Robert Half Q3 2021 Earnings Call Transcript

Participants

Corporate Executives

• M. Keith Waddell, Vice Chairman, President and Chief Executive Officer
• Michael C. Buckley, Executive Vice President, Chief Financial Officer

Analysts

• Andrew Steinerman, JPMorgan Chase & Co.
• Mark Marcon, Robert W. Baird
• Mario Cortellacci, Jefferies Financial Group Inc.
• Jeff Silber, BMO Capital Markets
• Kevin McVeigh, Credit Suisse Group AG
• Gary Bisbee, Bank of America Securities
• Tobey Sommer, Truist Securities
• George Tong, The Goldman Sachs Group, Inc.

Presentation

[Operator]

Hello, and welcome to the Robert Half Third Quarter 2021 Conference Call. 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. Sir, you may begin.

[M. Keith Waddell, Vice Chairman, President and Chief Executive Officer at Robert Half]

Thank you. 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 risks and uncertainties that could cause actual results to differ materially from the forward-looking statements.

These risks and uncertainties are described in today's press release and in our most recent 10-K 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, as adjusted. Reconciliations and further explanations of these measures are included in a supplemental schedule to our earnings press release.

Our presentation of revenues and the related growth rates for Accountemps, OfficeTeam, Robert Half Technology and Robert Half Management Resources includes their intersegment revenues from services provided to Protiviti in connection with the company's blended staffing and consulting solutions. This is how we measure and manage these divisions internally. The combined amount of divisional intersegment revenues with Protiviti is also separately disclosed.

The supplemental schedules just mentioned also include a revenue schedule showing this information for 2019 through 2021. For your convenience, our prepared remarks for today's call are available in the Investor Center of our website, roberthalf.com. We once again achieved a record level of both revenues and earnings in the third quarter, exceeding the high end of our guidance and as a result of continued broad-based acceleration in the demand for our staffing and business consulting services.

Our permanent placement and Protiviti operations continued to show very strong results, growing year-over-year revenues by 79% and 56%, respectively. Our temporary and consultant staffing operations also accelerated in the quarter with year-on-year revenue growth of 35%. Overall, our total revenues were 10% higher than the pre-pandemic third quarter of 2019. I'm very grateful for the notable efforts of our staffing, Protiviti and corporate services professionals who've continued to show an outstanding commitment to our success.

Company-wide revenues were $1.17 billion in the third quarter of 2021, up 44% from last year's third quarter on a reported basis and up 43% on an as-adjusted basis. Net income per share in the third quarter was $1.53, increasing 129% compared to $0.67 in the third quarter one year ago. Cash flow from operations during the quarter was $225 million.

In September, we distributed a $0.38 per share cash dividend to our shareholders of record for a total cash outlay of $42 million. We also acquired approximately 740,000 Robert Half shares during the quarter for $75 million. We have 7.7 million shares available for repurchase under our Board-approved stock repurchase plan. Return on invested capital for the company was 53% for the third quarter.

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

[Michael C. Buckley, Executive Vice President, Chief Financial Officer at Robert Half]

Thank you, Keith, and hello, everyone. As Keith noted, global revenues were $1.713 billion in the third quarter. On an as-adjusted basis, third quarter staffing revenues were up 38% year-over-year. U.S. staffing revenues were $932 million, up 40% from the prior year. Non-U.S. staffing revenues were $279 million, up 34% year-over-year on an as-adjusted basis. We have 321 staffing locations worldwide, including 85 locations in 17 countries outside the United States. In the third quarter, there were 64.4 billing days compared to 64.3 in the same quarter one year ago.

The current fourth quarter has 61.7 billing days, unchanged from the fourth quarter one year ago. Currency exchange rate movements during the third quarter had the effect of increasing reported year-over-year staffing revenues by $7 million. This impacted our year-over-year reported staffing revenue growth rate by 0.8 percentage points. Temporary and consultant bill rates for the quarter increased 5.4% compared to one year ago, adjusted for changes in the mix of revenues by line of business, currency and country.

This rate for the second quarter of 2021 was 3.7%. Now let's take a closer look at results for Protiviti. Global revenues in the third quarter were $501 million. $400 million of this is from business within the United States, and $101 million is from operations outside the United States. On an as-adjusted basis, global third quarter Protiviti revenues were up 55% versus the year ago period, with U.S. Protiviti revenues up 54%. Non-U.S. revenues were up 61% on an as-adjusted basis.

Exchange rates had the effect of increasing year-over-year Protiviti revenues by $3 million and increasing its year-over-year reported growth rate by 0.7 percentage points. Protiviti and its independently owned Member Firms serve clients through a network of 86 locations in 28 countries. Moving on to SG&A and gross margin presentation. We remind you that changes in the company's deferred compensation obligations are classified as SG&A or, in the case of Protiviti, cost of services with completely offsetting changes in the related trust investment assets classified separately below SG&A.

Previously, they were both classified as SG&A. Our historical discussion of consolidated operating income has been replaced with the non-GAAP measure of combined segment income. This is calculated as consolidated income before income taxes, adjusted for interest income and amortization of intangible assets. For your convenience, we've included a supplemental schedule to today's earnings release on page seven, highlighting the impact of changes in the deferred compensation accounts to the summary of operations for the third quarter of 2021 and 2020.

This is a non-GAAP disclosure. So we also show a reconciliation to GAAP. Turning now to gross margin. In our temporary and consultant staffing operations, third quarter gross margin was 40% of applicable revenues compared to 37.5% of applicable revenues in the third quarter one year ago. Gross margins were positively impacted by expanding pay-bill spreads and higher conversion revenues. Our permanent placement revenues in the third quarter were 12.9% of consolidated staffing revenues versus 10% of consolidated staffing revenues in the same quarter one year ago.

When combined with temporary and consultant gross margin, overall staffing gross margin increased 3.9 percentage points compared to the year ago third quarter to 47.7%. For Protiviti, gross margin was 29.5% of Protiviti revenues compared to 27.1% of Protiviti revenues one year ago. Adjusted for the effect of deferred compensation changes related to changes in the underlying trust investment assets as previously mentioned, adjusted gross margin for Protiviti was 29.4% for the quarter just ended compared to 28.1% one year ago.

Company-wide SG&A costs were 28.9% of global revenues in the third quarter compared to 32.8% in the same quarter one year ago. Changes in deferred compensation obligations related to changes in underlying trust investments had the impact of decreasing SG&A as a percentage of revenue by 0.1% in the current third quarter and increasing SG&A by 1.9% in the same quarter one year ago. When adjusted for these changes, company-wide SG&A costs were 29% for the quarter just ended compared to 30.9% one year ago.

Staffing SG&A costs were 35.9% of staffing revenues in the third quarter versus 40.2% in the third quarter of 2020. Included in staffing SG&A costs were deferred compensation reductions related to decreases in the underlying trust investment assets of 0.1% in the third quarter compared to additions of 2.6% related to increases in the underlying trust investment assets in the same quarter one year ago. When adjusted for these changes, staffing SG&A costs were 36% for the quarter just ended compared to 37.6% one year ago.

Third quarter SG&A cost for Protiviti were 12.1% of Protiviti revenues compared to 13% of revenues in the one year ago period. Operating income for the quarter was $230 million. This includes $2 million of deferred compensation reductions related to changes in the underlying trust investment assets. Combined segment income was therefore $228 million in the third quarter. Combined segment margin was 13.3%. Third quarter segment income from our staffing divisions was $141 million with a segment margin of 11.6%. Segment income for Protiviti in the third quarter was $87 million with a segment margin of 17.3%.

Our third quarter tax rate was 25% compared to 26% one year ago. At the end of the third quarter, accounts receivable were $1 billion and implied days sales outstanding were 52.8 days. Before we move on to fourth quarter guidance, let's review some of the monthly revenue trends we saw in the third quarter and so far in October, all adjusted for currency and billing days. Our temporary and consultant staffing divisions exited the third quarter with September revenues up 36% versus the prior year compared to a 34% increase for the full quarter.

Revenues for the first two weeks of October were up 35% compared to the same period one year ago. Permanent placement revenues in September were up 68% versus September of 2020. This compares to a 78% increase for the full quarter. For the first three weeks in October, permanent placement revenues were up 62% compared to the same period in 2020. We provide this information so that you have insight into some of the trends we saw during the third quarter and into October. But as you know, these are very brief time periods. We caution against reading too much into them.

With that in mind, we offer the following fourth quarter guidance: revenues, $1.655 billion to $1.735 billion; income per share, $1.37 to $1.47. Midpoint revenues of $1.695 billion are 30% higher than 2020 and 10% higher than 2019 levels on an as-adjusted basis. Midpoint earnings per share of $1.42 is 69% higher than 2020 and 44% higher than 2019. The major financial assumptions underlying the midpoint of these estimates are as follows. Revenue growth on a year-over-year basis: staffing, up 27% to 30%; Protiviti, up 34% to 36%; overall, up 29% to 31%.

Gross margin percentages: temporary and consultant staffing, 39.5% to 40.5%; Protiviti, 27% to 29%; overall, 41% to 43%. SG&A as a percentage of revenue, excluding deferred compensation investment impacts: staffing, 35.5% to 36.5%; Protiviti, 12.5% to 13.5%; overall, 29% to 30%. Segment income: for staffing, 11% to 12%; for Protiviti, 14.5% to 15.5%; overall, 12% to 13%.

Tax rate, 25% to 26%. Shares, 111.2 million. 2021 capital expenditures and capitalized computing costs, $15 million to $20 million for the fourth quarter. 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 Keith.

[M. Keith Waddell, Vice Chairman, President and Chief Executive Officer at Robert Half]

Thank you, Mike. The future of work increasingly includes flexible, hybrid and fully remote models, and we are uniquely positioned to benefit in this environment. We can deliver deeper skills and more price-point choices to our clients by expanding our candidate searches beyond local markets. We leverage our global office network and our advanced AI-driven technologies to deliver the best candidates for contract or permanent roles regardless of location, all while continuing to deliver the same superior customer experience our clients have come to expect.

This trend, together with elevated employee attrition rates at clients, has contributed to our staffing results recovering at a faster pace than we've experienced in the past. Our permanent placement and temporary consulting staffing segments, including blended solutions with Protiviti, have achieved cumulative sequential growth of 92% and 50%, respectively, during the first five quarters since the trough. Similar numbers for the financial crisis and the dot-com recoveries were 41% and 23%, and 45% and 31%, respectively.

The National Federation of Independent Business, NFIB, recently reported that 62% of small businesses had few or no qualified applicants for open positions and had 51% job openings that could not be filled, a 48-year record high. And we are seeing the impact of this on demand for our services on a very broad basis, spanning industries, client size, skill levels, geographies and lines of business. Protiviti continues to excel with multiple years of consecutive growth and a highly diversified client base and suite of solution offerings.

The collaboration between Protiviti and staffing continues to be a strong differentiator, pairing Protiviti's world-class consulting talent with staffing's deep operational resources to provide a cost-effective solution to clients' skills and scalability needs. Growth remains strong across internal audit, technology consulting, risk and compliance consulting, and business performance improvement. Protiviti also continues to benefit from project work in the public sector resulting from various federal and state stimulus programs.

Approximately $110 million in revenue this quarter resulted from work related to these programs or approximately $0.07 of our earnings per share. Growth in the public sector contributed 26 points to Protiviti's year-on-year growth rate of 56%, while the core business maintained a growth rate of 30%. Public sector revenues represent 6% of total revenues and contributed seven points to the company's overall 44% growth rate. We're excited about the opportunities ahead of us as the recovery continues with strong momentum and as the future of work continues to evolve.

As we've done historically, we will continue to invest in our people, our technology, our brands and our business model to strengthen our ability to connect people to meaningful new work and to provide clients with the talent and deep subject matter expertise they need to confidently compete and grow. Finally, we'd like to thank our employees around the world for making possible another significant recognition received this quarter as Forbes named us one of the World's Best Employers. We were also recognized by Newsweek as one of America's Most Responsible Companies for our ESG efforts, many of which are outlined in our recently released Corporate Citizenship Report. Now Mike and I'd be happy to answer your questions. Please ask just one question and a single follow-up as needed.

If there's time, we'll come back to you for additional questions.

Questions and Answers

[Operator]

[Operator Instructions] And our first question comes from the line of Andrew Steinerman, JPMorgan.

[Andrew Steinerman, Analyst at JPMorgan Chase & Co.]

Keith, could you just look at the fourth quarter guide with us on the staffing revenue side, up 27% to 30%? Could you just break it down a little bit for us to give a sense of that fourth quarter guide of how much might flex revenues be versus perm? And then within flex, which sub-segments might grow faster than the average?

[M. Keith Waddell, Vice Chairman, President and Chief Executive Officer at Robert Half]

Well, Andrew, we historically don't break out flex or contract versus perm. I think it would be logical to assume we would have perm continuing to outgrow contract consistent with the quarter, consistent with the exit of the quarter and consistent with the post-quarter start to the quarter that we're in. Generally speaking, our higher-level contract practice groups or line of businesses are growing more quickly. They're project-based. The clients are more open to remote work.

They're more interested in pinpointing deeper skills that we can access through remote work. So not that, they all aren't growing, which they are, it's just that Management Resources and Robert Technology are growing faster. You can also see that, if you would compare quarter three revenues to quarter three of 2019, which is pre-pandemic, and you'll see that Management Resources and Robert Half Technology have done better than the other divisions for all the reasons I just mentioned.

[Andrew Steinerman, Analyst at JPMorgan Chase & Co.]

Thank you.

[Operator]

Our next question will come from the line of Mark Marcon with Baird.

[Mark Marcon, Analyst at Robert W. Baird]

Hey, good afternoon, Mike and Keith, and congratulations on a terrific quarter. I was wondering, if you could talk a little bit more about Protiviti in the guidance. If we take the midpoint of the guidance, it looks like perhaps we might have a slight sequential decline in Q4 relative to Q3. And we've had that before in 2015 and 2016 in terms of going from Q3 to Q4.

So not a big deal, but it seems like there's probably some differences going on with regards to sequential trends on the government and public side relative to the private, with the private seeming to accelerate sequentially this last quarter. So I was wondering, if you could talk a little bit about that. Like, what are you seeing on - how are you thinking about public versus private in Protiviti as we go through the near term?

[M. Keith Waddell, Vice Chairman, President and Chief Executive Officer at Robert Half]

Okay. So we've got public versus private, and we've got a holiday impact to talk about. So first of all, let's talk a little bit about public. We disclosed $110 million overall. Of that $110 million, $92 million relate to contractors. So - whereas the $172 million total for blended solution contractors, $92 million of that relates to public sector, which is just a little over half.

Our expectation is that for the fourth quarter, that $92 million is down 5% to 10% sequentially in the fourth quarter; the balance of the $172 million, if you will, the other half. And again, while we're talking sequentially, in the third quarter, sequentially, about 80% of the growth in blended solutions overall came from commercial or non-public sector engagements. And so rather than focus just on the public sector half of our blended solutions, let's think about the whole and the other half, which is nonpublic sector engagements was 80% of the sequential growth.

Now as we roll into Q4, as I said earlier, we do expect some moderation, 5% to 10%, as unemployment claims processing moderates. On the other hand, housing and education assistance is growing. We do have a backlog of project work that's not transactional. They tend to be smaller projects, the sales cycle somewhat longer. So all of that was figured in when I said we expect down 5% to 10% for the half. That is public sector only.

The other point I will make is that many of Protiviti's clients have a soft close in the fourth quarter. Many of Protiviti's internal staff take paid time off during the fourth quarter. And so just for time, they expect related to those two, there's a $14 million sequential revenue impact. And so we've talked many times about December. It's our hardest month to project, both on the staffing side as well as on the Protiviti side because of the impact of downtime, holiday, vacation, whatever you want to call it, soft closes from clients.

But Protiviti alone, with their own staff, projects that their revenue impact would be $14 million sequentially from that alone. And so we've been talking about sequentially, but if we talk about year-on-year, Protiviti's comps were the toughest a year ago. Much of that was public sector. Together with the impact of soft close, paid time off, I think you get to where our projection is for our midpoint.

I'll also say this. Protiviti's, the tone of Protiviti's business has never been better. They are aggressively hiring people across their pyramid, meaning managing directors all the way down to consultants. So their issue is not, in any way, shape or form, demand. It's how quickly can they hire and onboard additional staff. The demand environment, frankly, has rarely been better than what Protiviti sees today.

[Mark Marcon, Analyst at Robert W. Baird]

Okay. Keith, that's great color. And then wondering, you did see that really strong sequential growth in the commercial side. And Protiviti has been clearly ramping up with multiple commercial clients, including -- I think you're dealing with 70% of the Fortune 500 now. Wondering if you can talk a little bit about your expectations a little bit beyond just the current quarter on the commercial versus the government side. And also, what does the new delivery center in the Americas mean as we think about the impact there?

[M. Keith Waddell, Vice Chairman, President and Chief Executive Officer at Robert Half]

Well, as I said earlier, 80% of our sequential growth in contractor blended solutions came from the commercial side, not the public sector side, such that now they're about 50/50 when you look at their impact overall. You have projects like accounting operation, processing backlogs, transformation, on-demand project management, ERP implementation assistance, IT operations modernization, help desk management. There are just a myriad of accounting and IT related project demand that are a glove fit for the blended solutions of staffing and Protiviti.

The delivery center is intended to be a space -- it's in Ohio. That's a lower cost base where -- and it's also in a lower cost of living area. And the thought is the more routine assignments that we have, to some degree can be performed, can be delivered from that alternative delivery center, which is just one more alternative that Protiviti has and another price-point choice that Protiviti can provide to its clients. It's all good news, all good, early days. It's already doing better than we expected.

[Operator]

Thank you. And our next question will come from the line of Hamzah Mazari with Jefferies.

[Mario Cortellacci, Analyst at Jefferies Financial Group]

Hi. This is Mario Cortellacci filling in for Hamzah. I guess, maybe you can just touch on how you're thinking about labor availability and labor inflation, I guess, specifically and how that's being contemplated in your guide -- in your revenue guide and your margin guide?

[M. Keith Waddell, Vice Chairman, President and Chief Executive Officer at Robert Half]

I'd say as to labor availability, we would say that candidate supply is manageably tight. We've successfully recruited at much lower unemployment rates. The current rate for those with a college degree of 2.5% is still well north of the high ones we got back in 2018, 2019 as an example. Further, our ability to recruit beyond local markets meaningfully expands the candidate pool. We've taken full advantage of this, particularly in Management Resources and Robert Half Technology. We have a very large percentage of our placements being sourced from people outside the local market where the client is.

Further, as we've talked about before, we hire people full-time and then send them out on assignments as contractors to clients, which is another way we address candidate availability. But when you put all those together, we're cautiously optimistic that we're not going to have a supply issue as it relates to meeting demand. From an inflation standpoint, we're in the mid-5 level. That's not unusual in the early part of a cycle. We have a multi-decade track record of passing through our wage inflation.

If anything, wage inflation is our friend because we expand our gross margins. As we talked about earlier in Mike's section, we have expanded our gross margins, again both sequentially and year-on-year. Part of that is conversions, which rose to 3.7% of revenue. And part of that's pay-bill spreads that have widened as well in the presence of that wage inflation. So again, wage inflation is our friend. We think we can manage availability.

[Mario Cortellacci, Analyst at Jefferies Financial Group]

Got it. And then I mean you just mentioned the cycle a little bit. So, maybe you can just update us on what your view is of the employment cycle in the US versus international. And then you've said it before and I think you obviously just mentioned again that we're starting a brand-new cycle. How are you seeing the impact to your customer base in this new cycle? But given the new supply chain issues, is it really not an issue for you at all because it's more of a blue-collar issue than a white-collar issue? But any color you can provide there would be helpful.

[M. Keith Waddell, Vice Chairman, President and Chief Executive Officer at Robert Half]

Well, so US versus international, we've had very good results from Germany, Canada, United Kingdom, Australia, just to name a few. The growth rates aren't that different between the US and what we call IZ. So I'm not sure there's a huge story there to -- our IZ is a little more perm-focused than is the case in the US. And as perm outperforms contract or temp, that's to their benefit and our benefit. We do think it's a brand-new cycle. We have talked about once we get going, we CAGR very nice double-digit growth rates for three to five years. We gave you the numbers earlier that five quarters into this recovery, our cumulative growth off the bottom is almost double this time what it was last. So we are bullish.

The other thing that's new that we talked about as well was this whole remote hybrid, the future of work. The combination of our global network, our local candidate relationships, our technology which can be location-agnostic when we decide who the best fitting candidates are for a given assignment. So we feel good about the cycle. We feel good about the incremental growth opportunities we have particularly with remote work that's in addition to the early cycle success we always have.

[Mario Cortellacci, Analyst at Jefferies Financial Group]

Great. Thank you so much.

[Operator]

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

[Jeff Silber, Analyst at BMO Capital Markets]

Thank you so much. I wanted to go back to the issue about the tight labor market. Can you talk a little bit about how fill rates are tracking compared to either when you mentioned that the unemployment rate for college graduates were in the high 1% or a normal environment? I'm just wondering if it's more difficult even in this environment and even though you're managing it.

[M. Keith Waddell, Vice Chairman, President and Chief Executive Officer at Robert Half]

No. I'm not sure it's more difficult. And the fact that we've got the new lever to recruit remotely, the fact that we're more willing than ever to hire professionals full-time and put them on the bench, if you will, also relieves some of that pressure. So the combination of all of those things and the fact that we aren't even back to 2018, '19 unemployment levels, all taken together, we think the labor -- the tight labor market is manageable from the standpoint of our supply.

It's at the transactional level, accounting operations, technology operations. Clients are more apt for them to want them to be on site. For the higher-level management resources, for tech developers, database administrators, they're more inclined or more accepting of remote roles there. So it makes it easier for us with the latter than with the former. Candidates actually want a premium today if you want them to be on site. And many clients will pay that. Some won't.

[Jeff Silber, Analyst at BMO Capital Markets]

Yes. And actually, that's a good segue to my next question. Just in terms of the overall market, you mentioned about 5.5% billing rate increases. Are you seeing any client pushback in that area?

[M. Keith Waddell, Vice Chairman, President and Chief Executive Officer at Robert Half]

So there's always some client pushback. And our people would tell you that one of the things they always have to deal with is a candidate's perspective on the labor market versus a client's perspective on the labor market. But it's helpful that virtually, every day in the news, there's some story about how tight the labor market is and how many unfilled jobs there are and how much attrition there is. And all of those make it easier for our staff to convince our clients that they need to pay, but it's just human nature that there's always some pushback.

[Jeff Silber, Analyst at BMO Capital Markets]

Okay. That's fair enough. Thanks so much.

[Operator]

Our next question will come from the line of Kevin McVeigh with Credit Suisse.

[Kevin McVeigh, Analyst at Credit Suisse Group]

Great, thanks so much. And congratulations on the results. Keith, with one number question and then just one a little more relative to the cycle, can you just remind us what conversions were in the quarter?

[M. Keith Waddell, Vice Chairman, President and Chief Executive Officer at Robert Half]

Yes. So conversions were 3.7% of revenue in the quarter. That's up a few basis points from last quarter. Remember, we've been 4% and higher in the past. So we don't think we peak to 3.7%, and there's some margin upside there.

[Kevin McVeigh, Analyst at Credit Suisse Group]

That's helpful. And then, Keith, it's been such a tricky cycle in terms of how quickly it decelerated and then the reacceleration. And I know no two cycles are the same, but do you think there's any pull forward of demand, not to say that it's not going to be a normal cycle, but do you think there's been any pull forward of demand? And maybe in the outer years, the sequencing may be not as robust? Or do you think we continue to kind of build on just the good momentum you've had so far?

[M. Keith Waddell, Vice Chairman, President and Chief Executive Officer at Robert Half]

Well, we're now five quarters from trough and we've grown twice as quickly as we've done in the past. As I said earlier, we think this remote hybrid work, the future of work, improves our competitive position significantly. Our clients themselves have a much harder time recruiting for their own account remotely. Our competitors that, by and large, are local and regional don't have the office network, don't have the local candidate relationships, don't have the technology. And so we're very bullish, and we're very pleased at the investments we've made in network, in people, in technology. All come together in a beneficial way for us vis-a-vis our competitors as we move forward, which make us very bullish as we move forward in this cycle.

[Kevin McVeigh, Analyst at Credit Suisse Group]

Makes a kind of sense. Thank you.

[Operator]

Our next question will come from the line of Gary Bisbee with Bank of America Securities.

[Gary Bisbee, Analyst at Bank of America Securities]

Hey thanks. I guess I wanted to go back to the public sector for a second. When you first began discussing this, I guess, over a year ago, the initial focus was on the pandemic created these opportunities and you've alluded a couple of times. Do you think that the relationships you see are creating maybe non-pandemic, longer-term, more durable opportunities? Can you just give us any color on that? Like what's the mix of stuff that you think is pretty much directly pandemic-related versus not? Or how do the pipelines longer term -- and I'm obviously not asking about Q4 but thinking into '22 or over time as you think about that opportunity? Thank you.

[M. Keith Waddell, Vice Chairman, President and Chief Executive Officer at Robert Half]

So the $92 million in contract were -- this quarter, that's a piece of the $172 million in total blended solutions, is largely pandemic-related. There's very little non-pandemic-related in there, and it's principally split between unemployment and housing. As we move forward, we have education coming on. That will be very helpful. That, we're very bullish about. And it's much more distributed by local school district, and we have hundreds upon hundreds of pre-existing relationships with local school districts.

But as it relates to non-pandemic assignments with the same pandemic state clients, we have talked about how the backlog has increased dramatically. It increased again this quarter. The sales cycle is different and longer. The procurement process is different. For the pandemic work, we did it pursuant to emergency authorizations, which were quick. For the non-pandemic work, you do it pursuant to blanket purchase agreements. We're happy to report we've secured those for multiple states, including in our largest state client, where we just got a blanket purchase agreement for IT support, virtually anything IT-related.

So it's early days. The sales cycle is longer. We're bullish that over time, we will net add because of those relationships. But my other point is let's not just focus on the half of our blended solutions that's public sector. Let's also focus on the other half, and that other half was 80% of our sequential growth during the third quarter. Public sector was 20% of our sequential growth for this quarter.

So let's think about both halves, not just the public sector half. As we said, we expect a modest fourth quarter decline, 5% to 10% in public sector. For 2022, we expect further modest declines. We do not expect a cliff decline in public sector across 2022. And then if we go to that other half of blended solutions, it's growing nicely, very nicely.

[Gary Bisbee, Analyst at Bank of America Securities]

That's helpful, and I agree. That's a great story. I guess the follow-up, you said the last few quarters that, especially in the staffing businesses, you have some good capacity. But I just wanted to get an update on that given the continued robust growth. How are you thinking about ramping up hiring in those businesses? You clearly said you're doing that aggressively in Protiviti today, but any update on your staffing business?

[M. Keith Waddell, Vice Chairman, President and Chief Executive Officer at Robert Half]

Sure. I'd say, we have the least capacity and are the most aggressive adding to staff and permanent placement. The growth rates speak for themselves. The cumulative progress off the trough speaks for itself. So we're aggressively adding permanent placement recruiters as we speak. We're also adding recruiters to this full-time contractor segment where we hire people full-time. We put them out as contractors.

That's something where we get very good margins, where we go up the skill curve in our accounting operations groups. And so we're being very aggressive there. We do still have some capacity in the other temporary contract practice groups lines of business, if you will. And so it will still be a quarter or two before we add to that head count. But when you put all the adds together, it's not going to be disproportionate to the revenue growth. So I wouldn't expect negative leverage. It will just be -- it will be just less positive leverage.

[Gary Bisbee, Analyst at Bank of America Securities]

Great. Thanks.

[Operator]

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

[Tobey Sommer, Analyst at Truist Securities]

Thank you. With respect to bill rates and sort of wage inflation, how do you expect that to unfold this cycle versus history? Is there -- are there any key differences that you've cited and/or expect that would cause you to have a different expectation than normal?

[M. Keith Waddell, Vice Chairman, President and Chief Executive Officer at Robert Half]

Well, there's this whole transitory, not transitory argument that I don't have any better insight than any other person would have. Typically, for us, for a three to five-year period, we would see mid-single-digit wage inflation that we would pass through and, in fact, expand our margins a bit. The only thing that's new this time that makes for interesting thought is this notion that we're going to place non-local candidates into local clients. And some of that's done as a labor arbitrage, better price point. Other times, it's done so you can get a more pinpointed, deeper skill.

But potentially, that could take some pressure off wage inflation. But again, wage inflation is our friend. It's not something we fear, and we'll let the game come to us. But typically, for three to five years, early cycle -- early to mid-cycle, we see single-digit -- mid-single-digit wage inflation.

[Tobey Sommer, Analyst at Truist Securities]

Thank you. And then, my follow-up question is -- you answered, sort of, are we having any pull forward on the revenue side, and that was clear. In terms of the margin in a normal cycle, is there any difference in the way the social costs kind of dampened gross margins typically during a recession and for a while and over time, that's alleviated, contributing to EBITDA margin expansion at the firm? Anything different this time versus what might have happened in recent cycles?

[M. Keith Waddell, Vice Chairman, President and Chief Executive Officer at Robert Half]

Well, so this is a little esoteric. So bear with me. In prior down cycles, as unemployment claims for people that work temporary/contract for us, their claims got charged to our account. On a three-year look-back period, that then formed the basis for elevated charges to us for the next three to five years. What's different this time is that, for states to get federal assistance, they had to agree not to charge unemployment claims to specific company accounts. Instead, it went into the general account. So the million-dollar question is, are we going to be better off or not to be part of the general pool only, rather than being primarily accountable to the individual claims of our former contract employees?

And as I sit here today, my sense is, it's going to be a little better, but it's never happened before. And the leisure, hospitality has been the lion's share of the unemployment, that's gone into that general pool. So we would share in that. So the good news is, we won't have to pay for our own claims. The not-as-good news is we're going to have to share in the leisure hospitality claims that are in the general pool. So I said it was going to be esoteric, and I've now just proven it. But it was a long-winded way of saying, I think it's going to be better, but I don't think it's going to be dramatically different.

[Tobey Sommer, Analyst at Truist Securities]

That's helpful. I appreciate your answer.

[Operator]

The next question will come from the line of George Tong with Goldman Sachs.

[George Tong, Analyst at The Goldman Sachs Group]

Hi, teams, good afternoon. Supply chain disruptions have had a negative impact on multiple verticals, including many of the verticals that Robert Half serves. Are there any signals that you're seeing that suggest there could be a shock to client demand perhaps further down the line?

[M. Keith Waddell, Vice Chairman, President and Chief Executive Officer at Robert Half]

Well, I'd say clearly, the supply chain disruptions have been most acute to manufacturing. We're not exposed to that vertical. In fact, our two biggest verticals, as we've talked before, are financial services and professional services. So George, there's nothing that would leave us -- lead us to believe there's some black swan shock because of supply chain as it relates to our client base.

[George Tong, Analyst at The Goldman Sachs Group]

Okay. Got it. You mentioned that Protiviti declines next year should be relatively gradual, not a cliff. Does that assume that the public sector work at -- in Protiviti specifically as it relates to COVID, some measure of it continues into 2022? Is that baked into your assumption?

[M. Keith Waddell, Vice Chairman, President and Chief Executive Officer at Robert Half]

Well, first of all, let me be clear. I did not say we expect Protiviti overall to decline in 2022. I said the public sector portion of Protiviti, which is half of 1/3 of their revenues, I'm saying that would decline modestly, which means some of the unemployment claims processing support, some of the housing rental assistance support would continue into 2022.

Further, this educational assistance that's been coming on strong the last few months, that also continues into 2022, such that our current thinking is for all of 2022 for the public sector portion only of Protiviti that it would be down modestly, 5% to 10%. But the rest of Protiviti is growing quite well. The demand environment has rarely been better, and they are aggressively adding to staff all the way from new college grads to MDs because of the robustness of that demand environment. So we absolutely expect Protiviti overall year-on-year to grow nicely.

[George Tong, Analyst at The Goldman Sachs Group]

Yes. I was referring to the public sector piece of Protiviti. Apologies for the confusion. And just to be clear, the part that is public sector that you expect a moderate decline, so you don't expect the public sector to completely go away.

[M. Keith Waddell, Vice Chairman, President and Chief Executive Officer at Robert Half]

That's correct. My word was...

[George Tong, Analyst at The Goldman Sachs Group]

That's simply because you expect some lingering...

[M. Keith Waddell, Vice Chairman, President and Chief Executive Officer at Robert Half]

Right. No cliff decline, no severe decline. It would modestly decline. And again...

[George Tong, Analyst at The Goldman Sachs Group]

Got it.

[M. Keith Waddell, Vice Chairman, President and Chief Executive Officer at Robert Half]

That's -- we might surprise ourselves to the upside to the extent we get traction with this non-pandemic-related work with those states. It could be better. And our earlier point as well as -- let's not forget about the other half of our blended solutions. Public sector is half of the 34%. There's the other half of that 34% that has nothing to do with public sector and has nothing to do with pandemic.

[George Tong, Analyst at The Goldman Sachs Group]

Great. Thank you.

[M. Keith Waddell, Vice Chairman, President and Chief Executive Officer at Robert Half]

Okay. Operator, I think that was our last question. Thanks, everyone, for joining.

[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 www.roberthalf.com. You can also dial the conference call replay, and dial-in details and the conference ID are contained in the company's press release issued earlier today. Thank you. This does conclude today's conference. You may now disconnect.