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Robert Half International (NYSE:RHI)

Q4 2010 Earnings Call

January 26, 2011 5:00 pm ET

Executives

Harold Messmer - Chairman, Chief Executive Officer and Member of Executive Committee

M. Waddell - Vice Chairman, President and Chief Financial Officer

Analysts

Tobey Sommer - SunTrust Robinson Humphrey Capital Markets

Giridhar Krishnan - Credit Suisse

Paul Ginocchio - Deutsche Bank AG

Vance Edelson - Morgan Stanley

Andrew Steinerman - JP Morgan Chase & Co

Jeffrey Silber - BMO Capital Markets U.S.

Sara Gubins - BofA Merrill Lynch

Gary Bisbee - Barclays Capital

Mark Marcon - Robert W. Baird & Co. Incorporated

Kevin McVeigh - Macquarie Research

Timothy McHugh - William Blair & Company L.L.C.

Operator

Hello, and welcome to the Robert Half International Fourth Quarter 2010 Conference Call. 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.

Harold Messmer

Thank you, and good afternoon, everyone. We appreciate your joining us. I'll start by reminding everyone that comments made on this call contain predictions, estimates and other forward-looking statements. These statements represent our current judgment of what the future holds and include words such as forecast, estimate, project, expect, believe, guidance and similar expressions. We believe these remarks to be reasonable but would remind you that they are subject to risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. We have described some of these risks and uncertainties in today's press release and in our SEC filings, including our 10-Ks, 10-Qs and today's 8-K. We assume no obligation to update the statements made on this conference call.

Now let's review our fourth quarter results. Revenues for the fourth quarter were $852 million, up 15% from the fourth quarter of last year. Income per share for the fourth quarter was $0.17, up 89% from the fourth quarter of 2009. Cash flow from operations during the fourth quarter was $74 million, and capital expenditures were $13 million.

We paid a quarterly cash dividend to stockholders at $0.13 per share for a total of $19 million. We also repurchased 700,000 RHI shares during the fourth quarter at a cost of $20 million. Approximately 11.4 million shares remain available for repurchase under our Board-approved stock repurchase plan.

During the fourth quarter, demand for our professional staffing and consulting services continued to improve across the board. Each of our lines of business reported sequential and year-over-year revenue growth in the fourth quarter. Our Robert Half Finance & Accounting Permanent Placement division continued to perform well, with revenues up 30% versus one year ago.

Our technology and office Administration divisions also reported strong revenue growth, as did our international operations. Protiviti reported its best operating results in more than two years.

Now I'll turn the call over to Keith for a closer look at our fourth quarter financial results. We'll have time for questions after our remarks.

M. Waddell

Thank you, Max. We'll start with company-wide revenues. Fourth quarter revenues were $852 million, an increase of 15% from the fourth quarter of last year and an increase of 4% sequentially. On a constant currency basis, the year-over-year and sequential growth rates were 16% and 3%, respectively. There were 62 billing days in the fourth quarter of 2010, the same as the fourth quarter of the prior year. There will be 63 billing days in the first quarter of 2011.

Revenues for Accountemps where $319 million, up 11% from the fourth quarter of 2009 and up 6% sequentially on a same-day basis. Accountemps is our largest staffing division, with 354 offices worldwide. It accounts for 37% of company revenues.

OfficeTeam had revenues of $174 million in the fourth quarter, up 23% from the fourth quarter of 2009 and up 11% sequentially on a same-day basis. OfficeTeam, which was introduced in 1991, is our high-end administrative staffing division. It represents 21% of company revenues. There are 320 OfficeTeam locations worldwide.

Fourth quarter 2010 revenues for Robert Half Management Resources were $103 million, up 14% from the fourth quarter of 2009 and up 9% sequentially on a same-day basis. This division was introduced in '97 and places senior-level accounting and finance professionals on a project basis. It has 153 locations worldwide, and it makes up 12% of company revenues.

Revenues for Robert Half Technology were $92 million in the fourth quarter, up 21% from the fourth quarter of 2009 and up 10% sequentially on a same-day basis. Robert Half Technology was introduced in 1994 and places information technology professionals on a consulting and full-time basis. This business operates in 116 locations worldwide and accounts for 11% of company revenues.

Robert Half Finance & Accounting, our Permanent Placement division, had revenues of $59 million in the fourth quarter. As Max indicated, this is a 30% increase from the fourth quarter of 2009 and an increase of 8% on a same-day sequential basis. Our Permanent Placement services were established in 1948 and are in 354 locations worldwide. This business accounts for 7% of company-wide revenues.

Fourth quarter revenues for our international staffing operations were $221 million, up 16% from the fourth quarter of 2009 and up 13% sequentially on a same-day basis. On a constant currency same-day basis, these growth rates were 19% versus one year ago and 8% sequentially. We have staffing operations at 100 locations in 18 countries outside the U.S. International staffing operations represent 30% of total staffing revenues.

Protiviti revenues were $104 million in the fourth quarter, up 8% from a year ago and up 5% sequentially. Formed in 2002, Protiviti is a global business consulting and an internal audit firm providing risk, advisory and transaction services. It has 60 locations in 16 countries and accounts for 12% of total RHI revenues. Protiviti's International operations represent 29% of total Protiviti revenues.

Now let's review gross margin. Fourth quarter gross margin in our Temporary and Consulting staffing operations was $238 million or 34.5% of applicable revenues. This compares with 34.5% of revenues for the fourth quarter of 2009 and 34.1% of revenues for the third quarter of 2010. The fourth quarters of 2010 and 2009 included workers' compensation credits of $1.5 million and $4 million, respectively. These were made pursuant to independent actuarial reviews.

On a sequential and year-over-year basis, we saw improvements in pay bill spreads and temp-to-hire conversions. Overall staffing gross margin was $297 million in the fourth quarter or 39.7% of staffing revenues. This compares to 39.1% of staffing revenues in Q4 2009 and 39.3% of revenues in Q3 2010. The mix of Permanent Placement revenues directly impacts overall gross margin and represents 7.9%, 7.1% and 8% of revenues for Q4 2010, Q4 2009 and Q3 2010, respectively.

Fourth quarter gross margin for Protiviti was $30 million or 28.8% of Protiviti revenues. This compares to $27 million or 28.7% of Protiviti revenues in Q4 2009 and $27 million or 27% of revenues in the third quarter of 2010. The increases are due primarily to higher utilization rates, both in the United States and internationally.

Turning to selling, general and administrative cost. Staffing SG&A cost for the fourth quarter were $257 million or 34.4% of staffing revenues. This compares to $229 million or 35.7% of revenues for the fourth quarter of 2009 and $245 million or 34.2% of revenues for the third quarter of 2010. The increase in the quarter relates primarily to staff compensation cost. We continue to invest aggressively in additional headcount in the technology staffing sector.

In addition, we backfilled positions in certain locations that had become understaffed during the downturn. We ended 2010 with 8,200 full time employees in our staffing divisions, up 9% from the prior year. Fourth quarter SG&A costs for Protiviti were $27 million or 25.6% of Protiviti revenues. This compares to $27 million or 28.4% of revenues for the fourth quarter of 2009 and $27 million again or 26.9% of revenues for the third quarter of 2010. We ended the year with 2,500 full-time Protiviti employees and contractors, the same number as 2009.

Operating income from our staffing divisions was $40 million during the fourth quarter or 5.3% of staffing revenues. The Temporary and Consulting divisions contributed $36 million of this amount or 5.2% of applicable revenues. Fourth quarter operating income for our Permanent Placement division was $4 million or 6.3% of applicable revenues.

Operating income for Protiviti was $3.3 million in the fourth quarter or 3.2% of revenues. This compares to $300,000 in the fourth quarter of 2009 or 0.3% of revenues. The year-over-year increases are due to significant improvements in Protiviti's non-U.S. operations during the quarter.

Turning to accounts receivable. At the end of the fourth quarter, accounts receivable were $423 million, with implied days outstanding of 45.2 days, which compares to 44.7 days at the end of the fourth quarter one year ago.

Now let's turn to guidance. We saw the following trends in our business during the fourth quarter of 2010 and the first few weeks of January. On a same-day sequential basis, Temporary and Consulting revenues were up in October, up in November and up again in December. On a same-day basis, Permanent Placement revenues were up in October and down in November and December.

During the first two weeks of January, revenues from our Temporary and Consulting businesses were up 14% compared to the same period last year. For the first three weeks of January, revenues from our Permanent Placement division were up 38% compared to the same period last year. As we've said many times before, it's very difficult to evaluate Perm Placement trends over such short time periods.

Taking into account these early trends, we offer the following first quarter guidance: revenues, $850 million to $900 million; income per share, $0.13 to $0.18 per share. As you know, we limit our guidance to one quarter. Consistent with prior quarters, our guidance does not include any amounts for the possible settlement of outstanding legal claims. The estimates we've provided on this call are subject to the risks mentioned in today's press release. Now I'll turn it back to Max.

Harold Messmer

Thank you, Keith. As I said at the start of this call, we were pleased to see broad-based improvement throughout our operations during the fourth quarter as many companies that had placed hiring plans on hold began adding staff on both a temporary and full-time basis as a result of better business conditions. U.S. unemployment levels remain high by historical standards, but we characterize the mood among our clients as certainly more optimistic than it has been in quite a while.

We also were pleased with Protiviti's operating results during the quarter, including those outside the United States. As we mentioned on last quarter's call, Protiviti's financial services industry practice is working with clients to help them understand and comply with the various financial reform measures that have either been enacted or are in process around the world. Protiviti's information technology practice is serving clients in areas such as IT security and privacy, IT applications controls and infrastructure management.

Reflecting back on the year as a whole, we believe we have positioned the business well to take advantage of improving economic conditions. As we head into 2011, we are optimistic about the growth prospects for our business for a number of reasons. The macroeconomic environment does appear to be improving. The U.S. economy added more than 1.1 million jobs last year. That is the most job growth since 2006. Hiring demand has improved outside the United States as well. As Keith indicated, revenues for our non-U.S. staffing operations were up 19% year-over-year and up 8% from the third quarter of 2010.

Businesses are benefiting from the use of variable cost of labor. In our experience, one effect of the global recession has been wider adoption by companies of flexible staffing models, including the use of temporary and project professionals. For the small and mid-sized businesses that make up the largest percentage of our client base, the ability to keep labor cost variable is invaluable.

Macro trends point to future hiring demand. Financial regulatory reform in the wake of the global financial crisis offers potential revenue sources for Protiviti and our staffing divisions. We also continue to believe the impending retirement of baby boomers from the workforce will heighten the demand for skill workers in the coming years.

Historically, we have emerged from economic downturns stronger than before. While we cannot predict the future, we hope this cycle is no exception. So far, this is among the fastest recoveries we've ever experienced post-downturn. In 2010, we saw higher demand for our staffing and consulting services across the board. This demand accelerated in the second half of the year.

We have an experienced team in place, both in the field and corporate services. I recently attended a meeting of our senior field managers in Phoenix, Arizona and was reminded once again what a talented and tenured team we have. They know what it takes to come back strong following the downturn, because they have been there before, and I am confident in their leadership. We kept our domestic and international office network largely intact during the recession, which means we're well positioned to respond to improved hiring demand. As Keith noted earlier in the call, we did begin adding staff in the fourth quarter to support future growth.

The middle market and professional segments of the market are under penetrated in our view. We work with a fraction of the middle market business we feel we could be working with. We're particularly optimistic about the opportunities we see in the technology staffing sector and are also encouraged by the growth potential in the accounting and finance segment, where we are already recognized leaders.

We have strong brand names, and we supported them during the downturn with marketing and promotional campaigns to stay visible with clients and candidates. We see business opportunities in the blended service model offered by our staffing divisions and Protiviti. We are able to deliver a full range of staffing and consulting services to our clients at a competitive price.

Finally, we are in a strong financial position. We had positive operating cash flow of $176 million in 2010, which helped to fund approximately $96 million in RHI stock repurchases, $35 million in capital expenditures and the payment of $77 million in dividends to stockholders. We kept a close watch on accounts receivable in 2010, and as a result, the collection period remained virtually unchanged during the year. This was a strong contributor to our cash flow. We ended the year with $315 million in cash and cash equivalents and essentially no debt.

At this time, Keith and I will be happy to answer questions. We would ask, as usual, that you please limit yourself to one question and a follow up as needed. If you have additional questions, we will certainly try to return to you later in the call. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Tim McHugh from William Blair & Company.

Timothy McHugh - William Blair & Company L.L.C.

Keith, I was wondering if we could just start talking a little bit about the margins. Good revenue guidance for Q1. I was a little surprised that the profitability won't be better. Can you talk a little bit about the gross margin? Are you expecting state unemployment taxes and payroll taxes to have a significant impact there? Or is that also reflective of continuing hiring plans as we go into Q1?

M. Waddell

So from a margin standpoint, Tim, for Q1, I guess there's a couple of major factors. The first, as you just alluded to, we do expect the state unemployment rates to increase in 2011 about at the same rate that they did in 2010. 2010, when all is said and done, there was a 75-basis-point increase in state unemployment rates, which we ultimately totally recovered, but it took us some time over the course of the year to do so. We expect that same 75 basis points in 2011, which again, we're cautiously optimistic we'll pass through. It just won't all happen in the first quarter. Our guidance, we're assuming that there will be a 50 to 75 basis points, sequentially, reduction in temp gross margins for that reason alone. The other big margin impact for the first quarter is Protiviti seasonality. If you look back, for the last several years, you'll see that Protiviti revenues decline sequentially on a seasonal basis between 6% and 18%. Our guidance has it declining in the 10% range, which means Protiviti would lose $3 million to $5 million in the first quarter. At the midpoint there, that's half as much as they lost a year ago, coming off what was a very good fourth quarter for Protiviti. So the temp margins, because of state unemployment, Protiviti seasonality, notwithstanding a very positive backdrop, both in the fourth quarter and for 2011 as a full year, are the principal drivers for the lower margins in our guidance.

Timothy McHugh - William Blair & Company L.L.C.

On Protiviti, I know, Max, you mentioned the financial services business. Was that the -- is that kind of the whole story for the international piece of Protiviti, which seems to have snapped back pretty significantly on kind of a sequential basis? And the point of the question, I guess, is how sustainable do you feel some of the improvements are that you've seen there?

M. Waddell

We feel their improvements are sustainable. It's not all financial services, but clearly, financial services contributed significantly as did IT security, IT privacy. In the U.S., particularly, we're seeing regulatory-related engagements. You have many thrifts trying to get in front of their new regulator, the OCC, which they expect to be a tougher regulator than they've had in the past. We see a lot of attention by financial services clients around consumer lending, fair lending regulations. So our financial services practice clearly is benefiting from even anticipated regulatory reform, which was a big, big story in the fourth quarter. We don't think that -- or stated positively, we do think that the success we saw in the fourth quarter will continue into 2011 for Protiviti. Just on a seasonal basis, as we've discussed for many years running here, our clients tend to focus on their 10-Ks, getting their books closed, the same buyers that we have in internal audit and SOX [Sarbanes-Oxley Act] also tend to be buyers that are impacted as well on the consulting side of our business. So seasonally, the first quarter is always going to be the lightest for Protiviti. But I can tell you, not only -- in Protiviti and in staffing as well, there's clearly the most positive backdrop of business environment as we speak, as we have seen in several quarters.

Operator

Your next question comes from the line of Jeff Silber from BMO Capital Markets.

Jeffrey Silber - BMO Capital Markets U.S.

I'm just curious about your comments about adding some internal folks, backfilling where it was understaffed. Can you give us a little bit more color in terms of the divisions where you saw that?

M. Waddell

Well, so there's a couple of things going on with staff, the backfilling and the technology investment. We've been systematically backfilling where we got really small for three or four quarters. They got more pronounced during the fourth quarter, and we feel like we pretty much backfilled those really tiny locations where we needed more presence to participate in the upside. We have also made a big investment in technology. Our bias, as you know, is always to build rather than buy when we can. We're very encouraged with the early results in the technology space. If you think about today versus 10 years ago, even our middle market clients have websites that are an integral part of their marketing strategy, which creates web development demand. In addition to that, they're all interested in web analytics as to who's coming to their site, et cetera. And so the combination of those, we think, presents a unique opportunity in the technology space with respect to middle market companies where we can get margins that are close, if not at the levels we've got in accounting and finance. One other footnote on headcount and backfilling, et cetera, if you look back in time, you'll note that in the second half of 2003, just as business was beginning to improve in that recovery, we added disproportionately to our headcount, which positioned us well thereafter. And so, it's not since 2003 that we've added a higher percentage of headcount than was our revenue growth, which was the case in 2010. So what you've seen in the second half of 2010, quite frankly, is very similar to the same thing we did. Now maybe it's more technology related this time versus in the past, but essentially, we staffed up in advance of the last recovery. And it's with that same intent that we did this year, the second half.

Jeffrey Silber - BMO Capital Markets U.S.

So based on what you know now, are you fairly happy with your internal staff count?

M. Waddell

We're certainly happy that we don't have tiny operations that are particularly fragile, because it has such a small headcount. We will continue to invest, particularly in technology, as we see more and more success as we invest in technology, because we think there's an outsized market opportunity there. So net-net, I don't think you're going to see the same kind of SG&A load going forward that you saw in the fourth quarter, for instance. But it's still in the technology space, there will be outsized investment and hits, which we think is already showing a nice payback.

Jeffrey Silber - BMO Capital Markets U.S.

If I could sneak in a quick numbers question, just for 2011, what should we be looking for capital spending and tax rate?

M. Waddell

Capital spending easier than tax rate. Capital spending, the number is $50 million to $55 million. That's up quite a bit from what we just spent this past year. A couple, three comments there. First of all, we estimated $40 million to $45 million for 2010. We under spent that to some degree for timing reasons. That rolls into '11. Further, we've got big lease expirations in London and Brussels that'll create some TI cost. We're refreshing our desktops and laptops, both in staffing and in Protiviti. Further, we're making IT, back-office, infrastructure investments, particularly in Europe. So all of those things together, the CapEx looking like $50 million to $55 million. Tax rate, as the business improves, the tax rate should come down. The non-deductible items become a lesser portion of the total. As we do better outside the U.S., particularly in Protiviti, you get a favorable tax impact from that. So I would think over the course of 2011, the tax rate will drift down. I wouldn't have it go down a lot in the first quarter, but it should drift down the rest of the year.

Operator

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

Andrew Steinerman - JP Morgan Chase & Co

Accountemps usually has its strongest sequential quarter in the first quarter. Within your range of guidance, are you anticipating Accountemps goes back to its normal seasonality? And how does that fit into the revenue range that you gave, given that Accountemps is almost a 40% unit?

M. Waddell

Well, Andrew, we do assume positive Accountemps seasonality in the first quarter. That's moderated a little bit by we're not as aggressive in the mortgage space, where we had gotten more aggressive during the downturn. So that has a bit of an impact on the revenue growth rates, a much smaller impact at the gross margin line. I think when you look at our overall guidance, the Accountemps seasonal strength is offset a little bit by OfficeTeam is not near as strong seasonally in the first quarter, post-holidays. And further, our project staffing businesses, Management Resources and Robert Half Technology, there's always this issue with restarting projects, particularly starting new projects the first of the year, post-holidays, which makes the first quarter seasonally not as strong in those businesses. So Accountemps, first quarter, seasonally the strongest. The other businesses, for different reasons, not as strong seasonally.

Andrew Steinerman - JP Morgan Chase & Co

And so I didn't quite catch you when you said the answer, Keith. Do you feel like we're back to normal seasonality to Accountemps, like the cyclical backdrop is permissive for Accountemps to have normal seasonality now?

M. Waddell

Well, normal means a lot of things based on what years you look back over the last 20. I mean, clearly, we expect a lift in Accountemps for seasonal reasons, somewhat moderated by the mortgage impact that I described. But yes, we do expect a seasonal lift of a meaningful amount in Accountemps, but there's the other divisions to consider as well.

Andrew Steinerman - JP Morgan Chase & Co

So just to close the point out, Keith, so are you rolling out of mortgage kind of fourth quarter versus first quarter or mortgage is just holding the line? It's not growing until you say that's one component, and Accountemps is not growing. And that's why you might not get a full seasonal bump.

M. Waddell

So we're not aggressively pursuing new mortgage clients, but we're certainly servicing our existing mortgage clients. So in the fourth quarter, overall, mortgage was down modestly. So the non-mortgage growth was even better than we reported. And we would expect, over time, since we're not aggressively pursuing new mortgage work, which is lower margin, that, that will impact the revenue growth rates more than it'll impact the bottom line.

Operator

Your next question comes from the line of Sara Gubins from Bank of America Merrill Lynch.

Sara Gubins - BofA Merrill Lynch

The revenue growth was stronger year-over-year and quarter-over-quarter at Management Resources than at what I'd consider lower end, Accountemps, and that was a bit surprising given what we've been hearing in the industry. I'm wondering if that was in line with your expectations, if there was anything that you think may have been company specific there in the fourth quarter.

M. Waddell

Well, clearly, the project business always gets a lift around year end. You've got the following year's budget season that benefits Management Resources. You've got anticipating year end close. You've got September 30 year ends they're working on their audit. So for a lot of reasons, the project business sees a lift in the fourth quarter. The differential between Accountemps and MR shows as greater than it actually is for this mortgage reason I just discussed. But in Accountemps itself, between accounting operations and the higher-level financial positions, in the fourth quarter, the financial positions always do better for many of the same reasons that I described for Management Resources.

Operator

Your next question comes from the line of Mark Marcon from R.W. Baird.

Mark Marcon - Robert W. Baird & Co. Incorporated

Just wondering if you could talk a little bit about the Perm business, and specifically, how we should think about the margins for that business. We've basically seen a couple of quarters here, where the margins have declined sequentially. And it sounds like you're building up the capacity there but just wondering if you could give a little more color.

M. Waddell

Well, clearly, the Perm business participated in the staff up the second half of the year, which impacted their margins more frankly than did the Temp business. We think the heavy lifting of that investment is, for the most part, behind us. And we would expect higher incremental margins in Perm as we go forward.

Mark Marcon - Robert W. Baird & Co. Incorporated

Should we have the normal sort of incremental margins that we've seen during past expansions if the environment stays favorable?

M. Waddell

We're certainly optimistic about Perm. It's all about the productivity of our internal staff. It's all about the leveraging of the fixed cost of the business to get allocated into Perm. Structurally, there's no reason why Perm can't have its margins of the past.

Mark Marcon - Robert W. Baird & Co. Incorporated

And then can you talk a little bit about international, just in terms of -- it seems like we saw a nice uptick. Can you describe what you're seeing in different countries? And specifically, what sort of exposure do you have to U.K. government or public work?

M. Waddell

Well, the last question is very easy. We have a de minimis amount of exposure in U.K. public work. The international, in the staffing side, we did very well during the quarter in Belgium, France, Germany, Canada. On the Protiviti side, we did very well in the U.K. and Australia and India. But overall, as the numbers showed, we outperformed the U.S., both in Protiviti and in staffing with our international operations during the quarter. The backdrop is very good there.

Operator

Your next question comes from the line of Tobey Sommer from SunTrust Robinson Humphrey.

Tobey Sommer - SunTrust Robinson Humphrey Capital Markets

I was wondering if you could describe within your Tech segment the extent to which bill rates may be moving a little bit differently than the overall portfolio and describe areas either geographically or by specialty of strength.

M. Waddell

So let's talk about bill rates first, overall, then we'll talk about Tech. I think, importantly, for the first time in nine quarters, our bill rates are actually up on a sequential basis. Overall, they're up 0.8% on a sequential basis, which still has them down 2.4% year-over-year, but that'll catch up as you see sequential strength. So we're very, very pleased to see the increase in the bill rates. It definitely reflects a firming of the market, particularly in technology. There's no question. The demand for technology staffing is the hottest in the market as we speak, and there are certain positions already where there are -- well, while I wouldn't say supply is short, it's certainly firming to a strong degree. Geographically, I'm not sure there's anything that particularly stands out. I think technology demand is broad based, both in the tech support area, where clients cut more and in the tech development area as well. And I would refer back to my prior comments, where we talked about even our mid-market clients have a big web presence, and there's demand for us in that regard.

Tobey Sommer - SunTrust Robinson Humphrey Capital Markets

You commented about the revenue growth off the bottom being relatively quick this cycle. Is the turn in bill rates correspondingly as quick?

M. Waddell

The bill rates are taking longer this time. I think last time, the bill rates were a couple of quarters from when the volume started to pick up. This time, it's certainly taking longer given that this is the first quarter we've seen an increase in bill rates. I don't think there's any question that the overhang of the overall unemployment rate certainly has an impact on that and the psychology of our clients as to what supply and demand is for staff.

Operator

Your next question comes from the line of Vance Edelson from Morgan Stanley.

Vance Edelson - Morgan Stanley

Just trying to pull everything together on the margins. Sounds like the Temp margins and the Protiviti seasonality affects the first quarter. But when we get beyond that and really think about the longer term further into the cycle, do the state unemployment rates remain a headwind? And is that more than offset by the fact that the backfilling will be over with, so you'll get some leverage there? So in other words, what are the thoughts regarding long-term targets for the operating margins as the positive cycle matures?

M. Waddell

We believe that the state unemployment is a cyclical phenomenon that we've had to deal with in every cycle. And that over time, we pass that through plus get back our typical margins that we see in a mid to up cycle scenario. So we don't see state unemployment rates as a permanent markdown to our Temp margins. Further, as I alluded to earlier, in the early part of an up cycle, there is always outsized hiring of additional internal staff that gets moderated thereafter. If you look at '04, '05, '06, '07, in none of those years did we add the same percentage of headcount as we had revenue growth, and we would expect to see that again in this up cycle. So long term, we're still very bullish about margins, including Protiviti margins, but first quarter, Protiviti's got its age-old seasonality. We wished it wasn't there, but it is. We've got the seasonal issue of passing through the state unemployment, but long term, we're very bullish on our operating margins.

Vance Edelson - Morgan Stanley

And then a quick follow up on an earlier question. Sounds like on a constant currency basis, international sequential growth was maybe just a little bit better than domestic on average. Based on what you're hearing from customers, do you feel as though domestic or international has the highest near-term growth potential looking into 2011?

M. Waddell

Well, remember now the sequential comparisons. You're comparing the fourth quarter to the third. The third in Europe is very holiday impacted. So part of their outsized growth versus U.S. sequentially is for that reason alone. I'd say we're equally optimistic, non-U.S. and U.S. U.S. is certainly coming back nicely. We saw strength in the countries I mentioned earlier. So I wouldn't call out necessarily one versus the other.

Harold Messmer

Just one footnote on your questions about margins, and Keith has already addressed it. But let me add that if you recall the nature of our business, predominantly accounting and finance, our people are sensitive to Keith's discussion of margins. And I can assure you that they will be working hard to pass along increased unemployment insurance and other costs at the desk level. So we think we'll be successful at that, but it takes some time, but we'll be doing it as expeditiously as possible.

Operator

Your next question comes from the line of Paul Ginocchio from Deutsche Bank.

Paul Ginocchio - Deutsche Bank AG

Just back to the SG&A, and your headcount's up 9% on an organic revenue growth of 5%. It sounds like at the start of this year, you have more capacity in your infrastructure than you did a year ago. Is that right? And then can we assume incremental margins are as good as they were this year?

M. Waddell

Clearly, we have more capacity this year than a year ago. The principal reasons we wouldn't have the kind of incremental margins that we had in 2010 is if we continue to invest disproportionately in Technology. And frankly, if we do that, it's for good and the right reasons. That means it's going well. That means we're particularly optimistic, and that means we think it's a good investment.

Paul Ginocchio - Deutsche Bank AG

Was there any benefit in your numbers from the HIRE Act? And was that mainly the second half?

M. Waddell

We did have a benefit from the HIRE Act. It wasn't significant. As you know, the HIRE Act didn't get renewed, and you won't see those numbers in 2011. But it wasn't even enough to call out for us.

Operator

And the next question comes from Gary Bisbee from Barclays Capital.

Gary Bisbee - Barclays Capital

I guess in terms of Protiviti sort of turning the corner here and understanding that seasonally, it's a bit weaker. But as we look out to what sounds like a solid demand environment there, the comments you've made about staffing levels and incremental margins, would all of that have similar application for Protiviti? Or should we think of that, in terms of investments you need to make, what incremental margins could look like being a lot different from the staffing businesses at this point in the cycle?

M. Waddell

Protiviti has had reported margins as high as 20% in the past. We said that was SOX aided to the point where if we got 10% to 12% margins in Protiviti, we would be happy with that, which we think is realistic. And therefore, the incremental margins Protiviti reports as its revenues ramp back up should be as high and frankly, even greater than is the case in staffing. If you compare 2010 to 2009, you'll see the major contributors from a margin standpoint were Protiviti and Perm. And we certainly believe that 2011, that Protiviti can continue to report outsized incremental margins.

Gary Bisbee - Barclays Capital

And I guess any thoughts beyond that? I mean, you go from a big loss to potentially a profit, so of course, the number looks a lot better. But if we start growing profit on top of profit, is that statement you just made still an accurate statement, you think?

M. Waddell

Given where we are and given what we think is realistic as where we can be, I absolutely believe that.

Gary Bisbee - Barclays Capital

And then the follow-up question, you mentioned a blended service model in just sort of a one-line comment. And I know you've been using some of the Management Resources contractors at Protiviti, but is there actually an effort ongoing to sell Protiviti and staffing together? And is there demand for that? Or was that more just a comment around using that flexible labor at Protiviti?

M. Waddell

Well, astutely, you've discerned your two different points there. Clearly, yes, we do go to market together, and we provide a blended service where Protiviti provides the supervision. The deliverables, the arms and legs often come from the staffing side. We are increasingly successful. We've had very nice wins. We have wins where neither Protiviti on its own nor staffing on its own would otherwise have won that engagement. While we tend to think very discreetly about consulting versus staffing, trust me, many clients don't, and many clients have a problem. And whether we staff that internally from Protiviti or from staffing, that's kind of our call. The second piece of your question is the extent to which Protiviti uses contractors sourced through our staffing operations on their engagements. That is also somewhere where we're having increasing success. If you look at first quarter of 2010 versus our guidance for first quarter of 2011, you will see when you work through the numbers, we're expecting the cost to flex quite a bit more in '11 than they did in '10 because of the higher contractor mix, which is a variable that they're currently using. And we hope to take that even higher into the future. So long story short, yes, we're going to market together. We think we have a competitive advantage because nobody under the same roof has the consulting and staffing capabilities that we do. Clients get that, and they're responding favorably to it. And yes, Protiviti is making its cost structure more and more variable. It's now over double digits as a percentage of its workforce, and its sources through staffing. And versus a year ago, that was a low- to mid-single digits as a percent.

Gary Bisbee - Barclays Capital

If I could just sneak one more in, did you say 63 billing days in Q1? So it will be up one day year-over-year?

Harold Messmer

Yes. That's correct.

Operator

Your next question comes from the line of Kevin McVeigh from Macquarie Research.

Kevin McVeigh - Macquarie Research

Keith, you spent a fair amount of time and investment in Tech. Obviously, it's going to be an area of growth in this next up cycle. As you think about it as a percentage of revenue, do you think it's going to stay in that 10% to 15% range? Or as you think about it in the next up cycle, does that increase, number one? And then number two, can you do it organically? Or would you consider any type of bolt-on acquisition to enhance your offerings there?

M. Waddell

Well, as to what percent of revenue it becomes, I think it's certainly reasonable to believe it will become a larger percent of revenue than it's been. But we don't think the rest of our businesses are going to stand still given their relative under penetration, and therefore, we don't think it's going to double as a percent of revenue, but it should increase as a percent of revenue. We want to grow each of those businesses on their own right. Given the market opportunity in Tech, I think it's reasonable to say it'll be a larger percent. As to organically versus acquisition, we've got almost a 25-year history here now. Clearly, we believe in organic growth and the superior returns it gives on capital to acquisitions. So not that we're negative on acquisitions, but if we can build it ourselves, why in the world would we buy it? Particularly, in the current market, if you've got a technology business, you think you're sitting on a gold mine, and the prices are higher than ever. We're very encouraged to the extent over the last six to 12 months, we've invested in technology on an organic basis. The returns are good. We think there's a unique opportunity where tech development is reaching down in the middle market companies for reasons that we spoke about earlier. So we're very positive on Tech.

Kevin McVeigh - Macquarie Research

And Keith, I don't know, not necessarily trying to get targets, but if you think about contractor versus non-contractor in Protiviti, where does that ultimately go over time? I mean, is it going to be 50%-50%? Or just generally, does it increase over time?

M. Waddell

I'm not sure if 50%-50% is realistic. I mean, we've gone from 4% or 5% to 10% or 12% in the last 12 months. I mean, might we take to 10% or 12% to 20-plus percent, I think that's certainly possible, but that's something we just kind of have to feel our way through over time. But it's much more established and embedded into the day-to-day operating model of Protiviti than it's ever been. And in my mind, it's only going to go up because of that.

Operator

Your next question comes from the line of Giri Krishnan from Credit Suisse.

Giridhar Krishnan - Credit Suisse

I think this is a question that references an earlier comment you had made about how bill rates are slower to pick up than in the last cycle. Assuming it's a broad comment, are there any segments where they're actually picking up maybe faster? Or is it just universally applicable across all the segments?

M. Waddell

I guess I would call out two areas. Technology, remember in the early part of the last cycle, we were coming off the tech bubble, and therefore, Tech was slower to pick up. This time, it's just the opposite. I think there's a lot of pent-up demand for Tech, and I think Robert Half's internal requirements are representative of that. And Tech's actually picking up faster. The market for the supply is firming up faster, and bill rates are improving faster. I would also say that in OfficeTeam, relative to recoveries past, I think the cutting was deeper this time in downturns versus the past. And I think OfficeTeam is also firming up more quickly, and we're seeing a little better bill rate environment for OfficeTeam at this point in the cycle versus in the past.

Operator

Our last question comes from Mark Marcon from R.W. Baird.

Mark Marcon - Robert W. Baird & Co. Incorporated

Just with regards to the revenue guidance, can you talk a little bit about the orders that you're seeing? Is the order flow kind of your key indicators that gives you confidence in terms of the upper end being achievable?

M. Waddell

Well, I guess we wouldn't show it as the high end of our guidance if we didn't think it was achievable. As I said earlier, anecdotally, looking at order flow versus virtually on any metric we look at, this is the most positive business backdrop we've seen in quite some time, and we're very optimistic about that. We try to be conservative in our guidance. We're very aware that based on guidance we give, that in turn impacts your estimates, et cetera. So the internal saying we've had for many years is we don't like for the best day of the quarter to be the day we give guidance. So we try to be conservative, and we'd like to think there's some upside. But that said, it doesn't always go perfectly and as you expect.

Mark Marcon - Robert W. Baird & Co. Incorporated

With regards to what you're seeing internationally, how should we think about the margins over the course of this cycle out of your international operations? And to what extent does that help or hurt us?

M. Waddell

I'd say we're more bullish on non-U.S. margins going forward for particularly one reason. Perm Placement is double as a percent of revenue outside the U.S. as is in the U.S., and that's no accident. Clearly, we've invested more in the Perm business during this last cycle, and we will continue to invest in the Perm business outside the U.S. in the coming cycle. And the incremental margins are much higher, as we all know, from that business. So whereas in the past, we tended to keep the mix of business outside of the U.S. consistent with the U.S., which have the overall impact of having smaller margins non-U.S. than U.S., we're letting out the chaff, so to speak, on the Perm business. And from that, you'll see higher margins than you otherwise would.

Mark Marcon - Robert W. Baird & Co. Incorporated

The compensation expense, how should we think about that over the course of this cycle? Now that things are starting to ramp up, aside from your normal commission schedules, is there anything above and beyond -- you'd mentioned during the last quarter on the Perm side that you had to pick things up a little bit. Is there more to come? Or are we at a good base?

M. Waddell

We think we're in a good base. Internally, we have a concept called PDA or per desk average hiring. And it basically says as a branch manager, you're entitled to additional headcount for your branch as long as the per desk average or productivity level of the staff in your branch is at a certain level. So to some degree, it goes on cruise control in an up cycle. And the impact of that is if you look at '04 through '07, is the headcount always lags the revenue growth. The differential is more bonus money for our staff, but we have a long history of controlling our compensation cost, particularly as we get into mid-cycle versus early part of a recovery.

Harold Messmer

This concludes today's teleconference. If you missed any part of the call, it'll be archived in audio format. We appreciate all of you being with us today. Thank you for your time.

Operator

This concludes today's conference call. You may now disconnect.

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