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Robert Half International, Inc. (NYSE:RHI)

Q1 FY08 Earnings Call

April 22, 2008, 5:00 PM ET

Executives

Harold M. Messmer, Jr. - Chairman and CEO

M. Keith Waddell - Vice Chairman, President and CFO

Analysts

Andrew Steinerman - Bear Stearns

Jeffrey Silber - BMO Capital Markets

Timothy McHugh - William Blair & Company

Kevin McVeigh - Credit Suisse

Andrew Fones - UBS

Thomas Robillard - Banc Of America Securities

Mark Marcon - Robert W. Baird & Co., Inc.

David Feinberg - Goldman Sachs

Michel Morin - Merrill Lynch

Tobey Sommer - SunTrust Robinson Humphrey

James Janesky - Stifel Nicolaus & Company, Inc.

Gary Bisbee - Lehman Brothers

Operator

Welcome to the Robert Half International Conference Call to discuss First Quarter 2008 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.

Harold M. Messmer, Jr. - Chairman and Chief Executive Officer

Thank you and good afternoon everyone. We appreciate your joining us. Before we... hello? Before we get started, let me remind 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 they include words such as forecasts, estimate, project, expect, believe, guidance, and similar such expressions. We believe these 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 conference call.

Now let's review the first quarter. First quarter revenues were $1.23 billion, an increase of 12% from the first quarter of 2007. Income per share was $0.45 compared with $0.42 in the first quarter of 2007. This is an 8% increase over the prior year. Revenues and earnings per share were both within the guidance range given last quarter. Cash flow from operations during the first quarter was $119 million, and capital expenditures were $16 million.

We paid a quarterly cash dividend to stockholders of $0.11 per share for a total of $18 million. We also repurchased 1 million RHI shares during the first quarter at a cost of $25 million. We have approximately 8.2 million shares remaining for repurchase under the company's Board approved stock repurchase plan.

We continued to see strong performance in international markets during the first quarter, where consolidated constant currency revenues grew 20% over last year. Revenues from our U.S. operations grew 5% over last year, led by our professional temporary and consulting divisions. Our staffing operationsonce again posted record revenues for the quarter. We saw some sequential slowing in our permanent placement business, but the division still had a solid quarter. Revenues were up 17% from last year.

I would like to acknowledge some recent accolades the company has received from the business press during the last 90 days. I want to thank our excellent team for those honors. We were again named the top firm in the industry on Fortune's magazine, a list of America's Most Admired Companies. We ranked 17th on the BusinessWeek 50 list of best-performing S&P 500 companies for the second consecutive year. And earlier this month, Forbes named Robert Half one of just 130 Global High Performers. We were the only staffing firm included on BusinessWeek and Forbes lists.

I'll let Keith provide a more detailed review of our first quarter results, and then I'll come back to you with some closing remarks.

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

Thank you, Max. We'll start with company-wide revenues. First quarter revenues were $1.23 billion, an increase of 12% from the first quarter of last year and flat sequentially. There were 63 billing days in the first quarter of 2008 compared with 64 billing days the first quarter of last year, and 61 billing days in the fourth quarter of '07.

Accountemps revenues were $467 million. This is an increase of 12% from the first quarter of last year and an increase of 1% sequentially on a same-day basis. Accountemps is our largest staffing division with 369 offices worldwide. It accounts for 38% of company revenues.

OfficeTeam, our high-end administrative staffing division, had revenues of $220 million in the first quarter. This is an increase of 6% from the first quarter of last year and a decrease of 3% sequentially on a same-day basis. OfficeTeam has 324 locations worldwide and represents 18% of company revenues. This division was introduced in 1991.

First quarter revenues for Robert Half Management Resources were $170 million, up 17% from the first quarter of '07 and up 1% sequentially on a same-day basis. This division was introduced in 1997 and places senior level accounting and finance professionals on a project basis. It has 148 locations worldwide and makes up 14% of company revenues.

Revenues for Robert Half Technology were $111 million in the first quarter, up 12% from the first quarter of last year, and down 2% 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 113 locations worldwide and accounts for 9% of company revenues.

Robert Half Finance & Accounting, our perm placement division, had revenues of a $116 million in the first quarter, up 17% from the first quarter of 2007 and down 4% on a same-day sequential basis. This business was established in 1948 and operates in 369 locations worldwide. It accounts for 9% of company-wide revenues.

First quarter revenues for our international staffing operations were $296 million, up 36% from the first quarter of 2007, and up 2% sequentially on a same-day basis. On a constant currency basis, these growth rates were 22% compared to the first quarter of last year and the same 2% sequentially. We have staffing operations in 105 locations in 18 countries outside the United States. International staffing operations represent 27% of staffing revenues.

Protiviti revenues were a $142 million in the first quarter, up 9% from one year ago and down 6% sequentially. The year-over-year growth reflects continuing success in the U.S. in transitioning from Sarbanes-Oxley related services, and particularly strong international results in China, Japan, and Italy. The sequential revenue decline is due to the seasonal moderation in demand as clients turn their attention to the annual financial close and year-end testing performed by their external auditors. Protiviti has 61 locations in 15 countries. It was established in May of 2002 and accounts for 12% of total RHI revenues. Protiviti's international operations represent 29% of total Protiviti revenues.

Now, let's turning to gross margin. First quarter gross margin in our temporary and consulting staffing operations was $355 million, or 36.7% of applicable revenues. This compares with 36.9% of revenues for the first quarter of '07 and 37.6% of revenues for the fourth quarter of '07. The percentage decline from the fourth quarter reflects higher payroll fringe costs which are primarily due to prior quarter workers' compensation credits which did not repeat as well as lower conversion revenues.

Overall staffing gross margin was $471 million for the first quarter, or 43.5% of staffing revenues. This compares to 43.3% of revenues in Q1 '07 and 44.4% of revenues in Q4 2007. The sequential decline is due to the lower temporary and consulting gross margins just noted as well as the lower mix of permanent placement revenues.

First quarter gross margin for Protiviti was $40 million, or 28.2% of Protiviti revenues. This compares to 31.9% of Protiviti revenues in Q1, 2007, and 32.2% of revenues in the fourth quarter of 2007. The margin declines are primarily due to lower utilization rates in both the U.S. and abroad. This reflects seasonally lower U.S. revenues and continuing SOX transition challenges in a few of our European locations.

Staffing, selling, general, and administration costs for the quarter were $355 million or 32.7% of staffing revenues. This compares to 32.2% of revenues for the first quarter of 2007 and 33.1% of revenues for the fourth quarter of 2007. First quarter SG&A costs for Protiviti were $40 million or 27.8% of revenues. This compares to $37 million or 28.5% of revenues in the first quarter of 2007, and 26.3% of revenues for the fourth quarter of 2007.

Turning to operating income. Operating income from our staffing divisions was $116 million during the first quarter, or 10.7% of staffing revenues. The temporary and consulting divisions contributed $99 million of this amount, or 10.2% of applicable revenues. First quarter operating income for our perm placement division was $17 million, or 14.8% of applicable revenues. Permanent placement margins are down due to lower productivity in our U.S. recruiting manager workforce, and the continuation of additional investments outside the United States.

Operating income for Protiviti was $0.5 million in the first quarter, or 0.4% of revenues. Operating in the U.S. was roughly flat with a year ago, while international operating income declined principally due to the continuing challenges replacing large SOX declines in the certain European markets and to some extent in Australia. Accounts receivable at the end of the first quarter were $623 million with implied days outstanding of 46.2 days, which compares to 46.5 days at the end of the first quarter a year ago.

Now let's turn to guidance. We saw the following trends during the first quarter and the first weeks of April. On a same-day sequential basis, temporary and consulting revenues were down in January, flat in February, and up in March. On a same-day sequential basis, permanent placement revenues were down in January, up in February, and up again in March.

During the first two weeks of April, revenues from our temporary and consulting businesses were up 7% compared to the same period last year. For the first three weeks of April, revenues from our permanent placement division were up 11% compared to the same period last year. As we said many times before, it's very difficult to assess permanent placement trends over short periods of time.

Taking into account these trends, we offer the following second quarter guidance; revenues, $1.190 billion to $1.230 billion; earnings per share, $0.41 to $0.44. As you know, we limit our guidance to one quarter. The estimates we have provided on this call are subject to the risks mentioned in today's press release.

Now, I'll turn the call back over to Max.

Harold M. Messmer, Jr. - Chairman and Chief Executive Officer

Thank you, Keith. It is hard to ignore some of the recent economic reports in the United States and elsewhere. Over the past 12 months we have seen the U.S. unemployment rate increase from 4.4% to 5.1%, and the number of temporary workers in the U.S. labor force declined by more than 100,000. We are not immune to the effects of a more cautious business environment in the United States. But considering the economic backdrop, we are generally pleased with how well our operations have performed.

Accountemps, Robert Half Management Resources and Robert Half Technology all had record revenues for the quarter and while our permanent placement business saw some sequential slowing, revenues remained well above year ago figures. In fact, it was our second best quarter ever for Robert Half Finance & Accounting. All of our staffing divisions and Protiviti reported year-over-year revenue growth for the first quarter.

International operations also were strong, led by results in markets such as Australia, Belgium, Germany, and France. We are a much more global business today than at any other time in our history. International operations represent 28% of our consolidated revenues, up from 18% just five years ago.

While we are closely watching current developments in the economy and financial markets, we do remain optimistic about our long-term outlook. We have traveled this road before and our experience tells us we are well positioned to manage the business through the current economic cycle.

Our business is free of customer or industry concentrations, our typical staffing clients are small and medium-sized businesses, and no single client accounts for a significant percentage of our revenue. Protiviti further enhances our suite of services. In the six years since its founding, Protiviti has been able to expand many client relationships beyond Sarbanes-Oxley and compliance related engagements. Protiviti now helps organizations solve problems in finance, operations, technology, and litigation. It remains a leader in internal audit and risk consulting. The business has significant potential and has great people with a reputation for providing excellent service to its clients.

We are in a strong financial condition with an outstanding long-term track record. We have demonstrated excellent cash flow capability in strong economies and in weaker ones. Perhaps most importantly we have an experienced field management team that has proven it can manage the business successfully through various economic cycles. They are poised to capitalize on opportunities to capture additional market share. By our estimates RHI does [ph] business with less than 14% of our target prospects in the United States, and of course greater opportunities exist outside the United States as well.

Demographic trends also benefit us. The anticipated retirement of millions of baby boomers from the global work force enhances the need for skilled workers. We think businesses will always need highly skilled interim [ph] and project professionals, and we have a proven track record of finding experienced talent for companies.

At this time, Keith and I are happy to respond to your questions. We would ask, as usual, 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

Operator

[Operator Instructions]. Our first question comes from Andrew Steinerman with Bear Stearns. Go ahead, please.

Andrew Steinerman - Bear Stearns

Hi, gentleman. My question is about the relationship between revenues and margins at Protiviti. Revenues were up year-over-year. Margins were down versus the challenge quarter of a year ago. I know there was a plan to have more flexible staffing within the Protiviti unit. I wanted to know how that flexibility worked this quarter and what should we think about in terms of seasonality of operating margins for Protiviti.

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

So, Andrew in the United States, the cost flexed pretty much as planned. As we reported, our operating income was about what it was in last year. Outside of the United States and particularly in certain locations in Europe, we continued to have challenges. Those challenges continued into the quarter. They were a little tougher than we expected. So, in the U.S. things were pretty much as planned for the quarter. Outside the U.S., particularly in Europe, things were a little softer than we had planned. In Asia, we were quite strong. Japan particularly had a blowout quarter. We were very pleased with that.

As we go forward, the second quarter for Protiviti in the United States is sequentially the... or seasonally the softest quarter. Typically that gets offset with some sequential strengthening outside of the United States. But as you look at our historical numbers, the first and second quarters for Protiviti are always seasonally their toughest quarters and then as year-end work, SOX compliance work, et cetera. heat up in the second half of the year, Protiviti does better.

I would say that particularly in the United States, we continued to see significant year-over-year and sequential double-digit declines in SOX work. There is clearly SOX fatigue out in the marketplace to some extent. Clients feel like they involuntarily dedicated more resources to controls than they wanted to. There is some backlash from that as we speak. So, the fact that we grew overall 9% in the quarter and then even in the U.S. we had positive year-over-year growth, it was not withstanding continuing significant declines in SOX work. So what that says is Protiviti has done quite well outside the SOX area.

In addition to internal audit, Protiviti thinks of itself as providing business consulting services principally either to the CFO or to the CIO. Things like financial investigations, financial restatements, business process effectiveness in the technology area, technology infrastructure, we've got some really nice IT asset management engagements. We have a marketing arrangement with SAP in the application controls area. So, again, I think Protiviti is non-SOX revenue improvements in gains and accomplishments this quarter were, to a large degree, offset by a continuing soft SOX market.

Andrew Steinerman - Bear Stearns

Right. Keith, you more talked about demand there. I was asking about the flexibility of your bench. Did you really try to create more of a hybrid model using Protiviti people in management resources? I know this was one of the things that was going to control margins better, was this part of the plan?

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

In the United States we executed that strategy well. We were quite pleased with the way the staffing organization was able to deploy appropriate Protiviti resources and, again, in the United States that worked quite well. That strategy is not as mature outside of the United States, and there are some legal barriers to accomplishing that strategy outside of the United States. So, we didn't make as much progress there.

Andrew Steinerman - Bear Stearns

Okay. And could you just comment some more on Protiviti's trends during the quarter?

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

During the quarter, the reporting in Protiviti is such, Andrew, that a fair amount of their billings go into suspense early on that then gets cleaned up thereafter. So, our month-versus-month trends in Protiviti aren't as precise as what they are in staffing.

Andrew Steinerman - Bear Stearns

Okay. Thank you very much.

Operator

Our next question comes from Jeff Silber with BMO Capital Markets. Your line is open.

Jeffrey Silber - BMO Capital Markets

Thanks so much. Keith, I was wondering if you can give us a little color underlying the range of guidance for the second quarter at the low end and the high end. What are your assumptions?

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

Well, the... at the high end on the staffing side it assumes for temp that the growth rates of the first few weeks pretty much continue throughout the quarter. We have assumed some softening on the perm side, even at the high number. On the low number for staffing, we have assumed some softening versus the early April start in both temp and perm.

I would hasten to say this, however, that while there is no question we saw some sequential softening during the quarter, the markets are nowhere near what they would look like from our point of view were we in an outright recession. So while clearly clients are taking even longer to make decisions, while they are being even more selective, while the demand environment has clearly gotten tougher, it's nowhere near where it would be and like we experienced back in 2002, as an example.

As far as forecast for Protiviti, if you'll look at prior years, Q2 overall is flat to down a little bit, which is in the United States typically Q2 is the lowest quarter, that's offset typically by a little sequential growth in the U.S. So with Protiviti on the high side, we are flat to down a couple of percent and on the low side it's more mid-single digits.

Jeffrey Silber - BMO Capital Markets

Okay, great. And if we could just drill down a little bit on the perm side, are you seeing any specific pockets of weakness, and also can you just discuss maybe is it the time to fill these engagements, has that been changing at all in recent weeks?

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

Well, the fill... from a fill standpoint as far as supply, we're not experiencing a supply issue. The issue is getting clients to pull the trigger. And as far as geographic pockets, I'd say it's the softness is fairly widespread. We're a little softer in Florida. We are a little softer in California, places that you would expect, Nevada that tracks somewhat with their economic additions [ph] which track somewhat with the housing market.

Jeffrey Silber - BMO Capital Markets

Fine. And just one more quick one on the guidance, what share count should we be using for the quarter?

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

Of the million shares we repurchased, the quarter only got credit for about 300,000, so you can roll a reduction of 700,000 in the next quarter.

Jeffrey Silber - BMO Capital Markets

Okay, great. Thanks so much.

Operator

Next question assumes from Tim McHugh with William Blair & Company. Go ahead, please.

Timothy McHugh - William Blair & Company

Yes. You mentioned part of the perm margins, weakness was continued investment internationally. I am wondering if you could elaborate on that, what regions and what type of investments are you referring to?

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

Well, the investments are particularly in recruiting managers. We have been the most aggressive in continental Europe, less aggressive in the UK. We've been fairly aggressive in Asia Pacific with permanent placement hiring. The biggest margin impact came from the fact in the United States we added modestly to headcount during the quarter and sequentially the revenues were down. As we move into or as we're in the second quarter, I think you'll find we are reviewing our cost structure carefully. We are we were trying to adjust our cost structure to our anticipated revenue levels, and therefore, we would not be as aggressive with headcount as we have been in the past.

Timothy McHugh - William Blair & Company

Okay. And then the trends that you said for the first few weeks of April, are we looking at down year-over-year in the U.S. at this point, or does that up 7% for temp include still somewhat modest positive growth in the U.S.?

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

That contemplates some modest growth year-over-year in the United States and even more so outside the U.S.

Timothy McHugh - William Blair & Company

Okay. And then lastly, how many days for the third quarter or second quarter?

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

I believe we have one more day in the second quarter than the first. Let's see, it's 64 compared to 63.

Timothy McHugh - William Blair & Company

Okay. Thank you.2741

Operator

Our next question comes from Brandt Sakakeeny with Deutsche Bank. Your line is open.

Unidentified Analyst

It's Adrian for Brandt. A housekeeping question, first, could you give us what the stock comp expense was in the quarter?

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

Stock comp was $1.3 million. This is options. A $1 million of that relates to temporary and consulting, 300,000 relates to perm placement.

Unidentified Analyst

Okay. And I'm just trying to reconcile some of the trends that you spoke about in the fourth quarter in terms of perm with the way the results actually panned out. You had talked about seeing, I think, a 15% start in the first two weeks of January and it sounds like you ended up seeing January perm being down in the quarter. I'm trying to again get a feel for what type of trends we can sort of expect. Given that you have seen a positive start to April, what we should be reading into that as well?

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

So, you are mixing sequential and year-over-year a little bit. When we give our after the quarter trends, those are year-over-year numbers. The trends we give during the course of the quarter are sequential numbers. So, we did start up year-over-year. But virtually, every first month of a quarter, sequentially it's down because there is a natural acceleration of revenues in the last month of any quarter. So what we gave you last quarter for the start, and what we gave you this year for the start, is a year-over-year number. When we showed you the trends during the quarter, we were trying to show you sequential trends.

Unidentified Analyst

Okay. That's helpful. I guess I'm just trying to again get a better sense if you think you were seeing some seasonality effects from the earlier Easter period and, again, there is some, you have seen... we've seen some negative data from the Bureau of Labor Statistics, and I am just trying to understand if you've seen any reflection in those trends.

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

Well, clearly we saw softening over the course of the quarter. It was particularly true late in quarter, and that softening has continued into the first few weeks of April. There is no question about that.

Unidentified Analyst

Okay. Thank you.

Operator

Our next question comes from Kevin McVeigh with Credit Suisse. Go ahead, please.

Kevin McVeigh - Credit Suisse

Hey, Keith, Max. Quick question in terms of OfficeTeam, I noticed year-on-year growth was up in the single digits, haven't [ph] seen a number that low in a while. Was there anything you could point to within OfficeTeam versus the other segments?

Harold M. Messmer, Jr. - Chairman and Chief Executive Officer

We have observed that OfficeTeam and the accounting operations positions and Accountemps are more economically sensitive than the higher level positions. If our clients go into cost control mode, they are more likely to do that with their administrative staff than they are their higher end staff. And then further within accounting the accounting operations positions, accounts payable, accounts receivable, et cetera are typically more sensitive than the higher level positions, and so we saw that during the quarter.

Kevin McVeigh - Credit Suisse

Okay. And then just, Keith, you had mentioned lower conversion fees. Did they trend similar to perm placement or could you give us some color around that?

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

They did trend lower consistent with perm placement. The other thing I would say is on the temp gross margin the fringes were up not only due to the absence of a workers' comp credit, but they were also up because every year of January 1 we reset our own employment and FICO rates where you're trying to guess for the year what those will be. We're typically conservative early in the year as to what those rates will be, and as we land the plane later in the year, those rates come down. So you've got the juxtaposition of a little bit lower rates in the fourth quarter and a higher restart in the first quarter which we hope is again conservative.

Operator

Our next question comes from Andrew Fones with UBS. Go ahead, please.

Andrew Fones - UBS

Yes, hi. Thanks. Earlier you categorized Protiviti in terms of four types of business consulting, financial, operational, technology, and litigation. I imagine you saw box businesses within that financial consulting category. Can you give us a sense of the size of these categories overall? Thanks.

Harold M. Messmer, Jr. - Chairman and Chief Executive Officer

We've never disclosed the subcomponents of Protiviti revenues. Again, as I mentioned earlier, we continued to see significant double digit declines sequentially and year-over-year with our SOX practice. And those have been more than offset this quarter with gains and the other practices, but as far as specific numbers, that's not something we disclose.

Andrew Fones - UBS

Okay. Thanks. And in terms of the margins there and actions you might be taking, you mentioned that you are using some Protiviti staff within Management Resources. Do you have any plans, or can you kind of discuss your plans in terms of hiring or actually thinning out [ph] the ranks there just a little bit? Thanks.

Harold M. Messmer, Jr. - Chairman and Chief Executive Officer

I'd say similar to the big four firms there is a natural and ongoing process to align your skill sets with your demand. Clearly, we are at a point where we need to streamline Protiviti's cost structure. We need to adjust headcount levels to anticipated revenue levels. And that more than likely means less headcount at the end of the Q2 than was the case at the end of Q1. Our compensation cycle is such that it's on a June 30 basis anyway, so this is a time of year when in the ordinary course every year Protiviti looks at its workforce.

Operator

Our next question will come from T.C. Robillard with Banc of America. Go ahead, please.

Thomas Robillard - Banc Of America Securities

Hi, great. Thank you. Good evening, guys. Just a couple of quick follow-ups. First, on the Protiviti margin side, given the trends that are going on right now and the fact that this is something [ph] that can turn on a dime, do you expect to see an operating loss next quarter or do you think you could have essentially break even?

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

Well, our hope is that it's break even. On the down side, we potentially could have a small loss.

Thomas Robillard - Banc Of America Securities

Okay. And, Keith, would that be baked into the low end of the guidance range a slight loss?

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

That would be baked in. I guess I would remind everyone that during Protiviti's six-year history we paid $18 million and cumulatively over that period of time Protiviti has earned $175 million. So, it clearly in it past has proven it can be quite profitable. We are certainly going through this SOX fall-off challenge at the moment, but we remain quite confident that we get through... that when we get through this transition, which admittedly has taken longer than we expected, Protiviti can make a very sizable contribution to the margins of Robert Half.

Thomas Robillard - Banc Of America Securities

And how should we think about the tough comparable that you have with the SOX fall off and Europe? It sounds like it was couple of big projects. Is that a situation where this was kind of the first quarter with that, so you have the headwinds for the next three quarters. And if you can give us a sense as to how we should be thinking about that SOX piece.

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

Well, the SOX, so in Australia, the UK and in France, we had major clients that either de-listed from the stock exchange or a large financial services client that was acquired, so the revenues, our revenues, went to zero abruptly. And they have been working very hard to replace those revenues. We started to get some traction in the UK. We feel good about that. We've taken longer to get traction in Australia and in France. So, not withstanding the fact that those events occurred in late Q1, during the course of Q2 last year, our operations in those countries are still challenged to some degree, replacing that lost revenue.

Because of the legal and regulatory environment in some of those countries, it's more challenging dealing with your cost structure than it might otherwise be in United States. That said, we've had some time to think about this, and to work on this. And we're to the point where, as I said earlier, we need to adjust our headcount levels to our revenue levels.

Thomas Robillard - Banc Of America Securities

Okay. And then just last real quickly. In the perm side with Europe and Asia Pacific, are you still hiring there or were your comments earlier about slowing down the hiring, was that across the entire segment or was that just to the U.S.?

Harold M. Messmer, Jr. - Chairman and Chief Executive Officer

Well, there will be certain countries where we would continue to hire. But on an overall basis, our expectation would be in virtually every division our headcounts at the end of Q2 will be less than the headcounts at the end of Q1.

Thomas Robillard - Banc Of America Securities

Okay, great. Thanks for the clarity.

Operator

Our next question comes from Mark Marcon with RW Baird. Go ahead, please.

Mark Marcon - Robert W. Baird & Co., Inc.

Good afternoon I was wondering if you could give us a feel for what the operating margins looks like in your traditional temporary staffing and perm placement divisions internationally. If we go back over the last three years, international has been growing quite nicely. I suspect a big part of, you're getting a fairly significant drag from Protiviti's international ops. But when we look at your breakouts, it looks like the margins are below your, well below your U.S. numbers, and I was just trying to get a better feel for that and how we should think about it longer term.

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

So, clearly non-U.S. margins are lower than U.S. margins. As we've said before, the UK is probably the most challenged of all because it's the most competitive temporary help market in the world. The continent, we get very good margins in some of the continental European markets and are optimistic that over time those can be even improved yet again. The other strategy call we've made some time ago was that we're going to have more permanent placement mix outside of the United States and in the United States which should also help bolster the fact that the temp margins, generally speaking, are lower. So over time, would there be modest consolidated margin dilution from outsized non-U.S. revenue growth the answer is yes, but with a combination of more perm, more continent, less UK, our objective would be to minimize that dilution.

Mark Marcon - Robert W. Baird & Co., Inc.

Can you give us a sense for how big the dilution is now?

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

I guess we're comfortable at the level of financial disclosure we've made. We try to be forthright as to the differentials, as far as actually quantifying those. We're reluctant to do so, and I'll also say, Mark, that there is a fair amount of tax planning intra-company transfer pricing that happens as well such that what's reported is also impacted by those types of things to some degree.

Mark Marcon - Robert W. Baird & Co., Inc.

Okay. All right. At what point would you expect that Protiviti's margins could actually start improving? You've mentioned that you are looking at a plan. Clearly you are doing some things, and are going to do some things in Australia and France probably.

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

We would expect in this third quarter that they would improve because typically there is a nice seasonal up-tick in revenues in this third quarter, third and fourth quarters. So, we're not talking years, we are talking next quarter. Now, as I've said, the second quarter is typically the lowest quarter in the United States, that's a challenge. But third and fourth quarter for seasonal reasons typically pick up nicely. We should get some leverage from that and margins should begin to improve. I would also say there has been a focus on streamlining the cost structure at Protiviti as we speak unlike what's ever been in the past.

So clearly we are looking at size of work force, the mix of the work force, what we call the pyramid. All that's being heavily scrutinized because trust me nobody is happy that we are essentially at breakeven with a half a billion dollar business. The point is we've got an excellent reputation in the marketplace. We have got a very special half a billion dollar business. We've kind of hung on for many quarters now that we're going to invest for growth. But given market conditions, our thought at the moment is we need to focus more on profitability in the very short term.

Mark Marcon - Robert W. Baird & Co., Inc.

Does that mean that by the fourth quarter, Keith, you could actually get to year-over-year improvement, or would you be happy just to get back to where we were in the back half of last year?

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

Again, we only talk one quarter out.

Mark Marcon - Robert W. Baird & Co., Inc.

Sure. It's not guidance. I'm just trying to understand your objectives.

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

We're taking a very, very serious look at our cost structure and, trust me, you've known us for a long time. We need more profitability there. That said, they have had a tremendous challenge dealing with the SOX fall off, which has dropped much more and for much longer than they expected. But, as I said before, we have made $175 million in Protiviti with our $18 million investment on a cumulative basis so it has shown it can make money.

Mark Marcon - Robert W. Baird & Co., Inc.

Sure.

Harold M. Messmer, Jr. - Chairman and Chief Executive Officer

The comment to your question, Mark, obviously more is better when you start talking about profits. But I think Keith's basic point is the people at Protiviti have done a good job dealing with this transition from Sarbanes-Oxley. The transition has occurred faster than was anticipated. But overall, they have done a very good job of replacing the revenue base, but obviously, we are still in a transition period. We recognize there is some slowing in the economy, and so the focus will be on profitability going forward and we will see how we do.

Mark Marcon - Robert W. Baird & Co., Inc.

And then last question just on the share repurchase. You didn't buy back as much as you normally do, is that primarily a function of just we are going into an uncertain economic time, and you could read the tea leaves, but that we shouldn't read that you're going to pull back dramatically in terms of how you've done in the past in terms of share repurchases or how should we think about that?

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

I think if you looked at our history, you would see that our repurchases jump around somewhat. So, I don't think I would be reading the tea leaves much.

Harold M. Messmer, Jr. - Chairman and Chief Executive Officer

I think we'll still be oriented to repurchasing our stock, Mark, to answer your question.

Mark Marcon - Robert W. Baird & Co., Inc.

Okay. Thank you.

Operator

Our next question comes from David Feinberg with Goldman Sachs. Go ahead, please.

David Feinberg - Goldman Sachs

Good afternoon, gentlemen. Question with regard to perm placement, I know you've answered a lot here. Wanted to know, you had talked about the searches taking longer and clients being more selective in their candidates. Wanted to know if you can give us some commentary on the types of searches you're doing, either by job description, vertical, or higher versus lower end, however you would characterize it?

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

There is not a lot of change from the past. As I said earlier, the accounting operations positions are more impacted by the staff accountant and above positions. The administrative positions are more impacted than the higher level positions. But other than that, there is no big mix change. But as we said, we have seen some broad slowing, but when we say slowing, it's nowhere near the degree, which we would expect if we were in an outright recession.

David Feinberg - Goldman Sachs

And then you gave some indication with regard to geography. Are there are any particular verticals that have slowed greater than others, similar to your comments on California, Arizona, and Nevada?

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

Again, verticals, not really. I guess to the flipside of that, Protiviti, which has the largest financial services concentration actually had positive year-over-year growth even in financial services, which is counterintuitive at least to some people.

Harold M. Messmer, Jr. - Chairman and Chief Executive Officer

We've said this a couple of different times, but to reiterate what Keith said earlier, the fall off in permanent placement business should have been much more pronounced if whatever the economic slowing we're in now has anything to do with prior recessions we have been through. There still is significant demand in the marketplace. It's somewhat uneven. If you are in the construction business or home building business, you probably don't need us much right now. But other types of businesses still seem to have significant demand.

There is general concern on Main Street [ph], probably created by Wall Street, about the overall economy which is probably making people take longer and be more selective. But at the end of the day, permanent placement still grew relatively strongly in the first quarter. So, it's a confusing scenario right now and we'll just have to see what unfolds for the economy. But as Keith has said a couple of times, and I'll say again, it doesn't look or feel like prior recessions that we've been through.

David Feinberg - Goldman Sachs

All right. Well we'll stay tuned. Thank you gentlemen.

Operator

And our next question comes from Michel Morin with Merrill Lynch. Your line is open.

Michel Morin - Merrill Lynch

Yes, good afternoon. You have mentioned that you saw some strength of Protiviti in China, Japan, and Italy and I was wondering if you could expand a little bit on that, what's driving that strength.

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

Well, China's economy is very vibrant. Japan, you're right in the middle of J-SOX, and there the issue is do you have resources more so than is there demand. Italy, we never had much of a SOX practice in Italy, so there is no negative impact from the fall off of that. We also have two very senior, very experienced operators that run our Italian practice and they do a nice job, so those three countries we had very, very good quarters.

Michel Morin - Merrill Lynch

Great. And then I was wondering, could you comment a little bit on the bill and pay rates for both Protiviti and on the temp side?

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

On the temp side consistent with last quarter, up about 8% year-over-year, up about 2% sequentially. Anecdotally, our people report they are starting to get some pressure on the bill rate side from clients. Accordingly, we are going back to candidates and offering them lower pay rates. So, my guess is when we report those statistics next quarter, they will be down somewhat. Protiviti, we never specifically report bill and pay rates.

Michel Morin - Merrill Lynch

I guess on Protiviti I was asking the question just because of the gross margin erosion and the stronger than expected top line, whether or not that might be a function of accepting lower bill rates.

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

To some degree in the first quarter to try to balance out seasonality, Protiviti goes to its clients and said if we can do some of our annual work plan during these months, we'll reduce our rate somewhat. That's pretty much across the big four. So, there is no question that during the quarter, the rates are down somewhat for that reason alone. In addition to that, with SOX fatigue, you have got some clients coming back and saying there is been an edict [ph] internally that will reduce our costs, call it 10%, and therefore, we need you to do the same. The other phenomenon we see is in a co-sourcing arrangement whereas in the past we did... we the client did 70% of the work, Protiviti did 30% of the work. That mix might shift to 60/40. So, clients are doing a little more themselves, plus they are pressuring rates in response to their own pressure to reduce their costs.

Michel Morin - Merrill Lynch

And are you seeing a change in the competitive behavior?

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

Not necessarily. I think generally speaking, there is an abundance of resources particularly in the SOX area across the big four. So there is more competitive rate pressure there. But again, more so than competitive situations, it's your existing clients coming to you and saying they need some cost relief.

Michel Morin - Merrill Lynch

Right. Okay. And then just to clarify the answer to the earlier question on the temp side, were the pay rates up also 8% year-on-year?

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

Roughly the same.

Michel Morin - Merrill Lynch

Okay.

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

The same.

Michel Morin - Merrill Lynch

Thanks very much.

Operator

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

Tobey Sommer - SunTrust Robinson Humphrey

Thank you. Wanted to ask a question about physically the locations that you've opened recently, wondering is part of the streamlining of the cost structure whether you will be talking a look at closing any of those or perhaps would it just be a function of slowing the pace of geographical expansion.

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

The geographical expansion has been primarily in international locations. I think we opened a grand total of four during the quarter, three of which were outside of the United States, and then within the OfficeTeam area. The reason for that addition to head counts is primarily because we added OfficeTeam in several locations in Germany. I actually don't see, the number of new locations hasn't been a significant part of our growth story for a long time. I don't see that changing.

Tobey Sommer - SunTrust Robinson Humphrey

In terms of the headcount reductions that you thought might take place in the divisions 2Q versus 1Q, could you tell us kind of order of magnitude what you are thinking?

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

Well, again, we'll look hard at our revenue run rates by division, by location, one size doesn't fit all. We have probably been the most aggressive adding to headcount in our perm placement divisions. It's seen the biggest margin impact as we just talked about. So, it would probably be the candidate for the closest scrutiny. In addition, we are going to look hard at Protiviti's headcount as we talked about before. But again, it's a market by market. What does our resource base look like, what is our revenue run rate look like, and make appropriate adjustments.

Tobey Sommer - SunTrust Robinson Humphrey

Thank you. One last question, your operating margin in the perm division in the quarter and in the year ago quarter, if you have that?

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

Let's see, this quarter, 14.8%. A year ago, 20.4%.

Tobey Sommer - SunTrust Robinson Humphrey

Thank you.

Harold M. Messmer, Jr. - Chairman and Chief Executive Officer

Just one clarification. I when we [ph] managing our headcount, we are to some extent talking about slowing down the hiring that we've been doing which has been fairly aggressive. There will be some hiring in the future that will be selective replacement. And then in some cases, there may be some actual reductions, but I don't want to give the impression that it's a unified body and there is going to be some massive announcement. That's not the case. We simply have a fair amount of attrition normally. We may not replace many of those people obviously. And we will be reviewing the headcount across the board in all divisions.

Operator

Your next question comes from Jim Janesky with Stifel Nicolaus. Go ahead, please.

James Janesky - Stifel Nicolaus & Company, Inc.

Yes, thank you. A couple of questions, on the perm international, are your margins the same or higher or lower than they are in the U.S.?

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

They are lower at the moment principally because of... we've added more significantly to headcount and the offices aren't as mature. But I would say, Jim, there is less differential between perm margins U.S. and non-U.S. than there are in temporary and consulting margins.

James Janesky - Stifel Nicolaus & Company, Inc.

Okay. So there is nothing... there is not a significant structural difference that would, as you're... because if I recall, the amount of international revenues, although it's 28% company wide, it's higher in the perm side. Is that correct?

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

As well as management resources.

James Janesky - Stifel Nicolaus & Company, Inc.

Okay. So there is nothing structural that would mean that margins as that mix changed, would, could go down over time?

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

Again, perm generally speaking helps margins relative to temp. And as I said, outside of the United States there is less difference in perm between U.S. and non-U.S. than there is in temp.

James Janesky - Stifel Nicolaus & Company, Inc.

Okay. And the comments you made about the sales cycle and clients not pulling the trigger as fast on the perm side, is that mainly U.S. based, or are you seeing that start to happen internationally?

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

It's primarily U.S.-based. We saw a little slowing in the UK sequentially, still solid year-over-year growth. We saw some flattening in Canada sequentially, still very strong year-over-year growth. But my comments were principally devoted to the U.S.

James Janesky - Stifel Nicolaus & Company, Inc.

Okay. And then shifting gears, a follow-up question on Protiviti, when... in the last cycle that you experienced coming out of a recession that formally ended at the end of 2001, Protiviti was in its infancy and then of course it took off with Sarbanes-Oxley spending. Are you at all getting any push back in Protiviti from clients due to the economy or is it mainly because of the pull back in Sarbanes-Oxley?

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

Well, it's what we call SOX fatigue, with this impression or this perception that companies had to overdo it to comply with SOX, and they are coming out of that. And further many companies for general economic reasons are trying to reduce their costs. And so they are going to their vendors, Protiviti included, and said we are reducing our costs and you need to participate. So, it's sum [ph] of each.

James Janesky - Stifel Nicolaus & Company, Inc.

Okay. Thanks. And then housekeeping question, you gave us the charge for stock options. Do you have the stock-based compensation expense for restricted stock in stock units for the quarter?

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

Yes, just a second. For the quarter, it was $15.7 million for restricted stock.

James Janesky - Stifel Nicolaus & Company, Inc.

Okay. Thank you.

Operator

And our next question comes from Gary Bisbee with Lehman Brothers. Go ahead, please.

Gary Bisbee - Lehman Brothers

Hi, guys. Good afternoon. Wondering if you can give us any sense at all at what percent of Protiviti's revenue at this point remains in the SOX realm.

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

It's not something we can just...we've ever disclosed. I can tell you it's a fraction of what it peaked at, and it's declined this quarter again at double digit year-over-year and sequential growth rates. So, it's clearly becoming much less important to Protiviti's overall revenue base.

Gary Bisbee - Lehman Brothers

It sounds to me like you've been saying that, maybe not at that aggressive a level, for what... if memory serves right, about two years that that has been falling. At what point does it just become so small that it's irrelevant in terms of being something that can be a reason why the growth remains challenge there?

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

Well, I guess we hope it doesn't get that small because the thought is there is an ongoing SOX component to our revenues because companies have to comply forever. That said, I don't think anybody anticipated the backlash against their spending for Sarbanes-Oxley compliance that we continue to have to deal with.

Gary Bisbee - Lehman Brothers

Okay. And then

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

We have gone from an environment where whatever you need to spend, spend it because we've got to comply to an environment of everybody knows we spent too much, everybody knows it was too mechanical, and shouldn't have been that mechanical, and therefore, everybody knows that or everybody believes that that's an area that could be targeted most heavily in cost cutting.

Gary Bisbee - Lehman Brothers

Okay. And then just I guess a follow-up question. A quarter ago, I wrote down in my notes the comment that you guys were continuing to see what you called the disconnect between Wall Street's view of the world versus Main Street's view. Obviously things are slowing a bit in the U.S., but is it safe to say that outside of construction, real estate, financial services that you are still seeing... how would you term the demand in the rest of the economy? Still solid, good, or has that deteriorated at bit as well in this quarter? Thanks a lot.

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

Well, I don't thank there is any question that our small business client base on a broad-base scale has seen some slowing during the quarter. The Wall Street, Main Street disconnect, I mean it's a chicken and an egg to some degree. I mean, it's hard for anybody not to read day after day after day about how energy prices, credit crisis, sub-prime at some point, it becomes self fulfilling. But again, we have said many times on this call we've seen slowing, we have not seen slowing to recession levels of demand, nor does our guidance contemplate for the next quarter there is slowing to a recession level of demand levels.

Gary Bisbee - Lehman Brothers

Okay. Thank you.

Operator

We are near the top of the hour, and we have time for one more question. Our last question will come from Jeff Silber with BMO markets. Go ahead, please.

Jeffrey Silber - BMO Capital Markets

Thanks. Just a couple of quick numbers questions, in terms of stock-based comp that you actually recorded on your income statement, I think you said the number was $1.3 million in the quarter. Is that something we can look for going forward? I know there was a lot of moving parts on that number, and also what is CapEx guidance for the year?

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

So the options-based comp, Jeff, has come down every quarter because we quit issuing options in 2004. So, all you're seeing there is the run-off of what we issued in the past. So from an options standpoint, that's clearly going down. The CapEx guidance we gave was $80 million to 90 million for the year. Actual was 16 for the quarter, which is a little light regarding that run rate. But for the moment, we are sticking with the $80 million to $90 million estimate for the year. That too is something we're studying as part of our cost streamlining studies.

Jeffrey Silber - BMO Capital Markets

Okay, great. Thanks so much.

Harold M. Messmer, Jr. - Chairman and Chief Executive Officer

Thank you for joining us today. That's all the questions we have time for. I appreciate your time.

Operator

This concludes today's teleconference. You may disconnect at any time.

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