Robert Half (RHI) Q3 Earnings Beat, Revenues Lag Marginally

Leading staffing firm Robert Half International Inc. (NYSE:RHI) reported better-than-expected third-quarter 2016 earnings. However, its revenues lagged the Zacks Consensus Estimate marginally, possibly due to an uncertain macro-economic environment and market volatility.

The company’s third-quarter 2016 earnings of 71 cents per share beat the Zacks Consensus Estimate of 70 cents by 1.4%, and were within the guided range of 68–74 cents. Earnings, however, declined 2.7% from the prior-year quarter adjusted earnings per share of 73 cents. In fact, this was the first time that earnings declined in the last 25 quarters.

Despite higher demand for services provided by skilled professionals and improving international operations, earnings growth has been declining due to the company’s clients taking longer to make hiring decisions. Also, we note that the U.S. economy added fewer jobs in September than expected. Unemployment levels in the professional fields also remained much lower than the overall U.S. rate, adding to the concerns. Shrinking margins are further responsible for the earnings decline.

Robert Half's total revenue grew 2.3% year over year to $1.339 billion, driven by broad-based revenue gains and higher demand for its professional staffing and consulting services, particularly related to accounting and finance. Revenue growth was also fueled by strong results from Protiviti. The company’s international operations too posted strong results.

Revenues marginally lagged the Zacks Consensus Estimate of $1.346 billion, but were close to the lower end of the guided range of $1.335–$1.395 billion. On a constant currency basis, revenues grew 2.4%.

Though revenues increased on a year-over-year basis, the rate of growth declined sequentially, possibly due to significant currency headwinds.

Gross margin contracted 60 basis points (bps) to 41.3% in the third quarter. Operating margin decreased 120 bps to 10.9% in the quarter due to lower gross margin and lower margin at Protiviti.

Segment Details

Based on the nature of services, the company has three reportable operating segments namely, Temporary and Consultant Staffing, Permanent Placement Staffing and Risk Consulting and Internal Audit Services.

Revenues from Temporary and Consultant Staffing and Permanent Placement Staffing come under the global staffing division, while Risk Consulting and Internal Audit Services are reported under the Protiviti division.

Global Staffing Division: Global Staffing revenues increased just 1% year over year. While international revenues grew 5.3%, U.S. revenues declined 0.1% from the prior-year quarter. Currency also had a negative impact of 0.3% during the quarter. On a constant currency basis, global staffing increased 1.5%.

Protiviti: Protiviti revenues increased 7.4%, driven by 6.1% growth in U.S. revenues and 15.2% increase in international revenues. Currency had a negative impact of 0.2% during the quarter. On a constant currency basis, Protiviti revenues rose 7.8%.

Financial Update

Robert Half had cash and cash equivalents of $292.5 million at the end of the third quarter, compared with $238.7 million at the end of the second quarter. Capital expenditure was $20 million in the third quarter compared with $25 million in the second quarter.

During the reported quarter, the company repurchased 1.2 million shares for $46 million. There are approximately 7.5 million shares available for repurchase under the board approved stock repurchase plan. The company also paid a quarterly cash dividend of 22 cents per share on Sep 15, for a total cash outlay of $28 million.

Q4 Guidance

Robert Half issued its earnings and sales guidance for the fourth quarter of 2016. The company expects revenues in the range of $1.250–$1.310 billion for the fourth quarter, compared with the year-ago revenues of $1.30 billion on a reported basis. It expects earnings in the range of 60–66 cents per share, compared with the year-ago earnings of 71 cents. The Zacks Consensus Estimate for the fourth quarter stands higher at 70 cents.

Protiviti also has an impressive growth outlook due to a robust regulatory environment and increased need for stronger internal controls and data security measures. However, lower margins, especially at Protiviti, are expected to take a toll on Robert Half’s profits.

Zacks Rank

Robert Half carries a Zacks Rank #2 (Buy).

Another well-positioned staffing stock in the industry is ManpowerGroup Inc. (NYSE:MAN) , which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

ManpowerGroup has an average positive earnings surprise of 7.32% in the trailing four quarters with a long-term earnings growth rate of 10.07%.

Some other stocks from the broader consumer staples sector include The Kraft Heinz Company (NASDAQ:KHC) and McCormick & Company, Inc. (NYSE:MKC) .

While Kraft Heinz sports a Zacks Rank #1 and has a long-term earnings growth rate of 19.54%, McCormick, holding a Zacks Rank #2, has a long-term earnings growth rate of 9.00%.

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