Korn Ferry (KFY) 2021 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Korn Ferry Fourth Quarter Fiscal Year 2021 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

We have also made available 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.

Okay. Thank you, Brad. Good morning, good afternoon to everyone. Thank you for joining us. Man, what a difference a year makes. Last April was rather dark, I think, for all of us. And in May with the George Floyd tragedy, it 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 eco change in this post pandemic world. We are the world's premier organizational consultancy. There's 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. It was 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 delivered strong financial results.

Now in this new world, there's 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 they'll 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 change, 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 and global accounts, and they continue to demonstrate the power of this strategy. The accounts, they generated about $640 million in fee revenue during the year and they sustainably utilized all of our global capabilities even during challenging economic periods.

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, to board members, to professional level talent. And looking at our Digital and Consulting businesses, we've been actively marrying our capabilities with today's mega trends. 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 to 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'll turn the call over to our CFO, Bob Rozek; and Gregg Kvochak, who's also on the call as well. Bob, it's over to you.

Great. Thanks, Gary, and good afternoon or good morning, depending on where you're 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 continue 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 3 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.

Second, our 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 3 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 nonrecurring 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 foregone during the year.

Now turning to new business. The months of March and April were the 2 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, 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 the last 3 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 2 and 3.

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'll turn the call over to Gregg to review our operating segments in more detail. Gregg?

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 was 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 24.9% 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 2 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.

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Great. Thanks, Gregg. The acceleration of new business in the months 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 3-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, our 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 and 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 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 Instructions) Our first question comes from the line of George Tong with Goldman Sachs.

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?

Yes, I made the comment, George, that in the month of May and June, we saw a 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.

Got it. That's helpful. And then you touched a little bit on cross-selling and 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?

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 2 to 3 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%, 5%. So that's an extra, call it, $50 million, $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's significant room to grow. And in the RPO and PS business, this last quarter was 50%. And so I look overall and say, we've got plenty of headroom.

Our next question comes from the line of Tim Mulrooney with William Blair.

A few questions here. So in your Executive Search business, consultant productivity crossed 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 the higher level of productivity expected, a step up, if you will, following the cost actions that you took at the end of last year?

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's 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 the name of the game for us.

And Tim, I would say, just to add to what Gary talked about, the -- you should expect the productivity to continue to be at that level. So one of the things we're doing is much more proactively managing the workforce. So if you look at, for example, in the deck we posted, you look at the consultants and the consultants and exec search, it's up 2, but that's after taking out 11 to 12 positions for people, who weren't performing at the top of their game. So we'll continue to do that more proactively.

Okay. Okay. That's helpful. So I mean, to summarize, I mean, hiring more people, but perhaps productivity kind of stabilizes at a higher level than what we've seen in the past. Is that fair?

It's fair.

Switching gears here on the RPO engagements, builds were up quite a bit in the fourth quarter of 35%. Is what we're seeing typical for this point in the cycle? Or do you think the pandemic has accelerated demand for RPO services in a material way as companies emerging from the pandemic rethink, not only their physical footprint, but also perhaps their overall organizational structure?

Well, let me make a couple of comments. Bob, you can add to it. I mean I think overall, the RPO business is outstanding for us. I mean you look over quarter-on-quarter over the last several years, and it's not short of impressive. I mean it's outstanding. And overall, if you look at the way the business operated here in the cycle, and Bob talked about it, what we saw was exactly the thesis that we've been talking about, where search was the most cyclical. Consulting was less cyclical than search. And RPO was less cyclical than Consulting. And Digital was less cyclical than RPO.

So clearly, the RPO business, it begins and ends with quality, with talented people. And the other thing is embedding our IP into our RPO engagements and whether that's success profiles or talent architecture, I think that's also proven to be a winning formula. So I look at the RPO business and say, yes, there's clearly some puts and takes quarter-on-quarter, but the trend, the trajectory is breath taking over time.

Yes. And the only thing I would add to that, Gary, is, Tim, if you look at what the RPO business did on a year-over-year basis, it actually grew 7% last year. When you think about the time frame that we went through and what the world looked like. I mean to Gary's point, just an incredible business.

Right. Yes. Yes, that's a great point, too, growing on top of growth even in a tough environment. That's really helpful. If I could squeeze one more in, I want to ask about your Digital business. Because new business in Digital, up 44% in the fourth quarter is promising. Can you talk about which of your digital offerings at this point in the cycle are really gaining traction and helping to drive that strong new business growth? Is it learning a development? Is assessment succession now really picking up steam? Any color here would be helpful.

Well, Bob, you can add to this. In terms of the long game, there are some really cool things we're doing around AI and success profiles that are linked to our assessment and succession business. So that will play out over several quarters. The other big transformation that's happening underneath that business, a big part of the business is around development. Every year, we develop about 1 million executives. And the transformation that's happening from physical to virtual is also something that's very significant. And we're seeing right now the sessions are down about 20% or so from, say, the high. And so we pivoted that business, and the world has pivoted too to online learning, and that's something we're going to continue to do.

And then the final piece, as Bob and Gregg talked about, is the movement of the business towards subscription and licensing. And so in this last quarter, about 1/3 of the new business was subscription-based. And that -- the good news is that's more sustaining, repeatable, loyal clients of scale, but it does take longer to recognize the revenue. So it's more durable, it's more sustainable. But the tail is substantially different. And that's a big, big change in the business from, say, 3 years ago.

Yes. Tim, if you -- just to add to what Gary said, if you look at the level of revenues that the subscription and licenses comprised, it's about -- for fiscal '21, it's about 31% for new business, subscription and license comprises about 36% of the total for the year. So you can see how that's going to continue to add. A couple of areas where if you look at it from a revenue perspective, Tim, where we saw better growth was in the assessment and succession area, it was up about almost 18% year-over-year and then in leadership development. It was up -- this is in the -- I'm sorry, this is in the fourth quarter, was up about 29% year-over-year.

And our next question comes from the line of Marc Riddick with Sidoti.

So there's a lot we could talk about in the quarter, and certainly, a lot of things are going very well. I wanted to specifically talk about the -- within the consulting space, there's a pretty significant pickup in bill rate year-over-year. I was wondering if you could sort of dissect that a little bit and sort of talk a little bit about maybe what you're seeing there that led to such a meaningful jump there. And then after that, I have a follow-up.

Well, every business in the world is reimagining how they get things done. And that's at the forefront of our Consulting business. So whether it's our org strategy or assessment, succession, leadership, professional development or our rewards business, our comp and benefits business, we are benefiting from the mega trend that's happening, which is changed. The eco of change here in the post pandemic world. And then there's other factors, too, whether it's ESG, which is driving consulting engagements, and that could even include executive pay tied to ESG goals.

Our diversity, equity and inclusion business has been phenomenal. It continues to be. So I can't say enough good things about our Consulting business. And I think the other thing is pivoting towards larger engagements. Years ago, we were really anchored around smaller, shorter assignments. And we purposely -- we've talked about this for, I bet it's been 3 years now, a consistent strategy of migrating the business towards more impactful engagements, whether that's organizational transformation, upscaling talent. Our Consulting business is just -- it's phenomenal in what we've achieved coming out of this dark period in human history.

Yes. And Marc, I would add that it is particularly interesting. We talked about large engagements over $500,000, but if you look at the engagements below that level, over the course of fiscal '21, Q1, they were -- the smaller engagements were down 27%, Q2 down 9%, Q3 down 3%. This is in new business. And then in Q4, it was actually up over 40%. So we're starting to see that portion of the business rebound and when you look at the bill rate, it's a function of the revenues divided by the hours you work. And so with the spike up in revenue, that's what's driving our bill rate up.

Okay. That's very encouraging. And then 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 it was a commentary to pick up on what we're seeing internationally. I was wondering 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 either 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?

Well, the industrial business has been historically, the biggest part of our portfolio. It's 26%, 28%, historically, maybe even as high as 30%. And so that part of the business saw growth, which is very, very encouraging, but it still got a long ways to go. So that provides further upside.

Obviously, energy continues to go through all sorts of transformation and change. So that's really, really good news for us. When you look at on a regional basis, as Bob talked about, we have seen an uptick in both EMEA and Asia that gives us hope for the future as well. Although, look, in parts of the world, it is just -- it's heartbreaking to see what's happening. I mean when you think about in South America, for example, and you look at the numbers of -- the COVID numbers and the death, it's just -- it's a tragedy, it's heartbreaking. And yet, our business, our colleagues have shown just incredible resilience. I mean India as an example, trailing 4 months new business, it's up 36%. Brazil is up 93% in the face of heartache. So that gives you, I think, a lot of promise of what the future can hold.

That certainly makes a lot of sense. I appreciate your commentary.

And we do have a question from the line of Tobey Sommer with Truist Securities.

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 nonrecurring expenses. Is 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?

That's a good question. I think the world is in a couple of year transitionary phase. And it's really hard to say where it's going to end. I would say that it's basically -- and I've said this for a long time, that 50% of whatever you are doing is probably going to be replaced with something else. So how you're entertained, how you consume, how you work is just -- it's changing dramatically. And you see it today and all the debate about working from home and going into the office. I mean I think it's going to take a couple of years for this to settle in to what this decade really looks like. But I personally believe it's probably going to be something like 50%, that people are really going to focus on accomplishment over activity. And this has proven that the world can get things done differently.

That's the definition of culture, how an organization gets things done. So the wildcard in that really for me is around what does society say that is. And what is going to be the view around all sorts of different things, getting on airplanes, meeting people in person, going to conferences. That's the big wildcard around "the plus." And so yes, we've put out, we've raised the long-term target of our firm up to 17% and -- 17% to 18%. And I would probably -- yes, I'd probably put a plus on that for now. But I think in the fall, we're going to learn a lot. Hopefully, this delta variant does not take hold in the United States or other parts of the world. But I would -- I'd probably put a plus on that, at least at this moment in time.

And I wanted to ask you a question about what you feel like the right kind of balance sheet is for the firm longer term. I realize you've increased the dividend today, but whether it's 17% to 18% or 17% to 18% plus, over time, on average, that's a very healthy margin that will generate a lot of cash. Should the company operate with net debt on a sustained basis? And if so, what level?

Well, I'll let Bob, can talk about the net debt level. The thing that we look at is the return on capital. And if you take the last couple of quarters and you were to annualize it, it's probably at least 15%, and that's going to go higher, probably these next 4 quarters, assuming the world doesn't change. I mean our strategy has been very disciplined around M&A. And that is -- our first and foremost priority is to use the capital that we have to create the premier organizational consultancy. And to do that, we have to continue to invest not only in our digital capabilities and our solutions organically, but we also have to do that inorganically as well.

And we've done 13 acquisitions. I think we're incredibly disciplined in how we do that. But your -- the sentiment behind the question, we have a very robust balance sheet, and that gives us tremendous strength and flexibility. And we want to continue to be balanced when it comes to capital in terms of our shareholders, our colleagues and investing in the business.

Yes, I guess, Tobey, I would just add to that, a couple of thoughts. So one is I think you'll see us starting to ramp up our investment back into the Digital business. Last year, we were obviously going through paying that, we cut back, we spent roughly $30 million on PP&E last year. And this year, we'll see that number jump back up to what I would call more historical levels around the $45 million plus or minus level.

In terms of net debt, we operate fairly conservatively, I don't see us being an operating on a long-term basis in a net debt position. And we actually look at it a little bit differently in terms of where we're comfortable operating at 2x leverage or below. As we've said in the past, we would go up to 3x, 3.25x, if the right acquisition came along, but our predisposition would be to pay that down as quickly as possible to get below back the 2x leverage.

Great. I can appreciate the returns. They have improved and managing that balance sheet is another lever, I guess, you get to pull. Could I ask your perspective on a couple of market-related things that we're hearing about retirements being prevalent and maybe what, on an ongoing structural basis, remote work means in terms of unlocking more sort of national recruiting to occupations and job levels where that really wasn't part of the landscape previously?

Yes. It's incredible. There's a big reset. And it was 20 years ago, this whole thing around the war for talent. I mean it's here. It's absolutely here. And you don't really read much about the baby boomers, but it's here. And this has been the big reset. And we've seen just tremendous mobility. We've had -- we've seen executives, who have said, this is -- I'm going to go off and do something else. Whether that's charitable work, whether it's retirement. You've got career nomads now that, that whole trend has been greatly accelerated.

I would have thought 2 years ago, you wouldn't have hired anybody virtually. Now we're doing it every single day. And so there is tremendous -- it's really, really fluid, the job market. I don't know if I've seen a better job market in all of my years in business. I mean this is unbelievable with the flexibility around geography. It's breathtaking.

Gary, can I 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's headquartered there?

Well, I think there will be. I think that's not an if, but when. I mean, there's no question about that, given how the punch bowl has spiked. I mean there's -- that's really clear. We haven't seen -- if your question is, are companies paying less to be in Kansas versus New York City. Sure, there's a cost of living element. We haven't seen companies make dramatic changes there. The market is really hot, and there is a war for talent right now. And it's all of these factors coming together. There's 9 million job openings, probably 9 million people unemployed. You've got the baby boomers. You've got career nomads. You've got the stimulus. You've got the flexibility of work. All of those things are hitting the labor market at the same time.

And we do have a question from the line of Mark Marcon with Baird.

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, wow, 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.

I think looking out, I do believe barring some unforeseen events such as a delta variant, I do believe that this is going to continue. I don't see this lessening over the next quarter, 2 quarters, 3 quarters. I'm not going to say it's a peak or a valley, but I certainly don't foresee any let up. You're absolutely right about the baby boomers that the data supports that. And I wouldn't be shocked if there was wage inflation, looking at the year. It's hard to see that there would not be.

The only, I guess, argument or theory against that would be the flexibility that knowledge workers have today and how -- what's the economic price of that flexibility. Because there is an economic price about flexibility. There's no question about it. And Tobey kind of alluded to it. We haven't -- maybe that's playing out now, and that's why you're not seeing it. But I do think when you look at the search business, which is 36% of the company today, I wouldn't be surprised if there would be wage pickup in that, for sure.

Great. And then with regards to just that flexibility, I mean we're in the very early stages in terms of determining that. When you talk about companies, I mean, when do they -- how are they thinking about it? Because I think the most thoughtful companies are actually in a wait and see mode in terms of need to see how this is going to work out, which means it could end up playing out over several years, no?

Yes. Yes. Yes, I think it's playing out over 2 years from now. I do believe that's correct. But ultimately, there is an economic trade-off of flexibility versus location. And I just don't know, as you said, I don't know how much that's going to factor into the calculus, but it will. It makes sense that it does. But you're right, companies are not pulling that card today. We're not pulling that card today, because there's such a shortage of skills. When I look at some of our clients, and what they're doing around workforce transformation and the types of upskilling engagements we have, it's big, it's definitely big. So I really think that we're in for a kind of a 2-year transitionary period along a number of dimensions on what work really looks like.

All right. And can you talk a little bit about on the consulting side, both on traditional consulting as well as digital. Miller Heiman, you bought that right prior to the 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, a 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?

Well, we call that -- yes, we have a major push underway. We've had it now for the last several months around accelerated revenue growth. And it is a solution anchored around customer experience as well as sales effectiveness. And we're in the very early days of taking that out to market. And so you probably see it on our website. We're taking it to our marquee and regional accounts right now. We've got many, many people in the company organized around it. And so it seems like it should be low-hanging fruit as companies are really reimagining what that customer experience should be and how a client interacts with their customers.

So we do think that is an opportunity for us. It is one of the gems that in our last acquisition of the Aspen companies, which included Miller Heiman, not only did we pick up, as you alluded to, the professional development and all of that, but we picked up real capabilities around customer experience. And the thing that we've done is we've tied that together with our success profiles, around what customer-facing people look like in the post-pandemic world. So yes, we're making a big, big push around that.

Mark, this is Robert. I would just add to that, that this is a great example of what we refer to as our integrated solutions. So as you think about the accelerated revenue growth, we call it ARG, it pulls from every single core solution area that we have. And obviously, you would cobble together a solution or architecture solution different for each client because they have a different use case. But this is an absolutely fantastic demonstration of our integrated solutions. And even what's interesting to me on this when it even runs to process, right? So as you think about the sales process, we now have content and IP around how to improve your -- to Gary's point, the sales effectiveness or the sales process as well. So very, very good example of an integrated solution.

That's great. And then from a capital allocation perspective, I mean, you've alluded to the 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, through buybacks in addition to pursuing M&A. I mean especially with the strength of the balance sheet as it currently exists.

Yes. I think there is that opportunity to do both, Mark. And I think both you and Tobey have kind of inferred that, which we would agree with. So we do think that there is that kind of opportunity. And on the M&A front, we're just going to -- we've been fairly systematic in how we do it and disciplined, and we're going to continue to do that.

And it appears there are no further questions. Mr. Burnison, please continue.

Okay. Well, I want to thank our shareholders and our constituencies here, who have listened. But clearly, most important, our colleagues and for the resiliency, and there's 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 DE&I, our initiatives such as leadership use for humanity, developing 1 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. See you. Bye-bye.

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