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Robert Half International Inc (RHI) Q2 2019 Earnings Call Transcript

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Robert Half International Inc (NYSE: RHI)
Q2 2019 Earnings Call
Jul 23, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the Robert Half Second Quarter 2019 Conference Call. Our hosts for today's call are Mr. Max Messmer, Chairman and CEO of Robert Half; and Mr. Keith Waddell, Vice Chairman, President and Chief Financial Officer. Mr. Messmer, you may begin.

Harold M. Messmer -- Chairman of the Board and Chief Executive Officer

Thank you. Hello, everyone, and thank you for joining today's call. As a reminder, the comments made on today's call contain predictions, estimates and other forward-looking statements. These statements represent our current judgment of what the future holds and include words such as forecast, estimate, project, expect, believe, guidance and similar expressions. We 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, 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.

Now, let's review Robert Half's financial results for the second quarter. Global revenues for the company were $1.516 billion, an increase of 4% from last year's second quarter on a reported basis, and an increase of 6% on a same-day, constant-currency basis. Second quarter net income per share was $0.98 versus $0.89 in the same period one year ago. This is an increase of 10% year-over-year.

Cash flow from operations was $121 million in the second quarter, and capital expenditures were $16 million. In June, 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 $60 million. We have 4.9 million shares available for repurchase under our Board-approved stock repurchase plan. We saw solid demand for our staffing and Protiviti services during the second quarter. Global talent shortages persist across our professional disciplines, particularly in the United States, where unemployment remains near a 50-year low. This enhances the value of our services. During the second quarter, return on invested capital for the company was 42%.

I'll turn the call over to Keith for a more detailed discussion.

M. Keith Waddell -- Vice Chairman of the Board, President and Chief Financial Officer

Thank you, Max. As noted, global revenues in the second quarter were $1.516 billion. This is up 4% from the prior year's second quarter on a reported basis, and up 6% 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 as-adjusted basis. These figures are further broken out by US and non-US operations. The term as-adjusted reflects the removal of the impact of billing days, currency fluctuations and certain intercompany adjustments in our international operations. This is a non-GAAP financial measure designed to provide insight into certain revenue trends in our operations.

On an as-adjusted basis, second quarter staffing revenues were up 4% year-over-year. US staffing revenues were $965 million, up 4% on a same-day basis. Non-US staffing revenues were $278 million, up 3% year-over-year on an as-adjusted basis. We have 325 staffing locations worldwide, including 86 locations in 17 countries outside the United States.

There were 63.4 billing days in the second quarter versus 63.5 days in the same quarter one year ago . The current quarter has 64.1 billing days, compared to 63.3 days in the third quarter one year ago.

Currency exchange rate movements during the quarter had the effect of decreasing reported year-over-year staffing revenues by $16 million. This reduced our year-over-year reported staffing revenue growth rate by 1.3 percentage points.

Global revenues for Protiviti were $273 million: $211 million of that is from business within the United States, and $62 million is from operations outside the United States. On an as-adjusted basis, Protiviti revenues were up 14% versus the year-ago period. On a same-day basis, US Protiviti revenues in the second quarter were up 15% from the prior year. Non-US revenues were up 9% on an as-adjusted basis. Exchange rates had the effect of decreasing year-over-year Protiviti revenues by $3 million and decreasing the year-over-year reported growth rate by 1.2 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 38.2% of applicable revenues, compared to 37.5% of applicable revenues in the second quarter one year ago. Expanding bill/pay spreads and lower payroll tax rates were the largest contributors to the increase. Permanent placement revenues were 11.3% of consolidated staffing revenues in the second quarter, compared to 11% during the same period one year ago. When combined with temporary and consulting gross margin, overall staffing gross margin rose 70 basis points compared to the year-ago period to 45.1%.

Protiviti gross margin was $76 million in the second quarter, or 27.9% of Protiviti revenues. One year ago, gross margin for Protiviti was $64 million, or 27.3% of Protiviti revenues.

Staffing SG&A costs were 34.6% of staffing revenues in the second quarter, compared to 33.7% in last year's second quarter. The higher mix of permanent placement revenues this quarter versus one year ago added 20 basis points to the quarter's SG&A ratio. SG&A costs for Protiviti in the second quarter were 17.3% of Protiviti revenues versus 19.4% of revenues in the year-ago period.

Second quarter operating income from our staffing divisions was $130 million. Operating margin was 10.5%. Our temporary and consulting staffing divisions reported $105 million in operating income and produced an operating margin of 9.5%. Operating income for our permanent placement division was $25 million in the second quarter and produced an operating margin of 18%. Second quarter operating profit for Protiviti was $29 million, resulting in an operating margin of 10.6%.

At the end of the second quarter, accounts receivable were $842 million, and implied days sales outstanding, DSO, was 49.8 days.

Before we move to third quarter guidance, let's review some of the monthly trends we saw in the second quarter of 2019 and thus far in July, all adjusted for currency and billing days. Our temporary and consulting staffing divisions exited the second quarter with June revenues up 5.3% versus the prior year, compared to a 3.7% increase for the full quarter. Revenues for the first two weeks of July were up 4.3% compared to the same period in July one year ago.

Permanent placement revenues in June were up 7.6% versus June one year ago. This compares to a 6.2% increase for the full quarter. For the first three weeks in July, permanent placement revenues were down 4.6% compared to the same period last year. We provide this information so that you have insight into some of the trends we saw during the second quarter and into July. 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 third quarter guidance: Revenues $1 billion, $525 million to $1 billion, $590 million; income per share, $0.98 to $1.04. The midpoint of our guidance implies year-over-year revenue growth of 5% on a same-day, as-adjusted basis, which includes Protiviti, and EPS growth of 6%. The projected tax rate for the third quarter is 28.5% compared to 24.1% a year ago. 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 over to Max.

Harold M. Messmer -- Chairman of the Board and Chief Executive Officer

Thank you, Keith. We were pleased with our results in the second quarter, both in our US and non-US operations. Protiviti had a particularly strong quarter. The demand for skilled talent is something we don't see diminishing anytime soon. Skills shortages are most pronounced in the professional occupations in which we specialize. Likewise, demand remains strong for the consulting expertise of our Protiviti professionals as they work with companies on risk and compliance, data and analytics, performance improvement, and technology-related efforts.

Increasingly, Protiviti is collaborating with Robert Half's staffing divisions to work on major client initiatives. Our blended staffing and Protiviti solutions allow us to meet a company's needs at every point in the staffing and consulting continuum. We believe this is a key differentiator for us. Access to talent on a full-time, project and consulting basis is at a premium right now, and with our full spectrum of staffing and Protiviti solutions, we are a reliable source for this hard-to-find talent and expertise.

As we have talked about many times on this call, small and midsize businesses make up the lion's share of our client base. While small business optimism is still at historically high levels, a few of the surveys we follow have reported slightly lower business confidence in recent months. This has had little impact on hiring activity, however. As of June, the NFIB Small Business Optimism Index reported 19 months of consecutive employment growth among small companies. In the June survey, finding qualified workers remained the single most important business problem for these firms.

Looking at the US workforce as a whole, the June employment outlook was positive, with job growth exceeding analysts' estimates. The labor participation rate also rose slightly, which is a positive sign that workers feel confident in their job prospects. For these and other reasons, we are optimistic about our growth opportunities. We will continue to invest in technologies that enable us to deliver a world-class digital experience that complements the personalized service we have perfected over 70 years in the staffing and recruitment industry.

Earlier this month, we introduced a new mobile app that allows candidates to search for full-time and temporary jobs, apply instantly and track the status of their applications. The app also recommends, on a real-time basis, new jobs that match a candidate's preferences.

Now, Keith and I would be happy to respond to your questions. [Operator Instructions] Thank you.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Mark Marcon from R.W. Baird. Your line is open. Please go ahead.

Mark Marcon -- Robert W. Baird & Co. Inc. -- Analyst

Good afternoon, Max and Keith. I was wondering if you could give us a little bit of additional color with regards to the acceleration that you ended up seeing in June and potentially continuing into July. I know we're not trying to make too much out a month-to-month trends, but just wondering if you could give a little bit of color in terms of where -- which specific segments within staffing you ended up seeing it in relative to also from a geographic perspective what are you seeing in the US relative to Europe, which seems to be slowing?

And then how would you comment with regards to how much of the benefit is basically coming from the collaboration that you're seeing between staffing and the Protiviti division, which continues to perform extremely well?

Harold M. Messmer -- Chairman of the Board and Chief Executive Officer

So on the acceleration, we did see improvement in US temp across our lines of business every month during the quarter. May was better than April, June was better than May. In the US, our July start is actually a little better than June, so the US trends cross our lines of business and progressively got better year-on-year each month. International results were different. We are seeing macro slowing in the Europe and in the UK and they offset those trends somewhat. Our guidance assumes that the growth for the quarter will be close to essentially on a year-over-year basis globally what it was in Q2, which is some firming in the US, according to the trends we just talked about, offset by some additional softening in Europe, UK.

As to the collaboration, it continues to go very well. As we've talked about before, those results get reported in Protiviti, not in staffing. So the staffing trends I just talked about do not consider the additional benefits from what we call managed business services, managed technology services, which were significant and were the fastest growing segment in Protiviti.

Mark Marcon -- Robert W. Baird & Co. Inc. -- Analyst

It's terrific. And can you talk just a little bit about just on the staffing EBITDA margin and the staffing SG&A? Was that partially just to the mix as it relates to the mix between the US and Europe in terms of the SG&A going up a little bit and just the deleveraging that you may have seen over there?

M. Keith Waddell -- Vice Chairman of the Board, President and Chief Financial Officer

So the -- frankly, the SG&A deleveraging, to use your word, is more about our continued investment in tech initiatives. We've talked about on prior calls that we continue and we continue pretty much unabated from what we had in the last few quarters. We've talked about AI, machine learning, matching engine, micro targeting and marketing, prioritizing leads for our staff. We talked earlier on the call about we released a new mobile app a couple weeks ago, that's principally candidate-focused. So the tech spending continues, kind of, irrespective of revenues. It's spending we're happy to make. We believe we're already getting payback, particularly in the candidate area. We're excited about the additional initiatives we have on the runway and that's the principal reason why SG&A is up as a percent of revenue. And going to guidance, we expect that to continue in the guidance as well.

Mark Marcon -- Robert W. Baird & Co. Inc. -- Analyst

Terrific. Appreciate the color.

Operator

Our next question comes from Andrew Steinerman from JP Morgan. Your line is open. Please go ahead.

Michael Choi -- JP Morgan Chase & Co. -- Analyst

Hi. Good evening. This is Michael Choi for Andrew. I just had a question on -- Keith, on the comment you made about acceleration in the US staffing business across all lines, then every month of the quarter. What do you think is driving that acceleration reason in the quarter and into July?

M. Keith Waddell -- Vice Chairman of the Board, President and Chief Financial Officer

Well, I would say that, generally speaking, our clients think you've got a friendlier fed today than they did six months ago that the trade tensions while still around don't seem to be as intense as they were six months ago. But if you look at the sentiment measures, we've referenced NFIB, you can look at PMI Services of -- the sentiment measures have stayed high and my personal belief is, it's primarily about a more friendly fed.

Michael Choi -- JP Morgan Chase & Co. -- Analyst

Got it. Thanks. Understood. And then just a quick follow up. What was the bill rate growth in the quarter?

M. Keith Waddell -- Vice Chairman of the Board, President and Chief Financial Officer

So the bill rate growth was 5.4% year-on-year, that's down slightly from 5.7% last quarter, but it's not unusual to see fluctuations...

Michael Choi -- JP Morgan Chase & Co. -- Analyst

Great.

M. Keith Waddell -- Vice Chairman of the Board, President and Chief Financial Officer

...in that neighborhood.

Michael Choi -- JP Morgan Chase & Co. -- Analyst

Thank you.

Operator

And our next question comes from Dan Dolev from Nomura. Your line is open. Please go ahead.

Dan Dolev -- Nomura Securities Company Limited -- Analyst

Hey, good evening. Thank you for taking my question. Following up on the bill rates versus billable hours, I guess 5.4% would imply about 1.6% negative billable hours, if my math is right, getting to 3.7% same-day, constant currency, that's probably the weakest it's been since the third quarter of 2017. I mean, what do we need? What needs to happen to get that number to trend back into positive territory? And kind of what are you implicitly modeling in your head for the third quarter for that for those two components? Thanks.

M. Keith Waddell -- Vice Chairman of the Board, President and Chief Financial Officer

Our third quarter modeling is very similar to second quarter actual. So that one's an easy one to answer. As to what needs to happen to turn it around, I'd say the US macro sentiment needs to continue to -- at least get no worse and improve would be nice. And then to the extent we get better and better with attracting and retaining candidates that we place on assignment and/or provide for permanent placement, the more pressure will take off of the sales cycle, which will help hours.

As we've talked about on prior calls, it's not unusual in this part of a cycle for hours to be pressured, because, A, it's harder to recruit candidates, B, more candidates to leave mid assignment and you have to replace them, all of which is additional work for our staff, all of which ultimately lead to pressure on ours. As we've also said on calls, because of the pressure on ours, we also feel like we need to get paid when we have the eligible candidates, which is why you see the bill rates increasing in the 5% range and has so for a few quarters now.

Dan Dolev -- Nomura Securities Company Limited -- Analyst

Got it. And just to clarify things for the third quarter guidance, you're basically implying about 3.7% staffing or temp organic growth for same-day, which was roughly similar components, is that what you were saying?

M. Keith Waddell -- Vice Chairman of the Board, President and Chief Financial Officer

Staffing overall is roughly expected to grow the same rate by which it did in the second quarter. We leave ourselves some wiggle room between perm and temp. But staffing overall, the guidance, is Q3 growth looks the same as Q2 growth, which notably isn't any slowing versus the growth what we just shown in part because of the trend line, the improving trend line we've talked about.

Dan Dolev -- Nomura Securities Company Limited -- Analyst

Got it. I appreciate it. Thank you. Nice results.

Operator

Our next question comes from Jeff Silber from BMO Capital Markets. Your line is open. Please go ahead.

Jeff Silber -- BMO Capital Markets -- Analyst

Thanks so much. I wanted to shift the gears and talk about Protiviti a little bit yet, some nice margin expansion both on the gross margin line and operating margin line. And if you can talk about what drove that and if you could also give us a little bit more color what's embedded in your 3Q guidance for Protiviti both revenues and margins? Thanks.

M. Keith Waddell -- Vice Chairman of the Board, President and Chief Financial Officer

So Protiviti had a very strong quarter. The good news is, it was very broad-based. Every one of their major segments had double-digit year-over-year revenue growth. Internal audit was strong. IT audit was the strongest part within that. Tech and consulting was strong; cloud, cyber, digital, FSI regulatory was strong and then the strongest of all, managed business services, managed technology services where the pipeline continues to be strong. We have various types of projects, where staffing and Protiviti work together. Examples include remediating material weaknesses, resolving processing backlogs, back office modernization, standing up shared service centers, user experience, user interface improvements. Again, our model where we have scalable staff from the staffing side, deep subject matter expertise from Protiviti continues to go very well.

But, as I just said, it's in addition to their traditional segments also already doing well. We did see margin expansion on SG&A. You've got better leveraging of cost at the gross margin line. They had slightly better pricing, slightly better utilization. We are very happy their margin, operating margin for the quarter, was double-digit. Year-to-date, they are up 9%, which is just below double-digit, still better than 7.6% a year ago. Our expectation is that they'll have double-digit margins the last two quarters of the year and we'll end the year with double-digit margins, which we've talked about are being our goal for some time. So, very strong revenue performance. US and non-US, although non-US had very high comps from a year ago, they also saw some slowing in Europe, UK. But still, all things considered, Protiviti non-US wasn't bad. Protiviti US was outstanding.

Jeff Silber -- BMO Capital Markets -- Analyst

Okay. That's helpful. And just a couple of quick numbers questions. What share count is embedded in your 3Q EPS guidance? And I know you're not giving 4Q guidance, but at least from a tax rate perspective, should we use that 28.5% for the fourth quarter as well?

M. Keith Waddell -- Vice Chairman of the Board, President and Chief Financial Officer

So we're using 116.5 [Phonetic] for share count. Tax rate should normalize in the fourth quarter, 27% to 27.5%. We pointed out [Speech Overlap] we've -- our Q3 guidance is 28.5%, which is 4 points higher than a year ago. A year ago, we had some non-recurring credits for foreign taxes when we reconciled our return to our tax accounts. We don't expect those credits to repeat, although Q3 is always a noisy quarter for tax rate given that it's the quarter you reconcile your tax return to your accountants.

Jeff Silber -- BMO Capital Markets -- Analyst

Okay. Thanks so much for the color.

Operator

Our next question comes from Kevin McVeigh from Credit Suisse. Your line is open please go ahead.

Kevin McVeigh -- Credit Suisse -- Analyst

Great. Thanks. Hey, Keith or Max, any sense of how conversion fees came in in the quarter? And then just what's been the tenor of client till they become kind of less picky or just pushing out the hiring decision at all? Just any thoughts at the margin, particularly on the perm side?

M. Keith Waddell -- Vice Chairman of the Board, President and Chief Financial Officer

So conversions were 3.5% of revenue on the temp side, which is consistent with last quarter. As to tone of business, in perm, particularly from a client point of view, clients are just as picky as they were, which slows us down. We're further slowed down by candidates are getting counter offers from their existing employers when they go tell them they're going to leave. They further get multiple outside offers when it's known that they're looking. So many times we go through an entire process with a candidate and then the 12th hour they decide to stay with their existing company or they take another offer and we have to start over or we have to go to Plan B to the extent we've got the Plan B into works. But the point is, clients are still demanding, they're still picky, they're still selective, candidates are still tight, they're in demand, they have many opportunities, which makes them more selective and more picky. So you've got both sides counterintuitively being more selective.

Kevin McVeigh -- Credit Suisse -- Analyst

Got it. And then just any -- the step up in the tax rate, was just mix or any particular reason for that?

M. Keith Waddell -- Vice Chairman of the Board, President and Chief Financial Officer

The tax rate, there are certain costs that are non-deductible under the new tax act. We had more of those this year than last and we had the absence of credits we got a year ago, as I just talked about. But a normal rate should be more into 27%, 27.5%, and that's what we hope to see in the fourth quarter.

Kevin McVeigh -- Credit Suisse -- Analyst

Great. Thank you.

Operator

Our next question comes from Gary Bisbee from Bank of America Merrill Lynch. Your line is open. Please go ahead.

Gary Bisbee -- Bank of America Merrill Lynch -- Analyst

Hey, guys. Good afternoon. I guess I just wanted to ask, given the success you're having going into market with Protiviti and using some of the staffing business. I realized in the grand scheme of the company that's still fairly small numbers, but is that -- have any sort of exacerbating, any ability to find candidates for temp engagements or in -- and then thus having an impact on the growth or presumably you'd prioritize those for your own Protiviti engagements or is that not of the scale that that's been an issue at all?

Harold M. Messmer -- Chairman of the Board and Chief Executive Officer

Oh, we'd like to think that we provide each of our candidates, our clients, the very best candidate available, and we don't cherry pick for the benefit of Protiviti. But clearly Protiviti is staffing's largest clients, so they impact the candidate pool. But, frankly, it's a high class problem to have and we'd like to have more of it. So I would say that the success with Protiviti is to the detriment of success with third-party clients, but there's no question that the candidate pool is tight. But particularly the tech initiatives we have in place, I believe, is having a meaningful impact on our ability to recruit candidates and to deliver them to clients whether that client is Protiviti or whether that client is a third-party client. Frankly, our people on the staffing side, internally, they get paid the same either way. So, they're ambivalent. They're agnostic. They're neutral on whether the client is Protiviti or whether the clients are third-party.

Gary Bisbee -- Bank of America Merrill Lynch -- Analyst

Okay. Thanks. And then the follow up. You've mentioned a couple of times the concept that the technology investments are helping with candidates. How do you measure that? And is there -- I guess, how do you get that out to the candidates? Are you having to do an advertising campaign or marketing campaign, or you just introduced it to people who are currently working with you?

Harold M. Messmer -- Chairman of the Board and Chief Executive Officer

Well, we do a lot of things. But, as an example, the new mobile app, we've released two weeks ago, every time we get a new order, we will match that against our candidate inventory and you will in the real-time get pushed to you that opportunity if you're on our mobile app. If you're not on our mobile app, we'll communicate with you by email or however you've told us you want to be communicated with. But the point is, for the first time in the history of Robert Half, when we get a new order, we immediately match it to our inventory and then we reach out to everybody that matches that order and ask them to apply for that position. That's much more proactive than we were five years ago, much less 10 years ago. It's just one example.

Gary Bisbee -- Bank of America Merrill Lynch -- Analyst

Okay. Thank you.

Operator

Our next question comes from Timothy McHugh from William Blair. Your line is open. Please go ahead.

Timothy McHugh -- William Blair & Company -- Analyst

Thanks. Just -- maybe one question, but two parts. I guess, internationally, can you -- is the softening broad-based or is there anything specific to certain countries? And then, secondly, the trends in June, as it -- rate -- was that broad-based in the US? Was that broad based as well or any of the practice lines more pronounced than the other ones in terms of improving trends? Thanks.

Harold M. Messmer -- Chairman of the Board and Chief Executive Officer

In the international zone, the softening was principally Europe and UK, although we will say while Germany slowed a lot, it slowed a lot on a high base and it still had a solid single digit growth number year-on-year, which given the environment we thought was pretty good. But, generally speaking, it was Belgium -- the slowing, Belgium, Germany, France, the UK. As to June trends, now while there are some differences by line of business, it was broad and it was broad. It was broad throughout the quarter and it was broad by a line of business. It wasn't isolated in any one line of business.

Timothy McHugh -- William Blair & Company -- Analyst

Okay, great. Thank you.

Operator

Our next question comes from Manav Patnaik from Barclays. Your line is open. Please go ahead.

Ryan Leonard -- Barclays Bank PLC -- Analyst

Hi. This is Ryan on Manav. Just curious on the perm declines in July. Is there anything specific call out there, 4th of July time, anything like that?

Harold M. Messmer -- Chairman of the Board and Chief Executive Officer

The perm is always, A, more volatile, B, the post quarter is less predictive of the full quarter. I think the most volatile period or time we have over the course of the entire year is around the 4th of July holiday. And so, we've studied the post quarter start relative to the full month with hindsight. We've looked at the post quarter start with respect to the full quarter with hindsight, and the least predictive period all year alone is the July 4th post quarter period. So would we like for it to have been stronger? Absolutely, but while I wouldn't say grain of salt, we certainly aren't particularly concerned about it and we continue to be very bullish on perm. In fact, continue to add per heads disproportionately in perm, which also somewhat impacts our SG&A.

Ryan Leonard -- Barclays Bank PLC -- Analyst

Got it. Thanks. And then on the mobile app. I mean, I guess if you're looking out the next couple of years, what are some milestones that we should think of either in terms of number of roles placed or candidates on the app itself as we kind of track the progress of this new initiative?

Harold M. Messmer -- Chairman of the Board and Chief Executive Officer

Well, I think the idea is we want to communicate with candidates on their terms, not just ours. So if they'd prefer to come to our website, fine, they can do that; if they'd prefer we email them, fine, we can do that; if instead they'd like to be pushed, then they can set up their own agents and hold jobs to themselves, we can push jobs to them based on what they match to. The point is, we want to be everywhere they are. So I'm not sure of the metrics of any one channel over any other channel are critical. But the point is, there is no question we live in a more mobile-centric world than we ever have and we've just in a major way upgraded the user friendliness and the functionality of what we provide on our website. And, by the way, if you report your time to us on that website or on the new mobile app, you get paid within 24 hours and not a lot of companies can say that.

Ryan Leonard -- Barclays Bank PLC -- Analyst

Interesting. Thanks a lot.

Operator

Our next question comes from Tobey Sommer from SunTrust. Your line is open. Please go ahead.

Tobey Sommer -- SunTrust Robinson Humphrey, Inc. -- Analyst

Hey. I was wondering if you could comment about bill/pay spreads and expectations for pricing and bill rate in the context of the slightly improved demand you're seeing in historical trends?

M. Keith Waddell -- Vice Chairman of the Board, President and Chief Financial Officer

We would say if you look at the 2004, 2009 period, while unemployment wasn't quite as low than as it is now, it was low, and we consistently got around 5% bill rate increases that, in virtually every case, slightly exceeded our pay rate increases, such that we expanded our gross margins. So we've been in that 5% range now for a few quarters. It would be our expectation that we stay in that range, we not go significantly higher nor significantly lower. It seems based on history to kind of be the sweet spot, giving what wage inflation is as we see it.

Tobey Sommer -- SunTrust Robinson Humphrey, Inc. -- Analyst

And could you frame that for us in terms of gross margin? What kind of expansion did you have in that five-year period in the last expansion, if you don't mind also incorporating in the -- kind of refreshing us on whatever social costs there still may be that could be alleviated from the gross margin this cycle? Thanks.

M. Keith Waddell -- Vice Chairman of the Board, President and Chief Financial Officer

So the social cost, I presume you're referring to the -- the most significant one we have is a state unemployment. And with unemployment rates at 50-year lows, one of the positives of that are each state has fewer claims. We have fewer claims charged to our account at each state and in turn the rate we're charged against current payroll declines. So I think it was 10 or 15 basis points of the decline -- of the improvement this quarter, year-on-year, relates to an improvement or a lowering of the state unemployment tax rate. And as unemployment rates continue to come down, our expectation would be, we'll continue to see benefits from that.

As to the gross margin expansion, I guess I don't have five years of history in front of me. We have to constantly weigh against our spreads versus the market versus our competitors that are largely local and regional. I don't think anybody would dispute that we have industry-leading margins and we're aware of that and we -- therefore, we certainly don't want to price ourselves out of the market. So while we believe we can modestly expand our gross margins from here our objective one is to pass through wage inflation, which we're doing and objective two is to modestly expand gross margins understanding we're already of the highest margin supplier in most local markets relative to our local competition.

Tobey Sommer -- SunTrust Robinson Humphrey, Inc. -- Analyst

Thank you very much.

Operator

[Operator Instructions] Our next question comes from Seth Weber from RBC Capital Markets. Your line is open. Please go ahead.

Seth Weber -- RBC Capital Markets -- Analyst

Hey, good afternoon. I wanted to go back to the Europe commentary and the kind of relative strength in Germany. Can you just remind us what's unique to your position there that's enabling you to put up positive growth numbers in a pretty soft market? Thank you.

Harold M. Messmer -- Chairman of the Board and Chief Executive Officer

Well, I'd start with we have a really good experienced team in Germany. We've made significant headcount investments consistently for many years, much less many quarters in a row. Our project-based businesses, management of resources and Robert Half technology generally speaking in Europe are more resilient than Accountemps and OfficeTeam that are more transactional. They seem to be more macro impacted than does management resources or Robert Half technology. So I think it's a combination of consistent past investment, the quality and experience of our team, and the positioning of our revenue mix toward the higher level project-oriented lines of businesses.

Seth Weber -- RBC Capital Markets -- Analyst

Okay. That's helpful. Thank you. And then just -- I'm sorry if I missed it, but did you give a third quarter -- a 3Q staffing operating margin guidance target or I know you get Protiviti double digits, but anything we should...

M. Keith Waddell -- Vice Chairman of the Board, President and Chief Financial Officer

So with our guidance, let's just do a brief little tour down the P&L. Our staffing gross margins up 30 to 50 basis points, higher spreads, lower suey [Phonetic] taxes, as we just talked about, Protiviti gross margins up 75 to 100 basis points, higher rates and utilization. SG&A staffing up 60 to 80 basis points, more tech investments, more perm heads. Protiviti SG&A down 50 to 80 basis points leveraged from their outsized growth. Operating income staffing down 20 to 40 basis points as the SG&A is more than the increase in gross margin. Protiviti up 100 to 200 basis points. You've got the double benefit of higher gross margin and less SG&A. However, the bad news is when you get down to the tax rate, it's up 4 points over last year and takes away some of the benefit we just described.

Seth Weber -- RBC Capital Markets -- Analyst

Perfect. It's very helpful. Thank you very much, guys. Have a good night.

Operator

Our next question comes from George Tong from Goldman Sachs. Your line is open. Please go ahead.

Blake Johnson -- Goldman Sachs Group, Inc. -- Analyst

Hi. This is Blake on for George. Thanks for taking my question. Given that bill rates expanded 5.4% this quarter, how much of the 70 basis points of gross margin expansion in temp staffing was driven by increasing bill/pay spreads versus the change in payroll tax rates?

M. Keith Waddell -- Vice Chairman of the Board, President and Chief Financial Officer

Okay. So as we talked about a second ago, our state unemployment rates came down and they added somewhere between 10 and 15 basis points to the increase in spreads and the balance is principally the different between pay rates and bill rates.

Blake Johnson -- Goldman Sachs Group, Inc. -- Analyst

Got it. Thank you. And then regarding hiring, are you continuing to grow headcount or have you pared back your hiring this quarter?

M. Keith Waddell -- Vice Chairman of the Board, President and Chief Financial Officer

Our objective with hiring is to stay as consistent as we can with our expectations on top line growth. We've gotten a little ahead in perm, we're still bullish on perm, we're still hiring in perm, so we'll still stay a little bit ahead. You'll see the perm margins, operating margins rather than maybe 20% or 18%, but we'll take 18% all day along. Generally speaking, we continue to hire, commensurate with, consistent with what we expect top line growth to be.

Blake Johnson -- Goldman Sachs Group, Inc. -- Analyst

Great. That's helpful. Thank you.

Operator

Our next question comes from Jeff Silber from BMO Capital Markets. Your line is open. Please go ahead.

Jeff Silber -- BMO Capital Markets -- Analyst

Thanks so much. Just a quick follow up, Keith. The margin guidance that you gave, was that compared to the prior quarter, the one that just ended, or the prior year?

M. Keith Waddell -- Vice Chairman of the Board, President and Chief Financial Officer

Prior year.

Jeff Silber -- BMO Capital Markets -- Analyst

Okay. Just wanted to clarify that. Thanks so much.

M. Keith Waddell -- Vice Chairman of the Board, President and Chief Financial Officer

Prior year, 2Q -- 3Q18.

Jeff Silber -- BMO Capital Markets -- Analyst

3Q18. Great. Thanks so much.

Harold M. Messmer -- Chairman of the Board and Chief Executive Officer

That was our last question. We would like to thank everyone again for joining us today on the call.

Operator

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.

Duration: 47 minutes

Call participants:

Harold M. Messmer -- Chairman of the Board and Chief Executive Officer

M. Keith Waddell -- Vice Chairman of the Board, President and Chief Financial Officer

Mark Marcon -- Robert W. Baird & Co. Inc. -- Analyst

Michael Choi -- JP Morgan Chase & Co. -- Analyst

Dan Dolev -- Nomura Securities Company Limited -- Analyst

Jeff Silber -- BMO Capital Markets -- Analyst

Kevin McVeigh -- Credit Suisse -- Analyst

Gary Bisbee -- Bank of America Merrill Lynch -- Analyst

Timothy McHugh -- William Blair & Company -- Analyst

Ryan Leonard -- Barclays Bank PLC -- Analyst

Tobey Sommer -- SunTrust Robinson Humphrey, Inc. -- Analyst

Seth Weber -- RBC Capital Markets -- Analyst

Blake Johnson -- Goldman Sachs Group, Inc. -- Analyst

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