Robert Half Q4 2022 Earnings Call Transcript

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Provided by Quartr
January 26, 2023

There are 11 speakers on the call.

Operator

Hello, and welcome to the Robert Half Fourth Quarter 2022 Conference Call. Today's conference call is being recorded. Our hosts for today's call are Mr. Keith Waddell, President and Chief Executive Officer of Robert Half And Mr. Michael Buckley, Chief Financial Officer, Mr.

Operator

Waddell, you may begin.

Speaker 1

Thank you. Hello, everyone. We appreciate your time today. Before we get started, I'd like to remind you that the comments made on today's call contain forward looking statements, including predictions and estimates about our future performance. These statements represent our current judgment of what the future holds.

Speaker 1

However, They are subject to the risks and uncertainties that could cause actual results to differ materially from the forward looking statements. These risks and uncertainties are described in today's press release and in our most recent 10 ks and 10 Q filed with the SEC. We assume no obligation to update the statements made on today's call. During this presentation, we may mention some non GAAP financial measures and reference these figures as adjusted. Reconciliations and further explanations of these measures are included in a supplemental schedule to our press Our presentation of revenues and the related growth rates for each of our contract functional specializations Includes intersegment revenues from services provided to Protiviti in connection with the company's blended talent solutions And consulting operations.

Speaker 1

This is how we measure and manage these businesses internally. The combined amount of intersegment revenues with Protiviti is also separately disclosed. The supplemental schedules just mentioned also include a revenue schedule Today's call are available in the Investor Center of our website, roberthalf.com. 2022 was a very successful year Across the entire Robert Half enterprise, we grew full year revenues and earnings per share both by more than 12% And achieve new record levels for each. All of our major practice areas contract, permanent placement and Protiviti Reached all time highs over and above the very strong growth in the prior year.

Speaker 1

We entered 2023 optimistic about our ability to navigate the uncertain global macroeconomic environment and the tight labor markets around the world. For the Q4 of 2022, company wide revenues were $1,727,000,000 down 2% from last year's 4th quarter on a reported basis, but up 1% on an as adjusted basis. Net income per share for the 4th quarter was 1.37 compared to $1.51 in the 4th quarter a year ago. Cash flow from operations during the quarter was 202,000,000 In December, we distributed a $0.43 per share cash dividend to our shareholders of record For a total cash outlay of $47,000,000 our per share dividend has grown 11.2% annually Since its inception in 2004, the December 2022 dividend was 13.2% higher than in 2021. We also acquired approximately 800,000 Robert Half shares during the quarter for $61,000,000 We have 3,800,000 shares available For repurchase under our Board approved stock repurchase plan, return on invested capital for the company was 39% in the 4th quarter.

Speaker 1

Now I'll turn the call over to our CFO, Mike Buckley.

Speaker 2

Thank you, Keith. Hello, everyone. As Keith noted, global revenues were $1,727,000,000 in the 4th quarter. On an as adjusted basis, 4th quarter Talent Solutions revenues were down 1% year over year. U.

Speaker 2

S. Talent Solutions revenues were 964,000,000 down 2% from the prior year. Non U. S. Talent Solutions revenues were 264,000,000 Up 5% year over year on an as adjusted basis.

Speaker 2

We have 317 Talent Solutions locations worldwide, including 86 locations in 18 countries outside of the United States. In the 4th quarter, there were 61.2 billing days compared to 61.7 billing days in the same quarter 1 year ago. The Q1 of 2023 Has 63.3 billing days compared to 62.4 billing days during the Q1 of 2022. Billing days for the remaining three quarters of 2023 will be 63.3, 63.1 and 61.1 for a total of 250.8 billing days during the year. Currency exchange rate movements during the Q4 had the effect of decreasing reported year over year revenues by $66,000,000 for Talent Solutions $12,000,000 for Protiviti.

Speaker 2

This negatively impacted our year over year overall revenue growth by 2.2 2.1 percentage points for Talent Solutions and 2.4 percentage points for Protiviti. Contract Talent Solutions bill rates for the quarter increased 7.8% compared to 1 year ago, Adjusted for changes in the mix of revenues by functional specialization, currency and country. This rate for the Q3 was 9%. Now let's take a closer look at results for Protiviti. Global revenues in the 4th quarter were $900,000,000 of that is from business within the United States $98,000,000 is from operations outside of the United States.

Speaker 2

On an as adjusted basis, global 4th quarter Protiviti revenues were up 4% versus the year ago period, With both U. S. And non U. S. Protiviti's up by 4% on an as adjusted basis.

Speaker 2

Protiviti and its independently owned member firms serve clients through a network of 89 locations in 29 countries. Companywide 4th quarter public sector revenues were $83,000,000 of which $60,000,000 was reported by Protiviti Approximately $3,000,000 during the quarter. Full year public sector revenues were down approximately 8% or 3% adjusted for currency. Turning now to gross margin. In Contract Talent Solutions, 4th quarter gross margin was 39.9 percent of applicable revenues compared to 39.8 percent of applicable revenues In the Q4 1 year ago, conversion revenues or contract to hire were 3.7% of revenues in the quarter.

Speaker 2

Our permanent placement revenues in the 4th quarter were 12.7 percent of consolidated talent solutions revenues Versus 12.4 percent of Consolidated Talent Solutions revenues in the same quarter 1 year ago. When combined with Contract Talent Solutions gross margin, overall Talent Solutions gross margins were 47.5% compared to 47.2 percent of applicable revenues in the Q4 1 year ago. For Protiviti, gross margin was 27.2 percent of Protiviti revenues compared to 28.7 Percent of Protiviti revenues 1 year ago. Adjusted for deferred compensation related classification impacts, Gross margin for Protiviti was 28% for the quarter just ended compared to 29.3% 1 year ago. Moving on to SG and A.

Speaker 2

Enterprise SG and A costs were 31.6% of global revenues in the 4th quarter compared to 30.8% in the same quarter 1 year ago. Adjusted for deferred compensation related classification impacts, Enterprise SG and A costs were 30.4% in the quarter just ended compared to 29.7% 1 year ago. Talent Solutions SG and A costs were 38.9 percent of Talent Solutions revenues in the 4th quarter versus 37.7 percent in the Q4 of 2021. Adjusted for deferred compensation related classification impacts, Talent Solutions SG and A costs were 37.2 percent for the quarter just ended compared to 36.2 percent 1 year ago. The higher mix of permanent placement revenues this quarter versus 1 year ago had the effect of adding 0.2 percentage points Turnell employees in our Talent Solutions divisions up 5% from the prior year.

Speaker 2

4th quarter SG and A costs for Protiviti were 13.6 percent of Protiviti revenues compared to 12.9% of revenues in the year ago period As operating expenditures return to more normalized levels, we ended 2022 with 11,700 full time Operating income for the quarter was $174,000,000 Adjusted for deferred compensation related classification impacts, Combined segment income was $199,000,000 in the 4th quarter. Combined segment margin was 11.5%. 4th quarter segment income from our Talent Solutions divisions was $127,000,000 with a segment margin of 10.3%. Segment income for Protiviti in the 4th quarter was $72,000,000 with a segment margin of 14.4%. Our 4th quarter tax rate was 27%, up from 24% in the same quarter 1 year ago.

Speaker 2

The higher tax rate for 2022 can be primarily attributable to higher non deductible expenses in 2022 as well as lower stock compensation deductions due to the company's stock price. At the end of the Q4, accounts receivable were $1,018,000,000 And implied day sales outstanding or DSO was 53.1 days. Before we move to Q1 guidance, let's review some of the monthly revenue trends we saw in the Q4 and so far in January, All adjusted for currency and billing days. Contract Talent Solutions exited the 4th quarter with December revenues down 6% versus the prior year compared to a 1% decrease for the full quarter. Revenues for the 1st 2 weeks of January were down 7% compared to the same period 1 year ago.

Speaker 2

Permanent placement revenues in December were down 1% versus December of 2021. This compares to a 2% increase for the full quarter. For the 1st 3 weeks of January, permanent placement revenues were down 23% compared to the same period in 2022. We provide this information so that you have insight into some of the trends we saw during the Q4 and into January. But as you may know, these are very brief time periods.

Speaker 2

We caution reading too much into that. With that in mind, we offer the following first quarter guidance. Revenue, dollars 1,685,000,000 to $1,765,000,000 income per share, $1.10 to $1.20 The midpoint revenues of $1,725,000,000 Are 5.4% lower than the same period in 2022 on an as adjusted basis. The major financial assumptions underlying the midpoint of these estimates are as follows. For revenue, On a year over year as adjusted basis, Talent Solutions down 7% to down 12% Protiviti, up 6% to up 9%, overall down 3% to down 7%.

Speaker 2

Gross margin percentage, contract talent 38% to 40% Protiviti 24% to 26% Overall, 39% to 41%. SG and A as a percentage of revenue, Excluding deferred compensation classification impacts, Talent Solutions 36% to 38% Productivity 14% to 16%, overall 30% to 32%. Segment income for Talent Solutions, 8% to 11%, Protiviti, 8% to 11%, Overall, 8% to 11%. Tax rate, 27% to 28% Shares, $106,500,000 to $107,500,000 2023 capital expenditures and Capitalized cloud computing costs $100,000,000 to $120,000,000 with $20,000,000 to $25,000,000 in the Q1. We limit our guidance to 1 quarter.

Speaker 2

All estimates we provide on this call are subject to the risks mentioned in today's press release and in our SEC filings. Now, I'll turn

Speaker 1

the call back over to Keith. Thank you, Mike. Global labor markets remain tight and the demand For talent remains high despite continued economic uncertainty. Clients continue to hire albeit at an even more measured pace, which has the effect of lengthening the sales cycle. Although recent metrics have come off their all time highs, Talop shortages persist.

Speaker 1

In the United States, unemployment stands at 3.5%, a 50 year low And remains even lower for those with a college degree where the rate is 1.9%. Job openings and quit rates remain elevated. Unemployment claims remain low. Similar reports across the globe also point to labor market resilience. Protiviti continues to have a very strong pipeline across an increasingly diverse offering of solutions, Both the regulatory risk and compliance practice and the technology consulting practice show particular strength.

Speaker 1

In 2022, Protiviti achieved record high revenues of nearly $2,000,000,000 Even while overcoming the wind down of very large financial services project and a shift in the trend of public sector engagements To projects more applicable to talent solutions, demand for Protiviti Services remains robust and is only mildly impacted by current economic conditions. While there remains volatility in the macroeconomic environment, We're optimistic about our outlook for 2023. We've successfully navigated many economic cycles, Each time achieving higher peaks. This was demonstrated by our ability to achieve the fastest recovery in our company's history Following the COVID-nineteen downturn, we also continue to benefit from Protiviti's resiliency, which stems from its diversified solution offerings that are much less tied to the economic cycle. Longer term, we're encouraged by the growth and margin prospects from our ongoing focus on services related to talent with higher skill levels.

Speaker 1

These include management resources, full time engagement professionals, Managed Solutions, Robert Half Technology and Protiviti. In addition, the structural shift to remote work, particularly for higher skills, creates new competitive advantage as it highlights our numerous strengths, including our global brand, office network, Canada database And Advanced AI Driven Technologies. Also, our very successful investments in innovation and technology, Which continue position us to meaningfully improve both the digital and recruiter experience For our clients and candidates and the internal productivity of our staff, we remain committed to our time tested corporate purpose To connect people to meaningful and exciting work and provide clients with the talent and subject matter expertise they need to Constantly compete and grow. I could not be more proud of all our global teams, including Dowling Solutions, Protiviti And corporate services professionals who put so much energy and dedication into our results this year. Their efforts made possible a record number of awards and accolades in 2022.

Speaker 1

4th quarter recognition Included being named 1 of the best workplaces for parents and honored by Forbes as one of the world's top female friendly companies. We're particularly proud of the recognition we continue to receive for our commitment to diversity, equity and inclusion. Now Mike and I'd be happy to answer your questions. Please ask just one question and a single follow-up as needed. If there's time, We'll come back to you for additional questions.

Operator

Your first question comes from the line of Mark Macon with Baird. Please go ahead.

Speaker 3

Good afternoon, Keith and Mike. Wondering if you can talk a little bit about Protiviti. You're basically guiding to a re Acceleration with regards to the revenue growth. You obviously mentioned that regulatory risk and compliance As well as technology continues to be a source of strength. So I'm wondering if you can give a little bit of detail, a little bit of what are you seeing from a visibility To what extent is it being driven by any sort of reacceleration in terms of public sector or how you're assuming about that?

Speaker 3

And to what extent is R2 Integrated contributing to the reacceleration? It seems like R2 is fairly small, about 40 employees, but wondering if that's having an outsized effect or how we should just think about the reacceleration in Protiviti?

Speaker 1

So first of all, the impact of the wind down of financial services project and public sector Impact their growth rate by about 11 points. So you take the 4% growth that was reported that becomes 15 On a core basis, that $15,000,000 is due to as you spoke about the Regulatory Risk and Compliance, where they've got some regulatory, consent order remediation projects that are quite good. On the technology side, you've got managed technology solutions, you've got data analytics, you've got security, all of those are good. The R2 integration, it's small. It doesn't move the needle overall, So we're very happy to have those capabilities around digital transformation customer experience, primarily based on the Adobe platform, which ironically we're going to use internally to replatform our own websites in 2023.

Speaker 1

So If you look at the guide for the coming quarter, midpoints, high single digits, The drag from the big project wind down in public sector becomes 5% or 6%. So you're still in that mid teens, double digit growth rate for Q1. Protiviti's pipeline is very strong. It's very diversified. They feel great about where they are.

Speaker 1

We feel great about Protiviti overall. From a profitability standpoint, as is always the case, quarter 1 seasonally is their lowest. They have all their raises that are effective Jan 1. They front load their staff additions to some degree. And in their internal audit and SOX business, it always seasonally slows, while their clients So external audit, focused on filing their SEC documents, which to some degree crowds out SOX and internal audit.

Speaker 1

So Protiviti, we're very bullish about the profitability you see is typical seasonal impacts As I just described.

Speaker 3

That's perfect. And then can you give us a little bit of help on the contract staffing just in terms of thinking about You gave the overall guide, but just how we should think about it in terms of finance and accounting versus admin And to what extent what are we thinking with regards to just the temp Contract gross margin just from a sequential perspective.

Speaker 1

So we did give the overall guide, which is hopefully the most conservative, we've been in quite some time. From a practice group standpoint, we're seeing strength in finance and accounting, particularly at the senior level and above. Within that, our full time engagement professionals remains incredibly strong, has held up incredibly well. Administrative customer support has been impacted by public sector fall off. It's been impacted by less Open enrollments.

Speaker 1

It's also impacted to the extent clients get more cost conscious, Stretching their administrative staff seems to be one of the first places they go. So ACS Would have a lower would have a bigger negative impact in Q1 than F and A. Tech Looks more like F and A, again, because our tech clients are largely SMB as is the case for F and A. Our tech Nature of services skews largely to infrastructure and operations rather than software and applications And they tend to be a little more impacted, than is the case with software and applications.

Speaker 3

And then the sequential gross margin?

Speaker 1

Sequential gross margin, the 4th quarter, We got a lift as we trued up estimates to actual for workers' comp and for state and federal employment. We got some credits. Those credits don't repeat. And so frankly, most of the sequential difference Q4 to Q1 Is the absence of those true up credits?

Speaker 3

Got it. Thank you.

Speaker 1

Pay bill spreads continue solid. Conversions were a little lighter in Q4 consistent with perm and that same kind of level It's what's embedded in the Q1 guide.

Speaker 3

Perfect. Thanks very much, Keith.

Operator

Your next question comes from the line of Andrew Steinerman with JPMorgan. Please go ahead.

Speaker 4

Hi, Keith. I know you guide for Talent Solutions, which is your contract business and your perm business together. When thinking about the midpoint for the Q1 margins for Talent Solutions of 9.5, Just give us a sense of how that might break down between perm and temp. I know you just gave us a little sense Why the contract gross margin will be down. It just still feels like a kind of a sequential Conservatism, when you're trying to model, when I'm trying to model the contract operating margin in the Q1 even Past the gross margin comment that you just made.

Speaker 1

Well, contract versus perm, We don't split out our guidance. I think it would be safe to assume based on the Q4 trends, the early Post quarter trends that our, perm assumption is lower than our contract assumption for the Q1. From a contract operating margin standpoint, Since our stance toward headcount adjusting has always been never to anticipate, but Pretty much to adjust coincident with what we see at the top line, there's always going to be a 1 or 2 quarter lag Between the actions we take on our costs, particularly headcount and how they show up in the P and L. And so you'll see a little bit of negative leverage in contract operating margins in Q1 for that reason, which Adjust AutoCorrects shows up, if you will, in Qs 2 and 3.

Speaker 4

And then lastly, when you say you're optimistic about 2023 and you use that where we enter 2023 optimistically. Do you mean like Robert Half is ready for whatever scenario the economy brings? Or are you saying you're optimistic That the economy will hold up.

Speaker 1

It's more of the former. We've been through many downturns of Different intensities and durations, we've emerged from every single one of them to make new highs. We're the most nimble we've ever been with our cost structure. We manage our headcounts on an individual basis relative to how they stand, relative to a standard given their tenure. And so we just feel really good about Where we are with our cost structure, where we are with the capability to take advantage of What business is there?

Speaker 1

We have some businesses growing quite nicely, quite double digit. We talked about Protiviti before, But in Talent Solutions, management resources higher level F and A still growing nicely double digit, Full time engagement professionals growing at really high double digit levels. And so we've been Particularly pleased with the way that has held up and we'll add the staff there. So our optimism is Whatever hand we're dealt, we'll deal with it. And we believe we'll emerge on the other side, Whatever the other side is, higher than ever.

Speaker 4

Excellent. Well said. Thank you so much, Keith.

Operator

Your next question comes from the line of Jeff Silber with BMO Capital Markets. Please go ahead, sir. Ms. Balsky, your line is open. Please go ahead.

Speaker 5

Hi, thank you. I You talked about being nimble with your cost structure and you gave a little bit of color around headcount. I would love to hear how you're thinking about the investments you're making in your business And you've been making your business and managing those costs. And then also with regards to headcount, I think in the past, you typically have adjusted SG and A To be kind of in line with sales, although with a lag, is that how you're thinking about things currently in this environment? Thanks.

Speaker 1

We're not thinking any differently than we traditionally have thought. As to headcounts, We adjust to top line as we just talked about. There's a lag of a quarter or 2, but Trading that against anticipating downturns that may not occur, we'll take that lag of a quarter or 2. As it relates to technology AI innovation, The thought is our spending for 2023 will be flattish with what we spent in 2022. We're very pleased with the returns we've gotten, particularly in AI.

Speaker 1

They've transformed how we identify and select candidates. We're turning our attention to using AI to identify the warmest leads for our field Professionals on the sales side, it's early days, but we're optimistic. I talked earlier about we've got a new website coming. We're re platforming that. We're very focused on improving the digital experience of our clients and candidates.

Speaker 1

That new website will come some 2nd half of the year, probably the latter part of that. So we're continuing our innovation technology spending Pretty much at a level flat with 2022, which we think is strategic and we think is appropriate. But other than that, our cost structure is the most nimble it's ever been. Our highest cost by leaps and bounds is our Branch payroll cost and as I spoke to earlier, we have the tools To manage that individually, the best we've had in our history.

Speaker 5

Thank you. And one quick question on the January trends. I think in the July quarter, you had noted That because of the July 4 holiday, there can sometimes be some noise In those 3 week trends, I'm curious just given that January you're coming off the holidays, if there's any seasonality or noise that may be in those numbers? Thanks.

Speaker 1

Well, holiday impacts are always hard to predict. Generally speaking, I'd say for The Christmas New Year holiday, we had more clients take time off. We had more internal staff take time off, which had some impact. The view was they came back a little later than normal, but that's anecdotal. It's hard to get a super precise read on holiday impacts.

Speaker 1

We've always talked about in perm placement, which was the weakest in January as we reported. It's also The least predictive, if you take the early part of a quarter for perm relative to the full quarter, The early part is the least predictive of the full. And so to some extent, we always discount The post quarter, early following quarter results of perm. That said, would I rather be up 20% than down 20 Sure, I would. But by the same token, we don't get overly excited about post quarter perm.

Speaker 5

Thank you. Appreciate it.

Operator

We'll take our next question from the line of Jeff Silber with BMO Capital Markets. Please go ahead, Jeff.

Speaker 6

Hi. I'm going to try again. Can you hear me now?

Speaker 1

We can.

Speaker 6

I wanted to focus on contrast Talent Solutions bill rates, they were very strong in the quarter. Do you expect them to stay at this level? I'm just curious what's incorporated into your outlook for the Q1 and what should we

Speaker 1

We would expect them to subside somewhat. And so while that might have a top line impact, as we've talked before, they'll have not much gross margin impact Because with the higher pay rates, we pretty much pass them through intact and have an expanded gross margins. So if that unwinds to some degree, which I think would be reasonable given Economic expectations that rather than be at 7%, 8%, 9%, it would return to something more normal, call it, 3%, 4%, 5%. It's going to more be a top line phenomenon than a margin phenomenon.

Speaker 6

Okay. That's helpful. And then on conversion fees, you gave us a little bit of color what we should incorporate in terms of 1Q. Can you just remind us what the historical range of conversion fees have been for your company in up cycles and down cycles and any reason to think things will be different this time?

Speaker 1

Well, depending on what timeframe you use, I can remember saying many times The typical range is 3% to 5% of revenue, but that 5% is long ago. If you look at the past 10 years and I'm not looking at anything specifically, It tops out probably more in the low fours than getting to 5. And so there's downside 100 basis points, versus where we are. It tracks to some degree with permanent placement, which as a percent of the total also gets smaller, but again very normal and comes back Strong. In fact, if anything, perm and conversions come back stronger when things improve.

Speaker 1

That is the case on the contract side.

Speaker 6

All right. That's helpful. Thanks so much.

Operator

And your next question comes from the line of Manav Patnaik with Barclays, please go ahead.

Speaker 7

Hi, this is Ronen Kennedy on for Manav. Thank you for taking my question. You shed some light on this to a certain extent with regards to the comments on the labor markets remaining tight, demand for talent high, clients continuing to hire slower pace. Just wondering with all the news and the data we see on the labor markets, I think even recently there were headlines on the contributions From SMB and 4 out of 5 open roles are for SMB, although December had the highest levels of termination attempt Since early 2021, can you just kind of reconcile what you saw throughout the quarter in December and the 1st 2 weeks, in your lead comments and results With the broader headlines and narratives within the news media on the labor market?

Speaker 1

Well, first of all, I think this is the most anticipated downturn ever. And the cumulative impact of all that negative news clearly has an impact on confidence. And I believe the same story you're referencing toward the end also talked about the NFIB Small Businesses. Their optimism index was down 12 straight months, lower than their 48 year average. And so while the hard data seems to be hanging in there pretty well, the softer data, which is about expectations, be it NFIB, be it Conference Board's Leading Indicators, be it the NABE, Which also had some negative expectation data.

Speaker 1

I think all of those would point to Some continued softness, but there's no question that there's tension between The very resilient labor market data, which clearly is indicative of supply And the forward looking expectations data of the groups I've talked about, which we see as more consistent with our clients. Having said that, orders have not dried up. We want to make that clear. It's just taking longer to get them closed. Our clients are less urgent.

Speaker 1

They're taking more steps. They want to see more candidates. They want to involve more people in the interview It simply lengthens the sales cycle. We still have orders. Orders have not dried up.

Speaker 7

Very helpful. Thank you. And maybe just to shift gears to margins and the dynamics of margin drivers. Could you talk about the of mix and conversions versus I think what most people less familiar with Robert Half would think is, it Place an emphasis on wage rate and inflation and bill pay spreads.

Speaker 1

Well, as we talked earlier from a Bill rate increase, pay bill spread increase, the point is for the most part at these elevated levels They've been pass throughs. So we've been 7%, 8%, 9% higher wage rates, bill rates recently, which have had very little margin impact. Conversions on the other hand have almost a dollar for dollar percent per percent impact. And so conversions So far this cycle, at a high, we're 4%, 4.1%. I think this quarter we're back down to 3.7%.

Speaker 1

And so clearly they have a margin impact, But we talked earlier on the call about the traditional range. And while they do show volatility On the downside, as I mentioned, they show volatility on the upside as well. And you'll see if you study Prior up cycles, perm and conversions recover the most quickly as clients ramp up their staff, Particularly if they're coming from tight labor markets, they want to lock up their good staff early in an up cycle, Which benefits perm, which benefits conversions.

Speaker 7

Got it. Thank you. Appreciate it.

Operator

Your next Question comes from the line of Stephanie Moore with Jefferies. Please go ahead.

Speaker 8

Hi, good afternoon. Thanks for the question. I wanted to know if you have seen any maybe signs of wage inflation being a little bit more So any improvement there?

Speaker 1

Well, we would say we're definitely seeing clients Pushing back more than they were, in part because they think they can, which is understandable. As I talked earlier as well, we would expect some dialing back of The wage rate pressures we're seeing as well as the bill rates that go along with that. So as things Soften a bit, we would expect pay rates and bill rates to dial back a bit. But as I talked about, We don't think that have much of a margin impact for reasons that I talked.

Speaker 8

Right. No, absolutely. And then Discontinuing, as we think about as you look at across talent solutions for the quarter, finance and Accounting, administrative and customer support and tech, were there any of those that surprised you in terms of the performance?

Speaker 1

Well, the biggest positive surprises where we had strong double digit growth in management resources And we had really strong double digit growth in full time engagement professionals. And so That was good. On the negative side, I'd say ACS was a little more impacted. I think clients As they get more cost conscious, tend to go first to their administrative staff in dealing with that And we saw that in our ACS numbers.

Speaker 8

Great. Thank you so

Speaker 1

Tech is interesting. On one hand, you've got Big Tech that over hired That with great fanfares announcing all their layoffs and while we're not Directly impacted much by Big Tech, I'd say there's a psychological and A sentiment impact to Alltech and that there's a perception that there are a lot of tech people on the market, That tech market has loosened a lot. The reality is a lot of those layoffs aren't even tech people. There are recruiters, HR, back office people at tech companies. Further, those that are getting laid off typically Are finding new positions fairly quickly.

Speaker 1

And so we would say that the Tech market in fact is stronger than the perception that's being led by Big Tech, Which has very specific, in many cases, company specific circumstances.

Speaker 8

Absolutely. And then sorry, last one for me. And maybe if it's more of you can provide a A little bit more of a history lesson just from prior down cycle. Do you feel like SMBs were in prior cycles Slower to kind of respond or slower to see the impact in a weaker economic environment or how would you think that kind of played out throughout a cycle and Any reason why this cycle might be different from those in the past on SMBs? Thanks.

Speaker 1

History would say SMBs are More nimble, more cost focused and would respond more quickly, not more slowly To macro uncertainty, by the same token, they would recover more quickly Than larger enterprise organizations, that's been the consistent experience we've seen at least across the last three cycles. And we have no reason to believe it wouldn't be the case again.

Speaker 8

Got it. Thanks so much.

Operator

Your next question comes from the line of George Tong with Goldman Sachs. Please go ahead.

Speaker 3

Hi, thanks. Good afternoon. Your goal has been to replace COVID related public sector Protiviti spend with Other forms of public sector spend. How do you expect federal budget constraints to potentially impact public sector spending on Protiviti? And what's your Embedded assumption around public sector spend in your Q1 guidance for Protiviti?

Speaker 1

Well, so first of all, just to kind of step back for public sector for a moment, Going into 2022, there was all this concern that there was going

Speaker 2

to be this cliff event

Speaker 1

Due to the absence of unemployment claims processing that would have to be replaced. As 2022 was ultimately reported, we were down 3% adjusted for currency 21 for 2022. So from where I come from, we were essentially flat in 2022 versus 2021. The Fear Cliff event didn't materialize and we were successful at replacing that work. As we move forward into 2023, we're optimistic that on an enterprise basis, you can't just look at Protiviti, you can't just look at Talend Solutions, you have to put the 2 together that on an enterprise basis that we're on solid footing, we've got good Talent Solutions, we don't plan to make a lot of specific disclosures about public sector going forward Because quite frankly, we have many sectors, many practice groups, many industry groups that are way larger than public sector.

Speaker 1

And given that this fear cliff event is behind us, we didn't feel the need to do so, but we're very pleased And how we manage through and replaced all that unemployment claims processing work were effectively flat and we'll build from there.

Speaker 3

Got it. You mentioned that lower 1Q margins reflect the seasonal impact from compensation And headcount, your guide for 1Q Protiviti SG and A as a percentage of revenue of 14% to 16% looks like Comes above the prior year's 1Q SG and A as a percentage of revenue of 13%. Can you unpack that a little bit? What's driving that since it seems like it's a little bit more than seasonality?

Speaker 1

Well, if you'll look at the progression over 2022 Of Protiviti's SG and A percentage, you will see that it grew quarter by quarter by quarter to get back to more normal levels Because 2021, early 2022, they didn't have as much training, they didn't have as much practice development, they didn't have as much marketing. So those have returned to a more normal level. So from a Q1 only perspective, you're comparing Q1 2023 with normal levels of spending to Q1 2022 that hadn't yet built back to normal levels of spending. But the featured fight, the main event for understanding Protiviti's Q1 segment margins, operating margins is What happens at the gross margin line and that's where they're impacted by all the raises that come all at once on Jan 1 By the front ending of some of their hires and from the seasonal softness in their internal audit savings, actually, That happens every year that they recover from nicely. Protiviti had 14% operating margins in Q4.

Speaker 1

We were very, very pleased with Those step down in Q1, which is very consistent with how they've stepped down in prior years and that step down is mostly about Gross margin, not necessarily about SG and A.

Speaker 6

Got it. Very helpful. Thank you.

Operator

Your next question comes from the line of Kevin McVeigh with Credit Suisse. Please go ahead. Great.

Speaker 9

Thanks so much. Just to unpack the Q1 guidance a little bit. Again, I know there's some seasonality there, but It looks like the range is similar to Q4. And if you take the midpoint the revenue, it looks like the midpoint of the EPS is about $0.21 less. Is that the typical seasonality or is there anything else in there that you'd kind of call out one way or another, maybe utilization being a little bit lower?

Speaker 9

I know there's always the typical seasonal step down, but is there anything else because again the revenue range looks pretty close

Speaker 1

I'd say, you've got typical Protiviti seasonality and maybe it's a little more this Year than last because the raises were a little higher this year than last. That'd be 0.1. 0.2, Because our perm assumption is more conservative than contract, you've got a smaller perm mix, which has higher margins. Point 3, there's some negative SG and A leverage because of this 1 to 2 quarter lag that I talked about earlier as we adjust our headcounts The current levels of revenue. You put on top of that, the tax rate is elevated.

Speaker 1

It was elevated in Q4. It will be elevated again in Q1 in part because the stock price is down. But if you compare Q1 to Q1 a year ago, the tax rate is up pretty significantly. So it's essentially about Protiviti seasonality, Less permix because of conservative guidance, some negative SG and A leverage because there's a 1 or 2 quarter lag Between top line and how we adjust heads, but otherwise pretty much as expected.

Speaker 9

Got it. And then Keith, you've been around a couple of cycles, I think, as a lot of us have. And no 2 are the same, but if you were to parallel any I mean, it's just so tricky with COVID dialed in, in the stimulus. As you think about the outlook like in your preparing and again no 2 are the same, is there any Time and history you draw similar parallels to just based on what you're seeing today?

Speaker 1

Well, they're also different and there's never been As strong an underlying labor market right through the softness like there's been this time. So one would like to think that, that would provide some buffer, make this one milder. As I said earlier, this is the most anticipated downturn ever. And the debate continues about soft landing, hard landing, Recession, no recession. So I can't really say it feels like the financial crisis or it feels like the dotcom.

Speaker 1

It's just too different. Clearly, COVID-nineteen, it's way different than that. But what is the same, and I'll say it again, In every one of those cycles, no matter what their duration, no matter what their intensity, we came back and And we're very confident we will come back and make new highs. We have our most experienced people absolutely engaged and in place To help us participate in that upside when it comes, our cost structure is as nimble as it's ever been. So we feel good about what our cost structure looks like, what our margins will look like until that happens.

Speaker 1

But the point is when it gets better, we will be that and we've proven that many times.

Speaker 9

And then did you and if you can't answer, you can't answer. Did you say what the impact of the R2 acquisition was in terms of the guidance on the Q1 Mr. Revenues contribution?

Speaker 3

Yes,

Speaker 1

very small. I think they had a total of 70, 75 people. It's very small, But important, but important and gives us a capability we didn't have and that's an important capability. So We love they're part of the family.

Speaker 9

Got it. Thank you.

Operator

Your next question comes from the line of Kartik Meta with Northcoast Research. Please go ahead.

Speaker 10

Mike and Keith, I wanted to ask you a little bit more Permanent placement. Mike, you had indicated that the first part of a quarter, especially 1st part of a month is difficult to gauge. And I'm wondering if you look at your clients and the number of job openings they have compared to maybe what they had before, That's a way to kind of look at it and maybe that's why the conservatism on your part on the conversion and just On the permanent placement, trying to figure out maybe what the reality is compared to maybe what the 1st 3 weeks of January might have shown.

Speaker 1

Well, you can't really look to the number of openings either Because it takes so much longer to close an opening today than it did a year ago. And so if your client Very urgently is filling a need. The time from order to fill is going to be pretty close. If in fact they don't sense that urgency, They've got all kinds of reasons how they can slow play or slow walk you, however you want to call it. It just takes longer.

Speaker 1

And so there's no magic metric that we can say, well, we understand the revenue say this, but in fact the order say this. The order flow isn't bad, but it's the time it takes to close an order that's the issue, not the presence or absence of an order.

Speaker 10

Fair enough. And then just one last one, just on Protiviti, in terms of competition, Are you seeing anything change or would you say the environment is about the same? Yes.

Speaker 1

I'd say the environment is about the same. I'd say that in that environment, we're getting a larger and larger share because we have something their competitors don't And that's under one roof. We have Talent Solutions and Protiviti. They have access to the operational resources at scale That none of their competitors have, we're winning more and more every day. And further, as they compete With their traditional big four competitors, I believe even their clients would tell you that Protiviti's resources are more specialized As to industry, they're more specialized as to their capabilities because Protiviti doesn't have Near as broad a solution offering as those other firms do, where many times they're leveraging the staff Across those solution offerings in a way to keep their chargeability up that Protiviti doesn't have to.

Speaker 1

So A, Protiviti is more specialized. B, Protiviti has access to talent solutions, both of which give Protiviti competitive advantage and they're increasing market share and they're doing great.

Speaker 10

Well, thank you both. I really appreciate it.

Operator

And your next question comes from the line of Mark Marcon with Baird. Please go ahead.

Speaker 3

I recognize we're out of time, but wanted to ask this in a public forum. Just are you seeing any sort of differences From a regional perspective, just in terms of the trends, whether it's Northeast California versus, say, Texas, Florida for industry differences that are illuminating in any way, shape or form. And then if you want to Discuss briefly just the potential impact of AI in terms of increasing the efficiency of your operations from a longer term perspective?

Speaker 1

I guess the only regional comment I would make is that the coasts Are a little softer than the middle of the country. I would also point out that Germany and the UK Had very good quarters. They have much better outlooks for this quarter than we would have expected. So our international results are frankly a little better than our United States results and Germany particularly and UK as well I impact that. As to AI, we've talked before, it's totally transformed how we identify talent.

Speaker 1

We have 30,000,000 people in our proprietary candidate database. In real time, we can get a short list The most matching candidates of candidates that have a proven track record with us Candidates that are active in the job market, we can real time get access through that 30,000,000 Number of people in that Canada database, which is a huge competitive advantage for us, It's making our people more productive. It's allowing our people to earn more money. It's internally we call it Art, AI recommended talent, but, Art is now a household word. Words and Robert have a year ago that would not be the case.

Speaker 1

We would like to do the same thing on the client side, on the lead side as I talked about earlier. So we would like to have an ARC As well as an ART, the C being AI recommended clients. And so that's where we're focused at the moment. I'm cautiously optimistic We'll have an impact there, but we couldn't be more pleased with what AI has done for our organization.

Speaker 6

Perfect. Thank you.

Speaker 1

Okay. So I think, we're a little bit over. So that will be our last question. Thanks everybody for joining.

Operator

This concludes today's teleconference. If you've missed any part of the call, it will be archived in audio format in the Investor Center of Robert Half's website at roberthalf.com. You can also log in to the conference call replay. Details are contained in the company's press release issued earlier today. You may now disconnect.

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Robert Half Q4 2022
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