羅致恆富 (RHI) 2006 Q1 法說會逐字稿

Welcome to the Robert Half International conference call to discuss first-quarter 2006 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. Good afternoon, everyone, and thank you for joining us. Here with me today is Keith Waddell, our Vice Chairman, President and Chief Financial Officer.

Before we review our first-quarter 2006 financial results, 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 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 with the SEC. We do not assume the obligation to update the statements made in this conference call.

Now let's review the first quarter. Revenues for the quarter were $944 million, an increase of 23% from the first quarter of last year. Income per share was $0.38 compared with $0.29 in the first quarter of 2005. This is an increase of 29% over last year. Our Company adopted FASB statement 123R effective January 1, 2006. This reduced first-quarter pretax income by $5.1 million and reduced reported income per share by $0.02 per share.

Cash flow from operations during the quarter was $101 million before capital expenditures of $24 million. We ended the first quarter with $473 million in cash and cash equivalents after paying a $14 million quarterly cash dividend to shareholders. We raised our quarterly cash dividend to $0.08 per share in February of this year. We also spent $44 million to reproduce 1.2 million RHI shares in the open market under our stock repurchase plan. Approximately 8.1 million RHI shares remain available for repurchase under the plan.

We were very pleased with the record revenue and earnings results achieved this quarter. Revenues in our staffing operations growth year-over-year and sequentially. We were particularly pleased with the strong performance of our Robert Half Finance and Accounting and Accountemps divisions, which reflected continued strength in the demand for accounting and finance professionals.

During the quarter, Protiviti continued to broaden its revenue base with outsourced and co-sourced internal audit engagements, as well as business and technology risk consulting services. It also continued to expand its footprint by adding new locations in the United States, Australia, Canada and Germany. Protiviti increased its service offerings with small acquisitions in the data, forensics and retail industry loss prevention fields. Protiviti continues to cultivate an increasingly loyal client base of major corporations around the world, and we are optimistic about the opportunities we have to further expand this business.

At this time, I will turn the call over to Keith.

Thank you, Max. As noted, overall revenues for the Company were 944 million. This is an increase of 23% from the first quarter of 2005 and an increase of 7% sequentially. There were 64 billing days in the quarter, up one day from the prior year's first quarter and up three days from the fourth quarter of 2005.

Accountemps, our largest staffing division, had revenues of 356 million on a same-day basis. This is an increase of 23% from the prior year's first quarter and an increase of 5% sequentially. Accountemps has 342 locations worldwide and makes up 37% of total revenues.

OfficeTeam revenues for the first quarter were 186 million, up 18% on a same-day basis from the prior year's first quarter and flat sequentially. OfficeTeam is our high-end administrative staffing division. It began operations in 1991 and has 305 offices worldwide. This division represents 20% of total revenues.

Robert Half Management Resources had first-quarter revenues of 120 million, up 13% on a same-day basis from the prior year's first quarter and up 4% sequentially. Robert Half Management Resources places senior level accounting and finance professionals on a project basis. We introduced this division in 1997. It operates in 126 offices worldwide and accounts for 13% of revenue.

Robert Half Technology revenues were 85 million for the quarter, up 24% on a same-day basis from the first quarter of last year and flat sequentially. This division plays IT professionals on a consulting and full-time basis. It was launched 12 years ago and represents 9% of revenues. There are 114 Robert Half Technology locations worldwide.

Our permanent placement division, Robert Half Finance and Accounting, had revenues of 75 million for the first quarter, up 63% from the first quarter of 2005 and up 25% sequentially. This business was established in 1948 and operates in 342 offices worldwide. It accounts for 8% of total revenues.

International revenues for RHI's staffing operations were 160 million for the first quarter, up 22% from last year and up 10% sequentially. On a constant currency basis, these growth rates were 26% versus last year and 9% sequentially. We have staffing operations in 86 locations in 13 countries outside the United States. International staffing operations account for 19% of total staffing revenues.

First-quarter revenues for Protiviti were 122 million, up 10% from one year ago and down 5% sequentially. The sequential decline was the result of seasonally lower staff utilization as clients turned their attention to the annual financial close and year-end audits conducted by their external audit firms. These factors impacted Protiviti's ability to provide internal audit and risk consulting services during the same time period and resulted in some lengthening of the sales cycle.

Established in May 2002, Protiviti has 52 locations in North America, Europe, Latin America and the Asia-Pacific region. Protiviti represents 13% of RHI revenues.

Turning to gross margin, temporary and consulting staffing gross margin was 275 million for the first quarter. This represents 36.8% of applicable revenues compared with 36.3% of revenues for the prior year's first quarter and 37.1% of revenues for Q4 2005. The sequential decline is primarily the result of higher worker's compensation costs. These costs were lower in the fourth quarter due to reserve valuation adjustments.

Overall staffing gross margin was 350 million for the quarter or 42.6% of staffing revenues. This compares to 40.8% of revenues in Q1 2005 and 42.1% of revenues last quarter. These improvements are due to our higher mix of permanent placement revenues, which more than offset the sequentially lower temporary and consulting margins noted above.

Gross margin for Protiviti was 43 million for the quarter and 35.5% of Protiviti revenues. This compares with 40.8% of Protiviti revenues in Q1 2005 and 37.8% of revenues in the fourth quarter of 2005. Gross margin during the quarter was impacted by further expansion in the number of Protiviti's professional staff, as well as seasonally lower revenues. The expensing of stock options also negatively impacted the gross margin percentage.

Turning to selling, general and administrative costs, staffing SG&A costs for the quarter were 256 million or 31.2% of staffing revenues. This compares with 31.4% of revenues for Q1 2005 and 31.1% of revenues for Q4 of 2005. The higher sequential percentage is the result of expensing of stock options and the higher mix of permanent placement activities.

Protiviti SG&A costs were 31 million for the quarter or 25.6% of revenues. This compares to 21% of revenue in Q1 2005 and 21.9% of revenue in Q4 2005. The increase relates primarily to higher training, travel and international infrastructure costs. Training hours are seasonally higher in the first quarter.

Operating income from our staffing divisions was 94 million for the first quarter or 11.4% of staffing revenues. The temporary and consulting divisions contributed 77 million of this amount or 10.3% of applicable revenues. The perm placement division had operating income of 17 million or 22.4% of applicable revenues during the first quarter. Operating income for Protiviti was 12 million for the quarter or 9.9% of revenues for this business unit. Accounts Receivable were 480 million at the end of the first quarter with implied days outstanding of 46 days, the same as Q4 2005.

Now turning to guidance. We observed the following trends in the first quarter and during the first two weeks of April. On a same-day sequential basis, temporary and consulting revenues were flat in January and February and then increased in March. Perm placement revenues were up in January, up in February and up again in March.

During the first week of April, revenues from our temporary and consulting businesses were up 15% versus the same period last year. For the first two weeks of April, revenues from our permanent placement division were up 65% compared to last year. Keep in mind it is difficult to evaluate perm trends over such a short period of time. Based on these trends, we offer the following second-quarter guidance. Revenues in a range of 950 to 980 million; income per share $0.37 to $0.39. As you know, these estimates are subject to the risks mentioned in today's press release. It is our policy to limit guidance to one quarter.

Now I will turn the call back over to Max.

Thank you, Keith. Our business continues to benefit from strong demand for skilled talent, and this is reflected in our first-quarter financial results. The labor markets remain strong with unemployment levels in the United States holding steady at 4.7%. This is the lowest level since July of 2001.

You have heard us talk on the past several calls about the secular trends contributing to the demand for our services. Accounting and financial reporting reforms have placed increased emphasis on internal financial controls. That heightened focus has led to new layers of infrastructure in the accounting departments of many businesses. Accountants are now sought-after to fill jobs that simply did not exist four years ago.

Our financial staffing divisions are well positioned to meet the demand for talent. We have established broad networks in accounting and finance during our nearly 60 years as the leader in financial staffing.

Protiviti, too, is benefiting from the focus on accounting reforms and better financial controls. The new business environment has created demand for expertise in internal audit, enterprise, risk management and compliance with Sarbanes-Oxley. Protiviti is also expanding its service offerings in litigation consulting, technology risk consulting, forensic accounting and fraud investigation, anti-money laundering and other critical activities.

Keith and I will now be 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). Michel Morin, Merrill Lynch.

A couple of questions, first on Protiviti. You mentioned the seasonality. I was just wondering is that -- is there a change in the seasonal pattern that you have observed? Is it perhaps a bit more pronounced than you had initially anticipated?

I would say, first of all, if you will look to a year ago on a sequential basis, Protiviti declined 11%. If you look at this year, the sequential decline was only 5% or half of what we noted or what we experienced a year ago.

We talked on the fourth quarter about we expected what we call external audit crowd-out or companies focusing on their financial close and the external audit. So clearly a seasonal impact was anticipated for the quarter, and it was a lighter impact than we experienced a year ago.

Okay. And then I just wanted to clarify on the option expense, Keith. Did I hear you correctly in saying that part of the option expense actually is reflected at the gross margin level as well?

Yes, so let's split it out divisionally. Of the 5.1 million, 1.1 relates to Protiviti, and that is principally in the direct cost line and impacts Protiviti's gross margin, and in fact, it impacts it about 88 basis points. The remainder of 4 million splits between 3.4 million that relates to our temporary and consulting divisions, and 600,000 then relates to our perm placement. That is all in SG&A. So for staffing the impact is in SG&A primarily, and for Protiviti the impact is in direct costs (multiple speakers) impacting gross margin.

And then on the temp side of the business, the gross margins there, is there anything that might have changed in the past few years? Just as we model this out and we look at where those margins have been, I think just going back to your first quarter of '01 you hit 37.6. Is there any reason why perhaps in this cycle you would not get back to those kinds of levels?

Well, I think one of the larger reconciling items are temp to perm conversions. We have said that historically that range is 3 to 5%. Although the conversions are a little bit higher this quarter, they are still essentially in the middle of that range. So one of the bigger differentials to give back to what you're talking about is to get conversions back to 5% of revenue rather than in the middle of the range.

Matt Litfin, Blair & Co.

Yes, a question on perm. Permanent revenue is up all through the quarter strongly in April as well so far. How do you measure your capacity there, and are there any constraints that you can see on your growth rate in perm going forward?

Well, we certainly measure our capacity on what we call a per [desk] average per month. So we look at productivity by person per month. Clearly in these times those numbers are up. We have added headcount as we talked about during the last call. We have added additional headcount during the quarter just ended. We anticipate adding headcount during the quarter we are currently in or the second quarter. We remain bullish about perm placement.

Greg Cappelli, Credit Suisse.

The question is on (technical difficulty)-- you mentioned that (technical difficulty)-- what was it this quarter if you are willing to share that? And I just had a quick follow-up.

I think your BlackBerry is close to the phone there. The SOX percentage actually declined just a little bit last quarter to this. So as an organization we're continuing our transition away from SOX. The thought was we were not going to actively break that out every quarter because it had gotten to a percentage level where we did not think it warranted it.

Okay. I understand. Then just the follow-up is on the bill rate, pay rate trends in Protiviti, specifically given the pullback in the gross margin there. Can you talk about that, Keith?

It is not a pay rate, bill rate thing; it's a utilization and expansion matter. Clearly in January you have got holiday impacted lower utilization. Seasonal reasons, as we have talked about, the utilization is a bit lower in the first quarter. Each year for that reason you heavy up on your scheduling of training which occurs during the first quarter. So you put all those together, you get a lower utilization rate, which impacts your gross margin.

Further, we continue to aggressively expand Protiviti during the quarter. If you look at the location count, it is up 10 from what it was. Seven of those 10 are in international locations. You hire staff which are at the direct cost line in impacting gross margin in those newer locations which also puts pressure on gross margin.

But those are investments we're happy to make. We're doing particularly well in Asia, specifically Tokyo. We just opened Osaka as well. We could not be more pleased about how Tokyo has gone. There is something they call JSOX, which is on the horizon for 2009 where some 3900 Japanese companies will most likely have to comply with something very close to U.S. Sarbanes-Oxley. So we're very well-positioned in Tokyo and Japan to participate in that as well.

Okay. That is great. So we probably could expect some sequential pickup in growth in this quarter given that there was -- the crowding out effect should be over?

That is correct, but there is still the issue of how aggressively we continue to expand, which would have some drag on the gross margin. We still have a robust appetite for expansion in Protiviti.

Okay, I understand. Thanks a lot, Keith.

Chris Gutek, Morgan Stanley.

I hate to beat the dead horse here, but just to follow up a little bit more on the Protiviti possibility. I mean just to be clear, the operating margin was down by half from a year ago period from almost 20 down to just under 10%. So the seasonal issue would not really explain that year-over-year compression of the profitability, and I understand the explanation with the options expense and aggressive hiring. But it sounds like the vast majority of that negative impact is because of the aggressive hiring. Is that a fair statement? And then as you look forward for Protiviti, have you modified your expectations for the long-term margins for that business? I think you previously talked about midteens to high-teens?

Well, clearly if you look at a year ago, we are more aggressive with our expansion efforts today than a year ago, and clearly that has a disproportionate impact on gross margins. The other phenomenon when you are comparing year-over-year, a year ago, which was the first quarter post the heavy SOX quarter, we pretty much absorbed the sequential decline in revenues, which we talked about before was 11% by using fewer contractors. We did not have that same opportunity to the same extent this year, and therefore, the utilization change that we would expect to happen every year was not quite as noticeable last year as it is because we had a higher mix of contractors on Sarbanes-Oxley work at that time.

That is helpful. What about the longer term margin expectation for Protiviti? Any change in --?

Our longer term expectations are still mid to high-teens. The fact that they are lower now for reasons because we have chosen to expand aggressively have not in any way dampened our appetite for productivity expansion, nor have they changed our long-term impact for the margins in that business. As we have said before, on a normalized basis, there is less delta between international and domestic Protiviti margins than there is in the staffing business.

And a final follow-up and I will hand it over, I think, if I heard you correctly earlier, Keith, you guys opened 10 new Protiviti offices just in Q1. Basically a 25% increase in the global footprint. Was that a bit of an aberration, or is that the pace you will be opening for the next couple of quarters?

Well, it is a little bit of an aberration, and then a little of it is a reporting issue as well. The point is we are aggressively expanding Protiviti with a bias toward international locations, particularly in Asia. I would expect that the go forward growth will be just as much expanding the offices we already have as it would be adding to the office count.

Brandt Sakakeeny, Deutsche Bank.

A question around the temp to perm conversions. I guess if I look at sort of where we are in the cycle, do you think there is anything structural that would explain why temp to perm conversions are sort of where they are right now?

Well, if you think about it, even though perm was very strong this quarter, it still is not at its peak as a percent of revenues, nor are temp to perm conversions at a peak as a percent of revenues. So there is more upside on both of those, and they are kind of going in lockstep. Maybe conversions are lagging a little bit what perm is doing as a percent of revenue, but for the most part, they are not different than what I would expect here.

Okay. I guess in light of that this sort of begs the question if you look at your margin performance both in temp and in permit, you are very close your to historical margins despite as you noted being materially lower on the conversion. So I guess that would speak to the fact that it looks like you would still have some further distance to go on the marketing side in both those areas.

Well, clearly if we return conversions to peak levels as a percent of revenue, there is margin upside for that reason alone.

Great. Okay. I just wanted to make sure, the 37 to 39 was ex-123?

Right, ex-options which would be another $0.02.

Mark Marcon, Robert W. Baird.

Good afternoon and congratulations on a great quarter. With regards to -- one question on Protiviti and then a follow-up on the temp side. Jefferson Wells indicated that they had a soft January and February due to seasonal factors, but then things picked up in March. Did you experience any sort of similar pattern, or how would you describe the pattern as the quarter unfolded? What would the expectations be for the second quarter from a revenue perspective?

Well, first of all, I will say that we are very pleased with the pipeline in Protiviti, and that pipeline strengthened during the quarter. January is always somewhat slow for holiday reasons, and that is not only in Protiviti but in Management Resources as well. February is a short month just because in the calendar, and so we had a very good March in Protiviti.

Great and how do you think that would translate as we think about going -- (multiple speakers)

If you look at just Protiviti for the second quarter, we would expect flat to sequential up revenues. We do not expect sequential down revenues. If you look at last year, we had a little bit of sequential growth in Q2 versus Q1.

So kind of that sort of pattern, maybe a little bit better?

Again, we hope for better.

I mean given all the new offices that you just opened, how long do you think it takes a new office to kick in?

Well, the new offices are a function of how many people do you begin with? What kind of relationships do they have? How free are they to pursue those relationships vis-a-vis the noncompetes with whatever they came? So there are a lot of factors there, but generally speaking our startup offices, particularly internationally, they come with relationships that are pretty quickly harvested.

Great. And then with regards to temp, obviously a tremendous performance there across the board. Incremental margins this quarter were around 18.5%. Where do you think -- how much more leverage can we get in terms of temp SG&A, and where can the temp margins go?

In the prior cycle, you had gotten up to 12%. Given your incremental margins, could you potentially exceed that, or how should we think about that?

Well, clearly we still have fixed operating costs get leveraged as you grow. That said, CapEx was higher this quarter in part because we are having to invest as we grow, particularly in the new locations.

So is there upside on the SG&A line as a percent of revenue? Yes. There is also upside from a revenue mix standpoint as we have talked about already for perm alone and for temp to perm as well.

If you look at our guidance for the quarter, remember if you kind of step back and look of the second quarter across our divisions in the past (multiple speakers) 16 years in Accountemps, there has been a sequential decline because there's typically a post-financial close, busy season, pullback in accounting staff demand in again nine out of the last 16 years that has occurred.

On the flip side, OfficeTeam, if you look back I think 15 out of last 16 years, have been strong sequentially. Some offset for there, although it is not necessarily a dollar for dollar offset. Perm typically in the second quarter -- our companies still have hiring budget left. There is no -- the patterns are not as distinct, but second quarter is generally speaking a pretty good for perm.

So when you dial all that together, we reported 944 million in revenues, and our guidance was 950 to 980, which is implied year-over-year growth of 16 to 20% at the revenue line. And adjusted for options, the $0.37 to $0.39 is 18 to 24% growth year-over-year.

Mark, just one comment. We have had your question as well as a couple of others about our international expansion, particularly in Protiviti. Just one observation for your consideration. We are careful, as you know from our history, about who we go into business with and how we do it and so forth. We have tried to be very deliberative. We feel very comfortable with the people who joined us originally from Arthur Andersen and then many of the other big four and other firms that now make up Protiviti. These people have long relationships with people literally around the world. Many of the offices we have opened internationally have been with people that we feel we know well because of those relationships. So it's much easier to go at a faster pace in a personal services business such as ours when you have confidence in the individuals with whom you're going into business.

So I would just say that when Keith talked about the fact that we are doing well internationally that has a lot to do with the fact that there were strong relationships there among the existing people at Protiviti. We felt very comfortable with the people upon meeting them. I would say that we are simpatico. So we feel very good about our positioning and stay tuned. We look forward to good things from these international offices we have been opening.

Terrific. Thank you.

Jim Janesky, Ryan Beck & Co.

Yes, good afternoon. In the first quarter, Max and Keith, despite the fact that you were investing in perm, the margins came in close to where the peak is. How long would you expect to invest in Protiviti that could keep the margins down at these levels? I mean is this something that could go on throughout '06 and even into '07?

Well, we see kind of a historic opportunity with Protiviti in that if you pick through 10 years ago, the big four pretty much owned all of Fortune 1000 America, all those relationships. There was a lot of inertia, very little changing of suppliers and vendors. Today could not be more different, and today new relationships are being developed everyday. There is an incredible amount of activity out there in the pipeline, an incredible number of proposals that are being worked on. Quite frankly, we are not sure that opportunity is going to exist two and three years from now.

So our thought is to the extent we can get good people that we are comfortable with, we are going to go for it. Because time would say that once you do develop various solid C level relationships, they are pretty loyal relationships over time, and the musical chairs are happening as we speak. We're going to be there. Therefore, we are going to continue to invest as long as we can get comfortable that the people that we can invest with are in the same quality of what we have had so far.

Okay. Did acquisitions add any meaningful revenues to either this quarter or going forward, or are they more tuck-ins to get you into a geographic area or into a specialty that you want to expand?

It is clearly the latter. It is a very small impact. But importantly, as we talked about, we have got more exposure to data forensics or eDiscovery and in the retail sector the loss prevention area.

Okay. Just to be clear, again on the outlook with and without FAS 123, you said that your expectation is 37 to 39. Are you saying that you add back $0.02 in options, and it would be 39 to 41 except for options, or do we get --(multiple speakers)

On a GAAP basis, it is 37 to 39, which is after a deduction of $0.02 for options.

Very good, okay. I just wanted to make sure I understood that. Thanks very much.

Kelly Flynn, UBS.

A couple of questions. The first one, a quick one on the impact of the timing of Easter. I know you gave out the revenue days, but what is your estimate of the kind of percentage benefit that you saw in the quarter from Easter? And I will start with that one, and then I have a follow-up.

Kelly, all the growth rates we quoted were same billing day growth rates, and we adjusted for three days sequentially for the quarter versus the fourth quarter, and we adjusted one day versus a year ago period. So all the rates we quoted were on a same-day basis.

Okay. Thanks. And then a question on the international. I know you gave the total percentage of staffing revenue coming from international. How much of that is the UK now? Could you just, Max, maybe give some kind of qualitative color on how is Europe feeling, some of the data points (inaudible) suggest that it is in recovery, but you phased in pretty weak. How are you feeling on that from what you're hearing on your clients?

Well, whereas we don't break out specific country revenues, we would say this. First of all, internationally Canada was quite strong. The continent was a bit stronger than the UK. On the continent we saw particular strength in Germany and Belgium. The UK I would not say lagged at all, but it was not as strong as we saw on the continent, particularly the countries that I talked about.

As far as this coloration to your question, I think we have critical mass in our international operations now, and we feel very good about the management team. [Espree] is very good, and they are doing very well. So we feel very good about how we are positioned and look forward to further growth.

TC Robillard, Banc of America Securities.

Just a quick question. I know it is a smaller division relative to your others, but you saw a really nice improvement year-on-year in the growth rate to Robert Half Technology. Could you kind of give some color around what was driving that strength?

I would say because he sequentially it was kind of flattish, you didn't see as much a drop-off in Q1 versus 4 as you have seen in the past, which kind of drove the year-over-year growth. Underlying the demand for all of our businesses are the kind of the expansion of small to midsize businesses, particularly in the United States. In technology we saw what we consider the development or programming side to be a little bit stronger than we did what we call tech support or the health desk side.

Tobey Sommer, SunTrust Robinson-Humphrey.

A question about Protiviti. You have done a good job in expanding into additional services. I was wondering if you could describe other services, new services perhaps that you would be interested in expanding into? And could you comment on bill rates in those new businesses and what kind of intrinsic rate increases you may be seeing in the marketplace?

Well, as far as new services, I would say that we view the risk consulting umbrella broadly, and we would be interested in any services that fit within that umbrella inclusive of litigation support which we have talked about a few times. Beyond that, we are kind of not of a habit to talk about exactly what we are looking at.

The second part of your question was --?

About bill rates.

Bill rates. Well, on the staffing side, the bill and pay rates on a sequential basis were up like 2%, which was a little bit stronger than the one-ish or so we have been seeing in the past. On a year-over-year basis, I think that makes it like 3.5. So bill and pay rates went up pretty much in lockstep.

Among the new services you are expanding in, are the bill rates noticeably different than existing business particularly?

I would say within the Protiviti area, the bill rates for the newer services are not that different on average from the bill rates in their existing services.

Chris Hussey, Goldman Sachs.

It is actually David Feinberg on behalf of Chris. A question on the temporary business. A lot of what we have heard so far and seen in 1T numbers across the board is that overall Finance and Accounting demand is definitely solid. Given your comments earlier about the low U.S. unemployment rate that we're seeing currently, do you have any concerns at this point of the cycle regarding the supply of financing accounting professionals and what impact that may or may not have on bill pay rate spreads?

Well, it is certainly something we give a lot of thought to, and we have talked many times on this call about there is certainly a strata of Finance and Accounting people kind of three to seven-year big four types that are in critical shortage as we speak. But that makes up a pretty small portion of our total universe of candidates that we place. While we would say that the candidate base is tightening, we certainly don't see that as being acute as we speak.

We also remember back to the late '90s when we hit the wall a quarter or two on the candidate supply side. We're very mindful of that. I would say our use of and integration with technology today as it relates to recruiting is light-years beyond what it was at that time, and certainly played a major role today is that we don't have a candidate supply problem.

I guess the only thing I would add is that we do have a 60-year reputation. We are easily the largest firm in the accounting and finance sector. We are easily the best known. I don't think you'll find an accountant or even an accounting student that has not at least heard of us, and we spend a lot of money on advertising and marketing over and above the technology we have developed.

I guess the point would be that we find that we're better able than most to recruit in tight markets. So we would expect to fare better than most in a tight situation. Years ago we were busy running client ads at a time we should have been running candidates ads. We don't intend to make that mistake again, and you will see much of our advertising going forward will be more recruitment oriented than it would be client oriented. So we have learned a few things from mistakes in the past, but again we feel we are well positioned to deal with the tightening labor market.

But other than that three to seven-year public accounting experience, I would say the market currently is okay. It is not overly tight, and we are still able to get adequate supply.

And to the extent that it is tightening, even on the margin, you are able to pass along any increases in pay rates directly to the clients? No pushback at this point?

That is correct. I think if you look over prior cycles, you would find that we have pretty consistently been able to do that.

The clients understand all too well how tight the market is. They worry about it when there are people with three to seven years of big four experience go to lunch for fear they are going to get recruited. So they understand the situation.

Michael Fox, JPMorgan.

Congratulations on the quarter. I just had a quick question. When you look at the different businesses that you are diversifying into with Protiviti, can you talk about if there is any difference on the pricing environment in any of the businesses and compare that to Sarbanes-Oxley work?

Yes, on average they are not dramatically different. I mean the bill rates in Protiviti are much higher than they are in staffing, and the service lines that we are branching into are very complementary to what we already do. The quality of the people, the skills of the people is very similar to what we already do, and therefore, the bill rates are not that different.

[Peter Terio], Citigroup.

Just a quick one actually. Interest expense line, it went in the wrong direction from what we had. Is it the little bit of debt that you added in the quarter, is that the case, and is that going to cause you to stay at the same level at the end of the year, go down, go up?

That is simply a structuring matter with respect to the little acquisitions we did. We chose to have a note as part of those, and there are some hooks attached to that as part of the deal.

Okay. So it stays at the same level I guess for the year then?

Well, I mean it is a pretty small to de minimus number, and we would not expect it to grow much.

Avram Fisher, Harris Nesbitt.

Can you quantify the impact of new office openings on margins at Protiviti? Thank you.

No, we have not I guess publicly quantified specifically what that impact is, but it is clearly disproportionately large to what it has been in the past.

Leone Young, Citigroup.

Good evening. I'm just trying to get a little clarification on the Protiviti margin as it comes back during the course of '06. Do you get sort of a bit of a snapback in the second quarter and then some gradual improvement, or because of the expansion to the [beat], we should consider it flat to much more gradual?

Well again, it is a function of how aggressively we continue to expand, which is a function of how successful we are at attracting additional people. So I think to be conservative I would probably go the gradual route rather than the snapback route. But clearly we want as much margin as we can report.

But, as I said earlier, we honestly believe this is a historical opportunity, and we want to pursue that opportunity. It is a long race, and we think if we don't pursue the opportunities now, we are going to be sorry in two years. Therefore, we're going to continue to invest, and whether our operating margin is 10% or 12% or 15% the next couple of quarters, over the course of the next three years, frankly, it won't matter.

Perfect. Thank you.

Chris Gutek, Morgan Stanley.

Just a couple of quick follow-ups. Your CapEx is rising significantly as you told us to expect based on some of your technology investments. I was hoping you could give us a brief update on some of these projects in terms of how the cost of the projects is trending, how the potential cost savings is trending? You get the Voice over Internet Protocol and some other projects, if you could kind of run through it quickly, that would be great.

I would say speaking about Voice over IP specifically the cost is right at what we thought it would be, and the savings are probably 10 to 20% greater than what we dialed in. We are a little over half rolled out across the United States with that, and while there have been a few small challenges, for the most part, we're quite pleased.

If you will look at the ramp-up during the quarter versus the last quarter, the ramp-up is not related to Voice over IP, but it is instead related to both the new locations, as well as we moved into new space in New York City for Protiviti, and we also moved into expanded space in Toronto.

Any other IT projects or back office projects to be aware of?

The other larger back office project is the Asia PeopleSoft Oracle, and that is still in the early stages.

And then one more unrelated. I saw the 8-K filing with the latest update on these overtime lawsuits. I guess now you have four of these lawsuits. Obviously the legal system moves very slowly, but it is taking a long time to get resolution. Are you guys any more concerned about these lawsuits ultimately having a financial cost to the Company?

Well, I guess given the legalities of the matter, my comment would be that all four of the lawsuits are essentially based on the same identical facts. So there is nothing nothing new or there's no new facts posed by the newer suits.

Okay. Fair enough. Thanks, Keith.

Yes, there is nothing to report on that at this time. It is a slow process. These suits are pretty common as you know against companies. This is a popular sort of lawsuit it seems, and the different suits seem to be based on the same facts. It may have to do as much with the different plantiffs' attorneys trying to get in line. I'm not sure what it is, but we have competent counsel, and they are handling it, and there is nothing to report at this time.

Mark Marcon, Robert W. Baird.

I have got a couple of quick follow-ups. First of all, the growth that you're experiencing internationally, particularly 26% year-over-year on a constant currency basis, is terrific. How much of that is due to Protiviti? How should we think about that?

Well, staffing alone has very robust year-over-year growth rates. As we said earlier, particularly due to the continent, Germany, Belgium stand out. UK did fine. Canada did particularly well, which is in our international number as well. So I would not discount staffing's contribution toward that. They easily had better than 20% year-over-year growth in their own right.

Super. Any reason to believe that you would not continue to invest over there in terms of expanding your presence? I mean it seems like things are going extraordinarily well internationally for, I don't know, probably about two years now.

I guess my observation would be we're getting more not less comfortable with the international expansion.

Okay. Then with regards to Protiviti, can you talk a little bit about how much is big project work, recurring work as opposed to kind of onesie, twosie small projects?

Well, the Sarbanes-Oxley engagements all began as one big compliance project. Many have morphed into what we hope will be an annuity, and we have been pleased with our ability to retain our year one clients beyond year one. Internal audit by its nature is also annuity-like in its characteristics.

That said, the other risk consultant services, particularly in technology, the security, the application controls, the identity management, those tend to be more unique consulting engagements. You have to run faster to repeat those. They are not as annuity-like as is the case with either internal audit or Sarbanes-Oxley ongoing compliance.

How does that mix break out between kind of the more annuity type business relative to the stuff you have to repeat?

I'm not sure we have ever specifically disclosed it. I would say that as we have gravitated away from Sarbanes-Oxley compliance, internal audit engagements have gotten the lion's share of that slack. That is actually the best news from a recurring standpoint.

Okay. I guess you're not going break it out like if it is 50 or 60 or --?

We're not contemplating a disclosure of percentages.

Okay. Then how should we think about the seasonality of Management Resources? It had a terrific performance sequentially this quarter. How does that normally work? How should we -- (multiple speakers)

It kind of tracks with Accountemps. I mean clearly in the first quarter it participated in the year-end close the books, year-end external audit. So it was different than Protiviti.

That said, it has had more participation in Sarbanes-Oxley than has Accountemps, so it is different in that regard. But seasonally it probably tracks closer to Accountemps than anything, although it does not track directly.

That was our last question. I would like to thank everyone again for your time this afternoon. We appreciate it.

This concludes today's teleconference. A taped recording of this call will be available for replay beginning at approximately 8:00 PM Eastern tonight and ending at 8:00 PM Eastern on April 27. The dial-in number for the replay is 800-283-8217, or for outside the United States 402-220-0868. This call will also be available in audio format at www.rhi.com.