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Edited Transcript of RHI earnings conference call or presentation 23-Apr-19 9:00pm GMT

Q1 2019 Robert Half International Inc Earnings Call

MENLO PARK Apr 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Robert Half International Inc earnings conference call or presentation Tuesday, April 23, 2019 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 of the Board & CEO

* M. Keith Waddell

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

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Conference Call Participants

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* Andrew Steinerman

JP Morgan Chase & Co, Research Division - MD

* Blake Johnson

Goldman Sachs Group Inc., Research Division - Research Analyst

* Dan Dolev

Nomura Securities Co. Ltd., Research Division - Executive Director of Business Services

* Gary Bisbee

BofA Merrill Lynch, Research Division - Analyst

* JeffSilber

BMO Capital Markets Equity Research - MD & Senior Equity Analyst

* Joseph Thompson

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Kevin McVeigh

Crédit Suisse AG, Research Division - MD

* Mario Cortellacci

Macquarie Research - Analyst

* Mark Marcon

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

* Ryan Leonard

Barclays Bank PLC, Research Division - Research Analyst

* Seth Weber

RBC Capital Markets, LLC, Research Division - Analyst

* TimMcHugh

William Blair & Company L.L.C., Research Division - Partner & Global Services 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 2019 Conference Call.

Our host 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 of the Board & CEO [2]

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Thank you, and hello, everyone.

Before we get started, I would like to remind everyone that comments made on our call today 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 such expressions. We consider 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 convenience, we've made our prepared remarks available on the Investor Center of our website at roberthalf.com. From the home page, click on Investor Center link at the bottom left of the page.

Now I'd like to go over Robert Half's financial results for the first quarter. Company-wide revenues were $1.469 billion. This is up 5% from last year's first quarter on a reported basis and up 9% on a same-day constant currency basis.

Net income per share for the quarter was $0.93 compared to $0.78 in the first quarter of 2018, an increase of 19%. Cash flow from operations was $127 million, and capital expenditures were $13 million in the first quarter. In February of this year, we increased our quarterly cash dividend from $0.28 to $0.31 per share, and in March, we distributed that dividend to shareholders for a total cash outlay of $38 million. We also repurchased roughly 800,000 Robert Half shares during the quarter for $52 million. We have 5.9 million shares available for repurchase under our board-approved stock repurchase plan.

We saw solid revenue growth in our staffing and Protiviti operations during the quarter, both in our U.S. and non-U. S. operations. Persistent tight labor markets globally continue to result in heightened demand for our professional staffing services.

During the first quarter, return on invested capital for the company was 41%.

I'll turn the call over to Keith now for a more detailed discussion of our results.

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

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Thank you, Max.

As just noted, global revenues in the first quarter were $1.469 billion. This is up 5% from the prior year's first quarter on a reported basis and up 9% on a same-day constant currency basis from the year ago period.

Accompanying our earnings release today is a supplemental schedule showing year-over-year revenue growth rates on both a reported and an as-adjusted basis. These figures are further 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 give you insight into certain revenue trends in our operations.

For our staffing business, first quarter revenues were up 7% year-over-year on an as-adjusted basis. U.S. staffing revenues were $931 million, up 6% on a same-day basis, and non-U. S. staffing revenues were $285 million, up 11% year-over-year on an as-adjusted basis. We have 325 staffing locations worldwide, including 86 locations in 17 countries outside the United States.

The first quarter had 62.2 billing days compared to 63 days in the first quarter of 2018. The shorter 2019 first quarter reduced our reported year-over-year staffing revenue growth rate by 1.4 percentage points. The current second quarter has 63.4 billing days compared to 63.5 days in the second quarter 1 year ago.

Currency exchange rate movements versus the prior year had the effect of decreasing reported year-over-year staffing revenues by $22 million in the first quarter, which reduced our year-over-year reported staffing revenue growth rate by 1.9 percentage points.

For Protiviti, first quarter global revenues were $252 million, with $192 million coming from business within the United States and $60 million from operations outside the United States. Protiviti revenues were up 17% year-over-year on an as-adjusted basis.

On a same-day basis, U.S. Protiviti revenues were up 17% year-over-year in the first quarter while non-U. S. revenues were up 19% on an as-adjusted basis. Exchange rates had the effects of decreasing year-over-year Protiviti revenues by $4 million in the first quarter and decreasing the year-over-year reported growth rate by 1.7 percentage points. Protiviti and its independently owned Member Firms serve clients through a network of 85 locations in 27 countries.

Now let's turn to gross margin in the first quarter. In our temporary and consulting staffing operations, gross margin was 38.0% of applicable revenues compared to 37.2% of applicable revenues in the same period 1 year ago. Expanding bill/pay spreads and higher temp-to-hire conversion fees were the largest contributors to the increase.

First quarter revenues for our permanent placement operations were 10.8% of consolidated staffing revenues versus 10.2% of consolidated staffing revenues in the first quarter of 2018. When combined with temporary and consulting gross margin, the overall staffing gross margin increased 110 basis points versus 1 year ago to 44.7%.

For Protiviti, gross margin in the first quarter was $64 million or 25.3% of Protiviti revenues. One year ago, gross margin for Protiviti was $55 million or 26.4% of Protiviti revenues.

First quarter staffing SG&A costs were 34.2% of staffing revenues compared to 33.5% 1 year ago. The higher mix of permanent placement revenues this quarter versus a year ago added 30 basis points to the quarter's SG&A ratio.

SG&A costs for Protiviti were 17.9% of Protiviti revenues in the first quarter compared to 19.1% of Protiviti revenues in the year ago period.

First quarter operating income from our staffing divisions was $128 million, up 7% from the first quarter of 2018. Operating margin was 10.5%.

Our temporary and consulting and staffing divisions reported $106 million in operating income, an increase of 10% from the first quarter of last year. This resulted in an operating margin of 9.8%.

In the first quarter, operating income for our permanent placement division was $22 million. This was down 4% from the prior year and produced an operating margin of 16.4%.

Operating profit for Protiviti was $18 million in the first quarter, an increase of 22% from the year ago period. This produced an operating margin of 7.4%.

At the end of the first quarter, accounts receivable were $826 million, and implied days sales outstanding, DSO, was 50.5 days.

Before we move to second quarter guidance, let's review some of the monthly revenue trends we saw in the first quarter of '19, and thus far in April, all adjusted for currency and billing days.

Our temporary and consulting staffing divisions exited the first quarter with March revenues up 4.7% versus the prior year, compared to a 6.2% increase for the full quarter. Revenues for the first two weeks of April were 3.7% compared to the same period in April of 2018.

March revenues for our permanent placement division were up 16.1% versus 2018 compared to a 12.3% increase for the full quarter. For the first three weeks in April, permanent placement revenues were up 6.3% compared to the same period last year.

This information provides a look into some of the trends we saw during the first quarter and thus far in April, 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 second quarter guidance:

Revenues - $1.485 billion to $1.550 billion; Income per share - $0.95 to $1.01

The midpoint of our first quarter guidance implies year-over-year revenue growth of 5.5% on the same day as-adjusted basis, including Protiviti, and EPS growth of 10%.

We limit our guidance to one quarter. All estimates we provide on the call are subject to the risks mentioned in today's press release and in our SEC filings.

Now I'll turn it back over to Max.

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

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Thank you, Keith.

We ended the quarter with a solid revenue growth throughout our staffing operations and Protiviti.

Current trends leave us optimistic about where the company is positioned. Last year, the economy produced 2.7 million new jobs. The March 2019 BLS report showed job gains of nearly 200,000, exceeding economists' estimates.

Our key staffing client base of small and midsized businesses is feeling the pinch. The NFIB's March jobs report showed that 60% of small and medium-sized business owners are either hiring or trying to hire, and their biggest business problem is a lack of available skilled talent. Increasingly, they are turning to Robert Half for help.

We are also seeing wage increases start to materialize as more employers recognize that they need to pay more to get the candidates they want. Wage inflation trends are now more typical of those we've seen in past tight labor markets.

Our brands are among the staffing and consulting world's most recognized and respected, our financial position is strong, and we have the most experienced field and corporate management teams in the industry.

The combination of technology and personal service we bring to market is key, and all of our people and technology investments are designed to offer an optimal mix of high-tech and high-touch. We are convinced that you can't have one without the other and still provide clients with the type of hiring assistance they need.

With respect to Protiviti, we believe their leadership and talent have made them a formidable competitor in consulting. Their suite of consulting offerings now includes risk and compliance, data and analytics, and performance improvement among others. Protiviti is also putting more focus and technology consulting, with additional emphasis on cyber security, cloud computing and digital transformation.

As noted on prior calls, we are actively marketing our full suite of staffing and Protiviti capabilities in a managed solutions model. We believe our ability as a single provider to offer clients project oversight and deliverables, deep subject matter expertise and a scalable network of experienced interim staff is unique in our industry.

Now Keith and I will be happy to respond to questions. (Operator Instructions)

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Questions and Answers

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Operator [1]

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

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

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I was wondering if you could discuss a little bit about the trends that we saw through the quarter and specifically the exit rate relative to the quarterly average. And then obviously, the first couple weeks is a fairly short time period. Wondering how you would view that in context to the uncertainty that we ended up seeing towards the end of the fourth quarter and the behavior that you're seeing among your clients? And specifically, are those revenue trends reflective of what you're seeing in terms of order and fill rates over the last, say, six, seven weeks and how you would think about that unfolding?

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

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Mark, there's a lot going on here. And so first of all, as you know, the comps certainly got tougher as we progressed through the quarter. Further, in Europe, we saw macro slowing in Germany, Belgium, France, a little beyond what we had expected. In the United States, particularly for Accountemps and OfficeTeam, we saw clients get more selective, either because they were replacing attrition and were looking for people to essentially hire on a full-time basis ultimately, which made them more spec-driven than they might otherwise have been. And we further saw their demand being more measured as we progressed through the quarter. That said, we had double-digit growth in perm, in Management Resources and in tech that were all quite strong throughout the quarter. As to the first couple of weeks and relative to the exit, so first of all, for perm post quarter, if you look at year ago, we had monster comps during that same short period where we grew 25% year-on-year so I would discount the post-quarter perm for that reason. If you looked at post-quarter temp just in the United States, it actually accelerated versus the exit rate in the first quarter in the U.S. It's non-U. S. that caused the overall reduction in the post-quarter growth rate versus the prior quarter and the exit rate. And again, that was principally Europe. But again, to put everything in context, for the quarter just ended, we did grow 9% year-on-year notwithstanding tougher comps. We did grow EPS 19%. For the guidance we've given for the second quarter, we still expect 5% or 6% at midpoint revenue growth and double-digit EPS growth, which in this environment isn't bad.

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

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No, it certainly isn't. And I fully appreciate that and appreciate the comps. With regards to -- in the last quarter, we talked about the headcount additions particularly on perm and Protiviti. I'm wondering how we should think about headcount additions going forward and what the impact -- how we should think about the margin progression in perm and Protiviti as hires mature and gain experience in productivity.

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

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And so the headcount strategy hasn't changed. It's to roughly stay in line with topline growth. You'll note that perm margins were slightly lower year-on-year in Q1. That's because it's quite typical that our field people would somewhat front-end their hiring for the year. So we expect as the year progresses that perm margins would expand as well which is embedded in our second-quarter guidance. So headcount, in line with topline growth. We've got some of our divisions growing nicely at double-digit rates. Those we will continue to feed with additional headcount. Those that are growing less will get less headcount. Protiviti is our fastest grower. And the largest contributor to Protiviti's growth are these joint solutions with staffing. As Max talked about, we have this unique offering ware for Protiviti. You get project oversight. You get deep subject matter expertise. You get deliverables. And then from staffing, you get scalable, experienced staff. That's the largest portion of Protiviti's growth that continues to get traction. We're very excited about that. While 75% to 80% of the staff come from the staffing divisions, 100% of the revenues get reported by Protiviti because it has the contract with the client. But again, it's a joint effort, we're getting more traction, and it's the largest single contributor to Protiviti's growth during the quarter, which we're quite pleased with. Not that it was our only source of growth. And in fact, if you just looked at Protiviti, it remains very balanced between internal audit, technology consulting and financial services, risk and compliance consulting.

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Mark Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [6]

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Great. And the margin? As is typical, I mean we should see the expansion towards the back half of the year.

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M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [7]

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That's correct. In Protiviti, seasonally, Q1 is always down versus Q4 as internal audit gets crowded out at clients as they focus on external audit. Their margins are doubly impacted in that -- or their entire firm. They do salary increases and promotions as of January 1. It takes them some time to recover that in bill rates. So Q1 margins are always trough, but year-on-year, Protiviti margins were as good as they were a year ago. But our expectation and our guidance considers that those margins improve as we move throughout 2019.

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Operator [8]

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Our next question comes from Dan Dolev from Nomura.

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Dan Dolev, Nomura Securities Co. Ltd., Research Division - Executive Director of Business Services [9]

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Can you maybe quickly give us the global hours and the bill rates for the quarter?

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

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So bill rates were up 5.7% year-on-year. That's an increase from last quarter when they were up 5.2% year-on-year. You'd back into the hours. Hours are pressured because, A., it takes longer to recruit candidates in this market. Further, they leave assignments more quickly as they receive full-time jobs, and we have to replace them. So it's not unusual in a tight labor market that the hours get strained from the reasons I just mentioned.

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Dan Dolev, Nomura Securities Co. Ltd., Research Division - Executive Director of Business Services [11]

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Got it. So there were about, say, 50 basis points of growth in the hours? Is that fair?

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M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [12]

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Well, the combination of hours conversions, I mean there's more than just hours there. But hours have been flattish to slightly down for a few quarters.

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Dan Dolev, Nomura Securities Co. Ltd., Research Division - Executive Director of Business Services [13]

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Got it. And if you kind of think about - you said the U.S. versus Europe, so all else equal, if you adjust -- if you basically didn't have that European business, you would say that your outlook would've been more bullish about the overall company? Or is that just the European issue? Or do you see something more broad-based both in the U.S. and in Europe?

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

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So Europe's growth rates declined more than the U.S., but they still, in absolute terms, were higher than U.S. But clearly, the trends in Europe are not as optimistic as they are in the U.S., and we were happy to see that our temp post-quarter start was better than our U.S. temp quarter 1 exit.

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Operator [15]

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

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JeffSilber BMO Capital Markets Equity Research - MD & Senior Equity Analyst [16]

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Keith, in your earlier remarks, you talked about the sequential change in gross margin in Protiviti. I'm just curious, on a year-over-year basis what drove year-over-year decline in gross margins at Protiviti?

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

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Again, quite common that they do their raises and promotions firm-wide on January 1. It takes a quarter or two to recover that, so there's gross margin compression early that picks up steam as you progress during the year. They offset that in Q1 with operating leverage on the SG&A line such that their operating margins year-over-year were flat on a percentage basis.

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JeffSilber BMO Capital Markets Equity Research - MD & Senior Equity Analyst [18]

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But were the bonuses relatively higher than a year ago? Is it maybe because you're doing more of the managed solutions offering? Again, I'm just looking at the 26.4% last year and the 25.3% this year.

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

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Right. So it's base pay increases and promotions both happen all at once, and you don't pass those through all at once. In the tight labor market we're in, Protiviti is having to give increasingly larger raises, and they're giving promotions a little sooner than they had in the past, both of which pressure costs. But again, they have totally offset that with operating leverage such that their operating margins came in same as last year which is a good thing.

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JeffSilber BMO Capital Markets Equity Research - MD & Senior Equity Analyst [20]

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I got it. And then just a quick follow-up on office. I know it's one of your smaller divisions, but same-day constant currency growth took a turn for the worse in the quarter. Is there anything specifically going on there different from some of the other divisions?

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M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [21]

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The only thing we would observe is that OfficeTeam for the last two or three years has been the beneficiary of a lot of activities on the part of clients with respect to changes to their health care plans in and around open enrollment. And for the most part, most companies that made those changes have totally digested them, and that source of demand has essentially dried up. So the only thing that's really that specific to OfficeTeam is this open enrollment health insurance administration planned changing that settled down after a period where they had two to three years of lift from that.

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Operator [22]

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Our next question comes from Andrew Steinerman from JPMorgan.

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Andrew Steinerman, JP Morgan Chase & Co, Research Division - MD [23]

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Keith, could you just make a quick comment about Protiviti in the second quarter from a revenue growth standpoint?

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M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [24]

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So second quarter guidance for Protiviti has double-digit growth rates embedded, and that's notwithstanding monster comps. If you look a year ago, the growth rates jumped 10 percentage points between Q1 and Q2. So notwithstanding those monster comps, we still expect they'll grow by double digits in Q2, again for all the reasons we talked earlier, the balanced solutions plus the joint activities with staffing.

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Andrew Steinerman, JP Morgan Chase & Co, Research Division - MD [25]

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Any comment about Protiviti in Europe?

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M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [26]

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Protiviti Europe, again, [has] done quite well. Germany, Italy were both strong. Again, the comps there are very high. If you look at a year ago, first quarter, it grew 22%. So it "slowed" to 19% this year, but I'll take 19% on top of 22% any day.

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Operator [27]

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

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Gary Bisbee, BofA Merrill Lynch, Research Division - Analyst [28]

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So as I just look at the trends over the last couple of years, it's sort of surprising that your international staffing businesses have continued to outpace the U.S. despite -- in Europe, at least, broadly slower economic growth than -- and just what seems like less tight labor markets in general. And it sounds like that's slowing now at least exiting the quarter. But how should we think about the potential for the international business to continue to put up good growth? And also, do you feel like there's potential for the U.S. businesses to accelerate further given the markets that we've got here?

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M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [29]

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Well, we have had very strong growth from non-U. S. operations. Germany has been a standout. Belgium has consistently been solid years on end. U.K., Brexit notwithstanding, has been solid for us. And then Canada, as part of non-U. S., Canada has been strong. Australia has been good. So country by country, we've done well. We've invested a lot in Germany for a long period of time. That's continued to pay off. So as we've spoken, from a trend standpoint, we had the most slowing in Europe but slowing to a level that still exceeds growth in the U.S. From a U.S. standpoint, we've seen some slowing of late in our Accountemps and OfficeTeam operations. Not so much our Management Resources, perm and technology. So we have seen some macro-uncertainty in the U.S. The external reports we've seen of late are mixed. NFIB, solid, but all highs. Weekly unemployment claims, quite low, quite good. JOLTS, mostly good, although openings were down a bit. PMI services that came out last week were negative. So the economic external metrics, if you will, are more mixed than they've been in the last several quarters. And so given that, we were more conservative in our U.S. guidance, notwithstanding the fact that at least out of the gate we accelerated versus exit. If you talk to our top people in the field, they would tell you their order rates have increased of late, but those order rates haven't yet shown themselves as revenue.

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Gary Bisbee, BofA Merrill Lynch, Research Division - Analyst [30]

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Okay. Great. And then -- so it sounds like some softening and potentially some conservatism, also much more difficult comps for the business overall. Would it be right to say that those two factors are in the same sort of zip code in terms of the impact on the deceleration here? Or [are] the comp's a much bigger factor than just the softening you're seeing? I don't know if you could ballpark that.

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M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [31]

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Well, the comps are different by line of business. Tech has the toughest comps for the quarter versus the first. Protiviti, as I said earlier, has a monster comp to compete with. Notwithstanding that, they still think, because their pipeline is strong, they can double-digit grow away from that. So I'd say while maybe in the same zip code, we anticipate more non-U. S. slowing than we do U.S.

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Operator [32]

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Our next question comes from Kevin McVeigh from Credit Suisse.

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Kevin McVeigh, Crédit Suisse AG, Research Division - MD [33]

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Keith, Protiviti feels like it's a lot more synchronized at this point in the cycle than it was last time, and just thinking about the peak in Sarbanes-Oxley and that kind of coming off, and the temp business continued to grow. Is that kind of still the case? And would you expect the outsized growth in Protiviti as a benefit from kind of the seed within Management Resources, if you would?

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M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [34]

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Well, it is clear that Protiviti has a much more balanced revenue stream today than they did in prior cycles. There was a time when Sarbanes-Oxley was 75% to 80% of their revenue. Today, it's less than 20%. Further, you've got this growth engine going to market together with staffing that essentially didn't exist to any material degree in prior cycles. So there's no question that structurally, Protiviti is in a better place than it was in prior cycles. No question.

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Kevin McVeigh, Crédit Suisse AG, Research Division - MD [35]

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And then just the temp date overall, relative to the BLS, was kind of negative the first three months of the year. Was that more kind of the December effect or kind of inability to fill? Or just any thoughts around that? Or is that just they're getting the general macro uncertainty that you've been talking about for kind of

the first 30 minutes of the call here?

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M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [36]

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Well, there's a lot of things you put you could point to. It's hard to pinpoint. There was a Fed scare in the market last fall that there was delayed impact from. The weather wasn't great, particularly in February. The government shutdown was a little bit of a negative overhang. So there's a lot of little pieces, but no one of those by themselves explains anything. But there's no question we saw our clients get more measured during the quarter which made them more selective, which slows down our sales cycle, particularly in the transaction-level people that we place, accounting operations and Accountemps, and in OfficeTeam. Our project businesses, Management Resources, Robert Half Technology, Protiviti, they have strong pipelines. They're growing well.

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Operator [37]

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Our next question comes from Tobey Sommer from SunTrust.

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Joseph Thompson, SunTrust Robinson Humphrey, Inc., Research Division - Associate [38]

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This is Joseph Thompson on the line for Tobey Sommer this evening. Digging in on the European business a bit, what do conversations with clients in the region look like? In your opinion, do these conversations and the macro data portend a soft patch or more of a significant slowdown?

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M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [39]

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Well, soft patch versus more of a slowdown, I don't think anybody would disagree that our European staffing businesses have outperformed the industry for several quarters consecutively. While they're slowing from those levels, they're still solid. And so would we prefer that they not be slowing? Of course. But they're still solid to the point we're going to support them to the extent their growth supports that. So we feel very good about the progress and the performance that our European businesses have had for several quarters, particularly Germany, particularly Belgium. The U.K., given it's circumstances, I think you'd be pleasantly surprised if we broke those numbers out individually. So our European operations have been stellar for several quarters relative to the market, but they're not totally immune from the market, and they're seeing some slowing.

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Operator [40]

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Our next question is from Tim McHugh from William Blair.

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TimMcHugh William Blair & Company L.L.C., Research Division - Partner & Global Services Analyst [41]

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Just want to follow up, on international, I guess do you still think --- I guess in 2Q, at least, do you expect that to grow faster than the U.S. in the staffing part of the business? Trying to understand the magnitude of the slowdown you're seeing there versus, I guess, what you've said.

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M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [42]

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Well, so permanent placement, getting close already. Europe temp still has quite the margin over U.S. temp, but they're converging. So we're within one quarter or two of them getting close. We just described more fully the conditions as we see them in Europe.

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TimMcHugh William Blair & Company L.L.C., Research Division - Partner & Global Services Analyst [43]

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Okay. That's helpful. I just wanted to put some numbers behind it. And then I want to circle back to the comment you made which the last couple of quarters the volumes essentially has been flattish, even slightly down. And I understand that the tight labor market it's -- that people are just moving jobs more often I guess. But how unusual is that to you versus history? And do you think that's the norm? Is that just something we should expect at this point? Or I guess how do you view that metric and think about that more medium term?

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M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [44]

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And so given the low level of unemployment relative to history, it's not a surprise and it's consistent generally with what we've seen in the past. It takes longer to recruit fee-eligible candidates. And once you get them on assignment, because many of them want full-time employment, they find full-time employment more quickly than they do at other points in the cycle, which means we are then obliged to backfill for them. This quarter, as I spoke to earlier, at that same time as clients have gotten more selective, it just puts more pressure on that. And to the extent client attrition is driving temp demand, they are more selective yet again when they're looking to replace full time the attrition that they're seeing more of because of the tight labor market. So it's not a surprise that volumes are pressured as the labor market tightens, and that's very consistent with the past. And one could argue that the labor market's never been tighter than it is as we speak. So that when you do have a fee-eligible candidate and when you place them, you charge more for them. That's why our bill rates are accelerating into a range more typical of what we see in a tight labor market.

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Operator [45]

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Our next question comes from Manav Patnaik from Barclays.

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Ryan Leonard, Barclays Bank PLC, Research Division - Research Analyst [46]

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This is Ryan Leonard for Manav. Just a question on Protiviti. You talked about in the last call how you're in the early innings of some of these hybrid offerings, but also this quarter, it seems to be the biggest driver of growth. I guess, what inning are we in this kind of hybrid push? And I think you'd mentioned you're rolling it out to some cities last time. Can you just help us maybe contextualize that offering over the longer term? And you guys are obviously excited about it. So just curious what inning we're at and where that can go from here.

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M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [47]

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It's hard to ascribe an inning number. It's certainly a 1 or a 2 or a 3. It's nothing beyond that. But also understand that many of these projects are sold by people from our staffing divisions where we have more distribution because of the number of locations and the number of people. When there's a client need for a temporary, there's often a root cause which results in a project if you're thinking that way. And now with the capability to whistle Protiviti on the field with their subject matter experts, our staffing people are starting to think through, "Gee whiz, this order for one person is really symptomatic of a larger project opportunity." And therefore, Protiviti comes in and jointly they handle it. So the point is, it's not like this is totally handled by a dedicated sales force that we're adding location by location by location. Not at all. What it is, is educating our existing staff to be more mindful of project opportunities that they ultimately benefit from themselves because they participate in the project revenue to a greater extent than they would had they just placed that one temporary on assignment.

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

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Got it. And then maybe -- I guess, could you give some reasons why the clients are being a little bit more hesitant? And just on the labor supply side, obviously we're seeing unemployment rates, particularly in finance and accounting roles, at pretty low levels. Can you just talk about maybe the candidate supply that you see today and how challenging that is?

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M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [49]

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I'd say -- we said our clients are more measured, a, because attrition is driving part of the demand. We also said there's macro uncertainty. We talked about various external factors you can look to. I think Services PMI, which came out last week, you can read yourself which also was reflective of that. On the supply side, supply has been tight for quite some time. We've made a lot of investments in technology, I think, more than any other area. The payback we're getting from our technology investments has been in the recruiting of candidates. Now we use AI in our discovery of candidates. We use AI in our outreach to candidates. We use AI in our matching candidates to orders. So I believe we're getting the most with what we have in large part because of our technology investments which have been significant, but that doesn't change that it's a tight labor market. And while on the one hand we're trying to sell talent to a client, many clients are buying specific skills. And when you don't have those specific skills, you sell overall talent that can acquire those skills on the job and hit some friction.

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Operator [50]

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Our next question comes from George Tong from Goldman Sachs.

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Blake Johnson, Goldman Sachs Group Inc., Research Division - Research Analyst [51]

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This is Blake Johnson on for George Tong. You mentioned rising bill/pay spreads continue to drive gross margin expansion in the quarter. How are the dynamics in international labor markets affecting bill/pay spreads in your non-U. S. businesses particularly Germany, Belgium and the U.K.?

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M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [52]

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So we clearly do not see the same rate of expansion non-U. S., which is correlated with the macro comments we made earlier. We are seeing some expansion, but not to the same degree we're seeing it in the U.S. where we're seeing significant expansion. As I said before, in a labor-short market, once you have a fee-eligible candidate in hand, the market says you should get paid for them, which we are.

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Blake Johnson, Goldman Sachs Group Inc., Research Division - Research Analyst [53]

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Great. That's helpful. Can you give us some detail on the kind of economic environment your guidance is assuming? Are you assuming no change from the prior quarter? Slower U.S. growth? Any improvement in Europe?

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M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [54]

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Well, we don't see a huge change in the trend line based on what we're talking, and we're only talking guidance for one quarter. As we said, we're encouraged by our U.S. temp start is better than our exit. We're practical as it comes to reality as it relates to Europe so we've continued those trends. So we hope we're being conservative. If you look at our guidance overall, notwithstanding 2 points of tougher comps, we're still going to grow 5 percentage points. But we have assumed that the trends where our U.S. AT/OT clients stay more measured and selective but that our Management Resources, technology, permanent placement, and Protiviti businesses all continue to grow nicely in double digits; that our margins, our operating margins actually expand on the staffing side 20 to 40 basis points; on the Protiviti side, 10 to 30 basis points. Now our tax rate for the second quarter jumps up to 28%, 28.5%. We lose some of the stock deductions you get in the first quarter because that's when our stock vests. Further, there are some expenses that become nondeductible with the new Tax Act, both of which give you a higher tax rate, 20% to 28.5%, which is up pretty significantly at least sequentially, and up 100 basis points versus a year ago. So when you put the package together, profitability actually improves year-on-year and sequentially, and growth, notwithstanding tougher comps, is mid-singles.

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Operator [55]

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Our next question comes from Hamzah Mazari from Macquarie.

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Mario Cortellacci, Macquarie Research - Analyst [56]

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This is Mario Cortellacci filling in for Hamza. You guys have talked a lot about the international business, but I'm just curious to see if you can comment on if you're seeing anything from a labor reform or a regulatory perspective in the international market that could have any impact on the business.

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M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [57]

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There's nothing that moves the needle. I mean there are some U.K. regulations being discussed that are certainly not final that could have an impact. But there's nothing that moves the needle, nothing overly dramatic to the point where it's on our radar screen in a major way.

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Mario Cortellacci, Macquarie Research - Analyst [58]

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Got you. And I guess maybe you can comment on whether you're seeing any changes in the competitive environment in terms of, say, competition from nontraditional staffing companies, for example, like the online players. And if you see any changes in candidate behavior or preference outside of again what you've said given the tight labor market and how they've been switching pretty quickly.

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M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [59]

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So I'd say the competitive environment from nontraditional players, we don't think is having significant impact. So first of all, most of them are focused on permanent placement rather than temp and consulting, and permanent placement is one of our strongest businesses as we speak. And frankly, the biggest challenge there is what we call closing candidates where you're trying to get a candidate to take the position in discussion rather than to hold out for yet a better position. And as labor consultants, because that's what our people do all day, they have a much better perspective on the market than any one person can have, and many times, it's that consulting our people do with candidates that gets them over the hump. And that activity doesn't happen with the online perm competitors. As far as impact on candidates, again, while there are platforms they can go to, they need to be convinced. They need to be nudged further. With our clients, many of them are not household names, so part of what value our people add is they sell these non-household names. They sell those opportunities in ways that the client themselves couldn't do. So they add value there as well. So we don't see an outflow of candidates to platforms having a major impact on supply. And in fact, as I said earlier, if anything, we see our own technology initiatives benefiting supply, and frankly disproportionately so, at least to our traditional competitors, and we don't see much linkage to nontraditional competitors in that way.

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Operator [60]

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Our next question is Seth Weber, RBC Capital Markets.

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Seth Weber, RBC Capital Markets, LLC, Research Division - Analyst [61]

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Keith, I just wanted to clarify your response to some of the Protiviti gross margin questions. Are you comfortable thinking that gross margin will be up year-over-year by the end of 2019? Is that what I heard? Or is it just -- I think trends will just get better sequentially?

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M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [62]

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It's our hope that by the end of the year they'll be up year-on-year, but it will take us some time to capture the additional cost that I talked about earlier, which is an annual thing. There are many ways they manage their gross margin. One is what they call the shape of the pyramid, which is the ratio of higher-level people to lower-level people. That's something they manage. Utilization or chargeability, how many hours is a person on an account versus non-chargeable. They manage that. Further, do they choose a staffing contractor or did they choose one of their own staff that's already on the payroll? That's another way they manage their gross margin. So there's a lot of levers there that they have to deal with. They're quite astute in managing those levers and how they impact their gross margin. They're also very astute, and they understand. They look at the year-on-year sequential gross margin just like you and I do. And so the plan is by the end of the year that year-on-year they have higher gross margins.

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Seth Weber, RBC Capital Markets, LLC, Research Division - Analyst [63]

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Okay. That's very helpful. And then just maybe on the tech business, the growth was really strong. Again, double digits. Like you said, the comps do get harder here. Do you think that, that can continue to grow double digits here in the second and third quarters?

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M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [64]

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Well, I certainly hope so. Prudence says to me I would probably give you a range of high singles to low doubles just to hedge a bit. But the point is that business is strong. Full-stack cloud, cyber, digital transformation, Windows 10, machine learning, IT apps, IT ops, it's all pretty good. And we're optimistic, but common sense says when you got the comps getting tougher by, let's see, 6 points, that's a big increase in comps. So it would seem to me prudent for a man to kind of consider that when he's doing his estimating.

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Operator [65]

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Our last question is a follow-up from Jeff Silber with BMO Capital Markets.

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JeffSilber BMO Capital Markets Equity Research - MD & Senior Equity Analyst [66]

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Just a quick numbers question. Keith, you mentioned the tax rate guidance for the second quarter. Should that be the number we use for the rest of the year as well?

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M. Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [67]

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Oh, no, no, no. The rest of the year will come back down somewhat. And so we're probably talking 26%, 27% for the rest of the year.

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JeffSilber BMO Capital Markets Equity Research - MD & Senior Equity Analyst [68]

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Okay, thanks so much for clarifying that.

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Max Messmer, Robert Half International Inc. - Chairman of the Board & CEO [69]

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Thank you. That was our last question. We appreciate you joining us today.

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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 Investors 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.