羅致恆富 (RHI) 2015 Q2 法說會逐字稿

Hello, and welcome to the Robert Half second quarter 2015 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.

Before we get started, I would like to remind you that our comments today contain predictions, estimates and other forward-looking statements. These statements represent our current judgment of what the future holds and include words such as "forecast," "estimate," "project," "expect," "believe," "guidance," and similar such expressions.

We believe these remarks to be reasonable; however, 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 8-K. We assume no obligation to update statements made on today's call.

For your convenience, our prepared remarks also are available on our website at roberthalf.com. Click on the Investor Center under the About Us tab, then the quarterly Conference Calls link.

Now, let's review our second-quarter results. Second-quarter 2015 results were $1.27 billion, up 9% from the second quarter one year ago, or up 13% adjusted for currency. Income per share was $0.67, up 21% from last year. Cash flow from operations was $142 million in the second quarter, and capital expenditures were $16 million.

In June, we paid our stockholders a cash dividend of $0.20 per share, at a cost of $27 million. We also repurchased 900,000 Robert Half shares during the second quarter, at a cost of $50 million. There are approximately 3.4 million shares available for repurchase under our board-approved stock repurchase plan.

We reached the half-year mark with all-time high quarterly results, led by Protiviti and Robert Half Technology. Continued strong demand for our staffing and consulting services contributed to a record quarter. Overall, revenues grew by 9% over the prior year on a reported basis, or 13% adjusted for currency.

Protiviti again reported excellent results, with currency-adjusted revenues up 23% from the previous year. Our staffing divisions also performed well, with revenues up 12% year over year, adjusted for currency. As with the first quarter, growth rates were best in our US operations, but we also saw nice growth internationally.

This was Robert Half's 21st straight quarter of double-digit net income and earnings per share percentage growth on a year-over-year basis. Our unlevered return on equity was 36%.

I'll turn the call over to Keith now for a closer look at our second-quarter results.

Thank you, Max. Global revenues were $1.27 billion in the second quarter. This is up 9% from the second quarter of 2014 on a reported basis, and up 13% on a currency-adjusted basis.

Second-quarter staffing revenues were up 12% on a currency-adjusted basis. US staffing revenues were $871 million in the second quarter, up 13%. Non-US staffing revenues were $219 million, up 7% when adjusted for currency. We have 335 staffing locations worldwide, including 93 locations in 17 countries outside the United States.

The second quarter had 63.2 billing days, the same number of days as the second quarter one year ago. The current quarter has 64.2 billing days, which is also the same as the third quarter of last year.

Currency exchange rates had the effect of decreasing year-over-year staffing revenues by $40 million in the second quarter. Exchange rates decreased our year-over-year reported staffing growth rates by 4%.

Each quarter, we include a supplemental schedule with our earnings release that shows year-over-year revenue growth rates for our various staffing lines of business on a reported basis, as well as on a same-day, currency-adjusted basis. The schedule further segments the data by US and non-US operations. You can find the schedule in today's press release and in the Investor Center of our website. This is a non-GAAP financial measure that provides information on certain revenue trends in our staffing operations.

Global revenues for Protiviti were $182 million in the second quarter, with $152 million in revenues in the United States and $30 million in revenues outside the US. Protiviti revenues were up 23% year over year on a currency-adjusted basis. US revenues were up 24%, and non-US revenues were up 20% from the prior year.

Exchange rates had the effect of decreasing year-over-year Protiviti revenues by $5 million in the second quarter and decreasing year-over-year reported growth rates by 3%. Protiviti and its independently owned Member Firms serve clients through a network of 75 locations in 25 countries.

Gross margin in our temporary and consulting staffing operations in the second quarter was 37.3% of applicable revenues. This is an 80-basis-point improvement from the same period one year ago. The improvement includes higher pay/bill spreads, higher temp-to-hire conversion fees, and lower insurance and payroll tax costs.

The second quarters of 2015 and 2014 include workers' compensation credits of $2.1 million and $900,000 respectively, pursuant to third-party actuarial reviews of our workers' compensation accruals.

Second-quarter revenues for our permanent placement operations were 10.1% of consolidated staffing revenues, which is unchanged from last year's second quarter. Together with temporary and consulting gross margin, overall staffing gross margin improved 70 basis points versus one year ago, to 43.7%.

Second-quarter gross margin for Protiviti was $54 million, or 29.9% of Protiviti revenues. Gross margin one year ago Protiviti was $43 million, or 28.4% of Protiviti revenues.

Staffing SG&A costs were 31.9% of staffing revenues in the second quarter versus 32.0% in last year's second quarter.

SG&A costs for Protiviti were 18.6% of Protiviti revenues in the second quarter compared to 20.2% of Protiviti revenues in the year-ago period.

Operating income from our staffing operations was $129 million in the second quarter, up 16% from the prior quarter. Operating margin was 11.8% of revenues. Our temporary and consulting staffing divisions reported $105 million in operating income, an increase of 18% over the prior year. This resulted in an operating margin of 10.7%.

Operating income for our permanent placement division was $24 million in the second quarter, up 7% from the prior year and producing an operating margin of 21.8%.

Second-quarter operating profit for Protiviti was $20 million, an increase of 65% from the prior year. This produced an operating margin of 11.3%.

At the end of the second quarter, accounts receivable were $687 million. Implied days sales outstanding (DSO) were 49.1 days.

Before we move to third-quarter guidance, let's review the monthly revenue trends we saw in the second quarter, and so far in July, all adjusted for currency.

Globally, year-over-year revenue growth rates for our temporary and consulting divisions decelerated slightly over the course of the quarter. We exited the quarter with June growing at 10.7% as compared to 11.3% for the full quarter. Revenue growth for the first 2 weeks of July picked up to 12% as compared to the prior year.

Global permanent placement revenue growth rates accelerated throughout the quarter, with June revenues growing at 15.1% as compared to 13% for the full quarter. For the first 3 weeks of July, permanent placement revenues also increased 15% compared to the same period last year. US versus non-US trends were not materially different.

This information is designed to give you additional insights into trends we saw during the second quarter and so far in July, but, as you know, it is difficult to read a great deal into these numbers given the short time periods they represent.

With that said, we offer the following third-quarter guidance. Revenues -- $1.295 billion to $1.345 billion. Income per share -- $0.70 to $0.75.

The midpoint of our guidance implies year-over-year revenue growth of 8% on a reported basis, or 12% adjusted for currency, using current rates, and EPS growth of 15%.

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 and in our SEC filings.

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

Thank you, Keith. We were pleased with our results for the quarter. As noted at the start of the call, we saw higher service demand and solid revenue growth for our professional staffing services and Protiviti's consulting solutions.

Year-over-year revenue growth rates were the strongest in the United States, where skilled professional talent is currently at a premium as a result of the tightening labor market. This is particularly true in the technology staffing area, where we have invested heavily over the past few years. We also are encouraged by the revenue growth in our non-US staffing operations, notwithstanding the headwinds from currency exchange rates.

Protiviti had another outstanding quarter, with a revenue growth rate of 20.4% versus the prior year. Adjusted for currency, that growth rate is 23.4%. These are strong numbers and speak to the strength of the Protiviti brand in the marketplace. Protiviti is seeing strong and balanced demand in all of its principal service areas -- internal audit and financial advisory services, risk and compliance, and information technology consulting.

At this time, we'll be happy to answer questions. We would request, as usual, that you please limit yourself to one question and a single follow-up as needed. If time permits, we'll certainly try to return to you later in the call if you have additional questions. Thank you.

(Operator Instructions). Mark Marcon, Baird.

Congratulations on the excellent results. I was wondering how you're thinking about future investments behind R H Technology and Protiviti, given that, while your business continues to be very strong, there are some other signs from other companies out there that, maybe on a global basis and a US basis, there might be some deceleration that's occurring in various pockets.

So, just wondering how the investment outlook is being viewed internally.

So, Mark, our view is, particularly in Robert Half Technology and Protiviti, that we will continue to invest aggressively in headcount in both of those divisions. We're quite pleased with the results we've seen there.

With Robert Half Technology, unlike most of the other, at least public providers, that have technology staffing, we're focused primarily on middle market accounts. With middle market accounts, we're seeing more complex IT staffing needs than have been the case in the recent past.

And with that, there's demand for mobility, cloud, security, app and web development, data analytics -- the type of demand you typically have seen only at larger companies. So, given that demand that's drifted into our sweet spot, we're doing quite well with that, and we continue to invest. And that's our expectation for the second half of the year.

Great. If I can just follow up on that, with regards to some of the assignments that you're getting, can you characterize them in terms of number of placements per account, in terms of how that's changed relative to the recent past?

Well, the biggest change is that they're higher-level skills versus what we've traditionally placed. It's still focused on middle market accounts. So, it's still relatively few people per account.

So, there's not a huge change there other than, as I spoke about, with the skill level. So, we're clearly advancing in what we call tech development, in a way we never have, for reasons we just described.

Terrific. Thank you.

Andrew Steinerman, JPMorgan.

Hey, Keith. Could you talk about wage rate increases and bill rate increases? I surely caught that you said the gap has opened up. My question really is, are you seeing greater rates of wage and bill rate increases than you had in the recent past?

Sure. For the quarter, our bill rates were up 4.7% year over year. That compares to 4.1% last quarter. Our pay rates lagged that by a little.

We did expand our gross margins that we talked about earlier. That gross margin expansion is a combination fairly balanced between higher spreads, pay/bill, conversions expanded both year over year and sequentially -- we got to 3.4% this quarter. I believe it was 3.3% last quarter, and a year ago it was 3.1% or 3.2%.

So, we're continuing to move up with conversions, as well as lower state unemployment , lower workers' comp. And as with currency, US is a larger portion of the mix, and the US has a lower fringe factor burden to payroll than is the case with non-US.

And did wage rate accelerate? Wage rate increases accelerate like bill rate?

Well, they did, but not quite to the same degree. We saw more of it in IT than any other area. But, frankly, it was pretty broad-based.

Right. And in general you consider wage inflation actually a pretty good thing for Robert Half, because of your ability to pass that through, right?

We do indeed. And not only traditionally have we passed it through; it's given us an opportunity to expand our margins a bit as well. And in fact, that's just what we've done so far in this cycle, and our pay/bill spreads are approaching all-time-high pay/bill spreads.

Well said. Thank you.

Sara Gubins, Bank of America Merrill Lynch.

Following up on that, could you talk about what your guidance assumes for gross margin progression and SG&A spend in the third quarter, and plans for adding to temp and perm recruiter hiring in international markets?

Sure. So, at the midpoint of our guidance, we're talking sequentially flattish; maybe up 10 basis points. Which, year over year, is still going to give you 30 basis points, which is a continuation of the trend that we've seen for some number of quarters.

At the SG&A line, we're expecting as a percent of revenue to remain pretty constant sequentially; maybe up a tick or two year over year. We're going to pretty aggressively hire in the second half of the year. That'll be focused heavily in Robert Half Technology, for reasons I think are obvious. But we're also going to do it on a pretty broad-based basis, and therefore the operating leverage you might otherwise see, we're going to reinvest in headcount.

Because we're bullish as we speak, and therefore, on a year over year basis, you're not going to see a lot of operating leverage at the SG&A line. That said, you're still going to see operating margins that are quite healthy. And we're very pleased that not only did our absolute revenues and earnings reach all-time highs this quarter, but our margins were as well.

Great. And then, separately, Protiviti is seeing very strong revenue growth. Are there further catalysts that could help keep the momentum going -- regulatory change, for example, or capital markets activity?

No. First, we don't see any slowdown in sight with where we already are, which is pretty balanced between internal audit, financial services, regulation and IT security and controls. We think there's a nice runway where we already are.

You've got things like new rev rec coming on board, although that has been pushed back a year to 2018, although some companies are already doing diagnostics-related work. So, data analytics is something else that, we're doing some investing in there. Small, currently; but we're optimistic of what that might become.

But the point is, we think where we are has legs. But, that said, we do continue to plant seeds, building out further solutions in technology, as an example; building out the breadth of our client base in financial services. So, we've far from run out of legroom in Protiviti.

Thank you.

Tim McHugh, William Blair & Company.

Just want to ask, Management Resources, can you elaborate a little bit more there? I don't want to look at the one area that didn't grow as much; but, any color on what you saw?

Well, first of all, we had our toughest comparisons in Management Resources as any other division. A year ago, the growth rate accelerated by 7 percentage points, which was the most acceleration and the toughest compare we had.

That said, Management Resources is our most project-oriented division. It's lumpier than the others. We've said that for many quarters. We had some projects end. We had some other projects that were not as large as we had hoped for. And, therefore, we saw more deceleration there than we did in any other division.

While we expect further deceleration in the third quarter, we certainly don't expect it to the same extent that we saw in the second quarter. And we exited the quarter in Management Resources stronger than the tough compares would otherwise indicate. And by the way, those compares get 6 points tougher yet again in the third quarter.

So, Management Resources -- lumpier; more project-oriented. We've been on the good side of those lumps for two or three quarters. This quarter we were on the other side of a lump, but we certainly don't think it's going to be here forever.

Okay. Great. And then the US perm growth rate accelerating a bit -- is there anything different in the market that you're seeing, or would you attribute to investments in headcount, or is it just lumpiness that we're over-analyzing, maybe if we look at the growth rates versus prior quarters?

The market continues strong in perm. We have made headcount investments. Clearly that's a factor in our growth. But as we've talked about for a few quarters now in a row, full-time demand for staff -- the labor markets in the US are clearly improving. And you see that first and foremost, which is typical in a cycle, in perm placement full-time hiring.

So, we're optimistic about perm. We're pleased with where we are revenue-wise, with where we are margin-wise. And we plan to continue to pretty aggressively add to headcount the second half of the year.

Okay. Thanks.

Randy Reece, Avondale.

I was trying to get a little bit more of an understanding of, when you're looking at guidance for the third quarter, what you feel stronger about among the brands -- how growth rates could compare on a sequential basis.

I just noted that your guidance -- if you look at it in terms of sequential growth, your guidance is actually a little bit better than the guidance you gave for the third quarter of last year.

Well, we looked at trends this quarter. We not only gave you the first few weeks of the current quarter; we also broke out the last month of the prior quarter. We exited the quarter pretty strongly. That got confirmed, or actually got better, so far, as short as it is in July.

But the guidance is certainly not a sandbag. I think for several quarters -- for several years -- we pretty much call it like we see it. We landed at the revenue line pretty much at the midpoint of our guidance for this past quarter. From a brand standpoint, it's hard not to feel best about Protiviti and Robert Half Technology.

That said, there were certainly no big surprises with the other brands for the quarter just ended. And we don't expect big surprises for the other brands for the quarter that we're in.

Was there anything in particular, other than Management Resources, that stuck out as a variance versus your guidance this quarter? It seems like that was the main thing.

Yes. I'd say the other thing, to a lesser degree, is that we had a bit of a mixed picture outside the United States.

So, we always talk about our big six countries. And for the quarter just ended, we had deceleration in Canada, Australia and France, a little more so than what we had expected. Canada and Australia related to minerals/mining/energy. France had some candidate tightness that got ahead of them a bit.

On the other hand, Germany, where we'd invested the most headcount, also accelerated during the quarter, which we were pleased by. But relative to our guidance for the second quarter, we came up a little bit short outside the US for the three markets I talked about. And for the record, Belgium and the UK stayed solid. Their growth rates pretty much remained intact versus what they had been.

Thank you.

Paul Ginocchio, Deutsche Bank.

Hey, Keith, a lot of my questions were answered, so maybe I'll just ask about The Creative Group. Could you just give us a rough size of that, since you've got a new owner of one of your competitors, and how you've seemed pretty [transient]. Where is that located within your divisions? Thanks.

Well, Paul, Creative Group is doing and has done very well. We reported in our Accountemps numbers -- I can say that The Creative Group has certainly grown faster than Accountemps overall for many years in a row. It has very good gross and operating margins. We do some perm business in Creative Group as well, that's grouped with perm overall.

That said, we do not break it out. We have no intention of breaking it out. We've grown that business organically. It's very much consistent with the culture of our other practices, and we certainly weren't surprised with the economics; the margin structure; the numbers that were reported by our competitor, as you mentioned. But it's not our intention to break it out.

Great. Thank you for that. And then, I've looked at some of the older staffing industry analysts' revenue run rates of The Creative Group, or of the whole creative industry and the various players in it. Are their numbers roughly right?

Again, we're not going to break it out. It's doing very well. We're very happy with our organic growth approach, and where we are. And that's about all we're going to say.

Thank you very much.

Jeff Silber, BMO Capital Markets.

I hate to nitpick, but I wanted to focus on your permanent placement margins. They were flat on a year-over-year basis, and you actually pointed out you saw accelerating growth during the quarter. Was it because of the hiring that you mentioned, or is there anything else going on there?

Well, let's first put in context, the operating margins were over 20%. And so, I think what you see is, they were 21.8% a year ago, and they were 21.8% this year. So, the growth you saw was the same as the revenue growth, which was impacted by currency pretty dramatically. So, quite frankly, we'll take 21% operating margins forever in perm placement.

But more directly to your question, we have added aggressively to headcount in perm placement. We will continue to do so, and to see operating income grow at roughly the same pace as revenue should not be a surprise. But let's keep in mind -- in context, that those margins are already very high margins.

Okay. Fair enough. If I can move on to Protiviti, I'm not sure if I have the numbers right, but it looked like you might have added a couple of locations in the quarter. Is that correct, and are there further expansion possibilities? You are adding to headcount -- you discussed adding to headcount. I'm just curious if you're going to be opening up new offices as well. Thanks.

The location strategy for Protiviti is primarily for the new locations to be Member Firm, or franchisees as some call them. So, to the extent we go to new countries, it's more than likely going to be through that vehicle rather than as owned operations. We feel pretty good about our own footprint as we speak.

So, we don't expect an expansion of our own footprint, but we are in discussions with others that have sought us out, frankly, that would like to be Protiviti Member Firms in parts of the world that we don't have a presence.

But while we're talking about international Protiviti, I'll point out that, once again, we had a very nice international Protiviti result for the quarter. As we spoke about last quarter, we've seen major improvement in Asia, and specifically Japan. Clearly the economy's gotten better in Japan.

We've diversified revenue sources nicely -- financial services; regulatory compliance continues to come on, which we've invested in, and we will continue to invest in, in Japan and Asia generally.

So, nice result for Protiviti, non-US Europe. Protiviti Europe was also very good. It's been very good for a while. Protiviti Australia -- very good result. But from an improvement standpoint, the most improvement came in Protiviti Asia, where Japan did particularly well.

That's helpful. If I can sneak in a quick numbers question, what share codes are you using for your EPS guidance and what should be the model (inaudible) for capital expenditures for the year? Thanks.

So, CapEx -- we're thinking $20 million, $22 million -- something in that range.

The share count will continue to tick down a little bit. I'm not sure I've got that. Let me just look in front of me. 134.2; 133.2; 133.2. It will continue to tick down as we've bought shares, and we would continue to expect to buy shares.

The other point I would make is the tax rate, we think, will come down 50 basis points to 100 basis points for foreign tax planning. So, rather than being high 39s, we're hoping it'll be in the low 39s for the third quarter.

All right. That's very helpful. Thank you so much, Keith.

Anj Singh, Credit Suisse.

Thanks for taking my questions. Just building on some of the questions that have been asked prior, I'm hoping you can touch on perm internationally. It's one of the few segments that's slowed despite very similar comps.

Can you just walk us through what may be causing those dynamics? Is it just some of the slowdown you mentioned in Canada and France? Perhaps you could also remind us quickly on how soon we can expect headcount additions in perm or other areas, to show up in your growth rates?

Well, I'd say the comments I made earlier about international generally will apply to international perm, where perm is a bigger portion of our international business than it is of our US business. So, we've made the most aggressive perm headcounts in Germany, and Germany's growth accelerated during the quarter, in part due to those investments.

We didn't have the quarter we wanted to have in Canada, Australia, and to a lesser degree France, for reasons I talked about. And those would also address perm as well as temp. So, those countries are the place we saw the most weakness, and that weakness was perm as well as temp.

Got it. And I'm hoping you can also talk a little more about Protiviti. I know that it's been a topic on several quarters of calls now -- the sort of opportunity on operating margins, and getting to the double-digit range.

And I know you've made a considerable amount of progress there, but it seems, if prior year operating margin trends hold, you should hit double-digit operating margins for the full year. So, wondering if you can share any updated thoughts as to where those margins could go, and how long it [could] take to get there beyond this sort of 11% range.

Well, the good news is, on a year-to-date basis we already have double-digit operating margins, and we're going into the second half, where traditionally the second-half margins are better than the first-half margins. So, we'd be quite disappointed if for the full year our Protiviti operating margins aren't higher than they are at the half-year.

So, we're very pleased with the progress we've made on operating margins. We would plan to see additional expansion. We've talked about the gross margin levels of utilization, leverage, or the ratio of managing directors to staff and bill rates. Utilization is at nice, high, solid, and we believe sustainable, levels. Bill rates are improving, mid-single-digit, similar to staffing -- maybe a touch higher.

And we think we've got further leverage opportunities for the ratio of managing directors to staff overall, the impact of which is, it reduces your average payroll cost as you add more staff relative to managing directors.

So, we think we've got gross margin upside, for the reasons I just described. Protiviti's leveraged their SG&A quite well. And we would expect to see that to continue, maybe not to the same extent that it has.

But we forever have said we saw Protiviti as a low-double-digit margin business. We're now into that range, and we stick by low-double-digit operating margins as where it should be, steady state, which is where it is, plus some.

Okay. Great. That's helpful. And one final quick one from me, touching back on perm. US perm is growing really impressively. And it seems -- I was wondering if you can just basically talk about the demand -- can you discern any particular industries or clients that are driving that demand? Is it pretty broad-based, or is there anything discernible in the areas that demand is coming from? Thank you.

I'd say it's broad-based. We've talked about it before. We see candidate counteroffers happening more often. We see more falloffs, which mean they start with clients and they actually get a better offer and go somewhere else, which is also indicative of high demand. For three, four quarters at least, we've talked about that trend, which continues.

As far as areas, California would be our strongest state. I don't think there's any secret that Silicon Valley's doing quite well. Texas -- although impacted in Houston primarily by energy -- Texas is still solid and not what it was, but it's still solid. Dallas -- much more diversified than is Houston; but Houston is doing okay, holding their own. New York -- solid. Chicago -- solid.

So, I would say perm, generally speaking across the board, is playing out pretty classically as you would expect it to, as the labor markets improve.

Okay. Got it. I appreciate the thoughts there. Thank you.

George Tong, Piper Jaffray.

Can you provide an update on the level of recruiter turnover, and whether you foresee any changes to incentive comp structure to drive retention, and what the implications could be for SG&A margins?

Well, recruiter turnover -- I would say there isn't a lot of change there. We've talked about for years that at Robert Half we're a pretty demanding lot. And for that reason, there's a fair amount of turnover, the first couple of years with Robert Half.

But, frankly, after the first two or three years, the turnover's almost nonexistent. And that's been the case for most of the 25-plus years we've been around and is the case as we speak.

As to our incentive comp plans, like most companies, we're always testing, changing, trying to make them as incenting as possible, to try to give our people as much line of sight as we can with their productivity and the compensation they get from that.

So, in the ordinary course, we're always looking at our comp plans, and now is no different than that. So there's no big story on either turnover or changes to comp plans. But they're both issues we have to deal with all the time.

Got it. As you think about the three sources of gross margin expansion, which are rising bill/pay spreads, temp-to-perm conversions, and lower insurance and payroll tax costs, this quarter they contributed equally to gross margin expansion. Do you expect the impact to be relatively equal on the go-forward basis, or will certain factors contribute more than others?

Well, I would say, given the progress we've made on bill/pay spreads, I think it's probably unrealistic to think we're going to continue to make progress at the same pace. We're at or near all-time highs for our margins on spreads alone.

The conversions -- we're at 3.4% of revenue. Our historical range is 3% to 5%. It's been our hope for some time that they will at least get to the midpoint of that, which is 4%. There are 60 basis points there.

On the fringes, we still think we have upside on the state unemployment cost, which lag market conditions such that, as the labor markets continue to improve, so will our unemployment claims, which will then in turn produce lower state unemployment taxes.

We've gotten a little lift of late because non-US payroll tax fringe factors are higher than US, and particularly currency-adjusted. There's less mix attributable to non-US, which helps the fringe factor overall.

So, I think we've still got upside in conversions, which is pretty easy to quantify -- or, harder to quantify, but probably 20 basis points -- to be aggressive, 40 basis points of upside in taxes, insurance, with more for international mix depending on what happens with exchange rates. We're happy with where our margins are. We're effectively at all-time-high staffing margins.

But we don't think we've run out of gas. And we've said for some time, we'd be apopleptic if we didn't get new margins, new highs, in this cycle. And I think we're knocking at the door.

Thanks for the color.

Manav Patnaik, Barclays.

This is Ryan, filling in for Manav. Just a quick question on the M&A front. There have been some other staffers out there who've been talking about looking to expand into some other areas, and maybe proceeding with some M&A. I know you guys like to focus on organic growth, but are there any new areas, particularly in technology, or anything you'd like to add onto your existing offerings?

Well, first of all, you're correct in that we have focused on organic growth for a long time. That's contributed significantly to our very large returns on equity, which, oh, by the way, was 36% for the quarter, which we're very proud of. The last 5 years, more of our deals have been Protiviti-oriented, where we've built out their solutions base.

So, I think it would be reasonable to expect in the near term that we would be more acquisitive to do small to midsize deals with Protiviti as it does try to add to the breadth and depth of the solutions that they offer. And skating pretty close to financial services; technology security control; project management; and to a lesser degree, internal audit.

Great. And you mentioned the temp-to-perm conversion at 3.4%. We've been seeing a lot more of that kind of model being used by employers more and more. Is there a chance, if you look out a few years, that the 3% to 5% range shifts slightly, and you see it become more of an impact on the overall revenue for you guys?

Well, typically, in a cycle, it isn't demand that limits the percentage. It's supply. So, I think there's no question, many clients would love to try people out before they have to commit to them full-time. But as the labor markets improve and candidates get tighter, clients don't have the luxury of being able to do that. They have to commit to full-time from the beginning, or they can't get them at all.

So, I'm not sure that there's some big shift going on. Which is why we've said, if we can get to the midpoint of our traditional range, there's quite a bit of upside.

Now, if you want to take your hypothesis there and say we go to 5%, then there's even more upside than what we've talked about. But again, the limiting factor as the cycle improves isn't client demand; it's candidate supply.

Great. Thank you.

Gary Bisbee, RBC Capital Markets.

Just a couple of quick ones. It sounds like demand in Protiviti remains very strong, but you do face considerably more difficult comparison, you know, the next quarter, and even more so in the fourth quarter? Any thoughts on how we should think about that? Is a moderation in the growth of several points a quarter a reasonable baseline to think about how the next couple of quarters might go? Thanks.

Well, it's certainly reasonable to think a moderation of the growth rates would happen. That said, they've had really tough comparisons for several quarters in a row. If you look at starting with Q1, even, of 2014, it was 14; 14; 18; 22; 26. So, I mean, they've had tough comparisons for some time, and they've anniversaried them quite well.

That said, I can assure you our guidance assumes some moderation in those growth rates, and they can't defy gravity forever; but they've done a hell of a job anniversarying tough comps so far.

Great. And then just a followup -- obviously, last year, your revenue growth in aggregate, and I think really for all of the businesses, or at least temp and Protiviti, accelerated throughout the year. Your guidance, I guess, implies a bit further deceleration, but less than the amount by which the comp gets tougher from a year ago.

Stepping back from all of that, just how do you feel about the demand outlook today relative to 6 months ago? We had a couple of quarters where you sounded massively bullish, and you sound a little more reserved tonight. Maybe that's just my reading of it. But how are you feeling about how the world is today? Thanks.

Well, we feel good. And the fact that the comps get tougher is something to be dealt with. As you observed, the comps get tougher by another 4 percentage points this quarter; yet our guidance is only a 1-percentage-point deceleration. So, that's less deceleration relative to the comps than we experienced this past quarter. We've had the non-US recovery that's been more mixed and uneven, and that's certainly impacted the growth rates as this has proceeded.

But we feel good. We've just talked about how, from a headcount perspective, which is the investment most impacted by our outlook, we plan to be aggressive, adding to hedge the second half of the year. And effectively, the operating leverage that we would otherwise enjoy, we're going to reinvest in headcount.

And I don't know whether that means we're massively bullish or cautiously optimistic. I can't parse my own words. But we feel good about things.

Very good. I appreciate that. Thank you.

Dan Dolev, Jefferies.

Thanks for taking my question. Somewhat related to the question before, I know you don't guide more than one quarter ahead, but if you look at next year's guidance, 2016, you're looking at about 10% revenue growth.

You often talk about where gross margin expansion can come from. But can you maybe elaborate on, if there is upside to debt, where you see that upside coming from in your business? Thanks.

Well, we see gross margin expansion up as we just discussed. More conversions; less payroll, tax and insurance burden. We would expect, over the medium term, operating classical operating leverage, our margins that are already at all-time-high margins in staffing, and we would expect that we will expand those further over the medium term, for the reasons we've talked about.

So, we do believe we can continue to grow our bottom line more quickly than the top line.

And is there upside -- sorry to interrupt you. I meant more about the top line, in terms of where consensus is today, about 10.1%. Is that a number that misrepresents some of the strength in your business? And if yes, where could it come from?

Well, as you stated, we limit our guidance to a quarter -- one quarter. So, it would be somewhat self-defeating to comment on 2016 at the moment. But we're bullish. We feel good. We feel good about the future. We've told you what the trends are this quarter. We've showed you how we exited the quarter; how we began the quarter that we're now in. That's pretty much all we can say.

Okay. Great. Thanks so much.

Tobey Sommer, SunTrust.

Most of my questions have been answered, as you'd imagine. But if you could comment, within IT, the extent to which the tech bill rates are maybe exceeding the average numbers that you characterize. And as you've invested for growth in that business, has the complexion of customers, either by size or geography, changed as you moved upstream to larger employers? Thanks.

As to tech bill rates versus the average, they might be slightly higher than the average, but they're not massively higher than the average. As to the complexion, as to client size and geographic concentration, the size of our typical tech client has always been modestly larger than accounting and finance, but not significantly larger. It's certainly not Fortune 1000.

And as to geography, relative to how we're doing in accounting and finance, I don't think there's any large tech differential. If we're doing well in California, we're doing well in California in tech; we're doing well in California accounting and finance.

And one's not necessarily outsized relative to the other. Maybe the one exception to that would be in Texas. We're still doing really well in tech, and we've seen some slowing in Texas for obvious reasons otherwise.

Thank you very much.

We have no further questions at this time. I turn the call back over to Mr. Messmer for closing remarks.

All right. Thank you very much. I guess that was our last question. As always, Keith did a very good job answering questions.

I would just say that, in conclusion, we are optimistic about the labor markets, for all the reasons Keith articulated. It's a strong environment. We have a very good, seasoned team. We have excellent market conditions. And we are optimistic going forward. So, thank you for your time, and we look forward to talking to you again next quarter.

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.