Houlihan Lokey, Inc. (NYSE:HLI) Q2 2024 Earnings Call Transcript

Houlihan Lokey, Inc. (NYSE:HLI) Q2 2024 Earnings Call Transcript October 26, 2023

Houlihan Lokey, Inc. beats earnings expectations. Reported EPS is $1.11, expectations were $1.

Operator: Good day ladies and gentlemen. Thank you for standing by. Welcome to Houlihan Lokey’s Second Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this conference call is being recorded today, October 26th, 2023. I will now turn the call over to Chuck Yamarone, Houlihan Lokey’s Chief Compliance Officer. Please go ahead.

Charles Yamarone: Thank you, operator and hello everyone. By now, you should all have access to our second quarter fiscal year 2024 earnings release, which can be found on the Houlihan Lokey, website at www.hl.com in the Investor Relations section. Before we begin our formal remarks, we need to remind everyone that the discussion today will include forward-looking statements. These forward-looking statements, which are usually identified by the use of words such as will, expect, anticipate, should or other similar phrases are not guarantees of future performance. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. And therefore, you should exercise caution when interpreting and relying on them.

We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. We encourage investors to review our regulatory filings, including the Form 10-Q for the quarter ended September 30, 2023, when it is filed with the SEC. During today’s call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating the company’s financial performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measures is available in our earnings release and our investor presentation on the hl.com website.

Hosting the call today, we have Scott Beiser, Houlihan Lokey’s Chief Executive Officer; and Lindsey Alley, Chief Financial Officer of the company. They will provide some opening remarks, and then we will open the call to questions. With that, I’ll turn the call over to Scott.

Scott Beiser: Thank you, Chuck. Welcome everyone to our second quarter fiscal 2024 earnings call. We ended the quarter with revenues of $467 million and adjusted earnings per share of $1.11. Revenues were down 5% and adjusted earnings per share were down 7% from the quarter a year earlier. However, in comparison to the June quarter, revenues were up 12% and adjusted earnings per share were up 25%. Over the last seven quarters and during a challenging time in the world’s financial markets, our diversified business model has enabled us to produce steady results, with quarterly revenues consistently in a range of $416 million to $490 million. Our business activity and financial results have shown consistent improvement since April, and we enter our third fiscal quarter with measured optimism.

The market environment for our Corporate Finance and Financial and Valuation Advisory business is improving, but at a pace that is likely to result in a slow exit from this market environment. Consistent with their commentary in the previous quarter, we continue to experience improvement in client confidence as a result of improving capital markets. We see some improvement in deal momentum, in M&A and a renewed interest from our clients in testing current market conditions after sitting on the sidelines for more than 18 months. However, recent events, including rising interest rates, a stalled stock market and the war in Israel have slowed some of the momentum we experienced in late spring and early summer. Looking forward, we remain optimistic that market conditions will continue to improve, but we are realistic about the macro pressures that exist today.

Our Corporate Finance business produced $282 million in revenues for the quarter. This was a decline from the prior year period but an increase from last quarter. For several months, we have continued to experience a solid level of new business opportunities. Financial sponsors are showing increased interest in taking their portfolio of companies to market, this is a result of improving availability of debt capital, a resilient stock market, pressure from limited partners seeking liquidity and the desire by PE managers to get back into the deal business versus maintenance business. Strategic buyers and sellers are also slowly coming back buoyed by an improving equity markets and continued stable financial performance. This increased interest to transact is still tempered by a fickle M&A market, resulting in a longer time to close transactions and deeper due diligence.

With respect to our Capital Markets business, our revenues are up year-over-year, driven by improvements in availability of credit, particularly in the mid-cap space. Also, capital is harder to access than it was in calendar 2021, which has increased our value proposition for this service line. Historically, in a business rebound, we see capital markets improving first, then M&A activity follows. We expect this rebound to follow a similar path. Our Financial Restructuring business had another strong quarter, producing revenues of $115 million. While the Restructuring business continues to benefit from higher interest rates and a fast approaching debt maturity wall, the growth in new business slowed during the quarter, likely a result of improving capital markets.

While the US restructuring market has leveled off a bit, causing slowdown in new business activity, we have seen continued strength in our restructuring business in Europe, Asia and South America, where we believe our brand and market presence is second to none. As we have said on previous calls, since this restructuring cycle is not the result of a one-off crisis, we expect to experience elevated revenues over the next couple of years versus a significant revenue spike and subsequent drop as we experienced in previous cycles. Financial and Valuation Advisory produced $71 million in quarterly revenues, down from the same quarter last year, but higher than anything we have reported for FVA in the last three quarters. Our market neutral service lines continue to perform well in this environment, while our service lines that are tied to the M&A markets are lagging previous year results.

If the slow but general improvements we are seeing in Corporate Finance and the overall M&A markets produce an increase in M&A closings, we would expect FVA to see positive revenue momentum in calendar 2024. Although we resumed share repurchases this quarter, we continue to take a conservative approach to excess cash in order to give us plenty of balance sheet flexibility to take advantage of acquisitions that may arise. Also during the quarter, we had two new Managing Directors start and believe that the market for hiring senior bankers remains attractive. Over the last seven quarters, our senior hires, acquisitions and geographic expansions have resulted in significant value being added to our investment banking platform. We believe we are well positioned for growth as market conditions continue to improve, and we are well prepared to maximize that opportunity for the benefit of our employees and shareholders.

And with that, I’ll turn the call over to Lindsey.

Lindsey Alley: Thank you, Scott. Revenues in Corporate Finance were $282 million for the quarter, down 11% when compared to the same quarter last year. We closed 117 transactions this quarter compared to 114 in the same period last year. Although our transaction count increased, our average transaction fee was lower for the quarter versus the same quarter last year. This was a result of deal mix and not the result of any trends in transaction value or fee size. Financial Restructuring revenues were $115 million for the quarter, a 17% increase versus the same period last year. We closed 31 transactions in the quarter compared to 24 in the same period last year, but our average transaction fee on closed deals declined slightly.

In Financial and Valuation Advisory, revenues were $71 million for the quarter, an 8% decrease from the same period last year. We had 852 fee events during the quarter compared to 890 in the same quarter last year. Turning to expenses. Our adjusted compensation expenses were $287 million for the quarter versus $301 million for the same quarter last year. Our only adjustment was $9.3 million for deferred retention payments related to certain acquisitions. Our adjusted compensation expense ratio for the second quarter in both fiscal 2024 and fiscal 2023 was 61.5%. We do not expect a change to our long-term target of 61.5% for our adjusted compensation expense ratio. Our adjusted non-compensation expenses were $75 million for the quarter, an increase of $3 million over the same period last year, but flat from the previous quarter.

This resulted in an adjusted non-compensation expense ratio of 16.1% for the quarter compared to an adjusted non-compensation expense ratio of 14.8% for the same quarter last year. On a per employee basis, our adjusted non-compensation expense was $29,000 per employee this quarter versus $30,000 per employee for the same quarter last year. We typically see some seasonality in our adjusted non-compensation expenses, with the second half normally coming in modestly higher than the first half. We expect that trend to continue this year. For the quarter, we adjusted out of our non-compensation expenses, $3.4 million in noncash acquisition-related amortization, the majority of which was related to the GCA transaction and $1.5 million For acquisition-related costs, primarily related to the Seven Mile acquisition, which is expected to close during our third fiscal quarter.

Our adjusted other income and expense decreased for the quarter, to income of approximately $2.5 million versus an expense of approximately $1.2 million in the same period last year. The improvement in this category was driven by higher interest income on our cash balances across the globe as a result of higher interest rates. We adjusted out of our other income and expense, a gain of $816,000 related to the payment of an earn-out on a previous acquisition. Our adjusted effective tax rate for the quarter was 28.4%, compared to 27.9% for the same quarter last year. We maintain our long-term range for our effective tax rate of between 27% and 29%, but we expect that our effective tax rate for the year will be at the higher end of that range. Turning to the balance sheet.

As of the quarter end, we had approximately $525 million of unrestricted cash and equivalents and investment securities. As a reminder, we will pay the deferred cash bonus related to compensation in fiscal year 2023 to employees in November, which will significantly reduce our balance sheet cash. In this past quarter, we repurchased approximately 239,000 shares at an average price of $1.04 — $104.33 per share as part of our share repurchase program. We continue to take a conservative approach to share repurchases as we are prioritizing balance sheet strength and flexibility to be able to take advantage of acquisition and hiring opportunities in this market. And with that, operator, we can open the line for questions.

See also TikTok is Banned in these 20 States and Countries and 12 Best Specialty Chemical Stocks To Buy Now.

Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] The first question comes from the line of Brennan Hawken with UBS. Please go ahead.

Brennan Hawken: Good afternoon. Thanks for taking my question guys. I wanted to start with the comments on the Corporate Finance market. So, totally appreciate — the environment has been challenging and somewhat fluid. But I’m curious about your perspective on sponsors. We’re hearing that sponsors have been a bit slow to return to the MA market. And I’m curious about what you’re seeing there. And with this, maybe a little bit of caution added to the more positive outlook, do you think that it’s reasonable to expect some seasonality here this year in the Corporate Finance line?

Scott Beiser: Brennan, well, I think there’s two questions there. I’ll take at least the first one on the sponsors. I think we’ve continue to see really over the last several months, an improved interest by sponsors to start doing things with their portfolio companies. We see that in terms of number of pitches that we have participated in. We’ve seen that in their attendance in our various industry conferences. We’ve seen that in terms of them asking us to get started in processes. We continue to hear from them that there is some nudging by LPs to start returning capital. And there’s issues, I think, from the employee base of sponsors that they eventually need to start getting back into what we call the deal business. Having said all that, they’re still not going at the pace that I think we all experienced in the industry three years ago, five years ago, seven years ago.

So, I wouldn’t quite say they’re exactly at the normal pace yet, but we do think it’s improved from where they were three, six, nine months ago. And on your question on seasonality, for as long as I could remember except for calendar 2022, the December quarter is always the best quarter for the industry and not too dissimilar for Houlihan Lokey either. Calendar 2022, the December quarter did not stand out like other quarters, there’s maybe a host of reasons. And once again, kind of unclear where the lawyers and bankers and accountants and all the other service providers, are they going to be pushing for various — probably compensation or tax-related reasons to get something done by this quarter. Or will they be more motivated to slip things where they do have control into the next quarter?

I don’t know. We know what historically has happened, and we also know that calendar 2022 was the operation? And I guess we’ll find out pretty soon what calendar 2023 holds.

Brennan Hawken: Okay, that’s fair. And when we think about the MD count in Corporate Finance, noticed that it was down quarter-over-quarter. Could you maybe speak to what drove that decline and whether or not you’d expect that to continue? Or what was behind that slip?

Scott Beiser: So, what I think we do, like in every year, and remember, we’re a March 31 company, so it’s that time period where we are talking to — always a small subset of our MDs, that maybe we think they’re in the wrong platform, aren’t outperforming at the level we’d like. And there is some involuntary departures as well. And then they typically occur — some in the June quarter, some in the September quarter. So, I think that’s just the normal year-end component. Offsetting that is, obviously, we promoted a number of MDs, in April, we hired a number of new MDs in the June quarter as well as the September quarter. And much like others in the industry, we have other offers that have been accepted, but they just have not started yet.