羅致恆富 (RHI) 2006 Q4 法說會逐字稿

Welcome to the Robert Half International conference call to discuss fourth 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 and thank you for joining us. Here with me today is Keith Waddell, our Vice Chairman, President, and Chief Financial Officer. As is our custom on these conference calls I'd like to remind everyone that some of the remarks made on today's call may contain predictions and estimates and other forward-looking statements. These reflect current judgment of what the future holds and they 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 filings with the SEC. We do not assume the obligation to update the statements made in this conference call.

Now, let's take a look at the fourth quarter. Fourth quarter revenues were $1.1 billion, an increase of 20% from the fourth quarter of 2005, income per share was $0.45, compared with $0.37 in the fourth quarter of 2005. This is a 21% increase over the prior year. Robert Half International adopted FASB Statement 123-R effective January 1, 2006. This lowered pretax income for the fourth quarter by $3.8 million and lowered reported income by $0.01 per share, adjusted for this change income per share rose 24% over 2005. Our cash flow from operations was $79 million before capital expenditures of $16 million during the quarter. We ended the fourth quarter with $447 million in cash and cash equivalents, after paying a $13 million quarterly cash dividend to shareholders. We repurchased 800,000 RHI shares in the open market under our stock repurchase plan at a cost of $31 million. Approximately 11.4 million RHI shares remain available for repurchase under the plan.

We were pleased with the fourth quarter and with the financial results for the full year. We crossed the $4 billion mark in annual revenues for the first time in our company's history. All of our staffing divisions and Protiviti experienced double-digit revenue growth on a year-over-year basis, and every line of business saw solid sequential revenue gains on a same day basis during the fourth quarter. Our international operations in both our staffing divisions and Protiviti performed particularly well, especially in Europe. Now I'll turn the call over to Keith who will provide more detail on our results.

Thank you Max. We'll start with revenues. Overall revenues for the company were 1.1 billion in the fourth quarter, an increase of 20% from the fourth quarter of 2005 and an increase of 3% sequentially. There were 61 billing days in the quarter, the same as the fourth quarter of last year and down two days from the third quarter of 2006. Revenues for Accountemps were 389 million. This is a 20% increase on a same day basis from the fourth quarter of 2005 and an increase of 6% sequentially. Accountemps remains our largest staffing division, with 355 locations worldwide. It makes up 37% of total revenues for the company.

Fourth quarter revenues for OfficeTeam were 202 million, up 13% on the same-day basis from the fourth quarter of 2005, and up 6% 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.

Fourth quarter revenues for Robert Half Management Resources were 136 million, this is an increase of 23% on a same-day basis from the fourth quarter of 2005 and an increase of 6% sequentially. Robert Half Management Resource,s which was introduced ten years ago, places senior level accounting and finance professionals on a project basis. It operates in 134 offices worldwide, and accounts for 13% of revenues.

Fourth quarter revenues for Robert Half Technology were 94 million, up 16% on the same-day basis from the fourth quarter of 2005 and up 7% sequentially. This division places IT professionals on a consulting and full-time basis and accounts for 9% of revenues. Robert Half Technology was introduced in 1994 and operates in 114 locates worldwide. Fourth quarter revenues for our Perm Placement division, Robert Half Finance and Accounting, were 87 million. This is an increase of 43% from the fourth quarter of 2005 and represents a slight increase on a same-day sequential basis. This business was established in 1948 and operates in 355 locations worldwide. It accounts for 8% of total revenues.

Fourth quarter revenues for our International staffing operations were 198 million, up 37% from the fourth quarter of 2005, and up 10% sequentially on a same-day basis. On a constant currency basis, these growth rates were 28% compared to the fourth quarter of 2005 and 9% sequentially. We had staffing operations in 96 locations and 16 countries outside the U.S. International staffing operations represent 22% of total staffing revenues. Fourth quarter revenues for Protiviti, were 152 million up 19%, from one year ago and up 7% sequentially. Protiviti celebrates its fifth anniversary this May. There are 57 Protiviti locations in 15 countries and this business accounts for 14% of RHI's total revenues. Protiviti's international operations represent 27% of Protiviti's total revenues.

Turning to gross margin. Gross margin in our temporary and consulting staffing operations was 305 million for the fourth quarter, or 37.2% of applicable revenues. This compares with 37.1% of revenues for the fourth quarter of last year and 36.8% of revenues for the third quarter of 2006. The sequential improvement relates primarily to a reduction in workers compensation accruals, which resulted from third party actuarial reviews. Overall staffing gross margin was 392 million for the fourth quarter or 43.2% of staffing revenues. This compares to 42.1% of revenues in Q4, 2005 and 43.1% of revenues in Q3, 2006. The sequentially higher temporary and consulting margins were mostly offset by a seasonally lower mix of permanent placement revenues. Fourth quarter gross margin for Protiviti was 59 million, or 38.8% of Protiviti revenues. This compares to 37.8% of Protiviti revenues in Q4, 2005, and 35.6% of revenues in the third quarter of 2006. These improved percentages relate primarily to better staff utilization rates, both domestically and abroad.

As to selling, general and administrative cost, staffing SG&A costs for the quarter were 293 million, or 32.3% of staffing revenues. This compares to 31.1% of revenues for the fourth quarter of 2005, and 31.8% of revenues for the third quarter of 2006. The sequential percentage increase relates primarily to the accelerated write-off of unamortized pension cost in connection with the conversion of the company's defined benefit plan to a defined contribution plan. We ended the year with 10,600 full-time employees in our staffing divisions, up 20% from last year. Protiviti SG&A costs were 39 million or 25.4% of revenues. This compares to 21.9% of revenues in the fourth quarter of 2005, and 24.6% of revenues in the third quarter of 2006. The higher costs are primarily due to further international expansion and infrastructure expenses. We ended 2006 with 2900 full-time employees in Protiviti, up 30% from 2005.

Fourth quarter operating income from our staffing divisions was 99 million or 10.9% of staffing revenues. The temporary and consulting divisions contributed 82 million in its amount or 10% of applicable revenues. Fourth quarter operating income for our perm placement division was 17 million or 19.3% of applicable revenues. Fourth quarter operating income for Protiviti was 20 million or 13.3% of revenues for this business unit. Regarding accounts receivable at the end of the fourth quarter, receivables were 532 million, with implied days outstanding or DSO, of 45.6 days, compared to 47.5 days at the end of the third quarter.

Now, turning to guidance. We observe the following business trends in the fourth quarter and the first few weeks of January. On a same-day sequential basis, temporary and consulting revenues were up in October, up in November, and up once again in December. On a same-day sequential basis, Permanent Placement revenues were down in October, but up in both November and again in December. During the first two weeks of January, revenues from our temporary and consulting businesses were up 17% compared to the same two week period last year. For the first three weeks of January, revenues from our Perm Placement division were up 15% compared to the same three week period last year with sequential strengthening within this period. As we frequently remind investors, perm trends are difficult to assess and short time frames, especially the holiday impacted weeks in January.

With respect to the first quarter, we offer the following guidance. Revenues, 1 billion 90 million to 1 billion 120 million income per share $0.44 to $0.46. As you know, these estimates are subject to the risks mentioned in today's press release. We limit our guidance to one quarter. At this time I'll turn the call back over to Max.

Thank you Keith. As I mentioned, we were pleased with the quarter particularly the year-over-year and sequential revenue growth we reported in our temporary and consulting operations and in Protiviti. Our offices continued to see strong demand for accounting and finance personnel both on a full-time and interim basis during the fourth quarter. We believe this demand is being driven by the secular trends in accounting that we've talked about in the past as well as by strong labor market for professionals and skilled workers in general. The unemployment rate in the United States remained at 4.5% December and for college graduates it was just under 2%. As we begin the new year we're optimistic about the growth prospects for our staffing operations and for Protiviti. We've invested in new staff hiring and training during the past quarters and we believe we are uniquely well positioned for future growth. There is strong demand for accounting and finance expertise as a result of the emphasis on governance and better internal controls over and transparency in financial reporting. A new layer of accounting infrastructure has emerged and 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 in internal audit and risk management are well established now in the business community. Protiviti has an impressive roster of global clients and the list continues to expand. We are pleased with the demand for Protiviti's full suite of internal audit and risk consulting services. At this time Keith and I will be happy to respond to your questions. We would ask that you please limit yourself to one question and a single follow-up as needed. If you have additional questions we'll try to return to you later in the call.

Our first question comes from Kelly Flynn with UBS. Go ahead , please.

Thanks, can you speak to the gross margins that you expect in Q1? And maybe give a bit more detail on Protiviti specifically and also for '07 what you expect the margin to be alt least directionally for Protiviti? Operating margin, actually. Thanks.

So let's first talk Q1 gross margins. First of all, we only do the workers comp assessment twice a year, so there was about 30 basis points of benefit in the fourth quarter for the workers comp evaluation, which would not repeat in Q1. So our thinking is first you first kind of have to adjust for that impact. Other than that, our expectation would be kind of the bill pay rate spreads in the temp business would be consistent. On the firm side, typically in the first quarter, seasonally there is some strength relative to the fourth quarter, which is particularly holiday impacted as well as impacted as companies kind of run out of their hiring budget. On the Protiviti side, we saw nice gross margin improvement in the fourth quarter as the utilization rates were up. In the first quarter, as we've talked about for a few years now, there is seasonal slowness in Protiviti as companies focus more on their external audit rather than their internal audit and further the Sarbanes-Oxley work we help our clients with, is typically a third and fourth quarter phenomenon, which means there is less demand for that in the first quarter for that as well. So you should expect Protiviti's gross margin percentage to back up somewhat in the first quarter consistent to what we've seen in prior years.

Okay.

We don't give full-year guidance, Kelly, but, again, we're quite aware and pleased that Protiviti's operating margins improved from the tenish percent range to better than 13% in the quarter and we actually started getting some nice traction from the international investments we've made in quarters past, and it is a little different this quarter in that Europe led the way, whereas in prior quarters Asia had been more predominant. Not that Asia had a bad quarter, but clearly we got traction in Europe, not only on the Protiviti side but on the staffing side, as well.

Okay. Do you think that margins will be up slightly for Protiviti in '07?

As we've said, many times, our thought is normalized margins in Protiviti should be the mid to high teens, and so we've just come from tenish to 13, so we're clearly moving in that direction. It is a function of how aggressive we continue to expand, what our opportunities to continue to be. We're going to do the right thing. We're going to take advantage of opportunities as they arise, which could have a short-term dampening effect on margins, but clearly our objective is to have Protiviti's consolidated operating margins return to the mid to high teens.

Okay. Thanks a lot.

Our next question comes from Andrew Steinerman with Bear, Stearns. Your line is open.

Hi, gentlemen. On term, obviously the first few weeks aren't always meaningful especially during this season. But when I think back to your operating margins in the fourth quarter at 19%. That suggests that you're probably hiring a fair number of recruiting managers, because you're seeing searches open up. Typically, as you said, first quarter you're seasonally strongest quarter for perm, typically, but I would also ask just to confirm that you usually have a decent idea of first quarter perm revs by this time just based on the number of open offers that you have out there and that by no means is, kind of 15% early in the quarter a constraint.

Right. So let's talk about perm a little bit, Andrew. First of all, for the fourth quarter we would observe that because our internal staff had a really good year, they took more time off for the holidays than they typically have, which clearly somewhat impacted fourth quarter revenues. We would further observe that they took more time off that first week of January, which clearly impacted how we started the quarter. You were correct in that in the fourth quarter we had seasonally lower revenues and we also ramped up the head count.

Right.

And the combination of the two depressed perm operating margins for the quarter. As we look into the first quarter, I think if you would compare in prior years how we start a quarter, the first couple three weeks, versus how we perform for the entire quarter, we typically perform better than how we start, particularly in perm. We can tell you that we've stayed close with our field people. They remain very bullish on perm. Job order activity is very strong. Candidate send-out activity is very strong. So we remain bullish on perm, and that bullishness is represented in the fact that we added to head count in Q4, so that we could stay ahead of this and participate in this robust perm market.

Right. And you mentioned total staffing head count, 10,600, up 20%. Was your perm head count within that number up more?

It would be.

Okay.

It would be.

So you are generally more bullish on perm than you are even on temp?

The only thing I would say is for the full year, what I just said is true. If you look at the fourth quarter, we were actually more aggressive on the temp side.

Oh yeah?

But it was back-end loaded so you didn't necessarily see it as much in the raw numbers themselves. We added to head count, temp and perm. We were a little more aggressive on the temp side, but again we're bullish, not only on the temp side but the perm side as well for the reasons I just mentioned.

Right. And the caveat you gave, the kind of they did so well, your recruiting managers did so well, they started out the year kind of a little slower after some vacation time, is that enough of a caveat that it's --

We typically don't whine about the holidays and the weather.

That's right, yes.

But the facts are that we can look at our time sheets and say people took more time off. To the extent they're you're revenue producers, it's going to have an impact.

In terms of our expectations, Andrew, you were asking about relative degrees of bullishness, I don't think Keith and I feel a lot differently today than we did a quarter ago when we were having this call. We were fairly bullish then and I think we feel pretty much the same now. Just to sum it up.

Thank you. Appreciate it.

Our next question comes from Jeff Silber with BMO Capital Markets. Go ahead please.

Thanks so much. If I remember correctly on these annual calls you usually give us an update in terms of the number of recruiters. If that is possible to do that again, I would appreciate that.

Yes, Jeff, we just mentioned, let's see, and I'll do it again, on the staffing side, 10,600, which is up 20%. On the Protiviti side, 2,900, which is up 30%.

My apologies. I jumped on late.

That's okay.

In terms of the tax rate, it was a little bit lower than we expected. I just was wondering if you could give us explanation why, what you're expect for '07 and also what kind of CapEx guidance you can give us for '07 as well.

Right. So tax rate was a little lower, we had a couple of favorable settlements , not to the extent we had in the third quarter where the rate was really low. A normalized rate would be 39.5, 39.6%, which we'll migrate toward, probably toward the first quarter. These settlements kind of have their own life, so that's where we are. You should build your models using a normalized rate of 39.5 or 6%. CapEx for 2007 will be a little higher. We would put it in the $100 million range. A few things going on. First of all, our Voice-Over IP project in the United States was extremely successful. We're very pleased with its outcome. We are currently studying extending that internationally, as well as to our corporate and field service center operations. There is money there. We continue to expand PeopleSoft back office to our international operations. There is money there. Our pay-bill system we use for temporary and consulting, is like on its ninth anniversary. Some people call it a dinosaur, although it works quite effectively. But it is time that we've got to deal with that and we budgeted money to begin to deal with that in '07 which will also roll over into '08. So a little higher, about 20% higher, in fact, than what we spent in '06, but it's kind of in the $100 million range for '07.

Right. And is there also plans to add head count, recruiter head count in '07 as well?

No question. Again as we talked about the biggest growth driver we have internally is the head count of our sales professionals. And if you look at '06, on the staffing side the topline growth rate and the growth and head count are really close. In Protiviti we had more head count growth principally because of our international expansion. But to continue to grow this the way we would like to grow it, we have to add the head count. As I said, we back-ended, added to head count in the fourth quarter, particularly on the temp side and we would continue to see over the course of '07 adding to head count, because quite frankly that's how we grow.

Okay. Great. Thanks so much.

Our next question comes from Greg Cappelli with Credit Suisse. Go ahead please.

Hi, guys. I was hoping to get an update. I heard you mention it. But, could you give us an update on the bill rate and pay rate in the quarter?

Yes. Sequentially I think it is up almost identically to last quarter, 1.3% and year-over-year it is right at 6%, which means you had very good unit growth if you take out pricing and in a year-over-year basis the days are the same, unit or hours growth. So we had a very strong fourth quarter in terms of hours billed, as well as maintaining our bill pay-rate spreads.

Okay. Great. That's helpful. Just a quick follow-up would be, [inaudible] following Kelly's question about the margin for Protiviti. What are the--what is your latest thoughts in terms of the expansion opportunities for them in the U.S. and internationally in '07? Is there perhaps a number of new locations you have targeted you can talk about? Or just a little bit more color on that?

As we've talked the last couple of calls, there was a footprint minimum we needed to achieve to service our global clients. And we for the most part have achieved that footprint minimum. From here it will be opportunistic as to where we go from a footprint standpoint, but we far from critical mass at most of the international locations we've already opened. So it is going to be more about getting critical mass and expanding internally the locations in the countries where we've already opened than it is going to be adding new countries. Not that we're not going to add new countries, we will. But again, we kind of have our footprint minimum in place.

Okay. So from a cost perspective, these would be more fill-in locations it sound like?

Well, I'm not sure I'd call them fill-in. It will be a function of the quality of the people, the quality of relationships that they have, they're fit with the other people, our familiarity with them, through our Anderson and other big four employees and contacts. It will be opportunistic.

But the big point he's making really is just that there is tremendous expansion opportunity in these international offices, most of which have not been opened very long. So you should expect to see the bulk of the activity internationally in terms of building out those existing locations. That's not to say there won't be additional locations on our opportunistic basis but again the main thrust is building out the offices we're in currently.

Okay. I understand. Thank you very much.

Thank you.

Next we'll go to Matt Litfin with William Blair and Company. Go ahead please.

Yes, hi, good afternoon.

Hi Matt.

I wonder what would be the signs that you would see if we were moving into a real candidate shortage in the U.S., and by that I mean the kind of shortage that could crimp your revenue growth down the road?

Well, we certainly track the number of candidates we interview on a weekly basis. We track the number of candidates we add to our databases on a weekly basis. And we would see a contraction of that candidate flow and but for this three to seven year big four accounting type, we're not seeing that. And as we've also observed, it is our belief that relative to the last time we were candidate constrained, kind of in the latish '90's, technology plays a much bigger role in the recruiting of candidates generally and gets us exposure to a broader base of candidates such that we believe we've got a decent shot at either not having that problem at all, or seeing it much, much later in a cycle than we have in previous cycles, such that we feel pretty good about the candidate issue, and it not being growth constraining, other than in this big 4, 3 to 7 year pocket that we would distinguish.

The other comment I would add to that is, we compete with many, many companies, many of which are very small, some of which are regional or local operators and candidly when the market begins to tighten, I think we operate at a significant advantage. We're better known. We advertise far more and have done so for far longer. It is hard to find an accountant or accounting student that doesn't know who we are, for example, in that particular discipline. So we tend to fare better in a tight market, we believe, than most of our competitors. But again, as Keith said, at the moment we're not struggling with a tight market.

Right. And building on Max's point, we would make a case that the value of your brand is actually more important in this technological recruiting environment than even before when it wasn't, because those brands attract candidates to our websites and, therefore, we would argue, give us even more of a competitive advantage than we had before.

Okay. Great. Thank you.

Our next question comes from David Feinberg with Goldman Sachs. Your line is open.

Good afternoon, gentlemen.

Good afternoon.

Hi. Two questions. One in terms of your expectations for Protiviti in 2007, can you discuss where you see Sarbanes-Oxley going as a percent of that revenue and what the growth opportunities are either for Sarbanes-Oxley or other lines of revenue?

So let's talk a little bit about Sarbanes-Oxley. First of all, I can report that it was down slightly on a sequential basis for the fourth quarter, which means the nice growth they achieved, they achieved from other than Sarbanes-Oxley assignments. Those included IT security, forensics, IT auditing, internal audit. It was non-Sarbanes-Oxley. We would--we would believe that Protiviti Sarbanes-Oxley, the percentage of revenues, would continue to moderate over time. As everybody knows the SEC has--is kind of constantly, it seems, kind of looking at the 404 requirements. Clearly this discussion of companies taking a top-down risk-based more materiality-driven approach, at the end of the day is going to result in less testing work of controls. That said, it is our view that companies will need help taking the approach I just described, so in the short-term there will actually be work from that. Ultimately we believe there will be more value added work to be done as it relates to 404 with our clients. But more than likely there will be less testing work, which is kind of at the lower end of the food chain as it relates to Sarbanes-Oxley. So kind of to summarize shortly that, we expect our exposure, our percentage of revenues from Sarbanes-Oxley to continue to decline over time. We don't see anything abrupt. None of this legislation or proposed legislation or proposed changes, particularly worry us for the reasons I've just outlined.

Okay. One second question. Sounds like business overall very strong across all your businesses. Any areas of concern, either by product line, region or world, head count, any of those issues?

Quite frankly, we had a very strong quarter across the board. I mean virtually everyone of our staffing businesses grew 6% or more on a same-day basis sequentially, which is strong. Perm fourth quarter is always a little soft, so that's a seasonal thing. So we feel good about where we are. We feel good about our prospects, our people in the field, are very optimistic about '07. Our people in Protiviti are also quite optimistic. We feel we're well positioned there and we're quite upbeat as we enter '07.

Great. Thank you very much.

Our next question comes from Michel Morin written with Merrill Lynch.

Hi guys. Good afternoon. I know that there have been a few acquisitions made in Protiviti in over the past year including one in the fourth quarter. So I was wondering if you can tell us how much was spent and how much that contributed to the quarterly revenue in Q4?

So it was a pretty small acquisition. It was made toward the end of the quarter. We did not disclose the purchase price, and the name of the company was Inspire. And it is our entree into the government services sector. Their niche was identity management, IP services for the government sector. We hoped to leverage that into what is called A123 work, which is the government Sarbanes-Oxley requirement. Again, small, it had a total of 57 people, all 57 of those people came over with us, so it didn't have a meaningful impact on fourth quarter revenues or earnings, but again we think it is meaningful in that it gets us an entree into government services work, which we're excited about.

Okay. Great. And then just moving on to the international staffing where you had, you know, very good results. Is there anything in particular that you would point to that has changed? I know that you've -- results have been improving in recent quarters. Is there anything that kind of stood out this quarter either by region or by segment?

Well, on the staffing side, I would say the continent did particularly well. You got Belgium, France, Germany, probably led the way. I hope I didn't leave somebody out. But clearly the continent was the bright spot for us. I think that's primarily better execution. I think across staffing companies have talked about how their continental European operations have strengthened and we participated in that.

And is that maybe leading you to think about accelerating any investment plans or expansion plans?

I mean, we're always looking to expand and incrementally we've done that for some time. So maybe at the margin we would be a little more aggressive. We've also got the combination of Protiviti and staffing that are going to market in these countries which makes both of them stronger.

Michel, there is no question our organization in Europe, in particular, is stronger today than it was a couple of years ago. We've achieved a certain critical mass. I think the expansion of Protiviti as Keith just noted has helped and we have a good team on the field. We've devoted a lot of energy to training and so forth and it is fair to say that we're probably paying a little bit more attention to our international markets now than we did a few years ago.

Great, thank you.

Your next question comes from Jim Janesky with Ryan Beck and Company. Your line is open.

Hi, yes, thank you. Good afternoon. Returning to perm for a moment. Last year in the fourth quarter coming into the first quarter, you were up 57% and I know this number jumps around a lot versus 15% this year. Does that have anything to do with the fact that in December of '05 you were down in perm and this December you were up? Or could you just remind us of what trends were going on as you came into '06?

So clearly the comps were more somewhat different and more difficult this time than last. But I think, when you ball it down, Jim, we would observe that there was a larger holiday impact this year than in years past. I know that's kind of a soft explanation, and our belief is notwithstanding this start to the quarter, we feel very bullish about perm.

Well, as you said earlier, the facts are people simply took more time off this year. They had a good year and they took more vacation time. W e continue optimistic, and we'll see if that is warranted.

Okay. In the past , Max, you've talked about the mood or the environment amongst the small business community. Can you let us know what they're telling you as we go into 2007?

Well, it's a pretty imprecise barometer, as you know, but I would say that to the extent there is concern, it relates more to what I would describe as the blue collar market. As far as the areas, you know, the professional areas in which we operate, demand appears to be very strong, and there is still a certain amount of optimism and so forth, in most clients, and that has led us of course to be optimistic.

Okay. Thank you.

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

Thanks. Keith, just a couple quick questions. Did you quantify the magnitude of the DB plan conversion in the fourth quarter?

4.1 million.

Okay. And trying to get just a little more color on the Protiviti growth rates. Could you talk about, Max, or, either one, Max or Keith, the international growth versus domestic growth and ideally also within those two geographic segments some sense for what the same store, same location growth is, versus the growth from, offices open less than a year?

Clearly international growth in Protiviti outpaced domestic growth given that is where we focused the additional head count and the investment dollars of the past 12 months. So by just looking at the percentages of revenues that we disclosed for international operations for Protiviti, you can quickly compute that Protiviti's international operations both sequentially and on a year-over-year basis outgrew the United States. And the biggest challenge in the United States was the much shorter calendar, because of the holidays. But for that, Protiviti did quite well in the United States in the fourth quarter for the reasons I talked about earlier. We haven't--we haven't given same store growth rates for Protiviti. In the United States, quite frankly, we haven't added hardly any locations, so what you see there is what you get is pretty much same store, virtually all the additional stores we added have been internationally.

Maybe I can try that question from a slightly different angle. I'm guess what I'm trying to get a sense of , if you're willing to talk about it, is how big you think this business can get based on how it has performed since you bought the business or hired the people in 2002? When you think about fully saturating sort of globally, you know, obviously that takes a number of years to play out. Do you have some kind of sense for what kind of revenue is possible relative to the competitive landscape relative to demand for the existing service lines the company offers through Protiviti?

Well, I guess without putting a number on it, I guess we see Protiviti as a fraction of its opportunity. You've got internal audit as a profession and as a discipline expanding globally, because of the additional focus on accounting controls. You further got this migration away from the big four to non-big four providers. I don't think anybody would dispute that Protiviti is getting a disproportionate share of that. Further, you've got these non-internal audit services, what we call technology risk and business risk services, that also traditionally were provided by the big four. I think there is probably more movement and migration from the big four with those services, than even there is on the others. So the combination of the market overall is growing, because of the focus on controls, and this market share shift from the big four, away from the big four, I think Protiviti has a huge opportunity, and what you're seeing now is literally a fraction of what it can become. Okay. Thanks Keith. Appreciate it.

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

Hello. It's Mike Fitz on for Toby this morning, or this afternoon. A quick question, a follow-up to that question on Protiviti and on the service offerings. Just wondering, if you guys, what your thoughts are on layering on additional consulting services to the current service offering?

We're actually quite interested in laying on additional services. Again, the business risk and technology risks umbrellas are pretty broad umbrellas for you to offer all types of niche services within those. So we're always looking at how we can broaden the service offerings of Protiviti. In fact, we broadened the offerings in the last five years since we begun Protiviti. But as you look now, we have a very nice IT security practice, IT audit practice, IT asset management practice. They're all niches within the technology risk consulting on the business risk side. We have a nice what we call vent-related practice which would include forensics, which would include kind of financial investigations, options, et cetera. So underneath the risk consulting umbrella I think it gives you permission to do a lot of services other than just internal audit or just Sarbanes-Oxley.

Great. Thank you. And then just a question on the G&A expenses. As a percentage of revenue it looks like they've been gradually increasing over time. I just wanted to get a sense of where do you think that we're kind of approaching a steady level as percent of revenue or is it going to change in one direction or the other?

Well, remember now in '06 you had like $18 million of options expense that you didn't have in '05, so you need to normalize for that. Clearly as we've done better with our graduated compensation plans with our field staff, that has put some pressure on SG&A as a percent of revenue. But quite frankly that is SG&A money we're happy to spend because it only happens if there is really robust revenue growth. We're very mindful of SG&A. Our largest SG&A cost is the compensation cost of our field staff. That same field staff is what drives our revenue and, therefore, we need to be careful and competitive. It is clearly gotten more competitive the last couple of years for internal staff, and that has put some pressure on SG&A in and of itself.

All right. Thank you very much.

Next we'll go to Michael Fox with J.P. Morgan. Go ahead, please.

Good afternoon and congratulations on a strong quarter. When you look at operating margins in the first quarter, do you expect all three segments to have expansion, and then also if you could rank the three segments and which ones will have more expansion, that would be great. Thanks a lot.

Sure, so let's talk about seasonal factors. Seasonally Accountemps typically does better in the first quarter. Management Resources typically does better because you're dealing with year-end audits, you're gearing up for tax work and so there is typically seasonal revenue expansion from that. You've got another two and a half billing days in the first quarter. So you get some G&A leverage from that. On the perm side you typically have a pretty good quarter in the first quarter. Companies have hiring budgets again. So seasonally perm is typically a pretty good first quarter. Protiviti, it is the opposite story for reasons we talked about earlier. It is typically down on a sequential basis, and, therefore, the operating margins, as well as the gross margins, would be less in the first quarter than they would be in the fourth quarter. So when you pull all of those together, the whole package traditionally, you might get a little better, but you've got stronger temp and perm margins offset to some degree by lower -- seasonally lower Protiviti margins.

But if you look at year-over-year on the Protiviti side, do you expect margins to be up in the first quarter on the operating margin side?

I guess we don't give divisional guidance by quarter, but clearly we saw some nice progression Q3 to Q4 and adjusted for the seasonal impacts I just talked about. Our hope is we can continue that progression into '07. But, again, there are seasonal factors in play for the first quarter.

Okay. Great. Thanks a lot.

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

Good afternoon. With regards to the rapid expansion that you're experiencing in international markets, can you talk a little bit about, and I'm talking about, of course, staffing and perm, can you talk a little bit about how we should think about margin profiles in the international markets relative to domestically and if there is any differences that we should take into account from a longer term perspective?

Clearly on the staffing side the margins are somewhat less than they are in the states. The UK is probably the most competitive staffing market in the world and that shows itself very directly in our margins. We typically get better margins on the continent than we do in the UK, although even there, they're somewhat lower than they are in the states. So to the extent we get outsized growth from international locations and staffing, that will put a little pressure on margin. But to the extent we're growing on the continent faster than we are in the UK, that will be lesser the case.

So still little bit of compression but on a blended basis nothing overly dramatic.

I think that is fair. I think that's fair.

Okay. Great. And then you mentioned, you know, internal steps getting a little bit more competitive. Can you talk a little bit about the productivity of the new hires that you're bringing on at this point, how quickly they're ramping up and what tools you might have to, you know, continue at the high levels of productivity that you have with your older staff? And what are you seeing in terms of retention rates among your staff?

Well, it is a fairly robust market, as we've talked about, and clearly that backdrop gets newer people up to speed more quickly. We're pleased with the ramp-up time that we have from our newer people. We have various training programs which Max has talked about, RHI University among them. We've talked for many years that the attrition rate, the first couple years you join Robert Half, is somewhat high because we set the bar high, because many accountants like the theory of being a salesperson until they become a salesperson, and they kind of their income depends on their productivity. Many of them decide that's not for them. So I would observe that the retention rates aren't that different than in the past, but clearly we've always had a challenge with people those first couple of years. Beyond those first couple of years, our retention rates are great. And, you know, we have many 10, 15, 20-year veterans with our company, which kind of makes us who we are.

We try to be known as one of the best paying firms in the industry in return for the best performance. So by definition, we're setting the goal fairly high those first couple of years, and for people that aren't really dedicated to a people sort of business, which at the end of the day is what we are, it is a people to people, you know, sales proposition, it's not comfortable and they'll tend to leave or be asked to leave. As Keith said though, and I think as we've noted in prior conference calls, if you took a look at our people after they have been here a couple of years, our retention rates are very high. And as you've moved up the ladder over time they are extremely high. So we feel we have a great field organization. It is not the easiest team to make but once you've made it, I think it is -- we believe the most remunerative opportunity in the industry, and that is in return for the most productive people.

Perfect. Obviously worked quite well over your history. Thanks.

Thank you.

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

Great. Thank you. Pardon me, just two quick questions. On the defined benefit conversion, is that just a one-time conversion or will there be kind of some ongoing expenses in the early part of '07?

It is a one-time conversion. We simultaneously froze future benefit accruals under that agreement and we converted it from defined benefit to defined contribution, which has the significant benefit of reducing the volatility of the liability account had we stayed with the defined benefit plan. The only ongoing cost will be the interest accruals on that account because, again, future benefits under the agreement have been frozen.

Got you. But, so on an operating basis, on a blended basis, then, you got more predictability and overall lower costs relative to just maintaining a defined benefit. Correct?

That is correct.

Okay. Great, thanks. And then the second question I had. On an earlier question you made a comment about being opportunistic in terms of office openings for Protiviti going forward now that you kind of got your minimum footprint as you had mentioned. Is it safe to assume that kind of your return to profitability hurdles or your IRR hurdles for those opportunistic offices are more aggressive than what your kind of minimum footprint would have been as you were looking to just satisfy some needs for some of your existing customers?

I'm not sure we set the bar higher on a per-country basis. Again if there are countries we haven't gotten to where we feel good about the people, we feel good about how they interface with the rest of Protiviti, we feel good about how they fit relative to the global needs of our existing clients, we'll do it. And I'm not sure we're going to set the bar any higher for their first 12 or 24 months than we set the bar for a similar period for the ones we've added.

The key factor really is the personal one. We've been fortunate in attracting a lot of highly skilled people around the world who either worked with, within the old Arthur Anderson or one of the other big four firms who otherwise had work experience with people within Protiviti in whom we now have great confidence. It is pretty easy in a personal business, personnel business, to move rapidly once you have confidence in the people that are involved. So if they are high quality people with great skills in countries we'd like to enter, that's going to trigger the decision to go in, much more so than any financial criterion. That having been said, we obviously pay attention to some financial parameters but they won't be any different than the past.

Understood, thanks for the commentary.

Our next question comes from Peter [Corrillo] with Citigroup. Go ahead please.

Hi guys. Couple quick questions. First one is, just as you look at your operating margin performance in '06 relative to '05, you had about a 50 basis point increase in operating margin and an even better, about 190 basis point increase in the perm side. I meant to say temp side, and on the perm side you had 190 basis point increase. Any ideas how it might progress [out of] it finishes up '07, up similar levels or at least flat, or?

Well, I guess as we sit here today we're quite optimistic in perm. Perm has higher margins, and our expectations as we sit here, that perm will outgrow temp for our '07, particularly the first quarter, which we try to limit our comments to. But we continue to be bullish on perm. We continue to believe it'll outgrow temp, and there is a positive margin mix impact from that. Further, as you're comparing '06 and '05, I would again remind you that '06 had the options expense, '05 did not.

Right. Okay. Okay. And then I guess secondly just share countwise, any idea, any feeling for share count as we go through '07 as well.

Share count going into first quarter there is nothing really -- there's nothing unusual going on there. The purchases we did were kind of throughout the quarter. The number wasn't that large in the fourth quarter. So the share count kind of continuing into Q1, more or less similar to what you got in Q4, is probably not a bad assumption. The caveat being our options get more diluted as the average price increases, and we kind of like having that problem.

Is there, how much is left in the share purchase program?

It's like 11 million shares.

Okay. Thanks.

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

Hi, sorry. Couple of just quick follow-ups. Can you tell us what the constant currency growth was on a consolidated basis both for Q4 and Q3?

You know, Kelly, we, in our prepared remarks, which I'll try to grab here, we give you constant currency for international only, which you can use to do overall. So let's see, for the fourth quarter -- just bear with me a second, let's see, on a nominal basis year-over-year up 37, sequentially up 10. On a constant currency basis, year-over-year up 28%, sequentially up nine. So that is the fourth quarter differential. We gave you that same differential last quarter. I could probably find it, but you could also find it.

Yes. We can look it up. And just the second one, the charge for the benefits conversion, is that pretax?

Yes. 4.1 million pretax.

Okay. Great. Thanks a lot.

That's all we have time for today. We appreciate your questions and your interest. I thank you for participating.

This concludes today's teleconference. A taped recording offer this call will be available for replay beginning at approximately 8:00 p.m. Eastern Standard Time. on January 25th and ending at 8:00 p.m. Eastern Standard Time on February 1st. The dial in number for the replay is 800-688-9459. Or outside the United States, +1-402-220-1373. The conference call will also be archived in audio format on the company's website at www.RHI.com. Thanks for your participation.