And so that’s recovering at the top line with contracts, with higher bill rates, that’s also better managing the contractor full time employee mix. And so virtually every year, they improve their margins over the course of the year and our expectation would be that’s true in 2024 as well. But there’s no missing piece. Sure, you’ve got some negative leverage on the talent solutions side, as I just said, and you’ve got Protiviti out of the gate with smaller margins, but that’s always true in the first quarter.
Operator: Your next question comes from the line of Kartik Mehta with Northcoast Research.
Kartik Mehta: Keith, I wanted to ask, you talked a little bit about the big four being aggressive and some pricing and some geographies. And I’m wondering with that as a backdrop, maybe your ability to recover some of the cost increases you’re seeing because of raises and promotions, and maybe how those dynamics would play out throughout the year.
Keith Waddell: Protiviti’s gross margins are a function of several factors. One is bill rate increases, one are the raises/promotions, one is the mix of contractors versus full time, one is the shape of the pyramid, meaning the ratio of the higher level managing directors to the lower level consultant level ones and the contractors. And so there are multiple levers that can be adjusted to manage gross margin. And to the extent that you might not get as much as an example from bill rate increases, you can tweak your employee versus contractor mix in part to deal with that. So there are multiple levers and Protiviti well knows each of those levers and have actively managed them, did a very good job during 2023 managing the blend of those levers, to bring their margins up significantly from beginning to end of the year. They had 11.4% segment income margins in the fourth quarter, which is fantastic.
Kartik Mehta: And just a question on bank spending. You’ve talked about, obviously, the need for banks on risk and kind of compliance spending. I’m wondering has Protiviti seen any pressure from maybe consulting on the technology part or any other part on the banking side?
Keith Waddell: I’d say on the regulatory compliance and remediation, banks — those things have to happen and in many cases, the regulators require a third party consultant at the table. And so that’s been very resilient. And in 2023, Protiviti had double digit revenue growth primarily from big banks and financial institutions. So that piece of big banks grew nicely. The internal audit piece of big banks, however, was pressured somewhat as their cost measures put them in a position to convert some of the work that was done by third parties to internal staff and that was at the expense of all consulting firms, Protiviti included. But when you put the package together, the financial services industry for Protiviti that includes regulatory risk and compliance as well as internal audit, it still grew single digits. But there was two different pieces of that, one grew nicely and one was impacted by big bank cost measures.
Operator: Your next question comes from the line of Jeff Silber with BMO Capital Markets.
Unidentified Analyst: This is Ryan on for Jeff. Just can you talk about your bill rates or placements or fee assumptions for 2024?
Keith Waddell: As you’ve seen now for many quarters, as wage inflation has come down, there’s been a smaller pass through of that on our side, so the bill rates have come down as well. And we would expect over the course of 2024 that wage rate increases would continue to moderate. And therefore, our bill rates would moderate accordingly, but our gross margin spread or the percentage gross margin should remain intact. Frankly, the biggest swing factor, just like we look year-on-year in the fourth quarter, the biggest swing factor was conversions, converting contractors to full time. And those were down about 30 basis points year-on-year, and that’s pretty much the change in gross margins year-on-year. So we would expect some moderation but at the top line — but our gross margin percentage shouldn’t be impacted because whatever less our bill rates are our pay rates would be down accordingly.
Unidentified Analyst: And then just related to the prior question. Can you give us a breakdown on some of those underlying Protiviti businesses between the internal audit and the tech consulting and risk and compliance?
Keith Waddell: Well, strongest was regulatory risk and compliance, where they grew nice double digit rates for the year. Technology consulting, I would say, is flattish and internal audit would be down mid-single digits. And business process improvement, which includes things like IPO, M&A, to some extent, public sector, that was down by double digit rates as expected. The good news is, if you just focus on that public sector piece, as state and local governments are understaffed, as local education understaffed, they’re seeing some nice wins and some of that first quarter above trend optimism relates to public sector engagements, which is a wonderful thing.
Unidentified Analyst: Thank you.
Keith Waddell: Okay. So that was our last question. Thank you very much for joining us.
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 Web site 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.
