Robert Half Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 25, 2024

There are 13 speakers on the call.

Operator

Hello, and welcome to the Robert Half First Quarter 2024 Conference Call. Today's conference call is being recorded. Of Robert Half and Mr. Michael Buckley, Chief Financial Officer. Mr.

Operator

Waddell, you may begin.

Speaker 1

Hello, everyone. We appreciate your time today. Before we get started, I'd like to remind you that the comments made on today's call contain forward looking statements, including predictions and estimates about our future performance. These statements represent our current judgment of what the future holds. However, they're subject to the risks and uncertainties that could cause actual results to differ materially from the forward looking statements.

Speaker 1

These risks and uncertainties are described in today's press release and in our most recent 10 ks and 10 Q filed with the SEC. We assume no obligation to update the statements made on today's call. During this presentation, we may mention some non GAAP financial measures and reference these figures as adjusted. Reconciliations and further explanations of these measures are included in a supplemental schedule to our earnings press release. For your convenience, our prepared remarks for today's call are available in the Investor Center of our website, roberthalf.com.

Speaker 1

Client and candidate caution continues to impact hiring activity and new project starts on a global basis. However, the trend towards stabilization that began in the second half of last year continued into the Q1 of this year. 1st quarter results were largely in line with expectations and we're encouraged that second quarter earnings guidance led by Protiviti anticipates higher sequential earnings for the first time in 7 quarters. We remain confident in our ability to navigate the current climate and optimistic about our growth prospects built on our industry leading brand, people, technology and unique business model that includes both professional staffing and business consulting services. For the Q1 of 2024, company wide revenues were $1,476,000,000 down 14% from last year's Q1 on a reported basis and down 13% on as adjusted basis.

Speaker 1

Net income per share in the Q1 was $0.61 compared to $1.14 in the Q1 a year ago. In March, we distributed a $0.53 per share cash dividend to our shareholders of record for a total cash outlay of 58,000,000 dollars Our per share dividend has grown 11.6% annually since its inception in 2004. The March 2024 dividend was 10.4% higher than the prior year. We also acquired approximately 750,000 Robert Half shares during the quarter for $60,000,000 We have 10,000,000 shares available for repurchase under our Board approved stock repurchase plan. Return on invested capital for the company was 16% in the Q1.

Speaker 1

Now I'll turn the call over to our CFO, Mike Buckley.

Speaker 2

Thank you, Keith. Hello, everyone. As Keith noted, global revenues were $1,476,000,000 in the first quarter. On an as adjusted basis, 1st quarter talent solutions revenues were down 17% year over year. U.

Speaker 2

S. Talent Solutions revenues were $764,000,000 down 19% from the prior year's Q1. Non U. S. Talent Solutions revenues were $248,000,000 down 10% year over year.

Speaker 2

We have 315 Talent Solutions locations worldwide, including 91 locations in 17 countries outside of the United States. In the Q1, there were 62.8 billing days compared to 63.3 billing days in the same quarter 1 year ago. The Q2 of 2024 has 63.5 billing days compared to 63.3 billing days during the Q2 of 2023. Currency exchange rate fluctuations during the Q1 had the effect of increasing reported year over year total revenues by $2,000,000 $2,000,000 for Talent Solutions and a negligible amount for productivity. Contract Talent Solutions bill rates for the Q1 increased 3.1% compared to 1 year ago, adjusted for changes in the mix of revenues by functional specialization, country and currency.

Speaker 2

This rate for the Q4 was 3.7%. Now let's take a closer look at the results for Protiviti. Global revenues in the Q1 were 464,000,000 dollars 378,000,000 of that is from the United States and $86,000,000 is from outside of the United States. On an as adjusted basis, global first quarter Protiviti revenues were down 5% versus the year ago period. U.

Speaker 2

S. Protiviti revenues were down 4%, while non U. S. Protiviti revenues were down 10%. Protiviti and its independently owned member firms serve clients through a network of 89 locations in 29 countries.

Speaker 2

Turning now to gross margin. In Contract Talent Solutions, 1st quarter gross margin was 39.5% of applicable revenues versus 39.8% in the Q1 1 year ago. Conversion revenues or contract to hire were 3.2% of revenues in the quarter compared to 3.7% of revenues in the quarter 1 year ago. Our permanent placement revenues in the Q1 were 12.3% of consolidated talent solutions revenues versus 12.8% in the same quarter 1 year ago. When combined with contract talent solutions gross margin, overall gross margin for talent solutions was 47% compared to 47.5% of applicable revenues in the Q1 last year.

Speaker 2

For Protiviti, gross margin was 18.9% of Protiviti revenues compared to 22.2 percent of Protiviti revenues 1 year ago. Adjusted for the amount of deferred compensation that is completely offset by investment income related to employee deferred compensation trusts or the deferred compensation investment income offset, gross margin for Protiviti was 20.7% for the quarter just ended compared to 23.2% last year. Moving on to SG and A. Enterprise SG and A costs were 35.3 percent of global revenues in the Q1 compared to 32.2% in the same quarter 1 year ago. Adjusted for the deferred compensation investment income offset, enterprise SG and A costs were 33% for the quarter just ended compared to 30.9% last year.

Speaker 2

Talent Solutions SG and A costs were 44.3 percent of Talent Solutions revenues in the Q1 versus 39% in the Q1 of 2023. Adjusted for the deferred compensation investment income offset, Talent Solutions SG and A costs were 40.8% for the quarter just ended compared to 37.1% last year. 1st quarter SG and A costs for Protiviti were 15.8% of Protiviti revenues compared to 15.3 percent of revenues for the same quarter last year. Operating income for the quarter was $41,000,000 Adjusted for the deferred compensation investment income offset, combined segment income was $85,000,000 in the 1st quarter. Combined segment margin was 5.7%.

Speaker 2

1st quarter segment income from our Talent Solutions divisions was $62,000,000 with a segment margin of 6.1%. Segment income for Protiviti in the Q1 was $23,000,000 with a segment margin of 4.9%. Our Q1 2024 income statement includes $43,000,000 as income from investments held in employee deferred compensation trusts. This is completely offset by an equal amount of additional employee compensation, which is reflected in SG and A expenses and direct costs. As such, it has no effect on the reported on our reported net income.

Speaker 2

Our first quarter tax rate was 30% compared to 28% 1 year ago. At the end of the Q1, accounts receivable were $861,000,000 and implied days sales outstanding or DSO was 52.5 days. Before we move to Q2 guidance, let's review some of the monthly revenue trends we saw in the Q1 and so far in April, all adjusted for currency and billing days. Contract Talent Solutions exited the Q1 with March revenues down 16% versus the prior year compared to a 16% decrease for the full quarter. Revenue for the 1st 2 weeks of April were down 16% compared to the same period last year.

Speaker 2

Permanent placement revenues in March were down 17% versus March 2023. This compares to a 20% decrease for the full quarter. For the 1st 3 weeks of April, permanent placement revenues were down 18% compared to the same period in 2023. We provide this information so you have insight into some of the trends we saw during the Q1 and into April. But as you know, these are very brief time periods.

Speaker 2

We caution against reading too much into them. With that in mind, we offer the following 2nd quarter guidance. Revenues $1,450,000,000 to $1,550,000,000 income per share $0.63 to $0.77 midpoint revenue of 1,500,000,000 are 9% lower than the same period in 2023 on an as adjusted basis. The major financial assumptions underlying the midpoint of these estimates are as follows: revenue growth on a year over year basis as adjusted Talent Solutions down 10% to 14% for Protiviti down 3% to flat overall down 7% to 11%. Gross margin for contract talent 38% to 41%.

Speaker 2

For Protiviti on an as adjusted for the deferred compensation investment income offset 22% to 24%, overall 38% to 40%. SG and A as a percentage of revenues adjusted for the deferred compensation investment income offset Talent Solutions 40% to 42% Protiviti 15% to 17% and overall 32% to 34%. Segment income for Talent Solutions 5% to 7%, Protiviti 6% to 8%, overall 5% to 8% our tax rate 29% to 30% and shares outstanding $103,000,000 to $104,000,000 2024 capital expenditures and capitalized cloud computing costs $90,000,000 to $110,000,000 with $20,000,000 to $25,000,000 in the 2nd quarter. As always, we limit our formal guidance to 1 quarter forward. Just for informational purposes, we would note that the 10 year average performance for the 3rd quarter excluding 2020's COVID impact is for sequential revenue gains of 1.1% and sequential EPS gains of 4.3%.

Speaker 2

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 Keith.

Speaker 1

Thank you, Mike. Consistent with prior quarters, clients are budget sensitive and very selective in their hiring activities, including the approval of new projects. Also many are maintaining their internal headcounts based on the anticipated difficulty in finding suitable replacements. Candidates are also more reluctant to change jobs reflecting diminished competence in the market. The net impact is less churn in the labor force and employee attrition is down significantly across the globe.

Speaker 1

On a weekly basis, we exited the quarter with revenues very similar to those at the end of the prior quarter, another sign of the stabilization we have seen since the middle of last year. We have many reasons to be optimistic about the future. We have significant opportunities as macroeconomic conditions improve starting with the reacceleration in the velocity of hiring and the more normalized labor churn that typically follows when client and candidate confidence improve. Job openings data, which is significantly higher now than in prior industry downturns, indicates substantial amounts of pinup demand for future hiring. We're also encouraged by the growth in margin prospects from our continued focus on services related to higher skilled talent, both in Talent Solutions and Protiviti, our investments in higher skilled services carry many advantages: higher bill rates and gross margins, longer assignment, increased client openness to remote talent, more full time engagement professionals and less economic sensitivity.

Speaker 1

Our mix of revenues from higher skilled positions has been steadily rising over the past several years and currently exceeds 50%. We expect this positive trend to continue. We continue to invest in technology and innovation to fuel our core business strategy, which places our specialized talent solutions professionals at the center of clients' hiring experience along with digital tools that provide greater client convenience, flexibility and transparency throughout the hiring process. We also continue to leverage our proprietary data assets to enhance the AI tools our recruiters use to discover, assess and select talent for our clients and the AI tools our recruiters use to effectively target leads for additional revenue. Protiviti continues to have a strong pipeline and a diverse offering of solutions, which compete very effectively in the marketplace.

Speaker 1

Protiviti's 1st quarter results were also impacted by client budget measures and seasonally higher cost. We encouraged that for the 2nd quarter, Protiviti expects to report sequential segment income growth for the first time in 6 quarters based on broad based strength in each of its solution areas, all of which are expected to grow sequentially. Coupled with close control over its resource costs and staff utilization rates, This anticipated growth drives approximately 200 basis points in sequential improvement in Protiviti projected gross margin and segment margin. We've weathered many economic cycles in the past, each time emerging to see higher peaks. While macroeconomic conditions have constrained client resource levels in the short term, this also results in pent up demand for talent and projects as business conditions improve.

Speaker 1

Also, aging workforce demographics and clients' desire for flexible resources and variable costs are structural tailwinds that are expected to benefit us for many years to come. With our current portfolio of talent and Protiviti solutions, we're even more confident about our future. We are held steadfast by our time tested corporate purpose to connect people to meaningful and exciting work and provide clients with the talent and consulting expertise they need to confidently compete and grow. Finally, we'd like to extend our gratitude to our employees across the globe whose efforts made possible a number of recent prestigious accolades. Robert Half was among an elite few companies and the only one in our industry to be honored as a Fortune Most Admired Company for 27 consecutive years.

Speaker 1

We were also recognized as one of Fortune's 100 Companies 100 Best Companies to Work For, Forbes, America's Best Large Employers and just this week, 1 of Forbes' Best Employers for Diversity. All are a testament to our people first culture, which is a cornerstone to our success. Now Mike and I'd be happy to answer your questions.

Operator

Thank Your first question comes from the line of Andrew Steinerman with JPMorgan.

Speaker 3

Hi, Keith. I was intrigued by your point about 3rd quarter sequential averages. And my question has to do with once we get out of this kind of funk where temporary help is down for so long, but we're not in a recession. When you look at your contract staffing business, what do you think the shape of the recovery will look like? Like do you feel like after we have this point of stability, we're going to kind of go back to typical sequential averages?

Speaker 3

Or do you feel like there'll be more of a spring loaded rebound?

Speaker 1

Well, I would argue the latter, the spring loaded rebound. And I base that in part on if you look at the number of job openings, which in the U. S. Are just under 9,000,000. Dollars While I understand that's less than their peak where it was in the 12 ish range, if you compare to prior staffing industry downturns, that $8,900,000 is significantly higher than it was at those times.

Speaker 1

And we view those openings as pin up demand for future hires, be it contract or perm placement. So we think the level of pin up demand for hiring as further evidenced by the labor short market we're in, we think that bodes very well and we think we will come spring loaded when we get through this funk, your word, that we've been experiencing for the last 6, 7 quarters.

Speaker 3

Okay. Thank you very much.

Operator

Your next question comes from the line of Mark Marcon with Baird. Go ahead.

Speaker 4

Good afternoon. Keith, you talked about the broad based strength in Protiviti. A number of other a rebound. I'm wondering if you can talk a little bit about what you think some of the underlying factors are for you to see some broad based stabilization and the high confidence that you have that we should see a sequential improvement? Is it improved marketing on your end?

Speaker 4

Is it the value proposition? Are there any things that you're doing differently that's enabling you to continue to gain share?

Speaker 1

Well, I'd say, 1st of all, by solution, the regulatory risk and compliance continues to be strong and leads the way. We had a very nice business process improvement quarter where we had joint wins with Protiviti and with Talent Solutions that contributed. Terminology and Tech Consulting continue to be impacted by client budget pressures pretty much like before. But if we look at the pipeline, we've got very good pipeline statistics this quarter as compared to last that gives us some confidence. We typically see a seasonal lift in the second quarter for Protiviti.

Speaker 1

And while not quite what the average seasonal second quarter lift, we're certainly back getting close to that. And with a little luck year on year Protiviti will get back to flat. And so based on the momentum they've got coming from Q1 based on the pipeline and the internals of that pipeline, which are very strong, they feel good about sequential growth in the second quarter, much of which falls to the bottom line. We talked about 200 basis point improvements in gross margin and segment margin, all because a disproportionate amount of that incremental revenue falls to the bottom line, which is a wonderful thing.

Speaker 4

That is. And then assuming that those trends continue, how would you think about the profitability margins as we start getting out towards the second half if we get back to kind of normal seasonal patterns?

Speaker 1

Typically, you would see another nice lift in margins in the Q3. On the internal audit side, that's the big quarter for Sarbanes Oxley compliance work. So seasonally, you get some lift from that. If you add to that any cyclical improvement, as you allude. And so seasonally, the pattern over the course of the year is you have a step down in Q1 because of external audit crowd out of internal audit on the revenue side.

Speaker 1

You've got the new cost from raises and promotions for your staff and then you recover that over the course of the next three quarters. So last year, Q4, I think we ended up at 11%, 11.4%, nice double digits in Protiviti notwithstanding the environment we're in. So but we feel good with Protiviti's control of their resource cost, which includes using their variable cost tranche, which are contractors from Talent Solutions that their gross margins will recover nicely as they have in the past.

Speaker 4

Perfect. Thank you.

Operator

Your next question comes from the line of Manav Patnaik with Barclays.

Speaker 5

Hi, Keith. This is Princi Thomas on for Manav. I wanted to just see if you could give us additional color on what you're seeing around staff attrition and utilization?

Speaker 1

And are we talking about Protiviti? Are we talking about Robert Half Enterprise? What's the context?

Operator

I have both if you're

Speaker 5

able to go into both.

Speaker 1

And as far as staff attrition at Robert Half, I'd say consistent with virtually every company across the globe, our attrition is down, both in our corporate services area as well as out in our branches. And so I think, it's just a as we've talked about before and because of the caution inclusive of our internal staff as well as those we place on assignment, there's just less attrition. As to utilization, particularly on Protiviti, which is where we measure it. Part of that margin improvement, a large part of that margin improvement is due to an increase in utilization, which includes controlling their costs by using contractors. So the utilization story is a good one and is a big piece of the margin improvement story.

Speaker 1

But if you look year over year or if you look sequentially, Protiviti has done a nice job managing their utilization levels.

Operator

Thank you. Your next question comes from the line of Trevor Romeo with William Blair.

Speaker 6

Hi, good afternoon. Thanks for taking the question. Had one on pricing and bill rates. It sounded like you saw about 3% bill rate growth in the quarter. I think that continued to moderate a bit relative to the past few.

Speaker 6

I was just kind of wondering if you could talk about your expectations for both low rate growth and bill pay spreads over the next few quarters and whether you see any variation across your mix of specialties within contract talent?

Speaker 1

Just like we've seen moderation in bill rate growth for several quarters in a row, we would expect that moderation to continue. However, we see very little impact to our spreads just as we've seen very little impact to our spreads over the last few quarters. If you look at our Talent Solutions gross margins on the contract side, the change has been primarily on conversions contract to hire. Those are down 40 to 50 basis points year on year. They're down another 10 sequentially.

Speaker 1

So those are driving the change in gross margins much more so than the moderating bill rate increases, which are essentially pass throughs of pay rate increases, which we also expect to continue to moderate.

Speaker 6

Okay. Thank you. And then for follow-up, maybe a bit of a bigger picture question. I wanted to ask about the rule earlier this week from the FTC, related to potentially banning non compete agreements. I they estimate it would affect almost 20% of the whole U.

Speaker 6

S. Labor market. Just given your view on kind of the professional labor market, was curious if you would expect any impact from fewer non competes, maybe such as higher labor market churn and whether there could be any potential flow to Robert Half or similar companies that could potentially fill gaps with contract talent? Thank you.

Speaker 1

Well, as you know, several states already don't enforce don't allow enforceability of non competes, the biggest one being California. So we've seen that movie to that extent. I think logic would say there'd be more churn if there are no non competes. How significant that would be in our area, I'm not sure it'd be that significant. Certainly in the news, you talk about hairdressers and people with very different skills than those we place.

Speaker 1

But I'd say net net, it probably results in more churn. However, remember now there are trade secret agreements that are enforceable. There are intellectual property pieces to those agreements that are enforceable. So it doesn't just become the Wild West when the non compete goes away because there's still a trade secret, there's still an intellectual property that would still impact one's ability and willingness to make a move.

Speaker 6

Okay. Very helpful. Thanks, Keith.

Operator

Your next question comes from the line of Tobey Sommer with Truist Securities.

Speaker 7

Hey, good afternoon. This is Jasper Bibb on for Tobey. I wanted to ask how you're thinking about managing recruiter capacity for an eventual rebound at the stage of the cycle and what that might incur G and A costs over the balance of the year?

Speaker 1

And so for a few quarters now, we have pretty much held the line on our recruiter levels notwithstanding some sequential reductions in our revenues. And we've done that so that we have the capacity to participate in the spring load we talked about earlier. We feel good about our resource levels. As we sit here today, we certainly have a few quarters of growth that we could benefit from without having to add significantly to headcount. So I think we've been pretty clear for 2 or 3 quarters minimum that we've been holding our resource levels pretty stable, pretty steady notwithstanding a sequentially declining revenue pattern.

Speaker 7

Thanks. And then on the tech staffing segment, some of your public peers have said, hey, demand seems to be stabilizing at this point, others still seeing revenue fall sequentially in the Q2. I guess just kind of curious what your experience has been there and what the outlook might look like for the Q2?

Speaker 1

I would say our tech staffing outlook for Q2 isn't that different than our overall outlook for the Q2, which is for a small single digit sequential decline in top line, but pretty much a continuation of this stabilization theme that we've seen since mid last year. So I'd say in line with our other segments, but starting with Accounting and Finance.

Speaker 7

That makes sense. Thanks for taking the questions guys.

Operator

Your next question comes from the line of Heather Balsky with Bank of America. Please go ahead.

Speaker 8

Hi, thank you. I was curious about your pipeline for Protiviti. You talked about a strong pipeline. When you look at the potential projects there And then you look at sort of within that business where you're seeing strength and weaknesses. Is there a correlation there?

Speaker 8

And are there areas within Protiviti if you that you think should rebound faster? I guess when you think about that business and how sales could come back or accelerate, kind of how do you see that evolving into recovery? Thanks.

Speaker 1

Well, regulatory risk and compliance has been the strongest. It's expected to continue to be the strongest. It has a very nice pipeline. The area most impacted by client cautiousness and focus on cost has been 1st internal audit and then next technology consulting. And so a reversal of those conditions would benefit internal audit and tech consulting the most.

Speaker 1

But as we said, every single Protiviti solution is expecting sequential revenue growth in the 2nd quarter. And that's very different than what we've seen for several quarters. So we see that as a very good trend. And the pipeline is reasonably strong across all those solutions and it's very strong in areas like regulatory compliance.

Speaker 8

Got it. And are you seeing is the pipeline you've talked about the pipeline being strong for a while. Are you seeing it continue to build quarter over quarter as you wait for the recovery?

Speaker 1

And Protiviti has all type of statistics. They're probability weighted. They slice and dice many ways. But if you looked at all those internals that I'm not about to start disclosing publicly, I think you'd be very encouraged about how those subcomponents of their pipelines stack up relative to not only a year ago, but to a quarter ago as well. That's not to say that conditions aren't choppy, which tends to be their favorite word.

Speaker 1

Clearly, it's competitive. Clearly, in internal audit, you've got big four firms with additional capacity in certain markets. They're very price competitive. All of that's there. It's been there for several quarters.

Speaker 1

We built that into our guidance. But that said, the pipeline and its components are quite strong, which makes us quite optimistic.

Speaker 8

That's really helpful. Thank you very much.

Operator

Your next question comes from the line of Stephanie Moore with Jefferies.

Speaker 9

Hi, good afternoon. Thank you. So I think, Keith, you called out what we've been continuing to see that clients are just simply very budget sensitive and very selective in their hiring activities. But based on your conversations with clients, what do they need to see to be a bit more aggressive with hiring? What are the factors that you hear the most from them?

Speaker 1

I think it comes down to confidence. If you look at NFIB, it will tell you that small businesses say their number one business problem is inflation. And clearly, there was more progress on inflation kind of going into the New Year. It seems to have been stickier. There's this thought of higher for longer, all of which impact confidence.

Speaker 1

And so I think what's needed is we need more client confidence. And therefore, all of that pent up demand for hiring, they have more urgency to get done.

Speaker 9

Got it. Helpful. And then maybe just one clarification question. Kind of looking at the geographic performance in the quarter, it looks like U. S.

Speaker 9

Actually was down a little bit more materially than in the non U. S. Anything to call out there?

Speaker 1

So in Talent Solutions, that's been the case for several quarters. I'd say generally speaking that's led by Germany. And I would say that in turn is largely attributable to Germany probably has had the most success of talent solutions and Protiviti going to market together. And in combination, it's had a meaningful impact on the results from Germany and therefore a meaningful impact on the relative performance of non U. S.

Speaker 1

And U. S. And I would also add for the last, I don't know, 5, 6 quarters, Brazil has been coming on nicely. It's now in our top 6 countries by dollars, converted dollars, as you look at our international zone countries. And if you do it on an hours basis, it ranks even higher than that.

Speaker 1

And so I'm happy to first start talking about Brazil because Brazil is starting to do quite well. It's been doing quite well.

Speaker 9

Got it. Well, thank you so much.

Operator

Your next question comes from the line of Jeff Silber with BMO Capital Markets.

Speaker 10

Thanks so much. Keith, you mentioned the words price competition when you were talking about Protiviti. I was wondering if you can give us some color about price competition in your talent solutions business, has it meaningfully changed or not?

Speaker 1

Yes, I would say it has not meaningfully changed. Clearly, pay rates aren't rising as quickly as they had been just in the market. Bill rates that pass those through aren't rising as fast as they were. We've always been premium priced relative to the competition. But over time, we've shown that value add to our client and we've been able to sustain that.

Speaker 1

And that spread, we've continued to sustain throughout these last 7 quarters, notwithstanding that premium pricing position. And so that hasn't changed much and our margins are pretty much intact relative to where they typically are. As I said earlier, the big swing is more about temp to hire, temp to contract to hire conversions, which is a function of the full time hiring market. But our gross margins that certainly reflect the competitive marketplace, our gross margins have held in remarkably well.

Speaker 10

Okay. I appreciate that color. If I could just sneak in one numbers question. You typically give us operating cash flow in your prepared remarks. I don't think you did so this quarter.

Speaker 10

Is it possible to get that number?

Speaker 1

Let's see. Let me see if anybody in the room has a number.

Speaker 10

If not, I can follow-up offline.

Speaker 1

It's operating cash flow was I think it's a use of $16,000,000 And the reason it's a use is the first quarter is the quarter where we pay annual bonuses in addition to the normal quarterly bonuses. And it's also the quarter we pay all our technology SaaS subscriptions for the coming year. So if you look back over time, there's the most differential between earnings and cash flow in the Q1 of any of the quarters.

Speaker 10

Okay. That's really helpful. Thanks so much.

Operator

Your next question comes from the line of George Tong with Goldman Sachs. Please go ahead.

Speaker 11

Hi, thanks. Good afternoon. Labor hoarding has been causing temp staffing to underperform overall non farm payrolls. When would you expect that phenomenon to lap? And if it does, to what extent would it be accompanied by lower client demand for staffing in general?

Speaker 1

Well, labor hoarding has multiple causes, one of which is there's concern that it'd be difficult to replace find suitable replacements for any involuntary attrition from the standpoint of the candidate. I see labor hoarding. I see candidate confidence to make a move, which is also impacted by what's the compensation outlook if they make a move. During the height of post COVID, you could switch jobs and get a large compensation increase. That's not the case anymore.

Speaker 1

So it's not just a matter of candid caution. It's also a matter of you don't get the premium to move that you once did. So there's no question that this whole churn that hoarding is a piece of, churn is no there's no doubt is a function of the macro and there has to be macro improvement. There has to be confidence improvement for that churn to change. But churn is way down and clearly that's impacting our revenues.

Speaker 1

And for me, it's probably the answer to one of the most asked questions we get is, why is it when the labor markets otherwise look pretty strong, is the entire staffing industry down for the last 7 quarters. And I think the biggest reconciliation item there is, post COVID, there was hyperchurn. There's been some normalization of that hyperchurn and you've now got below trend churn, all of which impacts staffing industry revenues. But you need confidence, you need client confidence that hasn't been there for several quarters. You look at NFIB, their optimism index, I think it's flat lined to slightly down and that measures directly at least small business confidence or optimism.

Speaker 1

But it's down 2 years below its multi decade average. It's all about confidence, which gets to urgency of hiring. We need more confidence.

Speaker 11

Got it. That's helpful perspective. And then your operating margin guidance for 2Q points to quite a bit of margin contraction on a year over year basis. To what extent does the margin contraction simply reflect deleveraging from top line declines? And how much control over the margin profile in 2Q do you have?

Speaker 1

Well, I'd say first of all, we've got sequential margin accretion. Let's keep that in mind. Year on year, you've got deleveraging from your additional SG and A costs tied to administrative compensation, both corporate services, the fixed component of compensation out in the branches as well as in Protiviti. So year on year, there's contraction sequentially. We're actually accreting and it's nice to see that accreting.

Speaker 1

And in fact, as we said in our prepared remarks, it's the first time in 7 quarters where we're talking about a sequential increase in operating margins. But year on year, as you point out, it's still down and it's because of deleveraging of those fixed costs, in part because we're retaining capacity for participation in a broader improvement in the macro and the confidence levels that we just talked about that we've seen by the way in every single cycle since we've been around, which is a long time.

Speaker 11

Got it. Very helpful. Thank you.

Operator

Your next question comes from the line of Kartik Mehta with Northcoast Research. Please go ahead.

Speaker 12

Good afternoon. Well, thank you. Good afternoon. Keith, you talked a little bit about price competition in Protiviti, especially in some areas. Has that at all resulted in you having to walk away from any business because maybe the margin profile wasn't what you wanted?

Speaker 1

Well, there are examples where our competitors for their own business reasons had crazy, I mean crazy pricing. And so did we walk away? No. Did we think we priced it aggressively to win the business? Yes, which we didn't when the competition crazy priced it.

Speaker 1

So I wouldn't say we walked away. We rarely decline to even propose, but some firms, some markets, given their capacity levels, get super aggressive in their pricing. That's not new. That's built into our margins this past quarter, the quarter before that. It's not new.

Speaker 1

We expect that to continue for a few quarters longer, but that's all built into our guidance.

Speaker 12

And just as a follow-up, Keith, you've talked about AI and obviously AI benefiting Robert Half. And I'm wondering today where AI sits, is it more of an expense or more of a benefit? And I didn't know if it just needed time for it to become a benefit.

Speaker 1

Well, so we continue to invest in AI. We're currently incorporating large language models into our matching algorithms. We're using our proprietary data to customize these large language models. The good news is there's this whole group of parameter efficient fine tuning models that let you customize at a relatively low cost and use your own data, we believe we can add more value for our clients, most of which are small businesses and for candidates with our AI algorithms. And it further differentiates us from our competitors, most of which are small that don't have our data, that don't have our technology.

Speaker 1

And so I could go down the P and L and talk about we know we have additional revenue because of our AI. We've been about AI particularly for matching for 7 to 10 years. They weren't large language models, but they were medium language models in today's world. So we've got a head start. We've got a leg up.

Speaker 1

We've been doing this for a while. I think that means it's we more quickly participate in the upside of large language models, which at the end of the day expand the context window for understanding the meanings of words, which are important when you're matching candidate titles, skills and work history. So personally, there's no question just based on the revenue we can measure for candidates we source and place using our AI greatly exceeds the cost of that. And our the high cost of these large language models is more for these hyperscalers that are doing the foundation models themselves. I mean, we're taking the open source version of those.

Speaker 1

We're customizing those for our use. And as I said earlier, there are wonderful advancements being made on customizing those large language models for your individual use cases that use your own data. So that's a real long winded way of saying, I think the benefits will outweigh the cost.

Speaker 4

Thank you very much. I really appreciate it.

Speaker 1

Okay. So, that was our last question. We appreciate everyone participating today. Thank you very much.

Operator

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 roberthalf.com. You can also log in to the conference call replay. Details are contained in the company's press release issued earlier today.

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Earnings Conference Call
Robert Half Q1 2024
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