Robert Half International Inc

NYSE:RHI

Earnings Call Analysis

Revenue and Earnings Outlook Remains Steady Despite Seasonal Challenges

In the third quarter, Robert Half reported revenues of $1.465 billion, marking a 6% decline year-over-year. Protiviti, however, showed resilience with a 5% revenue increase. Despite ongoing client budget constraints, business confidence is improving. For the fourth quarter, guidance suggests revenue between $1.34 billion and $1.44 billion, with earnings per share projected between $0.47 and $0.61. Protiviti is expected to achieve year-over-year growth, bolstered by strong demand in regulatory compliance and internal audit sectors. Cash flow from operations was robust at $130 million, and dividend payouts continued to rise, underlining the company's commitment to shareholder returns.

Resilient Performance Amid Challenges

In the third quarter of 2024, Robert Half reported total revenues of $1.465 billion, reflecting a 6% decrease year-over-year (YoY). However, despite this dip, the company's performance exceeded expectations, largely driven by strong results from its consulting division, Protiviti. Talent Solutions revenues faced significant headwinds, dropping 13% YoY. Notably, client budgets are still tight, leading to elongated decision cycles; nevertheless, there are signs of improving business confidence attributable to easing inflation and the anticipation of global rate cuts.

Stable Cash Flow and Shareholder Returns

The company generated $130 million in cash flow from operations, facilitating a $0.53 per share dividend distribution, totaling $54 million in cash outlay. The dividend has seen a consistent annual growth of 11.3% since 2004 and is 10.4% higher than last year. Additionally, Robert Half repurchased approximately 800,000 shares at a cost of $49 million, with 8.3 million shares remaining under the approved buyback program. The return on invested capital (ROIC) stood at a solid 18% in Q3.

Segment Analysis: Talent Solutions vs. Protiviti

Talent Solutions revenues, which encompass staffing, were notably weak, declining by 13% globally, with U.S. revenues mirroring this trend. Meanwhile, Protiviti's revenues showed resilience, rising 5% YoY at a total of $511 million, bolstered by an 8% increase in the U.S. This suggests a continuing demand for consulting services, particularly in financial services, risk management, and internal audit sectors.

Gross Margins and Operational Efficiency

Overall gross margins faced pressure, with Talent Solutions gross margins falling to 46.8% from 47.5% a year prior, and Protiviti's gross margins also dropped from 26.2% to 24.6%. However, Protiviti saw segment margins increase by over 250 basis points sequentially, suggesting improved operational efficiency. Additionally, the increase in contract talent bill rates by 3.2% highlights potential pricing power in the market.

Guidance for the Fourth Quarter

Looking ahead, management provided Q4 guidance with expected revenues ranging from $1.34 billion to $1.44 billion, indicating a decrease of 4% to 8% YoY at the midpoint. Earnings per share (EPS) are projected to fall between $0.47 and $0.61. The guidance reflects underlying challenges, particularly in Talent Solutions, which is expected to see a revenue decline of 9% to 13%, while Protiviti is forecasted to grow by 3% to 6%. The anticipated short quarter due to holiday seasonality is expected to further impact margins.

Market Outlook and Strategic Insights

Despite challenges, there is optimism in the market as job openings remain high relative to historical averages, exhibiting a continued demand for skilled talent. The tightening labor market, particularly for high-demand sectors like finance and IT, puts Robert Half in a favorable position for future growth. They plan to leverage their strong brand, talent pool, and technological investments to capitalize on anticipated recovery, positioning themselves for double-digit operating margins as economic conditions improve.

Earnings Call Transcript 2024-Q3

[Operator]

Hello, and welcome to the Robert Half Third Quarter 2024 Conference Call. Today's conference is being recorded. [Operator Instructions] 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.

[M. Waddell, executive]

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 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 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. 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 third quarter of 2024, company-wide revenues were $1.465 billion, down 6% from last year's third quarter on an as-reported basis and down 8% on an as-adjusted basis. Net income per share in the third quarter was $0.64 compared to $0.90 in the third quarter one year ago. Revenues and earnings for the third quarter exceeded our expectations, driven by very strong results from Protiviti, which posted sequential and year-on-year revenue gains. While client budgets remain constrained and decision cycles extended, business confidence levels are improving, aided by continuing progress on inflation and the beginning of a global rate-cutting cycle. This is reflected in our most recent weekly sequential results, which have been stable and consistent for the past 12 to 14 weeks. We continue to be confident, both in our ability to weather the current climate and in our future growth prospects as the macro landscape improves. We remain well positioned to capitalize on emerging opportunities and support our clients' growth initiatives with the strength of our industry-leading brand, people, technology and unique business model that includes both professional staffing and business consulting services.

Cash flow from operations during the quarter was $130 million. In September we distributed a $0.53 per share cash dividend to our shareholders of record for a total cash outlay of $54 million. Our per share dividend has grown 11.3% annually since its inception in 2004. The September 2024 dividend was 10.4% higher than the prior year. We also acquired approximately 800,000 Robert Half shares during the quarter for $49 million. We have 8.3 million shares available for repurchase under our Board-approved stock repurchase plan. Return on invested capital for the company was 18% in the third quarter.

Now I'll turn the call over to our CFO, Mike Buckley.

[Michael Buckley, executive]

Thank you, Keith, and hello, everyone. As Keith noted, global revenues were $1.465 billion in the third quarter. On an as-adjusted basis, third quarter Talent Solutions revenues were down 13% year-over-year. U.S. Talent Solutions revenues were $725 million, down 13% from the prior year's third quarter. Non-U.S. Talent Solutions revenues were $229 million, also down 13% year-over-year. We conduct Talent Solutions operations through offices in the United States and 17 other countries. In the third quarter, there were 64.1 billing days compared to 63.1 billing days in the same quarter one year ago. The fourth quarter of 2024 has 61.6 billing days compared to 61.1 billing days during the fourth quarter of 2023. The currency exchange rate fluctuations during the third quarter had a de minimis impact on reported revenues. Contract Talent Solutions bill rates for the third quarter increased 3.2% 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 3.1%.

Now let's take a closer look at results for Protiviti. Global revenues in the third quarter were $511 million, $421 million of that is from the United States and $90 million is from outside of the United States. On an as-adjusted basis, global third quarter Protiviti revenues were up 5% versus the year ago period. U.S. Protiviti revenues were up 8%, while non-U.S. Protiviti revenues were down 8%. Protiviti and its independently owned member firms serve clients through locations in the United States and 29 other countries.

Turning now to gross margin. In Contract Talent Solutions, third quarter gross margin was 38.9% of applicable revenues versus 39.8% in the third quarter one year ago. Conversion revenues or contract to hire were 3.3% of revenues in the quarter compared to 3.5% of revenues in the quarter one year ago. Our permanent placement revenues were 12.9% of consolidated Talent Solutions revenues in both the current quarter and the third quarter of 2023. When combined with contract Talent Solutions gross margin, overall gross margin for Talent Solutions was 46.8% compared to 47.5% of applicable revenues in the third quarter last year.

For Protiviti, gross margin was 24.6% of Protiviti revenues compared to 26.2% 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 25.8% for the quarter just ended compared to 25.6% last year. Enterprise SG&A costs were 34.9% of global revenues in the third quarter compared to [ 30.8% ] in the same quarter one year ago. Adjusted for the deferred compensation investment income offset, Enterprise SG&A costs were 33.3% for the quarter just ended compared to 32.5% last year.

Talent Solutions SG&A costs were 45.2% of Talent Solutions revenues in the third quarter versus 39.3% in the third quarter of 2023. Adjusted for the deferred compensation investment income offset, Talent Solutions SG&A costs were 42.8% for the quarter just ended compared to 40.4% last year. Third quarter SG&A costs for Protiviti were 15.6% of Protiviti revenues compared to 14.7% of revenues for the same quarter last year.

Operating income for the quarter was $61 million. Adjusted for the deferred compensation investment income offset, combined segment income was $90 million in the third quarter. [ Combining ] segment margin was 6.2%. Third quarter segment income from our Talent Solutions divisions was $38 million with a segment margin of 4%. The Segment income for Protiviti in the third quarter was $52 million with a segment margin of 10.2%.

Our third quarter 2024 income statement includes $29 million as income from investments held in employee deferred compensation plans. 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 our reported net income. Our third quarter tax rate was 31% compared to 30% one year ago. At the end of the third quarter, accounts receivable were $885 million and implied days sales outstanding, or DSO, was 54.4 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 ]. Contract Talent Solutions exited the third quarter with September revenues down 14% versus the prior year compared to a 13% decrease for the full quarter. Revenues for the first two weeks of October were down 12% compared to the same period last year. Permanent placement revenues in September were down 7% versus September of 2023. This compares to a 13% decrease for the full quarter. [indiscernible] three weeks of October, permanent placement revenues were down 19% compared to the same period in 2023.

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 reading too much into that. With that in mind, we offer the following fourth quarter guidance: Revenue, $1.34 billion to $1.44 billion; income per share, $0.47 to $0.61. The midpoint revenues of $1.39 billion are 7% 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 on a year-over-year as-adjusted basis, Talent Solutions down 9% to 13%; Protiviti, up 3% to up 6%, overall, down 4% to 8%. Contract margin percentage for Contract Talent, 38% to 40%; Protiviti on an as-adjusted basis for the deferred compensation investment income offset 25% to 27%, overall, 38% to 40%. SG&A as a percentage of revenues adjusted for the deferred compensation investment income offset, Talent Solutions, 43% to 45%; Protiviti, 14% to 16%, overall, 33% to 35%. Segment income for Talent Solutions, 2% to 4%; Protiviti, 10% to 12% overall, 4% to 6%. Tax rate, 28% to 30%, shares $102 million to $103 million. 2024 capital expenditures and capitalized cloud computing costs $80 million to $90 million with $20 million to $25 million in the fourth quarter. All estimates we provide on this call are subject to the risks in today's press release and in our SEC filings.

Now I'll turn the call back over to Keith.

[M. Waddell, executive]

Thank you, Mike. Although sales cycles are still elongated, job openings remain significantly above historical averages indicating substantial pent-up demand for talent, while the tightness of the labor supply has eased somewhat, the unemployment rate in the United States for those with a college degree is still only 2.3% with rates for many in-demand accounting, finance and IT positions even lower with lower inflation and widespread expectations of further rate cuts. The NFIB's Small Business Optimism Index has been up 5 [ over ] the last 6 months. That said, the NFIB's uncertainty index is at all-time highs in part due to the upcoming U.S. elections.

Many economists are making upward revisions to their forecasts. And as we get past the elections, the overall macro environment should begin to improve 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 thin and creates hiring and consulting demand that traditionally sets the stage for very strong gains for us in the early part of growth cycles.

We continue to invest in technology and innovation to fuel our core business. our proprietary recruiters plus award-winning AI strategy offers significant added value to our clients. Protiviti reported very strong results for the quarter achieving sequential and year-over-year revenue growth. Each of its major solutions areas performed well, particularly the regulatory risk and compliance and internal audit solutions for its financial service industry clients. Gross margin and segment income both exceeded expectations, growing more than 250 basis points sequentially on top of similar growth last quarter, reflecting ongoing efficient resource management. This includes the growing leverage of contractors with Talent Solutions which represent over 40% of the total hours billed by Protiviti, a key part of our enterprise-wide competitive advantage. Protiviti's prospects and pipeline remain very strong and we expect continued year-on-year revenue growth in the fourth quarter with broad participation across solutions and industries and the collaboration with Talent Solutions.

Aging workforce demographics and increasing client preference for flexible resources play directly into our strengths. We've weathered many economic cycles in the past, each time emerging to achieve higher peaks. We are even more confident about our future as our unique portfolio of talent solutions and consulting services positions as well as market confidence returns.

As we've done historically, we continue to invest in our people, our technology, our industry-leading brand and our unique business model to strengthen our ability to connect people to meaningful work and provide clients with the talent and the subject matter expertise they need to confidently compete and grow.

Finally, we'd like to thank our people across the globe, whose efforts have made possible a number of new accolades, most recently. Robert Half was named one of Fortune's best workplaces in consulting and professional services, one of People's Companies that Care and one of the World's Best Employers by Forbes. We also received five prestigious Academy of Interactive and Visual Arts W3 Awards for recent enhancements made to our Robert Half mobile app highlighting our ongoing commitment to innovation.

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 Instructions] Our first question comes from Andrew Steinerman with JPMorgan.

[Andrew Steinerman, analyst]

Keith, surely, I heard you talk about U.S. business confidence a few times, particularly at your clients and surveyed more generally. Have new orders for contract staffing picked up in recent weeks at Robert Half?

[M. Waddell, executive]

Well, we've said for the last 14 weeks, we've had very stable and consistent weekly results and that's the longest consecutive period of flatness that we've had in the last two years. And so given that, that's better than it has been, where it was drifting down week-on-week and month-over-month. I would say, yes, it's modest. But again, it's nice to see the duration of the flatness that we've seen, which is better than it's been.

[Andrew Steinerman, analyst]

And is it one area of contract staffing which you think will rebound sooner? Or do you think your professional contract business will rebound together?

[M. Waddell, executive]

Well, if you look at our business now, I would say our higher skilled management resources at Robert Half Technology, the higher piece of that are doing somewhat better and it'd be our expectation that, that relative trend would continue.

[Operator]

Our next question comes from Mark Marcon with Robert W. Baird.

[Mark Marcon, analyst]

Wondering, can you talk a little bit about Protiviti, a little bit more about Protiviti? It sounds like you saw some really nice acceleration if we take a look at the U.S. we went from 3.1% growth to 7.6% growth. Internationally, we went from negative 15.9% to negative 8.1%. And the comps for the fourth quarter are actually a little bit easier than they were in the third quarter, but the revenue guidance would basically suggest that we're not going to see acceleration relative to the third quarter. So I'm wondering, given all the positives that we're seeing, including the commentary on the financial services and particularly what you're doing in terms of internal audit and risk compliance, why wouldn't we see continued acceleration on the Protiviti side?

[M. Waddell, executive]

So the answer is very simple. They have a couple of large projects that are winding down and the pace of that wind down is a little uncertain, but they conservatively estimated a wind-down rate, and that has the impact on top of the holiday impact you always see in the fourth quarter, it's the shortest quarter. Protiviti even more so than Talent Solutions, their clients go through a soft close and principally take the entire week of Christmas off. Their full-time staff take a lot of choice time off. And so the combination of it's a shorter [ quarter ] due to the holidays, and you've got a couple of projects that are winding down. They have a very strong backlog. It always takes a little bit to build up for projects that replace those that wind down but their pipeline is very solid. They're very positive, they're very upbeat.

I mean, I can't think of a time, certainly not in the recent past, that Protiviti hasn't been more optimistic in part because of the breadth of strength in their solution areas. It's all of their major solution areas. As we've said, led by financial services, they have very large backlog of AML, anti-money laundering projects. Many are understaffed relative to what they need to complete their 2024 internal audit plans, which the regulators require they do and so Protiviti quite optimistic. They've got this typical -- some projects wind down and other projects start up and there's a little bit of noise one to the other. But for that, I think you'd be very pleased with the numbers.

[Mark Marcon, analyst]

And then just to stay on Protiviti, I mean with the U.S. growth being at 7.6%, it seems like you're continuing to gain share relative to the Big 4. We've heard from some other players that some of the Big 4 have overcapacity and perhaps are competing a little bit more on price. It doesn't seem like that's having an impact on you, but I'm wondering if you could just confirm or deny that, that's having any sort of impact and how we should think about Protiviti as we go into the first half of next year given the investments that you've made and how we should think about the margins there?

[M. Waddell, executive]

Again, the price competition from some of the Big 4 is not new. If anything, that leveled off. It certainly didn't get more acute during the period as to overcapacity and/or management resources generally. I think Protiviti has done an excellent job. You see that in their gross margin accretion, another 250 basis points on a sequential basis. And so like many companies post-COVID, Protiviti staffed up significantly with their full-time staff. Since that time, they pretty much held the line at that high level, some call that hoarding. But on the other hand, they significantly reduced their contractor usage, some 35% when demand softened a bit and their internal staff, the attrition was cut in half, such that they reduce their overall resource capacity by using fewer contractors.

But the good news, and what I think is instructive generally as things have improved at Protiviti, they have added back to the contractors. And in fact, if you look at the growth rates for the quarter, you'll see year-on-year, the revenues grew 4.5% but you've also looked at that intersegment line, which is [ their ] use contractors, it grew 19.5%. So my point is even though they're holding the line on that higher level of full-time staff, they first -- when they were in cost-cutting mode, reduced contractors. But now they've added those back.

And I think it's instructive because many people believe that somehow there's conflict between hoarding your full times and whether there's any upside to add contractors, I think Protiviti is a case study, in fact, that shows that there is plenty of upside to add back contractors for those who've reduced it in the first case, which frankly is true industry-wide because if you look at nonfarm payrolls overall, they're up 4% or 5% post COVID, yet temporary health contractors, if you will, are down 8% or 9%. So I would argue that even though our clients generally have "Hoarded their full times", they in part, funded with that with fewer contractors and restoring their contractors because they're in a capacity-constrained situation is our upside as things get better, just as it has been in the past.

[Operator]

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

[Princy Thomas, analyst]

This is Princy Thomas on for Manav. I wanted to see, are you seeing anything around finance and accounting positions and the risk from Gen AI fulfilling a lot of these temp tests?

[M. Waddell, executive]

The short answer is we're seeing very little currently as it relates to Gen AI. As we've talked about on prior calls, we've seen many technology cycles in the past, where there was automation of spreadsheets of payroll, of tax preparation, ERP, bookkeeping, and all those cycles have been much more impactful to accounting finance, all of which we grew through individually, and we also grew through in the aggregate. And we think those were much more significant when you effectively went from manual to automated in each of the areas I talked about, such that today, virtually all our clients, even the smallest have automated accounting systems and the impact of Gen AI relative to that starting point, pales in comparison to what I mentioned otherwise.

[Princy Thomas, analyst]

And then in terms of headlines around from reinforcing further return to office mandate, have you seen any client shifts that are impacting hiring opportunities? Are you still seeing demand for hybrid and remote roles from clients?

[M. Waddell, executive]

I'd say at higher skills, there is still demand for hybrid and remote roles at the more operational and transactional level, there's clearly a preference by clients for on-site. Frankly, they have to pay a premium to compensate those people for their commute time, for their parking, their otherwise out-of-pocket costs to come on site. But at higher skill levels, remote and hybrid work is alive and very well but at the transactional operational level, it's very much more on site.

[Operator]

Your next question comes from the line of [ Trevor Romeo ] with William Blair.

[Unknown Analyst]

First one, I just had a two-part question on the election. I think you mentioned some of the uncertainty in your prepared remarks. On the Talent Solutions side, just wondering what your conversations with clients are telling you about the impact of that uncertainty on-demand now and how that could change as we move past it?

And then on the Protiviti side, I was just wondering if you've historically seen any increases or decreases in demand from a change in administration. For example, if people expect regulatory changes, could that potentially drive demand for the regulatory risk and compliance or the internal audit practices to manage that change?

[M. Waddell, executive]

I'd say on the Talent Solutions side, it's more uncertainty about the outcome than it is one outcome or the other having a lesser or greater impact. There's clearly election anxiety, if you will. And I think it's just something, hopefully, we get past quickly but in any event, get passed. And that's more the issue on Talent Solutions.

Protiviti, at least immediately wouldn't be that impacted. But to the extent one side or the other had a significantly different position as to regulation, particularly financial services regulation and quite frankly, that's not expected, particularly anti-money laundering is not something that's usually emphasized more or less by one side or the other. So there's not a huge impact expected. But clearly, regulation generally and enforcement of regulation is a demand driver for Protiviti.

[Unknown Analyst]

And then for the follow-up, I just wanted to ask on internal head count levels. I think last quarter, you said you could grow 20- or 30-plus percent on the top line without adding heads. Is that still about the right range to think about in a demand rebound?

And then considering the macro uncertainty is still pretty high, if we didn't see a meaningful uptick in demand going into next year, let's say. What would it take, if anything, for you to kind of change your approach on holding the line on recruiter count?

[M. Waddell, executive]

Well, we continue to performance manage those that are struggling from an individual performance standpoint. But we stand by in a strong [indiscernible] recovery. There's no reason we can't get back to the same productivity levels we saw a couple of years ago. And given that the math says there's 20% to 30% upside, but again, based on how strong and based on how much we want to get ahead of that as we're in it, it would be a good thing if we started adding heads in advance of when we had to because that would signal that we're particularly bullish about our prospects.

But on a pure productivity basis, we've proven that productivity levels can be 20% to 30% higher than what they currently are. But again, so same economic backdrop to same economic backdrop, that's just math. But the question is kind of what's our expectation beyond that, which would also drive what our headcounts are.

[Operator]

Your next question comes from the line of Tobey Sommer with Truist.

[Tobey Sommer, analyst]

I wonder if you could update us on your government book of business in the last several years. You expanded that during the pandemic. And even though that project was going to taper off, you thought you'd kind of have good prospects over time in that vertical. Could you refresh us on what that looks like today?

[M. Waddell, executive]

Sure. And you are correct. We built up government during pandemic on some of those stimulus-related projects. There was significant concern that we would have a negative cliff event when that ended, Happy to report that didn't happen. We converted those into ongoing projects, both at the state, local and federal level. And we're generally pleased with how government has done for us relative to the other sectors that we're in. So nothing major to report. And I would argue no news there is good news given the short history we have.

[Tobey Sommer, analyst]

In terms of the tech business, is there a difference in the way you're -- what you're hearing from customers about that and seeing in terms of your own placement and bill rate trends versus the other staffing lines of business?

[M. Waddell, executive]

And I alluded to this earlier. And so when we think of tech, we split it between software and applications on the high end and infrastructure and operations on the operational end. And what we're seeing is more strength in software and applications, directly a result of data, cloud, security, privacy, and so we are seeing some strength. And if you look at our growth rates this quarter, you'll see compared to F&A and administrative, technology was a little better, and those were the reasons.

[Operator]

Your next question comes from the line of George Tong with Goldman Sachs.

[Keen Fai Tong, analyst]

Can you discuss trends that you're seeing with broader white collar hiring. And if you are noticing any sort of slowdown there? I know earlier you mentioned that weekly sequential trends were stable. So trying to see if you're seeing any second derivative changes. And then what white collar hiring trends are you assuming in your 4Q guide?

[M. Waddell, executive]

Well, so given that all we do is white collar, white collar is everything. As we said that we now have the longest period of stability or flatness. We have 14 consecutive weeks of flatness and we haven't seen that kind of duration over the last two years, which was the period we've been otherwise drifting down sequentially. So the white collar trend is the overall trend that we referenced. And it's a better trend than we had been seeing. You have to start somewhere. We flattened out, it's more than a week or two, it's more than 4 or 5 or 6 weeks, it's a long time, it's 14 straight weeks. So we're encouraged that we've flattened out for that period of time. And given the optimism index improvements we see from NFIB given the hope that we get through the election uncertainty relatively quickly, we're optimistic.

Now as far as what's built into our guidance, even though we've got that flatness that I described, we're more conservative than that in our guidance. We have included a kind of low single-digit sequential down for the quarter. Perm placement in the fourth quarter. There's always a lot of uncertainty. Clients go on holiday, clients run through their hiring budget, candidates are even stickier to displace because they're not only going on holiday, they're also waiting around for their bonus in hopes that they get one. So there's always more volatility for perm, you'll notice that we ended the quarter much better than the full quarter only to come the first few weeks after and go in the other direction, which is further demonstrates the volatility that perm has particularly over short periods of time.

But the principal issue for our guidance from a profitability standpoint, it's a short quarter. But for us, to put it all in perspective, we compare how we're doing today to prior cycles. And so dot-com, we had sequential down for 10 quarters, as we've talked about. Financial crisis was 5 quarters, but it was steeper during that period of time. And trough margins in the dot-com period were about 2.5% for Talent Solutions. Similarly, during financial crisis, shorter but steeper, trough margins 2.6%. So far, 9 quarters into this sequential down cycle. We're at 4% but if you look at the midpoint of our guidance for Q4, we're right back to that 2.5%. The composition of that is a little different, a little more pressure on SG&A because of the cumulative inflation during this down cycle, less negative perm mix than prior cycles. But interestingly, if you kind of view over the entire cycle versus the last two that I described, from a trough margin standpoint, they're very similar.

But for us, the focus isn't on how good are your trough margins? But instead, what are your prospects coming out of this. And I gave Protiviti as a real example of, we believe, because our clients have reduced their contractors. They're in a constrained capacity situation such that as their businesses improve, they're going to need more resources. And the path of least resistance is always to hire contractors before full time. Virtually every company will more quickly approve the addition of contractors than they will full-time talent. So we remain bullish on the upside, notwithstanding this focus on what our trough margins. Trough margins are very consistent what they've been in cycles past. And by the way, in dot-com, that trough margin of 2.5% that came 11.3% on the upside, financial crisis 2.6% became 12.5% on the upside. So we're as optimistic as ever we'll get back to double-digit operating margins in Talent Solutions as the macro improves.

[Keen Fai Tong, analyst]

And continuing the line of thought on margins. Aside from seasonality, can you discuss some of the factors that may be causing operating margins to step down at the midpoint in 4Q compared to 3Q?

[M. Waddell, executive]

Well, it's all about the shorter quarter. And so you don't leverage your fixed cost because it's at least 2.5 days shorter. As we talked about, Protiviti's, because of its client saw close, they lose more than 2.5 days. But it's all about the short quarter in the fourth quarter. But again, that's just one piece of what trough margins look like in this cycle, which history says, get quickly forgotten as you focus on the upside in a recovery.

[Operator]

Your next question comes from the line of Stephanie Moore with Jefferies.

[Stephanie Benjamin Moore, analyst]

I think you answered probably five of my questions in that last one, so that was very thorough. But I guess, actually taking it a step further, I really appreciate the color comparing this cycle to kind of the prior two. And importantly, your ability to reach new highs from a margin standpoint as you came out of the cycle.

As you think about the recovery from this cycle, maybe talk a little bit about the drivers and what you have in place today that give you confidence that you could essentially get back to that double-digit operating margin, but more importantly, maybe reach a new high on the margin standpoint compared to, again, those prior examples that you gave?

[M. Waddell, executive]

Well, first and foremost, we've retained our top producers. We've had negative leverage because we haven't reduced head count at the same pace that our revenues declined sequentially all because we wanted to have capacity from a recruiter standpoint to participate; B, we've made significant strides from a technology standpoint and improving the productivity of our staff, given better tools than they've ever had, which continues to improve as we speak. We lever the fixed cost on the upside, at least to the extent we did on the downside. So we retrace our steps, if you will, as that reverses, we have Protiviti that is performing extremely well, no end in sight, taking share from the Big 4, very well positioned broadly across its solution areas, technology, regulatory compliance, internal audit, business process improvement you put that package together, I would argue we have more upside than we've ever had.

[Stephanie Benjamin Moore, analyst]

And then maybe switching gears to the gross margin front. I think you've [ held in ] very well and the pricing has trended pretty well as well. So can you talk a little bit about the potential for maybe any gross margin pressure here or anything that you're seeing that could suggest that?

[M. Waddell, executive]

I think our biggest upside on gross margin is mix. And as we move up the skill curve, we get a higher gross margin on higher skilled positions than we do on operational skill positions. And we've been on this journey for many years to take that mix even higher, which we expect to continue to do. And therefore, I believe there's a gross margin upside for mix alone.

[Operator]

Your next question comes from the line of Kevin McVeigh with UBS.

[Unknown Analyst]

This is Mark [indiscernible] on for Kevin McVeigh. Last quarter, you guided to $0.08 in restructuring expenses related to Protiviti in Q3. Does today's report EPS number account to their structuring and if so, what was the actual impact from restructuring?

[M. Waddell, executive]

So the impact was exactly what we thought it would be. And it's $5.6 million in SG&A, and it's $2.5 million of tax provision. It gets you right to the $0.08 that we forecast, and it's embedded, it was embedded in our guidance. So there's no difference from what we guided to as it relates to that. And it's because we converted our Mainland China-owned operation to an independently owned member firm.

[Operator]

Your next question comes from the line of Mark Marcon with Baird.

[Mark Marcon, analyst]

I just had a quick follow-up. You're very clear about the margin impact for the fourth quarter. Three months from now, we'll be talking about the first quarter. And I was just wondering if you wanted to remind people just kind of some of the seasonal impacts as it relates to the first quarter and how people should think about this kind of normal margin sequential patterns going from Q4 to Q1?

[M. Waddell, executive]

I'd say, typically, in the first quarter on a same-day basis, contract is pretty flat seasonally and perm, because you're comparing it to the shorter, more volatile fourth quarter, perm typically has a mid-single-digit step-up in the first quarter for that reason. So same-day contract about the scene, but you have more days, right? You pick up those holiday days. So overall, you have more days and same per day, whereas in perm, you have more days and you get more per day.

[Mark Marcon, analyst]

And then on Protiviti, we've seen the pattern over the last few years. Anything that would be different this time around relative to that typical pattern?

[M. Waddell, executive]

Well, in Protiviti, because internal audit gets crowded out by clients focusing on their external audit, there's a seasonal step down per day that's typically mid-single digits on a same-day basis. And again, it's a seasonal thing. We've gone through that pattern in prior quarters that we've discussed and from a profitability standpoint, remember, too, Protiviti does all their raises their compensation increase is effective January 1. So you have a double impact, where the costs go up all in one day and the revenues seasonally, sequentially go down for the reasons I talked about. And so from a profitability standpoint, Q1 is Protiviti's lowest profitability quarter but happy to report that Protiviti had double-digit operating margins in the third quarter. So it's nice to see them back there. I mean I can't say enough about how well they manage their resource base, keeping that high level of full-time employees by very effectively managing their contractor base, and that contractor base, it's a bullet they have relative to the Big 4 that don't have that. So they very effectively have managed their resources. Just look at those gross margins up 250 basis points sequentially two quarters in a row.

[Michael Buckley, executive]

And Mark, just so that you have them, the days for next year, by quarter, first quarter, 61.9; second quarter, 63.2; third quarter, 64.2; fourth quarter, 61.4, for a total of 250.7.

[M. Waddell, executive]

So that was our last question. Thank you all for joining us today. So long.

[Operator]

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 [ look ] into the conference call replay. The details are contained in the company's press release issued earlier today.