Robert Half International Inc. (NYSE:RHI) Q4 2022 Earnings Call Transcript

Robert Half International Inc. (NYSE:RHI) Q4 2022 Earnings Call Transcript January 27, 2023

Operator: Hello, and welcome to the Robert Half Fourth Quarter 2022 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. Mr. Waddell, you may begin.

Keith Waddell: 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 are subject to the 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, 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.

Reconciliations and further explanations of these measures are included in a supplemental schedule to our press release today. 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. The supplemental schedules just mentioned also include a revenue schedule showing its information for 2020 through 2022. For your convenience, our prepared remarks for today’s call are available in the Investor Center of our website, roberthalf.com.

2022 was a very successful year across the entire Robert Half enterprise. We grew full-year revenues and earnings per share both by more than 12% and achieved new record levels for each. All of our major practice areas, contracts, permanent placements and Protiviti reached all-time highs over and above the very strong growth in the prior year. We enter 2023 optimistic about our ability to navigate the uncertain global macroeconomic environment and the tight labor markets around the world. For the fourth quarter of 2022, company-wide revenues were $1.727 billion, down 2% from last year’s fourth quarter on a reported basis, but up 1% on an as-adjusted basis. Net income per share for the fourth quarter was $1.37 compared to $1.51 in the fourth quarter a year ago.

Cash flow from operations during the quarter was $202 million. In December, we distributed a $0.43 per share cash dividend to our shareholders of record for a total cash outlay of $47 million. Our per share dividend has grown 11.2% annually since its inception in 2004, the December 2022 dividend was 13.2% higher than in 2021. We also acquired approximately 800,000 Robert Half shares during the quarter for $61 million. We have 3.8 million shares available for repurchase under our board-approved stock repurchase plan. Return on invested capital for the company was 39% in the fourth quarter. Now I’ll turn the call over to our CFO, Mike Buckley.

Michael Buckley: Thank you, Keith. Hello, everyone. As Keith noted, global revenues were $1.727 billion in the fourth quarter. On an as-adjusted basis, fourth quarter talent solutions revenues were down 1% year-over-year. U.S. talent solutions revenues were $964 million, down 2% from the prior year. Non-U.S. talent solutions revenues were $264 million, up 5% year-over-year on an as-adjusted basis. We have 317 talent solutions locations worldwide, including 86 locations in 18 countries outside of the United States. In the fourth quarter, there were 61.2 billing days compared to 61.7 billing days in the same quarter one year ago. The first quarter of 2023 has 63.3 billing days compared to 62.4 billing days during the first quarter of 2022.

Billing days for the remaining three quarters of 2023 will be 63.3, 63.1 and 61.1 for a total of 250.8 billing days during the year. Currency exchange rate movements during the fourth quarter had the effect of decreasing reported year-over-year revenues by $39 million, $27 million for talent solutions and $12 million for Protiviti. This negatively impacted our year-over-year overall revenue growth by 2.2 percentage points, 2.1 percentage points for talent solutions and 2.4 percentage points for Protiviti. Contract talent solutions bill rates for the quarter increased 7.8% compared to one year ago, adjusted for changes in the mix of revenues by functional specialization, currency and country. This rate for the third quarter was 9%. Now let’s take a closer look at results for Protiviti.

Global revenues in the fourth quarter were $499 million, $401 million of that is from business within the United States and $98 million is from operations outside of the United States. On an as-adjusted basis, global fourth quarter Protiviti revenues were up 4% versus the year ago period, with both U.S. and non-U.S. Protiviti’s up by 4% on an as-adjusted basis. Protiviti and its independently owned member firms serve clients through a network of 89 locations in 29 countries. Company-wide fourth quarter public sector revenues were $83 million, of which $60 million was reported by Protiviti and the balance reported by talent solutions. Currency exchange rates had the effect of decreasing year-over-year public sector revenues by approximately $3 million during the quarter.

Full-year public sector revenues were down approximately 8% or 3% adjusted for currency. Turning now to gross margin. In contract talent solutions, fourth quarter gross margin was 39.9% of applicable revenues compared to 39.8% of applicable revenues in the fourth quarter one year ago. Conversion revenues or contract to hire were 3.7% of revenues in the quarter. Our permanent placement revenues in the fourth quarter were 12.7% of consolidated talent solutions revenues versus 12.4% of consolidated talent solutions revenues in the same quarter one year ago. When combined with contract talent solutions gross margin, overall talent solutions gross margins were 47.5% compared to 47.2% of applicable revenues in the fourth quarter one year ago. For Protiviti, gross margin was 27.2% of Protiviti revenues compared to 28.7% of Protiviti revenues one year ago.

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Adjusted for deferred compensation related classification impacts, gross margin for Protiviti was 28% for the quarter just ended compared to 29.3% one year ago. Moving on to SG&A. Enterprise SG&A costs were 31.6% of global revenues in the fourth quarter compared to 30.8% in the same quarter one year ago. Adjusted for deferred compensation-related classification impacts, enterprise SG&A costs were 30.4% in the quarter just ended compared to 29.7% one year ago. Talent solutions SG&A costs were 38.9% of talent solutions revenues in the fourth quarter versus 37.7% in the fourth quarter of 2021. Adjusted for deferred compensation-related classification impacts, talent solutions SG&A costs were 37.2% for the quarter just ended compared to 36.2% one year ago.

The higher mix of permanent placement revenues this quarter versus one year ago had the effect of adding 0.2 percentage points to the quarter’s adjusted SG&A ratio. We ended 2022 with 9,300 full-time internal employees in our talent solutions divisions, up 5% from the prior year. Fourth quarter SG&A costs for Protiviti were 13.6% of Protiviti revenues compared to 12.9% of revenues in the year ago period as operating expenditures returned to more normalized levels. We ended 2022 with 11,700 full-time Protiviti employees and contractors, up 2.4% from the prior year. Operating income for the quarter was $174 million. Adjusted for deferred compensation related classification impacts, combined segment income was $199 million in the fourth quarter.

Combined segment margin was 11.5%. Fourth quarter segment income from our talent solutions divisions was $127 million with a segment margin of 10.3%. Segment income for Protiviti in the fourth quarter was $72 million with a segment margin of 14.4%. Our fourth quarter tax rate was 27% up from 24% in the same quarter one year ago. The higher tax rate for 2022 can be primarily attributable to higher non-deductible expenses in 2022 as well as lower stock compensation deductions due to the company’s stock price. At the end of the fourth quarter, accounts receivable were $1.018 billion and implied days sales outstanding, or DSO, was 53.1 days. Before we move to first quarter guidance, let’s review some of the monthly revenue trends we saw in the fourth quarter and so far in January, all adjusted for currency and billing days.

Contract talent solutions exited the fourth quarter with December revenues down 6% versus the prior year compared to a 1% decrease for the full quarter. Revenues for the first two weeks of January were down 7% compared to the same period one year ago. Permanent placement revenues in December were down 1% versus December of 2021. This compares to a 2% increase for the full quarter. For the first three weeks of January, permanent placement revenues were down 23% 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 fourth quarter and into January. But as you may know, these are very brief time periods. We caution reading too much into that. With that in mind, we offer the following first quarter guidance: revenue, $1.685 billion to $1.765 billion, income per share $1.10 to $1.20.

The midpoint revenues of $1.725 billion are 5.4% 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, on a year-over-year as adjusted basis, talent solutions, down 7% to down 12%. Protiviti, up 6% to up 9%, overall, down 3% to down 7%. Gross margin percentage: contract talent, 38% to 40%; Protiviti, 24% to 26%, overall, 39% to 41%. SG&A as a percentage of revenue, excluding deferred compensation classification impacts: talent solutions, 36% to 38%, Protiviti, 14% to 16%, overall, 30% to 32%. Segment income for talent solutions, 8% to 11%, Protiviti, 8% to 11%, overall, 8% to 11%. Tax rate, 27% to 28%; shares, $106.5 million to $107.5 million.

2023 capital expenditures and capitalized cloud computing costs, $100 million to $120 million, with $20 million to $25 million in the first 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.

Keith Waddell: Thank you, Mike. Global labor markets remain tight and the demand for talent remains high despite continued economic uncertainty. Clients continue to hire, albeit at an even more measured pace, which has the effect of lengthening the sales cycle. Although recent metrics have come off their all-time highs, talent shortages persist in the United States, unemployment stands at 3.5%, a 50-year low, and remains even lower for those with a college degree where the rate is 1.9%. Job openings and quit rates remain elevated. Unemployment claims remain low. Similar reports across the globe also point to labor market resilience. Protiviti continues to have a very strong pipeline across an increasingly diverse offering of solutions.

Both the regulatory risk and compliance practice and the technology consulting practice show particular strength. In 2022, Protiviti achieved record high revenues of nearly $2 billion, even while overcoming the wind down of very large financial services project and a shift in the trend of public sector engagements to projects more applicable to talent solutions. Demand for Protiviti services remains robust and is only mildly impacted by current economic conditions. While there remains volatility in the macroeconomic environment, we are optimistic about our outlook for 2023. We’ve successfully navigated many economic cycles each time achieving higher peaks. This was demonstrated by our ability to achieve the fastest recovery in our company’s history following the COVID-19 downturn.

We also continue to benefit from Protiviti’s resiliency, which stems from its diversified solution offerings that are much less tied to the economic cycle. Longer term, we are encouraged by the growth and margin prospects from our ongoing focus on services related to talent with higher skill levels. These include management resources, full-time engagement professionals, managed solutions, Robert Half Technology and Protiviti. In addition, the structural shift to remote work, particularly for higher skills, creates new competitive advantage as it highlights our numerous strengths, including our global brand, office network, candidate database, and advanced AI-driven technologies. Also, our very successful investments in innovation and technology, which continue to position us to meaningfully improve both the digital and recruiter experience for our clients and candidates and the internal productivity of our staff.

We remain committed to our time-tested corporate purpose to connect people to meaningful and exciting work and provide clients with the talent and subject matter expertise they need to constantly compete and grow. I could not be more proud of all our global teams, including talent solutions, Protiviti and corporate services professionals who put so much energy and dedication into our results this year. Their efforts made possible a record number of awards and accolades in 2022. Fourth quarter recognition included being named one of the best workplaces for parents and honored by Forbes as one of the world’s top female-friendly companies. We are particularly proud of the recognition we continue to receive for our commitment to diversity, equity and inclusion.

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.

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Q&A Session

Operator: Your first question comes from the line of Mark Marcon with Baird. Please go ahead.

Mark Marcon: Good afternoon, Keith and Mike. Wondering if you can talk a little bit about Protiviti. You’re basically guiding to a reacceleration with regards to the revenue growth. You obviously mentioned that regulatory risk and compliance as well as technology continues to be a source of strength. But I’m wondering if you can give a little bit of detail, a little bit of what are you seeing from a visibility perspective, to what extent is it being driven by any sort of reacceleration in terms of public sector or how you’re assuming about that? And to what extent is R2 integrated contributing to the reacceleration? And it seems like R2 is fairly small with about 40 employees, but wondering if that’s having an outsized effect or how we should just think about the reacceleration in Protiviti?

Keith Waddell: Well, so first of all, the impact of the wind down of financial services project and public sector impact their growth rate by about 11 points. So you take the 4% growth that was reported, that becomes 15% on a core basis. That 15% is due to, as you spoke about, the regulatory risk and compliance where they’ve got some regulatory consent order remediation projects that are quite good. On the technology side, you’ve got managed technology solutions, you’ve got data analytics, you’ve got security. All of those are good. The R2 integration, it’s small. It doesn’t move the needle overall, but we’re very happy to have those capabilities around digital transformation, customer experience, primarily based on the Adobe platform, which ironically, we’re going to use internally to replatform our own websites in 2023.

If you look at the guide for the coming quarter, midpoints high-single digits, the drag from the big project line down and public sector becomes 5% or 6%. So you’re still in that mid-teens double-digit growth rate for Q1. Protiviti’s pipeline is very strong. It’s very diversified. They feel great about where they are. We feel great about Protiviti overall. From a profitability standpoint, as is always the case, quarter one seasonally is their lowest. They have all their raises that are effective Jan 1, they front load their staff additions to some degree and in their internal audit and SOX business, it always seasonally slows while their clients focus on external audit focused on following their SEC documents, which, to some degree, crowds out SOX and internal audit.

So Protiviti, we’re very bullish about the profitability you see is typical seasonal impacts, as I just described.

Mark Marcon: That’s perfect. And then can you give us a little bit of help on the contract staffing just in terms of thinking about €“ you gave the overall guide, but just how we should think about it in terms of finance and accounting versus admin and customer support and technology. And to what extent €“ what are we thinking with regards to just the temp contract gross margin just from a sequential perspective?

Keith Waddell: So we did give the overall guide, which is hopefully the most conservative we’ve been in quite some time. From a practice group standpoint, we’re seeing strength in finance and accounting, particularly at the senior level and above. Within that, our full-time engagement professionals remains incredibly strong, has held up incredibly well. Administrative and customer support has been impacted by public sector falloff. It’s been impacted by less open and real mix. It’s also impacted to the extent clients get more cost-conscious, stretching their administrative staff seems to be one of the first places they go. So ACS would have a bigger negative impact in Q1 than F&A. Tech looks more like F&A, again, because our tech clients are largely SMB, as is the case for F&A.