Robert Half International Inc. (NYSE:RHI) Q3 2023 Earnings Call Transcript

Robert Half International Inc. (NYSE:RHI) Q3 2023 Earnings Call Transcript October 24, 2023

Robert Half International Inc. beats earnings expectations. Reported EPS is $0.9, expectations were $0.8.

Operator: Hello, and welcome to the Robert Half Third Quarter 2023 Conference Call. Today’s conference is being recorded. [Operator Instructions] 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. Mr. Waddell, you may begin.

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

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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 each of our contract functional specializations includes intersegment revenues from services provided to Protiviti in connection with the company’s blended talent solutions and consulting operations. This is how we measure and manage these businesses internally. The combined amount of intersegment revenues with Protiviti is also separately disclosed. For your convenience, our prepared remarks for today’s call are available in the Investor Center of our website, roberthalf.com. We delivered above consensus top and bottom line results for the third quarter, notwithstanding the ongoing macroeconomic uncertainty that lengthens both client and job candidate decision cycles.

Both talent solutions and Protiviti exceeded expectations. Gross margins remained strong due to pricing discipline and the ongoing benefit from the rising mix of revenues from higher skilled services. Our operating cost base also benefited from the targeted actions we’ve taken to align costs with revenues. We remain confident both in our ability to whether the current climate and in our future growth prospects as the macro landscape improves. For the third quarter of 2023, company-wide revenues, were $1.564 billion, down 15% from last year’s third quarter on a reported basis and down 14% on an as adjusted basis. Net income per share in the third quarter was $0.90, compared to a $1.53 in the third quarter a year ago. Cash flow from operations during the quarter was a $176 million.

In September, we distributed a $0.48 per share cash dividend to our shareholders of record for a total cash outlay of $51 million. Our per share dividend has grown 11.4% annually since its inception in 2004, the September 2023 dividend was 11.6% higher than in 2022. We also acquired approximately 1.2 million Robert Half shares during the quarter for $90 million. We have 11.5 million shares available for repurchase under our Board approved stock repurchase plan. Return on invested capital for the company was 24% in the third quarter. Now I’ll turn the call over to our CFO, Mike Buckley.

Michael Buckley: Thank you, Keith, and hello, everyone. As Keith noted, global revenues were $1.564 billion in the third quarter. On an as adjusted basis, third quarter Talent Solutions revenues were down 17% year-over-year. U.S. Talent Solutions revenues were $823 million, down 20% from the prior year’s third quarter. Non-U.S. Talent Solutions revenues were $260 million down 7% year-over-year on an as adjusted basis. We have 319 talent solutions locations worldwide, including 89 locations in 18 countries outside of the United States. In the third quarter, there were 63.1 billing days compared to 64.3 billing days in the same quarter one year ago. The fourth quarter of 2023 has 61.1 billing days compared to 61.2 billing days during the fourth quarter of 2022.

Currency exchange rate movements during the third quarter had the effect of increasing reported year-over-year total revenues by $13 million, $10 million for Talent Solutions and $3 million for Protiviti. Contract Talent Solutions bill rates for the third quarter increased 4.6% compared to one year ago, adjusted for changes in the mix of revenues by functional specialization, currency, and country. This rate for the second quarter was 6%. Now let’s take a closer look at results for Protiviti. Global revenues in the third quarter were $481 million, $386 million of that is from business within the United States, and $95 million is from operations outside of the United States. On an as adjusted basis, global third quarter Protiviti revenues were down 5% versus the year ago periods.

U.S. Protiviti revenues were down 6% while non-U.S. Protiviti revenues were down 2%. Protiviti and its independently owned member firms served clients through a network of 89 locations in 29 countries. Turning now to gross margin. In Contract Talent Solutions, third quarter gross margin was 39.8% of applicable revenue versus 39.4% in the third quarter one year ago. Conversion revenues or contract to hire were 3.5% of revenues in the quarter, compared to 4.1% of revenues in the quarter one year ago. Our permanent placement revenues in the third quarter were 12.9% of consolidated Talent Solutions revenues versus 13.8% in the same quarter one year ago. When combined with Contract Talent Solutions gross margin, overall, gross margin for Talent Solutions was 47.5% compared to 47.8% of applicable revenues in third quarter last year.

For Protiviti, gross margin was 26.2% of Protiviti revenues, compared to 30.5% [ph] of Protiviti revenues one year ago. Adjusted for deferred compensation related classification impacts, gross margin for Protiviti was 25.6% for the quarter just ended, compared to 30% last year. Moving on to SG&A. Enterprise SG&A costs were 31.8% of global revenues in the third quarter compared to 29.9% percent in the quarter one year ago. Adjusted for deferred compensation related classification impacts, enterprise SG&A costs were 32.5% for the quarter just ended compared to 30.6% last year. Talent Solutions SG&A costs were 39.3% of Talent Solutions revenues in the third quarter versus 35.3% in the third quarter of 2022. Adjusted for deferred compensation related classification impacts, Talent Solutions SG&A costs were 40.4% for the quarter just ended compared to 36.3% last year.

The lower mix of permanent placement revenues this quarter versus one year ago had the effect of decreasing the quarter’s adjusted SG&A ratio by 0.5 percentage points. Third quarter SG&A costs for Protiviti were 14.7% of Protiviti revenues compared to 16% of revenues last year. Operating income for the quarter was $144 million. Adjusted for deferred compensation related classification impacts, combined segment income was $130 million in the third quarter. Combined segment margin was 8.3%. Third quarter segment income from our Talent Solutions divisions was $78 million with a segment margin of 7.2%. Segment income for Protiviti in the third quarter was $52 million with a segment margin 10.9%. Our third quarter tax rate was 30% up from 26% for the same quarter one year ago.

The higher tax rate for 2023 can be attributed to an increased impact from non-deductible expenses and fewer tax credits. At the end of the third quarter, accounts receivable were $941 million, and implied days sales outstanding or DSO was 54.2 days. Before we move to fourth quarter guidance, let’s review some of the monthly revenue trends we saw in the quarter and so far in October, all adjusted for currency and billing days. Contract Talent Solutions exited the third quarter with September revenues down 17% versus the prior year compared to a 16% decreased for the full quarter. Revenues for the first two weeks of October were down 17% compared to the same period last year. On a week-on-week sequential basis, the rates of decline have narrowed over the past 10 weeks to 12 weeks.

Permanent placement revenues in September were down 26% versus September 2022, this compares to a 23% decrease for the full quarter. For the first three weeks of October, permanent placement revenues were down 24% compared to the same period in 2022. 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, $1.415 billion to $1.515 billion; income per share $0.75 to $0.89; Midpoint revenues of $1.465 billion are 15% lower than the same period in 2022 on an as adjusted basis. The major financial assumptions underlying the midpoint of these estimates are as follows: For revenue growth year-over-year, as adjusted, Talent Solutions down 15% to 20%, Protiviti down 8% to 10% overall down 13% to 18%.

Gross margin percentage for Contract Talent, 39% to 41%, Protiviti 25% to 27%, overall 39% to 41%. For SG&A as a percentage of revenues, excluding deferred compensation classification impacts. For Talent Solutions 39% to 41%. Protiviti 15% to 17%, overall 32% to 34%. And for segment income, Talent Solutions, 5% to 8%, Protiviti 9% to 12%, and overall 6% to 9%. Tax rate, 27% to 28%. Shares 104.5 million to 105.5 million. 2023 capital expenditures and capitalized cloud computing costs, $80 million to $90 million with $20 million to $25 million in 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: Thank you, Mike. Consistent with prior quarters, job openings remain elevated. Unemployment rates remain low, and monthly job gains remain healthy. Macroeconomic forecasts are mix, and this is reflected at clients continuing hiring caution. Clients are budget sensitive and very selective in their hiring activities, including the approval of new projects. Also, many are maintaining their internal headcounts based on the anticipated difficulty in finding suitable replacements. Many times, this is funded with a reduction in their contract staff. In addition, job candidates are more reluctant to make career moves, fearing they may become the last in and first out in their new roles. The net result is less churn in the labor market.

In Talent Solutions, we continue to strategically invest in services involving higher skilled positions across our practice groups. This carries many advantages. Higher bill rates in gross margins, longer assignment lengths, increase client openness to remote talent or full-time engagement professionals, and less economic sensitivity. The cumulative sequential revenue declines during the first five quarters of the current downturn are less than half what they were compared to the same periods of the dot-com and financial crisis downturns. A significant factor is if and this improvement is the relative greater resiliency of higher skilled services. Our current mix of contract revenues from higher skilled positions is over 50%, nearly double the percentage during the dot-com downturn.

We expect this positive mix shift to continue. Protiviti’s regulatory risk and compliance practice continues to be strong and again posted significant double-digit revenue growth for the quarter. Internal audit and to a lesser extent, technology consulting are being modestly impacted by client budget pressures. Protiviti’s pipeline continues to be very strong, although economic conditions are impacting the average deal size and the time it takes to close contracts and begin new engagements. Protiviti continues to compete effectively in the marketplace, and its prospects are very positive. We’ve weathered many economic downturns in the past each time emerging to achieve higher peaks. With our current portfolio of Talent and Protiviti solutions, we are even more confident about the future.

We remain committed to our time tested corporate purpose to connect people to meaningful and exciting work and provide clients with the talent and consulting expertise they need to confidently compete and grow. Finally, we’d like to thank our employees across the globe for their efforts, which made possible prestigious new accolades in the third quarter. Robert Half was honored by Time Magazine as One of the World’s Best Companies and by Forbes as One of the World’s Best Employers. And just today, we were again recognized as One of Fortune’s Best Workplaces for Women. 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.

Operator: Thank you. [Operator Instructions] And the first question will come from Andrew Steinerman with JP Morgan.

Andrew Steinerman: Hi, Keith. I’m going to give you kind of a tough question. Obviously, revenues are down here, but not quite like a recession. So, like, what environment would you describe this as. Like, do you feel like the next step could be a mid-cycle slowdown that has recovery that follows? Or does this really feel more pre-recessionary to you?

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Q&A Session

M. Keith Waddell: Oh, what environment are we in now, we’re in an environment where it’s just factual that we’ve had five quarters of sequential slowing. And that sequential slowing is about half as what we said of dot-com and great financial crisis as far as the cumulative impact. As an aside, we’ve done a better job with gross margin. We’ve done a better job with SG&A, and we’ve done a better job, with operating margins over those same five quarters. Yes. As to what’s next, hard to say. Clearly, on the one hand, economists are getting somewhat more positive, like last time Wall Street Journal last week was maybe 53-47. There won’t be a recession. But that’s still close to 50-50. So there’s still a lot of uncertainty to remain.

We’ve long taken the stance that we will not anticipate a downturn in how we manage our costs. They always lag a bit relative to our topline. The same has been true here. We’re more focused on having the right kind of dry powder when things get better, than optimizing trough margins. The characterization of the current environment, I think for 18 months now, Andrew, economists have struggled. Most times have been wrong about what was going to happen.

Andrew Steinerman: Right.

M. Keith Waddell: As we said on the call, we are encouraged that during the last 10 weeks to 12 weeks, our weekly revenues have declined less than that same rate a quarter ago, as an example, from start to finish this most recent quarter. Our weekly revenues are down 2% or 3%. Cumulatively, that same statistic last quarter was down 8% to 10%. So clearly, the rate of decline has narrowed and or improved significantly. We’re encouraged by that. But how we overall assess what’s next, given how bad everybody’s guesses, including professionals in the field, not really inclined to make an overall assessment.

Andrew Steinerman: That makes sense. Thank you so much, Keith.

Operator: And our next question will come from Mark Marcon with Baird.

Mark Marcon: Hi. Good afternoon, and thanks for taking my questions. I want to focus on Protiviti. You mentioned, areas of strength where regulatory risk and compliance practice. I’m wondering how big is that? And then the areas where you’re seeing some weakness, how would you characterize the size there and trying to narrow in on, you know, the environment doesn’t seem to be getting that much worse, but we are anticipating a continued decline at a faster rate here in terms of the guidance for Protiviti revenue. So I’m just trying to put those pieces together and to think that part through.

M. Keith Waddell: Okay. As to size, Protiviti basically has four major solution areas. Regular to our risk and compliance, internal audit, technology, consulting, and business process improvement. While they’re not all exactly equal orders of magnitude, they’re approximately equal. Technology consulting a little larger, regulatory risk and compliance, a little smaller, but orders of magnitude, they’re in the ballpark of being fairly equal. As far as the guidance, frankly, if you take the average daily or monthly billings in Protiviti for the third quarter and you do apply that to the fourth quarter that has fewer days because not only the holidays, but because of the soft close many clients have around the holidays, you get a 5% or 6% shorter quarter in the fourth quarter, and that’s precisely what the revenues are at midpoint projected to decline.

And so the intention is pretty stable revenues on a daily basis, if you will for the fourth quarter. It’s just a shorter quarter, and it’s an even shorter quarter than we see in Talent Solutions because of the soft closes that extend the number of days of impact.

Mark Marcon: Great. You mentioned the pipeline is strong. How would you compare the pipeline, you know, at this time of the year relative to, say a year ago, and to what extent, you know, does that portend how next year is going to shape up. And along those lines, wondering if you can give us any sort of color with regards to campus recruiting and what you ended up doing new additions from campuses this summer. And this is the time of the year when offers are going out for people for next year. How’s the size of the recruiting class coming in that will start up next summer?

M. Keith Waddell: The first on the pipeline, it is growing. It’s larger than it was a year ago. However, the velocity of converting pipeline opportunities to close contracts and project starts has slowed. So it’s not a matter of demand per se. It’s the speed with which, it’s the urgency with which that demand gets converted to a project start. Arguably, that portends well for next year. Protiviti feels good about where they are in this journey of 2023 that started with they’re having to pay, you know, high single, low double digit raises to their staff given how competitive the market was to quickly became less than half of the attrition, which they typically experience, which put pressure on utilization which they’ve managed through quite well.

They’ve taken their operating margins from high 7% in the first quarter to now back to over 10%. We think that’s a very positive result given those conditions which then segues into campus recruiting, given the significantly less attrition that they’re now seeing, they’ll be somewhat more conservative with their campus hires in the coming months than they have traditionally, but they’re still doing so. They still had they just finished a pretty sizable intern class many of which become, employees via campus. So still recruiting on campus, but not quite the extent to what they have before given the significant decline in attrition, which gets to this less churn in the marketplace that’s true across employers, but which is also seen internally ourselves.

Mark Marcon: Great. Thank you.

Operator: And our next question will come from Josh Chan with UBS.

Josh Chan: Hi. Good afternoon, Keith and Mike. Thanks for taking my questions. I guess Keith, could you talk about the resilience in the contract Talent Solutions gross margin? I guess it’s been very stable despite kind of a softening environment. I know you mentioned pricing and mix, but just kind of want to get your thoughts on whether that kind of can sustain going forward at these levels.

M. Keith Waddell: And so given the tightness of the labor market, we see no reason why we should be discounting pricing. If you have a solid qualified talent, you shouldn’t give it away. And so our pricing is held up there. Our assumption is that the labor market remains relatively tight. And that bodes well for pricing. As to mix, we’ve been on this long term journey across our practice groups to move up the skill curve. And there is a meaningful gross margin benefit to the higher level skills versus the more operational level skills and accounting operational level skills will be accounts payable, accounts receivable, payroll, general ledger, etcetera, while the higher level skills would start with senior accountants and move up.

And so that migration up the skill curve has been, planned and ongoing for several years now. We continue to march in that direction, which includes, by the way, our full time engagement professionals which are more prevalent at higher skill levels than at the operational skill levels. We feel great about gross margins, both as to what we’ve done and as to the outlook.