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Executives

Max Messmer – Chairman and CEO

Keith Waddell – Vice Chairman, President and CFO

Analysts

Andrew Steinerman – JP Morgan

Jeff Silber – BMO Capital Markets

Tim McHugh – William Blair & Company

Mark Marcon – Robert W. Baird

Andrew Fones – UBS

Sara Gubins – Bank of America

Kevin McVeigh – Credit Suisse

Tobey Sommer – SunTrust Robinson Humphrey

Gary Bisbee – Barclays Capital

Jim Janesky – Stifel Nicolaus

Ashwin Shirvaikar – Citigroup

Robert Half International Inc. (RHI) Q3 2009 Earnings Call Transcript October 21, 2009 5:00 PM ET

Operator

Welcome to the Robert Half International conference call to discuss third quarter 2009 financial results. Our hosts for today's call are Mr. Max Messmer, Chairman and CEO of Robert Half International; and Mr. Keith Waddell, Vice Chairman, President and Chief Financial Officer.

Mr. Messmer you may begin.

Max Messmer

Thank you and hello everyone. We appreciate you joining us today. Before we discuss our financial results for the third quarter, I want to remind those of you listening that our comments do contain predictions, estimates and other forward-looking statements. These statements represent our current judgment of what the future holds, and they include words such as forecast, estimate, project, expect, believe, guidance and similar expressions.

We believe our remarks to be reasonable but they are subject to risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Some of these risks and uncertainties are described in the press release we issued today, and in our SEC filings. We assume no obligation to update the statements made in this call.

Now, let's review our third quarter financial results. Third quarter revenues were $726 million, down 37% from the third quarter of 2008, and down 3% from the second quarter of 2009. Income per share was $0.06, compared to $0.42 last year and compared to $0.03 in the second quarter of this year.

Cash flow from operations was $67 million during the third quarter, and capital expenditures were $7 million. We paid a cash dividend to stockholders of $0.12 per share for a total of $18 million. We also repurchased 1.2 million shares of Robert Half stock during the third quarter, at a total cost of $32 million.

Approximately 7.1 million shares remain available for repurchase under our company's Board approved stock repurchase plan. While the global business environment during the third quarter remained challenging, year-over-year revenue declines in our staffing operations continued to moderate and on a sequential basis we saw some improvement in revenues in September and early October.

Our risk consulting subsidiary, Protiviti, reported an 8% sequential increase in third-quarter revenues compared to the second quarter, and reported significantly improved operating results.

We remain confident that our teams are well positioned to take advantage of a recovering economy in North America and abroad.

Now, I will turn the call over to Keith to provide additional commentary on our third quarter financial results.

Keith Waddell

Thank you, Max. As Max stated company-wide revenues during the third quarter were $726 million, down 37% from the prior year’s third quarter. Sequentially, revenues declined 3% from the second quarter. On a constant currency basis, these rates were a negative 36% year-over-year, and negative 5% sequentially.

There were 64 billing days in the third quarter, versus 64 billing days in the third quarter of last year, and there were 63 billing days in the second quarter of ‘09. Third quarter revenue for Accountemps, our largest staffing division, were $287 million, down 34% from the third quarter of last year, and down 8% sequentially.

Accountemps has 368 locations worldwide and makes up 40% of company-wide revenues. Revenues for OfficeTeam were $134 million in the third quarter, down 36% from the third quarter of last year, and down 1% sequentially.

OfficeTeam was introduced in 1991. It is our high-end administrative staffing division. It has 325 locations worldwide and represents 19% of company revenues.

Third quarter revenues for Robert Half Management Resources were $90 million, a decline of 42% from last year, and a decline of 4% sequentially. This division was introduced in 1997 to place senior level accounting and finance professionals on a project basis. Robert Half Management Resources operates in 147 locations worldwide, and makes up 12% of company-wide revenues.

Robert Half Technology, our IT staffing division, had revenues of $75 million during the third quarter, down 34% from the third quarter of last year, and down 1% sequentially. Robert Half Technology was introduced in 1994, and operates 109 locations worldwide and accounts for 10% of company revenues.

Our permanent placement division, Robert Half Finance & Accounting had third quarter revenues of $43 million, a decline of 60% from the third quarter of 2008, but only 1% sequentially. This business was established in 1948 and operates in 368 locations worldwide. It accounted for 6% of company-wide revenues during the quarter.

Third quarter revenues for our international staffing operations were $184 million, down 39% year-over-year, and up 1% sequentially. On a constant currency basis, revenues for international staffing operations were down 35%, compared to the third quarter of last year, and were down 5% sequentially. We have staffing operations at 110 locations in 20 countries outside the US. International staffing operations represent 29% of total staffing revenues.

Revenues for Protiviti were $97 million in the third quarter, a decline of 30% year-over-year, but an increase of 8% sequentially. Protiviti, which was formed in 2002, is a global business, consulting and internal audit firm, providing risk, advisory and transaction services. It has 62 locations in 17 countries, and accounts for 13% of total RHI revenues. Protiviti's international operations represent 29% of total Protiviti revenues.

Turning to gross margin, gross margin in our temporary and consulting staffing operations during the third quarter was $196 million or 33.5% of applicable revenues. This compares to 36.7% of revenues for the third quarter of 2008, and the same 33.5% of revenues for the second quarter of this year.

Pay bill spreads and conversions in the third quarter were little changed from second quarter levels. Third quarter gross margin for overall staffing operations was $239 million or 38.1% of staffing revenues. This compares to 43.4% of revenues in the third quarter of last year, and 37.9% of revenues in the second quarter of this year.

Overall staffing gross margins increased slightly on a sequential basis due to a higher mix of permanent placement revenues. Third quarter gross margin for Protiviti was $27 million or 27.8% of Protiviti revenues. This compares to 29.2% of Protiviti revenues in the third quarter of last year and 16.5% of revenues in the second quarter of this year.

Gross margins improved sequentially from this year’s second quarter as staff utilization rates rose, both in the United States and abroad. Protiviti's direct costs for the quarter were down $29 million versus a year ago and down $5 million sequentially or 29% and 7% respectively.

Staffing SG&A costs for the quarter were $223 million or 35.4% of staffing revenues. This compares to $337 million or 33.1% of revenues in the third quarter of 2008, and $227 million or 34.4% of revenues for the second quarter of this year. Staffing SG&A costs for the quarter were down $114 million versus a year ago and down $4 million sequentially or 34%, and 2% respectively.

Third quarter SG&A costs for Protiviti were $26 million or 26.8% of revenues. This compares to $37 million or 26.4% of revenues in the third quarter of 2008, and $28 million or 31.2% of revenues for the second quarter of this year. Protiviti SG&A cost for the quarter reduced $11 million versus a year ago, and $2 million versus last quarter or 29% and 8% respectively.

Operating income from our staffing divisions in the third quarter was $16 million or 2.6% of staffing revenues. Temporary and consulting divisions contributed $17 million or 2.9% of applicable revenues. Our perm placement division had an operating loss of $1 million in the third quarter.

Operating income for Protiviti was $1 million in the third quarter, a $14 million improvement from the second quarter. The improvement was the combined result of higher revenues and lower costs. US operations and non-US operations contributed equally to the improvement in operating income.

Protiviti’s revenue gains were achieved from internal controls reviews, corporate restructuring engagements, and credit risk assessments. Cost savings of an additional $4m are expected in the fourth quarter as compared to actual third quarter costs for Protiviti.

Now let us look at accounts receivable. At the end of the third quarter, accounts receivable were $365 million, with implied days sales outstanding of 45.7 days, which compares to 46 days at the end of third quarter of last year.

Now let us move to guidance. First I will share with you trends we saw during the third quarter, and the first weeks of October. On a same-day sequential basis, revenues from our temporary and consulting divisions were down in July, down in August, but up in September.

Perm placement revenues were down in July, up in August and up again in September. During the first two weeks of October, revenues from our temporary and consulting businesses were down 32%, compared to the same period last year. However, on a sequential basis average daily revenues in the first two weeks of October exceeded those of September, which in turn were higher than August.

For the first three weeks of October, revenues from our perm placement division were down 51% compared to the same period last year, but up sequentially from the same period last quarter.

We would caution, however, it is difficult to gauge perm trends over short periods of time. We would also note that the coming fourth quarter is expected to have at least 2.5 fewer effective billing days than the third quarter due to the holidays, which may have an even larger impact this year to the extent clients continue to control their cost.

In light of these trends, we offer the following fourth quarter guidance

Revenues, $675 million to $725 million; earnings per share, $0.01 to $0.06 per share. We limit our guidance to one quarter. The estimates we are providing on this call are subject to the risks we mentioned in today's release.

Max Messmer

Thank you, Keith. We were encouraged to note an increase from August to September in average daily revenues for our temporary and consulting divisions, and as Keith noted average daily revenues so far in October are higher than September.

Clearly we like to see more strength in the labor markets. The unemployment rate in the United States did climb to 9.8% in September, and many economists expect that it will climb higher before coming down. And yet companies can only cut so deeply before it starts to adversely affect their ability to conduct business.

As the economy recovers, we anticipate opportunities to work with our clients to rebuild their teams. Outside the United States, hiring demand is already returning in some markets. Protiviti reported sequential improvement in revenues as well as lower costs and we were pleased with these results.

Protiviti enjoys a good reputation among its consulting and internal audit clients. We believe that broader business trends will benefit both Protiviti and our staffing operations. Among these trends are regulatory efforts by countries all over the world to try and prevent the kind of recent financial crisis from ever happening again. We also anticipate that the exodus of baby boomers from the workforce may in the coming years create staffing shortages that could result in higher demand for our staffing and recruitment services.

In response to the tough economic climate, companies are trying to be as productive as they can with the fewest resources possible. At the first sign of a pickup in business, however, we believe these same companies are going to need staffing support. We have been a stable and reliable resource for our clients who need both temporary and permanent staffing expertise during difficult times, and we hope to play an even greater role as business conditions improve.

Before we take your questions, I would like to acknowledge the great work of our associates in our field offices in managing the business so well during the recession. We remain in strong financial condition, and our branch network remains substantially intact, which means we have an outstanding team in place to take advantage of opportunities to grow our business.

At this time Keith and I would be happy to answer your questions. To allow as many people as possible to participate, we ask that you please limit yourself to one question and a single follow-up as needed. If you have additional questions we will certainly try to return to you later in the call.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Andrew Steinerman with JP Morgan. Go ahead please.

Andrew Steinerman – JP Morgan

Hi gentleman. Obviously Protiviti has a real shine here. And I was wondering how you couch Protiviti within your guidance, the things that drove the incremental revenue in the third quarter, are those the type of drivers that could drive sequential growth for Protiviti in the fourth quarter given that your overall guidance is kind of flat to down revenues sequentially?

Keith Waddell

Well, Andrew, the big driver of the increase in the third quarter just ended was more internal audit, internal controls, and SOX work. That typically in the fourth-quarter it remains seasonally strong, although there is some thinking that as companies mature in their ability to comply with SOX that it becomes more of a third-quarter than a fourth-quarter matter.

But the bigger point we would make about the fourth-quarter is that it is a shorter quarter than the third quarter. It is shorter by about 4%. I would say, about 4 is a shorter quarter, our guidance clearly at the top end, which shows some sequential growth. We were encouraged by the September, the early October trends, not only in Protiviti but in staffing and – but for the fact that there is at least 2.5 fewer billing days, we would clearly give higher guidance at the top end.

Andrew Steinerman – JP Morgan

Right, and just to clarify, you said $4 million of cost improvement expected in the fourth quarter, so SG&A will be $4 million lower for Protiviti fourth versus third?

Max Messmer

Direct cost plus SG&A combined will be $4 million less.

Andrew Steinerman – JP Morgan

Got it. Thank you very much.

Operator

Our next question comes from Jeff Silber with BMO Capital Markets. Go ahead please.

Jeff Silber – BMO Capital Markets

Thanks so much. In your prepared remarks Max, who talked about your clients or companies only being able to cut so deeply before affecting their business, does the also apply to your business as well. Have we seen the end of the cost-cutting or will there be more?

Max Messmer

First of all, on our clients, we talked about that last time and my personal view has been that the typical CEO has cut quickly and deeply this time. So that I don't think there is a lot of room left to run the ship very well if they don't add staff once there is even a slight pickup in demand.

I think in our own case we have cut through attrition and otherwise we've kept our office network intact. Our revenues don't appear to require significant further cuts, and so I would say we're in good shape. If we had to make other cuts, we have a variable cost structure. There are adjustments we could make through compensation and so forth, but I would like to think that we don’t – we are in a position but we don't need to think too much about further cuts.

Jeff Silber – BMO Capital Markets

Okay, that is fair and I appreciate that. Moving on to your staffing business and not to nitpick, but in some of the areas we saw the year-over-year declines worsening a bit or you can actually say on a sequential basis, you saw business drop a little bit. But was there anything particular going on specifically in Accountemps?

Keith Waddell

Yes, so Jeff if you compare Accountemps to the rest, what is a bit different, we talked last quarter about this mortgage refinancing demand that we had. As a matter of keeping more people employed and understanding that it is lower margin business, we had decided to take on some of that nonetheless. Well, during the quarter just ended the margins got even more challenged for some of that business, and we decided to step away from it.

And therefore if you look at Accountemps’ sequential performance relative to some of the others on its face appears worse, but again that is principally our decision to add as the retail or the other part, the traditional part of our business began to firm up, and as the pricing got even more competitive in the mortgage refinance area, we throttled [ph] back from some of that.

Jeff Silber – BMO Capital Markets

But that was not in any of your other business units, correct?

Keith Waddell

That is correct. Not to a significant degree.

Jeff Silber – BMO Capital Markets

Okay, great. I will jump back in the queue. Thanks.

Operator

Our next question comes from Tim McHugh with William Blair & Company. Your line is open.

Tim McHugh – William Blair & Company

Yes. I know you said the bill pay rate spread hadn’t changed significantly. I was wondering if you can just give us what bill and pay rates were, and then also if you could comment, are you guys just finding that you are able to pass along any additional pressure on billing rates here, or would you say that the I guess there is no incremental pricing pressure, any big change in that environment?

Max Messmer

The pricing sequentially was down 1.1%, which was an improvement of pricing from last quarter, which was down 1.6% sequentially. So we were happy to see that improvement. Year-over-year pricing was down 6.1%. And I will say that the reason the pay bill spreads were about the same as that we were able to reduce our pay rates at about the same level that sequentially our bill rates were reduced. So we're pretty much in lockstep.

Tim McHugh – William Blair & Company

Okay, and then on the cost structure, you mentioned Protiviti would be down, is there any carryover effect into Q4 from some of the cost cutting you have done already this year for the staffing side?

Keith Waddell

There are some carryover benefits, but it is not material amount and as Max said, we’ve certainly reduced our focus on cost reduction and particularly capacity related adjustment as it relates to people et cetera. So I wouldn't count on the kind of cost reduction benefit in the fourth quarter you have seen in quarters past as we began to focus on making sure we retain as much capacity as possible rather than keeping the cost down as much as the revenues are falling away.

Tim McHugh – William Blair & Company

Okay, thank you.

Operator

And our next question comes from Mark Marcon with Robert W. Baird. Go ahead please.

Mark Marcon – Robert W. Baird

Good afternoon. Just wondering if you could talk a little bit, now that it sounds like SG&A has stabilized, I'm wondering if you can talk a little bit about how much excess capacity you think you have in this system, and how we should think about incremental margins, if we do have a recovery, and what are you hearing from the field and from some of your clients in terms of how you think this upturn may end up playing out from a demand perspective?

Keith Waddell

Well, so there were a lot of questions there.

Mark Marcon – Robert W. Baird

Trying to keep it to one.

Keith Waddell

As far as what we hear from the field, clearly tone is better, job order flow is better, new starts are up, more client visits, activity levels about anywhere you would measure them are up, and therefore our people in the field are encouraged by that. As to the velocity of the upturn versus the past, still way too early to tell. As to incremental margins, if you look back historically it is not unusual to see 20% incremental margins in our temp business, 30% incremental margins in our perm business.

There is a lot of discussion about how our current operations will lead to prior peak, and whether those are realistic assumptions as we move forward, and we make a few comments about that. So we did $1.81 in 2007, which was the prior peak annual earnings. At that time, temp margins were 10%, perm margins were 20%. Perm margins had been as high as 25% in the past, and importantly at that time Protiviti’s margins were only 3%, 3.5%, and so we are quite comfortable that those are very attainable operating margin percentages by division, and in fact I hope you would agree when we have seen as high as 22% operating margins in Protiviti that 3% to 4% shouldn't be a problem, and we would be disappointed if there were in double digits.

Further I would hasten to add if you are comparing last peak and looking or thinking through, can be get there again, we have 16 million fewer shares outstanding today than we did in 2007, which is about 10% pop [ph], and further I would say that during the course of this downturn, we have actually reduced our fixed costs of administrative comp charges. So we feel like we're very well positioned to return to the kind of profitability that we have seen in the past as measured by the prior peak, and hopefully we could do even better.

Mark Marcon – Robert W. Baird

That is terrific color Keith. Can you give a little bit more detail with regards to the reduced fixed cost and administrative costs?

Keith Waddell

Well, on the one hand as our leases are renewed, we might have taken less square footage. We have got better rates, the kind of up and down the line as we focused on cost, we have taken cost out from a fixed standpoint. On the administrative side we have gotten more efficient with the number of people we need from an administrative point of view.

So again up and down the line we feel pretty good about how we're positioned. And the unknown is the velocity of the revenue increase, and all I can say is that given where the revenues were at the last peak, can we achieve those kinds of margins? I think we're extremely well positioned to do so. As I’ve said, we think there is major upside in Protiviti. We think there is upside in the share count versus then and all the reasons I just mentioned.

Mark Marcon – Robert W. Baird

Terrific. Thank you.

Operator

And our next question will come from Andrew Fones with UBS. Go ahead please. Go ahead please.

Andrew Fones – UBS

Yes. Thanks. I was wondering if you could give us a sense of the new order or new assignment growth, since you mentioned it, (inaudible) and perhaps also if you could give us the average assignment by staffing division that will be really helpful. Thanks.

Keith Waddell

You know, Andrew, we don't get that granular on these calls. I would just say as I said earlier that virtually every activity, metric we capture and report is up incrementally, sequentially starting in September, which has continued into October. And it is not just one division, it is every single division. It is not just one region; it is pretty broad spread across the country. It is not just the United States, it is also particularly in the UK, Belgium, Germany and Australia. In Protiviti, China had a particularly good quarter and that continues.

So it certainly – the tone is certainly better globally by division, by geography. Now we are talking fairly small single percentage – single digit percentage sequential increases, but again it is nice to see an inflection point where they are headed north, rather than flat to down, which they have been lately.

Andrew Fones – UBS

No doubt. And then, if you could just perhaps give us some thoughts around offices, and whether you feel satisfied with the current office count. Whether you might start to look to add offices again, and when that might occur? Thanks.

Keith Waddell

We haven't changed our footprint much in this downturn, and I would say particularly coming out of this downturn in the early part of an up-cycle, I wouldn't see any major expansion of our footprint. Over time, incrementally might we add some to it, but again footprint expansion per se hasn't been a big part of our growth story.

Andrew Fones – UBS

Thank you.

Operator

And our next question comes from Sara Gubins with Bank of America. Go ahead please.

Sara Gubins – Bank of America

Hi, thank you. A question about temporary growth margins, I'm wondering what the direction would look like going into the fourth quarter. Typically, I believe that the gross margin tend to be up in the fourth quarter on a sequential basis, and I'm wondering if you would expect that in spite of the 2.5 day shorter number of days this year. And also just wondering what you are expecting in terms of temp gross margins into 2010, if you would expect to continue the pressure.

Keith Waddell

Well, a couple of things. One of the reasons why the fourth quarter had or couple of reasons why they have had stronger gross margins have been A, we do a semi-annual review of our workers comp accruals. For the last several years those have resulted in credits. We wouldn't expect those kind of credits to occur this fourth quarter. We haven't gotten credits now for a year or so in part due to economic conditions.

Further traditional fourth-quarter gross margins are a little bit higher because you have estimated your payroll taxes all year along, and you typically true up in the fourth quarter. We are typically very conservative early, which means we have a few credits of late. I'm not sure there is that much left there either. So the traditional reasons for Q4 temp margins being higher aren’t necessarily in place, but again there are more approval accounting related then they are pay bill spread hard-core margin related.

As to looking out on into 2010, no structural changes based on the present to the extent we see bill rates continuing to decline, we will continue to work hard to pass those through and lower pay rates, but again no major structural differences. We have certainly learned from cycles past that the unemployment insurance tax rates tend to go up in an up cycle, and we would expect that as well, but traditionally we have been able to pass that through either to the candidate or to the client.

Sara Gubins – Bank of America

Okay, great, and then just a follow-up in terms of pricing, as we do get into an improving cycle to some extent, what would you expect to happen on the pricing front. Do you think you'll be able to get it to prior levels, and if so how long does the typically take?

Keith Waddell

It is pure supply and demand in perception thereof, and to the extent clients view even sectors of the labor market as being tight. They will understand and they will pay up, and it is purely supply and demand. We have been through several of these, and just like today there is this perception that there are a multitude of candidates, and you don't need to pay up. That can change quickly, and to the extent people have over cut and began to add to their staff, the supply and demand equation began slowly to change and then turn around.

Sara Gubins – Bank of America

Okay, thank you.

Operator

And our next question comes from Kevin McVeigh with Credit Suisse. Go ahead please.

Kevin McVeigh – Credit Suisse

Great, thanks. Keith or Max – Keith or Max, I was wondering if you can give us your thoughts on as the recovery takes hold temp versus perm, and if we will see similar cycle in terms of a pickup, lag effect on the perm side or do you think temp will be elongated just overall.

Keith Waddell

I guess, I would observe that perm has held in there better in the last few quarters than many have expected, and there has been a lot of upgrade hiring for lack of a better term that has maintained our perm businesses at a pretty constant level. So I would be probably more bullish about the timing of when perm participates than may be has been the case in prior cycles.

That said, it is early, we don't know. But generally speaking, we think perm has held in there pretty well as to whether temp is elongated. Again, we don't know the velocity of the up-tick, but we are seeing a little bit of an up-tick now and that is a good sign.

Max Messmer

I think (inaudible) is that is that on the perm side, we have had a marketing program for some time in which we have been stressing to clients that they can hire people, who are unusually well-qualified, and who frankly they may not have been able to attract otherwise in a different economy. Perhaps that has had some success to help account for the perm numbers.

But as Keith said, perm has done somewhat better than before. I don't think anyone knows for certain exactly where we are in the economy. There are lots of encouraging signs right now. So we will just have to wait and see.

Kevin McVeigh – Credit Suisse

That is helpful, and Keith just one quick point on Accountemps, it sounded like the mortgage – in the mortgage business the pricing was a little more aggressive. Can you reconcile that to the comments on other parts of the business picking up a little bit, which drove the more aggressive pricing if other things are picking up that enabled you to kind of shed some of that lower margin business?

Keith Waddell

Well, we certainly – the pricing of our traditional business isn’t near as aggressive as the pricing of the mortgage refinance business. And as we saw more volume growth, as we began to see volume growth in our traditional business, that was a factor in our deciding to step away from some of the mortgage refinancing business, which pricing got even more competitive. So there were a couple of reasons, therefore that we decided to back away from some of the mortgage refi business.

Kevin McVeigh – Credit Suisse

Got it. Thank you.

Operator

And our next question comes from Tobey Sommer with SunTrust. Go ahead please.

Tobey Sommer – SunTrust Robinson Humphrey

Thank you. I was wondering if you could give a little bit of color on specifically the IT segment, and in terms of bill rates of pricing orders, et cetera and maybe if you could just quantify in terms of the 2.5 days fewer billing sequentially. Does that equate to about the 4% sequential decline in revenue at the midpoint. Am I doing my math right there? Thanks.

Keith Waddell

So the 2.5 days is on a base of 64.3 days. So it is almost exactly 4%. So you have got a 4% shorter quarter. Has to IT generally, I would say we saw some strength in tech support, whereas the last quarter we saw more relative strength in the tech developer programming side. We saw some support strength this quarter. The whole Windows 7 conversion, if and when it happens we think will be a good thing particularly for our tech support business, but the tone in IT generally is a little stronger than the other parts of our business, and we would be more bullish about them as we go forward.

Tobey Sommer – SunTrust Robinson Humphrey

Thank you very much.

Operator

Our next question comes from Gary Bisbee with Barclays Capital. Go ahead please.

Gary Bisbee – Barclays Capital

Hi, good afternoon. I guess questions on Protiviti. Now that you have the right sized the business and returned to profitability, and got a little bit of growth. I guess, I am trying to understand exactly what the business looks like today and what your strategy is for growing it as it relates specifically to percentage of the associates who are full-time folks versus part-time. Are you planning to grow mostly with part-time going forward or is full-time still a substantial part of the plan?

Keith Waddell

Well, Protiviti has come a long way, and we were very pleased that they were profitable again this quarter. We were within that very pleased that we made significant progress outside the United States both from a revenue and cost side as we did in the US. As we move forward from an operating model standpoint, it still will have a large portion of full-time fixed cost people.

That said, we certainly plan to have a larger tranche of variable cost labor, much if not most of which will come from our Robert Half Management Resources side, but there is no question everybody learned the hard way through this down cycle that more variable costs are a good thing, and with kind of cyclical top line impacts, you need a more variable cost structure. I think we are uniquely situated with our management resources division to provide that internally. If they get that and that is where we are going to be about as things get better at Protiviti.

It is always going to be a buoyant [ph], it is never going to be all variable. It is never going to get to that degree, but clearly we can have a more variable structure than we have in this last downturn.

Gary Bisbee – Barclays Capital

So that means is like 50-50 a reasonable target or you are not?

Keith Waddell

50-50 is too high. It is not going to be 50% variable. 80-20, I even hate to throw out percentages.

Max Messmer

We would like for it to be as variable as possible. That said clients like continuity, there is methodology training, tools training, there is things you can do for your full-time people that you can’t necessarily do to the same degree for contractors. So there is always going to be a buoyant, and even having let us call it a 20% buffer. That is 20% more than you had this time, and that is meaningful.

Gary Bisbee – Barclays Capital

Sure, okay. And then just given the things we are seeing some signs of stabilization on the revenue front. Does that change your appetite to consider M&A if you can pick something off near the bottom or you are still on the same place you have been? And then I guess the second part of that, obviously you could grow the international business a lot more. Is there any desire to maybe try to get closer to a 50-50 US, international balance in the near term or is that not something you are really worked about [ph]? Thank you.

Keith Waddell

Well, you know, international US split, we are certainly committed to have a global footprint in Protiviti as necessary to support our global clients. And we think we have got most of those bases covered. To the extent we extend that footprint, we will only do so when we think we can do so profitably, and not just for footprint sake.

That said, we clearly want to grow all pieces of our business, but we don't have some top-down predetermined. We want the US, non-US mix to be X. Now it is roughly 70-30. Over time, that will skew more towards the non-US probably given where we are in those markets, but again it is not like we are back saying it needs to be 50-50, what it needed to be is large enough to support our global clients. It is there. Everything we do beyond here is a judgment call and an opportunity call, not a necessity call.

Max Messmer

I will add and you can see if you agree. We're always focused at least primarily on being sure that we are growing organically and that we have the right approach to our own business to grow significantly as economic conditions permit. That having been said, we are always interested in meeting good people with whom we share a common vision and culture and so forth, and so to the extent there are opportunities that present themselves whether for Protiviti or staffing divisions, we are certainly interested in taking a look.

Gary Bisbee – Barclays Capital

Okay, thank you.

Operator

(Operator instructions) Our next question comes from Jim Janesky with Stifel Nicolaus. Go ahead please.

Jim Janesky – Stifel Nicolaus

Yes, good afternoon. First question is on perm expectations both on the top line and the profitability line for the fourth quarter. I know you mentioned about less billing days. I don't really think about perm on a billing day basis. It is the number of orders, and you know what you can fill. I know December has always been a wildcard for you in any year, no matter what time. So what are your expectations for the fourth quarter in terms of perm, are you assuming that companies are going to be more hesitant to hire this year, maybe pent up demand will make them more likely to hire and then profitability as well.

Keith Waddell

Well, for reasons you have stated, the fourth quarter is typically a harder to predict quarter in perm than the others. Some companies run out [ph] a hiring budget in the fourth quarter that then gets deferred into the first. The December holiday impact some years is greater than others. So it is clearly there is always more uncertainty particularly for the month of December than there is the other months. That said, anecdotally as we talk to our people they are pretty bullish about perm. There were no major, major concerns that perm was going to fall off a cliff in December, and therefore our guidance for perm, you know, wasn't that different than it was overall. But that said as you know and as we know for many, many, many years perm can be more volatile.

Jim Janesky – Stifel Nicolaus

Okay, and as a follow-up question you know, you pointed out that you folks have done a great job at controlling costs, you know, removing some positions that are more or less going to be permanent as we move forward and then have lowered your cost structure in some cases in some areas permanently. We've heard that from a lot of different companies both in service and non-service industries. As you think through that how do you think that can affect any trajectory of revenue recovery as we move forward?

Keith Waddell

I'd say the prominent reductions are more administrative positions than revenue producing positions. I view the revenue producing cost as mostly variable, given our comp structures. So when I talk about permanent reductions in fixed costs and administrative costs, I wasn’t talking about revenue producers, I was talking non-revenue producers.

Jim Janesky – Stifel Nicolaus

Okay, so is your point that you know, the move [ph] on the spectrum that the jobs you fill are in you know, "revenue producing jobs” the better the growth opportunities could be. (inaudible).

Keith Waddell

I was trying to say we haven't permanently reduced our capacity to produce revenues with the cost cuts we made this time. Clearly we have a smaller work force today than we did two years ago, but that said we have a long history of adding to that workforce on an as needed basis as business conditions improve. I was trying to make an admin cost point, not a direct cost point.

Jim Janesky – Stifel Nicolaus

Keith, really the question comes from your clients as they make the same cost reductions, how do you think that that will affect your velocity of your recovery coming into the next cycle?

Keith Waddell

I think we believe our clients have been very aggressive in cutting their costs, and even on the temp side some of the activity metrics we talked about earlier are a larger percentage of our temp orders are – as we speak our temp to higher orders, which says underlying that there is demand for full-time people, and therefore I think a strong case can be made that if anything clients have over cut, and therefore when there is demand they'll need to hire. I think the fact that Protiviti did as much internal controls and SOX work this quarter was some testament to its clients had cut its internal staff back significantly and needed help.

Jim Janesky – Stifel Nicolaus

Okay, that makes sense. Thank you.

Max Messmer

They are probably being redundant, because I know I've said it in a couple of our calls, but I really think it's hard not to recall how panicked the typical company was as recently as six months ago, and there was a lot of firing first and asking questions later. Most CEOs I know did not wait to make cuts this time. They are very aggressive. So I repeat what I said before. I think if anything there has been probably cuts that were deeper than they had to be perhaps, and as soon as there is any pickup in demand, there'll be a staffing demand. We been around a long time, we have a good reputation, we have a very seasoned group of managers in the field. We meet with them regularly. They're really very good. There've been through recessions before. The office network is intact. So our game plan, of course, is going to be to grow. So we will see how this all plays out but we are cautiously optimistic.

Jim Janesky – Stifel Nicolaus

Okay, thanks Max.

Operator

And our next question comes from Ashwin Shirvaikar with Citigroup. Go ahead please.

Ashwin Shirvaikar – Citigroup

Hi, I wanted to come back to Protiviti, obviously very good turn around in that business, and 4Q promises to be I guess, you guys talked about you know, in normal seasonal times it is going to be probably strong, but what about beyond 4Q. If you could spend some time to talk about demand drivers beyond 4Q as the business has changed and become more international if you could help me with that.

Keith Waddell

So let's be clear. The fourth quarter for all our businesses, including Protiviti, because it is going to be a short quarter, the midpoint of all of our guidance would say revenues will be down. The top end of our guidance you need sequential growth and billings per day to offset a fewer days. As we move into the first quarter, traditionally for Protiviti seasonally it's a weaker quarter as companies focus on their external audit, and getting their financial and Ks and Qs out rather than focusing on internal audit and SOX, and it's not until you know, mid to latter part of the following year on a seasonal basis that things pick up.

That said, clearly there is strong underlying demand for internal audit, for internal controls, we talked about restructuring, we talked about credit risk, we could talk about application controls effectiveness. We just got a really nice assignment where we went hand-in-hand with a large integrator to do a big SAP implementation. There the integrator was the controls expert. There are a lot of consulting services related to internal controls that we feel good about.

Ashwin Shirvaikar – Citigroup

Thank you. That – one housekeeping question if I may on the tax rate. Do you think it trends down to the upper 30s range here in the next couple of quarters or is going to be –?

Keith Waddell

No, we've never had a tax rate that low. It has been between 40% and 46% or so. It's higher now because your nondeductible charges and some of your non-US losses are a bigger piece of the pie, and therefore your tax rate goes up, but you shouldn't take anything down into the 30s. Again it's mid-40s for the near-term.

Ashwin Shirvaikar – Citigroup

No, I was kind of looking at 2006 and 2007 where you are at 39 to 39.5, 40. That kind of –

Keith Waddell

Right, close to 40.

Ashwin Shirvaikar – Citigroup

Right, okay, thanks.

Operator

And our final question will come from Jeff Silber with BMO Capital Markets. Your line is open.

Jeff Silber – BMO Capital Markets

Thanks so much. Just a real quick one, just wanted to clarify on the billing dates, can you give us the exact number 3Q09, 4Q09. I don't know if you have different numbers between staffing and Protiviti. Just help us model. That would be great.

Keith Waddell

Okay, so and this is going to sound a real precise, I will explain. So for quarter three 64.3 days, for quarter four 61.8 days, and so what we do we have a long history where we track effective billing dates. So as an example we'll look out on average that day before Christmas what percentage of a full day is that typically. The day after Christmas what percentage of a full day is that, and we've got a long track record of those kinds of statistics. And therefore that's why you've got these decimal points because we are looking back in history to say you know, what day does Christmas fall on, how is that going to impact the day before, the day before that et cetera.

So based on that Q4 2.5 days shorter, which is about 4%. Protiviti is a different calculation, and Protiviti is very capacity driven. We look at how much time our people take off either due to the holidays or because they take more vacation or time off and we look at from a capacity standpoint how many effective days of capacity do we have and if you make those calculations for Protiviti, they lose about three days during the quarter, rather than 2.5, but that was – I wasn’t going to go there unless you ask.

Ashwin Shirvaikar – Citigroup

Well, I appreciate you going there. That is actually very helpful. Thanks so much.

Keith Waddell

Thank you.

Max Messmer

That's all we have time for today. We appreciate your time and interest.

Operator

This concludes today's teleconference. The taped recording of this call will be available for replay later this evening through 8 PM Eastern on October 28th. The dial-in number for the replay is 800-374-0934 or for outside the United States country code plus 1-402-220-0680. Once again, the dial-in number for the replay is 800-374-0934 or for outside the US country code plus 1-402-220-0680.

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