Keith Waddell: Well, we haven’t gotten that granular. As clients focus on cost, they’re conservative, they’re more tentative. And to the extent they have demand, they are more — they take longer to decide when to pull the trigger. And then once they decide, it takes longer to get the contract and then get the project started. But that’s an environment Protiviti has been seeing for the last two or three at a minimum. The good news is the aggregate pipeline continues to grow. However, because it takes longer to convert those to contracts and then longer still to convert those to actual project starts their revenues are impacted. But the overall pipeline continues to grow, which we’re very pleased and we’re very optimistic with. It’s not new, it’s something they’ve been dealing with for the last at least two or three quarters. And it’s not just Protiviti, it’s pretty much a consulting industry wide phenomenon.
Operator: Your next question comes from the line of Manav Patnaik with Barclays.
Manav Patnaik: Just back on the margins. I mean, I understand sequentially, this is what you see, I guess, every year. But is there something else this year? It just feels a little bit lower than I think we all thought and perhaps has a bigger catch-up for the rest of the year, if you could help us with the cadence there?
Keith Waddell: Well, the sequential decline is in line as we talked about. I think the issue is you’re starting from a lower Q4 when you apply that sequential decline to it to get to Q1 than you have in years past. But as far as the sequential impact of the seasonality that I’ve talked about, it’s no greater than before. And in fact, we talked about how at the segment income or operating income level, sequentially, Protiviti is down about 6 percentage points. And if you look at the last 10 years, the range of that has been 4 to 7. So while maybe it’s a little bit at the higher end of that range, last year, that same sequential decline was 6.5 percentage points. So if anything, it’s an improvement relative to a year ago. So no, there is nothing else, there’s not something else.
Manav Patnaik: And then just in terms of the — can you just talk about the cross sell and kind of the success rate you’re seeing again between Protiviti and staffing, and if there’s anything in particular to call out there?
Keith Waddell: We continue to compete effectively by having resources from talent solutions and Protiviti available to our clients under one roof with one sales and delivery team. Some of the optimism, some of the reason why we’re above trend over Q1 guidance is we’ve had a couple of wins recently that are pretty significant that are, in fact, combined wins where talent solutions and Protiviti went to market together. So we’re encouraged by that. If you look at Protiviti’s revenues, about 25% of their revenues for 2023 were with resources, staff from talent solutions, that peaked at about 30% just post COVID. When due to the nature of some of those public sector engagements they were more contractor heavy, but where about 25% of Protiviti’s revenues come from resources that are sourced from talent solutions, but we think that’s wonderful.
I mean, the hours would be even larger than that, because the average hourly rate for contractors as less than it is for their full time employees of Protiviti. But 25% of revenues, Protiviti comes from contractor resources showing it works. We think that will grow over time. And it’s a competitive advantage. Nobody else has a business model that under one roof plus professional level, contractors together with big-four level consulting resources.
Operator: Your next question comes from the line of Kevin McVeigh with UBS.
Kevin McVeigh: The Protiviti headcount adjustments and the employee head count, is that a function of just the deleveraging in the business or is that some of the technological efficiencies you’re starting to see around Gen AI, things like that, or is that just purely the step function in the revenue?
Keith Waddell: Well, it started with revenue impacts. And Protiviti’s revenues, taking 2023 on an annual basis, we’re only down a couple of single digit percentage points, not a lot. That said, they had anticipated higher revenues, and when they were recruiting 12 months in advance of that, so they had full time employees coming on board that they had to adjust for given the flattening of revenues. And the good news is by enlarge all of those adjustment/reductions came from contractors and by enlarge they protected their full-time employees. But it’s not some AI technology driven impact on the Protiviti side, it’s more they’re matching their cost to revenues using this tranche of variable cost they have that, frankly, in their prior lives as a big four firm, they didn’t have that lever and nor do any other big four firms have that variable lever either.
So what a wonderful thing that they have that tranche of variable cost that they can use when they need to, which they have in the last 12 months.
Kevin McVeigh: I just want to go back because I just want to make sure I’m clear on the margins, because I understand the seasonal step function. But when I look at the absolute dollar of revenue you’re guiding to relative to the EPS, like it just seems I’m missing something. I mean, is there any maybe workers’ comp accrual, something else? Because — and I know levels vary, but if I go back to even ’21 and look at $1.4 billion of revenue, you [priced at] $0.98. And just can we reconcile that? And then is there any way — I know you typically don’t give annual guidance. But is there a way to think about if you start the year at the midpoint, how does that kind of scale over the course of the year? Just — and again, I think you’ve been clear, I’m just missing it.
Keith Waddell: Well, on the talent solutions side, you’ve got some negative leverage because we haven’t cut our head count commensurate with top line declines. As I talked about earlier, we haven’t tried to optimize trough margins. But instead, we’ve kept capacity for when things get better. So you’ve got some negative leverage there. And then on the Protiviti side, we’ve now talked about many times, you’ve got the beginning of year promotions, beginning of year salary increases and you’ve got beginning of year utilization contraction for seasonal reasons in internal audit. But if you look over the course of a year, Protiviti last year, as an example, started the first quarter, its operating margin or segment margin was 7.9, then went to 8.9 and went to 10.9, and it went to 11.4% between the first quarter and the fourth quarter.
