Oct 21, 2007
Executives
Harold M. Messmer, Jr.
- Chairman and CEO M. Keith Waddell - Vice Chairman, President, and CFO
Analysts
Andrew Steinerman - Bear Stearns Jeffrey Silber - BMO Capital Market Timothy Mchugh - William Blair & Company Thomas Robillard - Banc of America Securities Michael Fox - JP Morgan Mike Jacob - SunTrust Robinson Humphrey Brandt Sakakeeny - Deutsche Bank Securities James Janesky - Stifel Nicolaus & Company Andrew Fones - UBS Mark Marcon - R.W. Baird Michel Morin - Merrill Lynch Gary Bisbee - Lehman Brothers Christopher Gutek - Morgan Stanley
Operator
Welcome to the Robert Half International conference call to discuss third quarter 2007 Financial Results. Our host for today's call is Mr.
Max Messmer, Chairman and CEO of Robert Half International. Mr.
Messmer, you may begin.
Harold M. Messmer, Jr. - Chairman and Chief Executive Officer
Thank you. Good afternoon and thanks for joining us as we review our third quarter 2007 financial results.
Here with me today is Keith Waddell, our Vice Chairman, President, and CFO. Before we begin, I'd like to remind everyone that remarks made on today's call contain predictions, estimates, and other forward-looking statements, representing our current judgment of what the future holds.
These include words such as forecast, estimate, project, expect, believe, guidance, and similar expressions. We believe these remarks to be reasonable, but 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 filings with the Securities and Exchange Commission. We assume no obligation to update the statements made in this conference call.
Now, let’s review the third quarter. Third quarter revenues were $1.18 billion, an increase of 15% from the third quarter of 2006.
Income per share was $0.46 compared with $0.43 in the third quarter of 2006. This is a 5% increase over the prior year.
Cash flow from operations was $76 million during the quarter, and capital expenditures were $17 million. Consistent with prior year, third quarter cash flow was impacted by the timing of staff bonus payments, which have been accrued in the previous quarter.
We ended the quarter with $329 million in cash and cash equivalents. This is after paying a quarterly dividend of stockholders of $0.10 per share or $15 million in total, and repurchasing 3.5 million RHI shares in open market at the cost of $114 million.
We have approximately 2.2 million shares available for repurchase under our Board approved stock repurchased plan. In the last three quarters, we have repurchased 9.2 million shares.
Our staffing operation reported strong double digit revenue growth compared to last year, led by our international operations. Our accounting and finance divisions including permanent placement continued to perform well.
Protiviti benefited from our seasonal uptick in Sarbanes-Oxley, compliance fees, as well as expanded business and technology risk consulting revenues. At this time, I will turn the call over to Keith for more detailed look at our third quarter results.
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
Thank you, Max. let's first look at Company-wide revenues.
Third quarter revenues for the Company were $1.18 billion, an increase of 15% from the third quarter of last year, an increase of 3% sequentially. There were 63 days in the third quarter and the same number of billing days as the third quarter of last year and the second quarter of this year.
Revenues for Accountemps $444 million, an increase of 18% from the third quarter of last year and increase of 3% sequentially. Accountemps is our largest staffing division with 366 offices worldwide, net accounts for 38% of Company revenues.
Revenues for OfficeTeam are high in administrative division for $215 million in the third quarter. This is up 10% from the third quarter of last year and flat sequentially.
OfficeTeam has 314 locations worldwide, and represent 18% of Company revenues. This division was introduced in 1991.
Robert Half Management Resources at third quarter revenues of $157 million, up 18% from the third quarter of last year, and up 4% sequentially. This division places senior level accounting finance professionals on a project basis.
It was introduced in 1997 and has 148 locations worldwide. Robert Half Management Resources makes up 13% of Company revenues.
Robert Half Technology revenues were $110 million in the third quarter. This is an increase of 21% from the third quarter of last year and an increase of 5% sequentially.
Robert Half Technology was introduced in 1994, and places information technology professionals on a consulting and full-time basis. Robert Half Technology operates in 112 locations worldwide and accounts for 9% of Company revenues.
Our permanent placement division, Robert Half Finance and Accounting, had revenues of $113 million in the third quarter. Revenues were up 28% from the third quarter of last year, and down 2% on a sequential basis.
This business was established in 1948 and operates in 360 locations worldwide. It accounts for 10% of Company-wide revenues.
Our international staffing operations reported third quarter revenues of $256 million, up 37% from the third quarter of last year, and up 9% sequentially. On a constant currency basis, these growth rates were 27% compared to the third quarter of last year, and 4% sequentially.
We have staffing operations in 100 locations in 18 countries outside the U.S. International staffing operations represent 25% of total staffing revenues Revenues for Protiviti were $141 million in the third quarter, down 1% from one year ago, but up 8% sequentially.
As Max noted earlier, Protiviti revenues benefited from a seasonal increase in SOX compliance revenues as well as expanded consulting services. Notable areas of success included IT asset management, forensic investigations, and new internal audit engagements.
Protiviti has 60 locations in 15 countries, established in May 2002. Protiviti accounts for 12% of total RHI revenues.
Protiviti’s international operations represent 25% of total Protiviti revenues. Now, let’s review gross margin.
Third quarter gross margin in our temporary and consulting staffing operations was up $346 million or 37.3% of applicable revenues. This compares with 36.80% of revenues from the third quarter of 2006 and 37.1% of revenues for the second of year ’07.
The sequential percentage increase is a result of lower state unemployment charges, which offset slightly lower temp to hire conversion revenues. Overall, staffing gross margin was $458 million for the third quarter or 44.1% of staffing revenues.
This compares to 43.1% of revenues in Q3 2006, and 44.2% of revenues in Q2 in 2007. The sequentially lower mix of permanent placement revenues offset the higher temporary and consulting margins just noted.
Third quarter gross margin for Protiviti was $42 million or 30.2% of Protiviti revenues. This compares to 35.6% of Protiviti revenues in Q3 2006, and 32.3% of revenues in the second quarter of 2007.
In the United States, utilization rates and gross margins improved during the quarter even after the impact of July 1 staff compensations increases and promotions. Outside the United States, particularly in Europe, the utilization rates and gross margins declined due to the August holidays and lower SOX revenues.
Turning to Selling, general and administrative cost. Staffing SG&A cost for the third quarter were 334… excuse me… $343 million or 33% of staffing revenues.
This compares to 31.8% of revenues for the third quarter of 2006 and 33.0% of revenues for the second quarter. SG&A levels remained high during the quarter due to the relatively high mix of perm placement activities as well as continued additions to our internal staff, particularly in international locations.
Third quarter SG&A cost for Protiviti were $38.5 million or 27.4% of revenues. This compares to the same $38.5 million or 29.5% of revenues in the second quarter of 2007.
SG&A cost were flat on a sequential basis and were higher versus one year ago as a result of international expansion and structure expenses. Operating income from our staffing divisions was $116 million during the third quarter or 11% of staffing revenues.
Temporary and consulting divisions contributed $96 million of this amount or 10% of applicable revenues. Third quarter operating income for our perm placement division was $20 million or 18% of applicable revenues.
Protiviti operating income was $4 million for the quarter or 3% of revenues. At the end of the third quarter, accounts receivable were $628 million, with implied day sales of 48.5 days compared to 46.8 days at the end of second quarter.
The small sequential increase follows a pattern consistent with prior consistent with prior years whereby cash collections slow slightly during the summer months. Now, let’s turn to guidance.
We saw the following business trends, during the third quarter and the first weeks of October. On a same day sequential basis, temporary and consulting revenues were up in July, flat in August, and up in September.
On a same day sequential basis, perm placement revenues were down in July, up in August, and up again in September. During the first week of October revenues from temp and consulting businesses were up 13% compared to the same period last year.
For the first two weeks of October, revenues from our perm placement division were up 35% compared to the same period last year. We would caution the perm trends are hard to asses over short periods of time.
Taking this information into account, we offer the following fourth quarter guidance. Revenues $1.180 billion to $1.220 billion.
Earnings per share $0.44 to $0.48. And offering this guidance, we have recognized that the December is a particularly difficult month to estimate.
We have learned during our 20 plus year tenure with RHI that demand fluctuates in unpredictable ways in the month of December. As you know, these estimates are subject to the risk mentioned in today’s press release, we limit our guidance to one quarter.
At this time, I will turn the call back over to Max.
Harold M. Messmer, Jr. - Chairman and Chief Executive Officer
Thank you, Keith. We experienced continuing demand for skilled professional level talent, particularly in accounting and finance.
The demand was seen domestically and in countries where we have operations outside the United States. Looking specifically at the U.S., unemployment has remained low by historical standards.
It is currently 4.7%. The September jobs report from the group of labor statistics was stronger than some anticipated, but the addition of 110,000 new jobs, and the August number were revised upward also.
We view this data as conformation of our view that the labor market remains relatively strong in United States. We are optimistic about the prospects for out staffing operations and Protiviti for the reasons we have talked about.
We are pleased with the progress for Protiviti during the quarter, particularly in United States. Protiviti has garnered an excellent reputation among the businesses it serves.
We have been able to successfully extend our service offerings both in terms of the breath of services we can provide and in our geographic reach. And the consistently high quality of Protiviti work has allowed us to expand client’s relationships once we establish them.
Protiviti continues to transition from Sarbanes-Oxley work and we are encouraged by the sequential growth achieved Protiviti this pat quarter. On previous calls, we have discussed the secular trends driving the demand for accounting and finance professionals, including the focus by companies on strengthening internal controls.
This is a global trend and we believe that as one of the most recognized names in accounting and finance staffing, we are well position to benefit. Some other reasons for our optimism.
In the U.S., we estimate we do business with less than 13% of our target prospects, many companies here have still never used professional level temporary, which translates into opportunities to increase our market penetration. Internationally, we believe we also have opportunities to grow market share.
Our financial position is strong as our cash balance. We have a good track record of maintaining positive cash flow, whether the overall economy is strong or weak.
We have an experienced management team at the corporate level and in our field offices, and we believe we have the best reputation in most recognizable brand names. At this time, Keith and I will be happy to answer your questions.
We would ask that you please limit yourself to one question and a single follow-up if needed. If you have additional questions, we will certainly try to return to you later in the call.
Question and Answer
Operator
[Operator Instructions]. Our first question comes from Andrew Steinerman with Bear Stearns.
Go ahead, please.
Andrew Steinerman - Bear Stearns
Good evening, gentlemen. I am going to need a little more explanation on why Protiviti operating margins didn’t increase sequentially even though there was solid revenue achievement?
And sort of the same question as you look into the guidance of the fourth quarter, do you think that’s the inflection point for margins, this is just Protiviti?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
Okay. So, Andrew, Protiviti margins sequentially, it was the tale of two cities.
In the United States, utilization increased nicely, margins increased nicely, and pretty much what we expected occurred in the United States. In non-U.S., particularly in Europe, we had some challenges.
The traditional challenge is the month of August, which we all expected. What was a bit unexpected was we had two major clients in delist that were major SOX clients, and we had a third major client that was part of a… we are on the wrong side of M&A transaction, where our client was acquired.
And therefore, we did see margin improvement in the United States. But it was offset what happened in Europe.
I will make this commentary about it in United States effective July 1, is when we may staff compensation changes for the full year. Protiviti uses July to June compensation year.
So, that took what otherwise would have been even higher margins in the United States. But if your look back to prior years, that’s not inconsistent.
As we looked to our guidance, in the fourth quarter, at the major swing in the margin is what happens to perm and what happens to Protiviti.
Andrew Steinerman - Bear Stearns
Right.
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
The perm, we clearly, as the number showed, we are up 35% out of the gate, which was very strong and we are very encouraged by the start we have to the quarter in perm, and but for the fact that December, we have had a great Decembers during mediocre years, we have had weak Decembers during strong years, we have had strong Decembers during strong. So, Decembers are all over the lot.
And given that we were somewhat more cautious in our guidance further given the general trends in Protiviti where clients are getting much more cost effective more quickly than we expected with their SOX compliance in particularly testing work. We had some caution in our guidance there, so essentially the margin swing in the fourth quarter will turn on what happens with perm and what happens with Protiviti.
You have also got the Protiviti. You have got the holidays, which traditionally have a bigger impact on Protiviti then they do along staffing.
So, coupled with the somewhat in certain environment about what happened to SOX in Q4, that’s how we got the guidance we have given.
Andrew Steinerman - Bear Stearns
Right. But usually Protiviti is still up sequentially even with holidays right?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
In the United… the last two years if you look back, last year, it was up 7% sequentially revenue.
Andrew Steinerman - Bear Stearns
Yes. And then the year before was flat.
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
That was disproportionally non U.S., a year before it was flat.
Andrew Steinerman - Bear Stearns
Right.
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
So, our guidance for Protiviti in Q4 at the low-end. We have got it flat up at few percentage point.
At the high-end, we have got it 5% to 7% up consistent with last year.
Andrew Steinerman - Bear Stearns
Right .
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
Clearly, there will be more margin contribution from incremental revenues in Q4 in the United States then was the case in Q3 because you have already absorbed the comp increases that were all effective July 1.
Andrew Steinerman - Bear Stearns
Right. So, the direction for margin overall for Protiviti is up in those scenarios.
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
The direction should be up with incremental revenues with Protiviti.
Andrew Steinerman - Bear Stearns
Thanks so much. I appreciated it.
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
Initially, it is our best margin month of the quarter, excuse me… the best margin quarter of the year.
Andrew Steinerman - Bear Stearns
Okay. Sounds good.
Thank you.
Operator
Thank you. Our next question comes from Jeff Silber with BMO Capital Market.
Go ahead, please.
Jeffrey Silber - BMO Capital Market
Thanks so much. Actually, I want to clarify something, I think was the commentary around SG&A.
You talked about, I think it was contention additional… additions to internal staff, particularly international. Was that just Protiviti?
Was it the Company overall? And if you talk about some of the internal staff, changes or potential changes in the U.S.
as well, I’d appreciate it.
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
The headcount commentary we gave actually was principally non-Protiviti or our staffing operations. We continue to be very aggressive during the third quarter with addition to headcount.
It was just proportionally related to perm placement and within perm placement that was disproportionally related to international operations. So, we were very aggressive, in fact, even more aggressive in Q3 than we were in Q2 with headcount additions on the staffing side, you see that quite clearly with the perm operating margins that are down, not only sequentially, but year-over-year.
Our hiring plans for the fourth quarter would be to continue to add staff, but given we have been so aggressive for the past three consecutive quarters, we probably won’t add the same rate that we have added in the last few quarters.
Jeffrey Silber - BMO Capital Market
Okay. Great.
And as a follow-up kind of shifting gears a bit. Looking at the RHI Technology business.
It looks like that year-over-year growth has been accelerating in the past few quarters. Can you give us a little bit more color, what’s going on there.
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
Well, as we talked about last call, we have… cherry picked a handful of markets where we are being much more aggressive with the additions to internal staff, recruiters, sales people et cetera. In addition to that, we find the overall demand for IT people particularly, help desk and network administrators.
We see a lot of upgrades, refreshes that require that level of people. So, the underlying demand we are seeing at the level we play and than IT, is quite strong.
Jeffrey Silber - BMO Capital Market
Okay. Great.
That’s helpful. Thanks.
Operator
Thank you. Our next question comes from Tim Mchugh with William Blare & Company.
Go ahead, please.
Timothy Mchugh - William Blair & Company
Yes. I just want to ask about the European operations for Protiviti.
What’s the action plan there, given the loss to those clients and the seasonal impact? Are you properly staffed in Europe?
Are you making some changes? Or do you see potential work coming down the pipeline that can replace the lost client?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
Well, the part of issue is August and as you know a lot of Europe including our clients going on holiday during August. So, that automatically comes back to the extent we have lost clients.
We are working hard to replace those. And we are constantly looking at the skill sets of our existing staff versus the skill sets of the staff, we believe we need to grow the business.
It just so happens with the July 1 promotion and compensation cycle. There’s a natural opportunity there to adjust your staff to what you think is appropriate, and which is been done.
Timothy Mchugh - William Blair & Company
Okay. And then also if you could touch on, given the share repurchases as lately.
How, your authorization is coming close to ending there? Any update… your thoughts on seeking reauthorization as well as the capitalization on the balance sheet that you seek to prefer or would like to prefer, have there?
Harold M. Messmer, Jr. - Chairman and Chief Executive Officer
Well, we discuss with our Board every quarter, our stock repurchase efforts and program and we’ll certainly continue to do that. And it’s certainly a strong possibility that we’ll… have increased the number of shares available for repurchase.
As it is, we have a little over 2 million remaining, of course. But we will probably seek to increase that.
You may want to comment on the other part of the question, Keith.
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
The capital structure, I think, we have got a pretty consistent pattern now many quarters in a row taking our cash flow to extent it is not otherwise needed, returning it to the shareholders in the form of either a dividend or share repurchases. And I think, generally speaking, that trend should continue.
Timothy Mchugh - William Blair & Company
Okay. Thank you.
Operator
Thank you. Our next question comes from T.
C. Robillard with Banc of America Securities.
Go ahead.
Thomas Robillard - Banc of America Securities
Great. Thank you.
Is it fair to assume… I mean if you look over the last three quarter SG&A spending has been running about 20% or so year-on-year revenues kind of in the mid teens. And I clearly understand everything that you have talked about over the last three quarters in terms of the aggressive investing, particularly in the headcount side the expansion into Europe.
Is it fair as we look into next year to continue to see that, so basically any type of gross margin improvement you get, we are still really going to be running around kind of in the low 10% range for EBIT? Or does this look to be the big headcount investment year for you guys?
You are kind of where you want to be as you get into ’08 where we could start to see some operating margin expansion?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
We are certainly aware that on the staffing side our SG&A, which is principle compensation has grown faster than revenues, because of our investment and more people. Clearly, it’s our hope that over time that investment gives us an even larger incremental return as the new hires come up to speed.
That said we tend to be conservative in our guidance as to how much operating income or EBIT margin improvement you should dial in, but it’s certainly not our plan to indefinitely grow SG&A faster than we grow revenues.
Thomas Robillard - Banc of America Securities
I understood, I’m just trying to get a sense. I know obviously you want to take advantage of the opportunities that you have and if you guys seek growth that obviously makes sense to investment growth.
I’m just trying to get a sense as to… obviously I know you don’t give 12 month type of forecast, but as you do look our past,. the next quarter, I mean does the environment still look as attractive to you as it has over the past 12 months.
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
The environment still looks strong as our numbers attest to. But let’s take perm as an example, we are down at the 18% operating margins level as we speak, where as a year ago we were at 22%, 23%.
So, it just return to where we are… where we were, there’s a fair amount of up side right there alone. And again, we are quite aware of that.
Thomas Robillard - Banc of America Securities
Okay. And then, just real quick a sequential downtick on the CapEx side.
Is that a level we should expect going forward? Was there anything specific that kind of came up or that you held back on and start to standing.
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
It’s more timing. We talked about we are in the $100 million range on an annual basis.
And so, for timing reasons, primarily it was down a little bit this quarter. It could just as easily be up a little the next quarter
Harold M. Messmer, Jr. - Chairman and Chief Executive Officer
Keith, essentially said this, but let me just reradiate it. Certainly one of our goals is to improve the productivity per desk as people have been with us over a period of time.
Their experience rather goes up and hopefully their skill level goes up. So, we are certainly working on increasing productivity.
Thomas Robillard - Banc of America Securities
Great. Thank you.
Operator
Thank you. Our next question comes from Mike Fox with JP Morgan.
Go ahead.
Michael Fox - JP Morgan
Good afternoon guys. Can you give us an idea what the operating margin was for Protiviti in the U.S.
during the quarter?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
We have never broken out what the operating margins for Protiviti are between U.S and international. Quite frankly we have never broken that out for internationals as well.
I think it would be safe to say they were much higher than U.S than they were internationally.
Michael Fox - JP Morgan
Can you tell us, if they were double digits?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
Again, I think we leave it with the comments that I’ve made.
Michael Fox - JP Morgan
Okay. Historically, you guys have said that, that’s been a double digit margin business in the past and you expected to come back to that at some point in the future.
Do you still think that’s the case?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
We do in long-term we think that’s the case. Clearly, over the last few quarters, there has been a more impact full falloff of SOX revenues than we expected.
No question. Companies are more aggressively managing their SOX compliance cost that was anticipated.
So, we are having to run hard to replace that lost revenue with non-SOX revenue, and frankly, we have been very successful doing so. But it is in the backdrop that SOX is falling away more than we expected.
Given that, the utilization rates are not where we would like for them to be aren’t where they have been in the past. And therefore, we are still long-term quite optimistic that we can get mid teen plus operating margins out of Protiviti, but it is tough during this SOX transition period to do so.
Again, the long-term drivers where there are going to be more service providers than just a Big Four. The long-term drivers of internal audit is more top of mind and plays a more important roll in Company, which plays to Protiviti’s sweet spot.
Those drivers are intact. In the short-term here, we have got this SOX transition to manage through.
And again, in the United States this quarter, they did quite well. We had some particular challenges in Europe that offset that.
And we are optimistic that we can deal with that as well.
Michael Fox - JP Morgan
Okay. Thanks a lot.
Operator
Thank you. Our next question comes from Tobey Sommer with SunTrust Robinson Humphrey.
Go ahead, please.
Mike Jacob - SunTrust Robinson Humphrey
Hi. This is Mike Jacob in for Tobey S0mmer.
What was your overall bill rate and wage inflation?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
The rates went up about 7% year-over-year and around 2% sequentially… up 2% sequentially. That’s a little bit of an uptick from what it had been last quarter.
But to us as yet another indication that the labor markets for accounting and finance remain quite strong, unless you wouldn’t see those kind of increases.
Mike Jacob - SunTrust Robinson Humphrey
Okay. Thank you.
Operator
Thank you. Our next question comes from Brandt Sakakeeny with Deutsche Bank.
Go ahead, please.
Brandt Sakakeeny - Deutsche Bank Securities
Thanks. Good afternoon Keith and Max.
Question on the OfficeTeam business that actually decline very slightly sequentially. I’m just curious.
I can't find the last time it did that back in the cycle. Is there any indication there that the demand is potentially softening in that division or… anything else?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
I guess first comment that, while we haven’t seen negative sequential. If you go back in time, the third quarter, typically decelerates from the prior quarters.
In large part because clients have the opportunity to directly access college interns, which to some degree comes at our expense. And further, I would say that we are less non-U.S.
oriented with OfficeTeam than we are with the other divisions. So, the other divisions get lift from our international operations and that OfficeTeam doesn’t see.
So, I would say the fact that you saw some deceleration, which actually tipped over to be slightly negative in the quarter. Is it that out of line, what patterns we have seen in the past, maybe a little but not dramatically.
Brandt Sakakeeny - Deutsche Bank Securities
Okay. Great.
Thank you. And just as quick follow-up.
Do you have option expense in the quarter, and also the ending share count?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
Option expanse $2.3 million split, $400,000 perm, $1.9 million temp. Share count, we ended at 160 million and the number for the quarter was 162.
But let me caution you that the knee-jerk is to say, okay we have got a 2 million share embedded benefit for Q4 which is true. However, we also expect the tax rate to go up in Q4 from 39.5% to 40%.
And the two which tend to offset each other.
Brandt Sakakeeny - Deutsche Bank Securities
Okay.
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
I would also observe that if you look at this quarter… third quarter’s performance versus a year ago, the tax rate is up quite a bit, which accounts for some of a differential. If you look at a year ago we settled some tax audits that we had a unusually low tax rate and we didn’t have that this quarter.
Brandt Sakakeeny - Deutsche Bank Securities
Okay. Perfect, thank you.
Operator
Thank you. Our next question comes from James Janesky with Stifel Nicolaus.
Go ahead, please.
James Janesky - Stifel Nicolaus & Company
Yes. Good afternoon.
When you look at the perm business between the U.S. and international, can you give us the idea of the growth rates in each country?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
Jim, we don’t give country-by-country growth rates. We could say that we were the strongest in Continental Europe, particularly in places like Germany, Belgium to some degree.
We were also strong in the U.K. just not as strong as we were strong in the Continent.
But we don’t give country-by-country growth rates. We are relatively knew in Asia.
It’s doing quite well, but from our size standpoint, it’s not that impact full.
James Janesky - Stifel Nicolaus & Company
Okay. And with respect to perm again just overall, you started off the month of July up 22% and you said were down and then we’re up in the prior or in the following two months both August and September.
Was there something unique to July as you look back as to why it started off up, but then ended down?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
Well, so we are mixing sequential and year-over-year a little bit. So, let me try to add clarity.
James Janesky - Stifel Nicolaus & Company
Okay. Thanks.
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
So, for the second quarter we grew perm 35%. For the first three weeks of July, which we reported on the last call, that growth rate declined 22%, still growing.
The commentary we give each quarter and today about in truck order progress is sequential. So, we said sequentially July was down, meaning it was less that June.
That’s how those two records are. But let me try to finish the point.
We started the first three weeks of July up 22%, we finished the quarter up 28%. So, clearly, we did better the balance of the quarter than we did the first three weeks.
Our people will tell you that July was our most problematic month not September, and July related principally to the 4th of July, holidays which fell on Wednesday and the fall was more clients and more people internally took more time off. But if you takeaway the slow July starting perm and if you look at August, you look at September, you look at first three weeks of… excuse me… the first two weeks of October, you actually have a pretty rosary picture for the health of the perm market.
James Janesky - Stifel Nicolaus & Company
Okay. And there’s obviously… as a follow-up there’s a lot of controversy over the strength of the economy in the United States.
And probably last or broad. But I guess by the year hiring actions and your outlook for the fourth quarter saved the month of December, even if there were cynical headwinds, you think that just the underlying trend of the shortage of accounting and finance professionals can carry forward with pretty decent growth rate, is that an accurate statement?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
Well, again, we can speak to look at what happened in the first two weeks. The first two weeks we’re up 35% year-over-year.
If you look at your perm job orders they were the highest in the two weeks they have been all year. So, our Company specific information would tell us that the job market for accounting and finance peoples pretty robust.
Our only caution with our guidance is Decembers on odd duck and strange things happened in December notwithstanding economic headwinds or tailwinds and that was the principle reason that we hedge with our guidance.
James Janesky - Stifel Nicolaus & Company
Okay. Thanks.
That’s helpful.
Operator
Thank you. Our next question comes from Andrew Fones with UBS.
Go ahead, please.
Andrew Fones - UBS
Yes. Hi.
And I had a question about temp gross margin and the kind of a trend we have seen now I think in Q2. You were down about 10 basis points year-over-year and this quarter up 60.
Can you kind of explain the impact of swing [ph] and temp to higher conversions please?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
Well, so the biggest benefit of the quarter were lower state unemployment or swing rate. You have got rates tending down.
You got people as the year progresses less of their payroll gets tax for unemployment purposes. So, all of those things generally mean we have a bit of a smaller unemployment rate late in the year than we have earlier in the year.
On the conversions point, we said they were slightly down. And quite frankly, we see conversions as a percentage of revenue, swing up and down 20 basis points almost every quarter.
Some quarters have been up 20 basis points, some quarters have been down 20 basis points from our mix standpoint. So, it’s not unusual and in fact this quarter they were down about 20 basis points from our mix standpoint relative to what they were last quarter.
Andrew Fones - UBS
Okay. Thanks.
And then… and usually you see a pickup in the fourth quarter, can you give us any comments on your outlook there?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
If we are talking margins, I mean generally speaking the fourth quarter on a same day basis is quite strong for accounting and finance, generally. You have got budget season, you’ve got companies preparing for the year-end audit, there’s a lot of accounting and finance work that happens which is makes it a good quarter not with standing in fact you have too few days.
Additionally, we look work, which come twice a year and that review will happen during the fourth quarter, last year we got quite a credit from that review and this year we wouldn’t expect as larger credit but we certainly don’t expecting debits.
Andrew Fones - UBS
So I should think about the number being up a little bit but sequentially but not as much as last year?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
I think that would be a prudent well.
Andrew Fones - UBS
Thanks.
Operator
Thank you. Our next question comes from Mark Marcon with R.W.
Baird. Go ahead, please.
Mark Marcon - R.W. Baird
Good afternoon, Keith and Max. Just want to clarify, so if we look at this year your temp business exclusive of SUTA and conversions, were the gross margins up?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
They were flat.
Mark Marcon - R.W. Baird
Okay.
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
And certainly we are not down.
Mark Marcon - R.W. Baird
And then can you talk a little bit about the productivity of your new hires both on account, as well as, the perms item and what do you seeing in terms of differences from the people that your bringing on board now relative to say two years ago in terms of how quickly they wrap up? And then what are you seeing with regard to the focus has been around for a while that the salaries going up for those people in contrast to go up because recruiters are in high demand as well without limit what we can expect in terms of operating margin at those business?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
Well, irrespective of productivity we are clearly having to pay more because of the competitive nature of the marketplace, for the most part in accounting and finance our people are former accountants, they understand what the market is and we have to pay them more that irrespective of how productive they are. Then you got this issue of productivity clearly as our numbers indicate we are not as productive on average today as we were a year ago because we have a higher proportion of newer people today than we had a year ago.
Are there major differences and how long it takes us to get a person up to speed today versus a year ago, no but clearly there is just proportionally more people in the newer category today than it was a year ago.
Mark Marcon - R.W. Baird
Okay. So, the people who have been around for a while so if you take people who have been with your organization say for two years, those people are as productive as people who were around for two years a couple of years ago in other words.
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
There is no dramatic shift there.
Mark Marcon - R.W. Baird
Okay. it’s not like the labor market is getting too tight and it just costs so much more in order to recruit people.
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
No, and I would say on the candidate’s side not only with respect to internal recruiters for Robert Half but as well as candidates we place on assignment generally speaking we are not having a problem attracting those people.
Mark Marcon - R.W. Baird
And then lastly, in terms of European Protiviti business, how long do you think that’s going to take to normalize, what is the goal there in terms of your international productivity, obviously--?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
Our goal would be that it normalizes in months, not in quarters. And again part of it is August, right.
Europe shuts down in August so this is not some long road back to recovery sure we lost a couple or three larger clients and that will take a little while to replace but we are not talking mini quarters.
Mark Marcon - R.W. Baird
Great. Thank you.
Operator
Thank you. Our next question comes from Michel Morin with Merrill Lynch.
Go ahead, please.
Michel Morin - Merrill Lynch
Yes, good afternoon guys, I just wanted to drill down a bit more on the U.S if I am doing my math right it looks like you were actually down sequentially if you strip out the international staffing revenues and we haven’t seen that since I think 2002 and yet we are talking about strengths, so is it, was it really the July perm results that had that big of an a set to move the needle or is there something else going on here.
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
The big impact was July perm and as you can see perm over all for the quarter was down sequentially and so we haven’t seen that for quite some time but quite frankly its all about July. And but for July as I spoke to you earlier, we felt like conditions remained quit solid all the way into the last, first two weeks of October.
Michel Morin - Merrill Lynch
Was there some slowing in the U.S.?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
Yes, there was, but it was more of a perm driven than any thing else
Michel Morin - Merrill Lynch
Okay great and then on that point on perm in terms of the early October results, just scanning through the transcripts for a year ago, it seams that he also had relatively low growth in early October last year so if we wanted to look at things kind of on an average daily basis how would.
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
If you looked at the first two weeks of every month in 2007 just looking sequential, we got more job orders in the first two weeks of October than any other month in 2007. So that’s not a function of easy comparisons a year ago that’s just looking at sequential activity over the course of this year.
Michel Morin - Merrill Lynch
Great. Okay that’s very helpful and then just on the point of detail the share count included in your Q4 guidance
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
As we said it should be down a couple of million shares that said that will be off set more than likely by higher tax rate.
Michel Morin - Merrill Lynch
Okay, great. Sorry I missed that.
Thank you.
Operator
Thank you. Your next question comes from Gary Bisbee with Lehman Brothers.
Go ahead, please.
Gary Bisbee - Lehman Brothers
Hi, good afternoon, a couple of minutes going into the question, you said that you…. you had used it in July 1 and New Year for Protiviti to adjust the staff what is appropriate.
Can you clarify if you actually reduced the consultant headcount in Europe and if so, by how much
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
I guess we don’t make over all comments directly responsive to your question. On a market-by-market, product-by-product, industry by industry basis, we make those decisions.
And again, the my only point was it was somewhat convenient that our annual promotion rate cycle happened about the same time.
Gary Bisbee - Lehman Brothers
Let me try a more macro question on that and then you’ve had several quarters of far below trend margin in the business, are there reasons that you wouldn’t be more aggressive in shedding headcount, is it so difficult to hire new consultants that you don’t want to do it now and you are willing to live through the scanners, there has been more the type of thing where you really been caught by surprise, obviously if you loose the few points due to some of the them taken private you can’t do anything about it, is it more that type of thing or there were some reason?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
That’s more a new lots of this quarter in one part of the world. We still very much believe in the long-term prospects of Protiviti.
We very much believe long-term it’s a growth business and they drive away from the Big Four only, they drive toward internal audit as I spoke to you earlier, we think those are negative that will benefit Protiviti. In the short-term we have had this transition from stocks to other consulting services than we have had to manage through that have impacted U.S.
utilization rates as well. So have the margins been challenged for the last few quarters.
Yes, but we do think that’s something we can manage from as we go forward. We think it would be very short sighted just all in once way, say well because we have got less stocks and we need these other skills for consulting that we want to trim the stocks people in favor of just getting those skills relevant to consulting and that seems too abrupt to us further many of the skills are transferable.
Gary Bisbee - Lehman Brothers
Okay. And then just, if I could take one more, I think you mentioned perm hiring internationally any are you willing to give us a little color in terms of the where you made that hiring, I know Asia is much smaller but is that place you are making large investments today or is it more continental Europe you said, you’ve seen good strength?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
Well, the largest investments have been a continental Europe and we have been aggressive in Asia but it offer very, very, very small base.
Gary Bisbee - Lehman Brothers
Okay. Thanks a lot.
Operator
Thank you. Our next question comes from Chris Gutek with Morgan Stanley.
Go ahead please.
Christopher Gutek - Morgan Stanley
Thanks. Hi guys.
So I keep listening to the comments over the course of the call and just working with the model, it looks to me that EPS guidance for the fourth quarter is a bit on the conservative side and you said pretty clearly that December has uncertainties and lots of I know about the various businesses but you elaborate a bit what extend you might have levered in incremental conservatives and given the various uncertainties adding up together?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
I think we were very straight-forward in saying the margins for the fourth quarter will depend on term and Protiviti. There is terms has clearly started out of the gate very strong whether you look year-over-year or sequentially terms has started very strong, but for the December effect we would have been much more bullish in our guidance.
But we know based on years of experience bunny things can happen in December. Protiviti you’ve got December holiday effect which have some uncertainty attached to it, maybe exacerbated by you are in this general trend tour companies are trying to save on stocks compliance cost.
So, that’s why we were more conservative than we would typically be and that’s what’s going to swing the margins.
Christopher Gutek - Morgan Stanley
Okay. Very thanks.
Operator
Thank you. Our next question comes from Jeff Silber with BMO Capital Markets.
Go ahead please.
Jeffrey Silber - BMO Capital Markets
Thanks. Just a quick follow-up question, in terms of capital expenditures a guidance for the fourth quarter what are you looking for?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
Jeff, it’s under 25 million range and again timing can impact a few million either way, so if it comes in 22, it comes in 28, don’t kill me, it’s more timing than dramatic.
Jeffrey Silber - BMO Capital Markets
Okay, great, I appreciate that. Thanks.
Operator
Thank you. Our next question comes from Mark Marcon with R.
W. Baird.
Go ahead please.
Mark Marcon - R. W. Baird
Yes, short-term question and long-term question. The short-term question is can you talk a little bit about what sort of exposure you have in financial services and I think Protiviti as well the rest of the business?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
There has been a lot of discussion about particularly mortgage related exposure and again because of our middle market focus Mark, we don’t have an outsized exposure to mortgage related clients and so we are talking low single-digit as a percent of revenue kind of exposure in that area. So we have some but it’s not dramatic.
Mark Marcon - R. W. Baird
And I know your focus is mid sized, but
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
Protiviti, we have more exposure to financial service generally big banks, but it’s not mortgage companies specifically and even there it’s not so huge that get overly concerned about it.
Mark Marcon - R. W. Baird
So I mean when we look at things like what’s happened the Bank of America today or Citigroup earlier things of that nature we shouldn’t really get concerned about that as it relates to your business?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
I would get overly concerned as they generally speaking regulated industries, banks included are bigger users of internal audit services than others are. And therefore, clearly we have some exposure there that said it’s certainly not our largest industry group even in Protiviti and it’s not something I get overly concerned about.
Mark Marcon - R. W. Baird
Okay. And then thinking about from the longer term perspective, when we think about the margins and particularly your international growth, as well as Protiviti where do we think the margins should kind of top out at or how should we think of goals in terms of during normal economic times where the margin should go to?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
So, as you are well aware that margins internationally are generally lower than they are in the states, they are better on the continents and in the U.K. we are trying to focus more on the continent than we are on the U.K not they were not doing nicely in the U.K, in addition we are more per unit internationally than we are at this stage which also carries higher margins.
So what we are trying to do is we have our outsized international growth carries normal U.S. margins by focusing more on the continent and more on term to achieve that, might there be modest dilutions not withstanding that yes, but our objective is that it not be major dilution.
Mark Marcon - R. W. Baird
Okay. And so when we think about those normal margins when productivity levels are normal levels what should we think about that and your mix of new people versus experienced people perm?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
Staffing margins of 11% to 12%. If we can keep our overall margins at a 11% to 12% with outsized contribution from international growth we think that’s a pretty good day’s work.
Mark Marcon - R. W. Baird
Okay. Certainly it is.
What about on the perm side?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
What perm is they component of what I just described.
Mark Marcon - R. W. Baird
And then Protiviti?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
And the ways you keep those international margins overall close to what you have in the States.
Mark Marcon - R. W. Baird
Got it. And then how should--?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
On the Protiviti side the margins aren’t as different U.S. versus international during normal periods of time, clearly August holiday and the loss of a couple three big clients in the given country had short-term, but even in our short five year period of time, the margins internationally haven’t been that different than they were in the States.
They have they were this quarter.
Mark Marcon - R. W. Baird
Right, understand that, so I am just trying to get back to what we think about longer term?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
I think longer term outsized international growth in Protiviti should materially dilute their margins.
Mark Marcon - R. W. Baird
And therefore the goal would be?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
Mid double digit plus operating margins for Protiviti consolidated we certainly showed in the past are possible as we work through the stocks transition the margins have been more challenged in that.
Mark Marcon - R. W. Baird
But it sounds like we should be getting from a longer term perspective from that a quarter or two but if we look out a year or two we should be getting through the point where we transitioned today, correct?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
And Protiviti should help RHI overall margins not to loose some.
Mark Marcon - R. W. Baird
Terrific. Thank you.
Operator
Thank you. We are nearing the top of the hour and have time for just one more question.
Our last question will come from Andrew Fones, Mr. Fones?
Andrew Fones - UBS
Hi. I just have two questions, so I’ll try and keep it very quick.
Just on… if I look at international as a percentage of your staffing revenue 25%. Perm, obviously is a little bit higher than that, you said that you leave with him.
Could I estimate it would be less than 50% of your revenue though. International, would be less 50% from your perm revenue?
Harold M. Messmer - Chief Executive Officer
Absolutely.
Andrew Fones - UBS
Okay. And then the second question was just on forensic accounting, can you just kind of give me a quick idea the types of work you do there, and where you’ve see a pickup in revenue.
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
Well, I think there was one major assignment that are actually the client put out a press release that mentioned us and I’m not going to use their name. But there was a major inventory accounting issue.
And that’s turned into a major for forensic assignment for us as to figure out because and recommend ways to keep it from reoccurring.
Andrew Fones - UBS
But it wasn’t just that one project that’s closed to pickup in your revenue?
M. Keith Waddell - Vice Chairman, President, and Chief Financial Officer
That’s one example. We have… another example where we have a client that did some subprime lending.
It has as looking at some other controls they had as to how they ended-up where they ended-up that’s another example. In forensics, is probably more varied than most product areas, because it depends on the nature of what happened.
Andrew Fones - UBS
Okay. Thank you.
Harold M. Messmer, Jr. - Chairman and Chief Executive Officer
That’s all the question. We have time for today.
We appreciate your interest. Thank you for your time.
Operator
This concludes today’s teleconference. A taped recording of this call will be available for replay later this evening through 8:00, PM Eastern, on October 25.
The dial-in number for the replay is 800-753-9146 or 1402-220-2705 outside the United State. This conference call also will be archived in audio format in the investor center at www.rhi.com.
Thank you. Have a great day.