羅致恆富 (RHI) 2006 Q3 法說會逐字稿

Welcome to the Robert Half International conference call to discuss third 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 and good afternoon and thanks to all of you for joining us. Here with me today is Keith Waddell, our Vice Chairman, President and Chief Financial Officer. Before we begin, I'd like to remind everyone that remarks made on today's call contain predictions, estimates and other forward-looking statements. These statements reflect our current judgment of what the future holds and they include words such as forecast, estimate, project, expect, believe, guidance and similar such expressions.

We believe these remarks to be reasonable but they are subject to risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Some of these risks and uncertainties are described in today's press release and in our filings with the SEC. We assume no obligation to update the statements made in this conference call.

Now, let's take a look at the third quarter. Revenues for the third quarter were $1 billion, up 19% from the third quarter of 2005. Income per share was $0.43 compared with $0.37 in the third quarter of last year. This is a 17% increase over the prior year. Our adoption of FASB statement 132-R lowered third quarter pre-tax income by $3.9 million, and lowered reported income by $0.01 per share. Adjusted for this change, income per share rose 21% over 2005.

During the third quarter, our cash flow from operations was $89 million before capital expenditures of $21 million. We ended the third quarter with $432 million in cash and cash equivalents after paying a $13 million quarterly cash dividend to shareholders. We repurchased 4.7 million RHI shares in the open market under our stock repurchase plan at a cost of $152 million. Approximately 2.2 million RHI shares remain available for repurchase under the plan.

We are pleased to report our first $1 billion quarter. We saw solid growth both on a year-over-year basis and sequentially throughout our staffing operations and Protiviti. Our Permanent Placement division, Robert Half Finance and Accounting, again led the way with a 55% increase in revenue over the prior year.

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

Thank you, Max. As noted, overall revenues for the company were 1 billion, up 19% from last year's third quarter and up 5% sequentially. There were 63 billing days in the quarter, down one day from the third quarter of last year and the same as the second quarter of 2006.

Revenues for Accountemps, our largest staffing division, were 378 million. On a same-day basis, this is an increase of 21% from the third quarter of last year and an increase of 5% sequentially. Accountemps has 353 locations and makes up 37% of total revenue.

OfficeTeam third quarter revenues were $196 million, up 14% on a same-day basis from last year's third quarter and up 3% sequentially. OfficeTeam began operations in 1991 and is our high end administrative staffing division. It has 304 locations worldwide and represents 19% of total revenues.

Third quarter revenues for Robert Half Management Resources were $132 million. This is an increase of 23% on a same-day basis from the third quarter of last year and an increase of 7% sequentially. Introduced in 1991, Robert Half Management Resources places senior level accounting and finance professionals on a project basis. It operates in 132 offices worldwide and accounts for 13% of revenue.

Robert Half Technology had third quarter revenues of 91 million, up 16% on a same-day basis from the third quarter of 2005 and also up 5% sequentially. This division, which was launched in 1994, places IT professionals on a consulting and full-time basis. It operates in 115 locations worldwide and accounts for 9% of revenues.

Robert Half Finance and Accounting, our Permanent Placement Division, had third quarter revenues of $89 million. This represents a 55% increase from the third quarter of 2005 and an increase of 3% sequentially. This business was established in 1948 and operates in 353 locations worldwide. It accounts for 8% of total revenue.

Third quarter revenues for our international staffing operations were 186 million, an increase of 31% over last year and an increase of 10% sequentially. On a constant currency basis, these growth rates were 25% compared to last year and 8% sequentially. Outside the US, we have staffing operations in 94 locations in 15 countries. International staffing operations account for 21% of total staffing revenues.

Third quarter revenues for Protiviti were $142 million, up 11% from one year ago and up 11% sequentially. Protiviti was established in May of 2002 and has 56 locations in 15 countries. During the quarter, Protiviti announced its first locations in Brazil and India. Protiviti accounts for 14% of RHI revenues, international Protiviti operations represent 24% of total Protiviti revenues.

Turning to gross margin, gross margin in our temporary and consulting staffing operations was 293 million for the third quarter, or 36.8% of applicable revenues. This compares with 36.3% of revenues for the third quarter of last year and 37.2% of revenues for the second quarter of this year. The sequential decline relates primarily to lower temp-to-hire conversion fees and prior quarter reductions in workers compensation accruals.

Overall staffing gross margin was $382 million for the third quarter or 43.1% of staffing revenues. This compares to 41.3% of revenues for Q3 2005 and 43.5% of revenues in Q2 2006. The sequential decline is due to the lower temporary and consulting gross margins just noted. Third quarter gross margin for Protiviti was $50 million, or 35.6% of Protiviti revenues. This compares to 40% of revenues in Q3 2005 and 36.4% of revenues in the second quarter of this year. These changes relate primarily to continuing investments in Protiviti's international operations.

Turning to selling, general and administrative costs, staffing SG&A costs for the quarter were $282 million, or 31.8% of staffing revenues. This compares to 30.6% of revenues for the third quarter of 2005 and 32.2% of revenues for the second quarter of 2006. The expensing of stock options, the higher mix of Permanent Placement activities and the continuing additions to professional staff all contributed to higher SG&A costs.

Protiviti and SG&A costs for the quarter were 35 million, or 24.6% of revenues. This compares to 21.5% of revenues in the third quarter of last year and 26.3% of revenues in the second quarter of this year. The higher costs are primarily due to international expansion and infrastructure expenses.

Third quarter operating income for our Staffing divisions was $100 million or 11.3% of staffing revenues. The Temporary and Consulting divisions contributed $79 million of this amount or 9.9% of applicable revenues. Third quarter operating income for our Permanent Placement division was $21 million or 23.3% of applicable revenues. Third quarter operating income for Protiviti was $15 million or 11% of revenues for this business unit

Our third quarter effective income tax rate dropped from 39.6 to 38.6% due to the conclusion of certain state tax matters during the quarter. At the end of the third quarter, accounts receivable were 537 million, with implied DSO of 47.5 days compared to 47.2 days at the end of the second quarter.

Now turning to guidance. We observed the following business trends in the third quarter and the first weeks of October. On a same-day sequential basis, Temporary and Consulting revenues were up in July, up in August and up again in September. Permanent Placement revenues were down in July, up in August and flat with the higher August amounts in September.

During the first week of October, revenues from our Temporary and Consulting businesses were up 14% compared to the same period last year. For the first two weeks of October, revenues from our Perm Placement division were up 28% compared to unusually high revenues in the same two-week period last year.

As we said many times, it's difficult to gauge Perm trends over short periods of time. Based on these trends, we offer the following fourth quarter guidance. Revenues, $1.030 billion to $1.060 billion; income per share, $0.42 to $0.44. These estimates are, of course, subject to the risks mentioned in today's press release. It's our policy to limit guidance to one quarter.

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

Thank you, Keith. We were pleased with the quarter, particularly the broad based growth within our Staffing operations and Protiviti. Demand for our Professional Staffing services remained high during the third quarter buoyed by the strong job market. The unemployment rate in the United States held steady at 4.6% in September, and for college graduates the unemployment rate was 2%.

Today's focus on better corporate governance and internal control over financial reporting has continued to create new accounting jobs and our financial staffing divisions have benefited. This was evident in our third quarter results. Small public companies are also beginning to focus on Sarbanes-Oxley compliance at this time, and we believe we are well positioned to assist these smaller companies with their compliance efforts.

The focus for Protiviti has been on expansion both in its range of client engagements and in its global presence. As to the latter, as Keith noted earlier, we opened our first offices in Brazil and India during the third quarter. We continue to see strong demand for our services as indicated by our fourth quarter guidance.

Keith and I will now be happy to answer your questions. To allow as many callers as possible to participate, we ask that you please limit yourself to one question and a single follow-up as needed. If you have additional questions, we will certainly try to return to you later in the call.

[OPERATOR INSTRUCTIONS] And we'll take our first question from Greg Cappelli with Credit Suisse. Go ahead please.

Hey, guys. It's Greg in Germany. First, the question is on Protiviti, revenues really surged sequentially, and I wanted to know what shifted in the demand environment in the last few months? And then, why the gross margins slipped again, and if you think they're going to rebound in the fourth quarter? Thank you.

The sequential revenue increase in Protiviti is a function of several things. First of all, year two and year three kind of continuing SarbOx revenues kicked in during the quarter, and we actually had sequential growth there. Further, we continued to have success in the non-SarbOx area, outsourcing, internal audit, IT, asset management, supply chain consulting. So it was a mixture of both -- more year two, year three SarbOx and non-SarbOx revenues.

As to the gross margins, you've got more mix shift to international operations. The holidays in July and August, particularly in Europe, create some utilization issues that are seasonal, that have an impact on international gross margins, and ultimately consolidated gross margins.

Again, we're happy with the progress that our international operations have made, continue to make. We'll continue to invest there. They do have a short-term dampening impact on gross and operating margins, but we think it's a worthwhile investment.

We've said on prior conference calls, or Keith has said, that our expectation is that normalized margins in Protiviti would be mid to high teens. You might comment on that Keith, if you have any different opinion.

Well, again, I think our view of normalized continues. The question is kind of when do you get there? And that's a function of what our investment opportunities are between now and whenever that is. And at the moment, as we see many investment opportunities. This quarter Brazil and India, both places in which we had people well known to our existing managing directors that expressed an interest to join us. And we ultimately consummated arrangements, and that's something we're happy to do. So we're mindful that on the one hand, the model would generate mid-teen margins at Protiviti. Whether we get there two quarters from now or six quarters from now isn't really as important to us.

Okay. That answers my question. Thanks a lot.

Thank you. Our next question comes from Andrew Steinerman with Bear Stearns. Go ahead, please

Hi, gentlemen. Could you give a little sense of Perm Placement here? You've kept up a hyper rate of growth. Where are you in terms of investing? Are we still adding to headcount and recruiters? I noticed operating margins came down a touch from the second quarter. And could you give us a sense of where you think we are in terms of the overall cycle for Perm?

Well, we're still very bullish about Perm, and our guidance for the fourth quarter continues that feeling of bullishness about Perm. Overall, we feel very good about where Perm is and where it's headed.

Right. And usually fourth quarter sequentially perm's a little lower or can be?

Perm in the fourth quarter, you've got a couple things that happen. Sometimes companies run out of their hiring budget, which gets deferred into the following year. And then December, I guess this will be our 20th December in the Perm business and it's kind of feast or famine.

We've had some wonderful Decembers in perm and we've had not so wonderful Decembers in perm and quite frankly, they don't necessarily track with how economic conditions are generally. So given that and if you look back over the course of history, perm in the fourth quarter is typically an okay quarter seasonally, but it's typically not a blowout quarter seasonally

Right. And you didn't mention are we still hiring in the sort of recruiter environment?

We are continuing to hire. As we said on the last call, we've moderated our hiring a little bit during the quarter just ended. I said we probably stepped on the gas pedal a little stronger for the quarter. We're now into the fourth quarter because we do continue to feel very good about our prospects. Let me make some comments generally about our guidance, Andrew.

Please.

The kind of high end of the range that we gave pretty much assumes a continuation of the growth rates that we experienced in the third quarter into the fourth. The holiday impact and staffing is a couple of days. The holiday impact to Protiviti is five or six days as their clients, particularly that week between Christmas and New Year's, many times take off as do our people.

So for Protiviti, you'll also note on a sequential basis, it's typically kind of flattish in the fourth quarter because they have to run hard just to replace those fewer numbers of days. Again, speaking to our guidance, the gross margins on the temp side, we don't see anything particularly unusual about continuing Q3 into Q4. Maybe we get a little bit of pickup in the conversions which were a little weak in the third quarter.

Protiviti gross margins might get a little pressure from the shorter quarter, but again, historically, that hasn't been a huge deal. Staffing on the SG&A side, typically fourth quarter, we advertise a little more heavily. Typically, we hire a little more aggressively to kind of get off to a good start for the New Year, so typically that puts a little pressure on SG&A during the fourth quarter.

On the Protiviti side, we do continue to -- we expect to continue to invest in international and don't necessarily use as a proxy for our international investment the number of locations that we're adding because, clearly, there's investments to be made to get to critical mass in the locations where we've already added.

Of course.

The tax rate probably goes back up to more normal levels. We did conclude a state matter during the quarter, which we pointed out. The share count, there's a hidden benefit here. Of the 4.7 million shares we re-purchased during the quarter, the third quarter only benefited to the tune of 2.7 million of those on an average basis.

So you've got a 2 million share reduction coming just as a flow-through of the Q3 re-purchases offsetting that to some extent, the average price for options dilution during the third quarter was $33 a share and at least so far, it would be a higher number in the fourth quarter. So that's just some color commentary on the guidance generally.

Boy, that's a lot. Hopefully, you'll leave a little room for my discretion in my model. Thank you so much.

Andrew, I have one footnote to add to Keith's comments. You asked about the permanent job market, and I would just suggest when you get a chance, take a look at the article in the "Economist," the October 7th edition, it's called "the battle for brainpower, There's been a lot written about what the trends are going to be demographically and so forth. But I think you'll find it a thought-provoking piece. It notes among other thing that the war for talent has not only picked up steam, but it's gone global. So I think the future for the perm business may be stronger than a lot of people think.

Sounds good. Thanks so much for the comments.

Thank you. We'll take our next question from Brandt Sakakeeny with Deutsche Bank. Go ahead please.

Thanks. Hi, Max and Keith. Actually, I think that just took away just about all my questions, but I had one on the option expense. Keith, should we assume that this third quarter option extend, sort of, persists into the fourth quarter and sort of the penny is now the run rate versus the two pennies prior?

Yes. I think we lose about 500 or 600,000 a quarter pre-tax, this coming quarter and then it starts actually tailing off even more aggressively next year, so that by like the third quarter of next year, it's almost gone.

Okay.

But let me caution that just because the option expense itself is going down doesn't mean it's going down overall, because the offset to that is our amortization of restricted stock is going up by about the same amount. So if you look on our cash flow statement, the amortization of our restricted stock, when you add the options and the restricted stock together, the expense is about the same

Got it. Okay. That's helpful. And then, can you just help us allocate the $3.9 million in expense, sort of in the P&L, where that falls? Do you have that detailed?

I do. It's $2.6 million temp, $0.5 million perm and 800,000 Protiviti.

Great. Perfect. That's all I had. Thanks.

Our next question comes from Michel Morin with Merrill Lynch. Go ahead, please.

Well, most of my questions have also been answered by now. But I think maybe the one topic I wanted to touch on was the SG&A line, in particular in the first half of the year, there was very substantial investment made there. And we have seen a pretty significant decline in terms of the amount of incremental SG&A that's gone in in the third quarter.

And I'm wondering in terms of dollars, at least is how I'm looking at it, quarter-on-quarter so on temp, in the first two quarters you added $12 million or thereabouts in each of the first two quarters and now it's dropped to about $4. Are we, I think you mentioned something about advertising on the perm side, but is this a more normalized level that we should be expecting? It seemed like these $12 million that we'd seen in the first two quarters were a bit extraordinary.

I'm not sure I'd call it extraordinary. Again, it's mostly a function of how aggressive were we with hiring. And as I said on the last call, we weren't going to be as aggressive in the third quarter as we had been and we weren't. And as I just said, I think we're going to pick up the pace a bit. As we speak into the first quarter of next year, the advertising is not just a perm advertising phenomena. It's across the board. But again, our guidance would say you kind of take these margins into the fourth quarter and if we can do better than that, that's upside.

Great. Okay. Thank you

Thank you. We'll take our next question from Jim Janesky with Ryan Beck and Company. Go ahead, please.

Hi. Yes, hi, Max and Keith. A question for you on shifting back to Protiviti. There's been -- some of your competitors have reported strength in the Sarbanes-Oxley work, and then some have said that it's going down quicker than they had expected. Do you think that you're taking share or are you seeing more growth outside of the SarbOx work, if you can kind of drill into Protiviti?

Well, again, as I said, we're seeing growth on both fronts. On the one hand, year over year, there's still a fairly dramatic decline in year one SarbOx work done by Protiviti. So it's having to fill that gap and it's doing so both with year two, year three SarbOx growth -- revenues, which actually increased sequentially as I spoke to, as well as that gap is being filled by non-SarbOx work.

But clearly, Protiviti is competing quite well in the marketplace, not only continuing year two, year three with clients it did in year one, but it's getting a meaningful amount of year two and/or year three work for clients it didn't do in year one. So Protiviti is very pleased with how it's positioned in the marketplace, how it's competing for not only the SarbOx work, but the non-SarbOx work as well.

Okay. And as a follow-up question, it's more kind of macroeconomic, a lot of the comments in your actions that you are taking -- your company is taking, there's obviously kind of two schools of thought. Are we going to have a soft landing, better growth, or a hard landing? And you seem to continue to invest in hire as if there isn't going to be any slowdown. Can you just give us your thoughts on what your clients are seeing or are there just more secular than cyclical trends that are driving your topline and bottomline growth?

It's hard to precisely distinguish the two. But there's clearly robust demand in the marketplace, while clients might be getting a bit more selective, while maybe they're taking a little bit longer to pull the hiring trigger. You've got candidates still very willing change jobs to be closer to home for more money, for more responsibility.

They're still getting counter offers from their existing employer when they announce that they're planning to leave. So the perm placement market, as we see it today, is very sound. And we have no reason to believe, there's nothing on our radar screen that says anything to the contrary. And the pundits can kind of decide one way or the other, what's ahead of us six months out. But based on our 20-year history, we're not sure they're right either.

The other thing, Jim, I'd say is the baby boomer impact I don't think has even begun to be felt yet in any meaningful way, that is the wave of retirements and so forth that are anticipated. So I think our views about the perm business, which Keith has always described as being a lumpy one and hard to predict are probably somewhat more sanguine then some of the pessimists out there. I think -- we think the market may turn out to be a little stronger than they think.

And speaking again about perm, when we noted the first two weeks, we were up 28%, so your knee-jerk is to compare that to the 55% and say, wow, that's a big slowdown. But if you go back to our year ago's conference call, that same two-week period, we were up 112% over the prior year. So it was kind of a particularly high bar. And therefore, I think you ought to normalize for that.

No. Absolutely. I did go back and checked and it was up over 100%. Was there anything unusual in those two weeks where you were staffing a large project or anything? Do you recall?

No. Again, Jim, in a two-week period, there's a lot of volatility over two-week periods.

Sure. Okay. That's fair enough. Thank you.

Thank you. Our next question comes from Kevin Steinke with William Blair & Company. Go ahead please.

Yes, hi. It's Matt Litfin. Question to follow up on the hiring question. You guys have talked about you're continuing to hire. What about outside of perm? Are you hiring in temp and Protiviti? And I'm also interested in how does your hiring compare internationally versus domestic?

We are hiring across the board, Matt. It's not just a perm thing. Internationally, we actually had a better quarter internationally than we did domestically this quarter. Europe was particularly strong, which is not unusual based on what others have reported.

We were particularly pleased. I think you had 8% constant currency sequential growth in our international operations, which was wonderful. And we continued to be aggressive internationally, not only in Protiviti but in staffing as well. And they've done very well of late, and as we've said before, having both Protiviti and staffing as we go to market in new countries is beneficial to both.

Thanks. A follow up, if I could, on share repurchases. Was the more aggressive share repurchase opportunistic, or have you changed your view at all of the large cash balance? And should we look for that third quarter pace to continue until it's worked down to some new comfort level?

I think it's fair to say it's a combination of we have a large cash balance which allows to us be opportunistic. And so you kind of saw what we did in the first quarter when the price was in the high 30s -- excuse me the second quarter. Then you saw us in the third quarter when the price was in the low 30s. But clearly, the pace at which we buy is somewhat dictated by the price.

Okay. Thank you.

Thank you. Our next question comes from Mark Marcon with RW Baird. Go ahead please.

Good afternoon. And let me first of all congratulate you on hitting the $1 billion mark for the quarter. I remember when you weren't even doing $1 billion per year.

And with a little luck, by the way, Mark, with a good fourth quarter, we'll have our first $4 billion year, which would also be a milestone.

Yes, it's just been a terrific job over a long period of time. Congratulations.

The guidance kind of gets tough when you're talking a $1.03 billion versus $1.06 billion. It's the first time we've struggled with that problem but it's a good problem to have.

It sure is. I was wondering with regards to the international, I mean, for the longest time that, it seemed like you weren't placing a lot of emphasis there. International has clearly picked up. It sounds like you've become more optimistic about where -- how much international could contribute. And I'm wondering can you talk about what the international growth rate was in Protiviti? And then, where are you seeing it on the staffing side -- which divisions and how is that going, and how should that unfold? And then I have a follow-up.

Well, in staffing, we had a very good quarter in the UK, very good quarter in Germany, very good quarter in Belgium. In Europe, generally, we had a very good quarter in staffing. Additionally, their early efforts in Japan on staffing have been very successful, more successful than for that same early period that we've experienced at other countries. That's somewhat due to Protiviti, but mostly due to their own efforts.

So clearly, we're having more success. Part of that's internal execution, part of that's the experience of our internal leaders, internationally on both sides. But for all those reasons because it's doing better, it's contributing more, we're more optimistic.

Is it primarily Accountemps and RHI International in terms of perm, or what are you leading with internationally --?

Well, it's accounting and finance. We're leading with accounting and finance and accounting and finance and accounting and finance means perm, it means management resources, it means Accountemps and now it also means Protiviti. So our lead is accounting and finance and we're probably more accounting and finance driven internationally than we are in the United States because that's our strong suit.

And it would seem that they're in a much earlier stage in terms of adopting.

Well, that's particularly true for the non accounting and finance divisions.

Great. And then with regards to the - I actually happened to read that Economist article and I recall similar articles back in '99 and 2000. What do you think is -- do you think it's just purely the demographics not only here but also internationally that really is the key difference here now versus that period?

I personally think it's more about secular changes focused on accounting controls and governance than I do demographics. I think the demographics is kind of untapped future potential that's beginning

It's at the very early stages.

Right. But if you look back the last two, three, four years, the big story particularly in the United States, which is how exporting to the rest of the world, it's been about accounting controls. And accounting controls are right in our sweet spot and Protiviti just added to that.

Super. I'll follow-up with a couple of other questions later. Thanks

Thank you.

Thank you. Our next question comes from Chris Gutek with Morgan Stanley. Go ahead please.

Hi. This is actually Christine Yew calling in for Chris. I was wondering now that we're moving into a later stage labor market, have you noticed any change in the supply of accounting and finance candidates?

The supply issues are pretty similar to what we've described in the last few quarters, in the three to seven-year big four accounting traunch of the accounting finance market that's very tight. It's very competitive and continues to be so. Other than that, we don't see huge changes in the supply of candidates and certainly it's not to the point where it would be growth restricting.

Okay. Even with as you hire more people to recruit, is that -- do you think that will help you penetrate the market, maybe steal market share?

Well, clearly, the more recruiters we have, the more telephone power we have, the more feet on the street we have, the more sales calls we make, the better our opportunity is to penetrate the market.

And with those recruiters, approximately how long does it take them to be -- become fully productive?

Well, that's somewhat a function -- are they kind of a lateral hire that's experienced in the industry? Are they from the accounting industry, where they've been an accountant and are first becoming salespeople? I mean, it certainly typically takes three to nine months depending on what your background is.

People develop at different speeds. We started years ago something internally which we refer to as RHI University, and one way to describe the function of that is training but another way to put it is we're trying to get people up to speed as rapidly as possible in terms of the business, so they can become fully productive as soon as possible, because obviously there's a lot of money involved with becoming productive faster. So I think nine months will be the long end of that, but somewhere in that three to nine-month range would be fairly typical.

Okay. Great. Thank you very much.

Thank you.

Thank you. Our next question comes from Kelly Flynn with UBS. Go ahead, please.

Thanks. I wondered if you guys could talk about kind of how you gauge your exposure to the real estate market. I guess specifically, do you know how much exposure you have to the mortgage category? And just how do you look at that issue broadly? And then I have a follow-up.

While we have some exposure to the mortgage market both in OfficeTeam and Accountemps, it's not a significant enough exposure that I think it's meaningful to worry about or to think there's upside from in either direction.

Okay. All right, fair enough. And then on workers' comp, you can you just kind of give us an update on that issue? I know you've mentioned --

Well, last quarter, we had our semiannual third-party actuarial review, and based on that, we were over reserved. We made some adjustments. We disclosed that last quarter. We disclosed that this quarter wouldn't have that benefit and didn't have that benefit. So the gross margin reduction on a sequential basis is kind of evenly split between fewer conversions and the absence of that workers comp credit.

We'll have another semiannual review of the workers comp accrual in the fourth quarter, and so based on the outcome of that review, maybe we'll have more credits, but we didn't want to take credit for them prematurely. I mean, clearly, workers comp claims, particularly in California, have been trending down, and rather than anticipate that in a huge way, we've kind of let it come through this third-party review process.

Okay. All right, great. Thanks.

Thank you. Our next question comes from Pete Carrillo with Citigroup. Go ahead please.

Hi. I actually had a few questions, if you don't mind. First one was just, I don't know if you said this before or not, but tax rate for both the fourth quarter and '07, any help on that? It looks like it was down a little this quarter.

It was down a little this quarter and the guidance we would give for the fourth quarter and next year is returning more back to a, like, 39.6% rate.

Okay. Next one was -- it looks like, it looks like you obviously sort of buying shares just based on the data you gave us toward the middle to latter part of the quarter, which is probably would explain the higher interest income in the quarter as well as a little bit of a creep-up in rate. Is that about right, so we can see it go down little bit in the fourth quarter?

The interest income, clearly as we bought the stock, you have somewhat less interest income. And because we -- we can't buy stock until after we release earnings, you're kind of blocked out of the first month of a quarter, which somewhat backloads your repurchases, which is why I made the comments earlier of the 4.7 we bought, you only saw the benefit of 2.7 in the third quarter. But for the same reasons, you only saw the interest offset for that same period of time.

Right. Okay. And I know you gave a lot of information on Protiviti, et cetera. Just one quick one on that. I noticed last quarter - or a year ago quarter was basically a flattish, sequential quarter, slightly up sequentially so it looks like it's a little bit of an even comparison for this coming fourth quarter in terms of gross. So --

And again, the issue for Protiviti in the fourth quarter is holidays because -- the good news about the fourth quarter, particularly with year two, year three Sarb-Ox, our people are going to be doing it, our clients are going to be needing those services at that time, but it's a really short quarter and therefore, that's why you see kind of flattish sequential revenues in Protiviti, which is consistent with our guidance for this fourth quarter.

Okay. And just - the final one was the finance and accounting area, perm area. The growth rates obviously, if we look back over four or five quarters what we've been forecasting you saw this sort of freeze and focus in on the fourth quarter of '06 and going back what we had four, five quarters ago. We continued to sort of - we continued to have in up our estimates on growth. Is that type of -- I'm not saying 50% growth for next year total, but I guess that kind of growth should sort of stay sustained somewhat, something like that going up the next year or so?

Well, we only give guidance out for one quarter. But we like it when we report more growth than you expect.

Okay. Great, thanks.

Thank you. Our next question comes from TC Robillard with Banc of America Securities. Go ahead please.

Thank you. Just looking at your temp and consulting, the staffing gross margins, you guys have done a really good job of showing pretty consistent year-over-year improvement in those margins throughout '06. Do you need the temp-to-perm conversions to accelerate for that trend to continue going into the fourth quarter, or can you still see year-over-year improvements operationally with maintaining kind of the temp-to-perm for where it was at third-quarter levels?

Given that we have industry-leading margins to start with, we've always guided that if we simply maintain those we have, that's a really good thing, and if we do better than that, then that's upside. So we would continue to guide along those same thoughts -- that if we can maintain these industry-leading margins, that's an accomplishment in and of itself. And if we get higher temp-to-perm conversions, or if we broaden our spreads a bit between bill rate and pay rate, then that's gravy, and I think you should build your models accordingly.

Maybe -- could I drill down a little bit then on the third quarter gross margin? You saw 50 basis improvement year-on-year and your commentary sounded like the temp-to-perm conversions were a little softer than you guys were expecting -- I mean, not horribly, but a little bit softer than you were expecting. Can you give me a sense as to then what drove that improvement considering it wasn't the temp-to-perm?

Well, and clearly, our spreads have broadened a little bit, but the temp-to-perm dialogue was intended more for sequential comparisons than it was for year-over-year comparisons

Okay, great. Thanks for the clarification.

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

Good Afternoon. It's Mike Fitz in for Tobey. Question on Protiviti. Just wondering, it looks like there's nice demand for the unit. Just wondering if you could comment on the domestic utilization, I know you said international was hampered a little bit by holidays? I'm just trying to get a sense of --

Right. Well, so in the third quarter, domestic utilization improved as they diversified their revenue sources with the other services I talked about. SarbOx picked up, as I talked about. But year-over-year, it's still less than it was a year ago when SarbOx was a much bigger part of the total, where you had more larger projects that were more leveraged than the larger number of smaller projects we have today. So the good news is on a sequential basis, domestic utilization improved. We’ve still got a ways to go relative to where we were a year ago, and whether a year ago is even a realistic bar given how SarbOx dominated the mix was -- is up for discussion.

And then, if I can just ask a quick follow-up. On the technology side, is there any areas of strength you're seeing in the technology business?

I would say our tech support, our help desk, our network administration, it's kind of the middle, the middle tier positions are where we're seeing more strength than with the higher IT development positions. And I think that's in part a function of our middle-market client base.

Okay, perfect. Thank you very much

Thank you. Our next question comes from Mike Fox with JP Morgan. Go ahead, please.

Good afternoon. I just have a question about Protiviti. If you can talk about when you open a new office in the US, how long it takes to get to that mid-teens profitability, and then how that compares to offices you that open internationally and how long that takes?

Actually, I'm not sure the pace is that different, one versus the other. It's more unique to the facts and circumstances that -- who did you open the office with? How many people did you start with out of the gate? What if, any, business did they bring with them from wherever they came? And given that almost all of our new office openings over the last few quarters have been international, I mean, there isn't much of a more recent comparison of one to the other anyway.

Clearly, our focus has been building out our global footprint, which is necessary to serve our US-based global clients initially, and then our global clients that are domiciled in other countries that have global needs as well. So there have been many reasons why we very aggressively expanded our international -- our global footprint on Protiviti. We're very pleased with how it's gone, and we continue to do more of the same except that the growth from here forward will focus more on critical mass where we already are rather than a bunch of new countries and a bunch of new locations -- not that we won't have a few.

Okay, but can you give us an idea of anyone the shorter side or the longer side how long it can take, whether it would be a year, two years, three years, or any kind of ballpark range?

I guess we certainly would measure it in months, not years.

Okay. Thanks a lot.

Thank you. And our last question comes from Mark Marcon with RW Baird. Go ahead please.

A couple of quick follow-ups. First of all, the bill and pay rates on the temp side, how did those trends over the quarter?

So let's see, the -- on a sequential basis, our rates were up 1.3% and on a year-over-year basis, they were just shy of 6%, which is not that different than what it was last quarter.

Yes. And pay rates?

Roughly the same.

Okay. And then with regards to your comment about the conversions, was this unusually high last quarter and it's just more normal this time? Or did it slow down?

No, if anything this quarter is a little bit low, but just as perm has some volatility in it, so do conversions, and while as intellectually you would think conversions and perm kind of track each other quarter-to-quarter, it doesn't quite work that way. So it kind of bounces around.

Okay. And then just on Protiviti, how much, a couple of quick ones there. How fast did Protiviti grow internationally?

How fast did Protiviti grow internationally?

Yes, what was the growth rate in international for Protiviti?

We gave you -- well, let's see. We didn't disclose --

Right.

-- the precise numbers. Sequentially, its growth wasn't that different than US, because of the July-August holiday impact in Europe. But year-over-year, it grew nicely where you've got that phenomena in both numbers.

Okay. So -- I mean, obviously it grew faster?

Year-over-year, yes.

Okay. Great. And then there was a comment about the non-accelerated filers potentially adding going forward. Can you give a little bit of a feel there in terms of how that can help?

Yes. On the one hand you'd say what our middle market client base that that ought to be a big opportunity, and we think ultimately it will be. By the SEC deferring for a year passed when they first have to comply, the fact that they get an external audit, our view is that will probably delay, to some degree, when we get involved.

When do you think that might kick in at this point?

Well, I guess all we can say is so far, we've seen a little bit of demand coming in that direction, but not a lot. And the fact that they've separated the initial external audit review of controls date and the date you first complied, again, we think means it pushes the demand driver out somewhat.

Okay. But no, you don't think it may kick in in '07, or you don't have a tentative date in-terms of when you think that might actually really become material or significant?

Well, given that the external audit requirement doesn't kick-in until '08, the conservative thing would be to assume later rather than sooner.

And then finally, on OfficeTeam, you've been doing a lot better than other folks on the clerical side. What will you primarily attribute that to? Is it your execution at the branch level or is it more the small and mid-sized focus with a lower level of penetration in that market?

I think you did a good job of answering your own question. Our middle market client base is a factor and I think we do have better execution. I think our people in OfficeTeam do an excellent job and it shows when they outperform the other firms as you just described.

Any reason to believe that may change or do you think that you can keep that up?

Well, we certainly hope to.

Mark, we refer to it as the high end administrative division, that's definitely not the clerical division.

Pardon me. Okay. Great. Thank you.

Thank you. That concludes our question-and-answer session. Thank you again, for your interest today. We appreciate it. We turn it over to you, operator.

This concludes today's teleconference. A taped recording of this call will be available for replay beginning at approximately 8:00 p.m. Eastern time tonight and ending at 8:00 p.m. Eastern on October 27th. The dial-in number for the replay is 800-839-4014, or 402-220-2983 outside the United States. This call will also be available in audio format at RHI.com. Thank you.