Stephanie Moore: Got it. Well, thank you so much.
Operator: Your next question comes from the line of Jeff Silber with BMO Capital Markets.
Jeff Silber: 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 businesses that meaningfully changed or not?
Keith Waddell: 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. And that spread, we’ve continued to sustain throughout these last seven 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 attempt to hire, 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.
Jeff Silber: 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. Is it possible to get that number?
Keith Waddell: Let’s see. Let me see if anybody in the room has a number.
Jeff Silber: If not, I can follow up offline.
Keith Waddell: It’s — operating cash flow was — I think it’s a use of $16 million. 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. If you look back over time, there’s the most differential between earnings and cash flow in the first quarter of any of the quarters.
Jeff Silber: 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.
George Tong: Hi, thanks. Good afternoon. Labor hoarding has been causing temp staffing to underperform overall non-farm payrolls. When would you expect that phenomenon to last? And if it does, to what extent would it be accompanied by lower client demand for staffing in general?
Keith Waddell: 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. So it’s not just a matter of candidate 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 — there’s no doubt is a function of the macro.
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. 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 seven quarters. 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 flatlined to slightly down and that measures directly at least small business confidence or optimism.
But it’s down two years, below its multi-decade average. It’s all about confidence, which gets to urgency of hiring. We need more confidence.
George Tong: Got it, that’s helpful perspective. And then your operating margin guidance for 2Q points to quite a bit of margin contraction on the 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?
Keith Waddell: 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&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. And in fact, as we said in our prepared remarks, it’s the first time in seven 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.
George Tong: Got it, very helpful. Thank you.
Operator: Your next question comes from the line of Kartik Mehta with Northcoast Research. Please go ahead.
Kartik Mehta: 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?
Keith Waddell: 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. So I wouldn’t say we walked away. We rarely, you know, declined to even propose but some firms, some markets given their capacity levels yet 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. We expect that to continue for a few quarters longer, but that’s all built into our guidance.
Kartik Mehta: And just as a follow-up, Keith, you’ve talked about AI and obviously AI benefiting the 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.
Keith Waddell: 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 certainly benefit. 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. And so I could go down the P&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 headstart, we’ve got a leg up. 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 sourced and placed 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, 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 outweigh the cost.
Kartik Mehta: Thank you very much. I really appreciate it.
Keith Waddell: 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.
