Earnings Call Transcript - RHI Q3 2025

Keith Waddell, President and CEO

Hello, 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're 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 and 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. Specifically, we present adjusted revenue growth rates which remove the impacts on reported revenues from the changes in the number of billing days and foreign currency exchange rates. Additionally, we present adjusted gross margin, adjusted selling, general and administrative expenses and adjusted operating income by combining the gains and losses on investments held to fund the company's obligations under deferred compensation plans with the changes in the underlying deferred compensation obligations. Since the gains and losses from investments and the changes in the deferred compensation obligations completely offset, there's no impact on our reported net income. Reconciliations and further explanations of these measures are included in a supplemental schedule to our earnings press release. For the third quarter of 2025, global enterprise revenues were $1.354 billion, down 8% from last year's third quarter on both a reported basis and on an adjusted basis. Net income per share in the third quarter was $0.43 compared to $0.64 in the third quarter one year ago. Revenues and earnings were in line with the midpoint of our previous third quarter guidance. Client and job seeker caution continued during the quarter, subduing hiring activity and new project starts. That said, we're encouraged by the weekly trends and contract talent revenues, which sustained late second quarter levels for most of the third quarter and began to grow sequentially in September and into October. Our fourth quarter revenue guidance at and above the midpoint reflects a return to sequential growth on a same-day constant currency basis for the first time since the second quarter of 2022. We remain very well positioned to capitalize on these emerging opportunities and meet our clients' evolving talent and consulting needs. Our industry-leading brand, talented people, advanced technology, and our unique combination of professional staffing and business consulting services continue to set us apart and position us for long-term success. Cash flow provided by operations during the quarter was $77 million. In September, we distributed a $0.59 per share cash dividend to our shareholders of record for a total cash outlay of $59 million. We also acquired approximately 550,000 Robert Half shares during the quarter for $20 million. We have 5.6 million shares available for repurchase under our Board-approved stock repurchase plan. Return on invested capital for the company was 13% in the third quarter. Now I'll turn the call over to our CFO, Mike Buckley.

Michael Buckley, Chief Financial Officer

Thank you, Keith, and hello, everyone. As Keith noted, global revenues were $1.354 billion in the third quarter. On an adjusted basis, third quarter Talent Solutions revenues were down 11% year-over-year. U.S. Talent Solutions revenues were $649 million, down 11% from the prior year's third quarter. Non-U.S. Talent Solutions revenues were $207 million, down 12% year-over-year. We conduct Talent Solutions operations through offices in the United States and 18 other countries. In the third quarter, there were 64.2 billing days compared to 64.1 billing days in the same quarter one year ago. The fourth quarter of 2025 has 61.4 billing days compared to 61.6 billing days during the fourth quarter of 2024. Currency exchange rate movements during the third quarter had the effect of increasing reported year-over-year total revenues by $9 million, and that was $6 million for Talent Solutions and $3 million for Protiviti. Contract Talent Solutions bill rates for the third quarter increased 3.7% compared to one year ago, adjusted for changes in the mix of revenues by functional specialization, currency, and country. This rate for the second quarter was 3.8%. Now let's take a closer look at results for Protiviti. Global revenues in the third quarter were $498 million: $398 million of this is from the United States and $100 million is from outside of the United States. On an adjusted basis, global third quarter Protiviti revenues were down 3% versus the year-ago period. U.S. Protiviti revenues were down 6%, while non-U.S. Protiviti revenues were up 8% compared to one year ago. Protiviti and its independently owned member firms serve clients through locations in the United States and 28 other countries. Turning now to gross margin. In Contract Talent Solutions, gross margin was 38.9% of applicable revenues in both the current quarter and the third quarter one year ago. Conversion or contract-to-hire revenues were 3.2% of contract revenues in the current quarter compared to 3.3% in the third quarter of 2024. Our permanent placement revenues were 12.9% of consolidated Talent Solutions revenues in both the current quarter and the third quarter of 2024. When combined with Contract Talent Solutions gross margin, overall gross margin for Talent Solutions was 46.7% of applicable revenues in the current quarter compared to 46.8% in the third quarter of 2024. For Protiviti, gross margin was 20.9% of Protiviti revenues in the third quarter and 24.6% in the third quarter one year ago. Adjusted gross margin for Protiviti was 23% for the quarter just ended compared to 25.8% last year. Moving on to SG&A. Enterprise SG&A costs were 36.2% of global revenues in the third quarter compared to 34.9% in the same quarter one year ago. Adjusted enterprise SG&A costs were 33.5% for the quarter just ended compared to 33.3% one year ago. Talent Solutions SG&A costs were 48.3% of Talent Solutions revenues in the third quarter versus 45.2% in the third quarter of 2024. Adjusted Talent Solutions SG&A costs were 43.9% for the quarter just ended compared to 42.8% last year. Third quarter SG&A cost for Protiviti were 15.5% of Protiviti revenues compared to 15.6% of revenues for the quarter one year ago. Operating income for the quarter was $14 million. Adjusted operating income was $61 million in the third quarter or 4.5% of revenue. Third quarter adjusted operating income from our Talent Solutions divisions was $24 million or 2.8% of revenue. Adjusted operating income for Protiviti in the third quarter was $37 million, or 7.5% of revenue. Our third quarter 2025 income statement includes a $48 million gain from investments held in employee deferred compensation trusts. This is completely offset by an equal amount of higher employee deferred compensation costs, which are reflected in SG&A expenses and direct costs. As such, it has no effect on our reported net income. Our third quarter tax rate was 33% compared to 31% one year ago. The higher tax rate in the current quarter is due to the increased impact of nondeductible expenses related to lower pretax income. At the end of the third quarter, accounts receivable were $838 million, and implied days sales outstanding, or DSO, was 55.8 days. Before we move to fourth quarter guidance, let's review some of the monthly revenue trends we saw in the third quarter and so far in October, all adjusted for currency and billing days. Contract Talent Solutions exited the third quarter with September revenues down 10% versus the prior year compared to a 10.9% decrease for the full quarter. Revenues for the first two weeks of October were down 9.7% compared to the same period last year. Permanent placement revenues in September were down 12.3% versus September of 2024, this compares to an 11.4% decrease for the full quarter. For the first three weeks of October, permanent placement revenues were down 3.3% compared to the same period in 2024. We provide this information so that you have insight into some of the trends we saw during the third quarter and into October. But as you know, these are very brief time periods. We caution against reading too much into that. With that in mind, we offer the following fourth quarter guidance: Revenues, $1.245 billion to $1.345 billion, income per share $0.25 to $0.35. Midpoint revenues of $1.295 billion are 7% lower than the same period in 2024 on an as-adjusted basis. Our midpoint revenue guidance for the fourth quarter reflects a return to positive adjusted sequential growth for the first time in 13 quarters. Our Q4 midpoint adjusted operating margin guidance declined sequentially by 1.3 percentage points, which is consistent with long-term historical trends, fewer billing days because of the holidays result in modest Q4 negative leverage of operating costs. The major financial assumptions underlying the midpoint of these estimates are as follows: adjusted revenue growth year-over-year, Talent Solutions, down 8% to 11%; Protiviti, flat to down 4%; overall, down 5% to 9%. Adjusted gross margin percentages: Contract Talent, 38% to 40%; Protiviti, 22% to 24%; overall, 36% to 39%. Adjusted SG&A as a percentage of revenues: Talent Solutions, 44% to 46%; Protiviti, 15% to 17%; overall, 33% to 36%. Adjusted operating income as a percentage of revenues: Talent Solutions, flat to 2%; Protiviti, 6% to 8%; overall, 2% to 5%. Tax rate, 30% to 34%. Shares outstanding 99 million to 100 million. The 2025 capital expenditures and capitalized cloud computing costs $75 million to $90 million with $15 million to $25 million in the fourth quarter. While we do not provide full earnings guidance for two quarters into the future, we would call out the following seasonal items we expect to impact the first quarter of 2026. Historically, Protiviti's Q1 segment margins seasonally decline by mid-single-digit percentage points on a sequential basis. There are two primary drivers of this. Internal audit revenues are negatively impacted as clients focus instead on annual financial statement and related external audits. In addition, Protiviti employees received annual compensation adjustments effective January 1, which are recovered through pricing adjustments realized as client contracts are negotiated. Segment margins then improve accordingly. A majority of our employee stock compensation awards vest in the first quarter each year and the related tax benefits are measured based upon the stock price at that time. With the current stock price below grant values, we expect an unfavorable Q1 tax charge of $4 million or approximately $0.04 per share. All estimates we provide on this call are subject to the risks mentioned in today's press release and in our SEC release. Now I'll turn the call back over to Keith.

Keith Waddell, President and CEO

Thank you, Mike. While the macroeconomic backdrop is generally unchanged, we are seeing some early signs of improvement as trade policy volatility becomes business as usual and the probability of multiple interest rate cuts rises. While decision cycles are still measured, we are beginning to have more client discussions about staffing deferred projects and hiring for critical roles. As we mentioned earlier, we are encouraged by our recent weekly revenue trends that have turned up sequentially. While overall hiring and quit rates remain low, job openings continue to trend well above historical averages, signaling strong pent-up demand for talent. Though the latest NFIB Small Business Optimism Index is modestly below its recent peaks, the average for the past three months is up sequentially and small business hiring plans are at their highest level since January. Rising client and candidate confidence fuels additional hiring and project activity and increases pressure on already stretched client resources. These are the conditions that have historically marked the early stages of recovery and expansion, creating a strong demand environment for both our Talent Solutions and consulting services. With historically low levels of unemployment, clients will need even more professional assistance filling their open roles and unstaffed projects. As expected, Protiviti's year-over-year growth rates turned slightly negative during the quarter, in part due to tougher prior year comparables from large project builds and also due to longer sales cycles and smaller sized new engagements. That said, Protiviti's pipeline continues to grow across all of its major solutions areas and at the midpoint of our Q4 revenue guidance, its growth rates are expected to improve. The strategic use of contract professionals sourced through our Talent Solutions divisions remains a vital contributor to Protiviti's success, reinforcing our unique enterprise-wide competitive edge. We remain committed to our time-tested corporate purpose to connect people to meaningful and exciting work and provide clients with the talent and consulting expertise they need to confidently compete and grow. Our employees' commitment to success earned us several honors in the third quarter, including being named by Forbes among the World's Best Employers and America's Best Employers for Company Culture, and by Fortune, as one of the Best Workplaces in Consulting and Professional Services. Now Mike and I'd 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.

Operator, Operator

And the first question will come from Mark Marcon with Baird.

Mark Marcon, Analyst

I want to start with Protiviti. Keith, during the last call, last quarter, you mentioned that the pipeline was building. And I was wondering, when we take a look at the fourth quarter guide for Protiviti, to what extent did you see some of those projects materialize as expected? How is the conversion rate with regards to the pipeline? And can you talk a little bit about what you're seeing from a pricing perspective on the Protiviti side? In other words, is the gross margin down slightly due to lower utilization rates? Or is there anything that's going on from a pricing perspective?

Keith Waddell, President and CEO

Well, we did say the pipe was growing last quarter, and we continue to say that. It's growing on a gross basis year-on-year and it's also growing on a probability of success weighted basis. So we feel good about the pipe. We are winning pretty much as expected. That said, we talked about large projects that were coming to ends. And as we replace those, we're replacing them with smaller projects that have shorter durations and are not as efficient, if you will, as we can operate on the larger projects. As to pricing, we've said the pricing has been competitive for some time. The gross margin pieces are nuanced, the utilization looks good at face value. Part of how we get there is that we reassign Protiviti full-time employees to projects that were otherwise to be staffed by contractors and understand that the bill rate for contractors is about one-third of what it is for the average full-time staff. And so there is some margin compression by that reallocation of resources, which is being done to keep as many Protiviti full-time people deployed and employed as possible. So there's no major pricing story other than there's a mix shift to shorter projects. And further, there's a mix shift to reallocate full-time employees down to contractor roles in the short term as client caution subsides and confidence grows. But again, the pipeline looks good. If anything, we feel just as good today about Protiviti and Talent Solutions for that matter, as we did 90 days ago.

Mark Marcon, Analyst

That's great. Keith, I hesitate to ask this on the call, but since you probably wouldn't answer it offline, I have to ask it here. There's been a lot of discussion among investors about the sustainability of the dividend, and I'm curious if you can comment on the commitment to it. It seems like we might start seeing some improvement in revenue trends sequentially. However, if the current trend continues, what options do you have to protect the dividend? Or is that not a major concern?

Keith Waddell, President and CEO

Well, the dividend is very important, and we remain very committed to it. I would say that the second and third quarters and then for the midpoint guidance for the fourth quarter, our free cash flow more than covers the dividend. The first quarter is a seasonally low cash flow quarter. So that wasn't the case then. But near-term results say, free cash flow covers the dividend. Beyond that, we do have $360-odd million of cash on the balance sheet. So there's a cushion from that. And further, I would say that if unlike our recent trends, which have been positive, they were to turn around as we move forward, just as we did in 2023 and just as we did in 2024, we would look at our cost structure. But we remain very committed to returning all our free cash flow to investors. Because we're in the third year of a staffing industry downturn on an absolute basis, our numbers are lower, which means a disproportionate part of that free cash flow is going to return via dividends, but that's just how it is.

Operator, Operator

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

Andrew Steinerman, Analyst

Keith, I'm going to ask you to use an adjective when describing the fourth quarter revenue guide versus the third quarter. I know your team is encouraged by the revenue pickup recently on a weekly basis on a sequential basis. But I think if you look at sequential fourth quarter versus third, the pickup is still below a typical seasonal pickup on the flex side. Would you describe the guide then as conservative?

Keith Waddell, President and CEO

We would describe the guide as conservative. But let's start with, we met our third quarter guide. And we would say that if you looked at our September so far, October results and you took that run rate for all of the effective billing days in the fourth quarter, we would grow sequentially by 1.5 to 2 points. And what we forecast is just barely being positive. And so the differential would be a cushion and that cushion isn't that different than what we had in the third quarter where we met the guidance. It is true that traditionally, you get some seasonal uptick in the fourth quarter, small single-digit. But that's also been true the last three years where it didn't happen. And so I think we could safely say this isn't purely a normal seasonal trend that we're seeing given that we didn't see that normal seasonal trend in the last three years.

Operator, Operator

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

John Ronan Kennedy, Analyst

This is Ronan Kennedy on for Manav. Can you please confirm the margin driver dynamics and the puts and takes to the guide of 4Q margins, the role mix, conversion, wage rate, bill pay spreads and anything to call out from a segment-specific standpoint, please?

Keith Waddell, President and CEO

We initially mentioned a slight growth in same-day sequential numbers. However, it's important to note that the fourth quarter is shorter than typical, with three fewer days. This decrease in days affects our ability to leverage fixed costs, which results in lower gross margins for Protiviti since their staff costs are mainly fixed. In contrast, Talent Solutions experiences an impact on SG&A due to their costs being predominantly variable. From a gross margin perspective, we expect Talent Solutions to remain flat sequentially. Despite the challenges in the staffing industry over the last three years, our gross margins have remained strong, which reflects the value that our clients find in our services. We anticipate these margins to continue positively into the fourth quarter. For Protiviti, the reduced number of days impacts their gross margins, which are down approximately 20 basis points at the midpoint, an improvement from a year ago when they were down 70 basis points in the fourth quarter. Regarding SG&A, the shorter quarter results in some negative leverage. When we combine all these factors, operating income for the fourth quarter is expected to decrease by 1.3 percentage points sequentially. Looking at the past decade, excluding COVID, our operating margins have typically decreased by an average of one percentage point each sequential fourth quarter, suggesting we are consistent with this trend. The change from Q3 to Q4 aligns with our historical patterns, and overall, we have a more positive outlook today compared to 98 days ago.

John Ronan Kennedy, Analyst

Could I confirm for the trends exiting 3Q and early in 4. What are you seeing from a perm placement versus contract? And then in the context of kind of historical sensitivity and demand dynamics reflection or reaction to demand inflections, what does that tell you about a potential recovery?

Keith Waddell, President and CEO

Well, we've talked before, perm is more volatile. Perm is less predictive in short periods. Ironically, this time, perm is actually better than contract. So I'd prefer not to say that, but it's still the truth. Contract, we're now comparing to a year ago, a year ago, if you think about it, we had immediately before and immediately after the election, and there was some euphoria from that. Particularly with our SMB clients. And so we had some sequential pickup that halted, if you will, with the tariff uncertainty that happened thereafter. And so the year-on-year comps aren't as easy as they might be. And so perm versus contract, the other observation I would make for the third quarter ended, perm was a little soft, but we still overall met guidance. But perm was a little soft for reasons that I think you'd find somewhat surprising. It was more on the candidate side than the demand from client side as we were seeing more candidate turndowns because the compensation increases to switch and/or the work flexibility, i.e., work remote neither of which together were enough to entice candidates who already had a full-time job to switch to a new full-time job. And we actually had a little more struggle on the candidate side with perm than on the client side, which is a little counterintuitive, at least based on what you read every day. And so net-net, I think the trend for both Contract and perm, September into October is positive. And that's what informs our guidance for the quarter.

Operator, Operator

And your next question will come from Stephanie Moore with Jefferies.

Stephanie Moore, Analyst

I was hoping maybe we could continue on a conversation that we had, maybe two questions ago as we look at Protiviti and the gross margin profile. So kind of two-point questions. The first question, and I apologize if I missed it. I just wanted to hear what drove the compression in Protiviti gross margin year-over-year? And then secondly, your second part, maybe a little bit more of a philosophical or longer-term question. What's your degree of confidence for the Protiviti business to return to that more so high 20s gross margin profile that we saw a couple of years ago? What do we need to see from overall market or demand or pricing or however you want to describe it standpoint?

Keith Waddell, President and CEO

If you examine Protiviti's gross margin compression over the past few years, you'll notice that the cumulative inflation affecting their staffing costs has been significant. In the highly competitive big four consulting market, they've faced challenges in passing these costs through. Protiviti is deeply committed to their staff and is making every effort to retain as many as possible, which has slightly affected utilization. Additionally, to improve utilization, they are willing to place some of their full-time staff in contractor roles. Over the last year, there has been a decrease in the proportion of very large and high-margin projects, replaced by smaller, shorter-duration, lower-margin projects, all contributing to gross margin compression. Looking ahead, we remain committed to Protiviti, which aims to achieve double-digit operating margins. Although they experienced this in the past, it hasn't been the case in recent years. They expect to see improvement in their operating margins by 2026 and beyond, partly due to a shift back toward the types of projects they historically undertook. This also involves more careful management of their staffing resources at all levels. Protiviti is focused on restoring their gross margins to double digits, a range they've exceeded in the past. We have long maintained that Protiviti should operate with double-digit margins, and we anticipate this happening sooner rather than later. While it won't occur overnight, we definitely expect to see higher gross and operating margins for Protiviti by 2026.

Operator, Operator

And the next question will come from Trevor Romeo with William Blair.

Trevor Romeo, Analyst

Just wanted to start maybe by kind of thinking about your longer-term operating margin opportunity. Demand kind of is what it is. Hopefully, we're at the low point of the cycle now. But as you're thinking about, I guess, things that you can do internally such as maybe investments in technology, other productivity efficiency initiatives. I guess what kind of initiatives or investments are you making now for the next couple of years? And how much of a positive impact do you think that could have on margins outside of what happens with demand?

Keith Waddell, President and CEO

Well, I think the single most important thing we can do for upside to margins is to continue to move up the skill curve across our Talent Solutions practice groups because 2-way group, we get higher margins at higher skills than we do at the more operational skills. So I would point to that, number one. Two, we absolutely plan to relever our operating costs that have been delevered over the last three years. That gets us higher operating margins. Technology. We've talked a lot about we have award-winning matching engines, which gets us better candidates in front of clients, better jobs in front of candidates, which they both have forever prioritized as their #1 item of concern. Further, we continue to work on making our recruiters and salespeople more productive as we use AI to prioritize the leads and how they address them. We also use Gen AI to help pull together from various sources, the information about a given company, both internal and external that they use and leverage when they're making those calls to those leads that have been ranked ordered. And so the combination of all of those things together with Protiviti, as we just said, which we believe is a long-term double-digit operating margin business, and you don't have to look back very far to see examples of that. We think we have the opportunity and the possibility to actually have higher operating margins over the next cycle.

Trevor Romeo, Analyst

That's helpful. And then I got a couple of questions recently, I guess, on your public sector business. Just maybe first, anything you could say on the size of that public sector revenue today would be great. And then I know you don't have much exposure to the federal government, but is there any impact at all you'd see from the government shutdown here, whether it's maybe funding for state and local programs or anything we should be aware of?

Keith Waddell, President and CEO

The federal government accounts for less than half of 1% of our revenue. So far, we haven't seen any significant impact from the shutdown and we don't expect to. When you include state and local governments, they make up about 4% of our revenue. Overall, all forms of government together contribute a little less than mid-single digits, with the federal portion being less than half of 1%.

Operator, Operator

And the next question will come from George Tong with Goldman Sachs.

Keen Fai Tong, Analyst

You mentioned weekly trends in contract talent revenues began to grow sequentially in September and October. Can you specify what that weekly sequential rate of growth was over that time frame? And if the trends were linear?

Keith Waddell, President and CEO

Well, if you take September, early October, there's about a between 1.5% and 2% sequential growth rate, which is why I said earlier, if you just take that run rate and extrapolate to the full fourth quarter, then we would have that as essentially cushion relative to our fourth quarter guidance.

Keen Fai Tong, Analyst

Okay. And then separately, there have been instances of several large enterprises automating their finance departments with AI and in some cases, realizing 50% plus labor cost savings. To what extent would you see that as a risk for Robert Half going forward?

Keith Waddell, President and CEO

Well, there are views all over a lot on the impact of AI. I'm sure you know MIT did a study that said that only 5% of the companies currently using Gen AI are seeing any ROI so far. Our observation would be historically that those types of changes take a whole lot longer than what our first thought to be the case, and it would certainly be my view that that would also be the case here with Gen AI. We have a view into that with our Protiviti clients that happen to be large enterprises. And I can assure you the consensus experience they're seeing with their clients is nowhere in the same country, much less local ZIP code as the kind of productivity gains they're seeing from Gen AI so far relative to their own productivity. And so my observation would be, as verified by several studies. And further, as it relates to impact to jobs in the last 60 to 90 days, in fact, there were big studies by Stanford, Harvard, and Yale. Stanford says, AI impact is for early career, entry-level people that more experienced roles remain stable. Harvard says Gen AI reducing entry-level hiring while increasing reliance on senior talent. Yale says broader labor market has not experienced any discernible disruption from Gen AI. And so I guess my point would be as to impact the labor overall, impact for us, accounting and finance talent overall. We've seen very little impact. My view is there's a lot of upside longer term. But shorter term, I think the trends that I've quoted and that we've seen, including through our client wins, the gains are modest, if any, if at all so far. We're not AI doomers. We ourselves use it. Nor are we AI boomers. And I'd say 50% productivity gains in the short term, I would put in the AI boomer category, which isn't representative of the kind of ROI statistics I see and read.

Operator, Operator

And the next question will come from Kevin McVeigh with UBS.

Kevin McVeigh, Analyst

Great. Helpful commentary on the Q1. If you look at the seasonal sequential kind of trends from an EPS perspective, it's averaged like $0.27, I think, sequentially from Q4 to Q1. Is that a fair way to think about dimensionalizing the start to '26? Or would you expect less leverage just given where kind of the base earnings are in Q4? Just because you did talk about Q1 a little bit. And I know you typically don't go out two quarters, but just to try to get a sense of framing the Q1 as we think about '26 is where I want to start.

Keith Waddell, President and CEO

Well, sequentially, there's a meaningful impact, which is why we called it out. And so to have sequential impacts in the $0.20 per share impact, that's not unusual. And if you don't have to look back very far, I mean since 2023, that's what we've been seeing, which was why we called it out so that everybody understands that, that's what's normal based on history. Q1 is the low point because of Protiviti's seasonal circumstances that we described in our remarks.

Kevin McVeigh, Analyst

No, that's helpful. And then just to follow up on George's question, Keith. When you think about the Gen AI relative to the adjustments in temp the last couple 2, 3 years, was that adjustments from COVID or just the pressure you're seeing? And I'm not seeing Robert Half specific, but across the temp industry?

Keith Waddell, President and CEO

Kevin, I want to share this. Our data science team conducted an in-depth analysis over the past three years. We examined the performance of roles identified as vulnerable by the World Economic Forum, such as customer service, programming, and lower-level operational positions. Our findings showed that these roles performed similarly to others. Additionally, a study by NFIB revealed that 98% of its members reported that AI had no effect on their workforce size. Research from Stanford, Harvard, and Yale indicates that any impact has mainly affected early career and entry-level positions, which is not relevant to our business since our clients do not seek our assistance for these roles. Consequently, this confirms our internal studies that show little to no impact. Now, you might wonder why the industry has been struggling for three years. I believe it has to do with employee turnover. Referring to JOLTS data, in October 2022, there were 6 million hires and 4 million quits. Fast forward to August 2025, and there were 5 million hires with only 3 million quitting. This indicates significantly less turnover. The job growth we've seen in the U.S. is mainly in government, clinical healthcare, and the leisure and hospitality sectors, which typically do not require a lot of temporary staffing, especially for companies like Robert Half. I feel confident that AI has not played a role in our current situation, whether for the industry or for Robert Half. Instead, it's about clients managing their inflation concerns and recession forecasts, leading them to be more cautious. As businesses aim to retain their full-time employees, they often first cut back on contractors. Therefore, the industry is now in its third year of companies working to keep their full-time workforce while controlling costs, which has negatively impacted contractor usage. I believe all these factors are interconnected, and AI is not needed to make sense of it; it's simply less turnover and limited growth that don't significantly affect our industry or Robert Half.

Operator, Operator

And the next question will come from Jeff Silber with BMO Capital Markets.

Jeffrey Silber, Analyst

I wanted to return to some of the earlier discussion on capital allocation. Can you just remind us what your policy is regarding whether you're going to repurchase shares or dividend? What are the drivers for making those decisions?

Keith Waddell, President and CEO

It's quite straightforward. We assess our free cash flow after covering our operational needs, including capital expenditures and the small acquisitions we've made, especially with Protiviti. Initially, we focus on growing our dividend, which takes priority from our free cash flow, and whatever remains is used for share repurchases. We've maintained this approach for 20 to 25 years without interruption, and we continue to do so. However, at the moment, the dividend is consuming most of our free cash flow, leaving little for repurchases, which is unfortunate given the current prices. Nevertheless, we have always believed that our business should not take on excessive leverage. Instead, we maintain a strong and conservative balance sheet, which provides us with peace of mind.

Jeffrey Silber, Analyst

Okay. That's helpful. If I could just ask a couple of numbers questions. I know you usually put this in your 10-Q, but I was hoping you can tell us from your contract talent solutions perspective, what was the year-over-year change in the number of hours worked in average hourly billing rates? And also what is your billing days by quarter for 2026?

Keith Waddell, President and CEO

So Bill, when you ask about rates, are you referring to GAAP figures, not adjusted for all the differences we discussed? We've already mentioned that our billing rate is up 3.7%.

Jeffrey Silber, Analyst

Okay. That's fine. What about the average hourly work? Again, the number that you reported in your 10-Q?

Keith Waddell, President and CEO

Right. Don't have that in front of me. Clearly, we'll be in shortly 10-Q shortly. But don't have that at this moment. As to billing days, my team here has handed me a note that says Q1, 61.9 days; Q2, 63.1 days; Q3, 64.6 days; and Q4, 61.1 days.

Operator, Operator

The next question comes from Kartik Mehta with Northcoast Research.

Kartik Mehta, Analyst

Keith, I know you've talked a lot about Protiviti and it being a double-digit operating margin business and it's getting there. But I'm wondering more in the near term, what the incremental margins are. I don't know if you look at capacity, how you look at it. But just for the near term, how would you look at incremental margins for that business?

Keith Waddell, President and CEO

I'd say for 2026, we'd be disappointed if we can't get between 100 and 200 basis points of additional gross margin maybe with some upside. But a combination of all the things we've talked about, the nature of the projects, the mix of the staff assigned to the projects, the kind of attention or even more focus on cost generally starting with staff. And so we're not going to get back to double digits overnight. Not going to get back to double digits more than likely in 2026, but we ought to make substantial progress toward that, and you got to start somewhere.

Kartik Mehta, Analyst

Makes sense. Just from a bigger picture capital allocation standpoint, Keith. I know obviously, there's sensitivities around the dividend, but you seem pretty confident in your free cash flow. And you obviously have $300 million of cash on the balance sheet. Any thought of using a portion of that to buy back stock considering where we are from a price standpoint?

Keith Waddell, President and CEO

As I mentioned earlier, it's painful not to buy more stock at the current prices. Trust me, it really hurts. However, we are dedicated to our dividend and will continue to uphold that commitment. This means that there's less free cash flow available for stock repurchases. We've consistently aimed to return our free cash flow to shareholders, and we are still doing that. The proportion of our dividends compared to repurchases is heavily tilted towards dividends, given the historical growth since we started paying them in 2004. I understand how you feel. But as I said before, we don't believe it's wise to take on more debt in this business.

Operator, Operator

And the next question will come from Tobey Sommer with Truist Securities.

Henry Roberts, Analyst

This is Henry on for Tobey. To start, just looking at Protiviti, revenue is up about 1% sequentially. But can you just discuss within that how the Financial Services segment performed? And then the runway you see into next quarter and 2026 from the strong capital markets right now?

Keith Waddell, President and CEO

With Protiviti, financial services make up 40% to 50% of the company, so its trends are unlikely to diverge significantly from the overall trends. We are optimistic about financial services, as it performed well in the third quarter, with strength across its major solution areas. However, the issue of large versus small projects is very relevant in financial services. Some of the large projects are within this sector, and we are replacing them with smaller projects. Thus, financial services is clearly affected by this trend. Considering its substantial role within the whole business, it's difficult for the overall trend to be anything but reflective of the financial services trend.

Henry Roberts, Analyst

Understood. Understood. And just moving a little bit, can you discuss any difference right now in current trends between your enterprise customers and SMB customers? Those different cohorts discussing different things to increase their business confidence in the current climate?

Keith Waddell, President and CEO

Our enterprise clients have been performing better than our SMB clients for several quarters, which is not unusual. This is further supported by Protiviti's growth rates being more resilient compared to our talent solutions rates. When we focus on Talent Solutions, enterprise clients—typically mid-cap companies with revenues between $4 billion and $6 billion—have shown more resilience than SMBs, and this trend has always been present. However, when the market improves, SMBs tend to grow faster and respond more quickly. Thus, being more resilient is advantageous during challenging times, while being less resilient but quicker to bounce back can be beneficial when conditions improve.

Operator, Operator

And 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 roberthalf.com. You can also log into the conference call replay. Details are contained in the company's press release issued earlier today.