Robert Half Inc. Q2 FY2021 Earnings Call

Hello, and welcome to the Robert Half Second Quarter 2021 Conference Call. 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. Mr. Waddell, you may begin.

Hello, everyone. We appreciate your time today. Before we get started, I would 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 risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. These risks and uncertainties are described in today’s press release and 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, 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 Accountemps, OfficeTeam, Robert Half Technology and Robert Half Management Resources includes their intersegment revenues from services provided to Protiviti in connection with the company’s blended staffing and consulting solutions. This is how we measure and manage these divisions internally. The combined amount of divisional intersegment revenues with Protiviti is also separately disclosed. The supplemental schedules just mentioned also include a revenue schedule showing this information for 2019 through 2021. For your convenience, our prepared remarks for today’s call are available in the Investor Center of our website, roberthalf.com. We achieved record levels of revenues and earnings in the second quarter due to a broad-based, global acceleration in demand for our staffing and business consulting services. We were particularly pleased with the strength of our permanent placement and Protiviti operations, which grew year-over-year by 102% and 62%, respectively. Protiviti reached its 15th consecutive quarter of revenue gains with very strong growth in each of its solution areas. I am extremely proud of our staffing, Protiviti and corporate services professionals who are the key to our success. Companywide revenues were $1.581 billion in the second quarter of 2021, up 43% from last year’s second quarter on a reported basis, and up 40% on an as adjusted basis. Net income per share in the second quarter was $1.33, increasing 227% compared to $0.41 in the second quarter a year ago. Cash flow from operations during the quarter was $165 million. In June, we distributed a $0.38 per share cash dividend to our shareholders of record, for a total cash outlay of $42 million. We also acquired approximately 717,000 Robert Half shares during the quarter, for $63 million. We have 8.4 million shares available for repurchase under our Board-approved stock repurchase plan. Return on invested capital for the company was 49% in the second 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 $1.581 billion in the second quarter. On an as adjusted basis, second quarter staffing revenues were up 33% year-over-year. U.S. staffing revenues were $855 million, up 34% from the prior year. Non-U.S. staffing revenues were $267 million, up 31% on a year-over-year basis as adjusted. We have 322 staffing locations worldwide, including 86 locations in 17 countries outside the United States. In the second quarter, there were 63.4 billing days, unchanged from the same quarter one year ago. The current third quarter has 64.4 billing days, compared to 64.3 billing days in the third quarter one year ago. Currency exchange rate movements during the second quarter had the effect of increasing reported year-over-year staffing revenues by $24 million. This impacted our year-over-year reported staffing revenue growth rate by 2.9 percentage points. Temporary and consultant bill rates for the quarter increased 3.7% compared to one year ago, adjusted for changes in the mix of revenues by line of business, currency and country. This rate for Q1 2021 was 3.4%. Now, let’s take a closer look at results for Protiviti. Global revenues in the second quarter were $459 million. $366 million of that is from business within the United States, and $93 million is from operations outside the United States. On an as adjusted basis, global second quarter Protiviti revenues were up 59% versus the year ago period, with U.S. Protiviti revenues up 63%. Non-U.S. revenues were up 43% on an as adjusted basis. Exchange rates had the effect of increasing year-over-year Protiviti revenues by $8 million and increasing its year-over-year reported growth rate by 2.8 percentage points. Protiviti and its independently owned Member Firms serve clients through a network of 86 locations in 28 countries. Moving on to SG&A presentation. We remind you that changes in the company’s deferred compensation obligations are classified as SG&A or, in the case of Protiviti, costs of services, with completely offsetting changes in the related trust investment assets classified separately below SG&A. Previously they were both classified as SG&A. Our historical discussion of consolidated operating income has been replaced with the non-GAAP measure of combined segment income. This is calculated as consolidated income before income taxes, adjusted for interest income and amortization of intangible assets. For your convenience, we’ve included a supplemental schedule to today’s earnings release on Page 7, highlighting the impact of changes in the deferred compensation accounts to the Summary of Operations for the second quarter of 2021 and 2020. This is a non-GAAP disclosure, so we also show a reconciliation to GAAP. Turning now to gross margin. In our temporary and consultant staffing operations, second quarter gross margin was 39.7% of applicable revenues, compared to 37.1% of applicable revenues in the second quarter one year ago. Our permanent placement revenues in the second quarter were 12.8% of consolidated staffing revenues, versus 8.6% of consolidated staffing revenues in the same quarter one year ago. When combined with temporary and consultant gross margin, overall staffing gross margin increased 490 basis points compared to the year-ago second quarter, to 47.4%. For Protiviti, gross margin was 29.1% of Protiviti revenues, compared to 23.4% of Protiviti revenues one year ago. Adjusted for the effect of deferred compensation expense related to changes in the underlying trust investment assets as previously mentioned, adjusted gross margin for Protiviti was 30% for the quarter just ended versus 25.7% one year ago. Transitioning to Selling, General and Administrative Costs, company SG&A costs were 30.9% of global revenues in the second quarter, compared to 36.7% in the same quarter one year ago. Changes in deferred compensation obligations related to increases in underlying trust investments had the impact of increasing SG&A as a percent of revenue by 1.5% in the current second quarter and increasing SG&A by 3.8% in the same quarter one year ago. When adjusted for these changes, companywide SG&A costs were 29.4% for the quarter just ended, compared to 32.9% one year ago. Staffing SG&A costs were 38.4% of staffing revenues in the second quarter, versus 44.2% in the second quarter of 2020. Included in staffing SG&A costs was deferred compensation expense related to increases in the underlying trust investment assets of 2.1% in the second quarter, compared to an expense of 5.1% related to increases in the underlying trust investment assets in the same quarter one year ago. When adjusted for these changes, staffing SG&A costs were 36.3% for the quarter just ended, compared to 39.1% one year ago. Second quarter SG&A costs for Protiviti were 12.5% of Protiviti revenues, compared to 15.1% of revenues in the year-ago period. Operating income for the quarter was $177 million. This includes $28 million of deferred compensation expense related to increases in the underlying trust investment assets. Combined segment income was therefore $205 million in the second quarter. Combined segment margin was 12.9%. Second quarter segment income from our staffing divisions was $125 million, with a segment margin of 11.1%. Segment income for Protiviti in the second quarter was $80 million, with a segment margin of 17.4%. Our second quarter tax rate was 27%, compared to 20% one year ago. The comparative rate in 2020 was lower than normal due to adjustments made to the estimates of the pandemic impact on the 2020 tax rate. At the end of the second quarter, accounts receivable were $908 million, and implied days sales outstanding or DSO was 51.6 days. Before we move to third quarter guidance, let’s review some of the monthly revenue trends we saw in the second quarter and so far in July, all adjusted for currency and billing days. Our temporary and consultant staffing divisions exited the second quarter with June revenues up 34% versus the prior year, compared to a 27% increase for the full quarter. Revenues for the first two weeks of July were up 35% compared to the same period one year ago. Permanent placement revenues in June were up 83% versus June of 2020. This compares to a 97% increase for the full quarter. For the first three weeks in July, permanent placement revenues were up 83% compared to the same period in 2020. We provide this information so that you have insight into some of the trends we saw during the second quarter and into July. As you know, these are very brief time periods. We caution against reading too much into them. With that in mind, we offer the following third quarter guidance. Revenue $1.61 billion to $1.69 billion. Income per share $1.35 to $1.45. The midpoint of our guidance implies new all-time high revenue and EPS levels for the Company. Midpoint revenues of $1.65 billion are 37% higher than 2020 and 5% higher than 2019 levels on an as adjusted basis. Midpoint EPS of $1.40 is 110% higher than 2020 and 39% higher than 2019. The major financial assumptions underlying the midpoint of these estimates are as follows; revenue growth on a year-over-year basis; staffing up 33% to 35%; Protiviti up 46% to 48%; overall up 36% to 38%. Gross margin percentage, temporary and consultant staffing, 39% to 40%. Protiviti, 29% to 31%. Overall, 41% to 43%. SG&A as percent of revenues, excluding deferred compensation investment impacts: staffing, 35% to 36%; Protiviti, 12% to 13%; overall, 29% to 30%. Segment income for staffing, 10% to 11%; Protiviti, 17% to 18%; overall, 12% to 13%. A tax rate up 26% to 27% and shares outstanding 111.5 million. 2021 capital expenditures and capitalized cloud computing costs, $65 to $75 million, with $15 million to $20 million incurred during the third quarter. We limit our guidance to one quarter. All estimates we provide on this call are subject to the risks mentioned in today’s press release and in our SEC filings. Now, I’ll turn the call back over to Keith.

Thank you, Mike. Our staffing results continue to reflect a faster pace of recovery than we’ve experienced in the past. Clients have lean staff levels as they begin to expand, which is exacerbated by generally higher levels of attrition. Also, as they look remotely to fill their needs, clients are elevating the experience requirements for their job openings, which further adds to the demand for our services. The recovery is also very broad-based and spans across industries, client size, skill levels, geographies, and lines of business. The National Federation of Independent Business, NFIB, recently reported that 56% of small businesses had few or no qualified applicants for open positions, and 46% had job openings that could not be filled. This speaks well of the ongoing demand environment. Protiviti’s multiyear record of consecutive growth continues to benefit from a highly diversified suite of solution offerings and client base. Blended solutions with staffing pair Protiviti’s world-class consulting talent with staffing’s deep operational resources to provide a cost-effective solution to clients’ skills and scalability needs. Protiviti has also benefited from project work in the public sector resulting from various federal and state stimulus programs. Approximately $100 million in revenue this quarter resulted from work related to these programs, or approximately $0.07 of our earnings per share. Growth in this public sector business contributed 32 points to Protiviti’s year-on-year growth rate of 62%, while the core business accelerated to a growth rate of 30%. Core growth was strong across internal audit, technology consulting, risk and compliance consulting, and business process improvement with internal audit showing the most acceleration. Public sector revenues represent 6% of total revenues and contributed 8 points to the Company’s overall 40% growth rate. A year ago, the world faced an uncertain future with extraordinary challenges ahead. Along the way we have continued to invest in our tenured, high performing workforce. We also strengthened our investments in advanced AI technologies, enabling our professionals to help clients with critical talent and consulting needs and find solutions across broad resource pools. As a result, we closed the quarter with an employee base that is more engaged and productive than ever, with all-time high revenues, and strong momentum leading into the second half. Bolstered by the strengths of our brands, our people, our technology and our professional business model, we are excited about the continued ability to find meaningful and exciting employment for the people we place and provide clients access to the specialized talent they need to grow and the deep subject matter expertise they need to confidently compete in a dynamic world. Finally, we’d like to thank our employees for making possible another significant recognition received this quarter, as Forbes named us America’s Best Professional Recruiting Firm. Now, Mike and I would be happy to answer your questions. Please ask just one question and a single follow-up, as needed. If there’s time, we’ll come back to you for additional questions.

Your first question comes from the line of Mark Marcon with Robert W. Baird.

Good afternoon, Keith and Mike. Obviously, outstanding results. I’m wondering if you can talk a little bit about Protiviti. Specifically, you mentioned $100 million in revenue that came from the public sector programs, how sustainable do you think those programs are? How many started up in the second quarter? What’s the pipeline look like? How should investors think about that portion? And then if we subtract out the $100 million from the intersegment revenues, it looks like you’re also growing your non-public managed solutions business. So can you talk a little bit about that and the traction you’re seeing there?

Sure. And so again, to size this, it was $100 million in revenues for the quarter. That’s only 6% of our overall revenues that added 8 points to our growth rate and it’s $0.07 a share. It was again led by unemployment and housing assistance. The good news is there’s still a backlog of demand. Many states have already extended us into Q3 and Q4. The tail is expected to last well into 2022. Our forecast is flat for Q3 sequentially and for a modest decline in Q4. So the pipeline for non-transactional RFPs increased eight-fold during the last 90 days—projects such as performance improvement, data analytics, controls, modernization. So we’re cautiously optimistic that our win rate will be good, given the strength of our new relationships. As you mentioned, not only did we grow the public sector portion of intersegment, but we also grew the balance of intersegment, which is managed business solutions, managed technology solutions between staffing and Protiviti. So that grew 49% year-on-year as well, that had nothing to do with public sector. So bottom line is the transactional work we were doing has a longer tail than most expect and will likely last well into 2022. We’re certainly ramping up our pipeline beyond that and stay tuned to see what our win rate is.

That’s great. And then related to that, can you just talk a little bit about who you’re winning from? I mean, when you mentioned that eight-fold increase, where were those opportunities going previously? How would you characterize the win rates? Who are you winning from and how big is that potential TAM based on that strength?

I’d say most of those competing with us for the non-transactional work are other consulting firms, including the Big Four, not other staffing firms. For the transactional work, clearly the other staffing firms are in some of the states as well. So it’s relatively new days for us with these public sector clients. As I’ve said before, we feel very good about the referrals we’re getting from the relationships we’ve already established and therefore only time will tell what our win rate will be, but we’re optimistic. And our win rate clearly rises when we have existing relationships.

That’s terrific. Thank you.

Your next question is from Jeff Silber with BMO Capital Markets.

Thanks so much. You’ve mentioned the temporary consulting billing rates. I was wondering if we could talk a little bit about wage rates and bill price spread. Are you doing anything different on the supply side to track or are there constraints different from prior quarters or prior years? Thanks.

So first of all, the wage rates are up a little less than the bill rates, and I gave you global rates. The U.S. rates are a little bit higher than the global rates. When we talk about candidate supply, it’s tightest at the staff or transactional level, but it’s manageable. We’ve successfully recruited in environments with much lower unemployment rates, while currently it’s 5.9% overall and 3.5% for college grads. Just in 2019, it was 3.5% overall and 1.9% for college grads. And frankly, if you adjusted the current rates for participation rates, that would be even higher. I’d say that remote candidates have meaningfully expanded the pool. Our technology and our footprint facilitate this. Further, we do expect some relief at the staff and transactional level as unemployment benefits decline, and childcare and schools reopen. We’re passing through the wage inflation that we’re having, and we’ve actually expanded our margin some. And clearly, candidates want more remote options and frankly want a premium if you want them to work onsite. But net-net, we think the supply is manageable. And we’re not only at the staff and transactional level, but we are mid and higher skilled as well. It’s not nearly as tight there as it is at the staff and transactional level.

Okay. That’s really helpful. Shifting gears a bit and talking about your internal hiring. If I remember correctly, last quarter you said you had enough capacity to last at least for the next couple of quarters. Given the strength that you saw last quarter, are you wrapping up your internal hiring?

We’re clearly ramping permanent placement more quickly than temp or contract for obvious reasons. And so we’ll begin now to slowly add to our temp and contract internal staff, and we’ll get even more aggressive on the permanent placement side, given how successful it’s become.

Okay. Really helpful. Thanks so much, Keith.

Your next question is from Andrew Steinerman with JPMorgan.

Hi. Hi there, Keith. I don’t know if you’re going to say this is the same type of question, but I want to know if you feel like Robert Half right now is set up for multiple years of strong, flexible staff and growth. Usually there’s multiple years of strong growth when you add a new economic cycle. I definitely heard you say, I feel like supply is manageable. But my question really stems from you said, hey, we’ve really seen faster pickup of demand here than typical. So my question is when you see this faster demand than typical, do you feel like it might not be as long as you typically see?

Okay. So let’s first talk about how much faster so far. We measure four quarters past trough, and we compare that against the 2008-2009 and the 2000-2001 downturns. This time, four quarters past trough on the temp or contract side, we’re up 38%, on the permanent side, we’re up 96%. That compares to 2008-2009 where temp or contract was up 14% and permanent up 33% for the same period, and 2000-2001 where temp or contract was up 23% and perm up 41%. So clearly, it’s a fact that so far, we’ve recovered more quickly. Further, if you look back to those same periods, for the 2008-2009 period, three years hence we had compound annual growth rates of 12% a year for temp or contract and 24% a year for perm. The 2000-2001 period was frankly double that. So history would say, and if anything it’s repeating even better than historically, that once we start recovering, we have a three- to five-year runway of outsized growth. There’s nothing that would say otherwise as we sit here. Another structural point relevant to three to five years: we think widespread adoption of remote work is a structural win for us. It’s more difficult for clients to recruit remotely, particularly our SMBs, which mostly have local footprints. Clients want more experienced candidates when recruiting remotely to minimize training requirements. We can deliver deeper skills and lower price points when we recruit outside local markets, particularly when we’re recruiting for clients in large metro areas. Our competitive position improves, particularly against tougher local and regional firms. We have a national candidate database with local candidate relationships because of our footprint. Our advanced AI matching algorithms provide real-time short lists, not only of local candidates, but national candidates for every single job order we get; we give our internal staff a national selection as well as local. Our algorithms are trained with profiles of our most successful candidates across millions of actual engagements. Furthermore, administrative requirements that come with remote work, we handle through a mobile app, which is number one rated in the industry, 4.8 out of 5. We just processed our 1 millionth time record through that app. Our competitors don’t have that capability. Our SaaS-based internal infrastructure allows our staff to work remotely, improving job satisfaction, productivity, income potential, and allows us to balance workloads across a much broader geographic area. So not only do we have the traditional opportunity as business conditions improve, there’s this structural shift to hybrid/remote that gives us advantages we haven’t traditionally had.

Thank you. That was great. Appreciate the time.

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

Thank you. Keith, maybe just some comments around the margins and with this faster-than-expected recovery, should we expect more leverage or kind of the same? Any thoughts would be appreciated.

Well, as we look forward to margins, I’d say, first, let’s talk gross margins. On the one hand we’re at all-time highs. Our contract-to-hire conversions this quarter were 3.4% of revenues, so that was up. As we look forward, we think there’s upside with those conversions that have been as high as 4%; that benefits both operating margin and gross margin. There’s also a mix shift to higher skill levels, and mix is our friend. We get higher gross margins as we move up the skill curve. Mix has been a big part of our margin expansion over the past decade and our appetite to continue to move up that skill curve is greater, which is positive for future gross margins. On the SG&A side, we have new opportunities to leverage. As our people can fill jobs remotely, they get more productive. We can leverage our technology spend, which has been significant. We can leverage our field infrastructure, which is now only now returning back to 2019 levels. So we’re bullish that as we move forward, we can further expand our operating margins for the reasons I just mentioned.

And maybe specific to Protiviti, how should we think of that given this massive growth helped by the government solutions, and as that comes down, what are the moving pieces there?

Because an ever-growing portion of Protiviti is blended activity with staffing, we think it’s best to look at our enterprise margins rather than staffing alone or Protiviti alone. All the comments I just made apply to the enterprise.

Okay. All right. Thank you, Keith.

Your next question comes from the line of Hamzah Mazari with Jefferies.

Hey, this is Ryan Gunning filling in for Hamzah. You touched on it a little bit, but could you comment a little more on where you are in your technology journey, the use of AI to match candidates and your digital footprint in general? What’s behind you and what’s yet to come?

We’ve had significant accomplishments over the last few years. We have a SaaS-based salesforce.com front office infrastructure and we’ve adopted Workday for our financials, payroll and HR. We’ve spent significantly to create what we think is a competitive advantage by having our matching engine trained based on the profiles of our most successful candidates based on actual work performance across millions of jobs. We’re further enhancing that by trying to predict, using activity signals, likelihood to engage—because predicting fit is important, but predicting fit and likelihood to engage is doubly important. So we’ll continue to invest there. Our mobile app is highly rated and very successful. At 50,000 people we’ve long talked about a continuum from traditional staffing on one side to talent platforms and self-service on the other. The latter gives clients access to our technology and our candidate database. We’re still building out that other side of the continuum. We’ve made significant progress and hope in the next few quarters to have at least a minimum viable product ready to go to market. Our vision is that clients should choose how much they want to interact digitally versus traditionally. While many might first come thinking they want self-service, it will ultimately become lead generation as they find they need more help closing candidates, benefiting the traditional side. We feel great about the technology initiatives, the spending, and the impact. We’ve made tens of thousands of placements on a remote basis using this technology that we couldn’t have done five years ago. We know it works, we know it’s effective, and we strongly believe we can make it even better.

Great. Thank you. And then switching to the competitive landscape: can you talk about whether you see LinkedIn being a competitive threat at some point or whether you see it as more complementary to the business?

Whether it’s LinkedIn, Indeed, or other job boards, we’ve often described them as frenemies. On the one hand, we use them as part of our sourcing strategy. Today, we source more candidates directly to our own website than all other digital sources combined. That’s a major movement from five years ago. We use LinkedIn and other boards, but our brand combined with an AI-driven outreach program where we invite candidates to apply for open positions drives a lot of traffic straight to us. LinkedIn isn’t deploying new game-changing tools; they are one of many sources for us. The direct traffic to us has never been greater and is growing.

Got it. Thanks.

Your next question is from Kevin McVeigh with Credit Suisse.

Great. Thank you. Hey, congratulations on the results. The level of beats the last two quarters has been significantly upsized relative to even cash recovery and things like that. What’s been driving the incremental upside relative to the expectations you’ve been setting at the beginning of the quarter, particularly against the last two quarters?

I would say the strength of the recovery has been much greater than expected and much greater than traditional cycles. Not only do we get the lift we’ve traditionally gotten as clients who are lean get more transaction volume and restart projects, incremental to that is a higher level of attrition or churn that increases demand. Further, the appetite for remote workers makes clients less inclined to do it themselves and more inclined to use a third party. So you’ve got the traditional lift plus the higher attrition and remote candidate demand. That combination has produced stronger and faster results, and we think sustainable.

And then quick follow-up, Keith, the $100 million of government Protiviti revenue, how much of that is intersegment and revenue side as well?

I’d say it’s 95% in Protiviti, but remember not all of that is intersegment. The intersegment is the contractor participation on those engagements. There are also Protiviti professionals participating on those engagements and there’s revenue there. When we gave you $100 million, we’ve been transparent—it's everything.

Got it. And then how much is in the Q3 guidance for government?

Q3 guide for government is flat sequentially.

Thank you.

Your next question is from Tobey Sommer with Truist Securities.

Thanks. Could you dig into the factors driving perm being so high with such high growth and such a high percent of sales versus temp, and specifically the extent to which your clients looking nationally to recruit is a contributor?

As transaction volumes pick up because clients are starting at lean points and restarting projects, they need people. They also face higher attrition, so they need new hires. Many times they have to look outside the current market either for better price points or deeper skills not available locally. Clients are more inclined to use a third party for remote hiring than for a local hire. All of these factors support permanent placement. Also, temp and contract benefit because during the time it takes to hire full-time, temp and contract can fill needs, sometimes turning into a permanent hire. There’s a strong network effect. We believe the long-term shift to hybrid/remote structurally positions us better than ever versus clients doing it themselves or going to local competitors who lack the capabilities we’ve developed.

With respect to bill rates and what this phenomenon means over the course of the cycle, how do you net out potential labor arbitrage, which could lower bill rates, and normal wage inflation and broader inflation fears? How do you net that out over the medium term?

We have a multi-decade history of passing on wage inflation to clients. The labor arbitrage opportunity—driving recruiting outside local markets—does not squeeze our margins; if anything, it gives us an opportunity to participate in that arbitrage and expand margins. I don’t see it as a negative for us. You may see a muted aggregate bill rate, but we more than make that up by expanding margin on the arbitrage.

Okay. Thank you so much for your help.

Your next question is from Gary Bisbee with Bank of America.

Hi, good afternoon. Interesting continued progress in public sector work. As you think about that as a segment of work, you’ve not done a lot in the past. Are there any downsides to the public sector as a customer, whether that’s visibility, funding cycles, anything particular about the work or the profitability? I understand some of that is pandemic related and some demand will fade. Other than that, is there anything you’d call out about serving that sector relative to the corporate world?

For margins, we get normal margins on public sector work—neither higher nor lower. Contract administration is different and a bit more bureaucratic, but Protiviti has had GSA schedules for a long time which they used for federal work; we’ve leveraged them with state and local groups. States often refer us to other states due to friendly relationships—land and expand dynamics. They’re not directly competitive, which can benefit referrals. It’s new ground for us but we’re optimistic; clients in the public sector are generally happy and have referred us. Our pipeline grew eight-fold in 90 days, so now the onus is on us to deliver.

That dovetails to my follow-up: given how fast revenues have grown and margins have been strong, it seems likely you’ll need to step up SG&A investment to sell and serve this business. If demand stays strong, do you think these profitability levels are sustainable or might margins be impacted as you invest more?

Again, take an enterprise margin view. We believe we have enterprise margin upside potential. After funding SG&A, remember that our people can now fill jobs from non-local markets, making our workforce more efficient. This allows us to balance workloads over a larger group and represents a permanent productivity increase and permanent reduction in SG&A as a percent of revenue. The operating margins we saw this quarter—12.9% enterprise—are not necessarily peak; we think we have upside from continued mix shift and the ability to leverage SG&A.

Great. That’s helpful. Thanks.

Your next question is from David Silver with CL King & Associates.

Hi, thanks very much. I had a couple of questions. First, Keith, could you comment on your strategies for staff retention? Sometimes top producers in the industry take opportunities to go independent or are susceptible to poaching. Last year you adopted a lean staffing strategy. As you’ve reopened, how do you think about retaining your best producers to hit internal targets?

Retaining our best producers is everything. The tenure of our best producers is second to none in the industry. Over the last 15 months we learned they place a huge premium on flexibility and the ability to work from home. We’ve extended their individual choice to the end of the year and we’ve announced a hybrid model thereafter with as much flexibility as practicable. This improves job satisfaction and income potential. They appreciate our technology investments that bring more clients and candidates, including national candidates. Our recruiters are making more money because we are leaner and have incentive plans where they get a larger share of incremental gross margin as they grow their book of business. Controlling where they work is hugely important in our employee surveys.

Okay, great. And then philosophically about your permanent staffing business: first, is the quarterly revenue this quarter and the $30 million-plus EBIT both all-time quarterly records for the company? Second, hiring permanently usually happens as the cycle matures, not typically early-stage. Given we’re early in the reopening, how would you characterize the current strong appetite from customers for permanent hiring versus temporary? Can you project where perm revenues might reach as this cycle matures?

Early cycle permanent placement always outperforms temp or contract. In the last two cycles, perm CAGR was roughly double temp or contract for three to five years. The strong perm performance here is similar to what we’ve seen historically. Psychologically, press around tight labor markets affects client behavior broadly; companies often prefer to buy talent rather than lease it when they perceive tightness. Churn is our friend and there’s substantial churn now, some pent-up from 2020. So the environment supports strong perm demand, and historically that can translate into multi-year growth.

Thank you. I appreciate the insight.

Your next question is from George Tong with Goldman Sachs.

Hi, thanks. Looking across Accountemps, OfficeTeam, Robert Half Technology, and RH Management Resources, revenue performance in 2Q 2021 versus 2Q 2019 vary quite a bit among the segments. Can you discuss what’s driving that variation, namely the decline in Accountemps and the growth in Management Resources, OfficeTeam and Technology versus 2Q 2019?

Overall on the temp or contract side we’re 2% below Q2 2019 and on perm we’re 2% above, so essentially we’ve returned to 2019 levels overall. Higher-skilled divisions—Robert Half Management Resources and Robert Half Technology—are more project-driven and more remote-work friendly, so they declined less and recovered faster. OfficeTeam benefited from public sector work, which is why it outperformed Accountemps. Accountemps has more transactional on-premise work, which was more impacted, but it’s recovering quickly. Bottom line: overall we’re back to 2019 levels and growing from there rapidly.

Historically your gross margins have been approximately 41.5% on a full-year basis. Based on temp wage trends today and bill pay spreads, when do you believe you’ll return to historical gross margins?

If you’re referring to consolidated staffing gross margins, which include temp, contract and perm, we’re actually higher than that. Temp and contract only were 39.7% this quarter—the highest ever. Permanent placement margins are in line with historical levels, and the mix of perm to total is higher than ever. Today we have our highest staffing consolidated gross margins in our history and we think there’s upside as we continue to move up the skill mix.

Makes sense. Thank you.

Okay. So that was our last question. We appreciate everyone joining the call. Thank you.

This concludes today’s teleconference. If you missed any part of the call, it will be archived in audio format in the investor center of Robert Half’s website at www.roberthalf.com. You can also dial the conference call replay dial-in details, and the conference ID are contained in the company’s press release issued earlier today.