Hello, and welcome to the Robert Half Third Quarter 2022 Conference Call. Today's conference call is being recorded. [Operator Instructions] Our hosts for today's call are Mr. Keith Waddell, President and Chief Executive Officer of Robert Half; and Mr. Michael Buckley, Chief Financial Officer.

Hello, everyone. We appreciate your time today. Before we get started, I'd 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 these 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 adjusted. Reconciliations and further explanations of these measures are included in a supplemental schedule to our earnings press release. Our presentation of revenues and the related growth rates for each of our contract functional specializations includes intersegment revenues from services provided to Protiviti in connection with the Company's blended talent solutions and consulting operations. This is how we measure and manage these businesses internally. The combined amount of intersegment revenues with Protiviti is also separately disclosed. The supplemental schedules just mentioned also include a revenue schedule showing this information for 2020 through 2022. For your convenience, our prepared remarks for today's call are available in the Investor Center of our website, roberthalf.com. We are pleased to report third quarter year-over-year revenue growth of 7% or 10% adjusted for currency over and above the very strong 44% in the same quarter last year. Permanent placement led the way, growing 17% or 20% adjusted for currency and Protiviti revenues reached new all-time highs. Our results are a testament to the strength of our global teams as they demonstrate their agility and persistence, which makes our success possible. Companywide revenues were $1.833 billion in the third quarter of 2022, up 7% from last year's third quarter on a reported basis, and up 10% on an as adjusted basis. Net income per share in the third quarter was $1.53, the same as in the third quarter a year ago. Cash flow from operations during the quarter was $179 million. In September, we distributed a $0.43 per-share cash dividend to our shareholders of record, for a total cash outlay of $46 million. Our per-share dividend has grown 11.4% annually since inception in 2004. The September 2022 dividend was 13.2% higher than in 2021. We also acquired approximately 1.1 million Robert Half shares during the quarter for $86 million. We have 4.7 million shares available for repurchase under our board-approved stock repurchase plan. Return on invested capital for the company was 45% in the third quarter. Now I'll turn the call over to our CFO, Mike Buckley.

Thank you, Keith, and hello, everyone. As Keith noted, global revenues were $1.833 billion in the third quarter. On an as adjusted basis, third quarter talent solutions revenues were up 12% year-over-year. U.S. talent solutions revenues were $1.049 billion, up 13% from the prior year. Non-U.S. talent solutions revenues were $273 million, up 10% year-over-year on an as adjusted basis. We have 316 talent solutions locations worldwide, including 85 locations in 17 countries outside the United States. In the third quarter, there were 64.3 billing days compared to 64.4 billing days in the same quarter one year-ago. The current fourth quarter has 61.2 billing days compared to 61.7 billing days one year-ago. For 2023, billing days by quarter will be 63.3, 63.4, 63.1 and 61.1 for a total of 250.9. Currency exchange rate movements during the third quarter had the effect of decreasing reported year-over-year total revenues by $45 million, $32 million for talent solutions and $13 million for Protiviti. This negatively impacted our year-over-year overall revenue growth by 2.6 percentage points, 2.7 percentage points for talent solutions and 2.6 percentage points for Protiviti. Contract talent solutions bill rates for the quarter increased 9% compared to one year-ago, adjusted for changes in mix of revenues by functional specialization, currency and country. This rate for the second quarter was 8.2%. Now let's take a closer look at results for Protiviti. Global revenues in the third quarter were $511 million, $416 million of that is from business within the United States and $95 million is from operations outside of the United States. On an as adjusted basis, global third quarter Protiviti revenues were up 5% versus the year-ago period, with U.S. Protiviti revenues up 4%. Non-U.S. revenues were up 7% on an as adjusted basis. Protiviti and its independently owned member firms…

Thank you, Mike. Global labor markets remain tight and clients continue to hire, albeit at a more conservative pace. Demand for talent remains high, notwithstanding the increasingly uncertain economic outlook, although the sales cycle has lengthened. Many clients are becoming more selective and requesting to see more candidates for their open positions. They are adding more steps to their hiring processes and prioritizing onsite or local hybrid candidates who take longer to hire. At the same time, talent shortages persist. In the United States, job openings and quit rates remain at elevated levels although modestly off their highs. The unemployment rate stands at 3.5%, a 50-year low, while the rate for those with a college degree, more representative of our candidate base, is half that, at 1.8%. The National Federation of Independent Business, NFIB, recently reported that 89% of small business owners hiring or trying to hire had few or no qualified applicants, and 46% of all small business owners had job openings that could not be filled. Many candidates continue to prefer remote and hybrid working models, a structural shift that's expected to remain. Sourcing from this talent pool plays to our numerous strengths, including our global brand, office network, candidate database and advanced AI-driven technologies. Many times, clients' very specialized needs are only available on a remote basis. Protiviti demand remains very strong, particularly in the internal audit and regulatory risk and compliance practices. Protiviti has successfully overcome the combined headwinds of much larger comparables, 55% growth in the same quarter a year-ago, the wind-down of a very large financial services project and a shift in public sector client demand over to talent solutions, and still achieved record revenues for the quarter. Protiviti's pipeline remains robust and is little impacted by current economic conditions. While short-term talent solutions…

Thank you. [Operator Instructions] First question comes from the line of Mark Marcon with Robert W. Baird & Company.

Good afternoon, Keith and Mike. I have a couple of questions. One is on talent solutions and one is on Protiviti. With regards to talent solutions, can you talk a little bit about the admin and customer support business, and specifically, some of the factors that may have impacted it during the current quarter and what we should read into that looking ahead?

Sure. Admin and customer service has been most impacted by the public sector, wind down as it relates to unemployment claims processing. Also, they didn't see quite a number of larger projects related to open enrollment that they've seen in the past. So they have been disproportionately impacted relative to our other practice groups.

Got it. And with regards to not as much open enrollment, was there an underlying reason for that?

Hard to know, and it's also early days. You tend to get more of that in the fourth quarter than in the third. In fact, internally, we just opened our open enrollment period. And so I wouldn't overread that, but those are some of their larger projects typically. So the jury is out for the fourth quarter.

Okay. And then with regards to Protiviti, I was wondering what – I'm assuming that the portion of the public sector work that fell off was also tied to the claims. I'm just wondering as we think ahead, what – how much – how are you thinking about the public sector? You gave the guidance for the fourth quarter, but I'm thinking about for next year just broadly speaking. And then if you can talk a little bit about the exposure that Protiviti has to either M&A or IPOs. Obviously, with the cost of capital going up, challenging environment, how much of a headwind could that end up being on a go-forward basis?

And so let's talk generally and specifically. First of all, the impact to Protiviti's reported growth rate from the public sector runoff and the large project wind down is about 13 percentage points for the quarter. And as you look forward into how those two factors impact their growth rates, it will stay double-digit in the fourth quarter, 10% or 11%. But then starting next year, in the first half of the year, that cuts in half to mid-single digits. And the second half of the year wouldn't exist at all. And so for the full-year 2023, that drag, essentially, it's a very small single-digit number. And so the worst of that impact – the most impactful part of those two wind-downs is behind them, and the fourth quarter coming will be – it should be the last time, it has a double-digit impact on their growth rates. On public sector, specifically – let me just make some general comments. Yes. We're pleased with how the public sector has played out. We've essentially replaced the runoff of this unemployment claims processing with other work, all built on new client relationships. Some of the new work is on the talent solutions side, some on the Protiviti side. Talent solution helping these clients deal with their talent shortages as well as elevated needs and education and housing. Protiviti has a very high win rate for new projects, project management, financial controls. Although the project size is somewhat smaller than expected, that pipeline continues to build. So when you step back from this and take a two-year view, we've got – we now have a new industry group with new relationships, producing about $400 million in revenue that largely didn't exist for us three years ago. And we'd also say that since about – since most of the work in public sector has been jointly performed by talent solutions and Protiviti, frankly, it's given our entire organization more confidence that we can win together. And we're now approaching almost $600 million in revenue from joint engagements from this very unique business model that we have. And as our people would say, we are one of one in this space. So our assessment of public sector two years in is that we've managed the runoff of unemployment claims very nicely. We now have a new industry group. We have further confirmed this go-to-market to gather strategy. So we feel good about public sector. Then when you talk about IPO, M&A, it's a small part, not a large part of what Protiviti does. Protiviti has the largest backlog they've ever had. Adjusted for these two factors that I just spoke of, their growth rates, their core growth rates remain quite high. So we feel great about Protiviti.

That's terrific. And then just to button one thing up on the large financial services project that wound down, is that completely done?

It's not completely done. It's close, but it's not the only thing we do for that client. It's a very, very, very large project we did at that client. We do other things for that client. And we hope, frankly, to build from where we are. But by and large, we're down to a relatively small amount of revenue on that project.

Great. Thank you.

Your next question comes from the line of Andrew Steinerman with JPMorgan.

Hi. Keith, I wanted to ask you about the talent solutions fourth quarter guide for revenues to be down 1% to up 4%. And obviously, I know when the company labels talent solutions, they're talking about both contract and perm. But when I look at the trends that you talked about for early October, and contract was up 5%, and perm was up 2%. And I put those together, it just seems like in the guide, you've built in some room for deceleration from the October trends. I was just wondering, did you do that for the sake of conservatism? Or just what other dynamic helped you frame the talent solutions fourth quarter revenue guide?

So it's clearly a – we're simply being more conservative. We've discounted the field forecast that we get each quarter more than what we would traditionally discount their forecast. Clearly, the economic environment is becoming more uncertain. And given that uncertainty, we thought it prudent to be more conservative, but you're very much correct in that our full quarter guide is pretty significantly less than our start, and there wouldn't typically be that big a delta.

And then just if I could ask one more question about labor supply. I definitely heard your prepared comments. It seems like the labor supply for your addressable market hasn't meaningfully changed. So like kind of demand is more measured, but supply is still kind of persistently tight. Do you feel like that you might be looking at an outlook where kind of the talent shortages become a little less persistent and you might be able to source talent more easily?

I think that's a fair assessment in that talent acquisition is still tight. I would say it's not quite as tight as it has been. Having said that, and relative to the conversation, we're also seeing some reluctance of candidates from changing jobs, which is yet another indication that the candidate side is softening a bit.

That's fair. Thank you.

Your next question comes from the line of Tobey Sommer with Truist Securities.

Hey, good afternoon. This is Jasper Bibb on for Tobey. My first question was just on Protiviti. On the last call, you mentioned working to accelerate hiring as the mix is getting a bit too heavy on contract resources. Could you just update us on those hiring efforts and where the full time versus contract mix stands today?

I'd say they're still very aggressively adding to headcount that compete well in the marketplace. They continue to win all kind of culture-related awards, which simply reinforces that and helps them with their recruiting. As to the mix, the mix is more tied to the nature of work. So certain types of projects, public sector being a good example. 90% of that work was from contractors, only 10% Protiviti full-time employees. Whereas other engagements and the typical internal audit engagement, that mix might be more 15%, 20%, 25% of the total. So it's very much is driven by the nature of the work. And Protiviti for every one of its solution offerings loves having access to the just-in-time resources they have access to by reason of being together with talent solutions.

Thanks. And then looking at the [temp] gross margin guidance, the midpoint would imply gross margins down from the third quarter. Are you seeing any kind of incremental pressure on contract bill pay spreads? Or would you say you're taking kind of a similarly conservative approach as it sounds like it was the case on your revenue guidance?

We're certainly not expecting any compression on spreads. Spreads are still good. They're strong. We project they'll stay strong. The fringes have creeped up a bit. We've had some more medical claims than we anticipated in the third quarter, and that impacts our full-year estimates. So it's principally due to higher fringe rate than it is anything else. Conversions are also hanging in there nicely. So it's more about fringes, which is related to probably things that correct themselves, i.e., these large medical claims, which are unusual and certainly not expected to repeat into 2023.

Appreciate the detail there. Thanks for taking the questions.

Your next question comes from the line of Kevin McVeigh with Credit Suisse.

Great. Thanks so much. Hey, just one point of clarification. The guidance looks pretty similar to what it is for Q4, but the EPS about $0.15. Is that all tax? It looks like the tax rate is a little bit higher. I just want to [ask you] because it looks like the revenue range and kind of margins are similar. So is the delta there mostly tax?

Well, you've got six pennies of tax and exchange currency that make it different. Other than that, the margins are a little lighter, as we talked about. The gross margin on talent that we just talked about impacts that. The Protiviti margins year-on-year are still – it's still less than they were a year-ago because they've normalized their cost. And the fourth quarter is always a short quarter because of billing days. And so you get a little bit of negative leverage because the fourth quarter is always a short quarter because of the holidays.

Got it. And then I think you mentioned in the prepared remarks that you saw some of the shift in Protiviti was to talent solutions. What drove that shift? Was it just kind of the scope of work that was more kind of tuned on what talent solution does as opposed to Protiviti?

Yes. It's where – whereas a year-ago, the need of a given local government related to processing unemployment claims. Now it's more they're understaffed, and they need additional staff, which is right in the wheelhouse of talent solutions. Again – but for that relationship, talent solutions wouldn't be at the table. So therefore, we've nicely leveraged what we started as unemployment claims processing and transition that into something much more broad that benefits talent solutions. Enterprise-wide, we're very pleased that we're essentially going to be flat with a year-ago, down 2% adjusted for currency. So we feel good about this whole transformation of being very unemployment claims processing-centric to being much broader.

Understood. Thank you very much.

Your next question comes from the line of George Tong with Goldman Sachs.

Hi, thanks. Good afternoon. As you look across talent solutions and Protiviti in the third quarter, what factors most surprised you to the upside and downside relative to your internal expectations?

I'd say, to the upside, Europe was not as impacted as the headlines would – we would have expected, both in the UK and in Germany for that record – for that matter. And so I'd say that was a positive surprise. On the downside, our small business clients got a little more conservative in their hiring than we expected. Given the barrage of negative news as to inflation, as to interest rates, as to economic forecast, that all impacts confidence, psychology, sentiment. Remember that our SMB clients are more nimble managing their costs than larger companies are. And so given that more nimbleness, they adjusted more quickly than bigger companies have, and they adjusted their hiring pace a little more than what we expected. I'd say, as soon as I say that, I would also remind everyone that just like they're more nimble on the downside, they're also more nimble on the upside. And we demonstrated that most recently during COVID where our recovery was the fastest in our history. And I'd further say that clients don't quickly forget about a tight labor market. And as soon as things start to get better, they start to add staff and they do so quickly, which we just saw our peak-to-peak growth we've experienced and achieved in every cycle we've been a part of in the last 35 years. So we feel good about where we're positioned. We love our SMB client base, but they are more nimble. But it's a balanced more nimble, and let's keep that in mind.

Got it. That's helpful. Can you discuss how your internal hiring intentions for recruiters and sales have evolved? And what factors are influencing your outlook for internal hiring?

I'd say we're going to manage our headcount on a very targeted basis, both on the upside and the downside. This is the same way we managed headcount forever. We'll continue to hire where we're growing, and we'll adjust appropriately where we'll not. Also, consistent with the past, we will not make major reductions in heads ahead of near-term market conditions, which would make our results even more negative and self-fulfilling. There's too much uncertainty about the timing and the extent of any downturn to make that kind of call, but we look at current conditions, we look at the environment, we look at forecast, but we largely attempt to balance our cost structure against our revenues. We've been more nimble with our cost structure in the last three to five years than we have in our history. If you look during 2020, our margins bought – I think were for the year, they were at over 8%. We did not have that much negative leverage in SG&A, meaning we managed our headcount well. So I would argue just as our clients are very nimble in managing their businesses, we've also made ourselves very nimble as we manage our costs and our headcount and our business. Very targeted. We have data down to the individual. We know how everybody performs relative to the standard that's also adjusted based on their tenure. So we very objectively manage our headcount.

Great. Thank you.

Our next question comes from the line of Heather Balsky with BofA Global Research.

Hi. Thanks for taking the question. I was curious – you've been investing this year into your businesses. And in light of what you're hearing from your customers right now, I know you talked about ability to manage costs. I'm curious how you're thinking about your investment spend into your businesses and thoughts around cost control as well, especially into next year? Thanks.

And so I just talked about headcount, which is our largest cost. We will be nimble. We will adjust based on what's happening in the topline. We will not get way ahead of it, as I just talked about. Our other major investment is in innovation. I got a couple of comments there. So we just had our first full quarter where we added a new additional component to our AI, and it leverages the learnings of our recruiters with respect to a given candidate. Did we vet them? How far? Did we place them? How do they perform? By definition, this is very proprietary to us. So using this updated model, we had many branches rely almost exclusively on technology to identify candidates. It's the most successful pilot we've ever had metrics across many spreadsheets that we have improved meaningfully. Adoption rates for our AI are increasing rapidly in part because of the testimonials that have come from this. Essentially, we've totally transformed candidate discovery, candidate identification. It creates more capacity for our workforce. So more specifically to your question, we will continue to invest in AI and innovation because it's paying off in a very meaningful way. We will continue to enhance client and candidates' digital experiences as they interact with us. We will continue to make our candidate-driven matching AI better. And as I've also said before, we're focused as well on client-facing AI, helping our internal staff better identify which clients, which prospects are most likely to react positively to their outreach. So headcount we talked about, and it's the same way we managed headcount forever. We're more nimble than ever. Innovation, we'll continue to invest in because we're getting real payback from as recently as this quarter, especially this quarter.

Thank you very much.

Your next question comes from the line of Manav Patnaik with Barclays. Please go ahead.

Hi, how are you? This is Ronan Kennedy on for Manav. Thank you for taking my question. May I just confirm – you spoke of some of the leading indicators you are seeing within SMB and the nimbleness there. I was wondering if you could elaborate on that and what other leading indicators you would see in addition to the selectivity and say, the conservatism and hiring and what your visibility would be in seeing those indicators into a potential downturn?

Well, as to visibility, the nature of our business is we don't have a lot of visibility, and clients use contract staff in part to have more flexibility with their cost structure. And so we've never had visibility to any great extent, and we still don't have visibility. We look at our weekly trends. We look at our anecdotal interactions with clients, and it's a subjective judgmental assessment of where we think the business is headed. But as I said, because we can be so nimble with our cost structure, we don't have to get way ahead of it. We can keep pace with it, and we'll be just fine.

Okay. Thank you. And then may I ask, what was the driver of the sequential decline in the administrative and customer support business line? I think on the call, you mentioned a lengthening sales cycle, but was there anything with regards to that skill set in particular that caused it to slow?

Well, admin, customer service, as we said earlier, it's been disproportionately impacted by public sector, wind-down unemployment claims. And it also hasn't had as many larger projects as in years past, many of which related to open enrollment. But open enrollment season is still very much open. So that book hasn't been completely written yet.

Okay. Thank you.

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

Thanks so much. Just wanted to slip in one more question. If we just focus on the technology contract solutions segment or line of business, excuse me, I know that growth slowed from 2Q to 3Q. I know the comps on a year-over-year basis were tough versus 3Q last year. But was there anything else specific going on? I'm just wondering what you're seeing within that segment? Thanks.

Well, because the client base is SMB across all our talent solutions and practice groups, the trends aren't that different. And as you pointed out, the change in the growth rate is entirely explained by the change in the year-ago comps. And that's just as true for technology as it is finance and accounting. So the differential between the two isn't any different. And the client base is also largely SMB.

And are you seeing – are any projects potentially ending earlier? Is there any slowdown just specific to what's going on in the end market?

I'd say the only distinction that's been noted is that the gap between what candidates want, i.e., remote and what clients want many times on site seems to be the most acute in technology and got worse, not better during the quarter. It's hard to quantify how much of the – how much impact that had, but it's certainly a discussion point. But to me, the bigger point, it's still SMB clients, change in growth rate explained entirely by change in comps.

Okay. Fair enough. Thanks so much for the color, Keith.

Your next question comes from the line of Mark Marcon with Robert W. Baird & Company.

Thanks for taking a couple of follow-up questions. What are the bill rate assumptions for Q4? And how are you thinking about bill rate inflation on a go-forward basis and wage rate inflation?

Well, you broke up. I think you said one of the bill rate assumptions. And I would say they're not materially changed from what we're currently seeing. But I'll say this as well that we haven't gotten much additional gross margin from the higher bill rates. They've essentially been a pass-through of higher pay rates. And to the extent wage inflation subsides somewhat, while it might hurt topline a bit and that you'll pass through less, it shouldn't have much impact on margin.

Are you seeing any signs of wage inflation becoming more subdued?

Well, we're certainly seeing signs of clients pushing back more on having to pay more, and it's also a factor in why the pace of their hiring is less than what it was. They're having to pay more. But my point is it's not a margin impact.

Got it. And then you've been through so many cycles. You probably ended up seeing this week that there was a survey published by The Wall Street Journal of economists who are basically expecting a shallow recession in the first half of 2023. If it occurs, how do you think – for investors who aren't as familiar with you and your history, how do you think RHI is going to behave differently during this downturn relative to prior downturns? And then what are you most excited about for the next up cycle?

So I think the first point I'd make is, you're right, we have been around a while, 35 years for me. Happy to report in every cycle, we've grown peak-to-peak. And kind of interestingly, in the dot-com cycle, we CAGR-ed peak-to-peak in the 7% a year range. In the COVID cycle, we CAGR-ed 7% again peak-to-peak. The financial crisis was about half of that, but that lasted longer. It was more directed closer to our wheelhouse. But point one is we grow peak-to-peak. Point two is we've got the most nimble cost structure we've ever had, and we just proved that less than two years ago. Point three, we now have Protiviti. It's much less tied to the economic cycle. It has a diversified suite of solution offerings. Its current pipeline is the best they've ever had. Protiviti's revenue not only did not decline, they actually grew 12% 2020 versus 2019. Protiviti is now a third of our consolidated revenue and earnings. Said differently, Protiviti is half the size of talent solutions, and it has significant more resiliency than talent solutions has – it's by the nature of its business. So there's a huge difference between this cycle and cycles past and that we now have something half as large as talent solutions that's quite resilient.

That's great. Thank you.

Okay. I think that was our last question. So we appreciate everybody's time and thank you very much.

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 roberthalf.com. You can also log into the conference call replay. Details are contained in the Company's press release issued earlier today.