people for our clients. The demand for accounting and finance professionals also places a premium on services like Protiviti that specialize in internal audit and business and technology risk manage. The Protiviti team is made up of professionals with deep competency in these areas. Given these trends, we remain optimistic about the business prospects for our staffing operations and for Protiviti.

Keith and I will now be happy to respond to 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 will certainly do our best to return to you later in the call.

At this time, if you'd like to ask a question, please press the star and one on your touch tone phone. You may withdraw your question at any time by pressing the pound key. Once again, if you'd like to ask a question, please press the star and one on your touch tone phone. We'll take our first question from the site of Andrew Steinerman with Bear Sterns. Go ahead, please.

It's Andrew. Um, when I look at when I look at pro such amazing sequential and year-over-year revenue growth, I was wondering why the margins didn't move up from, um, the second quarter level?

Andrew, a couple of reasons, as we talked about on last quarter's call, staff raises were effective July 1. Those raises get passed through to clients as they anniversary their contracts with us so there's a little bit of a lag between when we grant the raise and we get the billing rate recovery. In addition, we certainly invested in more senior level talent at Protiviti during the quarter and that also pressured margins, but it pressured margins for good reasons from our perspective.

And, um, within the guidance that you gave for fourth quarter, where do you think Protiviti will lie?

Protiviti is actually the most tricky of our divisions from a fourth quarter estimation stand oynt, Andrew. On the one hand there's a bigger holiday impact of Protiviti Than our other divisions mostly driven by clients where the last week or two of the year depending on how well they've done with Sarbanes year two, for example, to the extent our clients take that time off, our people will take that time off as well.

Right.

So it's not totally within our control as to what that impact will be. I'd say but for the holiday impact, we're actually very bull ish about Protiviti in the fourth quarter. There's been talk for some time now about companies that have dragged their feet to some degree on getting year two worked on and we believe that there will be pretty robust demand during the fourth quarter for that, um, so there for, Protiviti fourth quarter given the holiday impact could actually be down sequentially, but again, adjusted for the holiday impact is doing quite well.

Sounds good. Thanks for the help.

We'll take our next question from the site of Greg Capelli with CSFB. Go ahead, please.

Hello, Max and Keith. How are you?

Good, thanks.

Just a follow-up on Andrew's question on the perm side. I'm sorry. Did you say you guys are still aggressively hiring recruit ers or do you have the a kas it that your conformable with at this point?

I think the entry is we're still aggressively adding recruiters and I think that most shows itself if you look at perm placement operating margins, quarter three versus, um, quarter two versus quarter three, and you could say they're down a little bit and the reason they're down a little bit is because we aggressively added particularly to our perm placement staff during the third quarter.

Got it. Just one follow-up. The strength of Protiviti and Management Resources is that coming from, you know, continued acceleration of projects, you know, international foreign fileers and other non- accelerated fileers ramp up to meet their compliance deadlines or is it more of a reflection of other non-socks work continuing to pick-up or both?

Well, it's both and let's talk about it a bit. First of all there's a fairly major shift away from first year socks compliance for clients to year two work which we believe will be much more, um, annuity-like in its characteristic, and somewhat similar to things like internal audit is an example so we clearly saw year two Sarbanes-Oxley work ramp up during the second quarter. In addition to that, we got some very nice internal audit co- sourcing and outsourcing engage mentss that had nothing to do with Sarbanes-Oxley. We continued to do well at ITS management and security. We've got a very good team in regulatory and forensic work, so clearly, given that our year one Sarb-Ox work trailed off both in dollars and percentage of the total and the fact that the whole thing grew nicely says by definition that you're non-year one Sarb-Ox work grew nicely during the quarter.

And is it fair the growth from international versus domestic, would the international be growing even faster at this point for you guys?

Well, because it's on a smaller base, our expectation would be that it grow faster. Internationally we did quite well during the quarter for Protiviti. It's about 15% of Protiviti revenues. I think it's been 13-14% the last few quarters but internationally it's done quite well as we mentioned, we added amsterdam during the quarter. We've got a half a dozen former Big Four types that have joined us over there and we're quite pleased with that.

Thank you, guys. Great job!

Thank you.

We'll take your next question from the site of Jeff Silber with Harris Nesbitt.

I want to talk a little bit more about international but outside the Protiviti area, talking on the perm and temp side and specifically in the UK which I believe is one of your largest regions. Some of the other companies have talked about economic weakness effecting their business. I was wondering if you can give us color on that from your end.

We have a solid quarter in the UK during the third quarter, Jeff. We had a little sequential growth, and given relative performance based on what you described with others, we were actually quite pleased with how we performed in the UK during the quarter. We did particularly well in German chi has been a focus of ours for the last few quarters so we were particularly pleased with the sequential growth we had in Germany during the quarter. Again it's small relative to the total but, um, unto itself it did quite well.

Okay, and shipping back I guess mostly in the U.S, Can you tell us what the annual increase was in billing rates and wage rates?

The increases year-over-year were fourish percent, sequentially were like 1%. Margins were pretty flat from on a non-conversions basis. Margins were a little bit better during the quarter. Conversions were a little bit lighter and they came together where there was little change in overall temp margins.

Okay, great. Thanks a lot.

We'll take our next question from the site of Michael Moran with Merill Lynch X

Yeah, most of my questions have actually been answered already but I was wondering if you could perhaps talk about what's happening in the legal side. I know that's very small but there has been some activity with some of the foreign players buying smaller firms. I was wondering what kind of trends you're seeing in that segment.

We're seeing some nice growth in our legal staffing division. We also have some capabilities within Protiviti that relate to legal support, litigation support, and we're fairly actively trying to put together the capabilities we have in Protiviti with the capabilities we have in staffing and it's certainly an area we expect to invest in going forward.

Great. Thank you, and then just on Protiviti, you've mentioned some senior hires. Is the pace of hiring overall pretty similar to what you have been experiencing year to date? So you're up said question you're up sequentially?

understand that this was the quarter, this is the quarter where the new college graduate staff people joined the firm as they graduate. So we had a nice in flux of new graduates to the Protiviti staff. We were very pleased with our success rate on campus, so this quarter benefitted a little bit disproportion alley for that reason, but generally speaking, you can look at revenue growth and assume that headcount growth isn't that different from that.

And into your Protiviti, the rates are close to zero year on year?

The increase in our Protiviti bill rates?

Yeah.

They're clearly up. As we speak to pass through the pay rate increases that we gave to our staff and I don't believe for competitive reasons we've ever talked specifically about that.

Okay. Thank you.

We'll take our next question from the site of Chris gu tech with Morgan Stanley. Go ahead, please.

Thanks. Hello, Max and Keith. Just wanted to follow-up on what is my favorite theme for your company which is seemingly a huge opportunity to continue to take share from the Big Four. Keith I think in the last call you had a quote saying it was an unbelievably unprecedented time in the marketplace because your customers were demanding alternatives to the Big Four. Is that trend accelerating? Is it stable or maybe was it even a little bit of abl ip with the potential indictment that was maybe accelerating that? Could you put a little characterization on what you see more recently?

I'd say it's clearly a trend. We believe if anything it's accelerating. Just yesterday, we were the finalists with one of the Big Four for a major outsourceed internal audit engagement and we found outlast evening that we won that and we were elated by that. But the trend due to perceived con nribts with the Big Four, the trend with the view that you need to have a bullpen should you want to change external Audi fors also reduces the number of Big Four firms that might be at play at any given time. Those trends are very much in place and some of them are successful this quarter. One of the surprises we can look to is we're actually doing some year two Sarbanes-Oxley work for clients we didn't do year one Sarbanes-Oxley work for which was a positive surprise for us but that's yet another indication that there's a continued movement in the favor of Protiviti.

Chris, when you ask that question, um, a similar question last quarter I added a couple of comment to what Keith said and I'll do so again. We have great respect for the Big Four accounting firms. We also recognize that they labor under an immense amount of litigation. They have a conflict issues that perhaps never existed before. There's a sensitivity among audit committees in the boardroom that didn't exist here to for as so conflicts and potential conflicts. As I've said last quarter, you really have to think about it if you're on an audit committee. If I use a Big Four Firm for my internal audit work under the exchange rules, I've pretty much taken that firm out of the hoper of potential parties to work with me in terms of external audit, I might take them out of the hoper as for certain tax and other consulting matters go. So if we're right, the Protiviti continues to enhance its reputation among C level executives as essentially a member of the big five when it comes to internal audit and risk consulting, I think the future puvr sx bright for Protiviti. We have the capacity to do a great job. We're doing a good job and I'd expect us to keep getting business for the reason that there are so many conflicts and potential conflicts plaguing the Big Four.

Thanks for the detailed answer. I just had one other question which is: On the permanent side of the business, the margins were down a little bit and I'm wondering if this is similar to what we saw I think several quarters before where the company was somewhat aggressively pi sx scarnlt ass. Was that the reason for the margins coming down or by contrast was there a little bit of pull back in de mrand for full time worker's because of energy prices, hurricanes, other issues that might have had a temporary negative impact ?

It was clearly the former not the latter meaning we aggressively added to our full time staff. We've seen no let up in demand for accounting to finance professionals. That's particularly true for the 3-7 year CPA level and our margin contraction on the perm side was a very planned event , a direct result of very aggressive hiring, particularly in that division.

And as always we'll be working for productivity improvements and if we're right, we'll see margin improvement as a result.

Sounds good. Thank y.

We'll take your next question from the site of mark mark on from the site of RW Baird.

Good afternoon and congratulations. I was wondering you talked a lot about year two Sarb-Ox work at Protiviti and I'm wondering if you can characterize that in terms of the size often gaugementes relative to the year one work for like clients.

Well, Mark, there is no imagine answer. It's very client-specific depending in Parton what the state of their controls are, depending in Parton how seriously they've taken this. We've gotta convert a project which was year one into a process which is suts unable to the extent they've tried to convert manual controls into automated controls to the extent they have tried to change controls designed to de tebingts problems to controls designed to prevent problems, depends on whether there was comprehensive across-the-board testing versus more targeted testing, so frankly, it's all over the lot. But we were pleased with the way that year two did ramp up and our outlook as to the suts un ability and repeat ability of that is actually quite positive.

Do you think that year two work will continue through the fourth quarter and then you'll kind of be done with that for most of the companies?

I think we found last year that our year one work trailed off after the end of the calendar year with the external audit firms coming in during the first following quarter to do their external audit work. So my guess is for the most part, year two work will be done mostly by the end of the fourth quarter.

Great. Thank you.

We'll take our next question from the site of Jim Janesky with Ryan Beck. Go ahead, please.

All right, yes, good afternoon. A couple of follow-up questions on perm, actually, Keith. You know, perm was up a couple million dollars sequentially and you're making a big investment again in perm and it was about this time last year that you started, um, also making investments I think. The markets good. You've talked about that now for several quarters. I mean, are you actually Alex pebingting an acceleration beyond this level and if so, what's driving it?

Well, an acceleration meaning year-over-year or sequential? I guess all we can say is our outlook for our perm placement division is supported by our hiring actions during the fourth quarter, excuse me, third quarter just ended and that continues into the fourth quarter.

Okay. And even, I know it's very early in the fourth quarter, but you know, even last year as perm was recovering, it was relatively flat between the third and fourth quarter. I know again, we're really early but up, you know, over 100% , is there something possibly going on in this fourth quarter that's a bit different?

A couple of things. First of all if you look back at the last 20 years of fourth quarters in the perm business and you will find that seasonally, many clients run out of hiring budget in the fourth quarter and those hires kind of get deferred into the new year, and there for, the fourth quarter seasonally is never the best quarter for our perm placement division, so, we certainly moderated our own, um, expectations as far as the guidance we gave you in that regard. The thing about the 111% or 12% is up for the first couple of weeks, one of the issues at play there is the year ago comparison were pretty ease were pretty ease necessarily go crazy over the fact that ear up 112% for the first two weeks. I mean, we're doing very well. In fact we're doing great, but 112% might be a little bit misrepresented of reality.

I think the secular trend in accounting and finance are very strong as we've discussed a couple of times now in conference calls. But I think Keith's admonition is probably appropriate.

Okay, thank you.

We'll take our next question from the site of Kelly nrin with UBS. Go ahead, please.

Thanks. The question relates to competition, particularly for talent , you know, you're on permanent talent being recruiters. One of the San Jose papers reported that Robert half filed the lawsuit for taking employees. I doubt you can really comment on that but could you comment just generally on, you know, the competition for talent, you know, for your own permanent recruiters And specifically on, you know, your turnover and any wage, um, upper wage pressures that you're seeing that might be different from kind of a normal wage place? Thanks.

I'd say, Kelly, that competitive environment for our people, um, has always been very robust and that our people are recognized throughout the industry as some of the better people in the industry. We've had non-competition squabbles with our competitors over time so the fact that we've got a couple going at the moment frankly isn't unusual. It just so happens that this one got a little press. As to turnover trends? What we have to pay our people trends I'd say there's no negative turnover trend of note to talk about on the staffing side. Clearly as the market for accounting financial professionals has heated up, so has the market for recruiters Dedicated to that, and we're paying our people competitively and there's clearly some pressure upward pressure on what we pay our internal people.

I'll add to that Kelly, you know, immitations the sincere its form of flattery. We have good training and good people. We would like to think we provide them with the best compensation opportunities. They have equity incentives and historically our turnover at the level of people that have been with us a couple of years is extremely low. Turnover has always been higher below those levels within the whole industry. Some people aren't suited to the industry or other issues but from a competitive standpoint if I wanted to enter this business I would certainly make my first stop, Robert half because I do think we have the best people and I would be trying to pick people off as well. Every now and then someone getings someone. In the rare case where there's litigation I have a feeling it's more often about something like trade secrets or whatever than it is about the fact that a person left. So, in any event, we feel like our track report overall is very good in terms of retaining top people, but there will always be cases where someone left to do something else.

Okay, thanks and then just a follow-up on Protiviti. I don't think anyone has asked yet on the revenue guidance. Could you narrow it down and tell us where you think Protiviti might come in for Q4 and then outside of Sarb-Ox, what are the hottest demand areas at Protiviti? I mean where are clients spending the most outside of that?

Okay, as far as fourth quarter guidance, we did not give specific guidance. We did say Protiviti potentially will be the most holiday and vacation impacted division that we have for that reason, it should not be a surprise if we've got a slight sequential down tic in Q4 versus Q3. adjusted for the holiday vacation impact, Protiviti is doing quite well and our guidance would assume it would continue to do quite well. The second part of the question was:

Just outside of Sarb-Ox --

Outside of Sarb-Ox? Again we rattled off a few of these before. I'd say internal audit co-sourcing and outsourcing, not related to Sarbanes-Oxley would probably be the largest area. In addition to that we talked about ITS management, ITS security and regulatory and forensics consulting and those are areas outside of Sarbanes-Oxley that we've had some success with this past quarter and would expect to continue to.

Okay. Thank you very much.

We'll take our next question from the site of Tobey Sommer with SunTrust. Go ahead, please.

Thank you. You've been talking about profitability overall hashas expanded significantly and your upper round where the prior peek margins are, I wonder if you could comment about what the margin structure of the business looks like going forward and maybe how it's fundamentally changed with the inclusion of Protiviti in terms of peek and trough operating margins and EBIDA margins.

And you have to separate staffing from Protiviti because I think if you just look at staffing, it's not back to its peek operating margins. The biggest reconciling item is that perm placement as a percentage of total is still less than 10% and it has certainly been right at 10% in the past, so there's a couple hundred basis points of margin improvement from that alone. Further, as we, um, continue to expand a revenue base we would expect not to have to expand our fixed cost or semi- fixed cost as quickly so we're hoping there's margin upside from that. Protiviti clearly has higher operating margins than our staffing division does. Those margins we believe are consistent with the kind of margins you get in that business as we witness when we get our due diligence back at the Anderson, into the Anderson records as we did the Protiviti deal three years ago. So, we believe there's certainly margin expansion opportunity as soon as I say that, the last thing I want to do is for people to mark up their margin expectations as they model the future. So, I guess my point is it's possible but don't necessarily count on it.

And then in turning to, um, Robert Half Technology, I was wondering if you could comment on trends in IT bill rates and then 9% sequential growth there, I was wondering if it's possible for you to characterize the contributors to that growth and maybe how much you think you derive from Protiviti referrals or referrals from your other business versus industry growth. Thank you.

Well whereas Protiviti clearly helps somewhat are RH Technology, quite frankly most of their growth is growth they got themselves. The biggest thing going on during the quarter, there was a fair amount of client desktop refresh projects which tended to deal mostly with PC technicians and help desk people. A fair number of operating system upgrades on the desktop. Network management including wireless was hot and we also had some IT security engagements so again, remember that our technology client base tends to be more middle market, more desktop oriented than fortune 1,000 firms so that's what's driving that demand and I would say generally speaking, just as business activity levels are better at small to middle size firms, so would their demand for IT services which I think is a big, um, factor mind RH technology's growth.

Have you seen any changes in the trend in bill rates?

The bill rate trends aren't that different than the rest of our business, not enough to comment on.

Thank you very much.

We'll take our next question from the site of klint Fen way with Wachov ia securities.

Could you discuss the longer term market opportunity for small businesses bearing in mind your customer base? And there's talk of potential changes here. What type of impact could this have on your ongoing socks work?

Well clearly they have deferred yet again for yet another year, um, small business compliance deadline for Sox. It remains anuntapped opportunity for the future because Protiviti is mostly fortune 1,000 based. It did not have hardly any impact on its business for the quarter, but the good news is that there will remain for some time first year Sarb-Ox compliance demand and that's clearly among Protiviti sweet spots.

You maybe discuss in more detail the market opportunity given your customer base within the temp side?

Well, again, the customer base on the temp side tends to be small to middle size businesses, and they've certainly got some short-term regulatory relief, but they haven't gotten long term regulatory relief. There was an interesting article in the journal, I don't know, a month ago that actually talked about if you look at audit failures and restatement issues, they were disproportion alley focused on smaller businesses, not larger businesses, so it was calling into question well they were in sympathetic that the deadlines were extended for smaller firms, it may be that they are the very firms that need it the worst. Long story short, again, our staffing client base at the moment has gotten regulatory relief from Sarb-Ox requirements but that's something to come and the fact that we're as well positioned as we are with that particular client base, I think pwods well for the future.

Thank you.

We'll take our next question from the site of Kevin with William Blair.

Hello, it's Matt lip son. You did a little acquisition I believe about three months ago in Philadelphia within Protiviti. How's the inter graiingz of that going and I think at the time you mentioned you might do more. Have you or what's the outlook for small acquisitions on the consulting front?

The integration on that small firm is doing fine. We typically have ongoing discussions on a handful of smaller deals. That's true as we speak. As we've said before, we do see pro tivr it it as a platform to get into a broader array of consulting services. We're looking at other firms that have different niches that have different skill sets than what we already have so we're quite interested to expand Protiviti's knowledge base in that regards. Nothing to report as having been closed, but again, it's not unusual that we're talking to firms which we do as a matter of force.

Okay, thanks.

We'll take our next question from the site of Pete Corillo from Citigroup.

Hello, guys. Temporary consulting was up due to operating leverage. Any guess at all as to how, I mean, it's clearly up 100 basis points over the second quarter. Any guesses as to how that may continue over the following quarters?

Well, I Think let's first talk about the coming quarter. Fourth quarter is typically a quarter where we advertise a little more strongly than we have the rest of the year. As companies go into their budget season, as companies get ready for year end and now we've got the additional demand driver from year two Sarbanes-Oxley, we found that it's a good time to heavy up on the advertising so next quarter's SG&a might be impacted a little for that reason. As we've said many times on these calls, we always look back to historical numbers to see what our SG&a percentage of revenues was and we always hope to beat it. We're kind of now in in chartered territory, from a revenue standpoint. Clearly it's our objective to have the SG&a as low as is practical. With that said, understand that the largest component of our SG&a is our internal staff and the quality of that internal staff very much drives revenue.

Okay. Now I guess looking back, I don't or I haven't seen that level since I guess fourth quarter of 99 in terms of actual operating margin. Might be see it again occur next year?

Well, our hope is that you'll see it more, but our point is we're now back to double digit operating margins with our staffing operations at a time when perm is less than 10% and it hasn't been that long for some of ours said you'd never get back to double digit operating margins and staffing business unless you had an outside participation from perm placement which is up but as I said earlier, it still isn't either absolute dollars or as a percent of revenue what it was.

Okay. And one other question. Any other seasonality issues at all you see coming during next year? Any of the quarters?

Well again for the fourth quarter you got the issue of holidays and vacations around holidays. You've got the issue of perm hiring budgets, sometimes causing a timing issue as to when people get hired, you got the issue of heavy up in advertising versus the other quarters, um, that's kind of the story for the fourth quarter. I mean looking into next year, we would expect typical seasonal patterns where first quarter is very, um, year round close accounting work oriented. Internal audit gets crowded out a bit and by external audit and there for there will be some Protiviti impact from that but we certainly don't see any changed seasonal patterns for next year relative to what we seen in the past.

Okay. Great. Thanks a lot.

We'll take our next question from the site of Jeff Silber with Harris Nesbitt. Go ahead, please.

Thanks. CapEx in the third quarter seemed to spike up a little bit. I was wondering what your budget is for the year.

It was a bit higher. A couple things. We continued to progress on this voice over IPTel-com project we talked about before. In addition we make our annual contribution to Microsoft to license their desktop software across our organization and that's never cheap in getting less cheap. We talked about having a $55 million annual CapEx budget for 2005. Our current thinking is we'll spend 14 or 15 in the fourth quarter which will put us close to what we have been talking about for some time. It didn't happen evenly quarter over quarter but I think we'll land the plane close to where we said we would.

Okay, great. And then in turning to the new stock base compensation rules , have you provided any guidance or could you give us some guidance what you're expecting that expense to be next year?

It typically runs two, maybe three cents a quarter and that's from the options. Having said that, we would see some shift in our compensation strategies to be more restricted stock oriented versus options, so it may change line items in being restricted stock amitorzation rather than stock option expense but when you put the two together, there's a two or three penny per quarter impact.

Okay, great. Thanks a lot.

We'll take our next question from the site of Brant Sakakeeny with Deutsche Bank. Go ahead, please.

Thanks. Hello, Max and Keith.

Hello.

Quick question just in terms of international. You spoke about the UK. Can you just comment on the French market because obviously you got a pretty decent presence there and I'm curious as I guess to just what the trends are in the market and whether or not you think you have seen that market turn and then B, as you look out toward the perm business in that market for 2006 are you as excited as a lot of other people are about that market? Thanks.

Well speaking about France, clearly, I don't think you should use Robert half's experience in France as a test for the market in France. Generally, I mean relative to Robert half it's pretty small. I think we did fine for the quarter in France. It was flatish as I recall, but again, I don't think I would use Robert half as the basis for how things are going in France. As to our thoughts about the prospects for perm placement in 2006, I'd say we're very bullish, and our money is where our mouth is and that we added significantly to our perm internal staff headcount during the quarter which you see very directly in perm margins for the quarter. We do not see any major, um, demand problem on the horizon as it relates to accounting and finance people for the reasons we talked about many times.

Great and finally can you just talk to potential acquisitions and pipeline, um, are there a lot of interesting sort of spins of the Big Four like obviously the Arthur Anderson business you saw that are up there or are they sort of, um, few and scarce?

Well, I think as an example, KP& G has publically stated there are a few pieces of particularly its tax practice that are probably inconsistent with what the SEC wants them to do going forward. I'm not sure those are the greatest fits for what we do, but those are, that's at least one example of what you might be talking about. And as I said earlier, there's always deal flow, starving oriented, more consulting oriented as we've done well with Protiviti, but there's nothing eminent to be closed but we're always looking at opportunities and we always learn from what we look at. Sometimes we do the deals. Sometimes we use that, um, as a basis for what we do ourselves.

Okay.

Let me just add, Brant, that real it's lick these are personal service businesses obviously and the key factor is who are the individuals involved? What kind of a fit is it? Do we share the same values? Do we have the same attitude about building the business for the long term and so fourth and those are hard to generalize about. They're very fact specific, but as we said in the past, we have a group that's looking almost all the time at situations and opportunities and I would expect we do a few things but it will be as in the past. It will be, um, you know, as the right opportunities present themselves and they will be incrimental. I don't think you'll wake up and find that we bet the barn on a particular transaction.

Okay, great. Congratulations on congratulations on a.

Thank you.

We'll take our next question from the site of Michael Moran with Merill Lynch.

Thanks for the follow-up. My own housekeeping item. Could you give us the end of period share count?

End of period share count? I don't have that number but let me give you some color for doing your model for next quarter. Clearly, the principal reason the share count was up for the third quarter is or our average stock price was up quarter over quarter and our outstanding options get more diluted as the share price increases, so when you're doing your modeling as a rule of thumb, every dollar of appreciation in the stock price adds about 300,000 net shares to the shares outstanding. Now, I think the average price embedded in the number you see for the third quarter is like 3250 so you do your own math as to where you think the stock ends up and that will tell you how many additional net shares you need to add for options.

Great. And in your guidance, it's based on what fully diluted share count for Q4?

Well, that would make me disclose my projection for what I think the stock would be.

All right I thought I'd Try it.

Good try!

Thank you.

We'll take our last question from the site of mark more con with RW Baird.

Thanks forgiving me the follow-up. You mentioned that year two has obviously picked up. How much year one work are you seering at this point?

Well, without getting real specific, whereas we said in the past, it was over 50% of Protiviti's revenues. It's now less than 50% of Protiviti revenues.

I could have guessed that.

Well, okay, but I guess there are still foreign fileers Of significant size. There are still off calendar year end companies of significant size. There are still smaller companies that not withstanding the fact that they have got a little time, are trying to get ahead of the curve, so year one Sarb-Ox work has not dried up.

I mean, how much of the Sarb-Ox work that you're doing how much of that would you say is year one roughly speaking?

And again, I think we've been as specific and maybe more specific than others have been. We've said if you look at Robert half wide, year one Sarb-Ox work is 12-13% of revenues.

OH, that was the year one work.

That's correct.

Got it. Okay. I thought that was all Sarb-Ox Work.

That's year one. Our position is year two Sarb-Ox work is not sufficiently different from a suts un ability standpoint to segregate it like we did year one work.

Got it. And in terms of the sequential increase that you sought Management Resources, how much of that is being driven by the sequential increase that you sought at Protiviti?

Actually, now, anything Management Resources does with Protiviti is reported in Protiviti's revenue column, not Management Resources so what you're seeing in Management Resources is business they do with third party clients unrelated to Protiviti. Management Resources had a very good quarter in its own right. There was, um, a fairly significant demand for supplemental staffing resources in the internal audit area where companies were doing it themselves and needed more hands and feet. There was also nice demand for interim finance positions, controllers, accounting managers, etc, And then they did year two SOA work themselves that Management Resources had a very nice quarter and again, it's with third party clients unrelated to Protiviti.

Great. Thank you.

I'll just add to what Keith said that as I noted at the very outset of the call these are obviously somewhat unprecedented times in the world of accounting and finance. As you look at our revenues obviously the great majority are related to accounting and finance. We were found in 1948. I would argue that we're easily the best known and best established firm in that area from a staffing standpoint and so we're not particularly surprised with the results that are being reported. We're pleased but we've expected strong demand. I think main street is optimistic and I think given the transparency that the world wants to see now in accounting and finance, we anticipate a good opportunity going forward which we hope to capitalize on. We appreciate your interests since that was our last question I'd like to thank everyone again for your time. We appreciate it.

This concludes today's tell econ for instance. A taped recording of this call will be available for replay beginning later today and ending at 8:00 p.m. Eastern daylight time on October 27th. The dialling number for replay is 800-839-9d 9d 307 or, 1-402- 22 O-6085 for outside the United States. This conference call will also be archived in audio format on Robert Half International's website at www.Rhi.Com.