Leading staffing company Robert Half International Inc. (NYSE: RHI) delivered a solid set of results in its latest earnings report, and its numbers imply a relative improvement in the U.S. employment market. Moreover, management highlighted a leading indicator that suggests conditions will improve in the coming quarters. Let's look at the results from one of the best bellwethers of the U.S. economy.
Robert Half International's second-quarter earnings: The raw numbers
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Starting with the headline numbers from the quarter:
- Net service revenue declined 2.7% to $1.308 billion and came in at the middle of the guidance range of $1.275 billion to $1.335 billion.
- Diluted EPS of $0.64 came in at the midpoint of guidance of $0.61 to $0.67.
The headline numbers were in line with the midpoint of expectations. For the third quarter in a row, revenue declined, and the guidance for the next quarter implies more of the same.
- Third-quarter revenue is expected in the range of $1.305 billion to $1.365 billion, compared with $1.338 in the same period last year https://www.roberthalf.com/about-us/investor-center/quarterly earnings-releases#
- Third-quarter EPS is expected in the range of $0.66 to $0.72, compared with $0.71 in last year's third quarter.
What happened in Robert Half's quarter
While management couldn't yet proclaim an increase in year-on-year revenue, there are clear signs of improvement. Here's a look at temporary and permanent placement revenue by geography:
There are three key points to look at from the chart.
First, international revenue growth has remained strong, with CFO Keith Waddell referencing particular strength in Germany and Belgium and an improvement in France. However, the U.K. remains flat, possibly a consequence of negative sentiment over Brexit.
Second, in both geographies, permanent placement employment revenue growth was higher than temporary staffing revenue growth. Talking on the earnings call, CEO Harold Messmer thinks "perm and temp are highly correlated, and we would expect temp to follow perm." If that's true, it would be good news, because Robert Half makes most of its money from temporary staffing. For example, 71% of operating income came from temporary and consultant staffing in the first half.
Indeed, Messmer went on to say that "perm is usually more economically sensitive than ... temp, and it seems to be what's leading at the moment, which is which bodes well for the environment." https://seekingalpha.com/article/4090494-robert-half-internationals-rhi-ceo-harold-messmer-q2-2017-results-earnings-call-transcript?part=single
Third, while U.S. permanent and temporary revenue growth remains in negative territory, the chart suggests a point of inflection has passed and positive growth could return in future quarters.
Linearity through the quarter
The theme of permanent placing as leading temporary staffing continues when looking at how the quarter progressed for Robert Half. Simply put, permanent placement revenue growth was stronger at the end of the quarter than at the start. For example, permanent placement revenue grew 5.4% in June compared with a 1.4% increase in the quarter, with the first three weeks of July generating 9.8% growth.
It's a somewhat different story with temporary and consulting revenue growth. In fact, June revenue declined 2%, compared with a 1.6% decline for the quarter, and was down 2.9% in the first two weeks of July.
In other words, conditions clearly improved for permanent placement through the quarter but got worse for temporary staffing. If Robert Half's management is right, then trends in temporary staffing will turn positive in the coming months, but that viewpoint is not confirmed in the trends through the last quarter.
Investors will be looking for improvement in the U.S and in particular with temporary staffing. As ever, employment trends are largely a function of the economy and business sentiment. The indicators are positive, and Robert Half will be hoping its revenue growth can turn positive before the end of 2017.
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