Robert Half International Inc

NYSE:RHI

Earnings Call Transcript 2021-Q4

[Operator]

Hello. And welcome to the Robert Half Fourth Quarter 2021 Conference Call. Our hosts for today's call are Mr. Keith Waddell, President and Chief Executive Officer of Robert Half; and Mr. Michael Buckley, Chief Financial Officer.

Mr. Waddell, you may begin.

[Keith Waddell, President & CEO]

Thank you. 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. Our presentation of revenues and the related growth rates for Accountemps, OfficeTeam, Robert Half Technology and Robert Half Management Resources includes their intersegment revenues from services provided to Protiviti in connection with the company's blended staffing and consulting solutions.

This is how we measure and manage these divisions internally. The combined amount of divisional intersegment revenues with Protiviti is also separately disclosed. The supplemental schedules just mentioned, also include a revenue schedule showing its information for 2019 through 2021. For your convenience, our prepared remarks for today's call are available in the Investor Center of our website, roberthalf.com.

2021 was an extraordinary year, and we achieved record annual results all organically. Fourth quarter revenues grew 36% and net income grew 78%, exceeding the high-end of our guidance and reflecting sustained broad-based demand across our staffing and business consulting businesses. Our permanent placement and Protiviti operations continued to show very strong results growing year-on-year revenues by 73% and 37% respectively. Our temporary and consulting staffing operations also performed well and had year-on-year revenue growth of 31% with particular strength in management resources, which grew 56% compared with the pre-pandemic fourth quarter of 2019. 2021 revenues were higher by 15% and net income was higher by 49%.

I continue to be impressed with the energy, drive and enthusiasm of our entire global workforce, including staffing, Protiviti and corporate services professionals without whom our success would not be possible. Company-wide revenues were $1.77 billion in the fourth quarter of 2021, up 36% from last year's fourth quarter on both a reported and adjusted basis. Net income per share in the fourth quarter was $1.51, increasing 81% compared to $0.84 in the fourth quarter one year ago.

Cash flow from operations during the quarter was $145 million. In December, we distributed a $0.38 per share cash dividend to our shareholders of record for a total cash outlay of $42 million. We also acquired approximately 540,000 Robert Half shares during the quarter for $61 million. We have 7.2 million shares available for repurchase under our Board-approved stock repurchase plan. Return on invested capital for the company was 50% in the fourth quarter.

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

[Mike Buckley, CFO]

Thank you, Keith. And hello, everyone. As Keith noted, global revenues were $1.77 billion in the fourth quarter. On an as adjusted basis, fourth quarter staffing revenues were up 36% year-over-year. U.S. staffing revenues were $992 million, up 37% from the prior year. Non-U.S. staffing revenues were $283 million, up 32% year-on-year on an as adjusted basis. We have 321 staffing locations worldwide, including 85 locations in 17 countries outside the United States.

In the fourth quarter, there were 61.7 billing days, unchanged from the same quarter one year ago. The current first quarter has 62.4 billing days compared to 62.3 billing days from the first quarter of 2021. Currency exchange rate movements during the fourth quarter had the effect of decreasing reported year-over-year staffing revenues by $5 million. This impacted our year-over-year reported staffing revenue growth rate by 0.5 percentage points.

Temporary and consultant bill rates for the quarter increased 8.5% compared to one year ago, adjusted for changes in the mix of revenues by line of business, currency and country. This rate for the third quarter of 2021 was 5.4%.

Now let's take a closer look at results for Protiviti. Global revenues in the fourth quarter were $495 million, $387 million of that is from business within the United States and $108 million is from operations outside the United States. On an as adjusted basis, global fourth quarter Protiviti revenues were up 37% versus the year ago period, with U.S. Protiviti revenues up 32%. Non-U.S. revenues were up 61% on an as-adjusted basis.

Exchange rates had the effect of decreasing year-over-year Protiviti revenues by $2 million and decreasing its year-over-year reported growth rates by 0.5 percentage points. Protiviti and its independently owned member firms serve clients through a network of 87 locations in 28 countries.

Turning now to gross margin. In our temporary and consultant staffing operations, fourth quarter gross margin was 39.8% of applicable revenues compared to 38.5% of applicable revenues in the fourth quarter one year ago. Gross margins were positively impacted by expanding pay bill spreads and higher conversion revenue which were 3.8% of revenues in the quarter and 2.8% of revenues in the same quarter one year ago.

Our permanent placement revenues in the fourth quarter were 12.4% of consolidated staffing revenues versus 9.7% of consolidated staffing revenues in the same quarter one year ago. When combined with temporary and consultant gross margin, overall staffing gross margin was 47.2%, an increase of 2.8 percentage points compared to the year ago fourth quarter.

For Protiviti, gross margin was 28.7% of Protiviti's revenue compared to 26.5% of Protiviti revenue one year ago. Adjusted for deferred compensation related classification impacts, gross margin for Protiviti was 29.3% for the quarter just ended compared to 28% one year ago. Protiviti gross margins improved primarily due to an increased mix of higher margin services.

Company-wide SG&A costs were 30.8% of global revenues in the fourth quarter compared to 32.6% in the same quarter one year ago. Adjusted for deferred compensation related classification impacts, company-wide SG&A costs were 29.7% for the quarter just ended compared to 29.9% one year ago.

Staffing SG&A costs were 37.7% of staffing revenues in the fourth quarter versus 39.7% in the fourth quarter of 2020. Adjusted for deferred compensation related classification impacts, staffing SG&A costs were 36.2% for the quarter just ended compared to 36% one year ago. The higher mix of permanent placement revenues this quarter versus one year ago had the effect of adding 1.6 percentage points to the quarter's adjusted SG&A ratio. We ended 2021 with 8,900 full-time internal employees in our staffing divisions, up 14% from the prior year.

Fourth quarter SG&A costs for Protiviti were 12.9% of Protiviti revenues compared to 14.1% of revenues in the year ago period. In 2021, we had 11,400 full-time Protiviti employees and contractors. This is up 56% from the prior year and is consistent with Protiviti's overall increase in billable hours.

Moving on to segment income. Operating income for the quarter was $200 million. Adjusted for deferred compensation related classification impacts, combined segment income was therefore $223 million in the fourth quarter. Combined segment margin was 12.6%. Fourth quarter segment income from our staffing divisions was $142 million with a segment margin of 11.1%. Segment income for Protiviti in the fourth quarter was $81 million with a segment margin of 16.4%.

Our fourth quarter tax rate was 24% compared to 27% one year ago. The lower tax rate for 2021 can be attributed to better coverage of non-deductible expenses due to higher income in 2021 as well as higher stock compensation deductions due to the rise in the company's stock price.

At the end of the fourth quarter, accounts receivable were $985 million and implied days sales outstanding DSO was 50 days.

Before we move on to first quarter guidance, let's review some of the monthly revenue trends we saw in the fourth quarter and so far in January, all adjusted for currency and billing days. Our temporary and consultant staffing divisions exited the fourth quarter with December revenues up 31% versus the prior year compared to 32% increase for the full quarter. Revenues in the first 2 weeks of January were up 40.2% compared to the same period one year ago. Permanent placement revenues in December were up 73% versus December 2020. This compares to 74% increase for the full quarter.

For the first 3 weeks of January, permanent placement revenues were up 51.7% compared to the same period in 2021. We provide this information so you have insight into some trends we saw during the fourth quarter and into January. 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 first quarter guidance: Revenues, $1.755 billion to $1.835 billion; income per share $1.39 to $1.49; midpoint revenues of $1.795 billion are 30% higher than the same period in 2021 on an as adjusted basis; midpoint EPS of $1.44 is 47% higher than 2021.

The major financial assumptions underlying the midpoint of these estimates are as follows: Revenue growth on a year-over-year basis, staffing up 32% to 34%, Protiviti, up 19% to 21%, overall, up 28% to 30%. Gross margin percentages; temporary and consultant staffing 39% to 40%; Protiviti, 27% to 28%; overall, 41% to 43%. SG&A as a percent of revenues, excluding deferred compensation classification impacts: staffing, 35% to 36%; Protiviti, 13% to 15%; overall, 29% to 30%. Segment income for staffing 11% to 12%; for Protiviti, 13% to 14%; overall, 12% to 13%. Tax rate, 26% to 27%. Shares outstanding 110 million to 111 million. 2022 capital expenditures and capitalized cloud computing costs, $95 million to $105 million with $20 million to $25 million during the first quarter.

We limit our guidance to one quarter. All estimates we provide on this call are subject to the risks mentioned in today's press release and in our SEC filings.

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

[Keith Waddell, President & CEO]

Thank you, Mike. The labor market is undergoing extraordinary change as remote and hybrid models continue to gain traction and professionals change jobs at record levels. Many candidates have a strong preference for working remotely. And our clients are also increasingly willing to recruit from outside their geography and embrace remote working arrangements.

Clients benefit by gaining access to a deeper talent pool and or lower price points than they may be able to find locally. Remote work is here to stay and creates a significant opportunity for us. It brings together our numerous strengths, including our global brand, our global office network, our global candidate database, and advanced AI-driven technologies and data analytics at the scale needed to excel at out of market recruitment and placements.

This strengthens our competitive position significantly since our traditionally toughest competitors, local and regional staffing firms simply do not have these capabilities. The National Federation of Independent Business, NFIB, recently reported that 95% of those hiring are trying to hire had few or no qualified applicants for open positions and 49% of all small business owners had job openings that could not be filled. This continues to bode well for us as we see increases in demand for our services on a very broad basis, spanning across industries, client size, skill levels, geographies and lines of business. This robust demand coupled with our continuing ability to successfully recruit candidates for our clients has contributed to our staffing results recovering at a faster pace than we've experienced in the past.

Our permanent placement and temporary and consulting staffing segments including blended solutions with Protiviti have achieved cumulative sequential growth of 125% and 63%, respectively, during the 6 quarters since the pandemic trough. Similar numbers for the financial crisis and dot-com recoveries were 56% and 25% and 52% and 39%, respectively.

Protiviti continues to be a strong differentiator for the company with multiple years of consecutive growth and a highly diversified client base and suite of solution offerings. Growth remains strong across internal audit, technology consulting, risk and compliance consulting and business performance improvement. Technology consulting is the largest solution group with particular strength in cybersecurity and privacy solutions as well as enterprise applications and data analytics.

We also continue to see remarkable results on the collaboration between Protiviti and staffing which pairs Protiviti's world-class consulting talent with staffing's deep operational resources to provide a cost effective solution to client skills and scalability needs. Protiviti has benefited in the last several quarters from project work in the public sector resulting from various governmental stimulus programs. Fourth quarter revenues were $103 million, with the $89 million component from Protiviti, providing accretive growth to its core commercial growth rate of 25% for the quarter.

Public sector work has created new credentials and deep relationships with a new client base as well as strong relationships with candidates whose skills are applicable to both public sector and commercial engagements. As stimulus square continues to moderate, we're building a significant pipeline of other opportunities, including finance and IT modernization and transformation projects. We expect first quarter 2022 public sector revenues to be flat to up 10% compared to the first quarter of 2021. We also expect digital revenues for our staffing operations from the redeployment of a substantial number of public sector candidates onto commercial staffing engagements.

In mid-2021, we completed a multiyear process to unify our family of Robert Half endorsed divisional brands to one single specialized brand, Robert Half. This simplifies our go-to-market brand structure for clients and candidates, reduces fragmentation and provides leverage for greater brand awareness and allows future flexibility to expand our existing practice groups without the need for new brands.

Beginning with Q1, 2022, our financial disclosures for contract operations will be based on functional expertise rather than the previously branded divisions. The functional specializations will be finance and accounting, administrative and customer support and technology.

Finance and accounting combines the former Accountemps and Management Resources, administrative and customer support was previously OfficeTeam and technology was formerly Robert Half Technology. There's no change to our underlying business operations or organization. Protiviti and our permanent placement operations will continue to be reported separately. Also, when distinguishing from Protiviti, we now call our staffing operations by a new name, Talent Solutions and temporary professionals are now referred to as contract professionals.

2021 was an extraordinary year for Robert Half. The record revenues and earnings and a pace of recovery unlike anything we've experienced before. We began the New Year with tremendous momentum and optimism and a steadfast focus on our people, our technology, our brands and our business model. We remain laser-focused on our time-tested corporate purpose to connect people to meaningful and exciting work and provide clients with the talent and deep subject matter expertise they need to confidently compete and grow.

Finally, we'd like to thank our employees around the world for making possible a number of new company accolades. In just the last 24 hours, we were once again named to the Bloomberg Gender Equality Index and also recognized as the Best Place to Work for LGBTQ+ Equality by the Human Rights Campaign earning a 100% rating on its Corporate Equality Index. We are particularly proud of the recognition we continue to receive for our commitment to diversity, equity and inclusion efforts.

Now Mike and I would be happy to answer your questions. Please ask just one question and a single follow up as needed. If there's time, we'll come back to you.

[Operator]

[Operator Instructions] Your first question comes from the line of Mark Marcon with Robert W. Baird.

[Mark Marcon, Robert W. Baird]

Good afternoon. And congratulations on a great year. I was wondering if you could talk a little bit more about Protiviti, particularly with regards to the expectations on the government side versus the commercial side. Just how sustainable do you think the commercial growth is? It certainly seems like there are more digital transformation opportunities. You're obviously now technologically focused, that being your biggest practice area. So just wondering how sustainable do you think that sort of commercial growth is?

And then can you also discuss the growth that you're seeing internationally? So that within the U.S., it's pretty clear that Protiviti is really distinguishing itself as a brand name and getting a lot of recognition. I'm wondering to what extent that's spreading internationally.

[Keith Waddell, President & CEO]

Well, we'll see several questions there. Protiviti continues to expect to expand significantly commercially. We talked about the public sector being flat to up 10%, which, frankly, is an improvement versus our expectations 90 days ago. On the commercial side, the expectation is that the 25% growth in the fourth quarter, ex public sector, would remain intact through the first quarter. There would be some dilution by the flat to up 10% on the public sector.

Protiviti's issue is not demand and in fact, is internal employee staff. It's aggressively adding to staff as we speak. The business backdrop has never been better. The SG&A assumptions for the first quarter consider and contemplate additional -- significant additional recruiting and training cost for all the additional many of which are experienced hires they're going to bring on board.

The IZ versus U.S., Protiviti IZ, you name the country also doing very well. We've had particular success in Germany, the UK, Australia, where the brands are also well recognized there. I think we now do business with 60% of the Fortune 1000 in the U.S. And so brand recognition is increasing as we get better penetration from those accounts.

[Mark Marcon, Robert W. Baird]

That's great. As a follow-up, I'd like to ask about the 8.5% bill rate expansion. And how you juxtapose that with the increased level of virtual work that's being done. It seems like there's a labor cost arbitrage. And so seeing the 8.5% increase on a like-for-like basis is interesting. I'm wondering if you can comment on that.

[Keith Waddell, President & CEO]

Well, the 8.5% is certainly higher than we've seen early cycle in prior recoveries where the range would tend to be 4% to 6%. So it's a little high. It's not hugely high. That 8.5% is not limited to any practice group irrespective of its remote versus on-premise mix. So I wouldn't necessarily attribute the higher bill rate percentage to a higher portion of remote work.

But instead, just the firmness of the labor markets across the board, across skill levels, across practice areas. The good news is while wage inflation is elevated, we're certainly able to pass that through and expand our gross margins just a little at the same time. It's a good place to be in.

[Mark Marcon, Robert W. Baird]

Absolutely. Congratulations again.

[Operator]

Your next question comes from the line of Andrew Steinerman with JPMorgan.

[Andrew Steinerman, JPMorgan]

I just wanted to ask you more about supply. And if you could answer it kind of both for Protiviti, which you mentioned a little bit, Protiviti aggressively adding to staff. My question really is, when you look at F&A professionals in the United States, we just generally hear labor is tight and maybe even too tight, we hear often. But if you could just focus on finance and accounting professionals, Keith. And tell us how you feel the supply of finance and accounting professionals are now versus other times that you've experienced in the past?

[Keith Waddell, President & CEO]

Well, we've used the term before, and I'll use it again, and I would say, manageably tight. It's true, candidates get multiple offers. They get counter offers. Generally, they want remote engagements and want to be paid a premium to go on site. Even though current unemployment levels are low, they're not at historical lows. College people with a college degree, their unemployment rate currently is 2.1. That's been sub-2 in the past.

Our staff are very skilled at recruiting. They have access to our proprietary database that use our proprietary AI and data science. Remote work significantly expands the pool that they can recruit from. This is not a tool they've had in recoveries passed.

Further, we've got a bench of full-time professionals that are also available for assignment, which also addresses the supply side of the equation. So for all of those reasons, we've been able to manage through the supply side of this. And we expect we'll continue to be able to manage given all the traditional tools we have, given the experience of our people and given the access to remote workers and the ability to use remote workers, which range from 20% to 70% depending on the practice group that you're talking about.

[Andrew Steinerman, JPMorgan]

Maybe just be a little more specific about F&A. Like do you feel like when you're recruiting for F&A positions versus when you're recruiting for IT position that there might be a little more availability of F&A professionals again, compared to IT professionals, for example?

[Keith Waddell, President & CEO]

Well, I'd say they're both tight -- on the F&A side is probably tighter at the operational level than it is at higher levels. The higher levels tend to be more conducive to remote work than the operational levels where clients tend to want people on site.

So relative to IT, I guess you could make the case that it's not as tight. I think that's fair, but it's tight. But again, manageably tight, we think we can manage our way through this.

[Andrew Steinerman, JPMorgan]

Got it. Thank you so much. Appreciate it.

[Operator]

Your next question is from Hamzah Mazari with Jefferies.

[Hans Hoffman, Jefferies]

Hi. This is Hans Hoffman filling in for Hamzah Mazari. So my first question is, it looks like technology and temp staffing slowed in Q4. Could you just provide some color on the drivers there?

[Keith Waddell, President & CEO]

Well, technology grew 21%, again, different than some of the other divisions, technology fared well, fared better during the pandemic than some of our others did. So generally speaking, they're going to have tougher comps than some of the others are. But frankly, we were pleased with technology in the fourth quarter and it was above our own internal forecast for that period.

[Hans Hoffman, Jefferies]

All right. Great. Thank you. And then my next question is, can you just give us a sense of how much capacity you have within your current business in terms of recruiters, given your demand outlook? Or do you kind of have to go out there and hire more people? And is labor availability at all becoming an issue for you?

[Keith Waddell, President & CEO]

I'd say on the recruiter capacity side, on the contract side of the business, we do have capacity. That said, we are beginning to add to staff there. We have less capacity with permanent placement given its elevated growth rates. And we're much more aggressively adding to staff there.

But I think one thing that in my tenure here that you can always count on is when you give our people the requisition approval to add to staff, they deliver. If you think about it, they recruit all day for a living. And some of those people, they are looking to place ultimately end up as recruiters working for us, placing others.

And so as I sit here today, I don't have any issue with. We'll be able to recruit internally the number that we have. Another point there, we are very pleased with the lack of turnover we've seen. There's all this talk about the great resignation, the great reshuffle. But if you look at our internal staff at Robert Half, our attrition is actually down, and we're very proud of that.

[Hans Hoffman, Jefferies]

Great. Thank you so much.

[Operator]

Your next question comes from the line of Jeff Silber with BMO Capital Markets.

[Jeff Silber, BMO Capital Markets]

Thanks so much. Wanted to continue the discussion on your internal headcount. First of all, I just want to clarify something. The numbers that you gave for Protiviti, is that a year-end number or an annual number, averaging?

[Keith Waddell, President & CEO]

Well, it's an average over the full year, that's right. But it was somewhat back ended. And therefore, the cost as we enter 2022 we'll have the full effect of that, whereas the fourth quarter only had the average portion of that.

[Jeff Silber, BMO Capital Markets]

Got it. And in prior years, did you always given an average or was it the year-end? Because I know for staffing you give a year-end. I just wasn't sure of Protiviti.

[Keith Waddell, President & CEO]

This consistent the methodology hasn't changed. The contractor versus employee counts at Protiviti get a little confusing, but we try to explain that the combined headcount for Protiviti inclusive of the full-time equivalents for contractors is what we disclosed. And by the way, about 50% of the hours worked for Protiviti, at least during the fourth quarter, were worked by contractors rather than its own employees.

[Jeff Silber, BMO Capital Markets]

Okay. Great. Sorry to get in the weeds there. Let me ask my bigger picture question. So it looks like your Protiviti headcount is at an all-time high, so are revenues. Staffing, you seem to be back at pre-pandemic levels, but your internal headcount is much lower. I mean I know you've talked in the past about some of the productivity tools. You mentioned briefly that you're going to be ramping up hiring firms. But should we expect these productivity levels to continue to improve going forward?

[Keith Waddell, President & CEO]

We're proud of our productivity levels. I'd say it's a reflection of, a, the average experience level of who we now have is higher than it has been in the past. B, we've introduced all these technology tools that I'd be happy to talk about for the next 45 minutes, if you'd like to listen.

Further, our own people are working remotely, which means when we fill orders we can spread that workload across a larger area of internal recruiters. Therefore, per se, making them more productive.

And so we have all of that going for us. We're focused on productivity. We think those productivity levels are here to stay. We think we've got upside from where we are. But we do need to begin hiring. We've already begun aggressively hiring in perm. And we will begin to do that as well on the contract side.

I've talked a couple of times about these people that work for us full time that we place on assignment. We're aggressively adding to the internal staff that manages that part of our business as well.

[Jeff Silber, BMO Capital Markets]

Okay. Fantastic. Thanks so much for the color.

[Operator]

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

[Kevin McVeigh, Credit Suisse]

Great. Thanks so much. Congratulations on the results. Keith, I went back and I think my numbers are close, but the revenue overall since 2019 is up about 6.5%. But if you look at temp, it's down 8.5%, Perm is up almost 7%, and then Protiviti is up 64%. Is there any way to think about, obviously, a pretty wide delta there? How are you thinking about demand pull forward versus where we are in the cycle? I mean it's been so unprecedented. Is there any way to think about how you're thinking of kind of each one of the segments and from a demand perspective, I guess, is where I wanted to start?

And is some of that structural as a result of remote workforce within Protiviti as opposed to the consulting, just such a kind of tricky cycle we're in. Just trying to understand any puts and takes across the three segments.

[Keith Waddell, President & CEO]

Well clearly, for staffing or talent solutions that we now call it. This recovery has been different in that the unemployment rates have recovered much more quickly than they've done in the past.

Typically early cycle of the unemployment rates stay high with that larger pool of people we feel elevated orders from small business clients who were lean and whose transaction volumes recover and they get into projects. And so clearly, the labor markets are tighter stronger sooner than they've been in prior recoveries.

As to Protiviti, Protiviti didn't go down during the pandemic. So it had uninterrupted growth. So when you look at a point in time now versus a point in time 2019, given that it never had -- it never went down. It's at a higher place and its benefit -- it's been the primary beneficiary, not only of public sector contractor work, but commercial sector contractor work as well -- and you could just as easily give our Talent Solutions operations credit for that work as you would Protiviti because it's blended that they both work on. So the distinction between one versus the other is blurred to some degree.

As we talked or as we said in our prepared comments, for the fourth quarter relative to 2019, I think, was your reference point. Overall revenues are 15% higher and earnings are almost 50% higher, which is pretty incredible.

[Kevin McVeigh, Credit Suisse]

And then just could you repeat and you were clear on it, but I just missed them, the project work, the public work versus the commercial within Protiviti in the quarter?

[Keith Waddell, President & CEO]

Right. And so -- for the quarter, we talked about Protiviti public sector. We gave you the number, the $89 million took its core commercial growth rate of 25% to the overall growth rate of 37%. So without public sector grew 25%, with public sector, it grew 37%. So that's the impact of public sector.

We expect that 25% to remain intact into the first quarter, which is built into the guidance. Even though year-on-year, the public sector work slows, we're still optimistic that for the full year 2022 will be at or better than 2021, notwithstanding the moderation in unemployment claims processing, that's been so large a part of what happened in 2021 and to some degree, late-2020.

So core commercial growth, Protiviti, very strong, 25% Q4, expected to be 25% again in Q1. And then public sector adds or subtracts as I just talked about. Underlying core very strong. Protiviti's biggest issue was not demand, not demand. It's getting internal staff for which they're hiring aggressively, primarily experienced staff that they're getting from other consulting firms that they're getting from other accounting firms, and they're very successful at doing it.

[Kevin McVeigh, Credit Suisse]

Thank you.

[Operator]

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

[Tobey Sommer, Truist Securities]

Thank you. If you could delve into wage growth, bill rate growth and put it in some historical context. I believe there was a period of 4 or 5 consecutive years. We had 5% growth in the 2000s with unemployment rate where you said it is, it's low, but it's not at historic lows. How long could we see this kind of high-single digit, maybe a little bit above the normal band that you characterized earlier on the call?

[Keith Waddell, President & CEO]

Well, as you just said, which is correct, if you look in the last recovery, we had 4 or 5 years where we had sustained bill rate growth between 4% and 6%. So I'd call that normal. So we're a bit higher than normal as we speak. Unemployment is lower than it is at a similar point in prior recoveries.

We believe because we're still not at historical lows, as you also mentioned that there's -- that current rates can be sustained but whether they're 6% or 8%, we're going to do well. And it's an environment where we can add to enhance our margins. Again, wage inflation is our friend when we can pass it through with a little margin enhancement.

[Tobey Sommer, Truist Securities]

Right. And if we think about gross margins from a social cost perspective given the payroll taxes, et cetera. Do we have a runway where those could add and contribute to gross margin expansion? Or has the pace of this recovery has been so different that much of that is already sort of embedded in the income statement at this point?

[Keith Waddell, President & CEO]

Well, we talked a little bit about this last quarter. I'm happy to report that we expect our state unemployment costs for 2022 to be roughly flat with what they were as a percentage in 2021. And that's dramatically better than prior recoveries where they're elevated for 1 to 3 years based on the higher claims filed against our account during the downturn.

So if anything, the historical drag we've seen from higher social cost early cycle, we're not seeing so far this time for reasons I explained on the last call. And I'm not going to bore everybody again. So there's good news on the social cost front.

And in fact, if you talk about gross margins, generally we think there's a lot of room for improvement. A, you've got mix going more towards management resources, good for gross margin. Mix going more toward full-time contractors, good for gross margins; mix going to higher conversions as full-time hiring stays robust, good for gross margins; social cost, not rising at the same pace they had in prior recoveries, good for gross margins. So we've got a lot going for us. At the gross margin line, not to mention, as perm grows faster than contract, that's also good for gross margins.

[Operator]

[Operator Instructions] Your next question comes from the line of George Tong with Goldman Sachs.

[George Tong, Goldman Sachs]

Hi, thanks. Good afternoon. You provided guidance on public sector Protiviti demand for 1Q. Can you provide thoughts around when you would expect public sector COVID-related relief work on Protiviti to normalize? How that time line would look like over the next several quarters?

[Keith Waddell, President & CEO]

Well, George, we believe that for full year 2022, we'll be at or above what we were in 2021. And notwithstanding, we have headwinds on unemployment. We have tailwinds on education. We have tailwinds on housing assistance, and we have tailwinds on finance and IT modernization projects for which the backlog is growing significantly.

So just as 2021 ramped up with public sector, we expect 2022 to ramp. It is just the nature of the projects that ramp 2022 will be different than those that ramp 2021. But for the full year, we actually think we'll be flat or grow, not down. And that will normalize over the course of the year. And as we said earlier, for the first quarter alone, we said we think we'll be flat to up 10% with public sector.

Public sector measurement gets a little confusing because part of it is recorded as Talent Solutions and part of it is recorded as Protiviti. And as we move forward, the educational component public sector is more Talent Solution centric. The unemployment and housing assistance portion is more Protiviti centric. And this modernization, IT accounting modernization is blended. And so it will be in both places.

So you have to stitch together the pieces of this to come to an overall number, which is a little confusing when you look at the numbers. But when you stitch all of the pieces together in 2021 and you stitch all the pieces together for 2022, we think will actually be flat or up. And that's a more positive outlook than we had 90 days ago, which is a function of, a, the pretty dramatic increase in the pipeline for new projects; and b, our success rate, which has been very high.

[George Tong, Goldman Sachs]

Got it. Very helpful. And then with respect to the impact of COVID, which sectors and end markets, would you say have seen the most impact from Omicron from a temp staffing demand perspective at Robert Half.

[Keith Waddell, President & CEO]

And so we disclosed that for the first 2 weeks out of the gate right during the teeth of Omicron, our contract side grew 40% which is an acceleration from where we exited 2021. And so while clearly, we saw contract professional absenteeism due to Omicron, the numbers would have been even higher. Protiviti also saw some absenteeism from Omicron.

But it was fairly short-lived, a week or 2 and viewed as a short-term thing that's in the scheme of a full quarter, it's not a huge impact. But again, like I say, we came out of the gate hot up 40% year-on-year, which was an acceleration, notwithstanding a small drag from Omicron.

[George Tong, Goldman Sachs]

Great. Thank you.

[Operator]

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

[Kevin McVeigh, Credit Suisse]

And I apologize in advance on this. So just so we're clear, the comments on Protiviti. Was that overall Protiviti flat to up or just the commercial and government work? Was that flat up or?

[Keith Waddell, President & CEO]

Flat to up, all right? So first of all, in our guidance for the first quarter, we said Protiviti's revenues would grow 19% to 21%, so let's call it, 20%. So that's overall Protiviti.

Then if you just look at the public sector impact on Protiviti, which is about 18% of their revenues, we said that piece would be flat to up. So what that means then is that the commercial part of Protiviti call it 80%, will be growing 25%. And the balance will be flat to up 10%. But Protiviti overall, our guidance has growing 20%.

[Kevin McVeigh, Credit Suisse]

I thought you talked about '22 overall, Keith, I apologize. I thought you said flat to up for the full year. I just want to clarify that.

[Keith Waddell, President & CEO]

Well, okay. That's public sector overall, for the full year, we do expect to be flat to up. For the first quarter, we expect it to be flat to up 10%. So the explanations of the same, frankly, whether you're talking in the quarter or the year, for the public sector piece only, but that's less than 20% of the total.

The other 80% is growing 25% and not slowing down. Demand isn't the issue, they need the staff.

[Kevin McVeigh, Credit Suisse]

Thank you.

[Operator]

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

[Mark Marcon, Robert W. Baird]

You just answered my question, which is basically, it's public work for all of 2021 was 18% of Protiviti or was it 20%?

[Keith Waddell, President & CEO]

So we're saying for the first quarter, Protiviti consolidated everything. The guidance has grows 20%, everything, commercial and public sector, everything. If you just focus on the public sector piece, which is less than 20% of Protiviti's total, it will be flat to up 10%. So the commercial side will grow faster than the public sector side for the first quarter.

[Mark Marcon, Robert W. Baird]

Keith, I got all that. What I was trying to get a precision on was just the percentage of Protiviti revenue that came from the public sector in all of 2021 for the full year. I wasn't sure if that 18% that is public sector was a fourth quarter reference number or 2021 reference.

[Keith Waddell, President & CEO]

It was a calculated fourth quarter. It was $89 million on $495 million. That's the 18%. I don't have those same numbers right here in front of me. So we had ramped. It probably -- it started less than that in the first quarter of 2021. It ramped to more than that in the second and third quarter. My guess is 20% to 25% for the full year would be where it ended up. But I'm guessing, I don't have numbers in front of me.

[Mark Marcon, Robert W. Baird]

Okay. But regardless, you've gone through the calculation, and it's -- for the full year, you would expect it ultimately will end up being up for the full year of 2022. And then that's notwithstanding the fact that some of the jobless claims work is going to be tailing off, which means that the other parts are growing faster, which means that conceivably, we should see growth even in 2023, for the public sector area as well.

[Keith Waddell, President & CEO]

We believe public sector will be a nice, permanent additional revenue source for Protiviti 2023 and beyond. And we absolutely believe for the full year 2022, Protiviti will grow nicely notwithstanding for 2022. The public sector component will grow somewhat more slowly.

I'm now being told that for the full year 2021, Public sector was 19% of the total.

[Mark Marcon, Robert W. Baird]

Perfect. Thank you.

[Operator]

There are no further questions in queue at this time. I'll turn the call back over to Keith for closing remarks.

[Keith Waddell, President & CEO]

Okay. Thanks, everybody, for joining today. Thank you very much.

[Operator]

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