Robert Half Inc. Q2 FY2024 Earnings Call

Hello, and welcome to the Robert Half Second Quarter 2024 Conference Call. Today's conference call is being recorded. Our host 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.

Hi, everyone. We appreciate your time today. Before we get started, I'd like to remind you that the comments made on today's call contain forward-looking statements, including predictions and estimates about our future performance. These statements represent our current judgment of what the future holds. However, they are subject to the risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. These risks and uncertainties are described in today's press release in our most recent 10-K and 10-Q filed with the SEC. We assume no obligation to update the statements made on today's call. During this presentation, we may mention some non-GAAP financial measures and reference these figures as adjusted. Reconciliations and further explanations of these measures are included in a supplemental schedule to our earnings press release. For your convenience, our prepared remarks for today's call are available in the Investor Center of our website, roberthalf.com. For the second quarter of 2024, company-wide revenues were $1.473 billion, down 10% from last year's second quarter on both a reported and as adjusted basis. Net income per share in the second quarter was $0.66 compared to $1 in the second quarter a year ago. Client and candidate caution continues to impact hiring activity and new project starts as macroeconomic and interest rate uncertainty persists. Second quarter revenues and earnings were within our guidance range. Protiviti posted strong results led by U.S. growth in revenues and segment income both on a sequential and year-on-year basis. We remain confident in our ability to navigate the current climate and optimistic about our growth prospects, built on our industry-leading brand, people, technology and unique business model that includes both professional staffing and business consulting services. Cash flow from operations in the quarter was $142 million. In June, we distributed a $0.53 per share cash dividend to our shareholders of record for a total cash outlay of $55 million. Our per share dividend is 11.5% annually since inception in 2004. The June '24 dividend was 10.4% higher than the prior year. We also acquired 900,000 Robert Half shares during the quarter for $60 million. We have 9.1 million shares available for repurchase under our board-approved stock repurchase plan. Return on invested capital for the company was 18% in the second quarter. Now I'll turn the call over to our CFO, Mike Buckley.

Thanks, Keith, and hello, everyone. As Keith noted, global revenues were $1.473 billion in the second quarter. On an as adjusted basis, second quarter Talent Solutions revenues were down 14% year-over-year. U.S. Talent Solutions revenues were $701 million, down 15% from the prior year's second quarter. Non-U.S. Talent Solutions revenues were $235 million, down 10% year-over-year. We conduct Talent Solutions operations through offices in the United States in 17 foreign countries. In the second quarter, there were 63.5 billing days compared to 63.3 billing days in the same quarter one year ago. The third quarter of 2024 has 64.1 billing days compared to 63.1 billing days during the third quarter of 2023. Currency exchange rate fluctuations during the second quarter had the effect of decreasing reported year-over-year total revenues by $6 million, $5 million for Talent Solutions and $1 million for Protiviti. Contract talent solution bill rates for the second quarter increased 3.1% compared to one year ago, adjusted for changes in the mix of revenues by functional specialization, currency, and country. This rate for the first quarter was also 3.1%. Now let's take a closer look at results for Protiviti. Global revenues in the second quarter were $487 million. $399 million of that is from the United States and $88 million is from outside the United States. On an as adjusted basis, global second quarter Protiviti revenues were down 1% versus one year ago. U.S. Protiviti revenues were up 3%, while non-U.S. Protiviti revenues were down 16%. Protiviti and its independently owned Member Firms serve clients through locations in the United States and 29 foreign countries. Turning now to gross margin. In Contract Talent Solutions, second quarter gross margin was 39.3% of applicable revenues versus 39.9% in the second quarter one year ago. Conversion revenues were contract-to-hire or 3.4% of revenues in the quarter compared to 3.7% of revenues in the quarter of one year ago. Our permanent placement revenues in the second quarter were 13.3% of Consolidated Talent Solutions revenues versus 13% in the same quarter one year ago. When combined with contract talent solutions gross margin, overall gross margin for Talent Solutions was 47.4% compared to 47.7% of applicable revenues in the second quarter of last year. For Protiviti, gross margin was 22.5% of Protiviti revenues compared to 22.9% of Protiviti revenues one year ago. Adjusted for the amount of deferred compensation that is completely offset by investment income related to employee deferred compensation trusts or the deferred compensation investment income offset, gross margin for Protiviti was 23.2% for the quarter just ended compared to 24% last year. Moving on to selling, general administrative costs. Enterprise SG&A costs were 34% of global revenues in the second quarter compared to 33.1% in the same quarter one year ago. Adjusted for the deferred compensation investment income offset, Enterprise SG&A costs were 33.2% for the quarter just ended compared to 31.6% last year. Talent Solutions SG&A costs were 43.1% of Talent Solutions revenues in the second quarter versus 40.7% in the second quarter of 2023. Adjusted for the deferred compensation investment income offset, Talent Solutions SG&A costs were 41.9% for the quarter just ended compared to 38.7% last year. Second quarter SG&A costs for Protiviti were 15.6% of Protiviti revenues compared to 15.1% of revenues for the same quarter last year. Operating income for the quarter was $76 million, adjusted for the deferred compensation investment income offset, combined segment income was $92 million in the second quarter. Combined segment margin was 6.2%. Second quarter segment income from our Talent Solutions division was $55 million with a segment margin of 5.5%. Segment income for Protiviti in the second quarter was $37 million with a segment margin of 7.7%. Our second quarter 2024 income statement includes $16 million as income from investments held in employee deferred compensation trust. This is completely offset by an equal amount of additional employee deferred compensation costs, which are reflected in SG&A expenses and direct costs. As such, it has no effect on reported net income. Our second quarter tax rate was 29% compared to 30% one year ago. At the end of the second quarter, accounts receivable were $893 million, and implied days sales outstanding, or DSO, was 54.6 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. Contract Talent Solutions exited the second quarter with June revenues down 13% versus the prior year compared to a 14% decrease for the full quarter. Revenues for the first two weeks of July were down 14% compared to the period last year. Permanent placement revenues in June were down 3% versus June of 2023. This compares to a 12% decrease for the full quarter. For the first three weeks of July, permanent placement revenues were down 17% compared to the same period in 2023. We provide this information so you have insight into some of the trends we saw during the second quarter and into July. But 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: revenues, $1.39 billion to $1.49 billion. Income per share $0.53 to $0.67. Our Q3 EPS estimate includes a restructuring charge of $0.08 per share related to Protiviti International. This includes $5.7 million charged to SG&A and income tax charges of $2.5 million. The midpoint revenues of $1.4 billion are 9% lower than the same period in 2023 on an as adjusted basis. The major financial assumptions underlying the midpoint of these estimates are as follows, revenue growth year-over-year as adjusted. For Talent Solutions, down 12% to 16%. Protiviti was down 1% to up 2%. Overall, down 7% to 11%. Contract margin percentage for contract talent, 38% to 41%. Protiviti, as adjusted for the deferred compensation investment income offset 24% to 26%. Overall, 39% to 41%. SG&A as a percentage of revenues, adjusted for deferred compensation investment income offset, for Talent Solutions, 41% to 43%, Protiviti 16% to 18% overall 33% to 35%. Segment income for Talent Solutions, 4% to 6%. For Protiviti, 7% to 9%, overall 5% to 7%. Tax rate, 31% to 33%. Shares 102 million to 103 million. 2024 capital expenditures and capitalized cloud computing costs $80 million to $100 million with $25 million to $35 million in the third 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.

So we're told we sound a little scratchy. We're going to switch lines. So give us just one second.

You are. Go ahead, please.

Okay. Thank you, Mike. Client budgets remain constrained, and candidates are reluctant to change jobs. This subdued short-term demand elongates sales cycles. However, job openings are well above historical highs and indicative of a pickup in future demand. As business confidence improves, hiring urgency returns, project demand accelerates, deferred backlogs and growth initiatives are reprioritized and labor churn normalizes. This puts pressure on client resources that are often already stretched and creates hiring and consulting demand that traditionally leads to very strong gains for us in the early part of growth cycles. While progress on inflation and economic momentum stalled during the first quarter of this year, positive trends reemerged in the second quarter, which should be more conducive for higher business confidence levels and overall sentiment going forward. We continue to invest in technology and innovation to fuel our core business, which combines the skills, judgment, and expertise of our specialized talent solution professionals with world-class AI tools that leverage our proprietary data assets. We recently upgraded the candidate discovery experience on our website to transparently display the ratings of our recruiters for all AI matched candidates we've previously placed or interacted with. This is an industry first that tangibly demonstrates the benefits of our combined recruiters plus AI strategy, which our clients highly value. We're very pleased with Protiviti's results for the quarter, based on broad strength in each of its solution areas. Its margin and segment income both exceeded expectations, growing more than 250 basis points sequentially. Additional improvement is expected in the third quarter. The result of continued revenue strength combined with close control over resource costs and staff utilization rates. Protiviti's prospects and pipeline remain very strong, a testament to its ability to increasingly gain share in a competitive consulting market. As noted previously, during the third quarter, Protiviti will transition its Mainland China operations to an independently owned Member Firm to optimize local revenue opportunities, including state-owned enterprises. This will result in a restructuring charge of $0.08 per share. We've weathered many economic cycles in the past, each time emerging to achieve higher peaks; aging workforce demographics and clients' desire for flexible resources and variable costs are expected to benefit us for years to come. With our current business portfolio of talent solutions and consulting, we're even more confident about our future as macro confidence returns. We'll continue to invest in our people, our technology, our brand, and our business model to strengthen our ability to connect candidates to meaningful work and provide clients with the talent and subject-matter expertise they need to confidently compete and grow. Finally, we'd like to thank our employees across the globe whose commitment to success made it possible for us to achieve a number of new accolades. Robert Half, again, ranked number one on Forbes' list of America's best professional recruiting firms, and our people-first culture was reflected in our selection as one of Fortune's Best Workplaces for Millennials, Forbes' Best Employers for Diversity, and just yesterday, Forbes' Best Employers for Women. Now Mike and I would be happy to answer your questions. Please ask one question with a single follow-up. If there's time, we'll come back to you for additional questions.

Thank you. And your first question comes from the line of Mark Marcon with Baird.

Hey, good afternoon, Keith and Mike. We know that job openings continue to be elevated, but obviously, the trends when we take a look at Member Firm continue to be relatively soft. And so one thing that a lot of investors are asking about is to what extent do we think it's not just macro concerns potentially that some companies ended up over hiring during the snapback COVID and in the midst of the great resignation. And once everything flows, they basically ended up with too high of a permanent staffing level, but we're concerned about like it's so difficult to hire quality people that they're just holding on to them. And that they're in certain cases, just overstaffed and therefore, precedent to basically using temps as their pathway to flexibility. I'm wondering, this is a subjective question, but how much do you think that's the dynamic that's at play relative to macro concerns? And if that is a big part of it, how long do you think it might take us to kind of go through that before we start seeing a bit of a pickup?

Well, Mark, I would say early post-COVID, those were certainly factors, but we're now eight quarters into consecutive declines, so that has played a significant role. We're clearly observing signs of project delays. Clients are definitely leveraging variable costs by using contractors. However, we've been in this situation for eight quarters now. One of our team members mentioned on our pre-earnings call that it feels similar to a retail scenario where our clients have done their research and added items to their cart, but haven't finalized their purchases, which reflects deferred demand at this time. There's no indication that the accelerated hiring seen early post-COVID has had any lasting effect. As I mentioned, we are eight quarters into this, and the longest stretch of consecutive downturns we've experienced was 10 quarters, tracing back to the dot-com era. We have been facing this for quite some time; contractors and temporary workers across the industry are down and have been for some time. For context, in the second half of 2023, inflation was decreasing, and there was much discussion about potential interest rate cuts. In the first few quarters of 2023, we noticed a mid-single digit decline. As we anticipated rate cuts and less inflation in the fourth quarter, the first quarter saw a slight improvement to low-single digits down. However, with recent inflation stalling and fewer interest rate cuts, we have returned to mid-single digits down again. Our guidance for Q3 indicates we expect to remain in the mid-single digits down sequentially, but we are hopeful considering how our business responded to changes in the latter half of last year. Given the current progress in inflation and talks of rate cuts, we are cautiously optimistic that, although there may be a lag, we will see an improvement in our numbers. The impact of over-hiring that occurred in the earlier part of these eight quarters has mostly played out at this point.

That's great insight, Keith. Thank you. I concur with your assessment. My other question pertains to Protiviti in the U.S., which has shown a significant improvement. Could you elaborate on the areas where you've observed additional strength? Also, when you provided guidance for Protiviti for the quarter, how much of that is attributed to China? What portion are we excluding?

So the good news is on Protiviti U.S., the solution strength was very balanced across its four major solution areas: technology consulting, internal audit, business process improvement, and regulatory risk and compliance. Very broad-based. Every one of them grew sequentially, which we're very pleased by. As to the impact of China, it was small annual revenues, less than $10 million. And so while there's an EPS impact of the conversion from owned to Member Firm, the revenue impact is quite small. And I'd say this as well for what's left that we have in China, which is principally Hong Kong, it's just under 1% of revenues.

And the next question will come from Andrew Steinerman with JPMorgan.

Hey, Keith. Could you give a little more color on the consulting market? I mean kind of the peer market that Protiviti plays in, I know you used the word competitive? And I know you used the word gaining share for Protiviti. But do you feel like the consulting market might be bottomed out here like what do you feel like bench utilization is at firms like a center and Big 4? And how does the Protiviti's utilization of its full-time staff look right now?

The consulting market remains competitive, especially on a market-by-market basis. Some firms have excess capacity and tend to be aggressive with their pricing. This trend impacted us this quarter, but Protiviti has navigated it effectively, largely due to their management of utilization and their strategic use of contractors through talent solutions. Protiviti nearly achieved year-on-year growth in Q2, and with some luck, they may see year-on-year growth in Q3. We are optimistic about Protiviti; their pipeline is robust and well-diversified across various solutions. They are dedicated to market-facing activities, maintaining close relationships with current clients, understanding their business challenges, and ensuring their capabilities are prominent. They have maintained high levels of conference sponsorships and engage in webinars and local events. They are actively marketing alongside Talent Solutions. Overall, we are very satisfied with Protiviti's performance in this highly competitive consulting landscape, and it's clear they are gaining market share.

And the next question will come from Manav Patnaik with Barclays.

This is Princy Thomas on for Manav. Thanks for taking my call. One question about demand expectations that you mentioned. Can you talk about how you've been managing your recruiter level? And then also separately, in your recent conversations with clients, have you noticed any changes with their hiring for the remainder of the year, seeing the same level of labor hoarding?

Well, I had a little trouble hearing you, but based on what I think I heard, you asked about our own internal recruiter levels as well as conversation with clients about their levels of resource needs. As to our own internal recruiters, our policy hasn't changed. On the one hand, we have a performance management approach on a person-by-person basis as to how we manage headcount and those that underperform. We counsel that they'd be better with their career somewhere else, just like we always have; by the same token, proven performers, while their productivity might be down somewhat given market conditions. We're committed to keeping them, to having that capacity or dry powder in case things get better. We've certainly estimated internally that we could grow revenue somewhere 20% to 30% plus without adding to heads, but that's all subject to how we shape the recovery we see and how much additional capacity we feel like we need at the time; but that's a high-class problem to have. As to conversations with clients about their needs, as of before, we definitely see deferred project demand, and the point we were trying to make in the prepared remarks was today's subdued demand is tomorrow's source of demand and that as projects are deferred, everybody talks about that. Most companies today focus only on those projects with a short-term ROI. There are many other projects growth related that are getting deferred. That's future demand. Churn is subdued as we speak. That impacts backfill demand again. So as candidate confidence improves, there will be more churn. You get backfill demand from that plus that impacts client capacity to deal with improvement, Stacey, in their business. So there's a deferred impact. There's a pushed-forward demand impact of current constrained conditions that we've seen many times through many cycles, there are one of the few management teams in the industry that's been through several of these cycles. And much of the softness in demand that we see and the impacts on churn that we see are not unusual, and they turn around, which is why we, and frankly, the entire industry typically do very well in the early part of growth cycles. We believe there's deferred demand. The job openings is a good backdrop to all of that, but down at the individual client level, individual conversation level, there’s no question that projects are being deferred and that there's less turnover, less attrition, less churn that also impacts demand for our contract labor resources as well as everybody else's in the industry.

Thanks. Appreciate the color.

Thank you. And our next question will come from Heather Balsky with Bank of America.

Hi, thank you for taking my question. Keith, just in amid backdrop that you're talking about, how are you thinking about the cost out of your business you've given this update every quarter, but just given the ongoing anomaly, are you thinking about making any changes? And how are you keeping in mind sort of positioning yourself for when there is a recovery?

Well, you broke up on the last part, but the first part was how do we see the cost side of our business? Our largest cost is our headcount, our staff payroll cost. And as I said, we haven't changed our policy for those underperforming; we performance manage as we always had. For those that have a medium to long-term track record of success, we're committed to them even though their productivity levels aren't what they are in normal periods during a cycle. So cost side management, not that different. Having said that, for the quarter just ended, our SG&A was down $32 million versus a year ago, that’s a 7% reduction. Although there is a negative leverage, particularly for our fixed costs, our corporate services, headquarters, the administrative compensation of our branches; we have some negative leverage, but we have reduced our SG&A year-on-year for the quarter, $32 million.

Thanks. And Keith, where I got cut off, I guess I was asking about thinking about the recovery and where you are from a staffing perspective. If we see an inflection in the near term, are you where you would like to be from a staffing perspective?

We feel good about where we are with our veteran productive staff. We just talked about, we think we could grow 20% to 30% plus without adding to heads. But that would be subject to an evaluation of just how robust the recovery was being, and we may want to add some sooner. But if we did, it would be for all the right reasons.

And moving on to Jeff Silber with BMO Capital Markets.

Thanks so much. For my first question, I'd like to focus on margins, specifically contract talent solution margins. I know you don't guide to that specific number. But at least compared to our estimates, it is a bit lower than we thought. Was there anything specifically going on there this quarter, timing, et cetera? Should we expect that number to at least increase sequentially going into the third quarter? Thanks.

Jeff, I would say two components. On the one hand, if we're talking year-on-year, our gross margins were down about 60 basis points. A little over half of that is due to conversions, which is a derivative of full-time hiring or permanent placement, not a surprise. And the other piece of that was essentially payroll fringes, payroll taxes, insurance, et cetera, a bunch of little pieces there, none of which individually was that large. The other piece of the margin contraction is the negative leverage on fixed SG&A costs, which I just addressed by saying we're committed to holding the line on our medium to long-term proven internal recruiters plus you've got your fixed costs that you have negative leverage on as the revenues fall a bit sequentially. As I said, for guidance purposes on the contract talent side, we're assuming mid-single-digit down sequentially, which is kind of what we were seeing first half of 2023. And our hope is that given recent price and inflation, hope for interest rate cuts that come fourth quarter and beyond, we'll see better sequential performance than that.

Okay. That's helpful. If I could switch back up to the revenue line. On the administrative and customer support segment, I know you don't talk about this much; it was relatively small. But sometimes, historically, the trends there have been leading indicators. And we took a slight step back in the second quarter; the year-over-year decline got slightly worse. Was there anything specifically going on there? Again, is it a one-time issue? What should we expect going forward? Thank you.

So I'd say most of our practice groups, as we refer to them internally, the near-term results were pretty similar. And the year-on-year results that you mention are more about the comparables a year ago than they are what's happening right now. And on this, kind of what leads potentially, one thing we look at is enterprise versus small business. And we would observe that for the last two or three quarters, we see some firming in enterprise clients. We call them strategic accounts. Protiviti also focuses on enterprise size accounts, and so internally, we're somewhat encouraged by we're seeing more strength at the enterprise level that generally, not always, but generally leaves SMB to a bit. And so if we're looking for kind of small green shoots of optimism, we would point to enterprises doing better than SMB and both in Talent Solutions and clearly in Protiviti. And in the past, that generally leads SMB by a little.

Good afternoon. I wanted to go back a little bit to what you were saying about pricing compensation and Protiviti. And I'm wondering, I know this is very short term, but has that gotten worse since the last quarter? Or are you seeing about the same level of price competition you saw at the beginning of the year?

It's similar, but it's not something that happens on a national scale; it's more localized. Depending on resource and utilization levels in local offices, a large accounting firm might become very aggressive in certain areas due to low utilization, but this isn't a nationwide trend. Protiviti has experienced this kind of pricing competition for several quarters now, and it is expected to continue into the third quarter. However, they are managing it well. This situation is contributing to their gross margin, which improved by 250 basis points this quarter. While pricing competition is a factor, other elements such as the structure of their workforce, with managing directors at the upper levels and variable cost contractors at the lower end, are also important. They have been actively optimizing this mix and managing the utilization of their full-time employees. Given these factors, it's quite impressive that they are making sequential progress despite the revenue challenges and competition in bill rates.

And then just, you've talked about kind of keeping your good employees, and I'm wondering what the retention rate has been, and if you've been successful? I imagine you're going through the same stuff that every other company is where people are less like to lead. But I'm just wondering if you’ve retained the employees that you want or if there's been any kind of movement because of what's happening in the industry?

Generally, almost every company in the United States is experiencing lower attrition rates due to the increased compensation opportunities available. I believe Robert Half stands out with more tenure among its top 250 employees compared to others in the industry; our retention rates have consistently been the strongest, and that remains the case. However, for economic reasons, retention rates across the board are currently better than usual, including ours. The key point is that our long-term retention rates remain the best in the industry, which contributes to our success.

Thank you very much. Appreciate it.

The next question will come from Stephanie Moore with Jefferies.

Hello. This is on Harold on for Stephanie Moore. Just wanted to touch on Talent Solutions within that finance on the comment. So I know at one point in time, you said you guys are seeing a higher mix of high-caliber job. So I just want to get a sense in the finance, and kind of how the job breakdown is looking there?

Well, we've said on prior calls that we've now gotten to where over half of our contract positions are higher skilled. They have higher margins. They're not as economically sensitive. And so we're pleased that migration up the skill curve. And we've been on that journey for a long time. We continue on that journey. It also plays in well with Talent Solutions and Protiviti going to market together because it's those higher skills that often fit best in the joint projects we have with Protiviti. So strategically, we love this higher mix of higher skilled, not that we're walking away in any shape or form from the more operational skills, which are the high-volume positions in most accounting departments.

Hi, thanks. Good afternoon. Can you compare and contrast trends that you're seeing with some staffing and perm placement and put that in the context with the broader macro environment?

Well, it's interesting, George. So if you go to our website where we've got our investor slides, we've got a couple that show for 20-25 years of relative performance between contractor temp and perm placement. And what you'll see is that they're highly correlated. The beginnings, the troughs, the peaks happen largely at the same time. Perm placement is always more volatile, our lower lows, higher highs from a growth rate standpoint. I'd say if you look at the past eight quarters of what I would certainly call a staffing recession, we were down peak to trough in both contract and perm placement, less than we have been in other staffing recessions. And the thing that probably is the most in contrast, whereas in prior staffing downturns, permanent placement declines by over 50%. In so far this time, these past eight quarters, I think peak to trough, we're down in the 30%. So more benign peak today in perm placement is better in contract, but not as different as is the case in perm placement. Said differently, perms faring better in this staffing downturn than it has in prior staffing downturns, but it's still more impacted than contract because it's fundamentally about full-time jobs. Got it. That's helpful. Earlier, you provided some comparisons between enterprise and SMB customer behaviors. Can you talk a bit about what you're seeing across different verticals, which verticals, and end markets are doing particularly well and which end markets are faring less well? I would put it on a practice group basis. And where we talk about finance and accounting, administrative customer support, technology are our big pack practice groups. And because they're all principally SMB-focused, current sequential performance one to the other isn't that different. And the year-on-year differences are more about the comps than they are current sequential performance. So I wouldn't call out any practice grew more so than another in that way.

Thank you, Mike. Thanks for taking the questions. Just a couple of quick ones for me. One on Europe. I think we heard from a few of the other kind of talent solutions companies that demand in Europe weakened a bit the past few months, incrementally, particularly on the perm side. Just curious if you saw that as well. And if you could kind of just talk about the demand environment in Germany, Belgium, many of your other notable markets in Europe, that would be great.

I would say not much change. If you look at our supplemental revenue schedules, you'll see the year-on-year performance quarter one versus quarter two for non-U.S. operations isn't very different. And so I would say more of the same. Our forecast for Q3 is similar as well. So no notable change in our collection of international countries led by Germany, Belgium, Brazil coming on, as I talked last quarter, but not much change.

Okay. That's helpful. And then just a quick follow-up on Protiviti. I think you called out broad strength across all the solution areas, which was nice to hear. But I think the last several quarters, you talked about internal audit and tech consulting seeing some budget pressures. So have you started to see some of that pressure on those two solutions in particular ease in the past few months?

I would say particularly in internal audit, we're seeing some life with financial institutions, internal audit, particularly IT internal audit. And so we would be more positive about internal audit, particularly with large financial institutions. As you know, about 40% of Protiviti's revenues are in the financial services industry. So to see some signs of optimism there is great. The other thing I'd point out is sequentially in the third quarter, we typically see a lift from more Sarbanes-Oxley work. We're going to see that lift again. However, it's masked by a couple of large projects that ended this past quarter. And so they’re essentially going to offset the sequential progress we would typically see in the third quarter such that the guidance you're giving sequentially is flat at the top-line, more improvement on organization such that you've got gross margin and segment margin improvements.

The next question will come from Tobey Sommer with Truist Securities.

Hey, good afternoon. This is Jack Wilson on for Tobey. Can you maybe dig into a little bit more of the dynamics you saw in June, it looks like NFIB small business optimism trended up sort of March to June. Is that something at all?

Well, I don't know whether you're talking about our numbers specifically or generally. I would say, generally, if you look at NFIB, we're encouraged that their confidence index has improved three months in a row. It's still below their normal average, but sequentially, at least for those three months, we are encouraged. 60% are still trying to hire, 85% of them have few or no qualified applicants. Inflation is still the number one business problem for which we seem to see some progress, which was helpful coming out of the second half of last year into the first part of this year. And so NFIB small business confidence hiring, it's a little better; it's a little better, June included. Go ahead.

Maybe as a follow-up to that. Do you think we could see sort of a step change in customer sentiment following the election inauguration?

The answer is I don't know. My recollection is having been here a bit is that there haven't been huge swings in elections one way or the other.

And the next question will come from David Silver with CL King.

Thank you. My first question is about the performance of blended solutions this quarter. It seems that the intersegment eliminations number has increased while the contract talent solutions have shown weakness across the board. Could you comment on the trend of blended solutions making up a larger portion of your contract talent placements? Also, can you explain the internal economic effects for Robert Half when a Protiviti project is handled through blended solutions compared to a situation where a candidate is placed with a non-Protiviti client? Thank you.

Okay. So blended solutions, and you're right, and we're happy that we now have three quarters in a row where blended solutions with Protiviti have grown sequentially. The two or three prior to that, Protiviti was aggressively managing its utilization levels for its full-time staff, which was done to some extent at the expense of using contractors. But we now have three quarters in a row where that's grown. We're going to market together better than ever. That's a good thing. As to economic impacts, from an enterprise point of view, whether we place a candidate on a third-party client directly from Talent Solutions or to a third-party client via Protiviti, the gross margins aren't that different. One way to look at it is by going through Protiviti for enterprise accounts, we're effectively getting SMB gross margins that we otherwise wouldn't get if we were going directly to those enterprise third-party clients rather than through Protiviti, if that's clear.

Thank you for the detailed explanation. I appreciate it. I noticed your mention of the recruiters with AI approach, which I believe will become increasingly significant. If we were to touch base in a year and that aspect of your business strategy progresses as you expect, how will that success be shown in your overall results? Should we anticipate a more substantial effect on specific staffing lines?

I think it would be broad. Our clients clearly tell us they want both. They want the benefit of world-class AI. They want the benefit of recruiters. They want to choose when they primarily go digitally versus recruiters typically at the front end; they're more digital. And at the back end, they're more recruiter-focused, but every client is different. And the point is we have both capabilities, which is not true for the digital-only competitors, if you will, out there. So they want both. And they want to choose on their terms and on their timetable when they want to lead with digital, AI and when they want to lead with recruiters, and they expect a seamless connection between our AI and our recruiters, which our internal systems do a decent job of today. And we'll do a better job as time passes. We're happy about this new capability; go to our website, roberthalf.com. You can today, anybody, search for candidates and in so doing, you will see who we have that matches those specifications. And we will show you in a star system, 1 to 5 stars, how our recruiters rate that candidate.

Got it. And then maybe just one last brief one. But there's a trend, I guess, over the last couple of quarters where sequentially, your perm revenues have actually risen while your temp and project-based staffing has continued to sequentially decline. And just from my models and whatnot, I haven't really noticed that trend happening too often with that divergence, and in particular, with perm leading temp. Is there anything you would call out to maybe describe or explain the relative strength in perm versus the contract and temp side of your staffing operations? Thanks.

And so I'm sitting here looking at the last 8 quarters. And then during 2023, they were pretty similar every quarter. And in 2024, the second quarter was stronger. The second quarter is always a seasonally stronger quarter for perm. And I would say even though it was up sequentially, that still was a normal sequential rise for them for seasonal reasons. And so I would attribute the differential in the second quarter to typical seasonality. Other than that, they're pretty similar.

My follow-up was answered. Thanks.

Thank you.

Okay. That was our last question. Thank you for joining us today. Thank you very much.

Thank you. This concludes today's teleconference. If you missed any part of the call, it will be archived in the audio format in the Investor Center of Robert Half's website at roberthalf.com. You can also log in to the conference call replay. Details are contained in the company's press release issued earlier today.