U.S. Markets open in 3 hrs 47 mins

Edited Transcript of RHI earnings conference call or presentation 23-Oct-18 9:00pm GMT

Q3 2018 Robert Half International Inc Earnings Call

MENLO PARK Oct 25, 2018 (Thomson StreetEvents) -- Edited Transcript of Robert Half International Inc earnings conference call or presentation Tuesday, October 23, 2018 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Max Messmer

Robert Half International Inc. - Chairman of the Board & CEO

* M. Keith Waddell

Robert Half International Inc. - Vice Chairman of the Board, President & CFO

================================================================================

Conference Call Participants

================================================================================

* Andrew Steinerman

JP Morgan Chase & Co, Research Division - MD

* Gary Bisbee

BofA Merrill Lynch, Research Division - Analyst

* Hamzah Mazari

Macquarie Research - Senior Analyst

* Jeff Silber

BMO Capital Markets Equity Research - MD & Senior Equity Analyst

* Joseph Thompson

SunTrust

* Kevin McVeigh

Crédit Suisse AG, Research Division - MD

* Mark Marcon

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Ryan C. Leonard

Barclays Bank PLC, Research Division - Research Analyst

* Sean Kennedy

Nomura Instinet - Equity Research Associate

* Tim McHugh

William Blair & Company L.L.C., Research Division - Partner & Global Services Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Hello, and welcome to the Robert Half Third Quarter 2018 Conference Call. Our hosts for today's call are Mr. Max Messmer, Chairman and CEO of Robert Half; and Mr. Keith Waddell, Vice Chairman, President and Chief Financial Officer. Mr. Messmer, you may begin.

--------------------------------------------------------------------------------

Max Messmer, Robert Half International Inc. - Chairman of the Board & CEO [2]

--------------------------------------------------------------------------------

Thank you, and hello, everyone. Thank you for joining us.

Before we begin, I would like to remind everyone that comments made on today's call contain predictions, estimates and other forward-looking statements. These statements represent our current judgment of what the future holds and include words such as forecast, estimate, project, expect, believe, guidance and similar expressions. We believe these remarks to be reasonable. However, 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 today's press release and in our SEC filings, including our 10-Ks, 10-Qs and today's 8-K. We assume no obligation to update the statements made on today's call.

For your information, our prepared remarks also are available on our website at roberthalf.com. From the home page, click on Investor Center at the bottom left of the page. You will find the Quarterly Conference Calls link in the Investor Center.

Now let's review Robert Half's financial results for the third quarter of 2018. Company-wide revenues were $1.466 billion. This is up 11% on both a reported and same-day constant currency basis compared to the third quarter of last year. Net income per share in the quarter was $0.95, up 39% compared to the third quarter of 2017. Cash flow from operations was $185 million. And capital expenditures were $10 million in the third quarter. We paid a $0.28 dividend to stockholders in September at a total cost of $34 million. We also repurchased 1.1 million Robert Half shares in the third quarter at a cost of $79 million. We have 9.1 million shares available for repurchase under our board-approved stock repurchase plan.

All of our staffing divisions and Protiviti reported solid year-over-year revenue gains in the third quarter. Our permanent placement and Protiviti operations performed particularly well during the quarter.

Skills shortages persist globally, driving heightened demand for skilled talent, especially in the professional-level segments in which Robert Half specializes. Also buoying our business is the sustained optimism among small and midsize companies, particularly in the United States, which is leading to increased hiring activity by this key client base.

Return on invested capital for the company was 41% during the third quarter.

I'll turn the call over to Keith now for a closer look at our third quarter results.

--------------------------------------------------------------------------------

M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [3]

--------------------------------------------------------------------------------

Thank you. As Max just noted, global revenues in the third quarter were $1.466 billion. This is up 11% from a year ago on both a reported and same-day constant currency basis. Accompanying our earnings release is the supplemental schedule showing year-over-year revenue growth rates on both a reported and as-adjusted basis. These figures further are broken out by U.S. and non-U. S. operations. The term as-adjusted reflects the removal of the impact of billing days, currency fluctuations and certain intercompany adjustments in our international operations. This is a non-GAAP financial measure designed to provide insight into certain revenue trends in our operations.

Third quarter staffing revenues were up 10% on an as-adjusted basis, comprised of U.S. staffing revenues of $920 million, up 7% on a same-day basis, and non-U. S. staffing revenues of $293 million, up 18% on an as-adjusted basis. We have 324 staffing locations worldwide, including 85 locations in 17 countries outside the United States.

Third quarter had 63.3 billing days compared to 63.1 days in the third quarter of 2017. The fourth quarter has 61.7 billing days compared to 61.3 days in the fourth quarter 1 year ago.

Currency exchange rate movements versus the prior year had the effect of decreasing reported year-over-year staffing revenues by $9 million in the third quarter, which reduced the year-over-year reported staffing revenue growth rate by 0.8%.

For Protiviti, third quarter global revenues were $253 million, with $200 million coming from business within the United States and $53 million from operations outside the United States. Protiviti revenues were up 18% year-over-year on an as-adjusted basis.

Third quarter U.S. Protiviti revenues were up 17% from last year on a same-day basis, while non-U. S. revenues were up 20% on an as-adjusted basis. Exchange rates had the effect of decreasing year-over-year Protiviti revenues by $1 million in the third quarter and decreasing the year-over-year reported growth by 0.6%. Protiviti and its independently owned Member Firms serve clients through a network of 81 locations in 25 countries.

Now let's turn to gross margin. Gross margin in our temporary and consulting staffing operations during the third quarter was 37.8% of applicable revenues compared to 37.2% of applicable revenues in the same period one year ago. Expanding bill/pay spreads and higher temp-to-hire conversion fees offset larger fringe benefit costs.

Third quarter revenues for our permanent placement operations were 10.7% of consolidated staffing revenues compared to 10.0% of consolidated revenues in the third quarter 1 year ago. When combined with temporary and consulting gross margin, overall staffing gross margin increased 110 basis points versus 1 year ago to 44.5%.

For Protiviti, gross margin in the third quarter was $71 million or 28.1% of Protiviti revenues. One year ago, gross margin for Protiviti was $62 million or 29.6% of Protiviti revenues.

Third quarter staffing SG&A costs were 34.1% of staffing revenues versus 33.8% in last year's comparable period. The higher mix of permanent placement revenues this quarter versus a year ago added 40 basis points to this quarter's SG&A ratio.

SG&A costs for Protiviti were 18% of Protiviti revenues in the third quarter compared 17.9% of Protiviti revenues in the one year ago period.

Third quarter operating income from our staffing divisions was $126 million, up 17% from the same period 1 year ago. Operating margin was 10.4%.

Our temporary and consulting staffing divisions reported $103 million in operating income, an increase of 17% from the prior year's third quarter. This resulted in an operating margin of 9.5%.

Operating income for our permanent placement division was $23 million in the third quarter. This was up 15% from the prior year and produced an operating margin of 17.7%.

Operating profit for Protiviti was $25 million in the third quarter, an increase of 4% from the same period in the prior year. This produced an operating margin of 10.1%.

At the end of the third quarter, accounts receivable were $834 million, and implied days sales outstanding, DSO, was 51.1 days.

Before we move to fourth quarter guidance, let's review some of the monthly revenue trends we saw in the third quarter of 2018 and so far in October, all adjusted for currency and billing days.

Our temporary and consulting staffing divisions exited the third quarter with September revenues up 9.0% versus the prior year compared to 8.9% for the full quarter. Revenues for the first two weeks of October were also up 9% compared to that same period in 2017.

For our permanent placement division, September revenues were up 19.1% versus last year compared to a 17.4% increase for the full quarter. For the first three weeks in October, permanent placement revenues were up 20% compared to the same period last year. This information provides a look into some of the trends we saw during the third quarter and so far in October. But as you know, they represent brief periods of time, and we caution against reading too much into them.

With that in mind, we offer the following fourth-quarter guidance. Revenues, $1,430,000,000 to $1,495,000,000; income per share, $0.88 to $0.94. The midpoint of our fourth-quarter guidance implies year-over-year revenue growth of 9% on a same-day, as-adjusted basis, which includes Protiviti, and EPS growth of 40%. We limit our guidance to one quarter. 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 the call back over to Max.

--------------------------------------------------------------------------------

Max Messmer, Robert Half International Inc. - Chairman of the Board & CEO [4]

--------------------------------------------------------------------------------

Thank you, Keith. It was another strong quarter. Year-over-year growth rates were solid across the board for our staffing divisions and for Protiviti. We were particularly pleased with the performance of Robert Half Finance & Accounting and Protiviti in the third quarter.

In the United States, hiring by small and midsize businesses, our primary client target, is at historic levels according to recent research. This year, the NFIB reported 45-year highs in measures for job openings, hiring plans and actual job creation. In the most recent Vistage CEO Confidence Index, 63% of CEOs at small and midsize businesses reported plans to expand their workforce in the year ahead.

Other indicators are equally positive. The number of job openings in the United States hit a record 7.14 million in August according to the most recent JOLTS report from the Department of Labor. The number of quits was also near an all-time high in the same survey. This is often seen as a sign that employees feel confident in leaving an existing job for a better one. U.S. unemployment remains very low at 3.7%, and in professional occupations, it is lower than that. Employers need help identifying and hiring skilled talent in this tighter market, and with our rich candidate database, proprietary matching technology and local market knowledge, we think we are well positioned to partner with them on their efforts.

Demand is also strong for the consulting and internal audit solutions provided by Protiviti. Protiviti has expanded its service offerings and continues to nurture and grow a loyal client base. We are also pleased with the collaboration between our staffing divisions and Protiviti. Together, these teams provide us with a key differentiator, the ability to offer businesses highly regarded consulting solutions and technologies combined with access to a vast network of experienced interim talent to implement these solutions.

Now Keith and I would be happy to respond to your questions. We ask that you please limit yourself to one question and a single follow-up question as needed. As time permits, we'll try to return to you if you have additional questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from Mark Marcon from R.W. Baird.

--------------------------------------------------------------------------------

Mark Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

--------------------------------------------------------------------------------

Good afternoon and congratulations on the strong results. I was wondering if you could talk a little bit about international. You maintained a very strong growth there despite much tougher comps. Just wondering if you could talk a little bit about what you're seeing, if you're seeing any signs of weakness in any markets on the international side.

--------------------------------------------------------------------------------

M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [3]

--------------------------------------------------------------------------------

Mark, I'd say that the strength we've seen for several quarters in staffing internationally has been Germany, Belgium, to some extent, the U.K. This quarter, Canada was particularly good. And other than comps getting tougher, those markets are still quite bullish about their prospects. Some of the other countries are much smaller as a percent of the total, but generally speaking, our country managers feel pretty good as we move into the fourth quarter. In Protiviti, internationally, very strong in Germany, very strong in Australia, and the U.K. had another solid quarter. So frankly, the sentiment our internal people have about tone of business as we go into the fourth quarter in those countries where our strength is feels pretty good.

--------------------------------------------------------------------------------

Mark Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4]

--------------------------------------------------------------------------------

It's great. And then can you talk a little bit about RH Technology? I mean, really nice acceleration there. I'm wondering how much of that is due to what is perceived to be the market relative to your go-to-market fine-tuning in terms of collaboration with Protiviti as well as some of the initiatives that you have from a technology perspective.

--------------------------------------------------------------------------------

M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [5]

--------------------------------------------------------------------------------

Well, the short answer is it's a combination. We did have a particularly good quarter in technology. While the year-on-year comparisons were relatively easy, the sequential comparisons were not. And sequentially, we grew almost 4% in technology for the quarter, which we're very proud of. And so first of all, with higher small business confidence comes higher tech budgets. So a rising tide raises all boats from the standpoint of the small business client base. In addition to that, you've got secular strength in cyber, cloud, digital transformation. We've talked before about how we've broadened the matrix of candidates that we focus on up and down the stack, support to development, including DevOps. As you mentioned, we are getting more and more traction where we go to market, together with Protiviti, in technology as well as in Finance & Accounting relative to Protiviti, and Management Resources in the latter case. So really solid quarter in technology. Some of it's the market. Some of it's our strategy. Some of it's the unique positioning we have between staffing and Protiviti.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Your next question comes from Gary Bisbee from Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

Gary Bisbee, BofA Merrill Lynch, Research Division - Analyst [7]

--------------------------------------------------------------------------------

You commented on the tougher comps in international. I guess, just any thoughts on how that plays out in the U.S. Obviously, you started to really accelerate fourth quarter a year ago.

--------------------------------------------------------------------------------

M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [8]

--------------------------------------------------------------------------------

Well, so as we talk about our guidance, the backdrop to that is the comps get five points tougher year-on-year and particularly so in perm placement and in Protiviti. That said, the midpoint of our guidance still has a strong 8% same-day constant-currency growth rate embedded there. The momentum we've had the last couple of quarters continues into the fourth. So we're pretty pleased with that -- with our midpoint of 8%, given how much tougher the comps get.

--------------------------------------------------------------------------------

Gary Bisbee, BofA Merrill Lynch, Research Division - Analyst [9]

--------------------------------------------------------------------------------

Yes. Yes, that sounds about right. I guess, all of the economic data we've seen look good. You cited a bunch of it, small business, et cetera. What are you hearing from clients about some of the things that have caused market sentiment or market delays over the last month or two? Are the trade issues, or higher interest rates -- is any of these stuff flowing down to the level of your customers? Or is everything you hear there continuing to be quite strong? I know the backwards-looking data looks great, but just any more updated forward commentary?

--------------------------------------------------------------------------------

M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [10]

--------------------------------------------------------------------------------

I'd say so far, the sentiment does remain quite strong, as does confidence. Trade issues and higher rates have not yet trickled into the conversations we have with clients or their buying habits. So, so far, so good. There's no question, given our results, given our data, the underlying U.S. economy is quite strong, particularly for small to middle size businesses.

--------------------------------------------------------------------------------

Max Messmer, Robert Half International Inc. - Chairman of the Board & CEO [11]

--------------------------------------------------------------------------------

Gary, I'd add. One comment we hear is that a lot of the small-to-midsize business people like to talk about Main Street versus Wall Street. They read about all the concerns of Wall Street, but all they recognize is the business is very good, and they expect it to continue that way. So, so far, all things look good to them.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

Your next question comes from Andrew Steinerman from JPMorgan.

--------------------------------------------------------------------------------

Andrew Steinerman, JP Morgan Chase & Co, Research Division - MD [13]

--------------------------------------------------------------------------------

It's Andrew. I wanted to ask you about bill/rate increases. I definitely caught your comment that the bill/pay spread was positive in the third quarter. Could you mention your bill/rate gross in the third quarter? Give a comment about wage inflation. And do you think this will pick up prospectively?

--------------------------------------------------------------------------------

M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [14]

--------------------------------------------------------------------------------

So bill rates were up 4.9% year-on-year. That's an increase from last quarter, where it was 3.7%. That's a direct reflection of some higher wage inflation that we're seeing across our lines of business, that not only are we passing through, but we're actually expanding our margins as well, which our numbers reflect. The 4.9% is getting into the range we saw during the last recovery, where we had five straight years of 5-ish percent year-on-year bill/rate increases that were slightly higher than year-on-year pay/rate increases.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

Your next question comes from Jeff Silber from BMO Capital Markets.

--------------------------------------------------------------------------------

Jeff Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [16]

--------------------------------------------------------------------------------

Thank you so much and again, let me congratulate you on a strong quarter as well. In terms of operating margins, if you drill down on 2 of the divisions, perm and Protiviti, operating margins were down a bit year-over-year. Was there additional spending going on? I'm just curious what was behind that.

--------------------------------------------------------------------------------

M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [17]

--------------------------------------------------------------------------------

Well, so both relate to investment in internal heads and resources. Perm placement, where we've had several quarters a row now of double-digit growth that we continue to invest and hedge, pretty much commensurate with the top-line growth and Protiviti. As we talked on the last call, significantly added to its headcount between the second and the third quarter. For Protiviti, that shows up in gross margins. For staffing, that shows up in SG&A. Both were expected. Both were bullish on as to prospects and, therefore, the investment in the heads.

--------------------------------------------------------------------------------

Jeff Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [18]

--------------------------------------------------------------------------------

Okay, great. And then on the tax rate, I know this is minor, but it was a little bit lower than what you had guided. If you could just give us a little bit of color why that was. And what are you incorporating in your guidance for the fourth quarter?

--------------------------------------------------------------------------------

M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [19]

--------------------------------------------------------------------------------

So tax rate, third quarter, we always reconcile our books to the tax return. And the tax return, we had some credits that had not yet been recognized for book purposes. So that reconciliation drove a reduction in the rate. For the fourth quarter, our range is 26% to 27%, and that's up a couple of points from what we just had in the third quarter, which was 24%.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

Your next question comes from Kevin McVeigh from Crédit Suisse.

--------------------------------------------------------------------------------

Kevin McVeigh, Crédit Suisse AG, Research Division - MD [21]

--------------------------------------------------------------------------------

Keith, it looks like the Q4 guide is pretty similar to Q3. Can you just help us understand? Obviously, a real nice step-up in bill rates. What's kind of the bill rate implied in that Q4 guidance? And then what would kind of cause you to be at the higher end versus the lower end? And is there any way to maybe just give a little more color on what you'd expect at the temp versus Protiviti versus perm? Any thoughts on that?

--------------------------------------------------------------------------------

M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [22]

--------------------------------------------------------------------------------

Okay. So there are several questions here. So implied bill rates, we would expect the trend we've seen, the 4.9% we just saw, we would probably see getting into the low 5s, but something in that range. What would make us be at the higher versus the lower end? It's all about revenues. If you looked at our third quarter, if you looked at how we finished the third quarter and if you look at how we began the fourth quarter, pretty much across the board, there was no slowing. That said, we built in somewhat slower growth rates in the fourth quarter on the basis that the comps got higher, got tougher later in the quarter. But to the extent we improved sequentially during the quarter, as we have in the past, maybe that won't come to pass, and there's some upside on the revenues. To the extent we would come out on the lower end, there's some concern that because clients have had a pretty good year, because many of our candidates have had a pretty good year, they're going to take more time off during the fourth quarter. And that more time off would slow down the process whereby we convert candidates to revenue. So if you ask what's the biggest risk to the revenues, we would argue it's holiday-impact. As you know, for following us quite a while, perm placement in December is always lumpy. Some companies close shop and do their hiring the beginning of the next quarter. Some try to get ahead of that. So perm December is particularly hard to predict. So with that in mind, we still feel good about our guidance. But upside/downside would be revenue-related. Protiviti, notwithstanding their comps, get a lot tougher. I think it's 9 percentage points. They still think they can grow double digits on top of that with the momentum that they have, which is good.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

Your next question comes from Manav Patnaik from Barclays.

--------------------------------------------------------------------------------

Ryan C. Leonard, Barclays Bank PLC, Research Division - Research Analyst [24]

--------------------------------------------------------------------------------

Yes, this is Ryan filling in for Manav. Just a question on the hiring. The decision to hire commensurate with growth. In the past, when you've seen robust demand, if you've tended to hire above the revenue growth rates, and, I guess, can you maybe give a little color on that decision to kind of keep in line at this point in the cycle?

--------------------------------------------------------------------------------

M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [25]

--------------------------------------------------------------------------------

It's a subjective call we make every quarter in concert with the top people we have in the field -- temp, perm and Protiviti. Our thinking is given that we've added more capacity than revenue supported a couple of years ago, we're holding to that capacity by continuing to hire in line with revenue growth. So the dry powder, if you will, that we created a couple of years ago stays intact as long as we continue to hire in line, and that's our strategy. We think we can grow the way we've just shown or projected or guided for Q4, given that strategy, but there's some art as well as science there.

--------------------------------------------------------------------------------

Ryan C. Leonard, Barclays Bank PLC, Research Division - Research Analyst [26]

--------------------------------------------------------------------------------

Understood. And, I guess, if you look across your client mix, are there any exposures to people who would be more impacted by any trade wars or anything like that?

--------------------------------------------------------------------------------

M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [27]

--------------------------------------------------------------------------------

Well, on the staffing side, the good news is we don't have any client concentrations, period. Typically, our clients on the staffing side, we have one or two temporaries out on assignment at the time, irrespective of how large the company is. Protiviti deals with larger companies. Protiviti's exposure is principally in FSI larger banks, and I'm not sure if the trade wars are projected to specifically directly impact the larger banks. So it's not the direct impacts that's the concern. It's the second-order impacts of how does that impact confidence, how does it impact sentiment, more so than how it directly impacts our client base.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Your next question comes from Tim McHugh from William Blair.

--------------------------------------------------------------------------------

Tim McHugh, William Blair & Company L.L.C., Research Division - Partner & Global Services Analyst [29]

--------------------------------------------------------------------------------

I guess, one, can you just elaborate on the comment that you are able to expand the bill/pay rates, spread even as you're having to pass through higher wages both, I suspect, to the workers and you're able to price that with clients. Is there anything else going on, on why you feel like you're able to do that? And do you think you can continue to do that if we continue to see higher wage inflation?

--------------------------------------------------------------------------------

M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [30]

--------------------------------------------------------------------------------

Is there anything else going on? I mean, clearly, the candidate is king in today's market. Our combination of our technology investments plus the experience of our recruiters together has done well for us on the recruiting side. Further, where having to help clients with alternatives to their first choice, clients tend to be very title-centric when they're looking for someone. And what we have to do often is to coach them on there are different titles that have similar skills. If you're looking for a financial analyst, if we don't have a financial analyst, maybe a budget analyst has many of the same skills, and you wouldn't ordinarily look for a budget analyst when you're looking for a financial analyst. But the point is we're having to consult with our clients to help them get similar skills even when the titles don't match. And you'd probably be surprised how title-sensitive many are. That's just one way we're helping our clients deal with the labor supply that we have. Now can we continue to expand our gross margins? Clearly, they're at absolute high levels, such that we're going to be careful not to run them up too much on an absolute basis. But from a directional standpoint, we do think we can pass through as supply continues to tighten and clients more and more accept that, that's the reality of the marketplace.

--------------------------------------------------------------------------------

Tim McHugh, William Blair & Company L.L.C., Research Division - Partner & Global Services Analyst [31]

--------------------------------------------------------------------------------

Okay. And then just the other question, the technology investment that you made internally over the last year or two here, I guess, can you give an update? I mean, how tangible is the impact? How are is the field responding to using them? Any more color on that?

--------------------------------------------------------------------------------

M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [32]

--------------------------------------------------------------------------------

Well, first of all, if you look at internal productivity, it's essentially flat. And I would argue that what your technologies help you do is offset the dilution you would have from dealing with a tight candidate market where candidates are harder to close, where candidates have multiple opportunities, and it takes longer to close candidates. We've been able to offset that by streamlining the discovery part of the candidate sourcing and recruiting process with our technology investments. So net, our productivity is flat, I would argue. But for our technology investments, our productivity would be down. The other thing, as we talked about on the call last quarter, clearly, we're making a big push into digital marketing, and we're pleased with how that's proceeding. We continue to expand the places where we apply our AI with machine learning in the marketing space, such that, ultimately, I think the larger payoff will come from extending the markets that we reach into, extending the candidates that we interact with, extending the clients that we're able to identify and interact with. So to me, it's as much about better revenue growth because of digital investments as it is about internal productivity growth.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

(Operator Instructions) Your next question comes from Tobey Sommer from SunTrust.

--------------------------------------------------------------------------------

Joseph Thompson, SunTrust [34]

--------------------------------------------------------------------------------

This is Joseph Thompson on the line for Tobey. Last quarter, you mentioned that you were focused on revenue growth maybe more so than profitability growth. To what extent would you say this still defines your approach so far in the fourth quarter of 2018? And what's your plan for 2019?

--------------------------------------------------------------------------------

M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [35]

--------------------------------------------------------------------------------

Well, I'd say not much has changed since last quarter. That said, I still think we can grow and grow very profitably. We're going to lever our fixed cost as we grow. So some margin expansion is in order. And the facts are the margins we reported for the third quarter are higher than we had guided to. So we're optimistic that we can grow, and grow profitably, but we're not going to optimize totally for higher profitability because we think the market is conducive for us to continue to grow.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

And your next question comes from Hamzah Mazari from Macquarie Capital.

--------------------------------------------------------------------------------

Hamzah Mazari, Macquarie Research - Senior Analyst [37]

--------------------------------------------------------------------------------

You talked about bill rates approaching a little over 5%. How sustainable do you view that? Is that just a function of sort of wage inflation? Or do you view that as a stronger market backdrop with clients willing to pay a number of years? Well, I'd probably say a couple of quarters ago, you had talked about clients being frugal. So just wondering if there's been a change post-tax reform? Or do you view this as more wage inflation-related?

--------------------------------------------------------------------------------

M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [38]

--------------------------------------------------------------------------------

Well, it starts with wage inflation, which is a function of supply and demand. As the labor markets tighten, it's just logical that you have to pay more for it. Clients understand that, given the economic backdrop, they're willing to recognize and pay for that. So they are all very interconnected. How sustainable is it? If you look back to 2004 to 2008, you had five straight years where our bill rates increased by roughly 5%. So we've certainly had periods of time in the past where we have multiple years, much less multiple quarters, of bill/rate increases in the 5% range.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

And your next question comes from Sean Kennedy from Nomura Instinet.

--------------------------------------------------------------------------------

Sean Kennedy, Nomura Instinet - Equity Research Associate [40]

--------------------------------------------------------------------------------

Good evening, gentleman. Nice job on the quarter. I was wondering what conditions would be necessary to accelerate billable hour growth from the current 4% range to the 6% range to achieve double-digit temp growth. And is there any chance we see it this cycle?

--------------------------------------------------------------------------------

M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [41]

--------------------------------------------------------------------------------

Well, currently, demand is quite strong, and the heavier lifting is on the candidate supply side. And so to take the hours growth up a couple of points, we would have to get even more efficient in delivering candidates to assignments. We've certainly had many periods in the past, even in low unemployment periods, where we've grown faster than we're now growing. So it's certainly not impossible. And we've also had several quarters now where we've actually accelerated our rates of growth. We hope we're being conservative with our near guidance because of the tougher comps. With a little luck, we'll do better than what we've guided. So candidate is king. And to the extent we recruit more candidates, we convert more candidates to revenue on assignments, the growth rate accelerates, and that would be the focus.

--------------------------------------------------------------------------------

Max Messmer, Robert Half International Inc. - Chairman of the Board & CEO [42]

--------------------------------------------------------------------------------

That was our last question. We'd like to thank everyone for joining us today. We appreciate your interest.

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

This concludes today's teleconference. If you missed any part of the call, it will be archived in audio format in the Investor Center of Robert Half's website at www.roberthalf.com. You can also dial the conference call replay. Dial-in details and the conference ID are contained in the company's press release issued earlier today. Thank you.