Robert Half International Inc. (NYSE:RHI) Q4 2023 Earnings Call Transcript

Robert Half International Inc. (NYSE:RHI) Q4 2023 Earnings Call Transcript January 30, 2024

Robert Half International Inc. beats earnings expectations. Reported EPS is $0.83, expectations were $0.82. Robert Half International Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the Robert Half Fourth Quarter 2023 Conference Call. Today’s conference call 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.

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 to these figures as adjusted.

Reconciliations and further explanations of these measures are included in a supplemental schedule to our earnings press release. For your convenience, our prepared remarks for today’s call are available in the Investor Center of our Web site, roberthalf.com. We delivered above consensus top and bottom line results for the fourth quarter with Protiviti leading the way. Global labor demand continues to be resilient and talent shortages persist, although, both are modestly below their peaks, ongoing economic uncertainty continues to impact client and candidate confidence, as well as hiring activity and in project starts. Nevertheless, we’re encouraged that our improving weekly revenue trends that again in the third quarter and continued into the fourth quarter are approaching a positive inflection point.

We entered 2024 confident in our ability to navigate the current climate and optimistic about our growth prospects built on our industry leading brand, people, technology and unique business model that includes both professional staffing and business consulting services. For the fourth quarter of 2023, company wide revenues were $1.473 billion, down 15% from last year’s fourth quarter on both a reported and as adjusted basis. Net income per share in the fourth quarter was $0.83 compared to $1.37 in the fourth quarter one year ago. Cash flow from operations during the quarter was $115 million. In December, 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 11.2% annually since its inception in 2004.

The December 2023 dividend was 11.6% higher than the prior year. We also acquired approximately 685,000 Robert Half shares during the quarter for $56 million. We have 10.8 million shares available for repurchase under our Board approved stock repurchase plan. Return on invested capital for the company was 22% in the fourth quarter. Now, I’ll turn the call to our CFO, Mike Buckley.

Michael Buckley: Thank you, Keith. Hello, everyone. As Keith just noted, global revenues were $1.473 billion in the fourth quarter. On an as adjusted basis, fourth quarter talent solutions revenues were down 18% year-over-year. US talent solutions revenues were $764 million, down 21% from the prior year’s fourth quarter. Non-US talent solutions revenues were $245 million, down 10% year-over-year. We have 313 talent solutions locations worldwide, including 89 locations in 18 countries outside of the United States. In the fourth quarter, there were 61.1 billing days compared to 61.2 billing days in the same quarter one year ago. The first quarter of ’24 has 62.8 billing days compared to 63.3 billing days during the first quarter of 2023.

Billing days for the remaining three quarters of 2024 will be 63.5, 64.1 and 61.6 for a total of 252 billing days in the year. Currency exchange rate fluctuations during the fourth quarter had the effect of increasing reported year-over-year total revenues by $11 million, $8 million for talent solutions and $3 million for Protiviti. Contract talent solutions bill rates for the fourth quarter increased 3.7 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 4.6%. Now let’s take a closer look at the results for Protiviti. Global revenues in the fourth quarter were $464 million. $372 million of that is from the United States and $92 million is from outside of the United States.

On an as adjusted basis, global fourth quarter Protiviti revenues were down 8% versus the year ago period. US Protiviti revenues were down 7%, while non-US Protiviti revenues were down 9%. Protiviti and its independently owned member firms serve clients through a network of 89 locations in 29 countries. Turning now to gross margin. In contract talent solutions, fourth quarter gross margin was 39.7% of applicable revenues versus 39.9% in the fourth quarter one year ago. Conversion revenues or contract to hire were 3.4% of revenues in the quarter compared to 3.7% of revenues in the quarter one year ago. Our permanent placement revenues in the fourth quarter were 12% of consolidated talent solutions revenues versus 12.7% in the same quarter one year ago.

When combined with contract talent solutions’ gross margin, overall gross margin for talent solutions was 46.9% compared to 47.5% of applicable revenues in the fourth quarter last year. For Protiviti, gross margin was 23.9% of Protiviti revenues compared to 27.2% of Protiviti revenues one year ago. Adjusted for deferred compensation related classification impacts, gross margin for Protiviti was 25.9% for the quarter just ended compared to 28% last year. We ended 2023 with 10,500 full time Protiviti employees and contractors, down 9.6% from the prior year. Moving on to selling, general and administrative costs. Enterprise SG&A costs were 35.1% of global revenues in the fourth quarter compared to 31.6% in the same 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 30.4% last year.

Talent solutions’ SG&A costs were 44.6% of talent solutions revenues in the fourth quarter versus 38.9% in the fourth quarter of 2023. Adjusted for deferred compensation related classification impacts, talent solutions’ SG&A costs were 40.8% in the quarter just ended compared to 37.2% 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 ratios by 0.4 percentage points. We ended 2023 with 8,000 full time internal employees in our talent solutions divisions, down 13.8% from the prior year. Fourth quarter SG&A costs for Protiviti were 13.5% of Protiviti revenues compared to 13.6% of revenues last year. Operating income for the fourth quarter was $67 million.

Adjusted for deferred compensation related classification impacts, combined segment income was $114 million in the fourth quarter. Combined segment margin was 7.8%. Fourth quarter segment income from our talent solutions divisions was $61 million with a segment margin of 6.1%. Segment income for Protiviti in the fourth quarter was $53 million with a segment margin of 11.4%. Our fourth quarter tax rate was 27% the same as one year ago. At the end of the fourth quarter, accounts receivable were $861 million and implied days sales outstanding or DSO was 52.6 days. Before we move on to first quarter guidance, let’s review some of the monthly [reviewed] 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 17% versus the prior year compared to an 18% decrease for the full quarter. Revenues for the first three weeks of January were down 17% compared to the same period last year. On a week-on-week sequential basis, the rates of decline continued to narrow during the quarter, a pattern that began last quarter. Permanent placement revenues in December were down 22% versus December 2022. This compares to a 23% decrease for the full quarter. For the first four weeks of January, permanent placement revenues were down 25% compared to the same period in 2023. We provide this information so you have insight into some of the trends we saw during the fourth quarter and into January.

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 first quarter guidance: revenues, $1.44 billion to $1.54 billion; income per share, $0.54 to $0.68; midpoint revenues of $1.49 billion or 13% lower than in the same period in 2023 on an as adjusted basis. The major financial assumptions underlying the midpoint of these estimates are as follows: revenue growth year-over-year on an as adjusted basis; talent solutions down 14% to 19%, Protiviti down 3% to 6%, overall down 10% to 15%; gross margin percentage for contract talent 38% to 41%, Protiviti 20% to 22%, overall 37% to 39%; SG&A as a percentage of revenues, excluding deferred compensation classification impacts, talent solutions 40% to 42%, Protiviti 15% to 17%; overall 32% to 34%; segment income for talent solutions 4% to 7%, Protiviti 4% to 7%; overall 4% to 7%; tax rate 29% to 30%; shares $104 million to $105 million; 2024 capital expenditures and capitalized cloud computing costs, $90 million to $110 million with $15 million to $20 million in the first quarter.

Protiviti’s first quarter segment income guidance includes the seasonal impact of annual staff promotions and compensation increases, all of which become fully effective on January 1st. This produces a sequential decline in midpoint estimated segment margin of 6 percentage points, which is consistent with the 4 to 7 point decline experienced in most of the last 10 years. 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. While job opening demand continues to be above historical levels and candidate supply remains tight, the velocity of hiring remains impacted and there is less churn in the labor force. The great resignation following COVID has given way to the big stay and employee attrition is down significantly across the globe. That said, the tone of client discussions has improved in the last 90 days due to some combination of lower inflation, a more favorable interest rate policy, fewer predictions of pending [recession] and newly approved staffing levels resulting from the annual budget cycle. These factors contribute to a more positive backdrop heading into 2024 than we saw a year ago. We’re optimistic about our opportunities for the year ahead, starting with the reacceleration in the velocity of hiring and the more normalized labor churn that typically follows when client and candidate confidence improve.

We’re also encouraged by the growth and margin prospects from our continued focus on services related to higher skilled talent, both in talent solutions and Protiviti. Our investments in higher skilled services carry many advantages, higher bill rates and gross margins, longer assignment links, increased client openness to remote tell, more full time engagement professionals and less economic sensitivity. This investment has already provided significant benefit in the current cycle as our cumulative sequential revenue declines during the last six quarters are about half of what they were compared to peak to trough declines of the dot-com and financial crisis downturns. We expect this positive mix shift to continue. We continue to invest in technology and innovation, including AI.

Major focus areas include providing a world class digital experience for our clients and candidates that is seamlessly connected to our specialized professional recruiters. Also, we continue to leverage our proprietary data assets to enhance the AI tools our recruiters use to discover, assess and select talent for our clients and the AI tools our recruiters use to effectively target leads for additional revenue. We’re pleased with Protiviti’s results for the quarter led again by the regulatory risk and compliance practice. Other solutions areas were again modestly impacted by client budget measures. Protiviti’s pipeline continues to grow, although, economic conditions continue to impact the average deal size and the time it takes to close contracts and begin new engagements.

Protiviti continues to compete very effectively in the marketplace, benefiting from its focused and nimble solutions offerings and its differentiated breadth and depth of resources, including priority access to scalable contract talent at all skill levels through our talent solutions practices. Protiviti now represents 34% of our annual segment income, which is expected to increase as it expands its small but growing market share in the growing global consulting industry. We’ve weathered many economic cycles in the past, each time emerging to achieve higher peaks, aging workforce demographics and clients’ desire for flexible resources and variable costs are structural tailwinds that are expected to continue for many years to come. We began the new year energized by our time tested corporate for 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.

We’d also like to thank our people across the globe whose commitment to success made possible a number of new accolades in 2023. Fourth quarter recognition included being named one of the best workplaces for parents by Great Places to Work, on America’s most responsible companies by Newsweek and Best Managed Company of 2023 by The Wall Street Journal. Now Mike and I would 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.

See also 11 Best Wine Stocks to Buy Now and 13 Best Aerospace Stocks To Buy On Sale.

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Mark Macon with Baird.

Mark Macon: I wanted to focus on Protiviti. It looks like at the midpoint of your guidance, you’re basically assuming a positive inflection with regards to the revenue trends, obviously, against — and not necessarily against an easier comp. So I’m wondering how is the level of visibility, are the comments that you made about improving weekly trends consistent there? And what areas or practice areas or geographies are seeing the strongest growth within Protiviti?

Keith Waddell: Well, the facts are that, let’s first look at our Q1 guidance. It assumes above trend, if you look at the last 10 years of what happens sequentially for Protiviti, it assumes above trend growth, which is a good thing. As to level of visibility, Protiviti certainly has more backlog than is the case for talent solutions. They know what percent of their forecast is already scheduled in their resource system, and that is strong. And so as we look at Q4 into Q1, Q4, as we projected, was very similar to Q3 on a same day basis, slightly better, beat forecast. And as we move into Q1, as I said before, slightly above traditional sequential trend, which is good for Protiviti. We feel good about where Protiviti is. First quarter sequentially or seasonally is always a tougher quarter for Protiviti.

They, on the one hand, on the revenue side, internal audit, utilization declines modestly because clients focus on getting their external audits done, which crowds out their work on internal audit, that’s something that’s happened for years and years. And further, they’ve got their promotions and raises that happened all at once on January 1 firm wide globally. And their client contract cycle usually begins in the first quarter and so they began to recover those higher costs over the course of the year. You don’t have to look very far. Look at 2023, look at gross margin progress they made from the first quarter to the fourth quarter. We would expect, they expect, to see that kind of progress again as we look across 2024. So we feel good about Protiviti.

If anything, business conditions are same or a little better and we would say the same thing in talent solutions, saying to a little better.

Mark Macon: And then can you talk a little bit about what you’re seeing in terms of competition or pricing? There have been some reports in terms of the big four about potentially having some excess capacity and perhaps discounting a little more than they usually have. Are you seeing that? And to what degree have you offset that with regards to — a reduction with regards to the number of contractors and professionals within Protiviti in terms of the cost base?

Keith Waddell: So as we talked last quarter, the big four have gotten aggressive in certain locations based on their own utilization levels and price competition has been tough for a couple of quarters. But that’s not something that’s new, and that’s something that’s well built into the guidance we’ve given. As to Protiviti’s own cost control measures, they have made a significant reduction. And in fact, the reduction we talked about in the prepared remarks is virtually all contractors year-on-year and it’s certainly a nice variable cost lever they have from a cost standpoint that helps as they deal with this environment versus more normal environments.

Operator: Your next question comes from the line of Andrew Steinerman with JPMorgan.

Andrew Steinerman: What do you think has led to the improved tone of client discussions in the last 90 days, and does that apply to both talent solutions and Protiviti?

Keith Waddell: Well, as we mentioned, it’s the combination of, there’s less inflation, there’s really no fears of more rate increases, and in fact, hopes are rate decreases, fewer economists are calling for a recession. So it’s a cumulative in fact of all of those. There’s less concern by our clients that we’re going into a recession than there were a year ago, and it sets a slightly more positive tone. I’d say that’s true on both the talent solutions and Protiviti side. I mean it isn’t huge, don’t get me wrong. The environment is saying to better on the talent solutions side, saying to better on the Protiviti side, but that’s better than what we’ve been saying for several quarters where it’s been declining somewhat.

Operator: Your next question comes from the line of Heather Balsky with Bank of America.

Heather Balsky: I just had a question on your CapEx spend. And if you can help us, just kind of what are the investments for 2024, kind of what might be driving the increase? And I guess, how much of that could be variable in nature depending on how the environment goes?

Keith Waddell: So first of all, we continue our commitment to technology innovation, AI, as we have for several years in a row. So there’s very little change in the piece of that, that relates to technology, innovation, AI. The increase is almost entirely attributed to in Corporate Services in Menlo Park and Pleasanton, San Ramon, we are significantly downsizing our space. And in San Ramon, we’re actually moving and that requires tenant improvements, furniture fixtures. But that investment, orders of magnitude, which is $20 million, in turn results in rent savings of about $5 million a year. So you can see that pays for itself quickly. And in terms of San Ramon, the lease is 11 years. And so for savings of $5 million for 11 years, you spend $20 million. So we’re going to reduce our footprint by about two thirds.

Heather Balsky: And just as a quick follow-up to that. If we take $20 million out of your CapEx, is that the way to think about run rate in future years?

Keith Waddell: Sure. And so if you look at our CapEx spending over a 10 year period, it averages about 1.3% of revenue. But for this corporate services move downsize that’s where we would be again in 2024. But as you can see, the $20 million is money well spent because it’s essentially driving cost savings.

Operator: Your next question comes from the line of Trevor Romeo with William Blair.

Trevor Romeo: First one, I just wanted to kind of follow up on your commentary about approaching a positive inflection point. I think, clearly, it does seem like year-over-year declines have leveled off. I guess two questions on this. One, do you see this more a factor of comps becoming easier or the underlying demand improvement may be getting slightly better? And then two, I guess, could you just define exactly what you mean by positive inflection, whether that’s weekly revenue starting to grow again?