羅致恆富 (RHI) 2005 Q4 法說會逐字稿

Welcome to the Robert Half International conference call to discuss fourth quarter 2005 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 good afternoon.

Here with me today is Keith Waddell our Vice Chairman, President and CFO. Thank you for joining us as we review our fourth quarter 2005 financial results.

Before we get started, I would like to remind everyone that comments 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 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.

Some of these risks and uncertainties are described in today's press release and in our filings where the SEC. We assume no obligation to update the statements made in this conference call.

Now let's review the fourth quarter. We were pleased with the financial results which capped off a record year for your company Revenues for the fourth quarter were $885 million, an increase of 17% from the fourth quarter of last year. Income per share was $0.37 compared with $0.28 in the fourth quarter of 2004. This is an increase of 32% over last year.

Quarterly revenues and earnings again reached their highest levels in our company's history. Cash flow from operations for the quarter was $90million before capital expenditures of $21 million. We ended the quarter with $458 million in cash and cash equivalence, after paying a $12 million quarterly cash dividend to shareholders.

We also spent $34 million to repurchase just under 1 million RHI shares in the open market under our stock repurchase plan. Approximately 9.3 million RHI shares remain available for repurchase under the plan.

Our staffing operations performed well across the board during the fourth quarter with all divisions posting solid sequential and year over year revenue gains. Revenues in our staffing operations increased 20% versus last year and rose 7% sequentially on a same day basis.

Protiviti also performed well. We were pleased that Protiviti continued to broaden it's revenue base with growth in outsourced and co-sourced internal audit engagements as well as business and technology risk consulting services.

Sarbanes-Oxley initial compliance work has proved instrumental in establishing these ongoing and productive client relationships. During the quarter, Protiviti was named by Forester Research to its top category of enterprise risk management consultants. We were one of only four firms to achieve this distinction. Protiviti also continued to expand its international foot print by opening new locations in the Netherlands and in Mexico.

Sarbanes-Oxley initial compliance work comprised approximately 6% to 7% of RHI's consolidated revenues for the quarter. At this time I'll turn the call over to Keith.

Thank you, Max.

Overall revenues for the company were $885 million. This is up 17% from the fourth quarter of 2004, an increase of 2% sequentially.

There were 61 billing days in the quarter, down one day from the prior year's fourth quarter and down three days from the third quarter of 2005. Accountemps, our largest staffing division had revenues of $324 million on a same day basis this is an increase of 23% from the prior year's fourth quarter and an increase of 7% sequentially. Accountemps has 339 locations worldwide and makes up 37% of total revenues. OfficeTeam revenues for the fourth quarter were $179 million, up 18% on a same day basis from the prior year's fourth quarter and similarly up 7% sequentially. OfficeTeam is our high end administrative staffing division. It began operations in 1991 and has 301 offices worldwide. This division represents 20% of total revenues.

Robert Half Management Resources had fourth quarter revenues of $111 million, up 8% on the same day basis from the prior year's fourth quarter and up 6% sequentially on a same day basis.. Robert Half Management Resource places senior level accounting and finance professionals on a project basis. We introduced this division in 1997.

It operates in 124 offices worldwide and accounts for 13% of revenues. Robert Half Technology revenues were $82 million for the quarter up 17% on a same day basis from the fourth quarter of last year and up 6% sequentially. This division places I.T. professionals on a consulting basis and full time basis. It was launched 12 years ago and represents 9% of revenue. There are 115 Robert Half Technology locations worldwide.

Our permanent placement division, Robert Half Finance and Accounting had revenues of $61 million in the fourth quarter up 64% from the fourth quarter of 2004 and up 6% sequentially. This business was established in 1948 and operates in 339 offices worldwide. It accounts for 7% of total revenues.

International revenues for RHI staffing operations were $146 million for the fourth quarter, up 17% from last year and up 3% sequentially. On a constant currency basis these growth rates were 22% versus last year and 3% sequentially. As of the end of the year we were operating in 81 locations and 12 countries outside of the United States. International Staffing operations account for 19% of total staffing revenues.

Fourth quarter revenues for Protiviti were $128 million and comprise 14% of RHI revenues. Protiviti revenues were up 3% versus very tough comparisons a year ago, and up 5% on a same day sequential basis. Established in 2002, Protiviti has 42 locations in North America, Europe, Asia, and Australia.

Turning to gross margins, temporary and consulting staffing gross margin was $258 million for the fourth quarter, this represents 37.1% of applicable revenues compared to 36.6% of revenues for the prior year's fourth quarter and for 36.3% of revenues for Q3 2005.

The improvements relate primarily to lower workers' compensation cost. Overall staffing gross margin was $318 million for the quarter or 42.1% of staffing revenues. This compares to 40.3% of revenues in Q4 2004 and 41.3% of revenues last quarter. These improvements are due to a higher mix of permanent placement revenues as well as the lower workers' compensation costs just mentioned.

Gross margin for Protiviti was $48 million for the quarter or 37.8% of Protiviti revenues. This compares to 39.8% of Protiviti revenues in Q4 2004 and 40% of revenues in the third quarter of 2005. Gross margins during the quarter reflects further expansion and the number of Protiviti's professional staff as well as the fewer number of billing days.

Turning to selling general and administrative cost, staffing SG&A costs for the quarter were $236 million or 31.1% of staffing revenues. This compares to 31.8% of revenues for Q4 2004 and 30.6% of revenues for Q3 2005.

The sequential percentage increase relates primarily to the hiring of additional staff in anticipation of future growth. Protiviti SG&A costs were $28 million for the quarter representing 21.9% of revenues. This compares to 17.6% of revenues in Q4 2004 and 21.5% in Q3 2005.

The increases relate primarily to higher recruiting, travel and international infrastructure cost. Operating income from our staffing divisions was$ 83 million for the quarter and represented 11% of staffing revenues. The temporary consulting divisions contributed $73 million of this amount or 10.4% of applicable revenues.

Our perm placement division had operating income of $10 million or 17% of applicable revenues. Operating income for Protiviti was $20 million for the quarter and represented 15.9% of revenues for this business unit.

RHI wide accounts receivable were $451 million at the end of the fourth quarter with implied days outstanding of 46 days. This compares with 48 days at the end of Q3 2005.

Now let's turn to guidance. We saw the following trends during the fourth quarter and the first three weeks of January. On a same day sequential basis temporary and consulting revenues increased every month during the quarter.

Perm placement revenues were down sequentially 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 16% versus the same period last year. For the first three weeks of January revenues from our perm placement division were up 57% compared to last year. As we noted in our prior calls, it's extremely difficult to assess perm placement trends over such a short time frame.

Based on these trends, we offer the following first quarter guidance, revenues $900 to $930 million, earnings per share $0.34 to $0.36. These per share amounts reflect reductions of $0.02 per share for the expensing of stock options which begins January 1, 2006.

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

I'll turn it back over to Max.

Thank you, Keith.

As I noted earlier we were pleased to see strong financial results in all lines of business during the quarter. As we begin the new year, we are optimistic about the growth prospects for our staffing operations and for Protiviti.

We have invested in new staff hiring and training during the past quarter and believe we are well positioned for future growth. . The economic forecast we've seen for the labor markets in 2006 were positive. And we note in particular that the National Federation of Independent Business has reported continued optimism among small businesses in December. Secular trends were also positively impacting the business as we discussed on the past several conference calls.

There is strong demand for accounting and finance expertise as a result of the growing emphasis on governments and better control over and transparency in financial reporting. A new layer of accounting infrastructure has emerged and it is creating jobs for accountants that did not exist four years ago.

We believe we are well positioned to locate the highly skilled talent to fill these jobs on a project and full-time basis. Protiviti's strong capabilities and internal audit and business and technology risk management have been noted by the business community.

We have invested in staff and training and are expanding to meet the demand. Protiviti has an impressive roster of global clients and the list is expanding. We are pleased with the demand for Protiviti's full suite of internal audit and risk consulting services.

Keith and I will now be a happy to answer 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.

[OPERATOR INSTRUCTIONS]

Our first question comes from Greg Cappelli with Credit Suisse.

Hi guys, thank you. My one question is on the Protiviti division just on the gross margin. You mentioned the fewer billing days and the increased head count, one I'm guessing the majority of that is from increased head count if you could just comment on that. And then as that productivity ramps up, would you expect to -- would you expect -- would you expect the previous level to be more in line with what we can expect to be going forward or are we at sort of a new level here?

A couple answers, Greg. First of all I want to make a seasonality point. Second of all an increased hiring of professional staff point.

Clearly the fourth quarter was a holiday shortened quarter where we had three to five fewer billing days depending on how you count time off. During that same quarter we're also aggressively adding to Protiviti staff and hence the contraction of gross margins in the quarter.

Going into the first quarter we've got the phenomenon we call internally, kind of the external audit crowd out. Where clients are saying let us get your books closed, let us do our year end financials, let us get through our annual external audit and therefore let's not focus on internal audit as much during the first quarter and therefore seasonally the first quarter is not going to be as strong whereas last year we were down sequentially about 11% first quarter versus fourth. We would not expect anywhere near that kind of decline going forward. Remember last year, the fourth quarter was the big Sarbanes quarter.

Our thinking for the first quarter of '06 is that Protiviti would be down slightly to flat, again, nothing like the prior year. But the point is I think you're going to see a seasonal trend and pattern established where the first quarter is going to be a little lighter to flat with the fourth quarter for this external audit crowd out that I talked about.

From a gross margin stand point given that seasonal pattern, they would probably stay down at the level of where you just saw them or just a little bit lighter for the first quarter but thereafter we would certainly expect to see some improvement. So we do not expect that this is kind of a permanent lower level of gross margins for Protiviti

Okay, I understand, and then just on my follow-up, I'm sorry I didn't hear this, but did you see that the SOX is a percentage of revenue?

We said six to seven which is down dramatically year-over-year and sequentially. Clearly year one SOX is declining as a percent of our total both at Protiviti and Robert Half overall. To some degree that slack's being taken up with year two Sarbanes-Oxley. But in the case of Protiviti particularly there have been impressive gains made in non-Sarb-Ox revenues. Max mentioned internal audit co-sourcing and outsourcing.

We actually published a rebalancing in the internal audit function white paper which has been well received. In addition to the internal audit area we've had nice wins and anti-money laundering consulting, fraud investigations, financial process effectiveness assignments in the technology area, ERP application control reviews as well as the auditing of I.T. controls.

So I think the point is it was a quarter where Protiviti significantly broadened its revenue base. And to the extent there was less year one Sarbanes-Oxley we more than made up the difference either with year two or these services that I just mentioned.

Great that's all. Thanks a lot.

Our next question comes from the site of Andrew Steinerman with Bear Stearns.

Hi, could you just go over in perm the operating margin a little bit more? Obviously this is another quarter where we're investing in perm? How quickly do you think we can get back to our previous level on perm?

Perm operating margins were still at 17%, which is down from the 20%. Clearly, that's primarily because of aggressive, backloaded head count additions in perm.

Quite frankly, Andrew, for the first quarter of '06 we continued to expand pretty aggressively the head count in perm because we're pretty bullish about the full time hiring market for accounting and finance. The fact that you give up up a little bit at the margin level in perm to do so seems to us a prudent investment to make and a pretty good trade off to make.

Perm is usually the strongest quarter in the first quarter and by far and so when you look at the range of guidance overall that's plus 2 to plus 5, I guess it's fair to assume that perm should be above that in percentage terms?

I think it's fair that the trends in perm have certainly been stronger and that's a fair assumption as far as Q1 '06 guidance.

Thank you so much.

Our next question comes from Jeff Silber with Harris Nesbitt, go ahead, please.

Thanks a lot.

In prior year-end calls you've been kind enough to share with us some more detailed operating date either in terms of number of consultants on assignment in Protiviti, or increase in recruiters on a year-over-year basis in your other divisions. I was wondering if you can do that again.

You are correct. You have a good memory. We are in a position to do so.

We anticipated your question.

Glad I asked it.

Thank you Dr. Max. Let's see, on the staffing side, the head count is 8,800 versus prior year 7,700. On Protiviti, it was 2,200 versus the prior year's 1,500. If you look at the percentage growth in heads versus revenues, I could just say that the growth is very I backloaded to the second half and to more extent the fourth quarter of the year.

The other comment I would make is you will notice that Protiviti's head count is up more than its revenue growth. That's very much a function of aggressive international expansion and our international head count is up significantly more than our domestic. International Protiviti revenues now are just shy of 20% of the total.

Okay, great. Then my follow-up question is on CapEx. I think it was a bit higher in the quarter and for the year than we were expecting. Can you give us a little bit of color on that and can you tell us what your budget is for '06?

That's fair, I'd say some of that is timing. We've had this voice over IP project that we've kind of been getting going on. I think we're now in earnest and full bore.

The guidance we would have for the coming year would be to kind of stay at the current 20 plus million a quarter and therefore we would say 80 to 90 million for the year. The two big projects that are a piece of that, the voiceover IP project will be principally an '06 project, in addition, there's going to be a heavy amount of spending done to do our back office infrastructure for Asia and Australia.

We're going to put the same kind of back office people soft Oracle systems in for those countries for both staffing and Protiviti that we have in the United States. That's an expensive infrastructure but one we think is necessary and worth while.

Okay, fantastic, thanks for the color.

Our next question comes from Mark Marcon with R W Baird.

Good afternoon and congratulations on a great quarter. I was wondering with regards to the staffing revenues and the staffing margins, you've hit double digits here in terms of the EBITDA margins. In the past you've gotten as high as 12%. Do you think that you can get there again? And if so, how soon?

If you compare now to the past, Mark, the biggest difference relative to 12% is the mix of perm and conversions which are still -- let's call it 8% of revenues on perm, whereas in the past they've gotten to almost ten.

So it's more of a perm mix issue or how robust are the full time hiring markets versus temp, and clearly the momentum was good so I'm not sure how quickly you get there, but we're certainly going in the right direction.

You still think that that's an achievable goal and in the past you've talked about how as we look at the revenue trends, it should be the inverse of when we went through the downturn but then the subsequent--as we come back on the rebound when we get to similar revenue levels we should get back to the --

I think that's fair and again, but from a percentage overall standpoint it's relative mix, it's as important as absolute numbers.

Sure.

I also would caution and refer you back to what we said earlier, the guidance we've given is after expensing options. And so expense and options are clearly going to impact margins as well. So I don't know whether you're doing and apples and apples or apples and oranges, but the point is there will be a increase in SG&A due to options expense.

Okay, and then can you just clarify what you said with regards to the perm trends on a monthly basis? October being down, November up, and then December down.

Again, December is the shortest month, so I was speaking on an absolute basis.

Absolute sequentially, not year-over-year?

That's correct.

Great, thank you.

Our next question comes from Michelle Moran with Merrill Lynch, go ahead please.

Actually, all of my questions have been answered, thank you.

In that case we'll go to the site of Chris Gutek with Morgan Stanley, you're line's open.

Hi, Max and Keith. The secular driver related to Protiviti in putting aside some of the timing and vacation type issues, I'm curious from your perspective, do you think that's an underlying demand for internal audit services, would you characterize it as stable, moderating a bit, picking up a bit? And similarly the desire of companies to move away from the big four, is that kind of stable? Is it moderating, maybe picking up a bit as well?

We think the demand for internal audit services particularly is very robust. As I referred to a little bit earlier, there's clearly a sense that internal audit departments, have dedicated virtually all their efforts the past couple, three years, to helping companies do their Sarbanes-Oxley compliance. And there's a lot of operational and regulatory compliance auditing that didn't take place that otherwise would have taken place.

There's this rebalancing that needs to take place, that is in fact taking place and we're seeing that of our non-Sarb-Ox revenue base. The strongest piece of that is co-source and outsource internal audit, which is just what I described. With respect to big four, clearly we compete head to head with the big four virtually every time we have a major engagement.

As Max mentioned, we're very pleased that we were one of four named by Forester for their highest level. And for the record only two of the big four got at the same level that we did. So I guess the point I'm trying to make is we're not only seen as an alternative to the big four we're seen as very competitive with and to the big four when we're competing with them head to head.

Clearly companies still have a view that they like to diversify their supplier base, they like to have a big four firm in the bull pen for their external audit if need be, and those are all trends that play into our hand.

Chris, the only thing I would put a footnote behind would be the last comment Keith made. I don't see that many large clients that are unhappy with the big four so much as they realize that they need an alternative. If they use the big four firm for internal audit work it means they cannot use them for other things.

To the extent they would like to keep the limited number of big four firms available for assignments in the future and to keep some competitive environment among the big four, it makes a lot of sense to look for a suitable alternative. And we'd like to think we're at the top of that list when they start looking around.

Makes sense, thanks, and just as a quick follow-up to come back to your response earlier about capex, I think you said 80 to 90 million for next year which puts you back up to the level you were spending, I guess around 2001, but otherwise well above trend. Is this sort of a short to medium term increase in investment and infrastructure or are we looking over the next couple of years, a big increase in capital intensity of the business?

Well, now, first of all you've got to look at your size today versus our size in 2001, where we did $2.4 billion in revenue in 2001 and we're well north of $3 billion for '05 and even more so in '06. Part of it is there's more activity level.

We're expanding Protiviti aggressively including internationally. A lot of CapEx to get those started is more expensive than it is in the states.

We've got this infrastructure cost to get particularly our Asian back office operations on solid and adjustable strength footing. So I'm not sure I'm willing to say it's a new higher level that's here forever, but I think first of all you need to look at it relative to the size of the company. We do have these two large products, voice over IP and the Asian infrastructure project.

Great, thank you.

Our next question comes from Matt Liftin with William Blair. Go ahead, please.

Good afternoon, Max and Keith.

Hi, Matt.

You had the highest temp gross margin in some time. If is that level sustainable? If so why is that?

We had a little bit of a bump from workers' comp in the quarter. We had favorable experience primarily in California, which is significant to us that got adjusted during the quarter.

We would expect that to moderate somewhat as we go into the first quarter. Offsetting that frankly is that we also advertised more heavily seasonally in the fourth quarter. So if you look at the bump we got from lower worker's comp costs, they were mostly offset but higher advertising costs, the two were a push, and the two probably kind of returned to the norm in the first quarter.

Okay, so if you look at by vertical finance I.T., high end office clerical, would you say that any of those saw a particular benefit from this, the jump in spread, or was it more across the board?

It was more across the board, and again we don't see any underlying fundamental gross margin pressure kind of point as we go into '06. We just had this workers' comp item that was a fourth quarter item, which won't repeat in the first quarter. But as I said, there's an offset in the advertising.

Okay, great, thanks.

Your next question comes from Brant Sakakini with Deutsche Bank, your line's open.

Great, thank you, hi, Max and Keith.

A quick question for you. On head count, I apologize if this has been asked but I joined late. Can you give us a sense for how competitive it is to find both associates for Protiviti and Accountemps and whether or not--just the extent of shortage of experienced personnel in certain key markets.

Let's first talk about Protiviti it's still very competitive, particularly with people with 3 to 7 years of experience.. I'd say that's maybe it's a little bit easier to hire in that category than it was a year ago. But that's still a very active and a very competitive market.

Hiring associates for our staffing divisions including Accountemps is not as difficult. It's a market we see as getting tighter, but it's not a market that we feel particularly constrained by as far as getting more internal associates for ourselves.

If you just look at the success we've had the second half of year adding to internal head count, you can see we've been pretty successful there.

Okay, great, and just as a follow-up, can you just add some color on the international markets, particularly France and how the expansion is going there as far as demand trends?

I would say maybe a little more generally that we were kind of flattish in the U.K. I'm talking sequentially now. We were stronger in Europe and then not quite as strong in Australia, but that's kind of how we saw internationally. Overall we gave you the international numbers, they were good. But within that, the continent a little stronger than the U.K.

Great, that's what I was looking for, thanks, congratulations on a nice quarter.

Thank you.

Our next question comes from Jim Janesky with Ryan Beck & Co., go ahead please.

Yes, good afternoon. It seems, Max and Keith, as if you have continued to invest in perm longer into this employment recovery than you had in the last employment recovery and you didn't have Protiviti around at that time so there's really no comparison. Do you see something fundamentally that has changed since the mid to late '90s that prompts you to continue to invest so aggressively in permanent head count--or head count increases within perm.

Well, Jim, we can both comment but I've mentioned on two or three conference calls that I think that we are in a different period now. I said in my opening remarks, there are accounting jobs being filled today that probably didn't exist four years ago because of the buildup in controls infrastructure.

The emphasis on internal controls, on transparency and financial reporting and on governance and so forth. It's created a different environment.

There aren't a lot of companies large or small that are busy trying to figure out ways to reduce the size of their accounting departments. Most of them have needed to increase them significantly.

I think there's no question that given our positioning and our almost 60 year history in the Robert Half business, we're well positioned to take advantage of that so we see a lot of demand and we think the sector demand will continue so we've been staffing up to meet it.

Okay. And on the first quarter outlook, just to kind of double-check, I mean, you know apples to apples, your outlook on the earnings per share basis, when you exclude the $0.02 hit for options, it's pretty much in line with what you did in the fourth quarter and the outlook for your revenues is certainly at the upper end, much higher. Is it pretty much all hiring or is it -- is there something else that we, that you're doing in terms of the investments?

No, we've principally provided a little room there for additional SG&A pressure from continued hiring.

Okay so that's substantially the reason why?

Right. But again X options, our guidance goes to 36 to 38 versus the 37 we just reported.

Correct, okay, thank you.

Our next question comes from Tobey Sommer with SunTrust Robinson. Go ahead, please.

Afternoon. I was hoping you could give some commentary about I.T. demand both within the quarter, maybe talked about the different monthly demands as well as what we should think of in terms of the first quarter? Thank you.

I.T., again, it's a smaller part of our business. It's very tech support, help desk driven. There's always the issue about getting assignments restarted after the first of the year.

So sequentially, the first quarter's never the best quarter from that standpoint from I.T. But where we had successes in the quarter were help desk, project management, wireless networking, security, aps development.net. I'd say generally speaking, tech development or programming was a little bit stronger than tech support which is a little different than most quarters. But other than that there wasn't a lot new going on.

Relative to the rest of your business units, is the supply/demand equation any different in any outlook for bill rate and pay rate spread expansion there that's different than the rest of your units?

I would say that while it's tightening, our technology division is virtually our only temporary and consulting staffing division that hasn't yet gotten back to its previous peaks. And so if anything, there's probably a little less pressure on supply there than there is our other divisions particularly accounting and finance.

Clearly technology hasn't benefited from all the compliance and controls focus that accounting and finance has the last couple of years.

Thank you very much.

Our next question comes from Kelly Flynn with UBS, your line's open.

Hi, this Andrew Fones for Kelly. You mentioned last quarter that you might see a three to six day impact from vacations in Q4. To the extent you're able can you discuss the impact of the vacations on billing days in each of the divisions in Q4 and the likely impact if there may be any in Q1?

We gave you the overall number of days for our staffing divisions which were down three days sequentially. We expect to get those three days back in the first quarter.

Protiviti, it's not quite as straight forward. Protiviti had at least those same three days and because of their vacation patterns and their clients' vacation patterns, we would argue that there's at least another couple of other days. But there's some art to that as well as science.

Okay, thanks. And then just as a house keeping follow-up, can you give us your pre-ax option expense in Q4?

Pretax option expense in Q4, I don't have on the top of my head. The option expense on a per share basis for all of '06 should be $0.06 per share and it should be $0.02 in the first two quarters and $0.01 in quarters three and four.

Remember as we've talked about in prior calls that we, over the last year or two, have pretty aggressively modified our compensation practices to go more toward restricted stock than stock options. In fact, you will see this year when your 10-K and proxy come out that many fewer options were issues and in fact, the executive officers got no options but instead got restricted stock.

And so therefore, stock options over time will continue to decline as they're as an impact on our P&L. Conversely there will be more restricted stock amortization expense.

So was the expense in Q4 also about $0.02?

It's about $0.02.

Okay, thanks.

Our next question comes from Pete Cario with Citigroup. Go ahead, please.

Hi, guys, couple of quick questions. The first one is, I guess looking back was you only had it ever happen twice where finance and accounting actually declined from 4Q to 1Q and they were both sort of recessionary years, I think it was '02 and '03.

Any ideas for what sort of bump you have, do you expect a spurt in 1Q and doesn't that get prompted by tax activity?

Clearly you've got annual audit activity taking place, close the book activity taking place and you've got personal income tax activities taking place, so first quarter traditionally in accounting and finance is strong on the staffing side. In contrast to that as we talked earlier, Protiviti, to some degree gets crowded out by those activities where companies don't want to focus on internal audit while they're focusing on the external audit.

Okay, aside from Protiviti , every other area should--you'd sort of expect to see some sequential increase?

I think that would be consistent with the guidance we've given. And also as we just mentioned there's more billing days in the first quarter than the fourth because of the holiday impacts or the lack of holiday impacts.

Our next question comes from Michael Fox with J.P. Morgan.

Good afternoon, thanks a lot. Could you just look at the impact on the margins on Protiviti longer term with the expansion internationally and whether you think it can return to high teens margin or if international will be lower margin? Thanks.

Clearly during the startup period of an international location that puts some pressure on gross margins as well as operating margins. After kind of the initial 12 to 18 month period, quite frankly, their margins are pretty similar to what we have in the states.

So long-term as the international operations grow and mature similar to what's the case in the states, I would expect that to normalize more. We've always said and contended and going back to the Anderson days when we were doing our due diligence for Protiviti, that mid to high teens are the long term normalized margins for Protiviti. And so during the hay day year one Sarb-Ox days, we were at the high end of that range but at the moment we're kind of in the middle of that range, but still comfortably in the range. Even at a time when we're investing aggressively internationally.

Did you feel comfortable that the Sarbanes-Oxley business reduced as a percent of the total that there's enough project out there to keep the utilization red high in Protiviti?

We've been very encouraged by the extent to which we've been able to leverage our Sarbanes-Oxley engagement into other kinds and we've been encouraged by the size of the opportunity for non-Sarbanes-Oxley work.

Okay, thanks a lot.

Our next question comes from Mark Marcon with RW Baird, go ahead please.

With regards to Protiviti there's been some recent discussion about limiting the amount of Sarb-Ox work that smaller companies have to do. Can you talk a little bit about the client profile for Protiviti and whether or not they'd be impacted by a potential reduction in work by smaller companies?

Clearly, Mark, to date, Protiviti's principally focused on the Fortune 1,000 and the deferral for small companies to '07 per se would have very little impact on and certainly have no short term negative impact on Protiviti. It could still have a longer or medium term, positive impact with Protiviti as it works with management resources, for instance, where those smaller companies are more in its sweet spot when they do have to comply.

So certainly no negative short term impact from Protiviti and hopefully a positive impact when management resources together with Protiviti addresses small company Sarb-Ox in the future.

When you talk about bill rate trends that you saw during the quarter and how you think, given the tightness that we're currently experiencing, how you think bill rates would trend broadly speaking next year?

Not a lot of change from prior trend line on the staffing side. I think sequentially bill rates were up 1% or so. So year-over-year it's also a small single digit number. Quite frankly, we don't see much in that trend line changing.

And then the business is about as solid as it can be. Any thoughts about increasing the dividend?

Mark, we discuss that at every meeting with our board of directors. As is your custom at our next meeting we'll certainly discuss it again. We've announced no plans or made no plans to date. We recognize that we have adequate cash to support an increase and to support further repurchases of our shares.

Thank you.

Our last question comes from Chris Gutek with Morgan Stanley. Go ahead, please.

Thanks, Keith, just a couple quick follow-ups.

You talked about the voiceover IP project, can you kind of quantify, roughly the expected in incremental cost as well as savings over time.

It's in the order -- the incremental cost is in the order of magnitude of $15 to $20 million. The savings are real and substantial. The payback period is a short number of years. That's probably more specific than I ought to be.

The tax rate picked up a little bit in the fourth quarter and as your international mix changes, there could be some nondeductible start up losses offshore would you expect that tax rate to go up in that context into '06 or not necessarily?

Good question, the tax rate did tick up on Q4, that's more due to the absence of some credits that we had in Q3, where we settled a few pending tax matters. We would expect in '06 the tax rate to tick up just a little bit. I think for the quarter, it was 39-6. And for '06 we're talking 39-8 or so, so it will tick up a little bit, but not dramatically.

And finally, kind of big picture, any thoughts on appetite for tuck end bolt on acquisitions especially international?

As we discussed many times, we're always fairly active looking at related acquisitions, with the edition of Protiviti there are consulting firms that we have an interest in. We are at all times kind of having some levels of discussions, which would include now as well.

Yeah, Chris, we've responded to that in the past. We do have a group here that spends a lot of its time looking at opportunities and many are presented. Most are smaller businesses, whether in staffing areas related to what we now do or extensions of what we now do, there are a number of consulting related businesses that we also look at that would possibly be fits for Protiviti.

We look at them. We outline every year our acquisition criteria. We continue to look. There are opportunities and all I can say is that if we think they make sense and there's a good fit in terms of the people involved, the quality, the reputation with clients, and so forth, we might proceed in that direction.

They are most likely to be small transactions as they have been in the past but we continue to look. We'll keep the lab coats on as we have in the past.

Okay, great, thanks.

Thank you. I believe that was the last question. I'd like to thank everyone today for joining us. We will conclude the teleconference at this point. Thank you.

This concludes today's teleconference. A taped recording of this call will be available for replay beginning later today and ending at 8:00 pm EST on February 2nd. The dial-in number for the replay is 1-800-688-7339 or outside the United States dial 1-402-220-1347. This transcriptions will also be archived at www.RHI.com.