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Edited Transcript of RHI earnings conference call or presentation 30-Jan-20 10:00pm GMT

Q4 2019 Robert Half International Inc Earnings Call

MENLO PARK Feb 1, 2020 (Thomson StreetEvents) -- Edited Transcript of Robert Half International Inc earnings conference call or presentation Thursday, January 30, 2020 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* M. Keith Waddell

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

* Michael C. Buckley

Robert Half International Inc. - Executive VP & CFO

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Conference Call Participants

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* Andrew Steinerman

JP Morgan Chase & Co, Research Division - MD

* David Silver

CL King & Associates, Inc., Research Division - Senior VP & Senior Analyst

* Emily McLaughlin

RBC Capital Markets, Research Division - Assistant VP

* Gary Bisbee

BofA Merrill Lynch, Research Division - MD & Research Analyst

* Jasper Bibb

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Jeff Silber

BMO Capital Markets Equity Research - MD & Senior Equity Analyst

* George Tong

Goldman Sachs Group Inc., Research Division - Research Analyst

* Kevin McVeigh

Crédit Suisse AG, Research Division - MD

* Mario J. Cortellacci

Jefferies LLC, Research Division - Equity Analyst

* Mark Marcon

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

* Ryan C. Leonard

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Hello, and welcome to the Robert Half Fourth Quarter 2019 Conference Call. Our hosts for today's call are Mr. Keith Waddell, Chief Executive Officer of Robert Half; and Mr. Michael Buckley, Chief Financial Officer.

Mr. Waddell, you may begin.

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M. Keith Waddell, Robert Half International Inc. - CEO & Vice Chairman of the Board [2]

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Hello, everyone. Thank you for joining today's call. Before we begin, I would like to remind you that the comments made on today's call contain forward-looking statements, including predictions and estimates about our future performance. These statements represent our current judgment of what the future holds. However, they are subject to the risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. These risks and uncertainties are described in today's press release, and in our most recent 10-K and 10-Q filed with the SEC. We assume no obligation to update the statements made on today's call.

During this presentation, we may mention some non-GAAP financial measures and reference these figures as as-adjusted. Reconciliations and explanations of these measures are included in a supplemental schedule to our earnings press release. For your convenience, our prepared remarks for today's call are available in the Investor Center of our website at roberthalf.com. From the homepage, click on the Investor Center link at the bottom left of the page.

Before we go over our fourth quarter results, I'd like to say a few words about Max Messmer, who transitioned to Executive Chairman at the end of last year after 33 years as CEO. Max set a very high standard in leading Robert Half to where it is today, and we're very grateful for everything he has done. Max and I have worked together over this entire time period, and I hope to continue his standard of excellence as we move forward. We are fortunate to have Max stay as Executive Chairman and remain involved in the growth and strategy of the company.

Joining me now on our quarterly calls is our newly appointed CFO, Michael Buckley. Mike is a 24-year veteran of Robert Half, originally from public accounting. Mike has served Robert Half in various roles including Controller, Vice President of Finance; and most recently, Chief Administrative Officer. He has led the finance and accounting function at Robert Half for many years.

Now let's review Robert Half's fourth quarter 2019 financial results. Companywide revenues were $1.537 billion, up 4% from the fourth quarter of 2018 on both a reported and as-adjusted basis.

Fourth quarter 2019 net income per share was $0.98 compared to $0.95 in the fourth quarter one year ago. This is a 4% increase year-over-year. Cash flow from operations was $81 million in the fourth quarter, and capital expenditures were $14 million.

In December, we distributed a $0.31 per share cash dividend to our shareholders of record for a total cash outlay of $36 million.

We also repurchased approximately 1 million Robert Half shares during the quarter for $59 million. We have 2.5 million shares available for repurchase under our board-approved stock repurchase plan.

We ended 2019 with continued strength in the U.S. job market and solid demand for our professional staffing and consulting services. We were particularly pleased with how Protiviti performed during the quarter. Our Robert Half Technology and Robert Half Management Resources divisions also turned in solid results, largely due to the ongoing talent shortages in the professional disciplines they serve.

Return on invested capital for the company was 40% in the fourth quarter.

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

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Michael C. Buckley, Robert Half International Inc. - Executive VP & CFO [3]

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Thank you, Keith, and hello, everyone. I am very pleased to join you on the call today.

Let's start with a closer look at revenues for the fourth quarter. As Keith had noted, global revenues were $1.537 billion for the quarter. This is up 4% in the fourth quarter one year ago on both a reported and as-adjusted basis. Also, on an as-adjusted basis, fourth quarter staffing revenues were up 2% year-over-year. U.S. staffing revenues were $962 million, up 3% on an as-adjusted basis. Non-U. S. staffing revenues were $271 million, down 1% year-over-year on an as-adjusted basis. We have 326 staffing locations worldwide including 87 locations in 17 countries outside the United States.

In the fourth quarter, there were 61.7 billing days, unchanged from the same quarter one year ago. The current first quarter has 63.1 billing days versus 62.2 days in the first quarter one year ago. Currency exchange rate movements during the fourth quarter had the effect of decreasing reported year-over-year staffing revenues by $6 million. This decreased our year-over-year reported staffing revenue growth rate by 0.5 percentage point.

Now let's take a look at results for Protiviti. Global revenues in the fourth quarter were $304 million: $239 million of that is from business within the United States and $65 million is from operations outside the United States. On an as-adjusted basis, global fourth quarter Protiviti revenues were up 14% versus the year ago period, with U.S. Protiviti revenues up 17% from the prior year. Non-U. S. revenues were up 3% on an as-adjusted basis. Exchange rates had the effect of decreasing year-over-year Protiviti revenues by $1 million and decreasing the year-over-year reported growth rate by 0.3 percentage points. Protiviti and its independently owned member firms serve clients through a network of 86 locations in 27 countries.

Now let's take a look at gross margin. In our temporary and consulting staffing operations, gross margin was 38% of applicable revenues in the fourth quarter compared to 38% of applicable revenues in the fourth quarter one year ago. Our permanent placement revenues in the fourth quarter were 10.2% of consolidated staffing revenues versus 10.3% of consolidated staffing revenues in the fourth quarter one year ago. When combined with temporary and consulting gross margin, overall staffing gross margin decreased 10 basis points compared to the year ago fourth quarter to 44.3%.

For Protiviti, gross margin was $93 million in the fourth quarter or 30.4% of Protiviti revenues. One year ago, gross margin for Protiviti was $80 million or 30.2% of Protiviti revenues.

Companywide SG&A costs were 31.6% of global revenues in the fourth quarter compared to 31.5% in the fourth quarter one year ago. Staffing SG&A costs were 35.2% of staffing revenues in the fourth quarter, versus 34.5% in Q4 of 2018. The increase in staffing SG&A as a percentage of revenue is a continuation of what we saw last quarter and is primarily the result of negative leverage from our non-U. S. staffing operations. We ended 2019 with 11,500 full-time internal staff in our staffing divisions, up 3% from the prior year.

Fourth quarter SG&A costs for Protiviti were 17.1% of Protiviti revenues compared to 17.3% of revenues in the year ago period. We ended 2019 with 5,500 full-time Protiviti employees and contractors, up 17% from the prior year.

Companywide operating income was $153 million in the fourth quarter. Operating margin was 10%. Fourth quarter operating income for our staffing divisions was $113 million with an operating margin of 9.1%. Operating income for Protiviti in the fourth quarter was $40 million, with an operating margin of 13.3%.

At the end of the fourth quarter, accounts receivable were $833 million, and implied days sales outstanding, or DSO, of 48.7 days.

Before we move on to first quarter guidance, let's review some of the monthly revenue trends we saw in the fourth quarter of 2019 and thus far in January 2020, all adjusted for currency and billing days. Our temporary and consulting staffing divisions exited the fourth quarter with December revenues up 2.1% versus the prior year compared to a 2.2% increase for the full quarter. Revenue for the first three weeks of January 2020 were up 3.2% compared to the same period one year ago.

Permanent placement revenues in December were down 3.7% compared to December 2018. This compares to a 0.9% increase for the full quarter. For the first four weeks in January, permanent placement revenues were up 4% compared to the same period in 2019.

As Keith has noted on prior calls, we provide this information so that you have insight into some of the trends we saw during the fourth quarter and into January. But as you know, these are very brief time periods, we caution against reading too much into them.

With that in mind, we offer the following first quarter guidance:

Revenues: $1.515 billion to $1.580 billion

Income per share: $0.90 to $0.96

The midpoint of our guidance implies year-over-year revenue growth of 4% on an as-adjusted basis, including Protiviti. 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 Keith.

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M. Keith Waddell, Robert Half International Inc. - CEO & Vice Chairman of the Board [4]

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Thank you, Mike. As discussed at the start of the call, Protiviti had a very strong fourth quarter. Robert Half Technology and Robert Half Management Resources also performed well, largely because of intensifying labor shortages in technology disciplines and highly skilled accounting and finance specialties we serve. On the last call, we talked about how the shortage of IT talent is negatively impacting companies trying to make technology enhancements, particularly in the digital space. This is also resulting in higher demand for our IT staffing solutions.

In December, the U.S. unemployment rate held at 3.5%. Until the last half of 2019, unemployment had not been that low in 50 years. Protracted skill shortages remain a problem for employers. The U.S. economy added 145,000 jobs in December. The Vistage CEO Confidence Index also improved in the fourth quarter, moving from 85 in the prior quarter to 91.5. Sixty-three percent of CEOs said they plan to expand their workforce in the year ahead, up 6 points from the third quarter.

Our Protiviti teams are also reporting higher demand across all of their practice areas, which run the gamut from internal audit to a wide range of business and technology consulting solutions. The collaboration between Protiviti and our staffing operations has become a key differentiator for us. Our unique ability to provide businesses with a full spectrum of staffing and consulting solutions under one roof makes us an attractive alternative to working with multiple service providers.

Customers demand more from companies today than ever before. Our investments in technology, including enhancements to our website, personalized job and candidate recommendations, and our own mobile app allow us to meet their changing expectations by offering more choice in how and when they work with us. These innovations, paired with the expertise of our local staffing specialists, are making it easier and faster to hire or be hired through Robert Half, whether customers engage with us online or in person.

We feel very good about how the company is positioned right now. Our brand is the best recognized in the industry, supported by over $1 billion in advertising over the last 25 years. Our business model continues to focus on professional-level engagements at small and middle market companies, attractive areas of the market. Our people are among the most driven and tenured in the industry. Our senior field leaders average more than 20 years with Robert Half. Our technology tools are state-of-the-art, and we continue to invest in digital transformation. And finally, Protiviti is performing well, not only in its traditional consulting and solutions areas, but also as it goes to market together with our staffing professionals.

Now Mike and I'd be happy to answer your 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 the line of Mark Marcon from 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 can talk a little bit more about the strong growth that you're seeing domestically in Protiviti. And just to what extent the momentum can be continued? Because it certainly seems like you went up against a pretty tough comp in the year ago period and still delivered the 16% total growth. And clearly, the blended workforce solutions is helpful, but it looks like you're expanding the number of areas of solutions that you're providing. So I'm just wondering if you can give some context there. And then I have a follow-up.

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

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Sure. So Protiviti is performing very well. It's at seven straight quarters of double-digit growth. It achieved an 11.3% operating margin for the year. So we had double-digit growth and double-digit margins, which we've long talked about is the standard we've set for Protiviti. Their growth and their strength is broad-based. Internal audit or IT audit is particularly strong. Technology consulting or cybersecurity and cloud, privacy are strong. FSI regulatory. We've long talked about anti-money laundering, but they're also getting nice traction in consumer lending as well. And then our joint solution, which we call Managed Business Solutions and Managed Technology Solutions, where we combine subject matter expertise from Protiviti, scalable resources from staffing, that continues to do well. In fact, the growth there has accelerated for several quarters in a row. The pipeline is strong. They feel good going into 2020. The normal Q1 seasonality, we expect to be pretty much like it's been in the past, such that year-on-year, when you look at our guidance, we pretty much perceive Protiviti staying at the same growth rates you saw in the fourth quarter, which is strong.

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

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That's fantastic. And then can you talk a little bit about what you're seeing in the international markets, if we look at perm and Protiviti. Listening to some other professional services firms that are based in Europe, it's not a surprise, but just wondering what you're seeing there and what we should think about with regards to some of the deleveraging that you mentioned earlier in terms of how that's going to impact the near term.

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

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So we have built into our guidance for the last few quarters, and we continue to for the coming quarter, that we would see some moderation of growth rates. That has been the case. I'd say on the good news front, Germany, which is our largest non-U. S. market, their growth rates are still positive, low single digit, but positive. They held in the fourth quarter versus the third. And the expectation is they hold again in the first quarter. So we're very pleased with how Germany is doing. The other strong spot outside the U.S. would be Australia, and that's on both the staffing and the Protiviti side. We do have negative growth in France, the U.K., Belgium, Canada, pretty much all the other countries, but I would observe we're faring better than most of the industry is in that way, in large part because we're not nearly as exposed to manufacturing as is most of the industry.

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

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Keith, would you say that France and the U.K. were somewhat episodic, either from the French pension strikes or the U.K. election?

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

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It's hard to put causation precisely on what you describe. They clearly contribute to it. But hopefully, those clear as the quarters progress, particularly Brexit, hopefully, the major disruption and uncertainty around that is behind us, but we'll see.

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Operator [8]

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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 [9]

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My question is about the 3.2% growth rate in early January for temp and consulting revs. Just remind everybody, I believe, that even though you say consulting, that's without Protiviti. My question is really -- that's on a global basis, could you give us a sense of how the U.S. did in January in temp revenues?

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

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So you are correct, the 3.2% is staffing only, does not include anything for Protiviti. It is global. U.S. is stronger. There is continuation of some negative growth outside the U.S. So if anything, if you look at the fourth quarter, November was particularly strong. December was not as strong, in part because there was a bigger holiday impact than we typically see. So we see January getting closer to what we had seen in November. And I must say that the re-entry points we saw once we got past January 6, our field people are quite energetic and enthused about.

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Andrew Steinerman, JP Morgan Chase & Co, Research Division - MD [11]

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Right. Maybe just answer the question. Why, Keith, why do you feel like U.S. temp revenue growth picked up in January from December?

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

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Well, one factor is the comps get a little easier. That's not the total message, but there was clearly some holiday impact to December, more so than we typically see. We talked about the Wednesday holidays on the last call, but we saw a broad-based strong re-entry point in January in U.S. temp staffing, which we're very pleased with.

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Operator [13]

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Your question comes from the line of Kevin McVeigh from Crédit Suisse.

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Kevin McVeigh, Crédit Suisse AG, Research Division - MD [14]

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Let me add my congratulations to Max. Keith, it's hard to replace a legend, but definitely if anybody was going to do, it's you. In terms of just really nice trends of Protiviti, I just wanted you to remind us, if you could, of the impact on Management Resources and just what percentage of that business is tied into Protiviti today, and just how that's trended over, I guess, 2019, if you could.

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M. Keith Waddell, Robert Half International Inc. - CEO & Vice Chairman of the Board [15]

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Well, first of all, the numbers you see externally for Management Resources include zero as it relates to Protiviti because all of the people Management Resources placed on Protiviti engagements are reported as Protiviti, not Management Resources. And in fact, if you look at Protiviti overall, 25%, 28% of their staff hours come from the staffing divisions collectively, not just Management Resources, and that's up versus a year ago. But that revenue gets reported as Protiviti. But orders of magnitude, about 1/4 of the staff level resources in Protiviti come from staffing, and we're delighted with that.

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Kevin McVeigh, Crédit Suisse AG, Research Division - MD [16]

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That brings a lot of flexibility. And then just real quick, Keith. If you said it, I apologize. Just the tax rate in the first quarter and then what we should model for 2020.

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Michael C. Buckley, Robert Half International Inc. - Executive VP & CFO [17]

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So the tax rate that we expect in Q1 would be in the 26% to 27% range. For the full year 2019, the tax rate was 27%. We expect the full year of 2020 to be in a similar range, say, 27% to 28%.

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Operator [18]

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Your next question comes from the line of Jeff Silber from BMO Capital Markets.

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

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When you typically give your outlook for earnings per share, you typically give us a little bit of color on what kind of margins we should expect. So I was just wondering if you can go through that right now.

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M. Keith Waddell, Robert Half International Inc. - CEO & Vice Chairman of the Board [20]

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Sure. So let me provide context to that a little bit from some commentary on the fourth quarter and then I'll segue into guidance from that. So in the fourth quarter on the temp side, it was pretty much as we expected with OfficeTeam being a little lighter as open enrollment didn't get the seasonal lift we've gotten in years' past, and we exited some low-margin accounts. Our project divisions, Management Resources and Technology did very well. And understand that's as much supply as it is demand because Management Resources and Technology have access to career consultants, a broader talent ecosystem than do Accountemps and OfficeTeam, which pretty much deal with the traditional people between full-time engagements.

The Wednesday holidays had a little more of an impact, as I said earlier. Europe, modest slowing and continues. Encouraged that Germany appears to be bottoming. Perm, demand remains strong. Holidays, even more impactful to perm as both clients and candidates were not around to close deals. Biggest issue for perm is we continue to lose candidates to counteroffers from existing employers from multiple offers from outside, but demand there remains strong, and that's continued into the first quarter. And then getting to the first quarter, our 2020 guidance has overall revenues up 4%, consistent with Q4. Staffing would be 2%, consistent with Q4. U.S. strong. Europe continuing to decline modestly. Remember, Germany, strong at the offset. Protiviti, growth rates stay pretty close to where they were in Q4, which was a strong double digit, 14%. Gross margins year-over-year, flat with last year, plus or minus 10-to-20 basis points as we continue to pass-through wage increases and our bill rate increased 5.2% in the fourth quarter versus a year ago, and we would expect to see that trend into the first quarter. Going back to guidance again, Protiviti gross margins would be up 100 basis points, plus or minus 20 as they get more leverage from their outsized revenue growth. Staffing SG&A, up 80 basis points. Again, relative to last year, plus or minus 10-to -20 basis points. We talked about the international zone, the negative leverage. The tech spending that we ramped up starting a couple of years ago. We're continuing at those levels. Protiviti SG&A versus a year ago, up 50 basis points, plus or minus 10 to 20. Principally, training and marketing as they add more people to support their growth, which means that overall operating income, the percentage versus revenues would be down 80 basis points, plus or minus those same 10 to 20 range that we've been talking about. Tax rate, as Mike mentioned, will be up a point versus a year ago. We'll have fewer grandfathered nondeductible costs, which drives up the rate and then the share counts in the $114 million range. But all in all, we're pretty pleased with the U.S. environment, how we're performing in the U.S. environment, and we're hopeful that things are going to bottom out in Europe. And as I've said that now for the fourth time, we're particularly encouraged with Germany.

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

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Right. Well, it sounds like you were prepared for that question. I really appreciate that. I'm sorry to ask this one. I just want to nitpick a little bit, but did you change the way that you calculate your full-time internal staff? You finished 2019 with 11,500. I had in my note, yes, something like 14,900 last year. Maybe I had the wrong number. But was there a different way of calculating it this year?

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

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So yes, we did make a change, and the change relates to the number of people that we have full-time that are out on engagements and billed to clients. It's long been the case outside the United States. And in some cases, it's mandatory, starting with Germany, that the people you place on engagements are your full-time employees. As you know, in the technology staffing sector, it's long been the case that many of those consultants are full-time to the staffing company and then they're put on their engagements from there. And so what we've done is we've taken from the full-time number, those that are actually billable on engagements, and we've reported an internal number. So whereas the prior distinction was full-time versus temporary, the distinction we're now making is internal versus on engagement, which is a suddenly different distinction. But the reason being that one of the strategies we have to deal with the candidate shortage is that we are beginning to put a single-digit number of the people we have on billing on our full-time payroll and then putting them on engagements because we believe our scale allows us to do that and keep them highly utilized. And further, we get to access the same pool of people for Accountemps, OfficeTeam, et cetera, that we're already getting to access for Management Resources and Robert Half Technology, because that's a common way of doing business in those sectors. So it's a long-winded way of saying, yes, we made a change, and we made a change because it reflects that some of the people we have on billing are, in fact, our full-time employees, which has long been the case outside the United States, which has long been the case for a portion of our technology staffing and is more recently the case in accounting and finance.

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Jeff Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [23]

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Got it. And the important thing is that on a like-for-like basis, it was up 3% year-over-year.

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

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Correct. The percentages are definitely on a like-for-like basis.

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Operator [25]

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Your next question comes from the line of Manav Patnaik from Barclays.

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

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This is Ryan on for Manav. Just a question. You kept the growth rate in temp. You're saying that it should be kind of similar to the fourth quarter. You're, obviously, getting pricing, the comps are easing a little bit. Is that an element of conservatism? Or is the volume slipping a little bit more? Maybe you can help bridge that gap.

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

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We hope we're being conservative. We understand that our guidance is at the same growth rates as Q4 with easier compares. But understand that the compares are easiest outside of the United States where there's more uncertainty as to how the quarter will play out. But we hope we have upside. We began the quarter stronger than we exited the fourth quarter. On top of that, we have easier comps. So hopefully, we have some upside relative to what we forecast.

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Ryan C. Leonard, Barclays Bank PLC, Research Division - Research Analyst [28]

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Got it. And then just on Protiviti, I think, you mentioned in the last call, there were some kind of big contracts in the mix in the fourth quarter. Maybe you can give some comment on how those progressed? And I guess, just generally, the pipeline of Protiviti.

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

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Well, the pipeline is very strong, and we feel great about that. As we talked last quarter, if you look at Protiviti international, the growth went from 9% to 3% between quarters 3 and 4. And that's the deceleration we talked about because they lost a couple of big contracts that hadn't yet anniversaried. So that was consistent with expectation. The good news is we had more than enough acceleration in the U.S. to more than cover that. But pipeline, for Protiviti, very good. And what's incredible about it, is it's virtually every one of their solution areas and then the go-to-market with staffing is just gravy on top of that.

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Operator [30]

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Your next question comes from the line of Gary Bisbee from Bank of America Securities.

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Gary Bisbee, BofA Merrill Lynch, Research Division - MD & Research Analyst [31]

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So I guess, it's interesting when we look at your international, obviously, you've seen deceleration as one would expect. But the deceleration has been significantly after the typical temp data in a lot of these countries outside the U.S. turned down. And I caught the comment less manufacturing and understand you have a very different mix. But is part of the timing of the deceleration just that higher skilled professional tends to lag low skill? And I guess, to the extent that part of why things are weakening now, would it be reasonable to expect that re-acceleration might lag the re-acceleration seen in some of those markets at some point in the future?

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

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We've been around over 30 years and at least the first half of that period, there was clearly a theory out there that manufacturing led and that ultimately that made its way to the back office and then the back office was impacted later. I no longer buy into that theory. A, manufacturing is not nearly as large a percentage of the total as it once was, and I don't think there's any empirical data that would support it in today's digital world and very intertwined supply chains. I think it happens much more quickly and pretty much coincidently than it did 15 years ago and longer. So I believe it's more coincident. I don't think the principal reason why we were impacted later is because of the traditional manufacturing back office lag. I think it's in part which countries we're in; it's which markets, which disciplines within those countries; what investments have we made, particularly in head count; what's the quality of leadership, which is quite good. I think it's way more company-specific and specific and granular market exposures than it is the old general theme of back-office lags manufacturing.

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Gary Bisbee, BofA Merrill Lynch, Research Division - MD & Research Analyst [33]

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Okay. And then do you have on hand what you expect the number of workdays in staffing to be for all four quarters of this year?

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

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Yes. Mike will give you that.

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Michael C. Buckley, Robert Half International Inc. - Executive VP & CFO [35]

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Yes. So by quarter, 63.1; quarter 2, 63.4; third quarter, 64.3; and in the fourth quarter, 61.7, for a total of 252.5 billing days for the year.

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Operator [36]

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Your next question comes from Tobey Sommer from SunTrust.

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Jasper Bibb, SunTrust Robinson Humphrey, Inc., Research Division - Associate [37]

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This is Jasper Bibb on for Tobey. I was wondering what you're seeing with respect to pricing for Protiviti. And also how you're thinking about head count growth in that segment.

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

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And so the second part cut out. The high, what?

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Jasper Bibb, SunTrust Robinson Humphrey, Inc., Research Division - Associate [39]

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Hiring in Protiviti?

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M. Keith Waddell, Robert Half International Inc. - CEO & Vice Chairman of the Board [40]

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Okay. Hiring. And so Protiviti clearly is having to pay its new staff more and it's impacted by wage inflation generally, which it is successfully passing through. As we talked earlier in the call, we're expecting 100 basis point improvement in gross margin year-over-year. So that's a good thing. As to hiring 2 sources, as I talked earlier, about 1/4 of their staff resources, they're sourcing from staffing on a just-in-time basis. And beyond that, they're very aggressive on campus. They have been forever. That's how the Big Four grow their staff, and Protiviti is right there with them. And they've got a very aggressive hiring program for 2020, in fact, even more so than it was in 2019.

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Jasper Bibb, SunTrust Robinson Humphrey, Inc., Research Division - Associate [41]

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Historically, it seems there have been demand positives due to election and tax uncertainty. So as we approach a new primary season, what extent do you think that might become a predominant factor in customer decision-making again?

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

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It's hard to comment on political and tax uncertainty. I don't think it's risen to everyday conversation yet at this point.

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Operator [43]

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Your next question comes from the line of Seth Weber from RBC Capital Markets.

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Emily McLaughlin, RBC Capital Markets, Research Division - Assistant VP [44]

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This is Emily McLaughlin on for Seth tonight. Sorry, if I missed it, but did you talk about, well, Protiviti margins were a little bit better than we expected in the fourth quarter. Was staff utilization better? Or did something else drive that?

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M. Keith Waddell, Robert Half International Inc. - CEO & Vice Chairman of the Board [45]

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Well, it's a combination of utilization, inclusive of using contractors sourced through staffing. And I'd say the biggest piece of upside is probably related to the number of people sourced through staffing which, by definition, have a 100% utilization, which helps their margins.

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Emily McLaughlin, RBC Capital Markets, Research Division - Assistant VP [46]

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Okay. And can you just talk about your CapEx expectations this year, and then the spend on technology and digital strategy?

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Michael C. Buckley, Robert Half International Inc. - Executive VP & CFO [47]

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So we finished '19 with CapEx of $90 million; for 2020, we're expecting a range of $100 million to $110 million; with Q1 coming in at $20 million to $25 million range. The increase in CapEx is largely the result of ongoing investments in technology and specifically a new project to implement Workday financials globally. Our legacy financial system is 17 years old in Ops Support. And so this move will bring our financial systems up-to-date and out of the data center and into the cloud. In addition, we've already transitioned to Workday HCM on a global basis, and this implementation will result in a full integration between these systems.

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M. Keith Waddell, Robert Half International Inc. - CEO & Vice Chairman of the Board [48]

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And then talking more generally about digital transformation and technology strategy, we've talked several quarters in a row -- we're about providing a world-class personalized digital experience for clients and candidates that's focused on our website, that's focused on our mobile app. We continue to refine and improve our AI for our matching engines. We micro-target recommendations to clients and candidates. We prioritize leads for our staff. The good news is we're now starting to see quantifiable benefits. We've seen a significant increase in traffic to our sites, both in terms of client, candidate -- excuse me, candidate applications and client leads. As importantly, we've also seen an improvement in the quality of those candidates. Because in many cases, they were pre-matched before we invited them to apply.

Also, I'm very pleased with our field adoption of our technology tools. And in fact, we're told by sales force we're 1 of the top 10 users in the world of their software, which is pretty impressive because we're certainly not 1 of the top 10 largest companies in the world. Our mobile app has gotten nice traction. It's currently rated 4.8 in the Apple App Store. We've gotten over 100,000 applications since we launched it in July. And further, we've launched Robert Half Direct earlier last year. It's our online hiring platform, where our clients have direct access to a short list of candidates. It leverages our technology. It leverages our candidate database that's maintained by live recruiters around the world. We piloted that in a dozen offices. It extends traditionally our full-service offerings to the self-service market. So we're upbeat about that as well. But the bottom line is, and the thing that's most encouraging to me is that we're beginning to see quantifiable benefits of significance from the investments we've made so far, and we continue to make those investments.

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Operator [49]

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(Operator Instructions) Your next question comes from George Tong from Goldman Sachs.

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George Tong, Goldman Sachs Group Inc., Research Division - Research Analyst [50]

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You mentioned you're still seeing negative growth in France, the U.K., Belgium and Canada. Can you elaborate on client sentiment and sales cycles in those countries?

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M. Keith Waddell, Robert Half International Inc. - CEO & Vice Chairman of the Board [51]

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Sentiment and sales cycles. I'd say, sentiment hasn't changed much. It's guarded, it's cautious, it's measured and it's been that way for a while. And we've included that in the guidance that we've given. On the flip side, we've talked about what appears to be a stabilization in Germany, which is our largest non-U. S. operation. But not a lot of change, George, from what we saw in the fourth quarter. If anything, some stabilization in Germany.

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George Tong, Goldman Sachs Group Inc., Research Division - Research Analyst [52]

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Got it. That's helpful. This cycle has been previously characterized as one that's relatively supply-constrained from a talent perspective. What evidence might you be seeing that suggests that there might be some give with demand as well?

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M. Keith Waddell, Robert Half International Inc. - CEO & Vice Chairman of the Board [53]

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Well, as we've talked about a couple of times on the call, demand is good. And, if you ask me, what needs to happen for our growth rates to improve, particularly in the United States, the first thing I would say is we need more fee-eligible candidates. If a client needs a person with 10 years' experience to the extent we have more people with 10 years' experience, our revenues are going to grow. And in a nuanced way, our clients could have more urgency in that when we present a 7-year person to their 10-year requirement, they take the 7-year person. So the combination of more fee-eligible supply and/or more client urgency would help us grow our revenues. As I just talked about, clearly, our technology investments are helping with supply. As we talked earlier, our approach to hire full time, some of the people we put out of engagements should also help with supply. But to this point, we are not seeing, particularly in the United States, any moderation in demand. Demand is strong. If we had more fee-eligible candidates, we report more revenue, full stop.

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Operator [54]

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Your next question comes from the line of Hamzah Mazari from Jefferies.

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Mario J. Cortellacci, Jefferies LLC, Research Division - Equity Analyst [55]

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This is Mario Cortellacci filling in for Hamzah. Just wanted to comment on the management change. Congratulations to both of you. But I also had a question about that as well. I just wanted to know if you're thinking about any type of change in strategy or if you guys have discussed how you guys are approaching the business and you guys have done business almost the same way with slight changes to it over the past decade or so. I just didn't know if there is a change in thought process or discussion that you guys had about that.

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M. Keith Waddell, Robert Half International Inc. - CEO & Vice Chairman of the Board [56]

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Well, the fact that I've been here 33 years, and Mike has been here 24 years, and we've been -- both been very involved in the strategy and the execution of that for those periods of time. I don't think you can expect any material changes because of the management change.

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Mario J. Cortellacci, Jefferies LLC, Research Division - Equity Analyst [57]

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That's what I figured. I just wanted to ask. And then on Protiviti, I just wanted to see if you can kind of frame for us what the competitive environment looks like there. And maybe share with us whether or not you think you're gaining share.

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M. Keith Waddell, Robert Half International Inc. - CEO & Vice Chairman of the Board [58]

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Well, Protiviti's principal competitors are the Big 4 accounting firms, and that's been true since day 1 in 2002. Gaining share, I don't think there's any question that our joint go-to-market with staffing is unique, differentiated and growing more quickly than the Big 4 generally and the consulting market, specifically. Because the Big 4 doesn't break out their like-for-like solutions similar to Protiviti's, it's hard to say, per se, whether we're gaining share. But I can say, overall, the Big 4 aren't growing at the same rates of Protiviti. And I suspect that we are gaining share. We've always majored in internal audit, and are known as such, more so than even the Big 4. And we've gotten tremendous traction in FSI regulatory consulting, as I said earlier. We're extending the base of anti-money laundering into consumer lending, where we've gotten some very good engagements of late. Technology, security, privacy is a hot area, where we're able to attract people into those practices. Success -- lead success. We get all types of awards as an organization. We were just named for the 23rd straight year to Fortune's Most Admired list. We made Forbes' Best Employers for Diversity. We made Bloomberg's Gender Equality Index. We made to Human Rights Foundation for Best Places for LBGTQ Equality, and that's just in the last couple of months. So all of those help Protiviti attract and Robert Half generally to attract the best and brightest which then propels their client satisfaction and engagement growth.

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Operator [59]

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Your next question comes from David Silver from CL King.

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David Silver, CL King & Associates, Inc., Research Division - Senior VP & Senior Analyst [60]

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So I'm going to ask a question or 2 that I think have been answered in part. But first thing I was going to ask was maybe about your staffing -- your internal staffing needs for maybe the first quarter and the full year. But you talked about an aggressive plan to staff up Protiviti. In the past, I guess, your first quarter EPS has been affected by additional hiring and the time it takes to absorb that incremental overhead. How should we think about that maybe for your first quarter and the full year for staffing as well as Protiviti?

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M. Keith Waddell, Robert Half International Inc. - CEO & Vice Chairman of the Board [61]

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By and large, we try to match internal headcounts to top line growth, and we just reported for the full year, that was the case, 3% on the staffing side and double digit on the Protiviti side, and that would be our plan as we move forward. The principal issue sequentially for the first quarter is that Protiviti has a seasonality impact from your post Sarbanes-Oxley compliance and post internal audit ramp up for year-end, which happens in the fourth quarter. So the following first quarter always is lower by 5% to 7%. And I think our guidance has something similar to that for this year. So it's that seasonal pattern inclusive of all of their raises are effective Jan 1, which then take some time to absorb as well. The combination of those sequentially, because of that seasonality, we back up somewhat at the EPS line. But if you look year-on-year, it effectively negates that, Protiviti is growing nicely and double digit. But that seasonal impact we've had per every year of the 17 years we've had Protiviti, it's very unexpected and very well managed. And the fact that 25% of their workforce hours come from staffing makes their cost even more variable.

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David Silver, CL King & Associates, Inc., Research Division - Senior VP & Senior Analyst [62]

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Okay. And then I have a question about the CapEx budget. And there's a couple of parts to it. So I hope I get this out in an organized fashion. So Mike highlighted an increase in budgeted CapEx for this year. And if I understand his description correctly, it was focused on, I guess, improving the back office reporting and administration side of your business. So first question there would be, do you anticipate year-over-year efficiency gain or cost reduction from updating what you said was a fairly outdated or older system? Second thing I would say -- I wanted to know about CapEx was, you mentioned a couple of years ago, the major IT investment you made. And Keith, you were about as effusive as I've ever heard you on this call today discussing the revenue generation potential of that 2- to 3-year-old investment. So what's the opportunity -- or what's the possibility, Keith, that you might be contemplating a step change in your digital capabilities, and maybe kind of a stage 2 development on the IT side to further enhance the efficiencies and the opportunities that your first stage front office, I'll call it, IT effort has generated?

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M. Keith Waddell, Robert Half International Inc. - CEO & Vice Chairman of the Board [63]

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So on the Workday Financials front, I mean, typically changing financial systems isn't an efficiency/cost-reduction-driven endeavor. Although, I will say, we will be going from on-premise to cloud, and that should drive some cost reduction and some efficiency, but it's basically a new financial system, accounts payable, accounts receivable. So it's accounting infrastructure, if you will.

On the second point, as I look at our IT initiatives, as we sit here today, it's more additional refinement of our AI. It's additional refinement of our recommendations, marketing. It's additional refinements of how we help the field generate and prioritize leads. Thematically, there's no one big thing that's going to be new to what we're already doing, but don't discount the benefit of the refinements we're talking because we're pretty much first generation of everything we've already done. But again, the candidate sourcing benefits we're already seeing are very encouraging, and in the future, make us less dependent on third-party sources for candidates for which we spend significant sums. That would be our plan in years following, and we not continue to spend at those amounts.

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Operator [64]

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And your last question comes from the line of Mark Marcon from Baird.

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Mark Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [65]

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Just a quick question with regards to AB5. Are you seeing any sort of impact?

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M. Keith Waddell, Robert Half International Inc. - CEO & Vice Chairman of the Board [66]

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Well, clearly, Mark, AB5 for California, which is the independent contractor versus employee and other states have their own versions of it. Many clients throw their hands up and say, I don't understand it, I don't want to understand it. The easiest way to deal with it is to only use employees and not use independent contractors. It's early. There are a lot of exceptions already in that. There's a lot of flux about whether there are going to be ballot initiatives that change it. So I would say it's early. We haven't seen significant movement, but we clearly have seen, particularly with larger clients that rather than try to figure it out, they just say, let's make this easy. We will not allow independent contractors, which would be good for staffing firms generally and us specifically.

Okay. So that was our last question. Thank you for joining us today.

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Operator [67]

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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.