Leading staffing company Robert Half International Inc. (NYSE: RHI) always gives good color on employment trends, and if its latest third-quarter results are anything to go by, the job market in the U.S. is definitely improving. Meanwhile, the company's international revenue growth remains strong. That said, there were still a couple of weak areas in the company's earnings report.
Robert Half International third-quarter earnings: The raw numbers
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Starting with the headline numbers from the quarter:
- Net service revenue declined 1% to $1.324 billion, coming in slightly below the midpoint of the guidance range of $1.305 billion to $1.365 billion.
- Diluted EPS declined 4.2% to $0.68, coming in slightly below the midpoint of the guidance range of $0.66 to $0.72.
As you can see above, the results were slightly disappointing, but there are signs of underlying improvement. In fact, the guidance for the fourth quarter (management doesn't guide more than a quarter ahead) suggests better days ahead:
- Net service revenue in the range of $1.287 billion to $1.347 billion, the midpoint of which implies 4% growth over last year.
- Diluted EPS in the range of $0.60 to $0.66 implies yearly growth of 3%.
Improving employment trends
Looking at the numbers in terms of year-over-year growth rates on a comparable basis (same billing days and constant currency), it's clear that the company's staffing end-demand is improving. For example, global temporary and consultant staffing revenue declined just 0.4% compared to a 1.6% decline in the previous quarter. Moreover, global permanent placement staffing increased 6.7% in the quarter. All told, global staffing revenue improved 0.3% compared to a 1.3% decline in the previous quarter.
A breakout of growth rates in its staffing operations shows the improvement across all areas. It's notable that permanent revenue is growing more than temporary and consultant revenue for Robert Half -- this is usually a sign of an economic recovery because permanent job growth gets hit more in a slowdown and so tends to recover stronger when the overall market turns up.
Positive management commentary
In addition, CFO Keith Waddell outlined linear improvement in the quarter. For example, temporary and consultant staffing revenue grew 2.1% in September compared to a 0.4% decline through the quarter. Similarly, permanent placement revenue increased 7.2% in September compared to a 6.7% increase in the quarter. Moreover, permanent placement revenue is up 21% in the first three weeks of October.
Two areas of concern
While staffing trends are improving, why did total revenue decline 1%?
The answer lies in the 2.7% decline in global Protiviti revenue -- driven by a 5.4% decline in Protiviti's U.S. operations. (Protiviti is Robert Half's consulting firm.) When quizzed on the earnings call, Waddell put the weakness down to the timing of contracts and revenue recognition, but promised that "the fourth quarter for Protiviti should be better."
The second area of concern was margin performance. Total gross margin for the quarter came in at 41.2% compared to 41.3% in the same quarter of last year. Meanwhile, operating income margin of 10% was below the 10.9% reported in last year's third quarter. Moreover, as you can see above, the fourth-quarter guidance implies revenue will grow more than earnings.
When asked about the latter on the earnings call, Waddell outlined that last year's fourth quarter benefited from around $5 million in credits, which wouldn't repeat this year. Adjusting for this effect in the fourth-quarter guidance, "gross margins are comparable," according to Waddell.
Turning to operating margin, Waddell expects "50-60 basis points lower operating margin percentages." However, a large part of this is because Robert Half has added to its head count in order to support future growth.
Investors will be looking forward to Robert Half benefiting from improving employment trends, while hopefully Protiviti will deliver the improvements management has promised. Moreover, if staffing trends continue to get better, then it's reasonable for investors to expect margin expansion next year.
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