Robert Half Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 24, 2024

There are 14 speakers on the call.

Operator

Hello, and welcome to the Robert Half Second Quarter 2024 Conference Call. Today's conference call is being recorded. Our hosts for today's call are Mr. Keith Waddell, President and Chief Executive Officer of Robert Half and Mr. Michael Buckley, Chief Financial Officer.

Operator

Mr. Waddell, you may begin.

Speaker 1

Hi, 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 the 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, roberthapp.com.

Speaker 1

For the Q2 of 2024, company wide revenues were 1,473,000,000 dollars down 10% from last year's Q2 on both a reported and as adjusted basis. Net income per share in the 2nd quarter was $0.66 compared to $1 in the 2nd quarter a year ago. Client and candidate caution continues to impact hiring activity and new project starts as macroeconomic and interest rate uncertainty persist. 2nd quarter revenues and earnings were within our guidance range. Protiviti posted strong results led by U.

Speaker 1

S. Growth in revenues and segment income both on a sequential and year on year basis.

Speaker 2

We remain confident in our ability to navigate the current

Speaker 1

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. Cash flow from operations during the quarter was 142,000,000 dollars In June, we distributed a $0.53 per share cash dividend to our shareholders of record for a total cash outlay of $55,000,000 Our per share dividend has grown 11.5% annually since inception in 2004. The June 24 dividend was 10.4% higher than the prior year. We also acquired 900,000 Robert Half shares during the quarter for $60,000,000 We have 9,100,000 shares available for repurchase under our board approved stock repurchase plan. Return on invested capital for the company was 18% in the 2nd quarter.

Speaker 1

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

Speaker 2

Thanks, Keith, and hello, everyone. As Keith noted, global revenues were $1,473,000,000 in the 2nd quarter. On an as adjusted basis, 2nd quarter talent solutions revenues were down 14% year over year. U. S.

Speaker 2

Talent solutions revenues were 701,000,000 down 15% from the prior year's Q2. Non U. S. Talent Solutions revenues were $235,000,000 down 10% year over year. We conduct Talent Solutions operations through offices in the United States in 17 foreign countries.

Speaker 2

In the Q2, there were 63.5 billing days compared to 63.3 billing days in the same quarter 1 year ago. The Q3 of 2024 had 64.1 billing days compared to 63.1 billing days during the Q3 of 2023. Currency exchange rate fluctuation during the Q2 had the effect of decreasing reported year over year total revenues by 6,000,000 dollars 5,000,000 for Talent Solutions and $1,000,000 for Protiviti. Contract Talent Solutions bill rates for the 2nd quarter increased 3.1% compared to 1 year ago, adjusted for changes in the mix of revenues by functional specialization, currency and country. This rate for the Q1 was also 3.1%.

Speaker 2

Now let's take a closer look at results for Protiviti. Global revenues in the 2nd quarter were 487,000,000 dollars 399,000,000 of that is from the United States and $88,000,000 is from outside of the United States. On an as adjusted basis, global 2nd quarter Protiviti revenues were down 1% versus 1 year versus the 1 year ago period. U. S.

Speaker 2

Protiviti revenues were up 3%, while non U. S. Protiviti revenues were down 16%. Protiviti and its independently owned member firms serve clients through locations in the United States and 29 foreign countries. Turning now to gross margin.

Speaker 2

In Contract Talent Solutions, 2nd quarter gross margin was 39.3 percent applicable revenues versus 39.9 percent in the 2nd quarter 1 year ago. Conversion revenues or contract to hire were 3.4 percent of revenues in the quarter compared to 3.7% of revenues in the quarter 1 year ago. Our permanent placement revenues in the 2nd quarter were 13.3% of consolidated talent solutions revenues versus 13% in the same quarter 1 year ago. When combined with talent with contract talent solutions gross margin, overall gross margin for Talent Solutions was 47.4% compared to 47.7% of applicable revenues in the Q2 of last year. For Protiviti, gross margin was 22.5 percent of Protiviti revenues compared to 22.9 percent of Protiviti revenues 1 year ago.

Speaker 2

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 23.2% for the quarter just ended compared to 24% last year. Moving on to selling, general and administrative costs. Enterprise SG and A costs were 34% of global revenues in the 2nd quarter compared to 33.1% in the same quarter 1 year ago. Adjusted for the deferred compensation investment income offset, enterprise SG and A costs were 33.2 percent for the quarter just ended compared to 31.6%

Speaker 3

last year.

Speaker 2

Talend Solutions SG and A costs were 43.1 percent of Talend Solutions revenues in the 2nd quarter versus 40.7% in the Q2 of 2023. Adjusted for the deferred compensation investment income offset, Talent Solutions SG and A costs were 41.9 percent for the quarter just ended compared to 38.7% last year. 2nd quarter SG and A costs for Protiviti were 15.6 percent of Protiviti revenues compared to 15.1 percent of revenues for the same quarter last year. Operating income for the quarter was 76,000,000 dollars adjusted for the deferred compensation investment income offset, combined segment income was $92,000,000 in the 2nd quarter. Combined segment margin was 6.2%.

Speaker 2

2nd quarter segment income from our Talent Solutions divisions was $55,000,000 with a segment margin of 5.5%. Segment income for Protiviti in the 2nd quarter was $37,000,000 dollars with a segment margin of 7.7%. Our 2nd quarter 2024 income statement includes $16,000,000 as income from investments held in employee deferred compensation trust. This is completely offset by an equal amount of additional employee deferred compensation costs, which are reflected in SG and A expenses and direct costs. As such, it has no effect on reported net income.

Speaker 2

Our 2nd quarter tax rate was 29% compared to 30% 1 year ago. At the end of the second quarter, accounts receivable were 893,000,000 and implied days sales outstanding or DSO was 54.6 days. Before we move to Q3 guidance, let's review some of the monthly review revenue trends we saw in the 2nd quarter and so far in July, all adjusted for currency and billing days. Contract Talent Solutions exited the 2nd quarter with June revenues down 13% versus the prior year compared to a 14% decrease for the full quarter. Revenues for the 1st 2 weeks of July were down 14% compared to the same period last year.

Speaker 2

Permanent placement revenues in June were down 3% versus June of 2023. This compares to a 12% decrease for the full quarter. For the 1st 3 weeks of July, permanent placement revenues were down 17% compared to the same period in 2023. We provide this information so you have insight into some of the trends we saw during the Q2 and into July. 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 Q3 guidance: revenues, dollars 1,390,000,000 to 1,490,000,000 income per share, $0.53 to $0.67 Our Q3 EPS estimate includes a restructuring charge of $0.08 per share related to Protiviti International. This includes $5,700,000 charged to SG and A and income tax charges of 2,500,000 dollars Keith will provide additional information on this in a moment. Midpoint revenues of 1.44 or 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.

Speaker 2

Revenue growth year over year as adjusted for talent solutions down 12% to 16%, connectivity down 1% to up 2%, overall down 7% to 11%. Contract margin percentage for contract talent, 38% to 41%. Protiviti, as adjusted for the deferred compensation investment income offset 24% to 26%, overall 39% to 41%.

Speaker 4

SG and A as a

Speaker 2

percentage of revenues adjusted for deferred compensation investment income offset for Talent Solutions 41% to 43%, Protiviti 16% to 18%, overall 33% to 35%. Segment income Accountant Solutions 4% to 6% with Protiviti 7% to 9% overall 5% to 7% tax rate 31% to 33% shares 102,000,000 to 103,000,000 expenditures and capitalized cloud computing costs $80,000,000 to $100,000,000 with $25,000,000 to $35,000,000 in the 3rd 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

Speaker 1

back over to Keith. So we're told the sound is a little scratchy. We're going to switch lines.

Speaker 2

So give us just one second.

Speaker 5

Okay. We're on the backup line.

Speaker 2

Justin?

Operator

You are. Go ahead, please.

Speaker 1

Okay. Thank you, Mike. Client budgets remain constrained and candidates are elected to change jobs. This subdues short term demand and elongates sales cycles. However, job openings are well above historical highs and indicative of pent up future demand.

Speaker 1

As business confidence improves, hiring urgency returns, project demand accelerates, deferred backlogs and growth initiatives are reprioritized and labor churn normalizes. This puts pressure on client resources that are often already stretched and creates hiring and consulting demand that traditionally leads to very strong gains for us in the early part of growth cycles. While progress on inflation and economic momentum stalled during the Q1 of this year, positive trends reemerged in the 2nd quarter, which should be more conducive for higher business confidence levels and overall sentiment going forward. We continue to invest in technology and innovation to fuel our core business, which combines the skills, judgment and expertise of our specialized talent solution professionals with world class AI tools that leverage our proprietary data assets. We recently upgraded the candidate discovery experience on our website to transparently display the ratings of our recruiters for all AI matched candidates we previously placed or interacted with.

Speaker 1

This is an industry first that tangibly demonstrates the benefits of our combined recruiters plus AI strategy, which our clients highly value. We're very pleased with Protiviti's results for the quarter based on broad strength in each of its solution areas. Gross margin and segment income both exceeded expectations growing more than 2 50 basis points sequentially. Additional improvement is expected in the Q3, the result of continued revenue strength combined with close control over resource cost and staff utilization rates. Protiviti's prospects and pipeline remain very strong, a testament to its ability to increasingly gain share in a competitive consulting market.

Speaker 1

As noted previously, during the Q3, Protiviti will transition its Mainland China operations to an independently owned member firm to optimize local revenue opportunities, including state owned enterprises. This will result in a restructuring charge of $0.08 per share. We've weathered many economic cycles in the past each time emerging to achieve higher peaks, Aging workforce demographics and clients' desire for flexible resources and variable costs are expected to benefit us for years to come. With our current business portfolio of talent solutions and consulting, we're even more confident about our future as macro confidence returns. We'll continue to invest in our people, our technology, our brand and our business model to strengthen our ability to connect candidates with meaningful work and provide clients with the talent and subject matter expertise they need to constantly compete and grow.

Speaker 1

Finally, we'd like to thank our employees across the globe whose commitment to success made possible a number of new accolades. Robert Half again ranked number 1 on Forbes list of America's Best Professional Recruiting Firms and our people first culture was reflected in our selection as one of Fortune's best workplaces for millennials, Forbes Best Employers for Diversity and just yesterday Forbes Best Employers for Women. Now Mike and I'd be happy to answer your questions. Please ask just one question and a single follow-up. If there's time, we'll come back to you

Operator

And your first question comes from the line of Mark Marcon with Baird.

Speaker 4

Good afternoon, Keith and Mike. We know that job openings continue to be elevated, but obviously the trends when we take a look at temp or perm continue to be relatively soft. And so one thing that a lot of investors are asking about is, to what extent do we think it's not just macro concerns, but potentially that some companies ended up over hiring during the snapback from COVID and in the midst of the great resignation. And once everything froze, they basically ended up with too high of a permanent staffing level, but we're concerned about like it's so difficult to hire quality people that they're just holding on to them. And that it's and that they're in certain cases just overstaffed and therefore hesitant to basically using temps as their pathway to flexibility.

Speaker 4

I'm wondering, this is a subjective question, but how much do you think that's the dynamic that's at play relative to macro concerns? And if that is a big part of it, how long do you think it might take us to kind of go through that before we start seeing a bit of a pickup?

Speaker 1

Well, Mark, I would say, early post COVID, those were certainly factors, but we're now 8 quarters into down sequential quarters such that to a large extent that's played out. We're clearly seeing signs of project deferrals. There's no question that clients are using the lever of variable cost which they get by using contractors. But again, we're 8 quarters into that. 1 of our people on our pre earnings call made an interesting comment.

Speaker 1

They said, it feels like using a retail analogy, our clients have done due diligence. They've put something in their shopping cart, but they just won't hit the submit button, indicative of there's deferred demand as we speak. And so there's no question that accelerated hiring that did early post COVID had an impact. But as I've said, we're 8 quarters into this. In fact, the longest period of sequential down quarters we've had was 10 and that relates all the way back to the dotcom period.

Speaker 1

So we've been at this a while. Contractors industry wide temps, if you will, are down and have been down. Feels to us like particularly given if you looked at second half of twenty twenty three, inflation was coming down, a lot of talk of interest rate cuts. If you looked at our sequential performance, the first couple of 3 quarters of 2023, we were down mid single digits. On the prospect of rate cuts less inflation, the 4th quarter the first quarter that those sequential declines improved to down low single digits.

Speaker 1

This quarter, given the stalling of the progress on inflation on the fewer interest rate cuts, we've moved back to mid single digits. Again, this is down sequentially. Our guidance for Q3 is that we stay in that down mid single digits sequentially, but we're optimistic given how our business reacted to what happened second half of last year. And as we see progress in inflation as we speak and more talk of rate cuts, we're cautiously optimistic that with a bit of a lag, we will see improvement in our numbers. But the overhang of over hiring to the extent it existed, it existed early in the last eight quarters and has pretty much plagued its way out as we

Speaker 4

speak. That's great color, Keith. Thanks and I agree with you. The other question is just on Protiviti within the U. S, really nice improvement.

Speaker 4

And what I'm wondering is, can you talk a little bit about the areas that you saw additional strength there? And when we you gave us the guidance for Protiviti in terms of the quarter, but how much of that is China? What's the amount that we're stripping out?

Speaker 1

So the good news is on Protiviti U. S, the solution strength was very balanced across its 4 major solution areas, technology consulting, internal audit, business process improvement and regulatory risk and compliance. Very broad based, every one of them grew sequentially, which we're very pleased by. As to the impact of China, it was small, annual revenues less than $10,000,000 And so while there's an EPS impact of the conversion from owned to member firm, the revenue impact is quite small. And I'd say this as well for what's left that we have in China, which principally Hong Kong, it's just under 1% of revenues.

Speaker 2

Great. Thank you.

Operator

And the next question will come from Andrew Steinerman with JPMorgan.

Speaker 3

Hey, Keith. Could you give a little more color on the consulting market? I mean, kind of the peer market that Protiviti plays in. I know you used the word competitive and I know you used the word gaining share for Protiviti. But do you feel like the consulting market might be bottomed out here?

Speaker 3

Like what do you feel like bench utilization is at firms like Accenture and Big 4? And how does Protiviti's utilization of its full time staff look right now?

Speaker 1

Well, I'd say the consulting market does remain competitive, particularly on a market by market basis. Some firms have excess capacity. They get particularly aggressive with pricing. That's not new. That impacted this quarter, but Protiviti has managed through that quite well.

Speaker 1

In large part, by how they manage their own utilization, including the judicious use of contractors through talent solutions. So Protiviti has it was close to year on year growth in Q2 with a little luck. Globally, it will have year on year growth in Q3. We feel great about Protiviti. Their pipeline is strong and that's a balanced across solutions strength.

Speaker 1

They're very focused on market facing activities, starting by staying close to their current clients, understanding their business problems, making sure our capabilities are top of mind. They've kept their conference sponsorships high. They do webinars, local events. They had to go to market aggressively jointly with talent solutions. So we're very pleased with how Protiviti is performing, particularly in this very competitive consulting marketplace.

Speaker 1

And I don't think anybody would argue that they're gaining share.

Speaker 3

Sure thing. Thanks so much, Keith.

Operator

And the next question will come from Manav Patnaik with Barclays.

Speaker 6

Hi, Keith. This is Mackenzie Thomas on for Manav. Thanks for taking my call. Question about demand expectations that you mentioned. Can you talk about how you've been managing your recruiter level?

Speaker 6

And then also separately, on your recent conversations with clients, have you noticed any changes with their hiring year, same level of labor hoarding?

Speaker 1

Well, I had a little trouble hearing you, but based on what I think I heard you ask about our own internal recruiter levels as well as conversation with clients about their levels of resource needs. As to our own internal recruiters, our policy hasn't changed. On the one hand, we have a performance management approach by person as to how we manage headcount and those that underperform. We counsel that they'd be better with their career somewhere else just like we always have. By the same token, proven performers, while their productivity might be down somewhat given market conditions, we're committed to keeping them, to having that capacity or dry powder as things get better.

Speaker 1

We've certainly estimated internally that we could grow revenue somewhere 20% to 30% plus without adding to heads. But that's all subject to how V shaped a recovery we see and how much additional capacity we feel like we need at the time, but that's a high class problem to have. As to conversations with clients about their needs, As I talked before, we definitely see deferred project demand. And the point we were trying to make in the prepared remarks was today's subdued demand is tomorrow's source of demand and that as projects are deferred, everybody talks about that most companies today focus only on those projects with a short term ROI. There are many other projects growth related including that are getting deferred.

Speaker 1

That's future demand. Churn is subdued as we speak. That impacts backfill demand. Again, so as candidates confidence improves, there will be more churn. You get backfill demand from that plus that impacts client capacity to deal with improvements Stacy in their business.

Speaker 1

So there's a deferred impact, there's a pushed forward demand impact of current constrained conditions that we've seen many times through many cycles. We're one of the few management teams in the industry that's been through several of these cycles. And much of the softness in demand that we see and the impacts on churn that we see are not unusual and they turn around, which is why we and frankly the entire industry typically does very well in the early part of growth cycles. So we believe there's deferred demand. The job openings is a good backdrop to all of that, but down at individual client level, individual conversation level, there's no question that projects are being deferred and that there's less turnover, less attrition, less churn that also impacts demand for our contract labor resources as well as everybody else's in the industry.

Speaker 6

Thanks. Appreciate the color.

Operator

Thank you. And our next question will come from Heather Balsky with Bank of America.

Speaker 5

Hi. Thank you for taking my question. Keith, just to admit the backdrop that you're talking about, how are you thinking about the cost side of your business? You've given us update every quarter, but just given the ongoing malaise, are you thinking about making any changes? And how are you keeping in mind sort of positioning yourself for when there is a recovery?

Speaker 5

Thanks.

Speaker 1

Well, you broke up on the last part, but the first part was how do we see the cost side of our business. Our largest cost is our headcount, our staff, payroll costs. And as I said, we haven't changed our policy for those underperforming, we performance manage as we always had for those that have a medium to long term track record of success, we're committed to them even though their productivity levels aren't what they are in normal periods during a cycle. So cost side management not that different. Having said that for the quarter just ended, our SG and A was down $32,000,000 versus a year ago.

Speaker 1

That's a 7% reduction. Although there is a negative leverage, particularly for our fixed cost, our corporate services headquarters, the administrative compensation of our branches. So we have some negative leverage, but we have reduced our SG and A year on year for the quarter $32,000,000

Speaker 5

Thanks. And Keith where I got cut off, I guess I was asking about, thinking about the recovery and where you are from a staffing perspective. If we see an inflection in the near term, are you where you would like to be from a staffing perspective?

Speaker 1

We feel good about where we are with our veteran productive staff. We just talked about we think we could grow 20% to 30% plus without adding to heads, but that would be subject to an evaluation of just how robust the recovery was being and we may want to add some sooner, but if we did, it would be for all the right reasons.

Operator

And moving on to Jeff Silber with BMO Capital Markets.

Speaker 7

Thanks so much. For my first question, I'd like to focus on margins, specifically Contract Talent Solution Margins. I know you don't guide to that specific number, but at least compared to our estimates, it was a bit lower than we thought. Was there anything specifically going on there this quarter, timing issues, etcetera? Should we expect that number to at least increase sequentially going into the Q3?

Speaker 7

Thanks.

Speaker 1

Jeff, I would say 2 components. On the one hand, if we're talking year on year, our gross margins were down about 60 basis points. A little over half of that's due to conversions, which is a derivative of full time hiring or permanent placement, not a surprise. And the other piece of that was essentially payroll, fringes, payroll taxes, insurance, etcetera, a bunch of little pieces there, none of which individually was that large. And the other piece of the margin contraction is the negative leverage on fixed SG and A costs, which I just addressed by saying we're committed to holding the line on our medium to long term proven internal recruiters, plus you've got your fixed costs that you have negative leverage on as the revenues fall a bit sequentially.

Speaker 1

As I said, for guidance purposes on the contract talent side, we're assuming mid single digit down sequentially, which is kind of what we were seeing first half of twenty twenty three. And our hope is that given recent progress in inflation, hope for interest rate cuts that come Q4 and beyond, we'll see better sequential performance than that.

Speaker 7

Okay, that's helpful. If I could switch back up to the revenue line, on the administrative and customer support segment, I know you don't talk about this much. I know it's relatively small. But sometimes historically, the trends there have been leading indicators. And we took a slight step back in the Q2, the year over year decline got slightly worse.

Speaker 7

Was there anything specifically going on there? Again, is it a one time issue? What should we expect going forward? Thanks.

Speaker 1

I'd say most of our practice groups as we refer to them internally, the near term results were pretty similar and the year on year results that you mentioned are more about the comparables a year ago than they are what's happening right now. And on this kind of what leads potentially, one thing we look at is enterprise versus small business. And we would observe that for the last 2 or 3 quarters, we see some firming in enterprise clients. We call them strategic accounts. Protiviti also focuses on enterprise size accounts.

Speaker 1

And so internally, we're somewhat encouraged by we're seeing more strength at the enterprise level that generally not always, but generally leads SMB to a bit. And so if we're looking for kind of small green shoots of optimism, we would point to enterprises doing better than SMB, both in talent solutions and clearly in Protiviti. And in the past, that generally leads SMB by a little.

Speaker 7

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

Operator

And the next question will come from Kartik Mehta with Northcoast Research.

Speaker 8

Hi, good afternoon. I wanted to

Speaker 4

go back a little bit to what

Speaker 8

you were saying about pricing competition and Protiviti. And I'm wondering, I know this is very short term, but has that gotten worse since the last quarter? Or are you seeing about the same level of price competition you saw at the beginning of the year?

Speaker 1

It's same ish. It's not a national thing. It's a local thing. And depending on a local office's resource levels and utilization levels, Given big 4 accounting firm might get super aggressive because of its low utilization levels in that location, but it's not a nationwide thing. And so Protiviti has been seeing that type of pricing competition for several quarters now.

Speaker 1

It continued into the second, it's expected to continue into a third. But it's something that they're managing through and they're managing through. And it's a component of gross margin for which they improved 2 50 basis points in the quarter. It's a component, but the other components are kind of the shape of the leverage pyramid, managing directors at the top end, variable cost contractors at the bottom. So they've been aggressively managing that mix.

Speaker 1

They've been aggressively managing the utilization of their full time employees. And so when you put that piece together, it's particularly impressive, I think, that they're making the sequential progress that they're making, notwithstanding the revenue, the bill rate competition that they're seeing for the reasons you mentioned.

Speaker 8

And then just you've talked about kind of keeping your good employees and I'm wondering what the retention rate has been and you've been successful if you've been successful. I imagine you're going through the same stuff that every other company is where people are less likely to leave. But I'm just wondering if you retain the right employees that you want or if there's been any kind of movement because of what's happening in the industry?

Speaker 1

I'd say generally speaking virtually every company certainly in the United States is seeing lower attrition rates because the raise the higher compensation opportunity to switch isn't what it was. I'd also say that I don't think anybody would dispute that Robert Half has more tenure amongst its top 2 50 people, not just 5, of anybody in retention rates have always been the strongest in that regard and they continue. But for economic reasons, virtually everybody's retention rate is better now than it typically is, ours included. But my point is, our long term retention rates are the best in the industry and that continues and it's a big part of our success.

Speaker 8

Thank you very much. I appreciate it.

Operator

And the next question will come from Stephanie Moore with Jefferies.

Speaker 9

Hello. This is Carol Onto on for Stephanie Moore. Just wanted to touch on current solutions with North Finance and the comment. So I know at one point in time you said you guys are seeing a higher mix of higher caliber jobs. So I just want to get a sense in the financing account how the job breakdown is looking there?

Speaker 1

Well, we've said on prior calls that we've now gotten to where over half of our contract positions are higher skilled, they have higher margins, they're not as economically sensitive. And so we're pleased with that migration up the skill curve and we've been on that journey for a long time. We continue on that journey. It also plays in well with Talent Solutions and Protiviti going to market together because it's those higher skills that often fit best in the joint projects we have with Protiviti. So strategically, we love this higher mix of higher skilled, not that we're walking away in any shape or form from the more operational skills, which are the high volume positions in most accounting departments.

Speaker 9

Thank you for the color.

Operator

And the next question will come from George Tong with Goldman Sachs.

Speaker 10

Hi, thanks. Good afternoon. You can you compare and contrast trends that you're seeing with temp staffing and perm placement and put that in the context with the broader macro environment?

Speaker 1

Well, it's interesting, George. So if you go to our website where we've got our investor slides, we've got a couple that show for 20, 25 years of relative performance between contractor temp and perm placement. And what you'll see is that they're highly correlated. The beginnings, the troughs, the peaks happen largely at the same time. Perm placement always more volatile, lower lows, higher highs from a growth rate standpoint.

Speaker 1

I'd say if you look at the past 8 quarters of what I would certainly call a staffing recession, we're down peak to trough in both contract and perm placement less than we have been in other staffing recessions. And the thing that probably is the most in contrast, whereas in prior staffing downturns, permanent placement declines by over 50%. And so far this time, these past 8 quarters, I think peak to trough were down in the 30%. So more benign peak today in perm placement, better in contract, but not as different as is the case in perm placement. Said differently, perms faring better in this staffing downturn than it has in prior staffing downturns, but it's still more impacted than contract because it's fundamentally about full time jobs.

Speaker 10

Got it. That's helpful. Earlier you provided some comparisons between enterprise and SMB customer behaviors. Can you talk a bit about what you're seeing across different verticals, which verticals and end markets are doing particularly well and which end markets are faring less well?

Speaker 1

Well, I would put it on a practice group basis and where we talk about finance and accounting, administrative customer support, technology are our big practice groups. And because they're all principally SMB focused, current sequential performance one to the other isn't that different. And the year on year differences are more about the comps than they are current sequential performance. So I wouldn't call out any practice group more so than another in that way.

Speaker 7

Got it. Thank you.

Operator

And the next question will come from Trevor Romeo with William Blair.

Speaker 11

Hi, Keith and Mike. Thanks for taking the questions. Just a couple of quick ones for me. 1 on Europe. I think we heard from a few of the other kind of talent solutions companies that demand in Europe weakened a bit the past few months incrementally, particularly on the perm side.

Speaker 11

Just curious if you saw that as well and if you could kind of just talk about the demand environment in Germany, Belgium, any of your other notable markets in Europe, that'd be great.

Speaker 1

I would say not much change. If you look at our supplemental revenue schedules, you'll see the year on year performance quarter 1 versus quarter 2 for non U. S. Operations isn't very different. And so I would say more of the same, our forecast for Q3 is similar as well.

Speaker 1

So no notable change in our collection of international countries led by Germany, Belgium, Brazil coming on as I talked last quarter, but not much change.

Speaker 11

Okay. Thank you. That's helpful. And then just a quick follow-up on Protiviti. I think you called out broad strength across all the solution areas, which was nice to hear.

Speaker 11

But I think the last several quarters, you talked about internal audit and tech consulting seeing some budget pressures. So have you started to see some of that pressure on those two solutions in particular EASE in the past few months?

Speaker 1

I would say particularly in internal audit, we're seeing some life with financial institutions, internal audit, particularly IT internal audit. And so we would be more positive about internal audit, particularly with large financial institutions. As you know, about 40% of Protiviti's revenues are in the financial services industry. So to see some signs of optimism there is great. The other thing I'd point out is sequentially in the Q3, we typically see a lift for more Sarbanes Oxley work.

Speaker 1

We're going to see that lift again. However, it's masked by a couple of large projects that ended this past quarter. And so they're essentially going to offset the sequential progress we would typically see in the Q3 such that the guidance you're giving sequentially is flat at the top line, more improvement on utilization such that you've got gross margin and segment margin improvements.

Speaker 11

All right. Thank you, Keith. Appreciate it.

Operator

And the next question will come from Tobey Sommer with Truist Securities.

Speaker 12

Hey, good afternoon. This is Jack Wilson on for Tobey. Can we maybe dig into a little bit more of the dynamics you saw in June? It looks like, NPIB small business optimism trended up sort of March to June. Is that something that you saw?

Speaker 1

Well, I don't know whether you're talking about our numbers specifically or generally. I would say, generally, if you look at NFIB, we're encouraged that their confidence index has improved 3 months in a row. It's still below their normal average, but sequentially, at least for those 3 months, we are encouraged. 60 percent are still trying to hire, 85% of them, a few or no qualified applicants. Inflation is still the number one second half of last year into the first part of this year.

Speaker 1

And so NFIB, small business confidence, hiring, it's a little better. It's a little better.

Speaker 12

Okay. And then maybe as a follow-up

Speaker 1

June included. Go ahead.

Speaker 12

Maybe as a follow-up to that, do

Speaker 2

you think we could see sort of

Speaker 12

a step change in customer sentiment following the election or the inauguration?

Speaker 1

Oh, boy. The answer is I don't know. My recollection is having been here a bit, is that there haven't been huge swings in elections one way or the other.

Speaker 12

Okay. Thank you very much.

Operator

And the next question will come from David Silver with CL King.

Speaker 13

Yes. Hi. Thank you. I think my first question would be on the Blended Solutions performance this quarter. So I guess the intersegment eliminations number grew, while Contract Talent Solutions was weaker across the board.

Speaker 13

And firstly, I was just wondering if you could comment on that trend where I guess Blended Solutions is accounting for a larger share of your contract talent placements? And then secondly, if you could remind me about the economic effects internally, I guess, for Robert Half, when, let's say, a Protiviti project is staffed via the blended solutions route versus, let's say, with another candidate or sorry, a non that candidate will be placed with a non Protiviti client? Thank

Speaker 1

you. Okay. So blended solutions and you're right And we're happy that we now have 3 quarters in a row where blended solutions with Protiviti have grown sequentially. The 2 or 3 prior to that Protiviti was aggressively managing its utilization levels for its full time staff, which was done to some extent at the expense of using contractors. But we now have 3 quarters in a row where that's grown.

Speaker 1

We're going to market together better than ever. That's a good thing. As to economic impacts from an enterprise point of view, whether we place a candidate on a 3rd party client directly from Talent Solutions or to a 3rd party client via Protiviti, their gross margins aren't that different. One way to look at it is by going through Protiviti for enterprise accounts or effectively getting SMB gross margins that we otherwise wouldn't get if we were going directly to those enterprise third party clients rather than through Protiviti, if that's clear.

Speaker 13

Okay. No, that's great. I will have to review it, but thank you for the walk through there. And then, I did note your comment about recruiters plus AI approach that I'm sure will grow in importance. But if we're speaking a year from now and that element of your overall business strategy is or develops as you suspect, where will that will that success be reflected in your results on a broader basis?

Speaker 13

Or should we look for greater impact on certain of your staffing lines?

Speaker 7

I think it would be broad.

Speaker 1

Our clients clearly tell us they want both. They want the benefit of world class AI. They want the benefit of recruiters. They want to choose when they primarily go digitally versus use recruiters typically at the front end of their more digital and at the back end, they're more recruiter focused, but every client is different. And the point is we have both capabilities, which is not true for the digital only competitors, if you will, out there.

Speaker 1

So they want both and they want to choose on their terms and on their timetable when they want to lead with digital AI and when they want to lead with recruiters and they expect a seamless connection between our AI and our recruiters, which our internal systems do a decent job of today and will do a better job as time passes. We're very happy to have this new capability. Go to our website, roberthaft.com. You can today, anybody search for candidates. And in so doing, you will see who we have that matches those specifications and we will show you in a star system, 1 to 5 stars, how our recruiters rate that candidate.

Speaker 13

Got it. And then maybe just one last brief one. But there's a trend, I guess, over the last couple of quarters where sequentially your perm revenues have actually risen, while your the temp and project based staffing has continued to sequentially decline. And just from my models and whatnot, I hadn't really noticed that trend happening too often with that divergence and in particular with perm leading temp. Is there anything you would call out to maybe describe or explain the relative strength in perm versus the contract and temp side of your staffing operations?

Speaker 13

Thanks.

Speaker 1

And so I'm sitting here looking at the last 8 quarters and then during 2023, they were pretty similar every quarter.

Speaker 13

Right.

Speaker 1

And in 2024, the Q2 was stronger. The Q2 is always a seasonally stronger quarter for perm. And I would say even though it was up sequentially, that still wasn't a normal sequential rise for them for seasonal reasons. And so I would attribute the differential in the Q2 to typical seasonality. And other than that, they're pretty similar.

Speaker 13

Very good. I appreciate all the color. Thank you.

Operator

And the next question will come from Mark Marcon with Baird.

Speaker 4

My follow-up was answered. Thanks.

Operator

Thank you.

Speaker 1

Okay. That was our last question. We thank you for joining us today. Thank you very much.

Operator

Thank you. This concludes today's teleconference.

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Earnings Conference Call
Robert Half Q2 2024
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