羅致恆富 (RHI) 2007 Q3 法說會逐字稿

Welcome to the Robert Half International conference call to discuss third 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. Good afternoon, and thanks for joining us as we review our third quarter 2007 financial results. Here with me today is Keith Waddell, our Vice Chairman, President, and CFO. Before we get started, I would like to remind everyone that comments made on today's call contain predictions, estimates and other forward-looking statements representing our current judgment of what the future holds. These include words such as forecast, estimate, project, expect, believe, guidance, and similar expressions.

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

Now let's review the third quarter. Third quarter revenues were $1.18 billion, an increase of 15% from the third quarter of 2006. Income per share was $0.46, compared with $0.43 in the third quarter of 2006. This is a 5% increase over the prior year. Cash flow from operations was $76 million during the quarter, and capital expenditures were $17 million.

Consistent with prior years, third quarter cash flow was impacted by the timing of staff bonus payments, which had been accrued in previous quarters. We ended the quarter with $329 million in cash and cash equivalents. This is after paying a quarterly dividend to stockholders of $0.10 cents per share, or $15 million in total, and repurchasing 3.5 million RHI shares in the open market, at a cost of $114 million. We have approximately 2.2 million shares available for repurchase under our Board-approved stock repurchase plan. In the last three quarters, we have repurchased 9.2 million shares.

Our staffing operations reported strong double-digit revenue growth compared to last year, led by our international operations. Our accounting and finance divisions, including permanent placement continues to perform well. Protiviti benefited from a seasonal uptick in Sarbanes-Oxley, compliance fees, as well as expanded business and technology risk consulting revenues.

At this time, I will turn the call over to Keith for a more detailed look at our third quarter results.

Thank you, Max. Let's first look at company-wide revenues. Third quarter revenues for the Company were $1.18 billion, an increase of 15% from the third quarter of last year, an increase of 3% sequentially. There were 63 days in the third quarter, the same number of billing days as the third quarter of last year, and the second quarter of this year.

Revenues for Accountemps were $444 million, an increase of 18% from the third quarter of last year, and an increase of 3% sequentially. Accountemps is our largest staffing division with 366 offices worldwide. It accounts for 38% of Company revenues.

Revenues for OfficeTeam, our high-end administrative division, were $215 million in the third quarter. This is up 10% from the third quarter of last year, and flat sequentially. OfficeTeam has 314 locations worldwide, and represents 18% of Company revenues. This division was introduced in 1991.

Robert Half Management Resources had third quarter revenues of $157 million, up 18% from the third quarter of last year, and up 4% sequentially. This division places senior level accounting finance professionals on a project basis. It was introduced in 1997, and has 148 locations worldwide. Robert Half Management Resources makes up 13% of Company revenues.

Robert Half Technology revenues were $110 million in the third quarter. This is an increase of 21% from the third quarter of last year, and an increase of 5% sequentially. Robert Half Technology was introduced in 1994, and places information technology professionals on a consulting and full-time basis. Robert Half Technology operates in 112 locations worldwide, and accounts for 9% of Company revenues.

Our permanent placement division, Robert Half Finance and Accounting had revenues of $113 million in the third quarter. Revenues were up 28% from the third quarter of last year, and down 2% on a sequential basis. This business was established in 1948, and operates in 366 locations worldwide. It accounts for 10% of Company-wide revenues.

Our international staffing operations reported third quarter revenues of $256 million, up 37% from the third quarter of last year, and up 9% sequentially. On a constant currency basis, these growth rates were 27% compared to the third quarter of last year, and 4% sequentially. We have staffing operations in 100 locations, in 18 countries outside the United States. International staffing operations represent 25% of total staffing revenues.

Revenues for Protiviti were 141 million in the third quarter, down 1% from one year ago, but up 8% sequentially. As Max noted earlier, Protiviti revenues benefited from a seasonal increase in SOX compliance revenues, as well as expanded consulting services. Notable areas of success included IT asset management, forensic investigations, and new internal audit engagements. Protiviti has 60 locations in 15 countries, established in May 2002, Protiviti accounts for 12% of total RHI revenues. Protiviti's international operations represent 25% of total Protiviti revenues.

Now, let's review gross margin. Third quarter gross margins in our temporary and consulting staffing operations was up $346 million, or 37.3% of applicable revenues. This compares with 36.8% of revenues for the third quarter of 2006, and 37.1% of revenues for the second quarter of '07. The sequential percentage increase is the result of lower state unemployment charges, which offset slightly lower temp-to-hire conversion revenues. Overall staffing gross margin was $458 million for the third quarter, or 44.1% of staffing revenues. This compares to 43.1% of revenues in Q3 2006, and 44.2% of revenues in Q2 2007.

The sequentially lower mix of permanent placement revenues offset the higher temporary and consulting margins just noted. Third quarter gross margin for Protiviti was $42 million, or 30.2% of Protiviti revenues. This compares to 35.6% of Protiviti revenues in Q3 2006, and 32.3% of revenues in the second quarter of 2007. In the United States, utilization rates and gross margins improved during the quarter, even after the impact of July 1 staff compensation increases and promotions. Outside the United States, particularly in Europe, utilization rates and gross margins declined, due to the August holidays and lower SOX revenues.

Turning to selling, general and administrative costs, staffing SG&A costs for the third quarter are $343 million, or 33% of staffing revenues. This compares to 31.8% of revenues for the third quarter of 2006, and 33.0% of revenues for the second quarter. SG&A levels remained high during the quarter, due to the relatively high mix of permanent placement activities, as well as contingent additions to our internal staff, particularly at international locations.

Third quarter SG&A costs for Protiviti were $38.5 million, or 27.4% of revenues. This compares to the same $38.5 million, or 29.5% of revenues in the second quarter of 2007. SG&A costs were flat on a sequential basis, and were higher versus one year ago, as a result of international expansion and infrastructure expenses.

Operating income from our staffing divisions was $116 million during the third quarter, or 11% of staffing revenues. Temporary and consulting divisions contributed $96 million of this amount, or 10% of applicable revenues. Third quarter operating income for our permanent placement division was $20 million, or 18% of applicable revenues. Protiviti operating income was $4 million for the quarter, or 3% of revenues.

At the end of the third quarter, accounts receivable were $628 million, with implied day sales of 48.5 days, compared to 46.8 days at the end of the second quarter. The small sequential increase follows a pattern consistent with prior years, whereby cash collections slow slightly during the summer months.

Now let's turn to guidance. We saw the following business trends during the third quarter, and the first weeks of October. On a same-day sequential basis, temporary and consulting revenues were up in July, flat in August, and up in September. On a same-day sequential basis, permanent placement revenues were down in July, up in August, and up again in September.

During the first week of October, revenues from our temp and consulting businesses were up 13% compared to the same period last year. For the first two weeks of October, revenues from our permanent placement division were up 35%, compared to the same period last year. We would caution that perm trends are hard to assess over short periods of time.

Taking this information into account, we offer the following fourth quarter guidance. Revenues, $1.180 billion to $1.220 billion. Earnings per share, $0.44 to $0.48, and offering this guidance, we recognize that December is a particularly difficult month to estimate. We have learned during our 20-plus-year tenure with RHI, that demand fluctuates in unpredictable ways in the month of December. 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. We experienced continuing demand for skilled professional level talent, particularly in Accounting and Finance. The demand was seen domestically, and in countries where we have operations outside of the United States.

Looking specifically at the U.S., unemployment has remained low by historical standards. It is currently 4.7%. The September Jobs Report from the Bureau of Labor Statistics was stronger than some anticipated, with the addition of 110,000 new jobs, and the August numbers were revised upward also. We viewed this data as confirmation of our view that the labor market remains relatively strong in the United States. We are optimistic about the prospects for our staffing operations and Protiviti, for reasons we have talked about.

We are pleased with the progress for Protiviti during the quarter, particularly in the United States. Protiviti has garnered an excellent reputation among the businesses it serves. We have been able to successfully extend our service offerings, both in terms of the breadth of services we can provide, and in our geographic reach. And the consistently high quality of Protiviti's work has allowed us to expand client relationships once we establish them.

Protiviti continues to transition from Sarbanes-Oxley work, and we are encouraged by the sequential growth achieved by Protiviti this past quarter. On previous calls, we have discussed the secular trends driving the demand for Accounting and Finance professionals, including the focus by companies on strengthening internal controls. This is a global trend, and we believe that as one of the most recognizable names in Accounting and Finance staffing, we are well-positioned to benefit.

Some other reasons for our optimism, in the U.S. we estimate we do business with less than 13% of our target prospects. Many companies here have still never used a professional level temporary, which translates into opportunities to increase our market penetration. Internationally, we believe we also have opportunities to grow market share.

Our financial position is strong, as is our cash balance. We have a good track record of maintaining positive cash flow, whether the overall economy is strong or weak. We have an experienced management team at the corporate level, and in our field offices, and we believe we have the best reputation and most recognizable brand names.

At this time, Keith and I will be happy to answer 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 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. I am going to need a little more explanation on why Protiviti operating margins didn't increase sequentially, even though there was solid revenue achievement, and sort of the same question, as you look into the guidance for your fourth quarter, do you think that is the inflection point for margins? This is just Protiviti.

Okay. So Andrew, Protiviti margins sequentially, it was a tale of two cities, in the United States, utilization increased nicely, margins increased nicely, and pretty much what we expected occurred in the United States.

In non-U.S., particularly in Europe, we had some challenges. The traditional challenges the month of August, which we all expected. What was a bit unexpected was we had two major clients delist that were major SOX clients, and we had a third major client that was part of a, we were on the wrong side of an M&A transaction, where our client was acquired, and therefore we did see margin improvement in the United States, but it was offset by what happened in Europe.

I will make this commentary about it in the United States. Effective July 1st is when we made staff compensation changes for the full year. Protiviti uses a July to June compensation year, so that took what otherwise would have been even higher margins in the United States, but if you look back to prior years, that is not inconsistent.

Right.

As we look to our guidance in the fourth quarter, at the major swing in the margins is what happens to perm, and what happens to Protiviti.

Right.

The perm, we clearly, as the numbers showed, we were up 35% out of the gate, which was very strong, and we were very encouraged by the start we have to the quarter in perm, and but for the fact that December, we have had great Decembers during mediocre years. We have had weak Decembers during strong years. We have had strong Decembers during strong, so December is all over the lot.

And given that, we were somewhat more cautious in our guidance. Further, given the general trends in Protiviti, where clients are getting much more cost effective, more quickly than we expected with their SOX compliance, and particularly testing work, we had some caution in our guidance there.

So essentially the margin swing in the fourth quarter, will turn on what happens with perm and what happens with Protiviti. You have also got the Protiviti, you have got the holidays, which traditionally have a bigger impact on Protiviti than they do on staffing. So coupled with the somewhat uncertain environment about what happens to SOX in Q4, that is how we got the guidance we have given.

Right, but usually Protiviti is still up sequentially, even with holidays, right?

In the United States, the last two years, if you look back, last year, it was up 7% sequentially, revenues.

Yes, and then the year before was flat.

That was disproportionately non-U.S.

Right.

The year before it was flat.

Right.

So our guidance for Protiviti in Q4 at the low end, we have got it flat to up a few percentage points at the high end. We have got it 5 to 7% up consistent with last year.

Right.

But clearly, there will be more margin contribution from incremental revenues in Q4 in the United States, than was the case in Q3, because you have already absorbed the comp increases that were all effective July 1.

Right. Right. So the direction for margin overall for Protiviti is up in those scenarios?

The direction should be up with incremental revenues with Protiviti.

Thanks so much. Appreciate it.

Officially it's our best margin month of the quarter. Excuse me. The best margin quarter of the year.

Okay. Sounds good. Thank you.

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

Thanks so much. I just want to clarify something. I think it was the commentary around SG&A. You talked about, I think it was contention additions to internal staff, particularly international. Was that just Protiviti? Was it the company overall? And if you can talk about some of the internal staff changes, or potential changes in the U.S. as well, I would appreciate it.

Yes, the head count commentary we gave actually was principally non-Protiviti, or our staffing operations. We continued to be very aggressive during the third quarter with additions to head count. It was disproportionally related to perm placement, and within perm placement, that was disproportionally related to international operations. So we were very aggressive, in fact even more aggressive in Q3 than we were in Q2, with head count additions on the staffing side.

You see that quite clearly with the perm operating margins, that are down not only sequentially, but year-over-year. Our hiring plans for the fourth quarter would be to continue to add the staff, but given we have been so aggressive for the past three consecutive quarters, we probably won't add at the same rate that we have added in the last few quarters.

Okay, great. And as a follow-up, kind of shifting gears a bit, looking at the RH Technology business, it looks like that the year-over-year growth has been accelerating the past few quarters. Can you give us a little bit more color of what is going on there?

Well, as we talked about last call, we have cherry picked a handful of markets where we are being much more aggressive with the additions to internal staff, recruiters, sales people, et cetera.

In addition to that, we find the overall demand for IT people, particularly help desk and network administrators, we see a lot of upgrades, refreshes, that require that level of people. So the underlying demand we are seeing at the level we play in IT is quite strong.

Okay, great. That is helpful, thanks.

Thank you. Our next question comes from Tim McHugh with William Blair and Company. Go ahead, please.

Yes. I just wanted to ask about European operations for Protiviti. What is the action plan there, given the loss of those clients and the seasonal impact? Are you properly staffed in Europe? Are you making some changes, or do you see potential work coming down the pipeline that can replace the lost clients?

Well, part of the issue is August, and as you know, a lot of Europe, including our clients, go on holiday during August. So that automatically comes back. To the extent we have lost clients, we are working hard to replace those and we are constantly looking at the skill sets of our existing staff, versus the skill sets of the staff we believe we need to grow the business. It just so happens with the July 1 promotion and compensation cycle, there is a natural opportunity there to adjust your staff to what you think is appropriate, and which has been done.

Okay. And then also, if you could touch on given the share repurchases lately, how your authorization is coming close to ending there, update your thoughts on seeking reauthorization, as well as the capitalization on the balance sheet you seek to prefer, or would like to prefer, or have there?

Well, we discuss with our Board every quarter our stock repurchase efforts and program, and we will certainly continue to do that and it is certainly a strong possibility that we will have increased the number of shares available for repurchase. As it is, we have a little over 2 million remaining, of course, but we will probably seek to increase that. You may want to comment on the other part of the question.

The capital structure, I think we have got a pretty consistent pattern here by many quarters in a row, of taking our cash flow and to the extent it is not otherwise needed, returning it to the shareholders in the form of either dividend or share repurchases, and I think generally speaking, that trend should continue.

Okay. Thank you.

Our next question comes from T.C. Robillard with Banc of America Securities, please go ahead.

Great. Thank you. Is it fair to assume, if you look over the last 3 quarters, SG&A spending has been running about 20% or so year-on-year revenues kind of in the mid-teens. I clearly understanding everything you've talked about in the last three quarters in terms of the aggressive investing particularly on the headcount side, the expansion into Europe.

Is it fair as we look into next year to continue to see that, so basically any type of gross margin improvement you get, we are still really going to be running around kind of in the low 10% range, or for the EBIT, or does this look to be the big head count investment year for you guys, that you're kind of where you want to be as you get into '08, where we could see operating margin expansion?

We are certainly aware that on the staffing side, our SG&A, which is principally compensation has grown faster than revenues, because of our investment in more people. Clearly, it is our hope that over time, that investment gives us an even larger incremental return as the new hires come up to speed.

That said, we tend to be conservative on our guidance as to how much operating income or EBIT margin improvement you should dial in, but it is certainly not our plan to indefinitely grow SG&A faster than we grow revenues.

Understood. I am just trying to get a sense. I mean I know obviously you want to take advantage of the opportunities that you have, and if you guys see growth, it obviously makes sense to invest in growth. I am just trying to get a sense as to, obviously I know you don't do 12-month type of forecasts, but as you do look out past the next quarter, does the environment still look as attractive to you as it has over the past 12 months?

The environment still looks strong as our numbers attest to. Let's take perm as an example. We are down at the 18% operating margin level as we speak, whereas a year ago we were at 22, 23. So to just return to where we are, where we were, there is a fair amount of upside right there alone. And again, we are quite aware of that.

Then just real quick, a sequential downtick on the CapEx side, is that a level we should expect going forward, was there anything specific that kind of came off or that you held back on in terms of spending?

It's more timing. We have talked about we are in the $100 million range on an annual basis, and so for timing reasons, primarily it was down a little bit this quarter. It could just as easily be up a little next quarter.

Keith essentially said this, but let me just reiterate it. Certainly one of our goals is to improve the productivity per desk, as people have been with us over a period of time, their experience level goes up, and hopefully their skill level goes up, so we are certainly working on increasing productivity.

Okay, great. Thank you.

Thank you. Our next question comes from Mike Fox with JPMorgan. Go ahead.

Good afternoon, guys. Can you give us an idea what the operating margin was for Protiviti in the U.S. during the quarter?

We have never broken out what the operating margins for Protiviti are between U.S. and international. Quite frankly, we have never broken that out for international as well. I think you would be safe to say they were much higher in the U.S. than they were internationally.

Can you tell us if they are double-digit?

Again, I think we leave it with the comments that I have made.

Okay. Historically you guys have said that, you know, that has been a double-digit margin business in the past, and you expect it to come back to that at some point in the future. Do you still think that that is the case?

We do long-term think that is the case. Clearly over the last few quarters, there has been a more impactful fall-off of SOX revenues than we expected. No question, companies are more aggressively managing their SOX compliance cost that was anticipated. So we are having to run hard to replace that lost revenue with non-SOX revenue, and frankly, we have been very successful doing so, but it is in the backdrop that SOX is falling away more than we expected.

Given that, the utilization rates aren't where we would like for them to be, aren't where they have been in the past, and therefore we are still long-term quite optimistic that we can get mid-teen plus operating margins out of Protiviti, but it is tough during this SOX transition period to do so. Again, the long-term drivers where there are going to be more service providers than just the big four, the long-term drivers of internal audit, is more top of mind, and plays a more important role in companies, which plays to Protiviti's sweet spot. Those drivers are intact.

In the short-term here, we have got this SOX transition to manage through and again, in the United States this quarter, they did quite well. We had some particular challenges in Europe that offset that. We are optimistic that we can deal with that as well.

Okay. Thanks a lot.

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

Hi. Mike Jacobs in for Tobey. What was your overall bill rate and wage inflation?

The rates went up about 7% year-over-year, at around 2% sequentially, up 2% sequentially. That is a little bit of an uptick, from what it had been last quarter, but to us is yet another indication that the labor markets for Accounting and Finance remain quite strong, less you wouldn't see those kind of increases.

Okay, thank you.

Thank you. Our next question comes from Brandt Sakakeeny with Deutsche Bank. Go ahead, please.

Hi, good afternoon, Max. Question on the OfficeTeam, that actually declined very slightly sequentially. I am just curious, I can't find the last time it did that back in this cycle. Is there any indication there that demand is potentially softening in that division, or anything else that--?

I guess first comment, that while we haven't seen negative sequential, if you go back in time, the third quarter typically decelerates from the prior quarters, in large part because clients have the opportunity to directly access college interns, which to some degree comes at our expense. And further, I would say that we are less non-U.S.-oriented with OfficeTeam than we are with the other divisions. So the other divisions get lift from our international operations that OfficeTeam doesn't see.

So I would say the fact that you saw some deceleration, which actually tipped over to be slightly negative in the quarter, isn't that out of line with patterns we have seen in the past. Maybe a little, but not dramatically.

Okay, great. Thank you. And just a quick follow-up. Do you have option expense in the quarter, and also the ending share count?

Let's see, option expense, 2.3 million split, 400,000 perm, 1.9 million temp. Share count, we ended at 160, and the number for the quarter was 162, but let me caution you that the knee-jerk is to say, okay we have got a 2 million share embedded benefit for Q4, which is true. However, we also expect the tax rate to go up in Q4 from 39.5 to 40%, and the two would tend to offset each other.

Okay, great.

I would also observe that if you look at this quarter, third quarter's performance versus a year ago, the tax rate is up quite a bit, which accounts for some of the differential. If you look at a year ago, we settled some tax audits, and we had an unusually low tax rate, and we didn't have that this quarter.

Okay, perfect. Thank you.

Thank you. Our next question comes from James Janesky with Stifel Nicolaus. Go ahead, please.

Yes, good afternoon. When you look at the perm business between the U.S. and international, can you give us an idea of the growth rates in each country?

You know, Jim, we don't give country by country growth rates. We could say that we were the strongest in continental Europe, particularly in places like Germany, Belgium to some degree. We were also strong in the U.K., just not as strong as we were in the continent, but we don't give country by country growth rates. We are relatively new in Asia. It is doing quite well, but from a size standpoint, it is not that impactful.

Okay, and with respect to perm again, just overall, you started off the month of July up 22%, and then said we were down, and then we were up in the prior, or in the following two months, both August and September. Was there something unique to July as you look back, as to why it started off up, but then ended down?

Well, so we are mixing sequential and year-over-year a little bit, so let me try to add clarity.

Okay, thanks.

So for the second quarter, we grew perm 35%. For the first three weeks of July, which we reported on the last call, that growth rate declined to 22%. It is still growing. The commentary we give each quarter and today about in-truck order progress is sequential, so we said sequentially, July was down, meaning it was less than June. That is how those two reconcile, but let me try to finish the point. We started the first three weeks of July, up 22%. We finished the quarter, up 28%.

So clearly, we did better the balance of the quarter, than we did the first three weeks. Our people would tell you that July was our most problematic month, not September, and July related principally to the Fourth of July holidays, which fell on a Wednesday, and the thought was more clients and more people internally took more time off, but if you take away the slow July start in perm, and if you look at August, you look at September, you look at the first three weeks of, excuse me, the first two weeks of October, you actually have a pretty rosy picture for the health of the perm market.

Okay, and, you know, there is obviously, as a follow-up, there is a lot of controversy over the strength of the economy in the United States, and probably less so abroad. But I guess by the, your hiring actions and your outlook for the fourth quarter, say the month of December, even if there were cyclical headwinds, you think that just the underlying trend of the shortage of Accounting and Finance professionals can carry you forward with pretty decent growth rates. Is that an accurate statement?

Well, again, we could speak to look at what happened the first two weeks. The first two weeks were up 35% year-over-year. If you look at our perm job orders, they were the highest in the first two weeks they have been all year. So our company-specific information would tell us that the job market for accounting finance people is pretty robust. Our only caution with our guidance is December is an odd duck, and strange things happen in December, notwithstanding economic headwinds or tailwinds, and that was the principal reason that we hedged with our guidance.

Okay, thanks. That is helpful.

Thank you. Our next question comes from Andrew Fones with UBS. Please go ahead.

Yes, hi. I had a question about the temp gross margin, and the kind of the trend we have seen there. I think in Q2, you were down by 10 basis points year-over-year, and this quarter up 60. Can you kind of explain the impact to [SUE] and the temp to hire conversions, please?

Well, so the biggest benefit to the quarter were lower state unemployment or [SUE] rate. You have got rates trending down. You have got people as the year progresses, less of their payroll gets taxed for unemployment purposes. So all of those things generally mean we have a bit of a smaller unemployment rate late in the year than we have earlier in the year.

On the conversions point, we said they were slightly down, and quite frankly, we have seen conversions as a percent of revenue swing up and down 20 basis points almost every quarter. Some quarters have been up 20 basis points. Some quarters they have been down 20 basis points from a mix standpoint. So it is not unusual, and in fact this quarter they were down about 20 basis points from a mix standpoint, relative to what they were last quarter.

Okay thanks. And then usually you see a pickup in the fourth quarter. Can you give us any comments on your outlook there?

If we are talking margins, I mean generally speaking, the fourth quarter on a same-day basis is quite strong for Accounting/Finance generally. You have got budget season. You have got companies preparing for the year end audit. There is a lot of accounting finance work that happens, which is, makes it a good quarter, notwithstanding the fact that you have two fewer days. Additionally we look at workers' comp twice a year, and that review will happen during the fourth quarter. Last year we got quite a credit from that review. This year, we wouldn't expect as large a credit, but we certainly don't expect any debits.

So I should think about the number being up a little bit, but sequentially, but not as much as last year?

I think that would be a prudent route.

Thanks.

Thank you. Our next question comes from Mark Marcon with R.W. Baird. Go ahead, please.

Good afternoon, Keith and Max. Just wanted to clarify. So if we look at just your temp business, exclusive of SUTA and conversions, were the gross margins up?

They were flat to up.

Okay.

They certainly were not down.

And then can you talk a little bit about, you know, the productivity of your new hires, both on the temp as well as the perm side, and what are you seeing in terms of differences, in terms of people that you are bringing on board now relative, to say a few years ago, in terms of how quickly they can ramp up?

And then what are you seeing with regards to the folks who have been around for a while? Are the salaries going up for those people, the comp has to go up because recruiters are in high demand as well, and does that limit what we can expect in terms of operating margins out of those businesses?

Right. Well, irrespective of productivity, we are clearly having to pay more, because of the competitive nature of the marketplace.

Okay.

For the most part, in Accounting/Finance, our people are former accountants. They understand what the market is, and we have to pay them more. That is irrespective of how productive they are. Then you have got this issue of productivity. Clearly as our numbers indicate, we are not as productive on average today as we were a year ago, because we have a higher proportion of newer people today, than we had a year ago.

Are there major differences in how long it takes us to get a person up to speed today versus a year ago? No. But clearly, there are disproportionally more people in the newer category today, than there was a year ago.

Okay. So the people who have been around for a while, so if you take people who have been with your organization, say for two years, those people are as productive as people who were around for two years a couple years ago. In other words--

There is no dramatic shift there.

Okay. It is not like the labor market's getting too tight, and it just costs so much more in order to recruit people?

No. No.

Okay.

And I would say on the Canada side, not only with respect to internal recruiters for Robert Half, but as well as candidates we place on assignment, generally speaking, we are not having a problem attracting those people.

Great. And then lastly, in terms of your European Protiviti business, how long do you think that is going to take to normalize, what is the goal there in terms of your international Protiviti, because obviously it's--

Our goal would be that it normalizes in months, not in quarters. And again, part of it is August, right? Europe shuts down in August. So this is not some long road back to recovery. Sure, we lost a couple, three larger clients, and that will take a little while to replace, but we are not talking many quarters.

Great, thank you.

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

Good afternoon guys. I just wanted to drill down a bit more on the U.S. Because if I am doing my math right, it looks like you were actually down sequentially if you strip out the international staffing revenues, and we haven't seen that since 2002, and yet you talk about strength. Was it really the July perm results that had that big of an effect to move the needle, or is there something else going on here?

Well, the big impact was July perm, and as you can see, perm overall for the quarter was down sequentially, and so we haven't seen that for quite some time, but quite frankly, it is all about July. And but for July, as I spoke to earlier, we felt like conditions remain quite solid, all the way into the first two weeks of October. So was there some slowing in the U.S.? Yes there was, but it was more perm-driven than anything else.

Okay, great. And then on that point on perm, in terms of the early October results, just scanning through the transcript from a year ago, it seems that you also had relatively low growth in early October last year, so if we wanted to look at things kind of on an average daily basis, how would--?

If you look, if you looked at the first two weeks of every month in 2007, just looking sequentially, we got more job orders in the first two weeks of October than any other month in 2007. So that is not a function of easy comparisons a year ago. That is just looking at sequential activity over the course of this year.

Great. Okay. That is very, very helpful. Just on a point of detail, the share count included in your Q4 guidance?

As we said, it should be down a couple of million shares. That said, that will be offset more than likely by a higher tax rate.

Great. Sorry I missed that. Thank you.

Thank you. Our next question comes from Gary Bisbee with Lehman Brothers. Go ahead, please.

Hi, good afternoon. A couple minutes ago in answering a question, you said you had used the July 1 new year for Protiviti to adjust the staff to what is appropriate. Can you clarify, you know, if you actually reduced the consultant head count in Europe, and if so, you know, by how much?

I guess we don't make overall comments directly responsive to your question. On a market-by-market, product-by-product, industry-by-industry basis, we make those decisions. And again, my only point was it was somewhat convenient that our annual promotion raise cycle happened about this same time.

Let me try just a more macro question on that then. You know, you had several quarters of, you know, far below trend margins in the business. Are there, are there reasons that you wouldn't be more aggressive in shedding head count, you know, is it so difficult to hire new consultants that you don't want to do it now, and you are willing to live through the pain, or has this been more the type of thing where you have been caught by surprise? Obviously if you lose a few clients due to someone being taken private, you can't do anything about it. Is it more that type of thing, or is there some reason?

That is more a nuance of this quarter in one part of the world. We still very much believe in the long-term prospects of Protiviti. We very much believe long-term it is a growth business, and the drive away from big four only, the drive toward internal audit, as I spoke to you earlier, we think those are mega trends that will benefit Protiviti. In the short-term, we have had this transition from SOX to other consulting services that we have had to manage through, that have impacted U.S. utilization rates as well.

So have the margins been challenged for the last few quarters? Yes, but we do think that is something we can manage from as we go forward. We think it would be very short sighted just to all at once say, well because we have got less SOX and we need these other skills for consulting, that we want to trim the SOX people in favor of just getting those with skills relevant to consulting. That seems too abrupt to us. Further, many of the skills are transferable.

Okay, and then if I could sneak one more in, you mentioned firm hiring internationally. Are you willing to give us a little color in terms of where you have made that hiring? So I know Asia is much smaller, but is that a place you are making large investments today, or is it, you know, more continental Europe where you said you have seen good strength?

The largest investments have been in continental Europe. We have been aggressive in Asia, but it's off a very, very, very small base.

Okay. Thanks a lot.

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

Thanks, hi, guys. So Keith, listening to the comments over the course of the call, and just working with the model, it looks to me as if the EPS guidance for the fourth quarter is a bit on the conservative side. You said pretty clearly that December has uncertainties and there are lots of unknowns about the various businesses. Can you elaborate a bit to what extent you might have layered in incremental conservatism, given the various uncertainties adding up together?

I think we were very straightforward in saying the margins for the fourth quarter will depend on perm and Protiviti. Perm has clearly started out of the gate very strong. Whether you look year-over-year or sequentially, perm has started very strong. But for the December effect, we would have been much more bullish in our guidance, but we know based on years of experience, funny things can happen in December.

Protiviti, you have got the December holiday effect, which has some uncertainty attached to it. Maybe exacerbated by you are in this general trend toward, companies are trying to save on SOX compliance costs. So that is why we were more conservative than we would typically be, and that is what is going to swing the margins.

Okay, great. Thanks.

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

Thanks. Just a quick follow-up question. In terms of capital expenditures guidance for the fourth quarter, what are you looking for?

You know, Jeff, it is in the 25 million range, and again, timing can impact it a few million either way. So if it comes in at 22, or if it comes in at 28, you know, don't kill me. It is more timing than somatic.

Okay, great. Appreciate that, thanks.

Thank you. Our next question comes from Mark Marcon with R.W. Baird. Go ahead, please.

A short-term question and a long-term question. The short-term question is, can you talk a little bit about what sort of exposure you have to financial services and at Protiviti, as well as the rest of the business?

There has been a lot of discussion about particularly mortgage-related exposure, and again, because of our middle market focus, Mark, we don't have an outsized exposure to mortgage-related clients. And so we are talking low single-digit as a percent of revenue kind of exposure in that area. So we have some, but it is not dramatic.

And I know your focus is midsize.

Right. On Protiviti, we have more exposure to financial services generally, you know, big banks.

Yes.

But it is not mortgage companies specifically, and even there, it is not, it is not so huge that I would get overly concerned about it.

So I mean when we look at things like what has happened at Bank of America today, or CitiGroup earlier, things of that nature, we shouldn't really get concerned about that as it relates to your business?

I wouldn't get overly concerned. I would say generally speaking, regulated industries, banks included, are bigger users of internal audit services than others are. And therefore clearly we have some exposure there. That said, it is certainly not our largest industry group, even in Protiviti, and it is not something I get overly concerned about.

Okay, and then thinking about from a longer-term perspective, when we think about the margins, and particularly your international growth, as well as Protiviti, where do we think the margins should kind of top out at, or how should we think of goals in terms of during normal economic times, of where the margins should go to?

So as you are well aware, that margins internationally are generally lower than they are in the States. They are better on the Continent than in the U.K. We are trying to focus more on the Continent than we are on the U.K., not that we are not doing nicely on the U.K.

In addition, we are more perm-oriented internationally than we are in the States, which also carries higher margins, so what we are trying to do is have our outsized international growth carry normal U.S. margins, by focusing more on the Continent and more on perm to achieve that. Might there be modest dilution, notwithstanding that, yes, but our objective is that it not be major dilution.

Okay, and so when we think about those normal margins, when productivity levels are normal levels, how should we think about that and your mix of new people versus experienced people?

Let's talk staffing margins of 11 or 12%. If we could keep our overall margins at 11 or 12% with outsized contribution from international growth, we think that is a pretty good day's work.

Certainly it is. What about on the perm side?

Well, perm is a component of what I just described.

Okay, and then Protiviti?

For the ways you keep those international margins overall close to what you have in the States.

Got it. And then--

On the Protiviti side, the margins aren't as different U.S. versus international during normal periods of time.

Okay.

Clearly August holiday and the loss of a couple, three big clients in a given country hurts short-term, but even in our short five-year period of time, the margins internationally haven't been that different than they were in the states. They were this quarter.

Right. I understand that. And so I am just trying to get back to when we think about longer-term--?

I think longer-term, outsized international growth in Protiviti should materially dilute their margins.

And therefore, the goal would be--

Mid-double-digit-plus operating margins for Protiviti consolidated. We have certainly showed in the past are possible, as we have worked through the SOX transition, the margins have been more challenged than that.

But it sounds like we should be getting, we should be getting, from a longer-term perspective, not a quarter or two, but if we look out a year or two, we should be getting to the point where we transition through that, correct?

And Protiviti should help RHI overall margins, not dilute them.

Terrific.

Thank you. We are nearing the top of the hour, and have time for just one more question. Our last question will come from Andrew Fones. Mr. Fones?

Hi. I had two questions, so I will try and keep it very quick. Just on, if I look at international as a percentage of your staffing revenue 25%, perm obviously is a little bit higher than that. You have said you lead with perm. Could I estimate that it would be less than 50% of your revenue though, international would be less than 50% of your perm revenue?

Absolutely.

Okay, and then the second question was just on forensic accounting, can you just kind of give me a quick idea of the types of work you do there, and where you have seen a pickup in revenue?

Well, I think there was one major assignment that actually the client put out a press release that mentioned us, and I am not going to use their name, but there was a major inventory accounting issue, and that has turned into a major forensics assignment for us, is to figure out the root cause and recommend ways to keep it from reoccurring.

But it wasn't just that one project that has caused a pickup in your revenue?

That is one example. Another example where we have a client that did some subprime lending, that has us looking at some of the controls they had, as to how they ended up where they ended up. That is another example. I mean forensics is probably more varied than most product areas, because it depends on the nature of what happened.

Okay. Thank you.

Thank you. That is all the questions we have time for today. We appreciate your interests. Thank you for your time.

This concludes today's teleconference. A taped recording of this call will be available for replay later this evening through 8:00 p.m. Eastern on October 25th. The dial-in number for the replay is 800-753-9146, or 1-402-220-2705 outside the United States. This conference call also will be archived in audio format in the Investor Center at www.RHI.com.

Thank you. Have a great day!