Houlihan Lokey, Inc. (NYSE:HLI) Q3 2025 Earnings Call Transcript

Houlihan Lokey, Inc. (NYSE:HLI) Q3 2025 Earnings Call Transcript January 29, 2025

Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Houlihan Lokey’s Third Quarter Fiscal Year 2025 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, January 28th, 2025. I will now turn the call over to the company.

Christopher Crain: Thank you, operator. And hello, everyone. By now, everyone should have access to our second quarter fiscal year 2025 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 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 upon 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 December 31, 2024, 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 Adelson, Houlihan Lokey’s Chief Executive Officer; and Lindsey Alley, Chief Financial Officer. 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 Adelson: Thank you, Christopher. Welcome everyone to our third quarter fiscal 2025 earnings call. We ended the quarter with revenues of $634 million and adjusted earnings per share of $1.64. Revenues were up 24% and adjusted earnings per share were up 34% compared to the same period last year. We are all pleased with our results for the quarter as well as with our performance year-to-date and we have entered our last fiscal quarter with continued momentum across all three of our business lines. Corporate finance and financial valuation advisory continue to benefit from improvements in the M&A and financing markets, while financial restructuring had another solid quarter as it continues to benefit from record leverage and persistently higher interest rates.

We remain optimistic about the balance of this fiscal year, as we believe the markets will continue to improve given a stronger macro environment. Interest rates and inflation appear stable, and the results of the US election have improved confidence. Looking at each of our segments, Corporate Finance produced $422 million of revenue for the quarter, representing a 36% increase over last year’s third quarter. Key metrics for our Corporate Finance business, including close rates, time to close transactions, new business generation and transaction volume continue to improve when compared with the same period last year. Growth in our Corporate Finance business is widespread, occurring across geographies, industries and driven by both strategic and private equity clients.

Financial Restructuring produced $131 million of revenue for the third quarter, a 2% increase versus the same period last year. During the quarter, we continued to generate enough new business to maintain our backlog and provide us with continued confidence that this restructuring market will remain elevated for longer than we anticipated a year ago. Financial and Valuation Advisory produced $82 million of revenue for the third quarter, a 14% increase versus the third quarter last year, an important result of the improving M&A climate. FVA saw strength across both its cyclical and non-cyclical businesses, and many of the same factors affecting the optimism for our corporate finance business are present in our FVA business as well. Regarding acquisitions, we closed our acquisition of Waller Helms in early December, and our new partners are off to a strong start, contributing to our results.

We added 17 new managing directors in the quarter, 14 through acquisitions and 3 through individual hires. As we look beyond our fiscal fourth quarter, our outlook for fiscal 2026 is positive. Improving M&A market sentiment, an increase in private equity activity, and continued strength in our restructuring business are all encouraging indicators for continued growth. With that, I will turn the call over to Lindsey.

Lindsey Alley : Thank you, Scott. Revenues in Corporate Finance were $422 million for the quarter, up 36% compared to the same quarter last year. We closed 170 transactions this quarter, up from 117 in the same period last year, but our average transaction fee modestly decreased as a result of transaction mix. Consistent with many past years, our third fiscal quarter was our strongest quarter year-to-date in Corporate Finance. Financial Restructuring revenues were $131 million for the quarter, a 2% increase versus the same period last year. We closed 41 transactions this quarter compared to 30 in the same quarter last year, but our average transaction fee on closed deals decreased again as a result of transaction mix. For Financial and Valuation Advisory, revenues were 82 million for the quarter, a 14% increase from the same period last year.

We had 1,005 fee events during the quarter compared to 926 in the same period last year. Turning to expenses, our adjusted compensation expenses were $390 million for the quarter versus $314 million for the same quarter last year. Our only adjustment was $13 million for deferred retention payments related to certain acquisitions. Our adjusted compensation expense ratio for the third quarter in both fiscal 2025 and fiscal 2024 was 61.5% and we expect to maintain our long-term target of 61.5% for this ratio. Our adjusted non-compensation expenses increased slightly to $83 million for the quarter compared to $82 million for the same period last year. This resulted in an adjusted non-compensation expense ratio of 13.1% for the quarter compared to 16.1% for the same period last year.

On a per employee basis, our adjusted non-compensation expense was $31,000 for this quarter, consistent with the same quarter last year. For the quarter, we adjusted out of non-compensation expenses, $4.1 million in non-cash acquisition-related amortization and $4.7 million in integration and acquisition-related costs. This included transaction costs associated with our acquisitions of Waller Helms and Prytania Solutions, as well as a real estate impairment charge associated with Waller Helms. We also had an adjustment of $3.6 million pertaining to professional fees associated with streamlining our global organizational structure, also referred to as Project Solo. Our adjusted other income and expense produced income of approximately $9 million versus income of approximately 6 million in the same period last year.

The improvement in this category was primarily due to an increase in interest income. Our adjusted effective tax rate for the quarter was 33.3% compared to 30.3% for the same quarter last year. The increase in our adjusted effective tax rate was primarily a result of timing issues. We expect our adjusted effective tax rate for the full fiscal year to settle between 31% and 32%. Turning to the balance sheet. As of quarter end, we had approximately $903 million of unrestricted cash and equivalent and investment securities. We did not repurchase any shares during the quarter. As would be expected this time of year, a significant portion of the unrestricted cash will be used to pay our cash bonuses in May for fiscal year 2025. With that, operator, we can open the line for questions.

Operator: [Operator Instructions]. And your first question today will be from Brennan Hawken with UBS.

Q&A Session

Brennan Hawken: It sounds like from your comments and your tone here in the prepared remarks that we’ve seen continued strengthening in the corporate finance environment. Is there any period or a historical context that you could point to help us think about how we should be refining and thinking about the potential for revenue growth in that business moving forward?

Scott Adelson: I think it is very much following what we have anticipated which was going to occur, which is really just this steady progress of things improving and at the same time seeing a strong restructuring environment, or certainly elevated, and that is the same thing we see today and really nothing has changed from last three quarters. At least, to date, that has been a correct way to think about it.

Lindsey Alley: I’m not sure you need to change your thinking, but I’d say, if you go back to Q1, on a consolidated basis, we grew roughly 23%, 24%. In Q2, we grew roughly 23%, and Q3, we grew roughly 24%. There is not an acceleration. It is just a continuation of improvements versus the same quarters last year.

Brennan Hawken: When we think about the typical seasonality that you see in Corporate Finance, normally, the back half of your fiscal year is the strongest and we haven’t really seen a sort of typical cycle here recently, but is it normally fair to think about the March quarter being in a similar ballpark to the December quarter? Is there upside? Is it a little slower because you don’t have the year-end? How would you think about those dynamics? I would think it would be pretty constructive, given how you said that the confidence improving on the back of the recent election, but just wanted to flush that out a little bit.

Lindsey Alley: Without getting into the March quarter, I would say fiscal 2024 had reasonable seasonality to the business. We were roughly 46% first half of the year, 54% second half of the year. If you look back over five, six, seven years, that’s pretty good average. No reason to believe we’re not going to be kind of in that same sort of seasonality that we’ve seen in the past this year as well. No, obviously, things can change with macroeconomic pressures. But we do seem to be seeing the same seasonality this year that we saw last year and in previous years. Historical is not a bad proxy.

Operator: And your next question today will comes from James Yaro with Goldman Sachs.

James Yaro: Starting with restructuring. Restructuring continues to surprise the upside. Maybe you could just comment on the likelihood that it could actually grow in calendar 2025, especially given that rates appear to remain higher for longer and the long end steepening we’ve seen recently.

Scott Adelson: We’ve been saying for a while and actually in the prepared remarks that it is performing better than we would have thought of a year ago and it continues to be elevated. Interest rates remain elevated and we expect that to continue. What that nets for actual numbers depends on an awful lot of factors that are kind of beyond our ability to completely predict.

Brennan Hawken: We’re now entering another year of, I think, as you described, sort of a steadily improving, clearly not snapping back, M&A environment. That probably has some negative ramifications on small competitors given the deal environment has been somewhat weak for a number of years now. So if activity continues to improve at this slow and steady pace, how does that impact your hiring and acquiring backdrop? Does that mean that you should be able to continue to potentially do more deals and I guess your outlook for acquisitions and hiring for the next 12 months?

Scott Adelson: I think a couple things. Again, things are improving. I don’t want that to get lost in that statement, but we have kind of good markets and bad, I would say, continue to find opportunities to both acquire talent and companies. I think that we are a believer that virtually regardless of markets that that will continue.

Lindsey Alley: I would say, James, look, I think from a market share gain standpoint, I’m not sure the market’s any different than it’s been. Our sense is that middle market investment banking firms are performing okay, not just who I am. And we’ll know better after some of our peers go who focus on the middle market. But our sense is in the markets where we perform, people are performing pretty well. The markets are coming back and we do expect to take market share, but not any different than sort of previous M&A recession that we just came through.

Operator: Your next question today will come from Michael Brown with Wells Fargo.

Michael Brown: I wanted to ask a little bit more about the M&A outlook here. And as we have the administration change here, I tend to think that deregulation, less deal scrutiny will be a positive for the large cap strategic M&A activity. But what are kind of the potential knock on impacts here for the small mid-market portion of the market for M&A activity? I guess tariffs, of course, add some uncertainty here when we start to think about some of the international M&A activity and things like cross border. I’d be interested to hear about how that could impact your business. Or again, is it the size of deals you focus on are somewhat more immune?

Scott Adelson: A couple things. On just the overall environment, people being more receptive to M&A, I think, is just overall helpful. Just people’s mindsets, thinking about it more is helpful regardless of size. Obviously we have not been as negatively impacted by regulatory environment as some of our brethren that are focused on large cap transactions. Having said that, it does just create a dampening on the market overall. The return of a far overused term, but the animal instincts of everybody wanting to get back to doing deals is something that is certainly noticeable. When you take a look at whether it be tariffs or threats of tariffs or any other elements of the landscape that I think everybody expect to change from what they have been, I think there will obviously be a number of winners in that and there will be some losers.

And I think one of the benefits we have is in the diversity across industries, across geographies. We really get the benefit of that portfolio effect when those changes occur.

Michael Brown: Just to switch gears, Lindsey, the adjusted non-comp expense has been in that low $80 million range. Any comment on or maybe guidance for the non-comp expense for next quarter? What’s the right range we should think about?

Lindsey Alley: I had been saying sort of sort of high single digits. I think this quarter, we had some sort of timing benefits and a couple other things went our way. I still expect that sort of same high single digit growth applying to Q4. So, really Q4 this year versus Q4 last year, I just think we had some benefits this quarter that brought it down a little bit from what I had suggested maybe last quarter. I’m still back on that same theme.

Operator: Your next question today will come from Ken Worthington with J.P. Morgan.

Kenneth Worthington: I wanted to talk about the deal environment from the perspective of Houlihan as an acquirer. Your stock is near the highs. The funding environment is quite good. Is now a good time for Houlihan to be a buyer and what sort of feedback are you getting from potential targets and partners? Given all the puts and takes, is it reasonable to think that Houlihan will be more or less or similarly active in calendar 2025 versus what you were in 2024?

Scott Adelson: We, if anything, have just gotten, I would say, more organized in how we think about our acquisitions and at any point in time are in dialogue with an array of parties. When somebody is interested in doing a transaction, markets are a portion of it. But again, these are people businesses and it has a lot more to do with the individuals than anything else, quite honestly. Everything you said is factual, but I don’t know that that necessarily drives more or less deals. I think that our view is that there are opportunities out there and we will continue to go after them. The timing of them, don’t know when they will happen.

Kenneth Worthington: Let’s try it in a fishing analogy. Do you have more lines in the water now, acknowledging you don’t know if a fish is going to bite or not depends on, as you said, a lot of different factors. But is there more dialogue happening now or is it just continuous?

Kenneth Worthington: I would say we have better SONAR today than we did before in identifying where the fish are.

Kenneth Worthington: In terms of client dialogue in Corporate Finance, thinking about this from a geography perspective, curious to hear if you’re seeing engagement differ by region at all. I’ll try it back to Trump in elections and so on. But are you getting different engagement and dialogue, North America versus Europe versus Asia? Like anything that strikes you as interesting or curious, that’s worth calling out.

Scott Adelson: As I said in my prepared comments, it really is across the board. There are pockets, if you will, that at a point in time do feel a little bit like they’re picking up faster. But each of those regions broadly defined is really seeing a pickup. As we said, in both private equity and strategics both. It is an all-around pickup. There are pockets that are moving a little faster, but when you look at them in those territories, it is fair to say it’s picking up everywhere.

Operator: And your next question today will come from Devin Ryan with Citizens JMP.

Devin Ryan: A question on just deal size and the evolution there. In the presentation, one of the drivers of Corporate Finance growth, you guys have highlighted is just increasing deal size and deal fees. Just flesh that out a bit more and really kind of get a sense of how much is a concerted effort around winning larger deals versus just how much is that natural progression of your private equity firms buying a company and then selling it a few years later at twice the size, so there’s just that natural growth? Or is there anything else that Houlihan Lokey is doing here to drive higher fees per deal?

Scott Adelson: A combination of all of the above that you mentioned. But simple answer is we are squarely focused on the mid cap space – period. Having said that, within that, we do continue to see year-over-year just a steady increase in both deal size and, for the most part, fee size as well correspondingly. I’m not going to say it’s perfectly linear, but that has been directionally correct for a very long time and we don’t really expect that to change.

Lindsey Alley: Slightly different answer for Restructuring and FVA, but for Corporate Finance, which I think was the sort of focus of your question, Scott said it.

Devin Ryan: A follow up on the private capital financing efforts. Obviously, some news of more hires there recently. You guys continue to invest. I’d love to just get an update on kind of the optimism for that part of the business and expectations there over the next year.

Scott Adelson: Obviously, that is an area that is a newer, hotter area. It has been for a while now. But we believe it’s here to stay and really is as part of a greater set of capital solutions for sponsors just having a broader set of alternatives than they would have had five years ago on what to do with and how they run their businesses. And we think that we’re well positioned to continue to take advantage of that.

Operator: Your next question today will come from Brendan O’Brien with Wolfe Research.

Brendan O’Brien: I guess to start, just to follow up on the capital markets business, one of the bulge bracket banks announced that they’re creating their own private capital solutions group that seems to be going after a similar TAM as you guys. I just wanted to get a sense as to whether you see increased competition in the space and whether that could pose a threat to the growth outlook for the business. If you could give some color on the size of companies that you’re working with, I would imagine that competition for these types of services would be much further down, much lower the further down market you move.

Scott Adelson: To answer your question on the capital markets side, there is not a business we’re in that doesn’t have competition. We understand that. And our capital markets business is absolutely no different. We actually do think that the growth in private capital has been so significant, there will obviously continue to be more players in the space. Obviously, there needs to be just given the growth in the ecosystem overall. We feel very good about our ability to continue to grow that business meaningfully in the years to come.

Lindsey Alley: I’d say if the article you’re referring to is Goldman kind of creating a capital solutions business, we kind of look at the capital markets business very similar to our M&A business, we’re going to have competition. That competition is likely going to come from other mid cap companies. Goldman’s capital solutions business is more likely going to compete with the Evercores of the world, the [indiscernible] of the world, sort of some of our publicly traded peers. Yes, I’m sure they’ll dip down into our business and we’ll increase some fee sizes to dip into their business. But in general, I think we’re staying on different playing fields and not just for M&A, but probably our capital solutions business as well.

Brendan O’Brien: For my follow up, I just wanted to touch on the restructuring outlook. There’s been a significant divergence in traditional restructuring and liability management activity this cycle. However, historically speaking, anywhere from 15% to as high as I think 35% of companies that undergo LME transaction end up filing Chapter 11 within the next two years. How much does this dynamic inform your optimistic outlook for restructuring? And how do you expect the mix between traditional restructuring versus liability management to evolve over time?

Scott Adelson: You are correct in the information that you stated and that obviously does factor in, but that’s just a piece of it. At the end of the day, it just is. If you look at where interest rates are, the number of sick balance sheets out there as a result of rapidly increasing interest rates for a higher period of time than perhaps people would have anticipated or some would have hoped for is really contributing to just more of those sick balance sheets needing to be taken care of. And that manifests itself in various different ways. And as we look at it and we just look at the level of inquiry that we have, we continue to feel confident that we’ll be higher for longer.

Operator: And your next question today will come from Ryan Kenny with Morgan Stanley.

Ryan Kenny: Just wanted to dig in a little bit more on your conversations with sponsored clients in the Corporate Finance business. Is that pickup also more gradual like what you’re seeing, broad based across M&A or should we expect some more outsized momentum on the sponsor side?

Scott Adelson: Certainly, the level of sponsor activity has picked up, no doubt about it. They are both picked up materially. I do think you’re correct. The sponsor activity and just the sponsored dialogue and sentiment does feel like it has picked up even more and we’re feeling good about where that’s heading.

Operator: [Operator Instructions]. Your next question today will come from Jim Mitchell with Seaport Global Securities.

Jim Mitchell: Scott, I think on the last call, you talked about transaction velocity improving, but not back to pre-pandemic levels. It sounds like it got a little better this quarter. Are we getting much closer or getting back to more traditional velocity levels or are still a ways away?

Scott Adelson: We’re not there yet. It is continuing to improve, just as I said, but we’re not there yet.

Jim Mitchell: What gets it there? It seems like financing is pretty wide open. What is what is causing still this hesitation or slower actions?

Scott Adelson: I don’t want to be cavalier about it, but time. It just takes time.

Jim Mitchell: Are bid/ask spreads still wide in terms of expectations?

Scott Adelson: That’s not really it. That’s not really it. As we’ve talked about before, still people are getting back in the water. They’re not running into the water, to keep with our water based examples. Because of that, over time, I think that you will just see that. History would say that will continue to speed up, but it just takes time.

Jim Mitchell: Just one follow up on Restructuring. Is the story here higher for longer rates and everything else you’ve described, it sort of keeps these elevated levels going, but maybe incrementally tougher to grow? Or do you still feel like, in the next couple years, you can still see some decent upward trajectory in revenues in Restructuring?

Lindsey Alley: I think the former. So long as the M&A markets are robust, it’s just hard to grow restructuring business unless you start to see pressure on interest rates in sort of higher versus pressure lower. I think we feel comfortable saying higher for longer. I don’t think we’re comfortable saying that potentially in this market could be incremental growth. Now, if the market changes, obviously, then you’ll start to see pressure on M&A and you’ll see some upward pressure on Financial Restructuring. But in this current market condition, assuming that it continues to get better, we love the fact that we’re not seeing restructuring revenue decline. We love the fact that they’re holding where they are. And we think it’s a kind of a heroic effort from the team to keep us flat in an increasing M&A environment.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to the company for any closing remarks.

Scott Adelson: I want to thank you all for participating in our third quarter fiscal 2025 earnings call. We look forward to updating everyone on our progress when we discuss our fourth quarter and full year results for fiscal 2025 this coming spring.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.