Robert Half International Inc. (NYSE: RHI) Q3 2022 earnings call dated Oct. 20, 2022
Corporate Participants:
M. Keith Waddell — Vice Chairman, President and Chief Executive Officer
Michael C. Buckley — Executive Vice President, Chief Financial Officer
Analysts:
Mark Marcon — Robert W. Baird & Company — Analyst
Andrew Steinerman — JPMorgan — Analyst
Jasper Bibb — Truist Securities — Analyst
Kevin McVeigh — Credit Suisse — Analyst
George Tong — Goldman Sachs — Analyst
Heather Balsky — BofA Global Research — Analyst
Ronan Kennedy — Barclays — Analyst
Jeff Silber — BMO Capital Markets — Analyst
Presentation:
Operator
Hello, and welcome to the Robert Half Third Quarter 2022 Conference Call. Today’s conference call is being recorded. [Operator Instructions] 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.
M. Keith Waddell — Vice Chairman, President and Chief Executive Officer
Hello, everyone. We appreciate your time today.
Before we get started, I would 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 these 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 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 each of our contract functional specializations includes intersegment revenues from services provided to Protiviti in connection with the company’s blended talent solutions and consulting operations. This is how we measure and manage these businesses internally. The combined amount of intersegment revenues with Protiviti is also separately disclosed. The supplemental schedules just mentioned also include a revenue schedule showing this information for 2020 through 2022. For your convenience, our prepared remarks for today’s call are available in the Investor Center of our website, roberthalf.com.
We’re pleased to report third quarter year-over-year revenue growth of 7%, 10% adjusted for currency, over and above the very strong growth of 44% in the same quarter last year. Permanent placement led the way, growing 17%, 20% adjusted for currency, and Protiviti revenues reached new all-time highs. Our results are a testament to the strength of our global teams as they demonstrate their agility and persistence, which makes our success possible.
Companywide revenues were $1.833 billion in the third quarter of 2022, up 7% from last year’s third quarter on a reported basis, and up 10% on an as-adjusted basis. Net income per share in the third quarter was $1.53, the same as in the third quarter a year ago.
Cash flow from operations during the quarter was $179 million. In September, we distributed a $0.43 per share cash dividend to our shareholders of record, for a total cash outlay of $46 million. Our per share dividend has grown 11.4% annually since inception in 2004. The September ’22 dividend was 13.2% higher than in 2021. We also acquired approximately 1.1 million Robert Half shares during the quarter for $86 million. We have 4.7 million shares available for repurchase under our Board-approved stock repurchase plan. Return on invested capital for the company was 45% in the third quarter.
Now, I’ll turn the call over to our CFO, Mike Buckley.
Michael C. Buckley — Executive Vice President, Chief Financial Officer
Thank you, Keith, and hello, everyone. As Keith noted, global revenues were $1.833 billion in the third quarter. On an as-adjusted basis, third quarter talent solutions revenues were up 12% year-over-year.
US talent solutions revenues were $1.049 billion, up 13% from the prior year. Non-US talent solutions revenues were $273 million, up 10% year-over-year on an as-adjusted basis. We have 316 talent solutions locations worldwide, including 85 locations in 17 countries outside the United States.
In the third quarter, there were 64.3 billing days compared to 64.4 billing days in the same quarter one year ago. The current fourth quarter has 61.2 billing days compared to 61.7 billing days one year ago. For 2023, billing days by quarter will be 63.3, 63.4, 63.1 and 61.1 for a total of 250.9.
Currency exchange rate movements during the third quarter had the effect of decreasing reported year-over-year total revenues by $45 million, $32 million for talent solutions and $13 million for Protiviti. This negatively impacted our year-over-year overall revenue growth rate by 2.6 percentage points, 2.7 percentage points for talent solutions and 2.6 percentage points for Protiviti.
Contract talent solutions bill rates for the quarter increased 9% compared to one year ago, adjusted for changes in mix of revenues by functional specialization, currency and country. This rate for the second quarter was 8.2%.
Now let’s take a closer look at results for Protiviti. Global revenues in the third quarter were $511 million, $416 million of that is from business within the United States and $95 million is from operations outside of the United States. On an as-adjusted basis, global third quarter Protiviti revenues were up 5% versus the year ago period, with US Protiviti revenues up 4%. Non-US revenues were up 7% on an as-adjusted basis. Protiviti and its independently owned member firms serve clients through a network of 89 locations in 29 countries.
Companywide third quarter public sector revenues were $89 million, of which $63 million were reported by Protiviti and the balance reported by talent solutions. Currency exchange rates had the effect of decreasing year-over-year public sector revenues by approximately $5 million. We expect fourth quarter 2022 public sector revenues to be $80 million to $90 million, which will result in full year revenues being down approximately 6%, or 2% adjusted for currency.
Turning now to gross margin: In contract talent solutions, third quarter gross margin was 39.4% of applicable revenues compared to 40% of applicable revenues in the third quarter one year ago. Conversion revenues, or contract-to-hire, were 4.1% of revenues in the quarter. Our permanent placement revenues in the third quarter were 13.8% of consolidated talent solutions revenues versus 12.9% of consolidated talent solutions revenues in the same quarter one year ago. When combined with contract talent solutions gross margin, overall talent solutions gross margin was 47.8% compared to 47.7% of applicable revenues in the third quarter one year ago.
For Protiviti, gross margin was 30.5% of Protiviti revenues compared to 29.5% of Protiviti revenues one year ago. Adjusted for deferred compensation-related classification impacts, gross margin for Protiviti was 30% for the quarter just ended compared to 29.4% one year ago.
Moving on to SG&A. Enterprise SG&A costs were 29.9% of global revenues in the third quarter compared to 28.9% in the same quarter one year ago. Adjusted for deferred compensation-related classification impacts, enterprise SG&A costs were 30.6% for the quarter just ended compared to 29% one year ago.
Talent solutions SG&A costs were 35.3% of talent solutions revenues in the third quarter versus 35.9% in the third quarter of 2021. Adjusted for deferred compensation-related classification impacts, talent solutions SG&A were 36.3% 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 0.4 percentage points to the quarter’s adjusted SG&A ratio.
Third quarter SG&A costs for Protiviti were 16% of Protiviti revenues compared to 12.1% of revenues in the year-ago period as operating expenditures returned to more normal levels.
Operating income for the quarter was $239 million. Adjusted for deferred compensation-related classification impacts, combined segment income was $224 million in the third quarter. Combined segment margin was 12.2%. Third quarter segment income from our talent solutions divisions was $152 million, with a segment margin of 11.5%. Segment income for Protiviti in the third quarter was $72 million, with a segment margin of 14%.
Our third quarter tax rate was 26%, up from 25% in the same quarter one year ago. At the end of the third quarter, accounts receivable were $1.101 billion, and implied days sales outstanding, or DSO, was 54 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 up 6% versus the prior year compared to an 11% increase for the full quarter. Revenues for the first week of October were up 5% compared to the same period one year ago.
Permanent placement revenues in September were up 17% versus September of 2021. This compares to a 20% increase for the full quarter. For the first two weeks of October, permanent placement revenues were up 2% compared to the same period in 2021. 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 them.
With that in mind, we offer the following fourth quarter guidance: revenues, $1.695 billion to $1.775 billion; income per share: $1.31 to $1.41. Midpoint revenues of $1.735 billion are 1.7% higher than the same period in 2021 on an as-adjusted basis. The major financial assumptions underlying the midpoint of these estimates are as follows:
Revenue growth, year-over-year, on an as-adjusted basis: talent solutions, down 1% to up 4%; Protiviti, up 1% to up 4%; overall, flat to up 4%. Gross margin percentages: contract talent, 38% to 40%; Protiviti, 27% to 29%; overall, 41% to 43%. SG&A as% of revenues, excluding deferred compensation classification impacts: talent solutions, 36% to 38%; Protiviti, 14% to 16%; overall, 30% to 32%.
Segment income: for talent solutions, 10% to 12%; for Protiviti, 13% to 15%; and overall, 11% to 13%. Tax rate, 26% to 27%; and shares, 107 million to 108 million. Fourth quarter capital expenditures and capitalized cloud computing costs: $15 million to $20 million.
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.
M. Keith Waddell — Vice Chairman, President and Chief Executive Officer
Thank you, Mike. Global labor markets remain tight and clients continue to hire, albeit at a more conservative pace. Demand for talent remains high, notwithstanding the increasingly uncertain economic outlook, although the sales cycle has lengthened. Many clients are becoming more selective and requesting to see more candidates for their open positions. They are adding more steps to their hiring processes and prioritizing onsite or local hybrid candidates who take longer to hire.
At the same time, talent shortages persist. In the United States, job openings and quit rates remain at elevated levels although modestly off their highs. The unemployment rate stands at 3.5%, a 50-year low, while the rate for those with a college degree, more representative of our candidate base, is half that, at 1.8%. The National Federation of Independent Business, NFIB, recently reported that 89% of small business owners hiring or trying to hire had few or no qualified applicants, and 46% of all small business owners had job openings that could not be filled.
Many candidates continue to prefer remote and hybrid working models, a structural shift that’s expected to remain. Sourcing from this talent pool plays to our numerous strengths, including our global brand, office network, candidate database and advanced AI-driven technologies. Many times, clients’ very specialized needs are only available on a remote basis.
Protiviti demand remains very strong, particularly in the internal audit and regulatory risk and compliance practices. Protiviti has successfully overcome the combined headwinds of much larger comparables, 55% growth in the same quarter a year ago, the wind-down of a very large financial services project and a shift in public sector client demand over to talent solutions, and still achieved record revenues for the quarter. Protiviti’s pipeline remains robust and is little impacted by current economic conditions.
While short-term talent solutions results may be impacted by a more uncertain macroeconomic environment, we remain optimistic about our overall outlook. We’ve successfully navigated many economic cycles, each time achieving higher peaks. Our recovery to new peaks from the recent COVID-19 downturn was the fastest in our history. We also benefit from Protiviti’s resiliency, which stems from its diversified solutions offerings that are much less tied to the economic cycle. This is demonstrated by Protiviti’s ability to grow through the last downturn. We’ve also demonstrated our ability to be nimble with our cost structure, aided by our AI-driven technology advancements, which continue.
As always, our success is driven by the strength of our people, our technology, our brand and our business model. We remain steadfast in our focus on our purpose: to connect people to meaningful work and to provide clients with the talent and subject matter expertise they need to confidently compete and grow.
Finally, we’re proud to have received several new accolades this quarter. We were named by FORTUNE as one of the Best Workplaces for Women and by Forbes as one of the World’s Best Employers. The Robert Half Mobile App has been recognized for its excellence in innovation receiving five awards in recent months, including a Gold Stevie. None of this recognition would be possible without the dedication and commitment of our employees across the globe.
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 for additional questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] First question comes from the line of Mark Marcon with Robert W. Baird & Company.
Mark Marcon — Robert W. Baird & Company — Analyst
Good afternoon, Keith and Mike. Have a couple of questions. One is on talent solutions and one is on Protiviti. With regards to talent solutions, can you talk a little bit about the admin and customer support business and specifically some of the factors that may have impacted it during the current quarter and what we should read into that looking ahead?
M. Keith Waddell — Vice Chairman, President and Chief Executive Officer
Yeah. Sure. Admin and customer service has been most impacted by the public sector wind-down as it relates to unemployment claims processing. Also, they didn’t see quite a number of larger projects are related to open enrollment that they’ve seen in the past, so they have been disproportionately impacted relative to our other practice groups.
Mark Marcon — Robert W. Baird & Company — Analyst
Got it. And with regards to not as much open enrollment, was there an underlying reason for that?
M. Keith Waddell — Vice Chairman, President and Chief Executive Officer
Hard to know, and it’s also early days. You tend to get more of that in the fourth quarter than in the third. And in fact, internally we just opened our open enrollment period. And so, I wouldn’t overread that, but those are some of their larger projects typically. So, the journey [Technical Issues] for the fourth quarter.
Mark Marcon — Robert W. Baird & Company — Analyst
Okay. And then, with regards to Protiviti, I was wondering what — I’m assuming that the portion of the public sector work that fell off was also tied to the claims. I’m just wondering, as we think ahead, what — how much — how are you thinking about the public sector? You gave the guidance for the fourth quarter, but I’m thinking about for next year, just broadly speaking. And then, if you can talk a little bit about the exposure that Protiviti has to either M&A or IPOs obviously in with the cost of capital going up challenging environment, how much of a headwind could that end up being on a go-forward basis?
M. Keith Waddell — Vice Chairman, President and Chief Executive Officer
And so, let’s start generally and specifically. First of all, the impact of Protiviti’s reported growth rate from the public sector run-off and the large project wind-down is about 13 percentage points for the quarter. And as you look forward into how those two factors impacted growth rates, it will stay double-digit in the fourth quarter, 10% or 11%. But then starting next year in the first half of the year, that cuts in half to mid single-digits and the second half of the year wouldn’t exist at all. And so, for the full-year 2023, that drag essentially is a very small-single digit number. And so, the worst of that impact, the most impactful part of those two wind-downs, is behind them and the fourth quarter coming will be — should be the last time it has a double-digit impact on their growth rates.
On public sector, specifically — let me just make some general comments. Yeah, we’re pleased with how the public sector has played out. We’ve essentially replaced the one-off of this unemployment claims processing with other work, all built on new client relationships. Some of the new work is on the talent solutions side, some on the Protiviti side. Talent solutions helping these clients to deal with their talent shortages as well as elevated needs in education and housing. Protiviti has a very high win rate for new projects, project management, financial controls. Although the project size is somewhat smaller than expected, that pipeline continues to build.
So when you step back from this and take a two-year view, we now have a new industry group with new relationships producing about $400 million in revenue that largely didn’t exist for us three years ago. And we’d also say that since most of the work in public sector has been jointly performed by talent solutions and Protiviti, frankly it’s given our entire organization more confidence that we can win together. And we’re now approaching almost $600 million in revenue from joint engagements from this very unique business model that we have. And as I would say, we are one of one in this space.
So, our assessment of public sector two years in is that we’ve managed the runoff of unemployment claims very nicely. We now have a new industry group. We have further confirmed this go-to-market to gather strategy, so we feel good about public sector.
Then when you talk about IPO, M&A, it’s a small part, not a large part of what Protiviti does. Protiviti has the largest backlog they’ve ever had. Adjusted for these two factors that I just spoke of, their growth rates, their core growth rates remain quite high. So, we feel great about Protiviti.
Mark Marcon — Robert W. Baird & Company — Analyst
That’s terrific. And then, just to button one thing up on the large financial services project that wound down, is that completely done?
M. Keith Waddell — Vice Chairman, President and Chief Executive Officer
It’s not completely done. It’s close, but it’s not the only thing we do for that client. It’s a very, very, very large project we did at that client. We do other things for that client. And we hope, frankly, to build from where we are. But by and large, we’re down to a relatively small amount of revenue on that project.
Mark Marcon — Robert W. Baird & Company — Analyst
Great. Thank you.
Operator
Your next question comes from the line of Andrew Steinerman with JPMorgan.
Andrew Steinerman — JPMorgan — Analyst
Hi, Keith. I wanted to ask you about the talent solutions fourth quarter guide for revenues to be down 1% to up 4%. And obviously, I know when the company labels talent solutions, they’re talking about both contract and perm. But when I look at the trends that you talked about for early October, and contract was up 5% and perm was up 2%. And I put those together, it just seems like in the guide, you’ve built in some room for deceleration from the October trends. I was just wondering, did you do that for the sake of conservatism or just what other dynamic helped you frame the talent solutions fourth quarter revenue guide?
M. Keith Waddell — Vice Chairman, President and Chief Executive Officer
So, it’s clearly a — we’re simply being more conservative. We’ve discounted the field forecast that we get each quarter more than what we would traditionally discount their forecast. Clearly, the economic environment is becoming more uncertain. And given that uncertainty, we thought it’s prudent to be more conservative, but you’re very much correct in that our full quarter guide is pretty significantly less than our start, and there wouldn’t typically be that big a delta.
Andrew Steinerman — JPMorgan — Analyst
And then, if I could ask one more question about labor supply. I definitely heard your prepared comments. It seems like the labor supply for your addressable market hasn’t meaningfully changed. So, like kind of demand is more measured, but supply is still kind of persistently tight. Do you feel like that you might be looking at an outlook where kind of the talent shortages become a little less persistent and you might be able to source talent more easily?
M. Keith Waddell — Vice Chairman, President and Chief Executive Officer
I think that’s a fair assessment in that talent acquisition is still tight. I would say, it’s not quite as tight as it has been. Having said that, and relative to the conversation, we’re also seeing some reluctance of candidates from changing jobs, which is yet another indication that the candidate side is softening a bit.
Andrew Steinerman — JPMorgan — Analyst
That’s fair. Thank you.
Operator
Your next question comes from the line of Tobey Summer with Truist Securities.
Jasper Bibb — Truist Securities — Analyst
Hey, good afternoon. This is Jasper Bibb on for Tobey. My first question was just on Protiviti. On the last call, you mentioned working to accelerate hiring as the mix is getting a bit too heavy on contract resources. Could you just update us on those hiring efforts and where the full time versus contract mix stands today?
M. Keith Waddell — Vice Chairman, President and Chief Executive Officer
I’d say, they’re still very aggressively adding to headcount that compete well in the marketplace. They continue to win all kind of culture-related awards, which simply reinforces that and helps them with their recruiting. As to the mix, the mix is more tied to the nature of work. So, certain types of projects, public sector being a good example. 90% of that work was from contractors, only 10% Protiviti full-time employees. Whereas other engagements and the typical internal audit engagement, that mix might be more 15%, 20%, 25% of the total. So it’s very much is driven by the nature of the work. And Protiviti, for every one of its solution offerings, loves having access to the just-in-time resources they have access to by reason of being together with talent solutions.
Jasper Bibb — Truist Securities — Analyst
Thanks. And then, looking at the temp gross margin guidance, the midpoint would imply gross margins down from the third quarter. Are you seeing any kind of incremental pressure on contract bill pay spreads? Or would you say you’re taking kind of a similarly conservative approach as it sounds like it was the case on your revenue guidance?
M. Keith Waddell — Vice Chairman, President and Chief Executive Officer
We’re certainly not expecting any compression on spreads. Spreads are still good. They’re strong. We project they’ll stay strong. The fringes have creeped up a bit. We’ve had some more medical claims than we anticipated in the third quarter, and that impacts our full year estimates. So, it’s principally due to higher fringe rate than it is anything else. Conversions are also hanging in there nicely. So it’s more about fringes, which is related to probably things that correct themselves, i.e., these large medical claims which are unusual and certainly not expected to repeat into 2023.
Jasper Bibb — Truist Securities — Analyst
Appreciate the detail there. Thanks for taking the questions.
Operator
Your next question comes from the line of Kevin McVeigh with Credit Suisse.
Kevin McVeigh — Credit Suisse — Analyst
Great. Thanks so much. Just one point of clarification. The guidance looks pretty similar to what it is for Q4, but the EPS is about $0.15. Is that all tax? It looks like the tax rate is a little bit higher [Indecipherable] it looks like the revenue range and kind of margins are similar. So, is the delta there mostly taxed?
M. Keith Waddell — Vice Chairman, President and Chief Executive Officer
Well, you’ve got $0.06 of tax and exchange currency that make it different. Other than that, the margins are a little lighter, as we talked about. The gross margin on talent that we just talked about impacts that. The Protiviti margins year-on-year are still — it’s still less than they were a year ago because they’ve normalized their cost. And the fourth quarter is always a short quarter because of billing days. And so, you get a little bit of negative leverage because the fourth quarter is always a short quarter because of the holidays.
Kevin McVeigh — Credit Suisse — Analyst
Got it. And then, I think you mentioned in the prepared remarks that you saw some of the shift in Protiviti was to talent solutions. What drove that shift? Was it just kind of the scope of work that was more kind of tuned on what talent solution does as opposed to Protiviti?
M. Keith Waddell — Vice Chairman, President and Chief Executive Officer
Yes. It’s where — whereas a year ago, the need of a given local government related to processing unemployment claims. Now it’s more they’re understaffed and they need additional staff, which is right in the wheelhouse of talent solutions. Again — but for that relationship, talent solutions wouldn’t be at the table. So, therefore, we’ve nicely leveraged what we started as unemployment claims processing and transition that into something much more broad that benefits talent solutions. Enterprise-wide, we’re very pleased that we’re essentially going to be flat with a year ago, down 2% adjusted for currency. So we feel good about this whole transformation of being very unemployment claims processing-centric to being much broader.
Kevin McVeigh — Credit Suisse — Analyst
Understood. Thank you very much.
Operator
Your next question comes from the line of George Tong with Goldman Sachs.
George Tong — Goldman Sachs — Analyst
Hi, thanks. Good afternoon. As you look across talent solutions and Protiviti in the third quarter, what factors most surprised you to the upside and downside relative to your internal expectations?
M. Keith Waddell — Vice Chairman, President and Chief Executive Officer
I’d say, to the upside, Europe was not as impacted as the headlines would — we would have expected, both in the UK and in Germany for that matter. And so, I’d say, that was a positive surprise. On the downside, our small business clients got a little more conservative in their hiring than we expected. Given the barrage of negative news as to inflation, as to interest rates, as to economic forecast, that all impacts confidence, psychology, sentiment.
Remember that our SMB clients are more nimble managing their costs than larger companies are. And so, given that more nimbleness, they adjusted more quickly than bigger companies have, and they adjusted their hiring pace a little more than what we expected. I’d say, as soon as I say that, I would also remind everyone that just like they’re more nimble on the downside, they’re also more nimble on the upside. And we demonstrated that most recently during COVID where our recovery was the fastest in our history.
And I’d further say that clients don’t quickly forget about a tight labor market. And as soon as things start to get better, they start to add staff and they do so quickly, which we just saw our peak-to-peak growth we’ve experienced and achieved in every cycle we’ve been a part of in the last 35 years. So we feel good about where we’re positioned. We love our SMB client base, but they are more nimble. But it’s a balanced more nimble, and let’s keep that in mind.
George Tong — Goldman Sachs — Analyst
Got it. That’s helpful. Can you discuss how your internal hiring intentions for recruiters and sales have evolved? And what factors are influencing your outlook for internal hiring?
M. Keith Waddell — Vice Chairman, President and Chief Executive Officer
I’d say, we’re going to manage our headcount on a very targeted basis both on the upside and the downside. This is the same way we manage headcount forever. We’ll continue to hire where we’re growing, and we’ll adjust appropriately where we’ll not. Also consistent with the past, we will not make major reductions in heads ahead of near-term market conditions, which would make our results even more negative and self-fulfilling. There’s too much uncertainty about the timing and the extent of any downturn to make that kind of call, but we look at current conditions, we look at the environment, we look at forecast, but we largely attempt to balance our cost structure against our revenues. We’ve been more nimble with our cost structure in the last three to five years than we have in our history.
If you look during 2020, our margins bought — I think for the year, they were at over 8%. We did not have that much negative leverage in SG&A, meaning we managed our headcount well. So, I would argue just as our clients are very nimble in managing their businesses, we’ve also made ourselves very nimble as we manage our costs and our headcount and our business. Very targeted. We have data down to the individual. We know how everybody performs relative to the standard that’s also adjusted based on their tenure. So we very objectively manage our headcount.
George Tong — Goldman Sachs — Analyst
Great. Thank you.
Operator
Our next question comes from the line of Heather Balsky with BofA Global Research.
Heather Balsky — BofA Global Research — Analyst
Hi. Thank you for taking the question. I was curious — you’ve been investing this year into your businesses. And in light of what you’re hearing from your customers right now, I know you talked about ability to manage costs. I’m curious how you’re thinking about your investment spend into your businesses and thoughts around cost control as well, especially into next year? Thanks.
M. Keith Waddell — Vice Chairman, President and Chief Executive Officer
And so, I just talked about headcount, which is our largest cost. We will be nimble. We will adjust based on what’s happening in the top line. We will not get way ahead of it, as I just talked about. Our other major investment is in innovation. I got a couple of comments there. So we just had our first full quarter where we added a new additional component to our AI, and it leverages the learnings of our recruiters with respect to a given candidate. Did we vet them? How far? Did we place them? How do they perform? By definition, this is very proprietary to us. So using this updated model, we had many branches rely almost exclusively on technology to identify candidates.
It’s the most successful pilot we’ve ever had metrics across many spreadsheets that we have improved meaningfully. Adoption rates for our AI are increasing rapidly in part because of the testimonials that have come from this. Essentially, we’ve totally transformed candidate discovery, candidate identification. It creates more capacity for our workforce.
So, more specifically to your question, we will continue to invest in AI and innovation because it’s paying off in a very meaningful way. We will continue to enhance client and candidates’ digital experiences as they interact with us. We will continue to make our candidate-driven matching AI better. And as I’ve also said before, we’re focused as well on client-facing AI, helping our internal staff better identify which clients, which prospects are most likely to react positively to their outreach.
So, headcount we talked about and it’s the same way we managed headcount forever. We’re more nimble than ever. Innovation, we’ll continue to invest in because we’re getting real payback from as recently as this quarter, especially this quarter.
Heather Balsky — BofA Global Research — Analyst
Thank you very much.
Operator
Your next question comes from the line of Manav Patnaik with Barclays. Please go ahead.
Ronan Kennedy — Barclays — Analyst
Hi. How are you? This is Ronan Kennedy on for Manav. May I just confirm — you spoke of some of the leading indicators you are seeing within SMB and the nimbleness there. I was wondering if you could elaborate on that and what other leading indicators you would see in addition to the selectivity and, say, the conservatism and hiring and what your visibility would be in seeing those indicators into a potential downturn.
M. Keith Waddell — Vice Chairman, President and Chief Executive Officer
Well, as to visibility, the nature of our business is we don’t have a lot of visibility, and clients use contract staff in part to have more flexibility with their cost structure. And so, we’ve never had visibility to any great extent, and we still don’t have visibility. We look at our weekly trends. We look at our anecdotal interactions with clients, and it’s a subjective judgmental assessment of where we think the business is headed. But as I said, because we can be so nimble with our cost structure, we don’t have to get way ahead of it. We can keep pace with it, and we’ll be just fine.
Ronan Kennedy — Barclays — Analyst
Okay. Thank you. And then, may I ask, what was the driver of the sequential decline in the administrative and customer support business line? I think on the call, you mentioned a lengthening sales cycle, but was there anything with regards to that skill set in particular that caused it to slow?
M. Keith Waddell — Vice Chairman, President and Chief Executive Officer
Well, admin, customer service, as we said earlier, it’s been disproportionately impacted by public sector, wind-down unemployment claims. And it also hasn’t had as many larger projects as in years past, many of which related to open enrollment. But open enrollment season is still very much open. So that book hasn’t been completely written yet.
Ronan Kennedy — Barclays — Analyst
Okay. Thank you.
Operator
Your next question comes from the line of Jeff Silber with BMO Capital Markets.
Jeff Silber — BMO Capital Markets — Analyst
Thanks so much. Just wanted to slip in one more question. If we just focus on the technology contract solutions segment or line of business, excuse me, I know that growth slowed from 2Q to 3Q. I know the comps on a year-over-year basis were tough versus 3Q last year. But was there anything else going on? I’m just wondering what you’re seeing within that segment.
M. Keith Waddell — Vice Chairman, President and Chief Executive Officer
Well, because the client base is SMB across all our talent solutions and practice groups, the trends aren’t that different. And as you pointed out, the change in the growth rate is entirely explained by the change in the year ago comps. And that’s just as true for technology as it is finance and accounting. So the differential between the two isn’t any different. And the client base is also largely SMB.
Jeff Silber — BMO Capital Markets — Analyst
And are you seeing — are any projects potentially ending earlier? Is there any slowdown just specific to what’s going on in the end market?
M. Keith Waddell — Vice Chairman, President and Chief Executive Officer
I’d say, the only distinction that’s been noted is that the gap between what candidates want, i.e., remote and what clients want many times on site seems to be the most acute in technology and got worse and not better during the quarter. It’s hard to quantify how much of the — how much impact that had, but it’s certainly a discussion point. But to me, the bigger point, it’s still SMB clients, change in growth rate explained entirely by change in comps.
Jeff Silber — BMO Capital Markets — Analyst
Okay. Fair enough. Thanks so much for the color, Keith.
Operator
Your next question comes from the line of Mark Marcon with Robert W. Baird & Company.
Mark Marcon — Robert W. Baird & Company — Analyst
Thanks for taking a couple of follow-up questions. What are the bill rate assumptions for Q4 and how are you thinking about bill rate inflation on a go-forward basis and wage rate inflation?
M. Keith Waddell — Vice Chairman, President and Chief Executive Officer
Well, you broke up. I think you said one of the bill rate assumptions. And I would say they’re not materially changed from what we’re currently seeing. But I’ll say this as well that we haven’t gotten much additional gross margin from the higher bill rates. They’ve essentially been a pass-through of higher pay rates. And to the extent wage inflation subsides somewhat, while it might hurt top line a bit and that you’ll pass through less, it shouldn’t have much impact on margin.
Mark Marcon — Robert W. Baird & Company — Analyst
Are you seeing any signs of wage inflation becoming more subdued?
M. Keith Waddell — Vice Chairman, President and Chief Executive Officer
Well, we’re certainly seeing signs of clients pushing back more on having to pay more, and it’s also a factor in why the pace of their hiring is less than what it was. They’re having to pay more. But my point is, it’s not a margin impact.
Mark Marcon — Robert W. Baird & Company — Analyst
Got it. And then, you’ve been through so many cycles. You probably ended up seeing this week that there was a survey published by The Wall Street Journal of economists who are basically expecting a shallow recession in the first half of ’23. If it occurs, how do you think — for investors who aren’t as familiar with you and your history, how do you think RHI is going to behave differently during this downturn relative to prior downturns? And then what are you most excited about for the next up cycle?
M. Keith Waddell — Vice Chairman, President and Chief Executive Officer
So, I think the first point I’d make is, you’re right, we have been around a while, 35 years for me. Happy to report in every cycle, we’ve grown peak-to-peak. And kind of interestingly, in the dot-com cycle, we CAGR-ed peak-to-peak in the 7% a year range. In the COVID cycle, we CAGR-ed 7% again peak-to-peak. The financial crisis was about half of that, but that lasted longer. It was more directed closer to our wheelhouse. But point one is, we grow peak-to-peak.
Point two is, we’ve got the most nimble cost structure we’ve ever had, and we just proved that less than two years ago. Point three, we now have Protiviti. It’s much less tied to the economic cycle. It has a diversified suite of solution offerings. Its current pipeline is the best they’ve ever had. Protiviti’s revenue not only did not decline, they actually grew 12% 2020 versus 2019. Protiviti is now a third of our consolidated revenue and earnings. Said differently, Protiviti is half the size of talent solutions, and it has significant more resiliency than talent solutions as described by the nature of its business. So there’s a huge difference between this cycle and cycles past, and that we now have something half as large as talent solutions that’s quite resilient.
Mark Marcon — Robert W. Baird & Company — Analyst
That’s great. Thank you.
M. Keith Waddell — Vice Chairman, President and Chief Executive Officer
Okay. I think that was our last question. So we appreciate everybody’s time, and thank you very much.
Operator
[Operator Closing Remarks]