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Edited Transcript of RHI earnings conference call or presentation 20-Apr-17 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Robert Half International Inc Earnings Call

MENLO PARK Apr 26, 2017 (Thomson StreetEvents) -- Edited Transcript of Robert Half International Inc earnings conference call or presentation Thursday, April 20, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Max Messmer

Robert Half International Inc. - Chairman and CEO

* Keith Waddell

Robert Half International Inc. - Vice Chairman, President and CFO

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Conference Call Participants

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* Andrew Steinerman

JP Morgan Chase & Co, Research Division - MD

* Anj Singh

Credit Suisse AG, Research Division - Senior Analyst

* Dan Dolev

Instinet, LLC, Research Division - Research Analyst

* Gary Bisbee

RBC Capital Markets, LLC, Research Division - MD of Business Services Equity Research

* Jeff Silber

BMO Capital Markets Equity Research - MD and Senior Equity Analyst

* George Tong

Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst

* Kevin McVeigh

Deutsche Bank AG, Research Division - Head of Business and Information Services Company Research

* Kwan Kim

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Mark Marcon

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

* Ryan Leonard

Barclays PLC, Research Division - Research Analyst

* Tim McHugh

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

* Kayvon Rahbar

Macquarie - Analyst

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Presentation

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Operator [1]

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Hello, and welcome to the Robert Half First Quarter 2017 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.

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Max Messmer, Robert Half International Inc. - Chairman and CEO [2]

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Thank you, and good afternoon, everyone. We appreciate you joining us. As is our custom, I would like to remind you there are comments on the call today that 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 About Us tab, go to our Investor Center, where you will find the Quarterly Conference Calls link.

Let's review our financial results for the first quarter of 2017. Quarterly revenues were $1.287 billion, down 2% on a same-day, constant-currency basis and down 1% on a reported basis from the first quarter of 2016. Income per share was $0.62. Cash flow from operations was $124 million in the first quarter, and capital expenditures were $10 million.

We returned $31 million to our shareholders during the quarter through a $0.24 per share cash dividend. We raised the cash dividend from $0.22 per share to $0.24 per share in February. We also repurchased 1.1 million Robert Half shares for $54 million during the quarter. We have 5.2 million shares available for repurchase under our board-approved stock repurchase plan.

We were pleased with our financial results for the first quarter, particularly our international staffing operations and Protiviti. While the U.S. economic environment is largely stable and the job market is strong, the hiring cycle remains uncharacteristically long as employers take more time to make hiring decisions. Recent reports show a noticeable improvement in optimism about economic prospects, which should shorten the hiring cycle and benefit our business. Robert Half's return on invested capital was 29% during the first quarter.

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

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Keith Waddell, Robert Half International Inc. - Vice Chairman, President and CFO [3]

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Thank you, Max. As just noted, global revenues were $1.287 billion in the first quarter. This is down 1% from the first quarter of 2016 on a reported basis and down 2% on a same-day, constant-currency basis.

Revenues for our staffing businesses were down 3% in the first quarter on a same-day, constant-currency basis. U.S. staffing revenues were $858 million in the first quarter, down 6% on a same-day basis. Non-U. S. staffing revenues were $233 million, up 9% when adjusted for billing days and currency exchange rates. We have 325 staffing locations worldwide, including 83 locations in 17 countries outside the United States.

The first quarter had 63.4 billing days compared to 62.7 days in the first quarter of 2016. The second quarter has 63.3 billing days compared to 63.9 days in the second quarter of last year.

Accompanying our earnings release is a supplemental schedule showing year-over-year revenue growth rates on both a reported and same-day, constant-currency basis. This data is further broken out by U.S. and non-U. S. operations. This is a non-GAAP financial measure that offers insight into certain revenue trends in our operations.

Currency exchange rates had the effect of decreasing reported year-over-year staffing revenues by $6 million in the first quarter, which decreased year-over-year reported staffing growth rates by 0.5%.

First quarter global revenues for Protiviti were $196 million, with $165 million coming from revenues in the United States and $31 million from revenues outside the United States. Protiviti revenues were up 4% year-over-year on a same-day, constant-currency basis.

U.S. Protiviti revenues were up 4% from the prior year on a same-day basis, and non-U. S. revenues were up 7%. Exchange rates had the effect of decreasing year-over-year Protiviti revenues by $1 million in the first quarter and decreasing the year-over-year reported growth rate by 0.6%. Protiviti and its independently owned Member Firms serve clients through a network of 75 locations in 25 countries.

Gross margin. Now let's talk about gross margin in the first quarter. Gross margin in our temporary and consulting staffing operations was 37.4% of applicable revenues. This is a 30 basis-point improvement from the same period one year ago and relates primarily to higher pay/bill spreads.

Revenues for our permanent placement operations were 9.5% of a consolidated staffing revenues in the first quarter of 2017, which is flat on a percentage basis compared to last year's first quarter. Together with temporary and consulting gross margin, overall staffing gross margin improved 20 basis points versus a year ago to 43.3%.

First quarter gross margin for Protiviti was $53 million or 27.0% of Protiviti revenues. A year ago, Protiviti gross margin was $51 million or 27.4% of Protiviti revenues.

Staffing selling, general and administrative costs were 33.4% of staffing revenues in the first quarter versus 32.4% in the previous year's first quarter. First quarter SG&A costs for Protiviti were 18.4% of Protiviti revenues compared to 19.6% of Protiviti revenues in the year-ago period.

Operating income for our staffing divisions was $109 million in the first quarter, down 9% from the prior year. Operating margin was 10.0%. Our temporary and consulting staffing divisions reported $91 million in operating income. This was a decrease of 8% from 2016 and resulted in an operating margin of 9.2%. Operating income for our permanent placement division was $18 million in the first quarter, down 15% from the prior year and producing an operating margin of 17.7%. First quarter operating profit for Protiviti was $17 million, an increase of 16% from the prior year, producing an operating margin of 8.6%.

At the end of the first quarter, accounts receivable were $700 million. Implied day sales outstanding, DSO, was 49.5 days.

Before we move to second quarter guidance, let's review the monthly revenue trends we saw in the first quarter and thus far in April, all adjusted for currency.

First quarter revenue growth rates for our temporary and consulting staffing divisions, while negative, gradually improved during the quarter, led by our international operations. We exited the quarter with March down 2.2% versus the prior year, compared to a 2.8% decline for the full quarter. Revenue growth for the first week of April was negative 2.5% compared to the prior year.

First quarter global permanent placement revenue growth rates, which were also negative, also improved during the quarter both in the U.S. and internationally. March revenues were up 3.3% versus last year compared to a 3.1% decline reported for the full quarter. For the first 2 weeks in April, permanent placement revenues were down 5.2% compared to the same period last year.

This information is designed to provide you with insight into the trends we saw during the first quarter in April. As you know, we hesitate to read too much into these numbers as they represent very brief periods of time.

With that said, we offer the following second quarter guidance: revenues, $1,275,000,000 to $1,335,000,000; income per share, $0.61 to $0.67. The midpoint of our guidance implies year-over-year revenue declines of 3% on a reported basis and 1% adjusted for days and currency and an EPS decline of just under 10%. 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.

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Max Messmer, Robert Half International Inc. - Chairman and CEO [4]

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Thank you, Keith. Moderate U.S. economic growth (in the range of 1.9% to 2.3%) is forecast for 2017. Notwithstanding the slower first quarter start (1.4% GDP growth according to The Wall Street Journal's monthly Economic Forecasting Survey), recent data from several sources, including the NFIB, PMI Services Activity Index and the University of Michigan Consumer Sentiment Index, all point to a more upbeat business outlook. We believe the wait-and-see approach to hiring that has affected our results to date should fade as economic optimism grows.

As labor markets continue to tighten, particularly for our professional occupations, we will benefit from our decades of experience helping clients find the right candidates even amid talent shortages. Outside the U.S., we are encouraged by the opportunities afforded by improving economic conditions, particularly in Continental Europe.

A final note about Protiviti, which had another strong quarter. Protiviti has been broadening its practice areas and now serves clients in a wide range of consulting areas. These include business performance improvement; data management and advanced analytics; digital transformation; forensics; technology consulting; internal audit and financial advisory services; risk and compliance; and transaction services. We could not be more pleased with the evolution of this business and its strong performance.

At this time, Keith and I will be happy to try to answer your questions. (Operator Instructions) Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Kevin McVeigh with Deutsche Bank.

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Kevin McVeigh, Deutsche Bank AG, Research Division - Head of Business and Information Services Company Research [2]

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Keith and Max, it feels like we're kind of starting to find the bottom here, particularly given the implied revenue. But I wanted to understand, if you look at the revenue guidance relative to the earnings, it seems like there's a little more deceleration on the EPS line. Keith, is that a higher tax rate? Or is there anything else to maybe factor in that dampened the EPS relative to what the revenue would imply?

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Keith Waddell, Robert Half International Inc. - Vice Chairman, President and CFO [3]

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Well, the tax rate is higher. We did benefit in the first quarter from about $0.01 a share with the new accounting for stock compensation and the tax effects thereof. So whereas the rate was 37.5% for the first quarter, we're projecting that to go up to about 38.5% in the second quarter. So that's some of it. But if you look at the profitability of the revenue guidance for the second quarter versus the profitability of the revenue guidance for the first quarter, I think you would conclude it's actually a little more profitable because you've got revenue mix favoring perm placement, which seasonally has its best quarter in the second quarter. You also have revenue mix favoring Protiviti, which typically does better, margin-wise, in the second quarter than the first. Seasonally, accounting and finance generally in the second quarter is flattish because you've got traditional accounting busy season, ending, companies file their 10Ks, their proxy statements. The private companies file their financial statements with their bankers. So accounting and finance generally in the second quarter treads water, but you get some mixed benefit from perm and from Protiviti. I also need to add we lose a day in the second quarter. So you'll get some negative leverage from that. Easter a year ago fell in the first quarter. Easter this year falls in the second quarter. So whereas typically, you get an extra day in the second quarter sequentially, this year, we actually lose a piece of a day. And then year-on-year, we lose almost a full day. So in the guidance we told you, there's a 2-point swing between reported and same-day, constant-currency implied revenues where you lose a percentage point for billing days and you lose another percentage point for currency, which is principally U.K. Brexit-driven.

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Kevin McVeigh, Deutsche Bank AG, Research Division - Head of Business and Information Services Company Research [4]

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Is there any way to think about what the EPS impact to that is, Keith, to those 2 points?

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Keith Waddell, Robert Half International Inc. - Vice Chairman, President and CFO [5]

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That kind of gets into levering SG&A, but currency typically doesn't have that much EPS impact when all is said and done, but billing days certainly do.

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Operator [6]

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Your next question comes from Mark Marcon with R.W. Baird.

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Mark Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [7]

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I was wondering with regards to your prepared remarks on the guidance, it sounds like both in the U.S. and internationally, perm got gradually improved during the quarter. On the temp side, you mentioned the international operations gradually improving during the quarter. Wondering if you could give some color in terms of what you saw in the U.S. on the temp side. Was there any sign of gradual improvement? So I'll start there.

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Keith Waddell, Robert Half International Inc. - Vice Chairman, President and CFO [8]

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So let me try to be precise. So if you simply look at revenues per day, in the U.S., temp, they got gradually better even in the U.S., February versus January, March versus February. When you look at year-over-year growth rates for temp U.S., they were pretty constant. So on an absolute basis, we did see improvement in March in temp in the U.S., and we certainly saw improvement non-U. S. both in terms of year-over-year rates as well as absolutely. So I want to be clear that temp U.S., for March, on an absolute basis per day, was better than January and February. Just when you compare it to a year ago, the growth rate for us was about the same. For perm, March was better not only on an absolute basis, but it was better year-on-year as well. We had a very good perm March month. January was a little weak. So March, to some degree, offset January weakness. But we were very pleased with March, particularly in perm, U.S. and non-U. S. When we did our guidance, we took the full quarter average. As it worked out, we do a buildup from the bottom when we do our guidance. But when you look at the result, they're slightly better than first quarter average, about 1% on a per day basis. We did not dial in March improvement into our second-quarter guidance. We hope that's being conservative. So our guidance is a little stronger than the first quarter average, but it is not as strong as March was, temp or perm.

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Mark Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [9]

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Got it. And I mean, typically seasonally, you would see a little bit of improvement in March relative to February, would you not? And then obviously, as the year builds, you continue to typically see some improvement, wouldn't you?

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Keith Waddell, Robert Half International Inc. - Vice Chairman, President and CFO [10]

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You would, but typical hasn't been our friend for a while. So I'm not sure what typical even means particularly when you're talking sequentially.

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Mark Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [11]

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Got it. And then, you cited some economic optimism creeping in. Are you seeing any signs of a shortening with regards to how long employers are evaluating your candidates? Is there any sort of speeding up with regards to pulling the trigger at all?

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Keith Waddell, Robert Half International Inc. - Vice Chairman, President and CFO [12]

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Well, we would conclude that March, some of the March improvement would reflect just that. But again, generally, our guidance for the second quarter is more of the same but a little better, and hopefully with some upside if March levels of activity continue into the second quarter. Now the post-March results we had, we only had one week of temp and we had 1.5 weeks of perm. So they don't mean much.

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Mark Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [13]

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Great. And then, Management Resources, that was really strong. Is that related to the strength that you saw in Protiviti? Or are there any special projects?

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Keith Waddell, Robert Half International Inc. - Vice Chairman, President and CFO [14]

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A couple of points. I'd say, generally speaking, the higher the skill level, the better the performance across accounting and finance. So that favors Management Resources. And also, remember Management Resources is about 30% non-U. S., versus temp overall, that's more like 20% non-U. S. And so Management Resources benefits from a stronger European macro more so than the other temp divisions. So it's a combination.

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Operator [15]

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Your next question comes from Andrew Steinerman with JPMorgan.

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Andrew Steinerman, JP Morgan Chase & Co, Research Division - MD [16]

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Keith, could you talk about bill/rate increases? And you mentioned kind of opening up the spread in the quarter, and talk a little bit more about that dynamic here in the quarter.

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Keith Waddell, Robert Half International Inc. - Vice Chairman, President and CFO [17]

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So bill rates were up 3.7% year-on-year. That compares to 3.6% last quarter. Conversions as well were up. I think it was 20 basis-points sequentially from 2.9% to 3.1%. But year-on-year, I think they're down 10 basis-points. So conversion sequentially were a little better, which is consistent with perm being a little better. But when you put the gross margin package together, net, it's better. Part of that is bill/rate growth exceeded wage rate growth.

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Operator [18]

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

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Jeff Silber, BMO Capital Markets Equity Research - MD and Senior Equity Analyst [19]

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Just wanted to focus on Robert Half Technology. If you look on a same-billing day and constant-currency basis, trends continue to worsen a bit in the quarter. Is there something specific going on in that unit that's different than the other units you manage?

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Keith Waddell, Robert Half International Inc. - Vice Chairman, President and CFO [20]

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Well, clearly, Robert Half Technology, as we've gotten more into the development space is more project-driven. Our middle-market companies are very agile. While they start projects more quickly, they also end projects more quickly. And so this wait-and-see attitude that we've talked about generally would apply to technology as well. So we've just seen reluctance to get new tech projects started, and that has impacted our growth rates disproportionately in tech more so than in accounting and finance that, across the board, is isn't as project-driven as is tech.

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Jeff Silber, BMO Capital Markets Equity Research - MD and Senior Equity Analyst [21]

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Okay, fair enough. And just a few numbers questions specifically on the guidance. What gross margin and share count are embedded in your second quarter guidance? And what should we be modeling for capital spending for the rest of the year?

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Keith Waddell, Robert Half International Inc. - Vice Chairman, President and CFO [22]

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Okay. So gross margin, our guidance says flat to down 10 basis-points, but because in the second quarter, we always get the workers' comp evaluation by third parties, a year ago, I think the number was about $1.5 million credit we had. We never build that into guidance. So when you're comparing this year to last year, last year had the workers' comp credit. This year's guidance does not. Adjusted for that, the gross margins stay at the high levels they were at the first quarter. Share count is a continuation or gets the benefit of the repurchases we did during the quarter. So I think it's in the 1 25 5 neighborhood that we use for share count. CapEx in the quarter was $10 million. I think we're expecting $11 million to $12 million in the second quarter. For the full year, our estimate is around $60 million, which is a little less than we thought it would be last quarter. And that $60 million is down from $80 million a year ago as we don't have the Salesforce CRM. We don't have the Protiviti project management business -- project management software upgrade that we spent heavily on in 2016.

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Operator [23]

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Your next question comes from Anj Singh with Credit Suisse.

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Anj Singh, Credit Suisse AG, Research Division - Senior Analyst [24]

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First off, I was hoping you could touch on your growth at Q1 versus what the BLS temp headcount growth shows. It seems like your business still is decelerating, and the BLS is showing an acceleration versus the Q4 trends. I realize there are mix differences, but would appreciate your thoughts on why overall temp headcount may be accelerating but it's not really manifesting in your results. Is it something due to the verticals? Is it the client profile? Just any thoughts there.

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Keith Waddell, Robert Half International Inc. - Vice Chairman, President and CFO [25]

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Well, first of all, the BLS data is very blue collar, manufacturing, light industrial driven, which we have virtually zero exposure to. I'd say second of all, there's never been a large correlation between what happens with BLS data then what happens with our data. Third, I would say on a constant-currency basis, for the second quarter of the midpoint of our guidance, the deceleration -- let me say this. Between first quarter and second quarter, it's less negative and it's only 1% negative. So if we do the midpoint of our second quarter guidance, it would seem the bottom, the inflection point occurred in the first quarter of '17, so we're hopeful that that's as bad as it's going to get, and the growth rates are slightly less negative in the second quarter. And we are hopeful that they turn in the other direction. But correlating us and BLS has always been perilous, and that hasn't changed.

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Anj Singh, Credit Suisse AG, Research Division - Senior Analyst [26]

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Okay, okay, got you. And at the risk of making another comparison with BLS, if we had to talk about the tightness of the labor market, it seems like per the BLS data, unemployment continues to tick lower although participation rates have also crept up. So I was hoping for your current sense of the supply of the labor market. Is the tightness the same level? Has it moderated at all? Just would appreciate you running us through the puts and takes there.

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Keith Waddell, Robert Half International Inc. - Vice Chairman, President and CFO [27]

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Well, I'd say there's not a lot of change in tightness. Generally, it is tight. The unemployment rate that gets all the headlines is the U-3 unemployment rate. If you look at broader rates, U-5 would include those not looking for work. U-6 would include those that would -- that are working part-time that want full-time. Those broader measures of unemployment are much higher and not as sanguine as is the case with the U-3 rate. So while supply has tightened a bit, it hasn't changed that much. And if you look at more broadly, the other broader measures of unemployment, I think it paints a little different picture than just looking at U-3, which is the rate that makes all the headlines.

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Operator [28]

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Your next question comes from Tim McHugh with William Blair.

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

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Maybe a different tone to the last question, but worrying less about the BLS. I guess as you look at the results, do you attribute it to just the market trends? We've talked a lot about that. Are there any parts of the business you look at and say they're not performing up to what you think or there are operational things you would change or could be executing better as we think about each piece of the business?

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Keith Waddell, Robert Half International Inc. - Vice Chairman, President and CFO [30]

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Well, so you always look internally, Tim, as to what can we do better. We can always do better. But as we look around particularly with companies focused on middle-market companies, not those focused on the Fortune 100 or the Fortune 1000, but when we look at companies focused on our-sized clients, we don't think we're losing market share. And therefore, we do not believe it's an internal operational issue. If anything, we bore down even more with our internal activity levels that traditionally generate leads, ultimately that generate starts and placements. So I can assure you we're as introspective and self-critical as you can get. And we do it often, but we honestly don't believe it's an internal execution issue as much as it is a market issue. And there's nothing like "the proof is in the pudding." And as the market improves, we better improve with it.

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Max Messmer, Robert Half International Inc. - Chairman and CEO [31]

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Tim, I would second what Keith said. We've always been somewhat paranoid. As you probably know, you always worry, "Are there things you could be doing better?" but my own view is that it's basically macroeconomics. You had a fairly anemic GDP growth rate this first quarter. The projections are for great improvement coming up, and we hope that's the case. And if it does occur, we certainly expect to do a lot better. So we'll see.

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Tim McHugh, William Blair & Company L.L.C., Research Division - Global Services Analyst [32]

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Fair enough. Just one follow-up. I think the language you had about Protiviti earlier in your script was a little different. You touted kind of the broader set of services they have. Are you seeing the work shift in that way? I mean, is there any shift away from some of the regulatory compliance stuff that we would have seen in the past and toward this kind of broader array? Or was there any message about the workload that's coming in from clients and what type of opportunities they're seeing?

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Keith Waddell, Robert Half International Inc. - Vice Chairman, President and CFO [33]

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Well, the general point was Protiviti's revenue sources are more diversified. There is no major shift one way or the other. We've talked about the last couple of years. There's been less higher-margin regulatory compliance work. That has stabilized. It actually grew somewhat this quarter. We were pleased with that. That said, the financial services industry is still very cost-focused. And even where we're doing internal audit for financial services firms, there's some margin compression. The good news is Protiviti more than offset that by managing its own internal costs, such that we had margin expansion, operating margin expansion year-over-year, which we were pleased with. So the major service offerings of Protiviti, internal audit, risk and compliance, and technology consulting, those are still the three major service offerings. But in addition to that, we talked about data analytics. We talked about the others in the script there. Protiviti definitely has broadened and continues to broaden its service offerings. Cyber is certainly something that's hot. And to the extent regulatory reform is going to help us in the future, there's more regulatory reform in the cyber area that plays into controls, that plays into security, both of which are in our wheelhouse.

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Max Messmer, Robert Half International Inc. - Chairman and CEO [34]

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Tim, my own thought was that I'm very pleased with the management group at Protiviti. They've done an outstanding job. I think their market acceptance is really superior. They've done a great job. So the point I guess I was hoping to convey was that we're optimistic about their continued growth in different areas in addition to the ones that we're already in. We certainly aren't planning to lose sight of the other areas, but they're getting a good reception in the market. Their reputation continues to grow.

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Operator [35]

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Your next question comes from Tobey Sommer with SunTrust.

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Kwan Kim, SunTrust Robinson Humphrey, Inc., Research Division - Associate [36]

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This is Kwan Kim for Tobey. As the wait-and-see approach to hiring fades among SMBs, how are you thinking about potentially jump-starting the recruitment force with additional hires before that optimism finally generates higher levels of activity?

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Keith Waddell, Robert Half International Inc. - Vice Chairman, President and CFO [37]

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So we would observe that we have held the line with our recruiters and our salespeople, notwithstanding the fact that our revenue base has declined somewhat year-over-year. So by holding the line, we have capacity, we have dry powder; however, you want to articulate such that we believe we will participate quickly and meaningfully as things do improve. With a few quarters of that, we can then begin to add to headcount, and that's U.S. For non-US, which is clearly doing better, led by Europe, particularly Germany, particularly Belgium, which are doing great, we're already adding to headcount there. So some of the year-on-year operating margin compression you see is SG&A deleverage because we've held the line in the U.S. notwithstanding less revenue. We've added to headcounts outside the U.S. to feed their hot hand, and the combination is we've got some negative SG&A leverage. We're fine with that. But that means we should participate well and profitably on the upside, particularly in the early parts of upside, because we have unused capacity.

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Kwan Kim, SunTrust Robinson Humphrey, Inc., Research Division - Associate [38]

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And on President Trump's recent executive order on the H-1B visa program to prevent abuse, how do you assess the potential impacts and benefits you may experience from this order? And how may that affect the technology growth for your customers?

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Keith Waddell, Robert Half International Inc. - Vice Chairman, President and CFO [39]

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Well, first of all, with our middle-market clients, there's virtually no demand for H-1B-type candidates to work on their projects. So there's no direct impact. But to the extent that in the marketplace, clients have relied on providers that source their people in that way. Those providers won't be able to source in that way, and frankly, don't have the recruiting infrastructure in the short term to do that. So we think that would be a net positive to us. There is some discussion about, well, to the extent H-1Bs aren't part of the U.S. available workforce, the remaining workforce becomes more scarce for the remaining providers. There is some truth to that, but net, we still see a positive, too. If anything, there is new demand that heretofore has been satisfied by H-1Bs, that thereafter, would now have to be satisfied domestically. We have a recruiting infrastructure in place to do that as well as other recruiting. So we think it's a net positive. But as we understand the regs, I mean the H-1Bs for this year have been granted. So this is 12 months hence. So this isn't going to play out overnight.

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Operator [40]

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Your next question comes from Gary Bisbee with RBC Capital Markets.

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Gary Bisbee, RBC Capital Markets, LLC, Research Division - MD of Business Services Equity Research [41]

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Would you term the sort of conservativeness of the assumptions in this guidance as similar to how you normally do it in talking about not assuming the March lift that you saw? I guess that sounded like that left room for some conservatism. But would you say that's similar to how you've done it in the past? Or is there some reason that maybe it would be more so this time?

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Keith Waddell, Robert Half International Inc. - Vice Chairman, President and CFO [42]

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Well, we go through a process where our key geography leads do their forecasting, our key line of business leads, they do their forecasting, and we roll that up. We take a look at it. It's a bottom-up, not a top-down, approach. We're saying the outcome of that process was that you've got a little more than the average but not much. So the process was absolutely the same that it always is. Do we, topside, sometimes adjust it a little one way or the other? Yes, we do. We're hoping we're conservative. I mean, clearly, the past few quarters, we've tended to be a little light, which didn't happen this quarter, we're happy to report. So we hope to be a little conservative. And if March trends continue, we will end up having been.

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Gary Bisbee, RBC Capital Markets, LLC, Research Division - MD of Business Services Equity Research [43]

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Okay, great. And then just the sluggishness in hiring cycles, is it fair to say that from your perspective, the biggest factor here has just been fairly low or weak U.S. GDP growth? Or do you have any sense from your clients that policy uncertainty around, when will the new administration and Congress deliver some of the stuff that they've promised, like tax reform, infrastructure spend, et cetera, that, that is a factor impacting them? I'm just trying to see if that stuff takes a while to go through, is that part of it?

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Keith Waddell, Robert Half International Inc. - Vice Chairman, President and CFO [44]

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Well, clearly, today, GDP growth has been anemic, and that's expected to continue this quarter where we talked earlier about. We're talking sub-2%, 1.5%-type GDP growth rates. And I think the policy uncertainty issue is, does it continue this gap between the soft data and the hard data, the optimism, the sentiment data versus real economic activity? And I think the longer the policy uncertainty exists, be it tax reform, be it regulatory reform, be it infrastructure, I think that uncertainty certainly defers the period of time that you see actual improvements in business activity. That said, we had a nice March. We've said it several times now. And it's only one month, which is why we didn't roll it all in to our guidance, but we had a nice March. We had more activity in March. We had it in perm, which is typically the most sensitive to macro trends. So we're happy about that. But yes, policy uncertainty matters, but factually up through this quarter, there's been less GDP growth, full stop.

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Gary Bisbee, RBC Capital Markets, LLC, Research Division - MD of Business Services Equity Research [45]

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Yes, right, yes. I know they're clearly related. I appreciate that. I appreciate that color.

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Max Messmer, Robert Half International Inc. - Chairman and CEO [46]

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Gary, the only thing I'd add to what Keith said is that historically, our bias on guidance is such that we would rather be on the conservative side than the overly-optimistic side. And as to your second question, I definitely think it's a GDP issue. And while people remain optimistic, they're still waiting to get a little bit more comfort on the policy front and so forth before they pick up their activity levels. So we remain cautiously optimistic in that regard.

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Operator [47]

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Your next question comes from Manav Patnaik with Barclays.

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Ryan Leonard, Barclays PLC, Research Division - Research Analyst [48]

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This is Ryan Leonard filling in for Manav. A lot of my questions have been asked, but I guess I just want to know on this particular part of the cycle, is there anything that you guys are doing differently that makes you feel like you can benefit additionally to the macro side? And I asked that question from the CRM landscape. Is that implementation going to provide some extra benefit that you typically haven't had at this point of the cycle?

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Keith Waddell, Robert Half International Inc. - Vice Chairman, President and CFO [49]

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Well, I guess I would broaden the CRM to the impact of our digital initiatives generally. I think as an optimist, I think as we improve our digital initiatives, as we share with our clients more and more of our internal technology that lets them participate in the selection and discovery of candidates, it ultimately results in more leads to the extent we use our artificial intelligence, our matching algorithms to make better matches. You have a better satisfied client, and that ultimately snowballs as well. So clearly, relative to prior cycles, we're much more advanced with how we've developed our internal systems, particularly from the point of view of how they're connected and how they interact with our website, which in turn is available to all candidates and clients. Traditionally, our website functionality has been almost exclusively candidate-facing. That's changing rapidly. You can go to our website this second and search our candidate database. You can filter on geography. You can filter on skills. You can filter on education level. You can further benefit from our algorithms, where we map skills that you're searching for to skills that would be relevant as well to what you're searching for. So I think we're light years better in our digital capabilities. We believe long term, the firm that wins has both digital and traditional capabilities. The digital can do a nice job of correlating skills and work experiences. But for things like attitude and professionalism and cultural fit, we still think our human being staff do a better job of that. So I think this hybrid combination of digital and traditional off-line. I think we've never had that combination of capabilities today that we've had in the past. The other thing I would observe is that we're working together -- staffing and Protiviti -- better than we ever have before. We're going to market together. I think the marketplace understands there are certain types of projects that need some kind of project management but that the staff level can be provided by our traditional staffing organization. So it's a combination together. You get a better price point. You get Big 4 Protiviti-level project management. You get staffing, specialized staffing, feet on the street, and the combination is effective, and the price point is better. So relative to where we've been in prior cycles, we've clearly got a better digital offering. That digital offering is well integrated into our traditional offering. And a combination of Protiviti staffing, the blending, the integration, the go-to-market coordination is the best it's ever been.

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Ryan Leonard, Barclays PLC, Research Division - Research Analyst [50]

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That was great. That was very in-depth. So I guess just one quick follow-up point. Are you hiring more people on the tech side? Or is this done through third parties?

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Keith Waddell, Robert Half International Inc. - Vice Chairman, President and CFO [51]

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We're talking internal tech or we're talking our tech staffing division?

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Ryan Leonard, Barclays PLC, Research Division - Research Analyst [52]

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Internal, focused on developing these applications in AI and algorithms.

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Keith Waddell, Robert Half International Inc. - Vice Chairman, President and CFO [53]

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Right. We use a combination of third parties, internal staff, contractors, freelancers and temporaries. We're sitting out here in the middle of the Silicon Valley. So there are all kind of flavors to the way we engage with resources. But we actually think we benefit by sitting right here in Silicon Valley in that regard.

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Operator [54]

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Your next question comes from George Tong with Piper Jaffrey.

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George Tong, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [55]

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You've indicated you're seeing noticeable improvement in customer optimism around hiring prospects. Can you discuss how the optimism is translating into order flows?

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Keith Waddell, Robert Half International Inc. - Vice Chairman, President and CFO [56]

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Well, I guess most recently, if you looked at our March, versus January and February and clearly, we saw an uptick in activities not only placements made but starts on the temp side, but interviews, send outs, all of the downstream activity that results as well, as things get better. So as we've said earlier, we're encouraged that March was better. It's one month. We didn't totally roll it into our guidance. We hope it's the beginning of many good months to come, but I don't think we're unique when you read almost every day and you see in the press virtually every day, the company is talking about the gap between hard data and soft data, sentiment optimism on the one hand and actual levels of activity on the other. But the good news for us and I guess relative to where we sat 90 days ago, I would tell you our people are moderately more optimistic. And so they've actually seen some signs of improvement at least for one month, and it happened to be the last month in the quarter. So relative to 90 days ago, we're moderately more optimistic, but it was one month.

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George Tong, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [57]

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Yes, makes sense. And I think you indicated that employers are taking at the increment a bit more time to make these hiring decisions. Can you talk about how the length of the sales cycle performed during the quarter as you move through the quarter and exiting the quarter?

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Keith Waddell, Robert Half International Inc. - Vice Chairman, President and CFO [58]

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I'd say over that short a period of time, the length of the sales cycle didn't change much. All that we're saying is that as we exited the quarter, clients pulled the trigger and actually hired people. Clients pulled the trigger and actually took our temporaries for assignments. So the trend is good, but over that short a period of time, it didn't change much.

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Operator [59]

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Your next question comes from Hamzah Mazari with Macquarie.

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Kayvon Rahbar, Macquarie - Analyst [60]

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This is Kayvon Rahbar filling in for Hamzah. I think you guys mentioned that gross margins were up 30 basis points from bill/pay spreads. I was wondering, can you maybe give some more color around the bill/pay spreads in the quarter and the conversions and how that trended relative to your internal expectations?

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Keith Waddell, Robert Half International Inc. - Vice Chairman, President and CFO [61]

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I would say gross margins were better than our expectations. And if you look at our first quarter versus our guidance, so the $0.62 versus the $0.58, a very simple way to think about it is perm outperformed our expectations, which was a couple of pennies. Temp gross margins, relative to your question, outperformed our expectation, which was about $0.01. And the tax rate was lower, which was about $0.01. So there's your 4 pennies. So one of those four was better temp gross margins than we had dialed in. A piece of that were sequentially better conversions, but the bigger piece of that was better spreads. Part of that is a mix issue. As your accounting operations positions and Accountemps are more impacted due to macro, that means your remaining Accountemps business is more staff level, versus accounting operations. Staff level has slightly higher gross margins than accounting operations. So you've got a higher mix of those. So that also helps to explain the increase in gross margins.

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Operator [62]

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Your last question comes from Dan Dolev with Instinet.

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Dan Dolev, Instinet, LLC, Research Division - Research Analyst [63]

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So clearly, things are inflecting, your guidance looks conservative. If you reflect back on your prior cycle, have you seen sort of an inflection point like this once it starts happening and actually not materialize, or I guess once the inflection happens, it sort of starts going upward? I mean, just historically speaking.

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Keith Waddell, Robert Half International Inc. - Vice Chairman, President and CFO [64]

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Well, we've had a month of improved results. So hopefully, that's a start in earnest and then once started, continues. Part of the better year-over-year growth rates is because the comparisons are starting to get easier as well, so you also benefit from that. We hope we're being conservative. We hope the March improvement is confirmed throughout the rest of the quarter and the year, but it's a little early to draw definitive conclusions based on March. But we're optimistic. We feel better than we felt 90 days ago. We've said that.

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Dan Dolev, Instinet, LLC, Research Division - Research Analyst [65]

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Yes, I meant more -- it's helpful, but I meant more historically if you reflect back on prior 30 years.

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Keith Waddell, Robert Half International Inc. - Vice Chairman, President and CFO [66]

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"Is it the same head fake" is what you're asking, right? Is it what we're saying?

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Dan Dolev, Instinet, LLC, Research Division - Research Analyst [67]

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Yes, exactly. That is the question.

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Keith Waddell, Robert Half International Inc. - Vice Chairman, President and CFO [68]

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We have had mix in the past. And I'm saying we don't have enough to -- the sample size isn't large enough to know whether it's a head fake or not.

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Max Messmer, Robert Half International Inc. - Chairman and CEO [69]

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And thank you. That was our last question. We would like to thank everyone again for joining us on today's call.

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Operator [70]

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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.