Robert Half Inc.

Hello, and welcome to the Robert Half Third Quarter 2025 Conference Call. Today's conference call is being recorded. If you'd like to ask a question during the Q&A portion of the call, please press star and the number one on your telephone keypad. Our hosts for today's call are Mr. Keith Waddell, President and Chief Executive Officer of Robert Half, and Mr. Michael Buckley, Chief Financial Officer. Mr. Waddell, you may begin.

Hello, everyone. We appreciate your time today. Before we get started, I'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 administrative expenses, and adjusted operating income by combining the gains and losses on investments held to fund the company Companies 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 a reported net income. 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 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. That income per share in the third quarter was 43 cents compared to 64 cents 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 in 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 is 13% in the third quarter. Now I'll turn the call over to our CFO, Mike Buckley.

Thank you, Keith, and hello, everyone. As Keith noted, global revenues were $1.354 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-US 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 had 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 Protivity. 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 Protivity. 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 productivity revenues were down 3% versus the year ago period. U.S. productivity revenues were down 6%, while non-U.S. productivity revenues were up 8% compared to one year ago. Fructivity 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 productivity, gross margin was 20.9% of productivity revenues in the third quarter and 24.6% in the third quarter one year ago. Adjusted gross margin for productivity 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 costs for productivity were 15.5% of productivity 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 percent of revenue. Third quarter adjusted operating income from our talent solutions divisions was $24 million, or 2.8 percent of revenue. Adjusted operating income for productivity in the third quarter was $37 million, or 7.5 percent 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 non-deductible expenses related to lower pre-tax income. At the end of the third quarter, accounts receivable were $838 million, and implied day 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. Viewer 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%, productivity Flat to down 4%. Overall, down 5% to 9%. Adjusted gross margin percentages. Contract talent, 38% to 40%. Productivity, 22% to 24%. Overall, 36% to 39%. Adjusted SG&A as a percentage of revenues. Talent solutions. 44 to 46%. Creativity, 15 to 17%. Overall, 33 to 36%. Adjusted operating income as a percentage of revenues. Talent solutions, flat to 2%. Creativity, 6 to 8%. Overall, 2 to 5%. Tax rate, 30 to 34%. Shares outstanding, 99 to 100 million. The 2025 capital expenditures and capitalized cloud computing costs, 75 million to 90 million, with 15 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, Protivity'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, productivity employees receive annual compensation adjustments effective January 1st, 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 4 cents per share. All estimates we provide on this call are subject to the risks mentioned in today's press release and in our SEC filings. Now I'll turn the call back over to Keith.

Thank you, Mike. 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're 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, thin-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, for TIVITIES, 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 sell cycles and smaller size new engagements. That said, productivity'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 and divisions remains a vital contributor to productivity 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 would be happy to answer your questions. Please ask just one question and a single follow-up if needed. If there's time, We'll come back to you for additional questions.

Thank you. If you would like to signal with questions, please press star 1 on your touchtone telephone. If you would like to withdraw your question, please press star 2. If you're joining us today using a speakerphone, please make sure your mute function is turned off before pressing the corresponding digits. Again, that is star 1. If you would like to signal with questions, star 1. And the first question will come from Mark Marcon with Baird.

Good afternoon, and thanks for taking my questions. I want to start with Protivity. Keith, during the last call last quarter, you mentioned that the pipeline was building. And I was wondering, you know, when we take a look at the fourth quarter guide for Protivity, you know, to what extent did you see some of those projects you know, 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 productivity 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?

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 productivity full-time employees to projects that were otherwise to be staffed by contractors and understand that the bill rate for contractors is about a third of of what it is for the average full-time staff. And so there's some margin compression by that reallocation of resources, which is being done to keep as many productivity full-time people deployed and employed as possible. And 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 productivity and talent solutions, for that matter, as we did 90 days ago.

That's great. Keith, I hesitate to ask this, you know, on the call, but you probably wouldn't answer it if I asked offline, so it's got to ask online. You know, there's been lots of, you know, chatter among investors about the sustainability aspect of the dividend. And I was wondering, I know it's a board decision, but I'm wondering if you can comment with regards to the commitment to the dividend. And, you know, it sounds like sequentially, you know, we may start seeing some improvement with regards to the revenue trends. But if the trend that's been in place for a while continues, what sort of leverage do you have in order to, you Is that something that is not all that important?

Well, the dividend is very important, and we remain very committed to it. I would say that the second and third quarters and then at 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.

That's just how it is. Appreciate the answer. Thank you.

And the next question will come from Andrew Steinerman with J.P. Morgan.

Hi, Keith. I'm going to ask you to use an adjective when describing the fourth quarter revenue guide versus the third quarter. You know, 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, you know, 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?

We would describe the guide as conservative. And 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 one and a half to two 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 personal. a normal seasonal trend that we're seeing, given that we didn't see that normal seasonal trend in the last three years.

Yep, that's well said.

Thank you, Keith. And the next question will come from Manav Patnaik with Barclays.

Hi, this is Ronan Kennedy. I'm from Manav. Thank you for taking my questions. Can you please confirm the margin driver dynamics and the puts and takes to the guided 4Q margins, you know, the role of mix, conversion, wage rate, bill price, spreads, and anything to call out from a segment-specific standpoint, please?

Well, we first talked about same-day sequential having a small amount of growth. That said, remember, the fourth quarter is a short quarter. We talk about same day, but the facts are there are three fewer days sequentially. And so given those three fewer days, you're going to lever your fixed cost less, which for productivity means gross margin because their staff is upstairs, and for talent solutions is SG&A because most of their costs are downstairs. And so, again, kind of walking through the puts and takes, from a gross margin standpoint, we see flat sequentially in talent solutions. And I would point out that notwithstanding this staffing industry downturn the last three years, our gross margins have held up remarkably. And we would note that that reinforces, because it's a proxy for the value added, our client C. And so our gross margins have performed wonderfully, and we expect that to continue starting with the fourth quarter. Productivity again. because most of their costs are upstairs in cost of sales, the shorter quarter impacts them there. And so at midpoint, productivity's gross margins are down 20-ish basis points, and that's actually better than a year ago when in the fourth quarter their gross margins were down 70 basis points. I talked about SG&A. It's a shorter quarter. You get some negative leverage from that. And so when you put all those pieces together, Operating income fourth quarter down 1.3 percentage points sequentially. We looked at a 10-year, the last 10 years, check out COVID, and for 10 of 10 of the last 10 years, sequentially our operating margins have been down on average by one point. And so we're right there. I would argue the progression from Q3 to Q4 with our guidance is very normal. very non-remarkable if you look at that same trend for the last 10 years. And as I said earlier, relative to 98 days ago, we feel better as we sit here today.

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

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. You know, 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 corridor. Thank you. Appreciate it. And your next question will come from Stephanie Moore with Jefferies.

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

If you look at productivity gross margin compression over the last couple of years, we would comment that one, The cumulative inflation that's impacted their staff cost has been meaningful. And in the competitive kind of big four consulting market, there's been challenges with passing all of that through. I'd say further productivity is very committed to their staff. They're doing everything they can to keep as many as they can. and that has impacted utilization a bit. And further, as I did say earlier, to help the utilization, they're willing to underutilize some of their full-time staff by putting them in contractor roles to make that happen. I'd say further, if you look at the nature of the projects over the last particularly 12 months, you've got a lower mix of very large, very efficient, high margin projects that have been replaced by smaller, shorter duration, i.e., lower margin projects. So all of those have resulted in gross margin compression. As we look to the future and their opportunity, you know, forever and ever and ever, we've said we're committed with Pertivity. Pertivity is committed to double-digit operating margins. They've certainly had that in the past. They've not in the last couple of years. They do expect improvements in their operating margins in 2026 and beyond. That's going to come in part through The nature of their projects returning more to the historical norm, that's going to be to even more diligent management of their staff resources up and down the pyramid, meaning at the highest levels of managing directors all the way to the lowest levels of staff. And so, productivity is very committed to getting their gross margins back to double digits. I mean, there have been periods in history where they've been much higher than that, but what we've committed to for a long time is productivity is a double-digit operating margin business, and we clearly see a line of sight to that sooner rather than later. It's not going to happen overnight, but we definitely expect higher productivity gross margins and therefore operating margins Thank you.

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

Hi, good afternoon. Thanks for taking my questions. Just wanted to start maybe by kind of thinking about your longer-term operating margin opportunity. You know, 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?

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 to a 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 re-lever 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 number one 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 GenAI 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 rank ordered. And so the combination of all of those things, together with productivity, 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 potential opportunity and the possibility to actually have higher operating margins over the next cycle.

Thanks, Keith. That's helpful. And then 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?

So size, so federal government is less than half of 1% of our revenue. We've seen no meaningful impact whatsoever from the shutdown so far and frankly don't expect one to be. If you add state and local to federal, I think we're around 4% of revenue to size that. And so all forms of government together are a little less than mid-single digit, and the federal less than half of 1%.

Okay, that is helpful. Thanks, Keith.

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

Hi, thanks. Good afternoon. You mentioned weekly trends and 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?

Well, if you take September, early October, there's about between a 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.

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?

Well, you know, there are views all over the 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 were 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 productivity 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 of 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 lens, the gains are modest, if at all, so far. We're not AI doomers. We ourselves use it, nor are we AI boomers anymore. And I'd say, you know, 50% of 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.

Very helpful. Thank you. And the next question will come from Kevin McVeigh with UBS. Great.

Thank you very much. And the helpful commentary on the Q1, you know, if you look at the seasonal sequential kind of trends from an EPS perspective, you know, it's averaged like 27 cents, I think, sequentially from Q4 to Q1. Is that a fair way to think about, you know, dimensionalizing the start to 26? Or would you expect less leverage just given... where kind of the base earnings are in Q4, you know, just because you did talk about Q1 a little bit. And, you know, I know you typically don't go out two quarters, but just to try to get a sense of, you know, framing the Q1 as we think about 26 is where I want to start.

Well, sequentially, there's a meaningful impact, which is why we called it out. And so to have sequential impacts in the, you know, 2020s cents per share impact, that's not unusual. And 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 understand that that's what's normal based on history. Q1 is the low point. because of productivity's seasonal circumstances that we described in our remarks.

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, two, three years, you know, was that adjustments from COVID or just, you know, the pressure you're seeing, and I'm not saying Robert has specific, but across the temp industry.

Right. Kevin, I'd say this. We did, with our data science group, we did a deep dive looking back for the last three years. We analyzed the results from our roles that are vulnerable based on the World Economic Forum, which are the customer service, the coders, the... the lower level operational level positions, and we looked at that in very granular detail and found that it performed no differently than the rest. Further, NFIB did their own study, and 98% of their constituents said AI had had no impact on their number of employees. And now you look at the Stanford, Harvard, Yale, and basically say the extent there's been an impact, it's on early career entry-level people. Well, guess what? That's not our business. Our clients won't pay us to get for them early career entry-level people because they can do that themselves. They don't need us for that. And so to the extent that's where there's an impact has been, it's easier to understand or it certainly confirms our own internal studies that there's no impact from that. And so you then say, well, okay, well, then why has the industry been down for three years? And that's where I come back to, let's talk about churn. Let's look at jolts. In October of 22, there were 6 million people hired and there were 4 million people that quit. You roll that forward to August of 25, there were 5 million hires in the United States and there were 3 million quits. And that's a huge difference. There's a lot less churn. That churn plus the job growth that has taken place in the United States have been concentrated in government, clinical health care, and leisure and hospitality. And those are not big consumers of contract temporary help for the industry and particularly for Robert Half. And so I feel about as confident as I feel with anything that AI has not contributed to what has happened so far, so far, either for the industry or for Robert Half. And instead, it's about clients, as they focused on their cumulative inflation issue, as they worry about all of these forecasts of recession, they become more cautious and juxtapose against they want to keep their full-time staff What's their first lever to control their cost? Fewer contractors. So the industry now is in year three of companies trying to keep, retain their full-time staff, control their cost, and it's been primarily at the expense of their contractor usage.

I think all those dots connect. But you don't need AI as an impact to connect them.

It's less churn. It's narrow growth, not that applicable to the industry and or Robert Half.

Very helpful. Thank you.

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

Thanks so much. 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?

And so it's actually very simple. We look at our free cash flow after we've taken care of our business, including capital expenditures, the small kind of tuck-in acquisitions that we've done a few of, particularly with Pertivity. So we start with free cash flow. We say, first step one, we'd like to grow our dividend. That's the first call on that free cash flow. And the residual, what's left, has been for repurchases. And we've done that for 20, 25 years uninterrupted. And that's still where we are. But what that means is with today's free cash flow, The dividend is taking most of that, leaving little for repurchases, which is unfortunate at these prices, and that hurts. That said, we've never believed the nature of our business as such that we ought to lever up. Instead, we've had a very conservative fortress balance sheet, and we sleep well with that.

Okay, that's helpful. If I could just ask a couple of numbers questions. I know you usually put this in your queue, 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? Thanks.

So, Bill, so the When you ask for rates, are you talking kind of gap, not adjusted to normalize for all the differences we talked about? We talked about our billing rate already as being up 3.7%. Okay, that's fine.

What about the average hourly work? Again, the number that you report in your queue.

Don't have that.

The number of hours worked.

Right, don't have that in front of me. Clearly, we'll be in the 10-2 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.

Okay, fantastic.

Thanks so much. Very good.

And the next question comes from Kartik Mehta with North Coast Research.

Hey, good evening, Keith and Mike. Keith, I know you've talked a lot about productivity 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. You know, I don't know if you look at capacity, how you look at it, but just for a near term, How would you look at incremental margins for that business?

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 of 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, you know, we're not going to get back to double digit overnight. Not going to get back to double digit more than likely in 2026.

But we ought to make substantial progress toward that. And you've got to start somewhere.

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?

As I said earlier, it hurts not to buy more stock at current prices. It hurts. I mean, trust me, it hurts. That said, we're committed to our dividend, and we will remain committed to our dividend, and therefore there's a smaller residual cost starting with our free cash flow, left for repurchases. So we've always committed to return our free cash flow to shareholders. We continue to do that. The mix of dividends repurchases is heavily weighted toward dividends, given the historical compounding since we started paying the dividends. I think it was in 2004. So I get it. Trust me. I feel your pain. But as I said earlier as well, we don't think the nature of this business is such that you ought to lever it up.

Fair enough. Thank you very much for the time.

And the next question will come from Toby Summer with Truist Securities.

Hi, this is Henry on for Toby. Thanks for taking my question. To start, just looking at productivity, 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? Thank you.

Well, with productivity, for financial services to be 40% to 50% of productivity, it's hard for its trend to be that different from the overall trend. And we feel good about financial services. It performed well in the third quarter. Frankly, the strength was spread across its major solution areas, as we mentioned before.

But we're positive. We feel good. That's it.

This large project, small project issue we've been discussing, that's true, very much true in financial services. Some of these very, very large projects were in financial services, and we're backfilling with smaller projects in financial services. And so financial services is clearly impacted by that trend and And as I said, when financial services is as big a part of the whole as it is, it's kind of hard for the overall trend not to be the financial services trend. Understood.

Thank you for that color.

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

And it has been true for several quarters. Our enterprise clients have better results than do our S&B clients, and that's not unusual. And that's further evidenced by productivity's growth rates have been more resilient than our talent solution rates. But if you do split out talent solutions, Enterprise, and for us, enterprise means mid-cap, typically $4 to $6 billion in revenues for our mid-cap. That's been more resilient than has SMB, and that's always been the case. On the flip side, when things turn around, you'll see SMBs will outgrow and they'll react more quickly. And so more resilient is good at times like these. less resilient or more quickly impacted will be a good thing on the upside.

Thank you. Okay, so that was our last question.

We appreciate you joining us today. Thank you very much.

Thank you. 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.