Q3 2021 Houlihan Lokey Inc Earnings Call
[music].
Good day, ladies and gentlemen, thank you for standing by and welcome to Houlihan Lokey third quarter fiscal 2021 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 28 2021.
I will now turn the call over to Mr. Christopher Crain, Houlihan, Lokey and general counsel.
Thank you operator, and Hello, everyone by now everyone should have access to our third quarter fiscal 2021 earnings release, which can be found on the houlihan Lokey website at www Dot H L Dot com and 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 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.
And we encourage investors to review, our regulatory filings, including the form 10-Q from the quarter ended December 31, and 2000 and 'twenty when it is filed with the SEC.
During today's call, we will discuss non-GAAP financial measures, which we believe can be useful and 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 Dot Com website.
Hosting the call today, we have Scott Beiser, Houlihan Lokey, as 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.
Thank you Christopher and welcome everyone to our third quarter fiscal 2021 earnings call.
By every measure the firm's quarterly results were very strong we recorded $1 77, and adjusted earnings per share and increase of 84% above our previous quarterly record of 96.
And we achieved $538 million and revenues, 61% above our previous quarterly record of $334 million on.
All three of our business segments reported record quarterly results corporate finance achieved 306 million and revenues, 52% above its previous record financial restructuring achieved a $178 million and revenues, 42% above its previous record and financial and valuation and advisory achieved $54 million and revenues.
13% above its previous record.
Year to date revenues were $1.025 billion up 20% versus the same period last year, notwithstanding the material impact on the COVID-19 pandemic on our first and second fiscal quarters.
And all three business segments are at record highs through the first nine months of the fiscal year.
Overall, the firm benefited this quarter from a confluence of events that enabled us to achieve record results, which will be a challenge to repeat in the near term.
We entered calendar 'twenty and 'twenty with expectations of solid performance for the year by spring everything changed with the onset and the effects of the pandemic corporate finance revenues and prospects quickly deteriorated financial restructuring prospects rapidly increased.
Similar to previous shocks to the economy, we redeployed, our industry and valuation and bankers towards focusing on distressed businesses and financial restructuring opportunities and.
And our capital market bankers pivoted to help helping raise capital for companies and suddenly under stress our differentiated resilient business model work the way, it's supposed to and consistent with previous distress cycles by summer of 2020, the business environment, most notably the capital markets.
It took a positive turn and this trend has steadily accelerated the downturn and corporate finance and valuation activity reversed course and turned upward.
Current activity levels, and both corporate finance and financial and valuation and advisory are at all time highs. However, near term prospects for new financial restructuring engagements have meaningfully slowed.
I'll now provide some specific comments for each of our business segments.
Corporate finance close to a record 121 transactions this quarter, 27% higher than any previous quarter.
Up to one third of our close transactions came from pre Covid engagements put on hold that might have closed and are first or second fiscal quarter without the impact of the pandemic. Additionally, a small portion of our close transactions. This quarter were likely accelerated as a result of concerned about potential tax law changes and calendar 2020.
And one.
Offsetting the factors that positively impacted this quarter's results was the lack of new business generated in spring and early summer, reducing the number of engagements that would likely have closed and our third fiscal quarter.
Now a few specifics about the quarter and year to date performance for the corporate finance business segment.
We did not exhibit any unusual mega fee projects this quarter.
All industry sectors are performing well our international revenues are growing faster than our U S revenues, our capital markets business is up substantially versus last year and it has proven itself to be recession resistant through this calendar challenging year.
The number of new engagements this quarter set a record up nicely from our second quarter and up substantially from our first quarter and finally, the number of dead deals and deals on hold this quarter are now at normal levels versus what we were experiencing early this fiscal year.
Our <unk> results were driven by strength and almost all of our sub product lines, our portfolio valuation business, which is our largest sub product line continues to produce record results and it's proven to do so and both bull and bear markets also the improvement and M&A activity has positively impacted our transaction opinion practice, which does.
For both corporate and financial sponsor clients the resilience of our SBA segment, even during the business trough created by the pandemic has been impressive.
Revenue is barely declined earlier and the year and have been growing since summer new business activity and the average size of fee events continues to improve.
Financial restructuring revenues for the quarter and year to date are significantly higher than any other comparable period. Our practice benefited from the distress caused by the pandemic and the historic amount of global debt and general our financial restructuring revenues have been strong across geographies and industries and year to date revenues.
Our slightly weighted towards debtor assignments versus creditor assignments financial restructuring tends to be more volatile on a quarterly basis and didn't benefit from both a large number of quarterly closings and a few mega events.
As described over the last two quarters, new business activity and restructuring has been slowing and and our third quarter. It slowed substantially driven by one of the strongest equity and debt capital markets in recent history.
The current business environment suggests restructuring revenues have likely peaked for the time being.
However, the amount of worldwide leverage continued to grow during the pandemic and an extraordinary amount of that has been added to the balance sheets of struggling businesses.
Even government support and unprecedented access to capital there may be a short term decline and new restructuring activity. However, the mid and long term prospects for financial restructuring are stronger today than they were pre COVID-19.
Rounding out other firm news for the quarter, we added PMA Bassi, and Cyrus Walker as independent Board members.
And Cyrus bring a wealth of knowledge and experience and we fully expect them to be great additions to our board.
On the acquisition front, the renewed bullish environment has benefited sellers of financial services businesses and slowed our progress, but we remain more active with potential acquisitions than pre COVID-19 levels and currently have two situations that look promising.
With respect to league table rankings, which come out every year and January Houlihan Lokey was recognized for the six year in a row as the number one firm and the U S and M&A based on the number of completed M&A transactions and for the seventh year in a row, we were recognized as the number one restructuring firm globally based on.
On the number of completed restructuring transactions and we're very proud of these accomplishments and congratulate all of our employees for achieving these rankings and closing I want to thank our employees, who have continued to show incredible energy and perseverance. Despite these unusual times and I wanted to thank our clients who continue to entrust us.
And with their important strategic business decisions and also they're difficult business challenges and I wanted to thank our shareholders, who have continued to have faith in our business model and who have supported us throughout a turbulent year.
We are very pleased with our results this quarter and feel we are well positioned for calendar 2021, and beyond and with that I'll turn the call over to Lindsay.
Thank you Scott.
Corporate finance closed 121 transactions this quarter compared to <unk> 95, and the same period last year and our average transaction fee unclosed deals <unk>.
<unk> significantly this quarter when compared to the same period last year.
Also as Scott stated, we closed a number of transactions that were put on hold earlier. This year due to COVID-19, contributing to a strong increase in revenues for the quarter.
Taking a step back and comparing year to date performance corporate finance is up 2% for the first nine months of fiscal 2021, when compared to the same period last year. This is a significant improvement from last quarter when corporate finance was down 32% year to date through September as a result of the pandemic.
As we enter our fourth fiscal quarter, we are seeing and returned to more normalized operating metrics for this business segment.
Financial restructuring includes 44 transactions this quarter compared to 28, and the same period last year and our average transaction fee on closed deals was significantly higher this quarter when compared to the same quarter last year. However.
However, as Scott suggested as the economy continues to recover from the pandemic and access to both debt and equity capital remains robust.
<unk>.
Activity level of new mandates is now around pre COVID-19 levels.
We still expect to see Covid impacted transactions close and our fourth quarter, but at this time, we expect those transactions to make a meaningfully reduced contribution to financial restructuring results and fiscal 2022.
We remain committed to our belief that global leverage levels and.
And acceleration and the adoption of technology, resulting and secular changes across many industries and other long term impacts of the pandemic makes for an attractive financial restructuring market over the medium and long term, however, current trends and government stimulus and strong capital markets are.
<unk>, a short term headwind to our restructuring business.
And financial and valuation and advisory we had 639 fee events during the quarter compared to 530 and the same period last year, who.
Overall FBA saw improving results across most of its sub product lines and we have continued to see growth and productivity throughout the year.
FBA is experiencing the same benefits that corporate finance is experiencing as the M&A markets continue to make up for lost time.
Before we get to expenses I would like to make a few comments about our pre tax margin performance year to date.
We have benefited this year from an unusually low non compensation expense ratio as a result of the pandemic.
Setting that we have seen slightly higher compensation ratio driven in large part by lower Reimbursable expenses and also a result of the pandemic.
This dynamic has produced adjusted pre tax margin of 28% year to date versus 24% for the same period last year.
As we sit here today. It is too early to determine on how COVID-19 is going to affect our long term targets for any of our expense categories.
But given our business model, 28% pretax margins are normally high.
Turning to expenses, our adjusted compensation expenses were $335 million per the quarter versus $203 million for the same period last year.
We had one adjustment this quarter for retention payments related to certain acquisitions.
Our adjusted compensation expense ratio was 62 three per cent for the quarter, which was above our current long term target for the adjusted compensation expense ratio of between 65% and 61, 5%.
We reduced our compensation expense ratio slightly from last quarter as a result of and increase in reimbursable expenses as compared to last quarter as I have discussed on previous calls our compensation ratio is slightly higher than our long term target primarily as a result of lower than expected reimbursable expenses for fiscal 2021 due to the <unk>.
Impacts from the pandemic.
Our adjusted non compensation expenses were $39 million for the quarter versus $50 million for the same period last year, a decline of about 23%.
This resulted in an adjusted non compensation expense ratio of seven 2% per the quarter versus 15% and the same quarter last year on.
Non compensation expense ratio year to date is running well below our current long term target as a result of the pandemic.
This decline is a direct result of lower travel meals and entertainment expenses as well as lower marketing office related and other operating expenses all due to the firm's response to the stay at home orders imposed because of the pandemic.
We expect to continue to see significantly reduced non compensation expenses and these categories at least through the first half of this calendar year.
This quarter, we adjusted only one item out of our non compensation expenses relating to acquisition related amortization.
Other income and expense decreased for the quarter to income of approximately 200000 versus income of approximately $1 million and the same period last year. This was primarily a result of lower interest earned on our cash and investment balances.
Our adjusted effective tax rate for the quarter was 25, 3% compared to 29, 2% during the same period last year to.
The adjusted effective tax rate is running below our current long term target driven by a significant significant decline and non tax deductible items, such as meals and entertainment and certain other expenses.
As a result, we expect our adjusted tax rate for fiscal 2021 to be closer to 26%.
Turning to the balance sheet and uses of cash.
As of the quarter, and we had $868 million of unrestricted cash and equivalents and investment securities as.
As a reminder, a significant portion of this cash is earmarked to cover accrued and unpaid bonuses for fiscal 2021.
Also in this past quarter, we repurchased approximately 283000 shares and an average price of $65 69 per share as part of our share repurchase program.
And our earnings release, we announced that we increased our share repurchase program to $200 million and for fiscal 2022, we expect to increase share repurchases above our stated goal of offsetting the dilution associated with shares issued as part of our compensation program.
And finally, we are pleased to announce that we are paying a dividend of <unk> 33 per share payable on March 15th to shareholders of record as of March 2nd.
With that operator, we can open the line for questions.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is and the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment and may be necessary.
Sorry to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Okay.
Your first question comes from the line of Ken Worthington with Jpmorgan. Please proceed with your question.
Hi, Good evening. Thank you for taking my questions I appreciate all your comments and.
In terms of restructuring where are you where would you say you are right now in terms of working through your Covid driven restructuring backlog.
Where would you say you are I guess in terms of completions versus retainers like any information you can give us about how that's working through the pipeline. Thanks.
Yeah, I think Ken it's a good question, but.
Prefer not to give specifics I think it just kind of leads to fourth quarter performance.
I will tell you that it is our expectation that we will see some COVID-19 related transactions closing and our fourth quarter that will have a positive impact on our restructuring and results that quarter.
But prefer not to comment on the specifics in terms of how much we've worked through.
Okay.
And maybe.
Triangle more vague vague approach as we think about.
You know where you stand versus.
The current calendar year, or maybe even skip the next quarter, but the maybe the following four quarters.
Is there and.
Any color you can give us maybe looking out further into the future.
In terms of what needs to be worked through or is that just because I just repackage. It. The same question again I'm sorry, if I did.
Okay.
In terms of what we've said and we saw a very large amount of new business come in and our first and second fiscal quarter. It started to.
Slowdown and the third quarter and suspected it was still maybe continue to slow down and the fourth quarter. There is still us.
I'll call it normal work, having nothing to do with Covid issues and this is what we talked about a year ago and whether it's technology disruptors, whether just generally overleveraged businesses et cetera, et cetera, and there is still business that we have not completely worked through from the Covid standpoint.
I think and our comments, we've clearly described when we look at the world in totality and terms of the amount of still leverage out there with companies and the number of companies that they are still struggling and may not totally resolve their business plan issues, we still feel very optimistic about.
On the mid and long term short term capital markets are very wide open and the government intervention has slowed down and probably what we all would have thought would've been restructure and potential short term, but Conversely, that's what's helped our corporate finance business and we've literally seen probably a flip and.
And the last two months from where business activity was coming in today versus six months ago.
Okay. Okay. Thank you and then just the average fee rate was higher per deal on M&A can you talk about the mix change that and you know.
Continuing to help that fee rate and links to try and we spent been seeing.
But anyway more more color on mix and what you are seeing driving that higher AR deal fee per deal.
And when you say mix can you.
Are you talking about our restructuring business and the debtor and creditor.
No no I'm, sorry, it was M&A and and sort of middle middle market M&A.
The corporate finance business I think you had mentioned you know me.
More non non U S based transactions I believe this quarter.
Is that contributing to the higher fee per deals.
Is it just size.
And <unk> related to market.
Yeah.
And I don't I don't think it has anything to do with international versus U S.
And I'd say, maybe there is a skew because of the benefit that we've had and our capital markets business.
Increasing those fees slightly but I think it's really just for the quarter and.
We saw generally speaking larger transactions than we had in previous quarters and it had an impact on the average fee size.
Okay, but nothing we should read forward from what we saw this quarter.
And there's no theme there and.
And that does generally fluctuate a little quarter by quarter, just dependent and depending on what engagements clothes and things along those lines.
Awesome well. Thank you very much really appreciate it thank.
Thank you Ken.
Your next question comes from the line of Devin Ryan with JMP Securities. Please proceed with your question.
Great. Thanks, Scott here one day.
And then.
So a couple here on corporate finance and clearly.
Really a special quarter and it seems like the pace of completions sped up and maybe you touched on a couple of reasons.
People squeezing and deals for.
Taxes potentially change.
Or just some deals that were in the backlog prior to the pandemic.
But I'm curious if the pace of completions does it feel like it's sped up so cannot continue and then maybe and a related question on the 121 corporate finance completions, how many were.
Tied to capital markets and I'm, assuming those deals probably come together.
Those faster as well so just trying to think about that just given how quick it seems like the completions changed maybe relative to what we were thinking a few months ago.
Yet taken them and isolation M&A.
<unk> typically take longer to close and capital market transactions, but if you were to dissect them individually I would say the normal time period to close any of those two types of transactions Hasnt really changed this quarter versus last quarter versus a year ago et cetera.
What we did have as a smaller percentage of deals maybe we're driven by purposely wanted to get accomplished by December 31, but it wasn't an overwhelming fact pattern, which drove the quarter and as we mentioned, yes. There were some deals that were maybe already partially completed put on hold and spring and so therefore part of the timeframe.
Already been eaten up and therefore, you could close those deals quicker, but Conversely, as we mentioned the normal amount of new deals that we probably would've brought in and March April may and et cetera, or much lighter than normal because of the pandemic. So there were some balancing there but your overall comment regarding the timeline to close deals I don't think he has meaningfully changed.
And today's world versus where we were pre pandemic.
Okay. Thanks, that's helpful. And then maybe just a follow up here. If you can just elaborate a little bit on the thought process for the $200 million repurchase.
Is that really.
Kind of return the capital that was raised last may without kind of a.
On large scale M&A occurring given kind of a similar size or.
Should we read this more as just being flexible and opportunistic obviously the business is creating a lot of excess cash or potentially.
To the extent that continues that you may continue to look to lean in on buybacks and you're trying to think about this announcement and whether this is a.
It really kind of on more of a one off situation.
Sure.
And this continues to perform well we may see you kind of reload and continue to do the same thing.
I think several factors the board continues to talk about.
What we can and should be doing with their cash to continue to maximize shareholder value.
We have looked at obviously the total market value of our company stock continues to grow.
And we've I think two or three other times have raised the total size of the repurchase authority. We had so I think somewhat its consistent with the business.
And profitability has grown the size of the business and the market cap and the business has grown.
Clearly feel we have some additional financial flexibility to continue to repurchase and as Lindsey mentioned, we've historically always focused on at least doing repurchases approximating the amount of shares that we've issued.
Goal at least heading into fiscal 'twenty. Two is in fact to do something more than that.
And I wouldn't read anything more other than we've lifted the size, we recognize the financial condition of the company and thought that was a prudent thing to do and in terms of returning some of our cash to shareholders.
Okay terrific. Thank you Scott I'll leave it there thanks for taking my questions. Thanks Devin.
Your next question comes from the line of men and Gus <unk> with Morgan Stanley. Please proceed with your question.
Hi, good afternoon.
And maybe coming back to your comments on the on the non comp expense line.
And maybe just thinking about it more.
Not so much and you have to them, but maybe more as we get into fiscal 'twenty, two and maybe even 'twenty three.
You've managed to keep it really low even and a record quarter and you're caught.
Non comp ratio as half of where it was pre COVID-19.
And I know, there's also some operating leverage and there.
But yes.
Clearly people are willing to do more things virtually so is there a reason why the non comp expense ratio should ever go back to that 15% number you had a year ago.
It's a good question and honestly, we don't know the answer to that question I think it is.
And we're anticipating that we will see some real.
Kind of efficiency benefits out of what's happened over the last nine months with the pandemic and that we will see that efficiency, primarily and our team and <unk> expense, which is one of our largest expense items. So we're hoping the answer is no. We do we don't expect it to go back to those normal to those levels, but until we come out of the pandemic.
Until we start to see how people travel again, and how they react to whatever the new normal looks like it's hard to answer that question, but as we sit here today will be a shame if we don't see some efficiencies coming out of this and not just with respect to <unk>, but over kind of the medium and long term, even with respect to our rent payments.
And the need for everyone to have a separate cube and everyone to have their own office.
On the.
The world is likely changed in that regard, but we are.
And at least a few quarters away from really getting a glimpse of what that might look like.
Got it and.
And then maybe on the M&A side, you know you spoke about how the international business is doing well.
Can you talk a little bit about the investments you've made there and curious about how much of this strength is.
And sort of the ramp up and activity internationally overall versus how much do you think you're gaining some share here.
I think it's both I mean over the last half dozen years, we've meaningfully invested internationally.
Added in terms of acquisitions hiring individuals.
Our London office is now our second largest office.
It was much much smaller, Italy 510 years ago. So part of it is our presence our brand our position is much greater outside and the United States State and it was even a half a dozen years ago and then partly the international business I think has lagged the U S for many years and while Theres been some stops and starts and it over the last year or two.
And at least for US it does feel like it is picking up from where its been maybe it's finally due to some resolution on Brexit, maybe it's because they're coming off of a lower base and then.
You had mentioned before closing and just because we also have a greater presence I think all of that is causing our business profile and results to be growing rather nicely at the moment internationally.
Great. Thanks for taking my questions and congrats on a great quarter.
Thank you.
Your next question comes from the line of Richard Ramsden with Goldman Sachs. Please proceed with your question.
Thanks. This is James <unk> filling in for Richard So obviously this is a fantastic quarter and so congratulations on that.
Perhaps I'll start with the capital markets Advisory business, which has obviously been a bright spot across both your results and those of your peers over say the last 12 months, maybe you could update us on the growth and HL finance, how it's performed versus your expectations and whether your views on the long term growth potential of this business or are higher or unchanged versus.
Maybe a year ago.
So we're still very optimistic about what I'll define as our overall financing capabilities remember we tend to do much more on the private marketplace and the public.
Marketplace much more focused on.
Net capital raising and equity capital raising and we continue to see that there has been ongoing interest by our client base, both in corporates and financial sponsors too.
Use advisors, Houlihan, lokey, and others, and we really do not participate.
Anything meaningful to what some of our other peers have done on the equity side, we're not a classical.
<unk> equity shop, so we havent benefited from that but everything that we see on the financing side.
Just as optimistic about where it can go over the next 510 years. Today is we were a year ago or two years ago.
Got it and that makes sense and then maybe you could talk about the dialogue with sponsors and how that's developed over the past few months and.
And.
So far and perhaps in 2021, and how do you think that could change over the next year.
So the number of sponsors and the number of sponsors we cover and their interest and ability to do deals while they were probably a bit and sleeping mode and spring and summer.
And they are in full force mode, both buy side sell side re Fannie and.
<unk> sighed restructuring side.
And very active and in fact and at certain points I think there and they've.
<unk> been too active to even look at certain things so part of it and they played catch up.
And part of it is just where the capital markets are they're able to go borrow money again and I think.
Most people believe that there is eventually light at the end of the tunnel here and the pandemic. We may argue over exactly what the time period is but kind of what the vaccine out people are feeling a little better about.
And what things might look like and the world's economies and next year or two and all of that is driving I think deal activity by our sponsors and corporates.
Okay.
And then last quarter, you did talk about and a focus on continuing to grow inorganically, but that the dialogue with potential targets had slowed down a little bit maybe you could characterize the environment today and how that's changed and what the timeline is for potentially returning the cash that you raised over the past year.
You don't see any acquisitions and if this has changed at all.
So we always felt when we raised the money back in May of 2020, and it is probably a two year ish type timeline in terms of finding acquiring and closing on transactions. So we're still only maybe a third or so on and that time period.
<unk> said that what we said last quarter and we repeat it again this quarter is due to the improved marketplace out there some of the sellers who were maybe sellers six months ago are kind of feeling like they want to stay independent.
Some have gotten their expectations from a price perspective that may be we think is not quite in line, having said that.
We are still talking to numerous companies as I mentioned there is two of them that we feel really good about at this juncture.
Still not close to the closing line, but all of these do always take some.
Time and months, so we're still optimistic about opportunities out there.
In terms of the number of situations and maybe sometimes the size of those situations or the timeline to close some of these situations. We think have gotten a little more long gated and and a little more.
Difficult and where we were six months ago, just due to the improvement in the marketplace.
Okay. Thanks, a lot congratulations on the great quarter.
Thank you.
Your next question comes from the line of Michael Brown with <unk>. Please proceed with your question.
Great.
Hey, good afternoon, Scott and engineering, guys, Hi, how are you doing Michael.
And so.
And I appreciate all the commentary on the corporate finance business.
But I wanted to take a little bit on a different tack. There. So clearly we've kind of got the wall of worry behind us around with the election.
Done and obviously vaccinations rolling out so a lot of the major concerns out there and it seem to have dissipated.
What I'm curious now as what what are some of the concerns that the C suites are raising and kind of conversations with your bankers and.
What are what are the potential risks here that it may not be contemplating now that there are a lot less obvious and is it just more of a focus on how valuations.
Relative to where they were like pre COVID-19 or.
And I'm sure. The virus is still kind of top of mind, but just curious how those discussions have evolved recently.
I think no matter what timeframe buyers are always going to be concerned about the certain things I mean, a few that I'd say, we still here.
No particular order, but one is potential.
<unk> and the corporate tax code both from the U S and other parts of the globe could.
Could impact People's views on what they can't and shouldn't do.
Increased regulatory issues coming from the current administration could have some impact on transactions, probably more likely on larger size deals that we tend not to work on.
And third thing out there is just general business valuations anything you look at clearly suggests that the valuation multiples of companies are at the upper quartile versus the lower quartile and then we still don't know for many many companies what does a normal post pandemic.
Look like and so when people are typically putting together their three or five year business plans. I think there is still generally more uncertainty and you can have disagreements between the way sellers see the world and buyers see the world and it may take a full here post pandemic before people can say, yes, and now we know exactly how you'll be able to on.
Operate post pandemic and so I think those are some of the handful of issues out there and at any given time I think there's always concerns and issues that day, both buyers and sellers would have but those would be some of them that we're hearing from the C suite today.
Okay, Great that's helpful.
So.
The operating margin pushing over 30% was.
Certainly great to see and something I really hadn't expected to sequel and be able to do of course little to no travel certainly true.
It really helps.
On.
When I see a revenue result like this.
And this quarter, though I suppose I would've expected that the comp ratio could have maybe come down just given given the operating leverage that Scott.
On a inherent in these and this business model. So I understand the dynamics of the Reimbursable expenses, but I just wanted to hear a little bit about how you're thinking about that and if that's.
And something that you're contemplating perhaps with the full year comp ratio.
And as you think about the fiscal fourth quarter results.
And I think we've always focused primarily on compensation for the full year, we try not to vary too much quarter to quarter, but there is going to be some variability.
So that's part of it.
Second I think we've always told ourselves and and told analysts and investors, we're typically getting and have less moving.
Movement and volatility and our compensation payout ratio, whether you view on the good years are bad years.
So you will typically just not see our pre tax margins shrinking much or at all and more difficult times and likewise that necessarily doesn't meaningfully increase during good times and this was an abnormal quarter just because our revenue theres so much higher.
And then we've ever seen before and the non comp.
Is usually a little bit more on the fixed side than on a percentage side. So.
We did lower the compensation payout ratio a bit this quarter based upon some of the comments that you've mentioned, but we've always said look we've generally stayed within a and it seems like a 100%.
Level from where we started on the beginning near the end of the year. This year had some twist to it mostly due to the significant decline and reimbursable, which in our minds are not necessarily classical.
Our revenues, because you're obviously not earning a profit off of it and it's the way we run our business and I think not too different today than what we would've told you three years ago or so.
The eve of us going public or even public.
Okay, Great I appreciate that Scott. Thank you.
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Your next question comes from the line of Jeff Harte with Piper Sandler. Please proceed with your question.
Good afternoon, guys, great great great quarter.
Okay.
Can you help me or us to think about the order of magnitude of the benefits to corporate finance revenues from things like.
Deals on hold closing and year and kind of pre administration change acceleration I'm, just trying to kind of get a feel for how to think about going forward. After a quarter, where revenue is just were so much stronger than any of the visible pipeline stuff, we can kind of see from the outside.
Okay.
So I'd take a step backwards and maybe start with looking at nine months worth of results versus just one quarter. We clearly mentioned there are certain things that had the pandemic not occurred we would have had a better first and second quarter and then arguably we would've had a third quarter.
Having said that the momentum that exists today is maybe isn't as great as we've ever seen so at least as the market presents it.
We're very optimistic about what corporate finance can continue to do for the next couple of quarters, but don't think you can look at this last quarter and say that some normalized level for us.
That's probably the best way to look at it I mean, the I think there was a smaller amount of deals that maybe ultimately closed third fiscal quarter and set a fourth fiscal quarter for tax reasons I think a lot of it was just as we mentioned a confluence of events things that should have closed first and second quarter. Some of that was ended up closing and the third quarter and some are still closed and the fourth.
Quarter and beyond.
But offsetting that is we werent, playing with a full deck heading into the quarter, because we didn't bring in and the amount of new business. So.
If we sit here today and try to analyze the business and what do we think about it.
Kind of going forward for the next half year year. Two years. However, you want to look at it we feel better about it now and we did pre pandemic before we knew what was going to happen with the pandemic. So we all got hit we seem to have recovered and we're back in growth mode.
Okay.
About non comp expenses and maybe at least in the near term do you have a kind of a feel for what you're expecting kind of a dollar wise I mean, we were kind of on.
And $30 million a quarter when the pandemic was hot and outlets.
$39 million and used to run 45, I mean do you have any feel for at least the near term trajectory and what we mean.
Sheila.
Some of the increase is really driven by Reimbursable expenses, which are hard to predict so I think the better we do from a revenue standpoint frankly.
Higher on non comp expenses, just because of the accounting for it.
So look I think that.
It's hard to tell you what the fourth quarter is going to look like.
And a proxy for that might be an average of the last three quarters.
Thats, a guess given that so much of it is driven by revenue growth and Q4 and usually when you grow revenues you have reimbursable expenses from clients attached to it and that will drive non comp expense and so a little harder to answer that question than it used to be free accounting change and.
Jeff If you look back historically, there is a couple of seasonal reasons and why this occurs but historically our fiscal third quarter on an absolute dollar amount just as our highest non comp.
And then our fiscal fourth quarters tended to come in lower so if the similar fact patterns occur that's not an unreasonable assumption to though as Lindsey mentioned I think that we can't predict is the amount of reimbursable and some of it's tied to revenue some of its timing.
And then there are certain things used to be because it's when you ran conferences and when you'll have certain costs and training.
And certain things have absolutely nothing to do with seasonality, but and there is there is been some seasonality quarter by quarter to the absolute amount of our non comp.
Okay, and then finally.
Should we think of something as being kind of a minimum targeted cash to hold on the balance sheet and there's just there's so much cash there on an absolute dollar basis, but also as kind of a percent of total assets. So kind of a targeted range you guys like to keep it up.
It's complicated and answer I think we have accrued and unpaid bonuses as a liability on our balance sheet.
Those do have to be paid so you are going to have to keep enough cash for for those payments and those payments to remind you occur in may and November.
And the other thing is there is a certain amount of money that is overseas and that there is some expense even with the new laws to bring that home.
And so that that capital is not necessarily easily distributable from us and then theres regulatory cash and operating cash that needs to be kept on the balance sheet and not only in the U S, but overseas and so on.
I think.
Hardware and the answer we don't think of it and in terms of and absolute minimum dollar number we do believe we're sitting here with excess cash today and as Scott suggested we at.
At the board level are having conversations about what to do with that excess cash youre seeing a little bit of movement on.
On the share repurchase that was mentioned earlier.
And probably more to come over the over the coming quarters.
Okay. Thanks, guys.
Thanks, Jeff.
Your next question comes from the line of Steven <unk> with Wolfe Research. Please proceed with your question.
Hi, good afternoon, Hi.
And I stayed with them and so what so I wanted to start off with a question on restructuring and you know when thinking about the pace of new restructuring mandates getting back to pre COVID-19 levels and is it reasonable for us to infer that restructuring fees at least over the medium term should be running at the pre COVID-19 run rate of roughly $90 million a quarter just recognizing.
And highly leveraged corporates may not based on the day of reckoning. So quickly simply given the existence of the fed backstop low rates tighter credit spreads what have you.
Yes.
I don't.
I think it's a little early to tell what restructuring is going to look like and the and.
And the short term youre going to continue to see some benefits from COVID-19 related transactions and our Q4 youll.
Youll see some in some periods next year as well.
Activity levels for restructuring are tough because the typical restructuring mandate can take years to complete.
What does that mean for Q3 of fiscal 2022 is hard to tell.
But you are going to see a return to normality.
And whether that's in one quarter to quarter three quarters is hard to answer.
And whether that normality is.
And of that $300 million to $350 million level that we experienced for the sort of two or three years prior to COVID-19.
We hope it's at that level, we just.
Too early to tell.
Okay Stephen.
And as Lindsey mentioned and the last four fiscal years fiscal 17 to 20 a.
Our restructuring revenues generally range from 300 to 350, a couple of positive and negative factors kind of ignore and the pandemic from the moment, obviously lower interest rates and a very healthy capital markets tends to slow things down and the restructuring world.
On the other hand, the ever increasing impact of technology moving.
Disruptive businesses and the total absolute dollar.
The amount of leverage across the system.
The number of companies that still today.
Are have been and may never completely come out of the pandemic.
As healthy as they once were all of those kind of lead you to.
Giving yourself to be more optimistic so the total size of the market I would start with it.
Has continued to grow year by year, having nothing to do with for the moment a blip in the pandemic the complexities of restructuring continue to get more difficult.
We maintained a leadership position and this business and then one other thing while we obviously did very well this quarter and so far these first nine months and there I would say theres been a number of Mega size deals. We worked on there really hasnt been the Super Mega size deals that we saw and the.
Great Global financial crisis, a decade, or so ago, there has not been that Lehman brothers and <unk> or some of these other ones.
And so in fact, the business is probably healthier when you really analyze it from a standpoint on a number of transactions. We're working on kind of the typical size and not getting skewed by any super Mega deals.
Size of our staff and the experience of our staff and in many regards pretty much. The same staff, we had a decade ago. There just basically more skilled more mature et cetera.
And leads us to all those comments that we said.
We're feeling very good about where restructuring can go over the medium and long term, there's going to be some bumps on the road, where it may continue to see some good results from some of the Covid work that still isn't done and the other hand, and tell things kind of stabilize and other areas. We have been witnessing and to the last several months, a slow down and new business activity.
No. Thank you bought it through a really helpful color and just from my follow up on the subject of the topic of normality, but focus more on the corporate finance side and you alluded to some expectation for obviously not at least a decline versus the most recent quarter I mean, I think thats to be expected.
If I look at the productivity level in this quarter. It was north of $10 million per banker you alluded to the fact that about a third of the transactions that closed probably should have closed and the two earlier quarters as I tried to square, what and a very healthy M&A environment, and what's a reasonable productivity per banker expectation.
You guys are comfortable underwriting right now recognizing it was 6 million pre COVID-19 activity seems to be healthier now not quite a $10 million per obviously, you can drive a truck through that range. What do you think is a reasonable expectation as we look out for the next year or two years in terms of what that productivity trajectory might look.
Like.
Yeah.
Here's the good news the good news is we've proven that productivity can increase from 6 million to $10 million overnight and so there is capacity for us to continue to drive productivity of our M&A bankers and there is a number of things that.
And that keep the productivity levels below 10.
One of them is we hire constantly new people and then productivity levels are lower.
Our overseas expansion.
Also a headwind on productivity levels because of the fee structure overseas relative to the U S.
But.
There is capacity and the system.
And I think the M&A bankers corporate finance bankers worked extraordinarily hard and this last quarter that is not sustainable.
We have proven that there is capacity there and we will continue to look for ways to drive productivity.
On quarter by quarter and we.
We've seen it not only and our corporate finance business over the last few years, but we've seen continued improvements in productivity and our SBA business.
And we believe that will will be a <unk>.
<unk> for us over the next three years to five years.
Okay.
Great color. Thank you so much for taking my questions.
And your next question comes from the line of Brennan Hawken with UBS. Please proceed with your question.
Good afternoon, guys. Thanks for taking my questions.
You referenced in the euro.
On the prepared remarks that the.
Year end and.
And potential and anticipation of tax law change drove some acceleration in activity and your corporate finance business.
I just would is it possible to try to understand.
Size that impact so that we can know the right base of revenue in which we'd be wanting to build off of.
Looking forward and kind of bringing thinking about squaring up our our forecast into next year.
Yeah, Brendan and there isn't a number we can give you that says Oh, yes, and it was five or 10 or 20 and projects of our 121.
What we're really comment is when we talk to our bankers out and the field.
And number of them would say, yes, there were transactions, where the client very much wanted to close by December 31, some of them achieve that and some didn't.
And even had expectations to be able to close but if we got hired in.
Late summer early fall, while there were probably some people who are optimistic that you can get close by December 31 did that just isn't practical at least on the M&A landscape. So I think it was more of a small rounding amount that actually was pushed into this quarter.
And because of people trying to accelerate a deal and don't really don't really have an easy way of being able to analyze all 121 projects and said which ones were.
Had a close by December 31, otherwise, we wouldn't have gotten hired or project went to closed its like I said there was commentary that.
Several people had for different reasons I don't think it was an overwhelming.
Reason that caused our revenues and this quarter would be strong it warranted a footnote commentary not a major statistical adjustment to analyze our business.
Okay. Thanks for that Scott and then.
Thinking about.
The quarter from a different way and just trying to understand.
I want to say that.
You had said that this has involved some business that kind of.
Deals that were.
Re.
Yeah.
Reinvigorated.
Re animated what have you from when everybody on the kind.
World shuts down.
And then there was some that were.
Brought on it with new business.
Is it given that.
When we think about the cadence of that.
Quarter over quarter as this year, which is clearly going to look really funky.
We better off just focusing on your fiscal year full year fiscal number one we wanted to think about fiscal year 2021 and.
And.
Rather than try and think about what.
And we jumping off period is since it seems like there was some.
Business that had been in the ground for a while that just got quickly brought to the finish line this quarter and and some regular way stuff so it might be a bit misleading.
I think Scott mentioned and earlier Brennan.
If you look at the year to date numbers, our corporate finance business is up slightly year over year.
And there's no reason not to take a look at Q4 of last year and have that as a jumping off point and.
And realizing that there's going to be some benefit in Q4 of this year from transactions that might have closed earlier had not the pandemic occurred but.
If you look at the year to date numbers and you kind of go through what my comments on which is a lot of the metrics, we're seeing and corporate finance are normalized.
And then I think we're probably back to a quarter on quarter comparisons.
Potentially with a little bit of upside for the next quarter or two relative to.
Pandemic related things.
If that makes sense.
It does thanks a lot.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Mr. Scott Beiser for closing remarks.
I want to thank you all for participating in our third quarter fiscal 2021 earnings call and we look forward to updating everybody on our progress when we discuss our fourth quarter results for fiscal 2021, this coming spring.
And.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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Okay.
Yes.
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Okay.