Earnings Call Transcript
Korn Ferry (KFY)
Earnings Call Transcript - KFY Q4 2021
Operator, Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Korn Ferry Fourth Quarter Fiscal Year 2021 Conference Call. At this time, all participants are in listen-only mode. Following the prepared remarks, we will conduct a question-and-answer session. As a reminder, this conference is being recorded for replay purposes. We have also made available at the Investor Relations Section of our website at kornferry.com, a copy of the financial presentation that we will be reviewing with you today. Before I turn the call over to your host, Mr. Gary Burnison, let me first read a cautionary statement to investors. Certain statements made in the call today, such as those relating to future performance, plans and goals constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the company believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, investors are cautioned not to place undue reliance on such statements. Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties, which are beyond the company's control. Additional information concerning such risks and uncertainties can be found in the release relating to this presentation and in the periodic and other reports filed by the company with the SEC, including the company's soon to be filed annual report for fiscal year 2021. Also some of the comments today may reference non-GAAP financial measures such as constant currency amounts, EBITDA and adjusted EBITDA. Additional information concerning these measures, including reconciliations to the most direct comparable GAAP financial measure is contained in the financial presentation and earnings release relating to this call, both of which are posted in the Investor Relations section of the company's website at www.kornferry.com. With that, I'll turn the call over to Mr. Burnison. Please go ahead, Mr. Burnison.
Gary Burnison, CEO
Okay. Thank you, Brad. Good morning, good afternoon to everyone. Thank you for joining us. Now, what a difference a year makes. Last April was rather dark, I think for all of us, and May with the George Floyd tragedy was hopeless, and, boy, I'll tell you this — the company has rebounded tremendously, and in particular our colleagues have shown incredible resilience over the past year. I'm proud of our colleagues; I’m proud of our company, what we've accomplished and our performance amid the continuing echo of change in this post-pandemic world. We are the world's premier organizational consultancy. There is no question about that. It’s definitely working. We're meeting the key objectives that we discussed last quarter, which included diversifying our offerings, capitalizing on our leadership and relevant solutions, driving an integrated go-to-market strategy, advancing our position as a premier career destination and pursuing transformational opportunities at the intersection of talent and strategy, and all of this is translating to what I believe is outstanding performance. During the quarter, we generated about $555 million in fee revenue, an all-time high that was up 26% year-over-year. Our profitability was strong. We had an adjusted EBITDA margin of a little over 20% and adjusted EPS of $1.21. We've clearly accelerated through the turn, and it's a testament to the pivot we made and the agility of our colleagues over this past year. The diversity and relevance of our offerings and our ability to deliver our consulting services in a virtual world have helped clients achieve organizational opportunities and our company deliver strong financial results. In this new world, there is tangible opportunity for Korn Ferry. The center of gravity for today's workforce is shifting from a place of work to a location for collaboration. It's no longer about the where, it's all about the why and how work gets done differently. Almost every company on the planet is reimagining and will have to continue to reimagine its business from a strategy to its people to its culture. Quite simply, companies are rethinking their organizational structure, roles, and responsibilities. How they compensate, how they motivate, how they engage, how they develop their workforce, let alone the type of agile talent they hire, and how they hire that talent, and they're going to need to lead differently. Gone are the days of vertical leadership that focuses on driving results up the chain; today companies need more horizontal leadership. That's all about leading across the enterprise, and these changes align with Korn Ferry's businesses, whether it's M&A services, change management, virtual sales effectiveness, or customer experience services, Korn Ferry is poised to seize this opportunity. We've also used this time of change as an opportunity to reimagine our own business. In a post-pandemic world and beyond, we're delivering an integrated value chain, digitally enabled and delivered. To deliver this at scale, we're bringing everything together in a digital framework. All this makes our world-class IP even more relevant and unique. To fulfill our vision and position our company for long-term success, we remain relentlessly focused on meeting the evolving needs of our clients. Number one, we're driving an integrated solutions-based go-to-market approach through our marquee and regional accounts. That not only facilitates growth and enduring partnerships, but it's also key to more scalable and durable revenues. We have about 350 marquee and regional global accounts and they continue to demonstrate the power of this strategy. The accounts generated about $640 million in fee revenue during the year and they sustainably utilized all of our global capabilities even during challenging economic periods. You know, today the fight for talent is more profound than ever. The pandemic shakeout is driving a robust market for our talent acquisition expertise, capabilities, and approach, and we're helping companies find the right talent, fitting the right need from senior level executives, board members, to professional level talent. And looking at our Digital and Consulting businesses, we've been actively marrying our capabilities with today's megatrends. The result is larger projects with greater sustainability and more durable revenue. Right now, we're seeing high areas of demand in D&I and organizational transformation as well as core solutions such as assessment, pay and governance, and leadership and professional development. We indeed have a lot of opportunity in front of us. We've become a much different company with a broader and deeper mix of business. Importantly, we're translating the value we are creating for our clients and the returns for our shareholders. As part of our balanced capital allocation framework, I'm pleased to announce that our Board has approved a 20% increase in our quarterly dividend to $0.12 per share. Looking to the fiscal year ahead, I truly feel we have the right strategy with the right people at the right time to help our clients drive performance in this new world. With that, I will turn the call over to our CFO, Bob Rozek and Gregg Kvochak who is also on the call as well. Bob, it's over to you.
Bob Rozek, CFO
Great. Thanks, Gary, and good afternoon or good morning depending on where you are sitting. Our fourth quarter results continue to demonstrate the relevance and importance of our human capital solutions in the rapidly evolving business environment that we find ourselves in. It also validates our strategy and highlights the strength and durability of our business model. By all measures, the fourth quarter was the strongest quarter in our history with record revenue and profitability. Our new business in the fourth quarter was also a record and it actually accelerated throughout the quarter leaving us well positioned for growth in fiscal '22. Now, before I jump into the actual results for the quarter, I want to talk about a couple of proof points that we have shared with you in the past that really continued to demonstrate the success of our strategy. First, our overall business has demonstrated more resilience than at any other time in our history and just by way of example, in just three quarters from our COVID recession trough, we've achieved new all-time highs in new business revenue and profitability. In contrast, coming out of the great recession approximately 10 years ago, it took over 12 quarters for fee revenue to rebound past the prior pre-recession high. Our second marquee and regional account program that Gary talked about really continues to add value providing a steady, strong growing stream of fee revenue for our firm. For all of fiscal year '21, 35.3% of our consolidated fee revenue was generated from these accounts. Further, our year-over-year fee revenue on marquee and regional accounts was essentially flat, while the rest of the company was down about 9%. For new business, our marquee and regional accounts were actually up 11% year-over-year, while the rest of the company was flat. And finally, our success driving cross line of business referrals continues to grow. Just over three years ago cross line of business fee revenue referrals were approximately 15%. Today, fee revenue from cross line of business referral stands at almost 27% for all of fiscal '21 and almost 29% for the fourth quarter. Now, let's turn to some important highlights of our fourth quarter. As Gary mentioned, fee revenue in the fourth quarter was up $115 million year-over-year and $80 million sequentially, reaching an all-time high of $555 million. Growth continued to be broad-based with fee revenue improving sequentially for the third consecutive quarter in each of our lines of business. Recent growth trends for our flagship talent acquisition businesses have been particularly strong, consolidated fee revenue growth in the fourth quarter measured year-over-year was up 26% with Executive Search being up 20%, RPO and Pro Search up 46%, and Consulting up 27%, all reaching new all-time quarterly fee revenue highs. New business growth in the fourth quarter was also very strong with all business lines generating new business at levels higher than before the pandemic. Additionally, earnings and profitability were at record levels in the fourth quarter, adjusted EBITDA grew $16 million or 17% sequentially to $113 million with an adjusted EBITDA margin of over 20% for the second consecutive quarter. Our earnings and profitability continue to benefit from both higher consultant and execution staff productivity and lower G&A spend driven in part by virtual delivery processes. Our adjusted fully diluted earnings per share also reached a record level in the fourth quarter, improving to $1.21, which was up $0.26 or 27% sequentially and up $0.61 or 102% year-over-year. Now, it's important to note that the fourth quarter expenses included $13.5 million of non-recurring expense accruals. That's roughly 2.5 percentage points of margin related to our business recovery plan, as we decided to reimburse employees for the remaining portion of salaries that were forgoed during the year. Now, turning to new business, the month of March and April were the two best months of new business ever. On a consolidated basis, new business awards excluding RPO were up 48% year-over-year and up 16% sequentially. Measured on a sequential basis, new business growth in the fourth quarter also showed broad-based improvement led by our talent acquisition businesses with Executive Search up 29% and Professional Search up 18%. In addition, our Digital business was up 8% and Consulting was up 5%. RPO new business was also strong in the fourth quarter with an additional $115 million of new contracts. Our cash balance also improved, at the end of the fourth quarter, cash and marketable securities totaled $1.1 billion. Now, excluding amounts reserved for deferred compensation arrangements and for accrued bonuses, our investable cash balance at the end of the fourth quarter was approximately $642 million and that's up $108 million sequentially and up $110 million year-over-year. Now it continues to be our priority to invest back into our business to maximize future growth. Now this includes the hiring of additional fee earners. Over three quarters combined across all of our business lines, we have hired approximately 160 new consultant fee earners and that includes about 86 in the fourth quarter with the rest coming from quarters two and three. Additionally, as Gary mentioned, consistent with our balanced capital allocation framework, our Board has approved a 20% increase in our quarterly dividend to $0.12 per share and that's going to be payable on July 30 to shareholders of record on July 6, 2021. With that, I will turn the call over to Gregg to review our operating segments in more detail. Gregg?
Gregg Kvochak, Executive
Great, thanks Bob. Starting with KF Digital, global fee revenue for KF Digital was $80.5 million in the fourth quarter, which was up 16% year-over-year and up 6% sequentially. The subscription and licensing component of KF Digital fee revenue continues to improve. In the fourth quarter subscription and license fee revenue was $24 million, which was up over 14% year-over-year. Global new business for KF Digital in the fourth quarter reached $108 million, the second consecutive quarter of new business over $100 million. Additionally, for all of fiscal '21, new business tied to subscription and license services improved approximately 72%. Earnings and profitability also improved for KF Digital in the fourth quarter with adjusted EBITDA of $27.9 million and a 34.7% adjusted EBITDA margin. Now turning to Consulting, in the fourth quarter Consulting generated $153.6 million of fee revenue, which was up approximately $32.6 million or 27% year-over-year and up approximately $17.3 million or 13% sequentially. Fee revenue growth was broad-based across all solution areas and strongest regionally in North America. Consulting new business also improved in the fourth quarter, growing approximately 53% year-over-year and 5% sequentially. Additionally, new business tied to large engagements, those over $500,000 in value, was up approximately 56% in the fourth quarter and up approximately 31% for all of fiscal '21. Regionally, new business growth was also broad-based and remained strongest in North America. Adjusted EBITDA for Consulting in the fourth quarter was up $16.1 million or 145% year-over-year with an adjusted EBITDA margin of 17.7%. RPO and Professional Search global fee revenue improved to $120.3 million in the fourth quarter, which was up 46% year-over-year and up 26% sequentially. Both, RPO and Professional Search benefited from the post-recession surge in demand for skilled professional labor. RPO fee revenue grew approximately 58% year-over-year and 34% sequentially, while Professional Search fee revenue was up approximately 27% year-over-year and up 17% sequentially. With regards to new business, in the fourth quarter, Professional Search was up 17% sequentially and RPO was awarded $115 million of new contracts, consisting of $23 million of renewals and extensions, and $92 million of new logo work. Adjusted EBITDA for RPO and Professional Search surged to approximately $30 million in the fourth quarter, which is up approximately $17.2 million or 136% year-over-year and $10.3 million or 53% sequentially. Adjusted EBITDA margin for RPO and Professional Search was 21.9% in the fourth quarter. Finally, in the fourth quarter, global fee revenue for Executive Search exceeded $200 million for the first time in company history. Global Executive Search fee revenue was up approximately 20% year-over-year and up approximately 19% sequentially in the fourth quarter. Growth was also broad based and led by North America, which grew 28% year-over-year and 23% sequentially. Sequentially, fee revenue in EMEA and APAC was up approximately 15% and 9%, respectively. The total number of dedicated Executive Search consultants worldwide at the end of the fourth quarter was 524, which was down 32 year-over-year and up two sequentially. Annualized fee revenue production per consultant in the fourth quarter improved to a record $1.54 million and the number of new search assignments opened worldwide in the fourth quarter was up 39% year-over-year and 32% sequentially to 1,712. In the fourth quarter, global Executive Search adjusted EBITDA grew to approximately $49.8 million, which was up 5% year-over-year and up 19.5% sequentially. Adjusted EBITDA margin was approximately 25%. Now, I'll turn the call back over to Bob to discuss our outlook for the first quarter of fiscal '22.
Bob Rozek, CFO
Great. Thanks, Gregg. The acceleration of new business in the month exiting the fourth quarter and entering the first quarter of fiscal '22 has positioned us very well for further growth. Our combined total new business in the months of March, April and May was easily the highest total for any three-month period in company history. Additionally, strong new business activity has been broad-based with all of our lines of business taking advantage of both the market strengthening and the acceleration of demand for our unique combination of service offerings for the last couple of quarters demand across all of our lines of business has been strongest in North America, but I will say during the fourth quarter, we did begin to see signs of acceleration in international markets as well. Now, if recent new business activity continues and normal seasonal patterns hold, we expect that new business in the first quarter will remain strong. We saw that in May, and so far new business month-to-date in June is in line with our expectations. Recognizing normal seasonal patterns and assuming no new major pandemic-related lockdowns or changes in worldwide economic conditions, financial markets or foreign exchange rates, we expect our consolidated fee revenue in the first quarter of fiscal '22 to range from $535 million to $555 million and our consolidated diluted earnings per share to range from $1.04 to $1.14. As we close out the fiscal year, we are very encouraged by the momentum in our business. This is the momentum that we believe is reflective not only of the macro conditions but of the intentional steps we have taken to build this business and extend our comprehensive offerings to our clients to enhance our financial profile and really to position Korn Ferry for long-term success. Through the power of our offerings, we look forward to building on these results for quarters and years to come. With that, we'd be glad to answer any questions that you may have.
Operator, Operator
Your first question comes from George Tong with Goldman Sachs. Please go ahead.
George Tong, Analyst
Hi, thanks, good morning. You discussed new business trends in March and April and also exiting the quarter, can you elaborate on how new business performed in May and the first half of June in your various lines of business?
Gary Burnison, CEO
Bob, why don't you take that.
Bob Rozek, CFO
Yes. I made the comment, George, that in the month of May and June, we saw very strong new business and it's really across all of our lines of business, and June to date we expect that to continue. June to date is in line with our expectations, again strong across all lines of business.
George Tong, Analyst
Got it. That's helpful. And then, you touched a little bit on cross selling in business referrals across the business certainly making strong momentum there. How much further opportunity do you think there is for additional cross-pollination and cross-selling among the various segments?
Bob Rozek, CFO
Well, I think it's substantial. I mean, when you look overall, the encouraging thing is that you look at the company's top line and almost 30% is from inside sales, which tells you that the strategy is working, and it’s increased steadily over the last two to three years quarter-on-quarter. So, you look at it overall, and you say it's at 29%, and I think we've got substantial headroom. The thing that was — actually the number may sound low, but the thing that was most encouraging to me this last quarter were the referrals into Executive Search, and even though the number is 12%, that may sound low, that's up substantially from a couple of years ago when it was like 3%, 4%, or 5%. So that's an extra, call it $50 million to $60 million of top line, and so the company's strategy is to be the premier organizational consultancy. But for us, we have this intangible asset which is our Executive Search business, and that allows us to take the relationships that we have at the top of the house and drive deeper impact with our clients. So, I think there is significant room to grow, and in the RPO and NPS business, this last quarter was 50%. And so, I look overall and so we've got plenty of headroom.
George Tong, Analyst
Got it, very helpful. Thank you.
Operator, Operator
Our next question comes from the line of Tim Mulrooney with William Blair. Please go ahead.
Tim Mulrooney, Analyst
Good morning.
Gary Burnison, CEO
Hey, Tim.
Tim Mulrooney, Analyst
A few questions here. So, in your Executive Search business, consultant productivity across the $1.5 million mark annualized in the fourth quarter. I went back in our model quite a ways and couldn't find another period where productivity was so high. Is that a clear signal that you need to accelerate hiring in the coming quarters or is a higher level of productivity expected a step-up, if you will, following the cost actions that you took at the end of last year?
Gary Burnison, CEO
Well, we certainly as Bob talked about, we've been very aggressive in the marketplace in terms of bringing in talent across the entire platform. And as Bob alluded to, we’ve brought in over 160 new partners and principals into the firm, and we're going to continue to aggressively look for talent across the entire platform, and that includes Executive Search. So you're absolutely right, this was the all-time high for productivity per consultant in our Executive Search business. I still think there is more room to go there. But talent is the name of the game, it's the name of the game for clients and it's name of the game for us.
Gregg Kvochak, Executive
And Tim, in addition to what Gary mentioned, you should anticipate that productivity will remain at that level. One of the things we're doing is managing our work more proactively. For instance, in the deck we posted, if you look at the consultants in Executive Search, the numbers are up, but that includes removing 11 or 12 positions for individuals who weren't performing at their best. We will continue to take a more proactive approach.
Tim Mulrooney, Analyst
Okay, that's helpful. To summarize, we are hiring more people, but perhaps productivity will stabilize at a higher level than what we have seen in the past. Is that fair?
Gregg Kvochak, Executive
It's fair.
Tim Mulrooney, Analyst
Switching gears, the RPO engagements billed increased significantly in the fourth quarter, rising by 35%. Is this growth typical for this stage in the cycle, or do you believe the pandemic has significantly boosted demand for RPO services as companies reassess their physical presence and overall organizational structure while emerging from the pandemic?
Gary Burnison, CEO
Let me make a couple of comments, Bob you can add to it. Overall, the RPO business has been outstanding for us. If you look at the quarter-on-quarter performance over the last several years, it's impressive. When we analyze the way the business has operated during this cycle, we noted that Search was the most cyclical, followed by Consulting, which was less cyclical than Search, then RPO, which was less cyclical than Consulting, and finally Digital, which was less cyclical than RPO. Clearly, the success of the RPO business relies on quality and talented people, along with embedding our intellectual property into our RPO engagements, such as success profiles or talent architecture. This has proven to be a winning formula. While there are definitely fluctuations quarter-on-quarter in the RPO business, the overall trend and trajectory are remarkable over time.
Bob Rozek, CFO
And the only thing I would add to that, Gary, is that the RPO business actually grew 7% year-over-year last year. Considering the time frame we've experienced and what the world looks like, it's truly an incredible business, as Gary pointed out.
Tim Mulrooney, Analyst
That's a great point about growing even in a tough environment, which is really helpful. If I could add one more question, I'd like to ask about your digital business, as the 40% increase in new business and digital in the fourth quarter is promising. Can you discuss which of your digital offerings are gaining traction at this stage and driving that strong new business growth? Is it learning and development, or is assessment succession really picking up steam? Any insights would be appreciated.
Gary Burnison, CEO
Well, Bob, you can add to this. In terms of the long game, we are engaging in some exciting initiatives around AI and success profiles linked to our assessment and succession business. This will develop over several quarters. Additionally, a significant transformation is taking place in this business, particularly in development. Each year, we develop around a million executives, and the shift from physical to virtual training is notable. Currently, we are observing a decline of about 20% in session attendance from previous highs. We have adapted our business to this change, as the world has embraced online learning, and we plan to continue in this direction. Lastly, as Bob and Gregg mentioned, the business is moving towards subscription and licensing. In the last quarter, about a third of the new business came from subscription-based models, which is encouraging as it leads to more sustainable, repeatable, and loyal clients, although revenue recognition takes longer. This shift represents a substantial change in our business compared to three years ago.
Bob Rozek, CFO
Tim, to build on what Gary mentioned, the subscription and licenses represented about 31% of revenue for fiscal '21. New business subscriptions and licenses made up around 36% of the total for the year, indicating continued growth in that area. Looking at revenue growth, we saw significant increases in the assessment and succession area, which grew nearly 18% year-over-year, and in leadership development, which experienced a 29% year-over-year increase in the fourth quarter.
Tim Mulrooney, Analyst
All right, got it. Congrats on a nice quarter. Thanks for taking my questions.
Bob Rozek, CFO
Thanks.
Operator, Operator
And our next question comes from the line of Marc Riddick with Sidoti. Please go ahead.
Marc Riddick, Analyst
Hi, good morning.
Gary Burnison, CEO
Hi, Marc.
Marc Riddick, Analyst
There's a lot to discuss about the quarter, and many things are progressing well. I want to focus on the significant increase in bill rates year-over-year within the Consulting space. Could you explain what factors contributed to this meaningful jump? After that, I have a follow-up question.
Gary Burnison, CEO
Every business is reimagining their operations, and this is at the core of our Consulting division. Our focus on organizational strategy, leadership development, and compensation has positioned us well to take advantage of the ongoing shifts in the post-pandemic landscape. Additionally, factors like ESG are influencing consulting engagements, including executive pay related to ESG objectives. Our efforts in diversity, equity, and inclusion have been outstanding and continue to thrive. I am very positive about our Consulting business, especially as we shift towards larger projects. In the past, we were more focused on shorter, smaller assignments, but for the past three years, we have intentionally moved towards more significant and impactful engagements, such as organizational transformations and upskilling talent. Our Consulting division has made remarkable progress coming out of this challenging period in history.
Bob Rozek, CFO
I believe it's particularly noteworthy that while we discuss large engagements over $500,000, the smaller engagements below that level saw a decline in the first three quarters of fiscal '21: a decrease of 27% in Q1, 9% in Q2, and 3% in Q3 in new business. However, in Q4, there was an impressive increase of over 40%. This indicates a rebound in that segment of the business. Additionally, when considering the bill rate, which is calculated by dividing revenues by the hours worked, the recent spike in revenue is contributing to an increase in our bill rate.
Marc Riddick, Analyst
Okay, that's very encouraging. And I wanted to shift gears, there was a commentary made around the pickup, we've seen the strength in North America kind of leading and there was commentary in pick up and what we're seeing internationally. I was wonder if you could delve a little bit deeper into that as to maybe some of the areas that have picked up more recently and then maybe some other geographies or even, maybe even client types perhaps that may still be sort of on the cusp of accelerating in a way that you've seen with the rest of your client base. Thank you.
Gary Burnison, CEO
The industrial business has traditionally been a significant portion of our portfolio, historically making up 26% to 28%, and it may have reached as high as 30%. This segment has experienced growth, which is encouraging, but there is still much potential for further development. Additionally, the energy sector is undergoing various transformations, which is positive for us. Regionally, as Bob mentioned, we've observed an increase in both EMEA and Asia, providing optimism for the future. However, it is disheartening to see the tragic events occurring in certain regions, such as South America, where COVID-related statistics and fatalities are alarming. Despite these challenges, our colleagues have demonstrated remarkable resilience. For instance, in India, our new business over the past four months has grown by 36%, and in Brazil, it surged by 93% despite the difficulties, which suggests a promising outlook for the future.
Marc Riddick, Analyst
That certainly makes a lot of sense. I appreciate your commentary, thank you.
Operator, Operator
And we do have a question from the line of Tobey Sommer with Truist Securities. Please go ahead.
Tobey Sommer, Analyst
Thanks. I'd love to get your perspective on the long-term EBITDA margin opportunity at the company. You had a couple of tremendous quarters here, even with some non-recurring expenses, the 17% to 18% still the right number long term or is there kind of a 17% to 18% plus that you're thinking about?
Gary Burnison, CEO
That's a good question. I think the world is currently undergoing a transition, and it's difficult to predict the final outcome. I believe that about half of what we currently do will be replaced with something new. Our methods of entertainment, consumption, and work are changing significantly, as evident in the ongoing discussions about remote work versus returning to the office. It may take a few years to establish what this decade will truly look like, but I personally think that around half of people will prioritize achievement over mere activity. This situation has demonstrated that the world can accomplish tasks in different ways, which reflects the culture of an organization. The wild card in this scenario is how society will respond, particularly regarding travel and in-person meetings, as well as attending conferences. We have increased our long-term target to between 17% and 18%, and I suspect it could be higher, but I believe we will gain more clarity in the fall, hoping that the delta variant does not spread widely in the United States or elsewhere. For now, I would lean toward a higher estimate.
Tobey Sommer, Analyst
Thank you. I wanted to ask about what you consider to be the appropriate long-term balance sheet for the firm. I understand you increased the dividend today, and whether it's in the range of 17% to 18% or a bit above that, it represents a very healthy margin that will generate substantial cash. Should the company maintain net debt over the long term, and if so, what would be the appropriate level?
Gary Burnison, CEO
I’ll let Bob discuss the net debt level. What we focus on is the return on capital, and if you look at the last couple of quarters and annualize it, it's probably at least 15%. This is likely to increase over the next four quarters, assuming conditions remain stable. Our strategy has been very disciplined regarding mergers and acquisitions, which is our top priority. We aim to use the capital we have to create a leading organizational consultancy, and this requires ongoing investment in our digital capabilities and solutions, both organically and through acquisitions. We have made 13 acquisitions and have been very disciplined in that process. In response to your underlying concern, we have a strong balance sheet that provides us with significant strength and flexibility. We intend to maintain a balanced approach concerning capital for our shareholders, employees, and business investments.
Bob Rozek, CFO
I would like to add a few thoughts. First, you'll notice that we are beginning to increase our investment in the Digital business again this year after having reduced it during the pandemic. Last year, we spent approximately $30 million on PPV, and this year we expect that amount to rise back to more historical levels, around $45 million or so. Regarding our net debt, we maintain a conservative approach. We prefer operating with leverage at two times or less. As previously mentioned, we could consider going up to 3 to 3.25 if the right acquisition opportunity arises, but ideally we would aim to reduce that debt quickly to return to below two times leverage.
Tobey Sommer, Analyst
Great. I appreciate the returns. They have improved, and managing the balance sheet is another factor to consider. Could I ask for your perspective on a couple of market-related issues we are hearing about, such as the prevalence of retirements and the ongoing implications of remote work in terms of expanding national recruitment into jobs and industries that previously did not see this as an option?
Gary Burnison, CEO
It's remarkable to witness a significant shift in the workforce that began around 20 years ago. This change is evident, yet it often goes unnoticed concerning the baby boomer generation. This reset has led to substantial mobility within the job market, with many executives choosing to pursue alternative paths, whether in charitable work or retirement. There is a growing trend of career nomads that has gained momentum. Two years ago, I thought hiring would be virtually impossible, but now it's a daily occurrence. The job market is incredibly dynamic right now. In all my years in business, I haven't encountered a better job market. The flexibility regarding geography is truly astonishing.
Tobey Sommer, Analyst
I have a follow-up, one last question, I'll get back in the queue. Is there a manifestation within sort of the key metrics driving your recruiting businesses that wage inflation, comp and sort of effectively price in some of your businesses might be driven higher by the fact that somebody in Des Moines doesn't necessarily have to live in Des Moines even if the company is headquartered there.
Gary Burnison, CEO
I believe it is not a question of if it will happen, but rather when it will happen. There is no doubt about it considering how the situation is evolving. We haven't observed significant changes in the costs for our company in comparison between Kansas and New York City, although there is a cost of living difference. Companies have not made drastic adjustments in that regard. The market is currently very competitive, with a high demand for talent, and numerous factors are contributing to this scenario. There are nine million job openings coinciding with about nine million unemployed individuals. We have the baby boomer generation, career nomads, stimulus impacts, and increased work flexibility, all affecting the labor market simultaneously.
Tobey Sommer, Analyst
Thank you very much.
Operator, Operator
And we do have a question from the line of Mark Marcon with Baird. Please go ahead.
Mark Marcon, Analyst
Hey, good morning. Wondering if you can talk a little bit about your last comment. Gary, you mentioned, hey you haven't seen a job market like this. Some people might react to that and say, well, this is the peak, but if we take a look at the baby boomers and where they are at in terms of retirement cycles and kind of the fluidity, I'm wondering if you can just comment with regards to the sustainability of these high levels of demand and what you think executive comp inflation rates are going to be and how you think about the productivity within the executive search consultant force and then I've got some other questions with regards to Consulting and Digital?
Gary Burnison, CEO
I believe that unless unexpected events occur, like a delta variant, this trend is likely to continue. I don't expect any reduction in demand over the next few quarters. While I won't claim this is the peak or the lowest point, I certainly don’t anticipate any decline. You're right about the baby boomers, and the data supports that. I wouldn't be surprised to see wage inflation this year; it's hard to imagine we won't see it. The only counterpoint could be the flexibility that knowledge workers have today and its economic implications, which is significant. Tobey hinted at this, and it may currently be influencing the situation. However, when considering the search business, which constitutes 36% of the company, I wouldn't be shocked to see wage increases in that area.
Mark Marcon, Analyst
We're in the early stages of determining how to use that flexibility. When speaking with companies, it seems the most thoughtful ones are in a wait-and-see mode, wanting to understand how this will play out, which suggests it may take several years to fully realize its impact.
Gary Burnison, CEO
I think this is going to unfold over the next two years. I believe that’s true. However, there is a trade-off between flexibility and location, and I'm not certain how much that will influence decisions, but it makes sense that it will. You're right; companies aren't making those moves right now, and we aren't either due to a significant skills shortage. When I examine what some of our clients are doing with workforce transformation and the upskilling initiatives we have, it's substantial—definitely substantial. I truly think we are entering a two-year transitional phase that will reshape what work looks like across various dimensions.
Mark Marcon, Analyst
Right. Can you talk a little bit about on the Consulting side, both traditional consulting as well as digital. You know, Miller Heiman, you bought that right prior to pandemic. So you haven't seen the full benefit, but it would seem like now, given that everybody is finally returning. There's a lot of people who are entering the workforce that don't have a lot of training, lot of formal training, can you just talk about the evolution of that solution, the different ways that you're marketing it and what you think of as kind of the opportunity set for Korn Ferry outside of the traditional leadership Consulting assessment and into some areas that are not considered as traditional for Korn Ferry.
Gary Burnison, CEO
We have a significant initiative in progress focused on accelerating revenue growth, centered on enhancing customer experience and sales effectiveness. We're in the early stages of launching this to the market, and you'll likely see it featured on our website. We're currently presenting it to our key regional accounts, with many team members organized around this effort. It appears to be a promising opportunity as companies are rethinking how they improve customer interactions. Additionally, through our recent acquisition of the Aspen companies, including Miller Heiman, we gained valuable capabilities in customer experience. We have integrated this with our success profiles that define what customer-facing roles should look like in the post-pandemic landscape. Therefore, we are committed to making a significant push in this area.
Bob Rozek, CFO
Hey Mark, this is Bob. I just want to emphasize that this is a great example of our integrated solutions. When you consider the accelerated revenue growth, which we call ARG, it draws from all of our core solution areas, and of course, we combine them into a solution. Our architecture solution varies for each client due to their unique use cases, but this is a fantastic demonstration of our integrated solutions. What's interesting is that it even relates to the process. As you consider the sales process, we now have content and intellectual property focused on improving sales effectiveness. This is a very strong example of an integrated solution.
Mark Marcon, Analyst
That's great. And then from a capital allocation perspective, I mean you've alluded to potential for acquisitions and also building the firm organically. You also ended up increasing the dividend here, I'm just wondering to what extent can we do both on a continued basis, so continue to return even more cash to shareholders either through the dividend or through buybacks in addition to pursuing M&A. I mean especially with the strength of the balance sheet as it currently exists.
Gary Burnison, CEO
Yes, I believe there is an opportunity to pursue both avenues. I think you and Tobey have hinted at this, and we agree. We see potential for opportunity now. Regarding mergers and acquisitions, we have been methodical and disciplined in our approach, and we will continue to maintain this strategy.
Mark Marcon, Analyst
Great. Thank you very much.
Operator, Operator
And it appears there are no further questions. Mr. Burnison, please continue.
Gary Burnison, CEO
Okay. Well, I want to thank our shareholders and my constituencies here who have listened but clearly most important our colleagues and for the resilience and is one word and that's resiliency and for their resiliency over this last year and I think also the consistency of our actions that we've taken, whether it was over a year ago with the George Floyd tragedy, our voice around D&I, our initiatives such as Leadership U for humanity developing million professionals of color over the next few years, it's been consistency and resiliency. So, thank you very much, and we look forward to talking to you next time.
Operator, Operator
And ladies and gentlemen, this conference will be available for replay one week starting today at 3:00 PM Eastern Time running through the day June 29 midnight. You may access the AT&T Executive Playback Service by dialing 1866-207-1041 entering the access code 6425814. International participants may dial 402-970-0847; additionally, the replay will be available for playback at the company's website which is www.kornferry.com in the Investor Relations Section. That does conclude your conference for today. Thank you for your participation, and for using AT&T Teleconference service. You may now disconnect.