羅致恆富 (RHI) 2007 Q1 法說會逐字稿

Welcome to the Robert Half International conference call to discuss first quarter 2007 financial results. Our host for today's call is Mr. Max Messmer, Chairman and CEO of Robert Half International. Mr. Messmer, you may begin.

Thank you, and hello, everyone. Thank you for joining us. I am here with Keith Waddell, our company's Vice Chairman, President and Chief Financial Officer. I would like to begin with a reminder that remarks made in today's call may 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 forecasts, estimate, project, expect, believe, guidance and similar expressions. We believe those 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 review our first quarter results. Revenues for the quarter were $1.1 billion, an increase of 16% from the first quarter of 2006. Income per share was $0.42 compared with $0.38 in the first quarter of 2006. This is an 11% increase over the prior year. Cash flow from operations was $112 million before capital expenditures of $24 million during the quarter. In February, our Board approved raising our quarterly cash dividend to $0.10 per share. The $0.10 per share cash dividend was paid to stock holders in March and totaled $17 million.

We ended the first quarter with $450 million in cash and cash equivalents after paying the quarterly dividend and repurchasing 2 million RHI shares in the open market under our stock prepurchase plan. The cost of the stock repurchase was $77 million, approximately 9.4 million RHI shares re main available for repurchase under this plan. In our staffing divisions we saw a continuation of the broad based revenue growth that we have seen for several quarters. The financial divisions continued to perform, well particularly our permanent placement business, Robert Half Finance and Accounting. International staffing operations also had a strong quarter. Protiviti continued to expand its client base and service offerings during the quarter. Revenues for Protiviti grew 7% on a year-over-year basis, led by its international operations.

Now I will turn the call over to Keith for a closer look at our financial results.

Thank you, Max. We'll begin with revenues.

First quarter revenues for the Company were $1.1 billion, an increase of 16% from the first quarter of last year and an increase of 4% sequentially. There were 64 billing days in the quarter versus 64 a year ago and 61 days in the most recent fourth quarter. Accountemps had revenues of $416 million, up 17% on a same-day basis from the first quarter of 2006 and up 3% sequentially. Accountemps is our largest staffing division, and operates in 357 offices worldwide. Accountemps makes up 38% of company revenues.

OfficeTeam revenues were $208 million in the first quarter, an increase of 12% on a same-day basis from the first quarter of 2006, and a decrease of 1% sequentially. OfficeTeam is our high-end administrative staffing division, which began operations in 1991. OfficeTeam has 301 locations worldwide and represents 19% of company revenues.

Revenues for Robert Half Management Resources were $145 million in the first quarter, up 21% on a same-day basis from the first quarter of 2006 and up 2% sequentially. This division, which was introduced ten years ago, places senior level accounting and finance professionals on a project basis. Robert Half Management Resources has 142 locations worldwide, and makes up 13% of company revenues.

First quarter revenues for Robert Half Technology were $99 million, up 17% on a same-day basis for the first quarter of 2006, and flat sequentially. This division places IT professionals on consulting and full time basis and accounts for 9% of company revenues. Robert Half Technology was introduced in 1994, and operates in 111 locations worldwide.

Our permanent placement division, Robert Half Finance and Accounting had revenues of 99 million in the first quarter. This is up 31% from the first quarter of last year, and up 9% on a same-day sequential basis. This business was established in 1948 and operates in 357 locations worldwide, yet accounts for 9% of total revenues. First quarter revenues for our international staffing operations were $218 million, an increase of 36% from the first quarter of last year, and an increase of 10% sequentially on a same-day basis. On a constant currency basis, these growth rates were 28% versus the first quarter of last year and 9% sequentially. We have staffing operations in 99 locations and 17 countries outside the U.S. International staffing operations represent 22% of total staffing revenues.

Revenues for Protiviti were $130 million in the first quarter, up 7% from one year ago and down 14% sequentially from all time high fourth quarter 2006 revenues. As in prior years, the first quarter experienced seasonal moderation in demand as clients turned their attention to the annual financial close and year end testing performed by their external auditors. In addition, the uncertainty surrounding pending changes to Sarbanes-Oxley regulations caused many clients to reduce the scope of outstanding 2006 compliant engagements and delay the start of 2007 engagements. Protiviti was established in May of 2002, has 57 locations in 15 countries, as of March 31. Earlier this month, we announced the acquisition of PENTA Advisory Services, which provides restructuring and insolvency services, litigation, and bankruptcy-related tax accounting and administrative services. This added locations in Baltimore, Maryland and Richmond, Virginia to our office count. Protiviti accounts for 12% of RHI's total revenues. Its international operations represent 26% of Protiviti revenues.

Turning to gross margin, first quarter gross margin in our temporary and consulting staffing operations was $320 million or 36.9% of applicable revenues. This compares with 36.8% of revenues for the first quarter of 2006, and 37.2% of revenues for the fourth quarter of 2006. The sequential decline relates primarily to the fourth quarter 2006 reduction in workers' compensation accruals which did not repeat in the first quarter of 2007. Overall staffing gross margin was $419 million for the first quarter or 43.3% of staffing revenues. This compares to 42.6% of revenues in Q1 2006, and 43.2% of revenues in Q4 2006. The sequentially lower temporary and consulting margins were offset by a higher mix of permanent placement revenues.

First quarter gross margin for Protiviti was $42 million or 31.9% of Protiviti revenues. This compares to 35.5% of Protiviti revenues in Q1 2006 and 38.8% of revenues in the fourth quarter of 2006.The lower gross margin percentages relate primarily to lower staff utilization rates, due to lower revenues.

Turning to selling, general and administrative costs, staffing SG&A costs for the quarter were $311 million, or 32.2% of staffing revenues. This compares to 31.2% of revenues for the first quarter of 2006, and 32.3% of revenues for the fourth quarter. SG&A levels remained relatively high during the quarter due to the higher mix of permanent placement activities, as well as continued additions to our internal staff. Protiviti and SG&A costs for the first quarter were $37 million or 28.5% of revenues. This compares to 25.6% of revenues in the first quarter of last year, and 25.4% of revenues in the fourth quarter of 2006. Higher costs were primarily due to international expansion and infrastructure expenses.

Operating income in the first quarter from our staffing divisions was $108 million, or 11.2% of staffing revenues. The temporary and consulting divisions contributed $88 million of this amount or 10.1% of applicable revenues. First quarter operating income for our permanent placement division was $20 million, or 20.4% of applicable revenues. First quarter operating income for Protiviti was $4 million or 3.4% of revenues for the business unit. Regarding accounts receivable at the end of the first quarter, accounts receivable were $561 million, with implied day sales outstanding or DSO of 46.5 days compared to 45.6 days at the end of the first quarter.

Now turning to guidance. We observed the following trends in the first quarter, and the first couple of weeks of April. On a same-day sequential basis, temporary and consulting revenues were down in January, flat in February, and up in March. On a same-day sequential basis permanent placement revenues were down in January, up in February, and up again in March. During the first week of April, revenues from our temporary and consulting businesses were up 17% compared to the same period last year. For the first two weeks of April, revenues from our permanent placement division were up 20% compared to the same period last year. We would remind you that it is difficult to assess perm trends over such short periods of time.

With respect to the second quarter, we offer the following guidance. Revenues, $1.1 billion to $1.13 billion. Earnings per share $0.40 to $0.43. 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 will turn the call back over to Max.

Thank you, Keith. Overall, we were particularly pleased with the year-over-year and sequential revenue growth in our financial staffing divisions during the quarter. The unemployment rate in the United States declined to 4.4% in March, and we continue to see demand for highly skilled talent, particularly in accounting and finance. We are optimistic about the business for a number of reasons, economic and demographic trends are placing a premium on skilled labor in our specialty areas. Looking ahead, staffing shortages are expected to increase as more baby boomers retire. This is a global phenomenon and one that we believe will benefit our staffing operations not only in North America but outside of it as well.

The overall U.S. economy is reasonably strong, and growth in global markets bodes well for our international offices. The emphasis on internal controls, transparency in financial reporting and corporate governance has created a more demanding business environment. Most Corporations have responded by strengthening their controls infrastructures and this has produced accounting jobs that didn't exist just a few years ago. Protiviti has continued to broaden its service offerings and its client base.

Protiviti celebrates its fifth anniversary in May, and has become a recognized leader in internal audit and business and technology risk consulting during these past four and a half years. The quality and deep experience of the Protiviti professionals, which we have been careful to maintain, has been well received by our global client base. We have highly recognizable brand names and an outstanding reputation in our specialty fields, a very good track record and an experienced team in place in our branch and corporate locations. For all of these reasons, we think the business is well-positioned for the future.

At this time, Keith and I would be happy to answer questions, we would ask, as usual, that you try to limit yourself to one question and a single followup as needed. If you have additional questions, we will certainly try to return to you later in the call.

[OPERATOR INSTRUCTIONS]. Our first question comes from Andrew Steinerman with Bear Stearns. Go ahead, please.

Good evening, gentlemen. On Protiviti, could you give us the intraquarter trends and the outlook for the direction of gross margin?

Okay. Andrew, first let me make some prospective comments on Protiviti, and then I will talk about the trends you talked about. First of all, remember that the first quarter comes on the heels of the best quarter Protiviti has ever had. The first quarter was still the third highest quarter revenue Protiviti has ever had.

Remember that we've also experienced seasonality in the past. Two years years ago, Protiviti was down 12% sequentially. Last year it was down 5% sequentially. This year it is down 14% sequentially. Clearly there is a first half, second half, busy season, seasonality trend that's evolving. As clients focus on their 10-Ks, as they focus on getting through their controls and financial statement audits, they don't want to focus on internal audit and they don't want to focus on the coming years' SOA compliance.

The pending new regs gave clients another reason to delay the start of their 2007 compliance, particularly when the expectation is that less work will be required. As an example, our external auditor, PWC, is telling their clients and us as well to expect somewhere between 15 and 20% lower fees as a result of the currently proposed regs. As you remember, in mid-to late December the SEC and the PCAOB issued guidance both for management and auditors that is expected to be enacted in May or June, which is the current timetable. I think the good news is that Protiviti grew its consulting services outside of SOA nicely during the quarter. They saw demand in IT application controls, business continuity, anti-money laundering. All of these, however, are smaller engagements, generally speaking, than the SOA engagements they replaced.

The good news further is we have more scheduled work as we enter the second quarter than we had scheduled work as we entered the first quarter. That said, just because it is scheduled doesn't mean you always work it as we found out in the quarter just ended. On the trends we're talking, Andrew, I would say we started January in Protiviti about how we would have expected. Nothing great, given that it is right after the heels of year end. February was a little softer than we expected, and March was a lot softer than we expected.

It was a combination of we had some large accounts that were still finishing up their 2006 compliance that were emboldened by the new rules and basically said, we think we've done enough, we think we're compliant, and because the leverage with the outside auditors has changed, they basically said to the auditors, we're done until you prove it otherwise. Further, as I said earlier, we had clients where we had commitments to start on 2007 compliance work where they said let's hold off, let's see that these new rules are finalized, and let's then reassess where we are. The combination of those two things drove the trends we saw during the quarter.

Right. That's fair. Just one follow-up. If in fact that SOX fees to all companies is down 15 to 20%, is that really such a different trajectory than we were on? Haven't we had a couple of years already?

The truth is if it is ultimately going to be a 15 to 20% reduction, that's not that different than we expected. What's that different is kind of the abruptness with which it caused clients to pause during the quarter.

Right. So you're more concerned about the immediate effect of the short-term pause that we don't know, we have to see, and then if it ultimately comes out to be efficiency is 15 to 20%, that's -- we've been on that pathway for awhile?

That's correct.

Thanks for the comments.

That's correct. I would also say that if you look at RHI globally as an organization, less than 10% of RHI's revenues relate to all forms of Sarbanes-Oxley. That's where it is directly attributable to Sarbanes-Oxley. It is less than 10% of the total. Clearly Protiviti is greater than that, and clearly with Protiviti's cost structure, margins are magnified or margin changes are magnified with revenue changes.

Okay. Thank you very much.

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

Good afternoon. Keith, I was wondering in light of the surprise here in terms of Protiviti, would it be possible for you to give us some color in terms of the utilization rates where we stand today and how that has evolved over the past few quarters?

Well, we've had a longstanding policy not to give the rates per se. Clearly the utilization rates were down this quarter, some of which was expected, some of which was not expected. Again, as we move into the second quarter, if we look at last year, the U.S. was down sequentially in the second quarter last year. International operations more than made that up. In the guidance we gave both from a revenue and an earnings standpoint, we're assuming a range of somewhere from Protiviti grows sequentially by a few single digit it percentage points to Protiviti goes down sequentially by a few percentage points, and again the margin impact of that is pretty much the same as the revenue impact from that.

Okay. All right. That's very helpful. Thank you. And I am not sure that you've ever shared any client concentration metrics with us either in terms of Protiviti. Is that something you would be able to talk to us about as well?

We've not given specifics, but I think you can be comforted to know there is no meaningful client concentration in Protiviti, meaning there is no one client that makes up a meaningful percentage of their revenues.

Let's say the largest client is less than 5%, for example?

That's fair.

Okay. All right. And then I know that there have been a few small acquisitions at Protiviti. Is it possible to quantify how much in aggregate that's added, that he added, that's contributed to your 7% year-on-year?

It is a very small portion of the total.

Okay. All right. That's fine. Thanks very much.

Our next question comes from Jeff Silber with BMO Capital Markets. Your line is open.

Thanks. A couple questions about internal head count. Given the utilization rates in Protiviti, is there any thought of potentially letting go some of those folks or moving them onto other types of engagements if possible?

Jeff, there is no thought of letting go of anybody. Again, we see this as a temporary -- I am struggling for what the word is, a short-term pause on the part of clients while they understand what 2007 Sarb-Ox is going to look like, coming at a while when you're otherwise seasonally somewhat soft anyway, and so quite frankly we expect the second half of '07 in Protiviti to pick up, which is essentially its busy season like it has in the past. We think it would be absolutely the wrong thing to do to lay anybody off. Again, we still made money during the quarter. Quite frankly, if we had to, if you look at this revenue level, you don't have to look back many quarters to see we can make very good money at this revenue level if we conclude that that's as good as it gets. We're far from concluding that as we sit here today.

That's great. In terms of the -- sounds like you did more hiring on the staffing side. Was that on the temp side, the perm side, was it mixed between the two?

It was a mix between the two. I would say the robustness of the perm market let us incorporate those new people into our organization with very little impact on the comp ratios. The reason that that the margins are down a little bit sequentially is we're more aggressive in the way we accrue their bonuses in the first quarter because their bonus plan restarts on January the 1st where as on the temp side, we were a little more aggressive on the hiring as we said on the last conference call, and our per desk productivity went down a little bit because of that.

Our plan as we go into the second quarter is to continue to hire. Everything we're hearing anecdotally from our field people, what we're seeing generally on the staffing side of our business, it was very strong. If you look at the quarter just ended, as we said on the last call, we started January very slowly. January clearly was soft. February picked up steam. We had an absolutely fantastic March in the staffing business. Those March results were pretty much confirmed, particularly on the temp side the first week in April. We feel very good about the progress that we saw over the course of the first quarter on the staffing side.

That's great. I will sneak in a quick number question. What was stock based comp for the quarter and what kind of share comp guidance are you giving for the second quarter?

Stock-based comp for the quarter has two components. That related to options was $2.6 million. That related to restricted stock is $12.3 million. On share count guidance we would observe that of the 2 million shares we purchased during the quarter or the quarter only got the benefit for half a million of those which means there is 1.5 million share benefit to come.

Okay. Thanks a lot.

Our next question is from Matt Litfin with William Blair & Company. Go ahead, please.

I also have a Protiviti question. Can you expand a little bit on the international expansion and infrastructure spending you're doing? Expand a little on each of those, and then maybe talk about how long you expect that investment spending on both of those to continue.

Matt, as we've observed in a couple of prior calls, the international spending currently is more about getting to critical mass where we've already physically opened a location. We've clearly slowed down the number of locations we've added because we've got to that minimum footprint we need to service our global accounts. We still are hiring aggressively where we already opened, and therefore that'sts the infrastructure costs you see as far as how long that continues, again, we'll do the right thing for the business to the extent good people are available. We will hire them, but it should relatively speaking not be as significant as we go forward as it has been in the past and therefore should moderate somewhat.

Okay. My other question is also on Protiviti, how much if any utilization level at Protiviti affect the compensation levels of the consultants in a given year, and are you happy with the way the consultant leverage pyramid is currently?

When we're talking consultants, I presume you're talking below the managing director level. They have compensation plans that tie directly to their utilization rates, and if their utilization rates are lower, their comp plan pays out a lower amount. Similarly, the managing director comp plans include an element for their own individual performance as well as Protiviti wide performance, both of which flex when utilization rates decline like what we're talking. As far as the leverage model, we would say that if anything, we would like to have a larger component at the bottom of the pyramid than we currently have, but that's something that has to evolve over time. It is still very, very competitive for young staff people in this business not only from the other accounting firms but private industry firms that are looking to reduce costs in Sarbanes-Oxley by doing it themselves versus having consultants do it, and our people are prime targets for those companies. The good news is that further entrenches us with those companies as clients. The bad news is you have a short-term disruption in your own staff.

Great. Last one, can you comment at all on employee turnover within both the temp and perm side of the business as well as Protiviti? Thank you.

I don't think there is any new news on the staffing side as we said many times early on, there is a lot of turnover after a couple of years there is virtually none. I don't think there is any new trend there. On the Protiviti side, I would say if there is any trend we clearly see more clients looking to hire our people as I just observed, and described why. It is not like it is a huge shift from what it was 90 days ago, but it has an impact.

One of the advantages of size on the staffing side of the business, Matt, is simply you can offer a lot of career advancement opportunities to people. As Keith has noted and as we said in many prior conference calls, and I am sure I talked about it, the first two years are tough. It is a demanding team, but people that do well during that period have a lot of opportunities both geographically and in terms of management opportunities, so our track record after that first couple of years is very good on retention.

Great. Thanks.

Our next question comes from Brandt Sakakeeny with Deutsche Bank.

Thanks. Good afternoon, Max and Keith. Just want to drill down a little bit more on the momentum through the quarter. Was it consistent in the U.S. and in Europe, or did you see a difference, and I guess also, too, within our specific temp businesses and without getting too granular, did you see any big material difference between say how OfficeTeam behaved and also say Management Resources?

Well, traditionally which was generally the case again, OfficeTeam and Technology have a slower start in January and had a little tougher time catching up in March than does Accounting and Finance because they don't have the traditional Accounting and Finance busy season. As you go into the second quarter seasonally, what typically happens because your past the busy season, Accounting Finance seasonally doesn't do as well, but OfficeTeam and Technology typically do better as they worked out of their slow January.

Yes. But holding seasonality constant, I guess, if you compare the first quarter this year the way it behaved and April versus first quarter last year, any differences there? I guess that's what I was asking.

This year March was stronger than a year ago March. As you look at how March participated in the quarter for staffing.

Okay.

We come into the second quarter with more momentum this year than we have last year.

Interesting. Okay. And then also, Keith, with respect to the Europe U.S. difference, I think you said your constant currency growth in Europe was high 20s, 26, 27%.

Generally speaking they stronger across the board. That's particularly true on the continent and as well as in the U.K.

Okay. Perfect. Final, just a quick number. Can you give us a CapEx update for this year?

We talked last time. We were in the $100 millionish range, and we're still in that range, and we talked about how we were replacing our pay bill, temp payroll system in PeopleSoft with a new version, our version was like nine years old. That's the biggest discrete piece of that, but we're still at the $100 million range.

Okay. Great. Thank you.

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

Thanks. Just following up on the Sarbanes-Oxley question, I know you said you think what you saw this quarter was more of a pause than something that has implications for long term growth. Can you elaborate on why you think that, because intuitively it would seem that if these Sarb-Ox rules were relaxed that generally demand would go down, and I imagine you said this already, but what percent of your revenue is Sarb-Ox?

The good news with the pause is there ought to be more work left the balance of the year. The bad news about the new regs is based on currently proposed regs, using a third party PWC as one example, they think it is going to be down 15 to 20%. That's a reduction percentage that we pretty much counted on anyway. So therefore there is no news there. It is just how it all happened to hit in this quarter. We said earlier that our RHI-wide Sarb-Ox percentage, be it year one work or ongoing work is less than 10%.

Okay. Can you just reiterate long-term growth in margin goals for Protiviti?

Our long-term growth and margin goals would be that Protiviti ought to grow at least 20% a year and they ought to have mid-teens operating margins. I know it didn't happen this quarter, but our long-term confidence in Protiviti is not shaken one bit by this quarter. They have great people. They have a great reputation in the marketplace. I would encourage every one of you to talk in your local marketplace about how Protiviti is positioned versus the big four and versus some other smaller providers in this space.

Thanks.

Kelly, on your first question, just a quick footnote to Keith's remarks, PW speculated 15 to 20% and so forth in terms of the new rules. It is pretty obvious that no one knows for sure what will happen. We think that's an educated guess, and I think what Keith was trying to say is that for some time we've been transitioning away from Sarbanes-Oxley work in any event, so if in fact it is a 15 to 20% rate, that's probably in the range of what was expected in any event, but obviously we don't know for certain. No one knows what's going to happen, we'll have to stay toned and see what's done.

Relative to 18 months ago, Protiviti's exposure to Sarbanes-Oxley is just over half as a percent of its revenues, what it was 18 months ago. There has been a lot a lot of transition already into internal audit and into these other consulting services.

Okay.

That continue to grow during the quarter as I mentioned.

Okay. Thanks a lot.

Our next question is from Chris Gutek with Morgan Stanley. Your line is open.

Keith, just wanted to follow up on a line of questioning on Protiviti. It certainly makes sense that as the rules change for big companies you would see a drop off, or further drop off in demand there around the regulatory changes. What about the notion that the exemption for small market cap companies may well go away at least an unaudited base this year and audited base for financial controls next year, not so much Protiviti but the other core businesses have been very well positioned with small companies. Isn't that a significant offsetting opportunity this year and next?

Well, I guess our view would be because this year if the small caps still have to comply by December which is the current proposal, it is an unaudited compliance, and the audit is yet a year hence, and so what we've seen frankly around the globe is without the audit requirement, there is not near as much work as there is once there is an audit requirement. I think you're exactly right that we're very well positioned in staffing to help the smaller companies, but our view is until the audit requirement is effective, that's probably not a huge demand driver, but it would be a driver in the future.

It is certainly a net plus but it is tough to quantify exactly how much of a plus it is and when exactly it is going to hit. Overall, it is obviously a plus.

A couple quick ones. Is there any weakness in pricing you're seeing on the Protiviti side given the regulatory changes and the demand drop off where you think the gross margins can hold at going forward can hold at historical levels?

I think because of the market is still understands how competitive it is to get people, there hasn't been any large impact on pricing to this point.

And then finally, broadly, not just Protiviti but broadly for the Company, given the macro uncertainty, why the strategy still aggressively hiring internal staff and aggressively driving growth? Why not hedge a bit and dial back and let the operating margins float up a bit at this point in the cycle given the macro uncertainty.

Our view has been and this is how we run the business for a long time is that to the extent we try to anticipate slowing growth and we dial back our internal hiring, I can guarantee you our growth will slow down. It will be self-fulfilling. Our thought is we will continue to hire as long as we see underlying strength out in our field operations until such time it is obvious that's not the case and at that time we will right size our staff accordingly. Otherwise, we would essentially anticipate slower growth and make it happen internally.

Right. Okay. Thanks.

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

Thank you. With respect to Protiviti, as you talked about the slowdown or the pause, I guess from clients, should we expect this to be kind of a new seasonality trend for Sarbanes work as we go forward so next year to kind of see the same level of magnitude of normal seasonal downtick and but then also clients probably likely to take a pause or something unique around the new regs this year that makes this a one-time issue in terms of magnified seasonality?

Again, we've already seen seasonality in this business. As I said earlier, two years ago down 12% sequentially, last year down 5%, this year down 14. I think one could easily conclude that there is going to be more seasonality including with this Sar-Box department as we go forward. In fact, we're talking internally about the first half of the year is the non-busy season, and the second half of the year is the busy season, and there are all types of strategies you can employ to cost shift to deal with that.

Okay. And so if that's the case and you certainly sound comfortable that this is a pause and you're going to see the pick up in the second half, then is it fair to assume that you guys still are looking for 20% growth for the full year for this business, just obviously second half loaded?

Again, we were asked what's our long-term growth expectation. We've never given specific guidance out more than a quarter, so when I say long-term, I am talking three to five years is the expectation that it would be in the 20% range.

Okay. And then lastly, just on you made the comment that as a percent of the business, the Sarbanes work is about half of what it was eighteen months ago.

A little more than half, yes.

Okay. Should we consider that to still be the trend in the next eighteen months given what you're doing with internal audit and some of the other stuff to be down another 50% as a percent of total business?

Again, that's largely a function of where do these SEC, PCAOB roles end up, and based on what we know today and based on what's been proposed today and assuming that's where they end up, I wouldn't expect the fall off over the next eighteen months to be any worse than that. That said, if they change the rules, if they relax the rules yet again, all bets would be off.

Okay. Great. Thanks for the color.

Our next question comes from Mike Fox with JPMorgan. Go ahead, please.

Thanks. Good afternoon. I just had a question about one of the points you brought up about Protiviti, the fact that it is the third highest quarter, and the revenue level is pretty consistent with the second quarter of '06, but the operating margins are significantly lower. Can you just kind of quantify or give color around how much of that change in margin is due to utilization and how much is due to international expansion?

It is a combination of the two, and we've never broken out the components, but clearly there is a meaningful component that relates to both.

Okay. And then with regard to the utilization, have you guys gone more to permanent full time people with Protiviti and less utilization from Management Resources, and has that caused any type of inability to manage the utilization rate?

If you look at Protiviti's utilization of contractors from Management Resources that peaked a couple of years ago in the quarters where first year compliance I think was December '05, maybe I am off a year, but we still have a tranch of our staff in Protiviti that's contractors. It is not what it was two years ago, and therefore there was more a margin impact from the revenue fall off. As we move forward, we will look first to see whether there is an opportunity to work more overtime during the busy season and give more time off during the non-busy season. Further, we'll look to work for contractors into the mix again to the extent we settle into we've got this first half of the year that's not the busy season and the second half of the year that is the busy season. There are many ways we can manage the costs around that. If the business does become more seasonal, do you think it could have a permanent impact on the operating margin on an annual basis or do you think it will be able to manage around that completely? If it is just seasonal that says the margins are depressed the first two quarters and they're out sized the last two quarters. The seasonality shouldn't impact the full four quarter operating margin.

Okay. Great. Thanks.

Our next question comes from Jeremy Davis with Credit Suisse.

Building off the last set of questions wonder if you can comment on management resources, haven't had too much commentary around that one yet, but it continued to do pretty well during the quarter despite the softness that at Protiviti. Is there risk to the demand for management resources as we look into the next quarter just given the first half softness of related to the Sarbanes issues and Protiviti?

First remember that most of the management resources clients are small and little-sized businesses not fortune 1,000 businesses, big difference there. Also remember that during the first quarter management resources is participating in the additional demand as companies close their books, get through their audit, so in the second quarter traditionally post that busy season accountemps and Management Resources seasonally is not as strong, but for the first quarter both Accountemps and Management Resources benefit by the fact that companies are closing their books and need help doing so.

Okay. Understood. And then just follow-up, could you remind us if there is a revisiting the workers comp policy here in the second quarter, if there is an adjustment that may benefit Q2 gross margins?

Well, we will do another actuarial review which we do twice a year in the second quarter. For the last couple three years those have resulted in a positive adjustment. There is no assurance that it is going to be another positive adjustment. Our guidance essentially assumes that there will be very little adjustment.

Okay. Thank you, guys.

Next question comes from Mark Marcon with Robert W. Baird. Your line is open.

Good afternoon. Just to put a point on one thing, this -- your Protiviti revenue everybody is concerned about what's happening on the Sar-Box side and there are a lot of questions around this, but I am wondering why you can't tell us relatively in the straight forward manner how much of Protiviti's revenue at this point does come from Sar-Box.

We've given you RHI's consolidated percentage. There are recruiting implications, client implications. There are other implications of being more specific, competitive implications. We have competitors on these calls. We have clients on these calls. We have employees on these calls. There are some reason why is we don't get more granular. That we told you is that less than 10% of the company and let's not forget the Company in total grew its revenue 16%, the Company in total grew its earnings per share 11% this quarter notwithstanding what happened in Protiviti. We couldn't have done that if there were a bigger companywide exposure to Sar-Box than we have. And how much Sar-Box exposure do you think you have in the rest of the other divisions? Clearly Protiviti has the largest Sar-Box exposure. OfficeTeam has the least Sar-Box exposure. When you put them altogether, it is less than 10% of the total and declining.

Okay. And in terms of the seasonality, just to make sure I am straight on this, it sounds like what you're basically saying is Q1, Q2 are going to -- from what you can tell at this point should be relatively similar as it relates to Protiviti because of the Sar-Box dynamic and then we'll get the big seasonal bump in the sec half?

That would be our expectation, and again the only thing that can throw a with where it was this quarter and similarly your internal costs or could those continue to creep up as you continue to invest? The business and maybe we even have margin degradation from here? They ought to be generally the same. Maybe they creep up a little, but generally the same. Second half is when we'll see the benefit.

Is there -- Keith, you mentioned when you were talking about the margins, the gross margins on Protiviti, you mentioned it was primarily due to utilization. Is there anything else, have you had to pay your folks more than you've seen a big spike in pay just in order to retain people because of the high level of demand or is that having any impact at all?

I would say no big spike in pay. I think there is continued high demand for our people across risk consulting generally, so we're generally having to pay more, but there is no spike. There is nothing that unusual relative to the past.

Okay. Were there any one-time costs in this quarter that last quarter you mentioned about the pension adjustment. Is there anything that was temporary in nature in this quarter?

I would say on the Protiviti side because of the utilization is lower in the first quarter they train more, and there is costs associated with that training, but that's not a huge item, but generally speaking, no, there is no one-time costs. The tax rate was actually a little bit lower for the quarter because we had some credits. We wouldn't expect the tax rate to be quite that low next quarter.

Finally in terms of the people that you have at Protiviti, how easy is it to shift them to other types of assignments? If in the future you see this dynamic is going to exist, can you take some of the folks and move them from one type of work to another or are they fairly specialized?

Well, first of all, the people can certainly move between internal audit and Sarbanes-Oxley engagements, and further, their functional expertise if as an example you're an IT security expert, your skills may be needed on a Sarbanes-Oxley engagement where that's relevant. Your skills may be needed on an internal audit engagement, or your skills may be needed on a pure IT consulting engagement. You can actually go across those demand drivers based on your skills, but particularly at the lower levels I would say that the Sarbanes-Oxley staff and the internal audit staff move quite easily and comfortably between the two.

And final question just on a separate note, R H technology, nice acceleration for the last two quarters in a row. Can you give any color there in terms of what's driving that?

I would say we've probably added head count a little bit disproportionately there. We're seeing a lot of demand in desktop support, in Customer Service Help Desk, and given that demand, we've hired a little more heavily internally, and you're seeing that in the growth rates. We also had a very, very strong March there which we hope will continue into the second quarter. Basically what we're seeing on the temporary side for staffing, what you see for the quarter is a little misleading because it was held down by the slow start in January. You take out the slow start in January, the quarter looks much more robust than if you just look at March it is really robust, and again we feel like we actually have more momentum in staffing going into the second quarter than we had in the first first.

I told you it was my last question, but I just -- you brought something up there.

We'll have to make this your last question. I think somebody in the room just counted number eight.

I apologize. This is what you said about March really picking up, why do you think that happened?

Why do I think that happened?

We're not seeing data points from an economic perspective that would necessarily suggest that, so why do you think things really picked up?

I don't have a good answer.

Would be purely speculative.

I don't have a good answer.

Okay. Thank you.

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

I was wondering if you can comment about tech related Sarbanes-Oxley system development and deployment and if there was any impact on those kinds of projects towards the end of the year given the outlook for some changes in the rules? Thank you.

Yes, they were also impacted as Sarbanes-Oxley revenues generally were impacted. I am not sure they were necessarily significantly better or significantly worse, but clearly impacted. It is just a component of our Sarbanes-Oxley offerings that virtually every engagement has some portion of.

The general IT market, would you describe that as one of the firmer markets or how would you characterize that relative to --

As I said earlier, the at least at the desktop support Help Desk level we would see it as a bit firmer, and we've hired a bit heavier to reflect that.

And was that a relatively based on that comment a relatively robust area within perm?

It did fine in perm reges but perm is so accounting and finance dominated, I am not sure it makes a huge difference.

Thank you very much.

Our next question comes from Peter Carrillo with Citigroup.

I have a bigger picture question. You said a moment ago two callers ago you mentioned or hinted to March being potentially sort of a nicer things happen and maybe can carry over and yet your guidance suggests at best you'll reach the first quarter level and EPS side but the most of the guidance on the EPS side is below what we just saw. Can you reconcile those two?

We gave -- let's talk revenues for starters, right, on the staffing side at the low end we kind of assumed the full quarter sequential growth rates repeat, and at the high-end, something closer to the March much more robust sequential growth rates repeat. The reason the earnings per share guidance is more muted than that it is because we built in some cushion for further Protiviti declines. As I said earlier, the range we gave there was that Protiviti might be up a few percentage points in revenue and it also might be down a few percentage points in revenue sequentially. Because there is a large margin impact to those revenue swings, we built in some conservatism to the earnings per share amounts. If you look at the quarter just reported, we actually made the quarter from a revenue standpoint at the low end, but it was the revenue mix i.e. less Protiviti that impacted the margins.

Okay. Great. Thanks.

Your next question comes from Gary Bisbee with Lehman Brothers.

Thanks. When we look at within Protiviti the businesses that are more the business and IT risk consulting, do those businesses face similar crowding out early in the year as some of the more financial related people or is that just happening within the finance portion of Protiviti?

Most of our clients are CFO-centric, and to the extent CFOs are focused on getting their 10-K filed and getting the auditors out the door. It has an impact. It is not as noticeable in the non-Sar-Box internal audit area, but it definitely still has an impact.

Thanks. You've done a bunch of real small M&A transactions within Protiviti I guess to expand the breadth and service offerings. Do you have a desire and if so do you see any targets to do larger deals than you've been doing to more aggressively diversify that business?

We look at deals of all size and based on their merits decide whether to do them. If you look at our twenty-year history, we clearly our style is to do smaller deals and grow thereafter organically, but we don't just look at small deals.

Okay. And just lastly, I think you mentioned earlier that you might have seen somewhat of an uptick in the temp to perm conversions and can you give us a sense where that is as a percentage and how that may have been impacting the margins?

Sequentially stayed about the same. There wasn't much movement there. I think if you take a longer cycle perspective, temp to perm conversions as a percentage of the total still are not back at where they were in the last cycle.

Okay.

Where as perm has come back as a percentage of the total, temp to perm has not which is a little bit perplexing.

So the -- when that happens, that's obviously or I shouldn't say obviously, but that would be a positive?

No question, no question. To bring that back to prior peaks would have a positive impact to margins. Okay. Thanks a lot.

We're nearing the top of the hour. Our final question comes from Jim Janesky with Stifel Nicolaus. Go ahead, please.

Max, you made a comment or Keith did, I forgot, about continuing to hire and that would be self fulfilling if you stopped hiring and it would slow down your growth rate. Can you if I have us an idea of just how far out either a slowdown or an acceleration of growth you folks kind of start talking about and see internally and then make adjustments accordingly?

Well, Jim, there has never been a huge amount of visibility in this business, and therefore you kind of talk to your field people about what kind of order flow do they see, what kind of candidate flow do they see, candidate sendouts. There are a lot of internal metrics that we can track, but again there isn't a long lead time or a long visibility time attached to that, and there never has been.

Jim, keep in mind that we estimate we do business let's focus on the United States for a minute, with roughly 11% of the targeted companies that we would like to to do business with. That may be the largest market share in our accounting and finance segment, but it is still not a very big share. Our goal is to continually expand our market and to grow the business. Unless we see definitely signs of slowing, which we don't see currently, our goal is to keep expanding. So we have to be a bit of a surgeon as I said before, and we're certainly capable of making mistakes, but in general we think that if we're going to grow and keep expanding and building out our market share we have to keep adding qualified people, and if you wanted to talk internationally, there are obviously so many opportunities there and we opened so many offices that everything I said about the U.S. applies even more so there. Again, we watch it constantly, we meet constantly to think about it, but we're clearly in the growth mode right now.

Okay. That's helpful. Thank you. Can you discuss the rationale or the timing behind getting into the bankruptcy restructuring type of practice? I mean you folks have had a good history of recognizing trends, taking advantage of them, for example acquiring the Protiviti folks. Is this something to diversify your revenues and then take the acquisition and grow upon that or if you could just take a look at timing wise why to get into this area?

Well, clearly it is an effort to diversify. Our thinking about why now is because we found a group of people were we're comfortable with primarily, but as you know in the bankruptcy restructuring cycle, this is kind of a low cycle for that business, and our hope is we're buying during the low cycle.

Keep in mind that Protiviti already had a presence in this business, Jim, so while it is a diversification move, it is certainly in addition to what we already have. We think we know enough about the area to know we like it, that the whole forensics area is one we're interested in expanding as we said before.

With that we'll wrap up today. We appreciate your interest and and thanks for your time today.

This concludes today's teleconference. A taped recording of this call will be available for replay beginning at approximately 8 p.m. eastern daylight time on April 19th and ending at 8 p.m. eastern daylight time on April 26th. The dial in number for the replay is 1-800-283-8520, or for outside the United States, +1-402-220-0870. Once again, the number 800-283-8520 or for outside the U.S. 1-402-220-0870. The conference call also will be archived in audio format on the Company's website at www.rhi.com. Thank you for your participation.