羅致恆富 (RHI) 2013 Q3 法說會逐字稿

Hello, and welcome to the Robert Half third-quarter 2013 conference call.

Our hosts for today's call are Mr. Max Messmer, Chairman and CEO of Robert Half, and Mr. Keith Waddell, Vice Chairman, President, and Chief Financial Officer. Mr. Messmer, you may begin.

Thank you, and good afternoon, everyone. Thank you for joining us.

We begin our call with a reminder that today's commentary contains predictions, estimates, and other forward-looking statements. Our comments represent our current judgment of what the future holds, and include words such as forecast, estimate, project, expect, believe, guidance, and similar expressions. We believe these remarks to be reasonable but we do remind you that 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 SEC filings, including our 10-Ks, 10-Qs, and today's 8-K. We assume no obligation to update statements made on today's call.

Now let's discuss the third quarter. Global revenues were $1.08 billion in the third quarter, a 4% increase year over year. Income per share was $0.48, up 17% from one year ago. Cash flow from operations was $80 million in the third quarter, and capital expenditures were $12 million. On September 16 we paid a $0.16 cash dividend to stockholders at a cost of $22 million. During the third quarter we also repurchased 800,000 Robert Half shares at a cost of $28 million. Approximately 8.6 million shares remain available for repurchase under our Board-approved stock repurchase plan.

Demand for our professional staffing and consulting services remained solid in the third quarter, led by Protiviti and our technology and permanent placement staffing divisions, particularly in the United States. For the 14th consecutive quarter, we grew net income and earnings per share in excess of 15% on a year-over-year basis. We also were pleased with the Company's return on equity of 30% for the quarter, which was accomplished with essentially no financial leverage.

Now I'll turn the call over to Keith for a closer look at our third-quarter financial results.

Thank you, Max.

As Max mentioned, global revenues were $1.08 billion in the third quarter, a reported increase of 4% over last year and a 3% increase on a same-day constant currency basis. Global staffing revenues increased 1% year over year on a same-day constant currency basis, with the US growing 4% and international staffing revenues declining by 6%. US staffing revenues were $708 million in the third quarter, while international staffing revenues were $228 million. We have 346 staffing locations worldwide, including 100 locations in 19 countries outside the US.

We calculated 64 billing days in the third quarter, compared to 63.2 days in last year's third quarter, the effect of which was a 1.3% increase in reported year-over-year staffing growth rates. The current quarter has 61.9 billing days, as compared to 62 days in the fourth quarter of 2012. Currency exchange rates had no meaningful effect on reported third-quarter 2013 staffing revenues.

A supplemental schedule accompanying our earnings release today shows year-over-year revenue growth rates for each of our staffing lines of business on a reported, as well as a same-day constant currency basis. The schedule further divides the data between US and non-US operations. You can find the schedule in today's press release and the investor center of our website. This is a non-GAAP financial measure meant to provide you with information on certain revenue trends in our staffing operations.

Third-quarter revenues for Protiviti were $139 million, including $113 million in the United States and $26 million outside the US. Global revenues for Protiviti grew 16% year over year, with US revenues up 22% and non-US revenues down 4%. Protiviti and its independently owned member firms serve clients through a network of 74 locations in 25 countries.

Now turning to gross margin, third-quarter gross margin in our temporary and consulting staffing operations was 36.2% of applicable revenues. This was the same as the third quarter of 2012. Permanent placement revenues were 9.4% of overall staffing revenues for the quarter, compared to 8.9% reported one year ago. Including the impact of temporary and consulting gross margins just discussed, overall staffing gross margin expanded 30 basis points versus one year ago to 42.2%. Protiviti's third-quarter gross margin was $42 million, or 30.5% of Protiviti revenues compared to $32 million, or 26.9% of Protiviti revenues a year ago. This is an increase of $10 million, or 32%, owing largely to higher staff utilization levels and billing rates in the United States.

Turning to selling, general, and administrative costs, in the third quarter, our staffing SG&A cost were 32.6% of staffing revenues, up 30 basis points from the 32.3% reported one year ago. Third-quarter SG&A costs for Protiviti were 20.6% of Protiviti revenues. This is 140 basis point improvement from the 22% level reported last year. Third-quarter operating income from our staffing divisions was $90 million, or 9.6% of staffing revenues. The temporary and consulting divisions reported $76 million in operating income for the quarter, or 9% of applicable revenues.

Third-quarter operating income for our permanent placement division was $14 million, or 15.5% of applicable revenues. Protiviti's operating profit was $14 million in the third quarter of 2013, or 9.8% of revenues. This compares to $6 million in the third quarter one year ago, or 4.9% of revenues. Operating income more than doubled year over year to the highest level achieved since 2006. Accounts receivable were $566 million at the end of the third quarter, with implied days sales outstanding of 47.9 days, compared to 49 days at the end of the third quarter 2012.

Now let's turn to fourth quarter guidance. We saw the following trends in the third quarter and so far in October. In the US, year-over-year growth rates for our temporary and consulting divisions accelerated in July, decelerated in August, and reaccelerated in September. Also in the US, year-over-year growth rates for our permanent placement divisions slowed in July, accelerated in August, and decelerated in September. Outside the US, year-over-year temporary and consulting staffing growth rates remained consistently negative, while permanent placement growth rates improved modestly throughout the quarter.

For the first two weeks of October, global revenues for our temporary and consulting operations were up 1% on a same-day constant currency basis, compared to the same period last year, with US temporary and consulting revenues up 3% and non-US temporary and consulting revenues down 5%. For the first three weeks of October, global permanent placement revenues were down 3% on a same-day constant currency basis compared to the same period last year, with US perm revenues up 5% and non-US perm revenues down 17%. We would remind you, however, it's difficult to read a lot into these trends, given the short time periods they represent.

Taking this information into account, and the two fewer sequential billing days, we offer the following fourth-quarter guidance. Revenues, $1.05 billion to $1.10 billion; income per share, $0.44 to $0.49. We limit our guidance to one quarter. All estimates we provide on this call are subject to the risks mentioned in today's press release.

Now I'll turn the call back to Max.

Thank you, Keith.

We had a strong quarter overall. The one consistent trend, of course, is the uncertain macro environment in many of our non-US markets, most notably in Europe. While our business exposure within the hardest hit countries is minimal, the soft economy in Europe did continue to impact our financial results. In the United States, the technology sector is leading the way in hiring demand, and this also is reflected in our financial results. We believe that our investments in growing our information technology staffing business are paying off.

Protiviti had its best quarter in six years, as Keith noted, with continued growth in all consulting solutions, particularly in technology as well as risk and regulatory compliance in the financial services industry. We are pleased with the momentum we continue to see in Protiviti.

We hope to see an improving economy in 2014 and beyond. We are focused on growing those areas of the business where we see demand for highly skilled talent, and we are investing in more internal resources accordingly. Skill shortages persist in many professional disciplines, including technology and accounting. We believe Robert Half is well positioned to meet the global demand for specialized talent on a full-time and temporary basis. We are confident in the abilities of our leadership team and our staffing operations and Protiviti.

We have a highly recognizable and respected brand name in Robert Half. Earlier this month we introduced a new logo and other design updates that place greater emphasis on the Robert Half name. It allows us to showcase our breadth of services while also paying homage to Robert Half's rich history. The new logo works especially well when viewed on a mobile device or in other digital formats. Our corporate website is now located at roberthalf.com. Our stock ticker, of course, remains RHI.

At this time, we'll be happy to answer questions.

(Caller instructions)

(Operator Instructions)

Your first question comes from the line of Mark Marcon from R.W. Baird. Your line is open.

Good afternoon. I was wondering if you could talk a little bit about the trends that you are seeing internationally by country? We've been seeing some indications that maybe the UK was getting a little bit stronger, and I was wondering if you were seeing something similar, or are there any signs that you're seeing that maybe some of the international markets might get a little better? Thank you.

Yes, Mark. The UK has gotten stronger. We actually had slightly positive year-over-year revenue growth in the UK for the quarter, which is the first time in quite a while. Germany remains solid, not flashy, but it's been solid for several quarters. Belgium was less negative, and Belgium is particularly important because it's our most profitable non-US country. And France and Australia pretty much stayed as they had in prior quarters. So generally speaking, when you put it all together, we were less negative in the non-US operations led by the UK, Germany, and Belgium.

Is there any tone from the operations over there that the less negative/inflection to positive is continuing? Or is it just too early to say?

I'd say anecdotally there's positive sentiment that things are getting better. But frankly, I would probably respond that it's too early to say.

Okay. And I'm assuming your revenue guidance basically incorporates that in terms of not assuming much of an inflection as it relates to the international side?

That's correct. Our guidance at the midpoint for non-US would be roughly equal, maybe a touch better year over year than was the case in Q3.

Great. Thanks. I'll jump back on a little bit later in the call. Thank you.

Your next question comes from the line of Tim McHugh of William Blair & Company. Your line is open.

Yes, thanks. Just want to follow up from some of the prior calls. You've talked about the mortgage sector and the drag that has been. I know we saw the full impact of the stoppage of the mortgage foreclosure review work, but there's been some commentary about refinancing activity being lower. I know it's a lower margin area for you. Just update us, I guess, on what you're seeing and how much of an impact that had in this quarter?

Let's first talk about foreclosure look-back, and that's the piece of business that abruptly ended the first week of January. What we call a cliff event internally. And so that cliff event had a 300 basis point impact on the growth of both Accountemps and Management Resources. So a little bit more than prior quarters, but not much. And we would expect its impact on the fourth quarter to be similar to the impact it just had on the third quarter.

Now beyond the foreclosure look-back, which was a very discrete set of projects with a few clients, there's the whole mortgage origination, mortgage refi. And while that's drifted down a little during the course of the year and adds a little bit to the impact that we've just talked about with the foreclosure look-back, it's nothing in the order of magnitude that the look-back is. So yes, it's drifted down a little. But it hasn't had a huge impact the way foreclosure look-back has.

Okay. And then on the technology side, --[has] the growth rate picked back up there? Do you think the market's gotten stronger? Is there something that you're doing that you think is driving the growth rate back up? What do you attribute the little faster growth to?

I think given the relative young age of the investment we've made, I think our people get more skilled, particularly at recruiting over time. We have a disproportionate number of relatively less tenured people in technology. And as they become more tenured and more skilled, I think it shows up in the top line, which is very candidate-recruiting driven.

We feel good about tech, we feel good about how tech performed. Tech is still a drag on the bottom line because of our outsized investment in headcount and SG&A there. But, we're certainly getting the top line results that we hoped for. And over time, some of the bottom line drag that we're currently experiencing on purpose will subside.

And are you still adding to that at this point? Or are you letting it mature?

We are still adding. We're adding in technology. We're adding in permanent placement. In addition, we've been modestly in the background adding to our other divisions as well. As the tone begins to improve we want to make sure we have the capacity to participate fully in that. So, we have modestly added to our headcount across our divisions, but certainly led by technology and permanent placement.

Okay, great. Thanks.

Your third question comes from the line of Andrew Steinerman of JPMorgan. Your line is open.

Hi, gentlemen. I want to ask about the trajectory of margins for Protiviti, which obviously it's been on the rise. What's assumed in the fourth quarter? When do you think that Protiviti's margins will normalize?

Well as to the trajectory of margins, first let me say we were particularly pleased with Protiviti during the quarter, both from the revenue growth standpoint as well as a margin. 9.8%, almost got to the magic double digits we've been talking about for some time. We're very happy there.

Typically, the fourth quarter, is a shorter quarter for Protiviti, even more so than staffing because many of Protiviti's clients shut down, or at least have what's called a soft close that last week of the year. So, generally, Protiviti's fourth quarter is shorter than staffing's equivalent quarter. And therefore it puts a little bit of a drag on operating margins. I think we backed up, 30 or 40 basis points a year ago. So something in the same ballpark would be reasonable. We hope to do better. We'll try to do better. The Protiviti margin story has been a strong one, with which we're very happy.

Do you want to throw in the other side? When do you feel like Protiviti's margins will normalize? In other words, hit target utilization rates?

Normalize is an interesting word, given Protiviti's history. We've had 20% operating margins in its way distant past. We went to single digit and below. We've consistently said we expect double digit operating margins on a consolidated global basis for Protiviti. We got really close this quarter. We hope to get there more consistently next year in the first half of the year when margins are typically lighter. So we're certainly not here to say that the current quarter margins can't be normal margins, but we're also not here to say that 20% is normal either.

We're getting into that double digit range that we've long talked about. We can take utilization levels on an annual basis higher. We can take the leverage model where you look at your managing directors versus staff. We do think we can further improve that. The bill rates, although they increased a modest single digit year over year in this quarter, we do think there's room to take bill rates up, particularly given the demand environment. We're optimistic, Andrew, that we can continue to expand Protiviti operating margins and create a new normal, and that new normal is double digit.

Right. And there's still room to move from here. I got it. Thanks.

Right.

Got it. Thank you.

Your fourth question comes from the line of Sara Gubins of BofA Merrill Lynch. Please go ahead.

Hi guys, this is Brian Davis in for Sara Gubins. How are you?

Good.

Good. So I just wanted to ask about total revenue on a same-day constant currency basis, which was 1.3% in the quarter, slightly below the midpoint of guidance at 1.5%. I was wondering what were some of the areas that decelerated below the trend in the quarter, and if there were any noticeable areas of acceleration above the trend? Thank you.

Well, we've shown you the growth rates by line of business for the quarter year over year. It was really close to our midpoint. We're almost splitting hairs to say how was it different. Maybe Accountemps was a touch light of what we had first expected. Technology was a touch better than we expected. But again, when we're talking $5 million on a billion dollar base, we're getting pretty picky.

Fair enough, thank you. And then looking ahead to 4Q, could you give us a sense of what the implied same-day constant currency rate might be that's embedded in your revenue guidance? Thank you.

At the midpoint of our guidance, the global same-day rate would be 2.5%. And that 2.5% is up from the 1.3% as you just noted that we reported in the third quarter. And to me, importantly, if you look at the US piece of that, we had three quarters in a row where our US growth rates decelerated, and this past quarter they flattened out and actually increased a touch. And we're expecting a slight increase yet again in the fourth quarter.

So it certainly looks like at a minimum, our US growth rates have flattened out versus declining sequentially for the last three quarters, and again we're projecting a small bump year over year, in part because the comparisons obviously get easier as you look backwards.

Thank you, gentlemen.

Your next question comes from the line of Tobey Sommer of SunTrust. Your line is open.

Thank you. I just want to get your perspective on how you feel, [for] Accountemps, OfficeTeam, and the Management Resources, the different kind of accounting-related segments are performing relative to their end markets. And I ask you that in the context of a BLS temp job number that showed a pick-up and a pretty nice rate of growth, if you believe that data. Thanks.

Well, the BLS data for some time hasn't tracked very well, either with the American Staffing Association data on a broad basis, or certainly not with our data. We for years have tended to discount BLS, in large part because it's heavily nonprofessional driven. And therefore we've never considered a very good proxy for the professional market, and even less so the last 12 months or so. How we're performing relative to the end markets, we believe we're holding our own. There's been a lot of macro uncertainty, fiscal uncertainty.

There's been a lot of uncertainty in the markets for some time, which has clearly impacted our small and middle-sized clients. But we feel like we've held our own, as I just spoke. Our US growth rates decelerated three quarters in a row. They flattened out, ticked up a little this quarter. We're hoping to see a continuation of the ticking up into the current quarter.

Hopefully we're at an inflection point. It's certainly too soon to absolutely declare that the case. But we feel like we're holding our own. We talked earlier about mortgage. Mortgage has been a headwind, particularly the foreclosure look-back. But that anniversaries itself in the first quarter. So, you'll get 300 basis points of growth from anniversarying that alone.

And then could you comment on your bill rates relative to the technology business? Is there any distinction between what you're experiencing there versus your overall bill rate experience?

Well, technology, because it's more candidate short, the pay rates are a bit firmer and the bill rates are a bit firmer, but not significantly so than the rest of our business. If you look at consolidated, our bill rates were up 1.8% year over year. They were up 1% sequentially, and that's a little better than they had been the last few quarters. And tech certainly was a major contributor to that. There's no question that supply is tightest in tech. That puts pressure on pay rates. But that in turn gives us permission to charge more in bill rates, not only to pass through the pay rate increase but more.

(Operator Instructions)

Your next question comes from the line of Kevin McVeigh from Macquarie Research. Your line is open.

Great, thanks. Hey, Keith and Max, I wonder if you could give us a sense of where the utilization is at Protiviti now split between US and non-US, and where we should look for that to go to?

We've never published utilization rates per se. Clearly US are much higher than non-US. That's no shock. But it's three levers that drive Protiviti revenues. It's not only utilization, it's bill rates and it's the shape of a pyramid, or the leverage model between the people at the top end and the people at the base of the pyramid. So we believe we have upside in all three of those levers with Protiviti.

Again, while utilization was high this quarter in Protiviti, it certainly wasn't nearly that high in the first half of the year. So we think, particularly on a full year basis, we've got upside with Protiviti utilization, we've got upside with bill rates, as we talked earlier, and we have upside with the leverage model. So we do not think we've topped out with Protiviti operating margins by any stretch of the imagination.

The fourth quarter is a little shorter than the third, and for that reason you usually backup just a little bit, the basis points versus the third. But we think Protiviti is on a good path profitability-wise, and I think generally speaking, most people are more favorably inclined than negative about the progress they've made and the time period they've made it.

It's been impressive, Keith. 22% US growth, if I heard you right. We haven't seen that in a long time. Is there kind of new accounting out? Or is it just more feet on the street? What's driving that type of revenue growth, particularly in the US?

The good news is, it's pretty broad-based. First of all, in the tech space you've got security, business continuity, application controls, SharePoint, all of which played a role very consistent with prior quarters. On the financial services side, it's on money laundering, capital adequacy, model validation, regulatory enforcement, regulatory monitoring, internal audit support, IPO readiness.

There are a lot of drivers, but clearly Protiviti is very well positioned in the strongest part, particularly the financial services market. So it's adding to its own resources at all levels of the pyramid. It's also tapping into the resources of our staffing divisions and using more contractors. But Protiviti is in a very good place from a demand standpoint as we speak, and is working very hard to get the internal resources to keep up with the demand. It's more resource constrained than it is demand constrained as we speak.

Thank you.

Next we have Randle Reece with Avondale Partners. Please go ahead.

Good afternoon. I was just noting the behavior of temp staffing SG&A against gross profit. And I was wondering if you could talk a little more about what you're doing in spending on the temp and contract staffing side?

So as I talked about a bit earlier, Randy, we have been adding to staff in the background. Not only in tech and perm placement, but also in Accountemps, Office Team and Management Resources. We felt like as business conditions were beginning to improve, we were a little light on internal staff. So we have been adding to that pretty much across the board in the background. But for that, you'd see more improvement in SG&A.

SG&A is pretty constant as a percent of revenue year over year, particularly if you look at temp versus temp, perm versus perm. If you look at overall, because there's more perm in the mix, the overall percentage reads as higher because that's just mix-related. No question in the temp side of the business we've been adding to staff. That's put some pressure on SG&A. That was intentional on our part. If things improve in 2014, as many project, we'll be ready.

Does it make it hard in an erratic growth environment like this to time spending initiatives?

Absolutely. We understand that we're investing a bit ahead of any proven inflection point in the market. We flattened out this quarter. Our midpoint says we tick up a bit next quarter. And based on that, and based on many believing that 2014 will be stronger, we've modestly added to our headcount. We're not talking huge in order of magnitude. Clearly we could have reported more in our earnings this quarter by not adding to the headcount, but we chose not to. And only time will tell whether we're right or wrong. If we're wrong, we can make a mid-course correction.

Randy, we've been at this for quite a few years, as you know. And to some extent you have to be a bit of a surgeon, knowing when to cut and when to add. There's no guarantee, but you use your best judgment. And we'll see how it plays out soon enough.

Thank you very much.

Our next question comes from the line of Paul Ginocchio from Deutsche Bank. Please go ahead.

This is Ato Garrett on for Paul Ginocchio. And I have one question relating to incremental benefits that you have seen from healthcare reform in the third quarter and whether or not you're assuming to see anything in the fourth quarter? Thanks.

There's not much new on healthcare reform. A lot of discussion with our clients, not much real demand. Our fourth quarter guidance doesn't assume anything to speak of. Frankly, hardly anything for an uptick due to healthcare. We're getting a little bit of business with some of the exchanges as they deal with their issues. But again, not such that it would move the needle.

Okay, great. Thank you.

Next we have Mark Marcon from Robert W. Baird. Please go ahead.

You seen nice acceleration in Robert Half Technology, and you obviously have multiple decades of experience in terms of growing areas outside of technology at a very rapid rate in a decent environment. I'm wondering if you can talk just a little bit about some of the differences that you're seeing on the tech side as it relates to the ability to grow that business at the rates that you've demonstrated in the past in terms of some of the other areas?

I think the largest difference is that tech is more resource driven, more recruiting driven than traditionally has been the case in accounting and finance. But we believe we can be equally as successful bringing in Robert Half recruiters as we were in the past bringing in a more balanced mix of recruiters and salespeople. So we're bullish about our tech growth rates. We've shown for some time now that we can get nice growth rates.

The market is growing nicely in tech. We're participating. It's not like we're wildly outperforming the market, but we're certainly participating. And we believe we're positioned to continue to participate. The playbook is not hugely different than the playbook we traditionally used with accounting and finance. It's just more candidate-driven.

Great, but no difference in terms of being able to bring people on, train them, in terms of recruiters, get them up to speed, and eventually scale that?

It's different, but not such that we're concerned we can't generally use the same playbook. And we've gotten to where we are with generally using the same playbook. And there's no reason to believe we can't continue to go from here with generally the same playbook.

It's generated great returns on capital. On the Accountemps side, once we get past the hurdle and go into tail end of Q1, Q2. If the macro environment stays the same, how would you think about Accountemps on a longer-term basis? We've all heard about a lot of companies basically being fairly tight in terms of how they're spending. How do you think about the potential growth in that, a more mature area where maybe there's a little more automation on the margin, and how you could grow that?

First of all, we continue to be bullish about Accountemps. I think but for the foreclosure look-back impact, it wouldn't stick out as negatively as it does, which elicits all of these questions about, is there any growth left in Accountemps. We do not think it's mature. We still do business with just over 10% of our client base, which are small to middle-sized firms. We do even less than that -- all divisions combined. We do even less than that with Accountemps alone.

The impact of automation, the major impacts of automation happened many years ago when you went from manual to various spreadsheets and from spreadsheets to various payables packages, Quick Books, Accpac. So, I don't think there's a lot of remaining risk of a huge nature for automation in accounting. Again, we've come through a pretty uncertain period with small to middle-sized businesses.

Accountemps had the foreclosure look-back. It had some mortgage refi. The combination of which has made it appear to underperform. But add the 300 basis points back, and it's right in there with the rest of them, but for technology, which has done better for obvious reasons. We feel good about Accountemps, and it's not mature. And we haven't lost our touch in Accountemps. Again, as soon as we get through this foreclosure look-back, it won't stick out like it does now.

Obviously, we get that question. So that's the reason I'm asking it. And I'm sure you get it a bit yourself. Just thought it would be good to ask on a public forum here. As you're thinking about it, when we add back in the 300 bps, do you think you'd see the same sort of multiplier effect? Assuming that the environment gets a little bit better as we go into next year.

If the environment gets better, Accountemps will fully participate.

Great. Thank you.

Mark, I'd just add that the last couple of years have been a particularly difficult period for most members of the NFIB, the small, the mid-sized businesses we do so much work with. It wouldn't take much in terms of an improvement in their attitude in terms of the macro economy to, I think, give them quite a boost. And I would expect us to get quite a boost right along with them. Accountemps is a very cost-effective way for them to operate in their business. I don't think we should lose sight of that.

One thing I failed to mention, too, about guidance. So our tax rate was a touch lower this quarter as we utilize some of our foreign credits for the most part, which we predicted last quarter. This coming quarter, the quarter we're in, the tax rate is probably going up from 36% to 37%. When you're building your models, the tax rate will be a touch heavier in Q4 than it was in Q3.

Your next question comes from the line of John Healy of Northcoast Research. Your line is open.

I wanted to ask a question about the expansion into the tech market. I was hoping you could give us a little bit of color just in terms of where you're really seeing the traction at, and I imagine the early innings with the new recruiters, it could be more in the basic level of technology. As you see that business develop, I was hoping you could give us some thoughts on how you think it materializes in terms of high end versus low end, presence in the market, and maybe where you think you're at today, and where you ultimately think the business can be and shake out?

We're actually getting traction at the tech support level, which is where we've been traditionally, as well as in the tech development area, which is principally applications development. And clearly of the last 12 months, we've actually gotten more relative improvement at the high end than at the basic level, as you call it. If you look at our client base, that's generally smaller than the size most tech firms serve. If anything, the application development demands have come down more to that size firm than traditionally has been the case.

Without regard to size, every firm needs a website. Without regard to size, everybody wants web analytics, data analytics. Without regard to size, they need an intranet. And without regard to size, they use the cloud. So the point is whereas traditionally with our client base, their needs were focused principally in tech support. Today their needs are broader than that for the reasons I mentioned. And they have application development demands as well. So, we're benefiting from the downsizing of technology from a client size standpoint where there's demand that traditionally we didn't benefit from.

That's helpful. And I know there's been a lot of discussion about the potential benefit of healthcare reform to you guys in the future. I wanted to ask, as you see the cost in readying for that, and not necessarily providing benefits or anything like that, is there a way to think about some readiness costs as we go into 2014? Is there something material that maybe we should expect? Or should we not really expect too much there?

The short answer is, I wouldn't expect very much there. We were geared up before the employer mandate was delayed a year. We were geared up to offer bronze level coverage to our temporaries alongside a low-cost non-compliant option. We're going to continue and offer the low-cost non-compliant option. But we are not going to offer the bronze level coverage. Currently our thinking is we would offer that beginning in 2015 when the employer mandate is currently scheduled to go into place.

With our prior cost estimates, it added a small single digit percentage to our cost structure because not many temporaries would qualify. Of those that did qualify, not a huge percentage would choose, and therefore from a cost standpoint it was not going to be a huge event. There's nothing that's changed our thinking there. Everything just got pushed back by a year. So 2014, there's not a lot of readiness costs to deal with that.

Thank you.

Next we have Tim McHugh of William Blair & Company. Please go ahead.

You answered one of my follow-ups. I guess just the other one in terms of the gross margin as we look at Q4. I know sometimes in Q4 you get a benefit from a look at your accruals for some of the workers comp and other insurance. Are you expecting that this year? And if not, does that create a tough comp year over year that we should be aware of?

Our assumption is that absent the workers comp credit, and by the way, that workers comp credit last year Q4 was $2 million, which completely drove the sequential improvement a year ago. So our guidance didn't assume any new credit this year for worker's comp because the actuaries haven't finished their work. So currently we're planning for sequential flat temp gross margins, which would be down year over year due almost entirely to the absence of the workers comp credit that we got a year ago. Now, to the extent we get one this year, then it will benefit the quarter, obviously. We just haven't dialed any in.

Okay, and I guess just more broadly on the bill rate or pay spreads, I apologize if I missed it. But are they pretty consistent? I'm assuming, given the gross margin, but is there any trend?

The bill pay spreads were consistent. The conversions were consistent. The fringe factors were consistent. The gross margins were pretty much exactly what we expected them to be, and we plan or expect that consistency to carry over into the fourth quarter, which is what is built into our guidance. And if we get some workers comp credit, that's gravy.

Next we have Andrew Steinerman from JPMorgan. Please go ahead.

Hi, Keith. Could you just go over bill rate trends US versus international? Is there anything to pull out there? I definitely caught the bill rate trends you said overall.

Clearly the trends are stronger in the US than non-US. So I think it's fair to look at the numbers I gave you and say US-only would be higher. But we haven't been breaking them out per se between US and non-US. Non-US is flat to slightly improved. But US is even more so. So the trend is good , which is one more factor that would say things have flattened out, and potentially you are at an inflection point. But again, the changes are too minuscule to be making calls like that.

Got it. Thank you.

Our final question comes from the line of Kevin McVeigh of Macquarie Research. Please go ahead.

Great, thanks. Keith, is there a way to quantify what the investments were in terms of staff investments in Q3, and then ultimately if that leaks into Q4, as well?

We haven't broken out specifically what the hit to SG&A would be from additional headcount. But it's not overwhelming. Then again, when we're measuring things by basis points, it has an impact. Next quarter we will talk about our headcount, as we do every year at the end of the year and you'll see just what we're talking about, but pretty much across the board our year-to-date headcount right now exceeds our current year-to-date growth rates, and that's by design per our prior discussions.

Understood.

That was our last question. Keith and I would like to thank everyone again for joining us on today's call. We appreciate your time.

This concludes today's teleconference. If you missed any part of the call, it will be archived in audio format in the investor center of Robert Half's website at www.roberthalf.com. You can also dial the conference call replay. Dial in details and the conference ID are contained in the Company's press release issued earlier today.