Q1 2022 Houlihan Lokey Inc Earnings Call
Thank you for standing by this is the conference operator, welcome to the Houlihan Lokey, Inc. Fiscal first quarter 2022 earnings conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded after the presentation there'll be an opportunity to ask questions to join the question queue. You May Press Star then 1 on your telephone keypad should you need assistance during the conference call you may signal, an operator by pressing star and zero I.
I'd now like to turn the conference over to Christopher Crain Houlihan Lokey as General Counsel. Please go ahead.
Thank you operator, and Hello, everyone by now everyone should have access to our first quarter fiscal year 2022 earnings release, which can be found on the houlihan Lokey website at www Dot H L Dot 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 extra day 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 June 32021, 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 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.
<unk> the call today, we have Scott Beiser, Houlihan, Lokey, 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 first quarter fiscal 2022 earnings call. We are pleased to report another strong quarter, we achieved $373 million in first quarter revenues up 77.
Percent from a year ago. This significant increase was compared to a relatively weak first quarter last year as a result of the pandemic.
While our first quarter revenues were down from our exceptionally strong third and fourth fiscal 2021 quarters $373 million in first quarter revenues were the best ever for what is usually our seasonally lowest quarter on.
All 3 of our business segments did very well corporate finance and financial and valuation advisory exhibited continued strength in a very robust M&A market environment and.
And financial structuring delivered strong revenues and continued to maintain its significant market share during a challenging restructuring market environment on.
On the expense side, we reduced our compensation ratio from last year's level, while maintaining historically low non compensation expenses as we slowly return to in person events and business travel for.
For the first fiscal quarter of 2022, we reported adjusted earnings of $1.19 per share up 112% from last year.
Our corporate finance business continued to benefit from our historically strong market with all key metrics experiencing positive trends new business activity remained at record levels. Our average transaction size and average fee per close transaction were higher than previous years close rates were up with fewer transactions put on hold.
Every industry sector, and geography experienced improved market environments in our core product offerings of M&A capital markets and private funds advisory showed year over year growth.
Our FAA business has done incredibly well over the last few years growing its revenues at a 5 year compounded average growth rate of just under 10% all of our service lines within FCA performed above last year's levels and the number of our clients.
<unk> of new clients recurring clients complexity of assignments and average fees all increased.
Our financial restructuring business continues to slow and the torrid pace. It experienced last year as previously discussed financial restructuring is now operating at pre pandemic activity levels, and we expect debt levels of business to continue for the foreseeable future.
However, an ever increasing amount of corporate leverage coupled with effects from the pandemic, Inc. Continued disruption from technology.
<unk> optimism for this business segment in the medium and long term.
During the first quarter, we announced 16 newly promoted Mds, our largest class ever and we hired 5 M. D is mostly in corporate finance, while competitive we believe the hiring market remains strong and we remain in active dialogue with a number of key prospective hires.
Regarding our acquisition activity, we are excited to announce our commencement of a tender offer to acquire all of the outstanding equity of G. C. A corporation for a total cash purchase price of approximately $591 million.
The transaction is expected to be funded with cash on our balance sheet G.
G C. A is a well known global investment banking firm publicly traded on the Tokyo stock exchange. They have significant operations in the U K and Europe, The Asia Pacific region, and the U S. Their primary focus is in technology and related sectors, but they also have expertise in a couple of additional core industry.
<unk> complementary to our existing business we.
We plan to commence the tender offer for GCI shares shortly and we anticipate closing the tender offer in the beginning of October in the meantime, we have started planning for a smooth and successful integration of our 2 businesses.
Within the press release issued yesterday announcing the transaction, we provided a link to a summary of G. C..8 that gives a snapshot of the company and the transaction expense explains our strategic rationale for wanting to commence the tender offer to make this acquisition on.
On the highlight a few performance statistics from that presentation.
Upon completion of the tender offer houlihan Lokey, we'll have over 2000 employees generating more than $1.8 billion in revenues on an annualized basis, we will have offices in 17 countries and over 30% of our combined revenues will be outside the United States as a combined firm revenues and our technology Midi.
We're in telecom industry group will go from being under weighted relative to the industry size to becoming our largest and most global industry growth.
In many regards this transaction is similar to the dozen or so transactions. We've completed over the last decade, it's a business, we know well run by a management team that has a similar culture and business philosophy as we do.
G C. A N houlihan lokey share a number of important cultural traits, including a collaborative entrepreneurial approach independent thoughtful advice and a relentless focus on its clients. While we believe this is an exciting transaction for our collective clients employees and shareholders. We also recognize the time and effort it will take to integrate.
These 2 businesses effectively this is by far the largest transaction we've ever pursued but we're up for the challenge and we are focused on a successful outcome and with that I'll turn the call over to Lynn.
Thank you Scott.
Revenues in corporate finance were $210 million for the quarter up 139% when compared to the same quarter last year. We closed 84 transactions this quarter compared to 35 in the same period last year and our average transaction fee unclosed deals increased.
As a reminder, our corporate finance business was negatively impacted by the pandemic in the same period last year.
Net restructuring revenues were $99 million for the quarter on 11% increase from last year's first quarter. We closed 24 transactions this quarter compared to 29 in the same period last year and our average transaction fee unclosed deals was significantly higher on.
Restructuring activity has now returned to more normal pre pandemic levels and unless something changes, we expect to see solid but significantly lower restructuring revenues for the balance of 'twenty of fiscal 2022.
In financial and valuation advisory revenues were 64 million for the quarter and 85% increase from the same period last year, we had 820 fee events during the quarter compared to 512 in the same period last year and we continue to see an increase in revenues per <unk>.
Turning to expenses, our adjusted compensation expenses were $229 million for the first quarter versus $132 million for the same period last year are only adjustment was for deferred payments related to certain acquisitions. Our adjusted compensation expense ratio was 61, 5% for the quarter.
Our adjusted non compensation expenses were $32 million for the quarter versus $30 million for the same quarter last year, an increase of 6%.
This resulted in an adjusted non compensation expense ratio of 8.5% for the quarter versus 14, 2% in the same period last year.
This quarter, we adjusted out of our non compensation expenses $1.1 million in acquisition related amortization.
We expect to see a significant increase in non compensation expenses in fiscal 2022, as we begin to return to more normalized travel and operations, but we do not expect that to occur until the second half of the fiscal year.
Our adjusted other income and expense decreased for the quarter to income of approximate 101000 versus income of approximately $1.2 million in the same period last year. This was primarily a result of lower interest earned on our cash and investment balances.
Sure.
Our adjusted effective tax rate for the quarter was 26, 7% compared to 25, 3% during the same quarter last year as a reminder, a portion of the deferred stock that we issue as compensation to employees.
During the first quarter of each fiscal year, which was adjusted for in order to get to a more normalized effective tax rate for the quarter.
Our long term target for our adjusted effective tax rate is between 27% and 29%, although we expect our tax rate for fiscal 2022 to be closer to the lower end of the targeted range.
Turning to the balance sheet and uses of cash as of the quarter end, we had approximately $830 million of unrestricted cash and equivalents and investment securities and our first quarter. We issued approximately 1.9 million net new shares to employees as part of their bonus compensation for fiscal 2021.
We intend to offset this dilution through share repurchases throughout fiscal 2022 and in our first quarter, we repurchased 1.4 million shares through either open market repurchases repurchases met to cover taxes on vesting shares at an average price of approximately $76 <unk> per share.
Finally, moving to the acquisition of GCI.
Given the length of the tender offer process in the next quarter, we expect to be in a better position to answer questions that you will have regarding our integration strategy. The pro forma combined company combined company financial profile.
Accumulation and deployment of future cash and the timing to achieve appropriate long term targets. We believe this acquisition will be accretive to our shareholders at closing and we look forward to sharing with you our plan to drive shareholder value through the combination of these 2 businesses.
And with that operator, we can open the line for questions.
Thank you we will now begin the question and answer session to join the question queue. You May Press Star then 1 on your telephone keypad, you'll hear tone acknowledging your request if youre using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then 2 we will pause.
For a moment as callers join the queue.
Our first question comes from Ken Worthington of Jpmorgan. Please go ahead.
Hi, Good morning. Thank you for taking my questions I wanted to focus on on the GCI deal acknowledging you said that you would get.
More into some of the strategic rationale next quarter.
But talk to us a little bit about the growth of the company. So clearly 2021 is great for M&A globally and it looks like <unk> is having a great start to 'twenty 1.
It looks like revenue was down in 19, what is the growth looks like for this company.
Over the last 5 years is it sort of.
Would you characterize it as a fast growing company it.
It looks like it could have more stagnant growth, but I just don't have enough of.
On the timeline yet to see that so first talk to me about the growth.
Yes.
Morning, Ken I think its performance and growth has been similar to do not only our firm, but other investment banking firms over the last couple of years, there's been some volatility obviously with the pandemic impact.
Actually in calendar 2020 for them they are having a very good year in 2021.
As I think most everyone else in the marketplace and we think there on a very good space clearly in technology, which is.
1 of the leading if not the leading industry.
And they clearly have a lot of geographical diversity to continue to help their growth.
Okay.
And then how does this fit into the Houlihan vision.
It seems to me the attraction is an attractive asset class so technology diversifies the business.
The geography.
Are there synergies here.
On the simple side would be cost synergies I'm not sure there's anything there, but does it complement restructuring or financial advisory anywhere.
And are there existing are there synergies for your existing middle market M&A business. Do you think you can do more cross border deals with this company like.
Help me understand the synergies that you envision.
While in many regards we look at it very similar to the other dozen or so deals that we've done obviously, we mentioned this is a larger business and scale and scope.
But.
We've experienced almost every time whenever we've acquired a business that eventually we do get some revenue synergies, we're putting together 2 teams that have a different set of clients and experiences we add to the geographical bench, we clearly strength in the TMT.
Industry.
They don't have the restructuring business that debt. We've got they don't really have the same level of depth of the valuation group that we have they really don't have the same level of the financial sponsor.
With that we have so all these things we believe combined would make both of the businesses stronger.
Most steel having said that we know it takes time and it takes energy to get there and that's kind of our expectations on the revenue synergies and I would say very similar to what we've experienced with our past deals.
Okay, great. Thank you very much.
Thanks, Ken.
Our next question comes from Steven <unk> of Wolfe Research. Please go ahead.
Hi, good morning.
Good morning, So wanted to start off with a question on the restructuring outlook.
To your credit I think you were pretty early and calling out some slight signs of the slowdown.
The updates from your peers have been increasingly tepid.
I just was curious based on the prior guidance you guys had given US 300, or 350 million being a reasonable range is that still the level that we should be underwriting just given the pace of activity in the near term recognizing some of your optimism on the opportunity long term.
Yes, I mean I think.
That's very specific guidance I'm not sure. We gave the 300 to 350, but we did say look where we are at activity levels that were consistent with pre pandemic.
And and so you can take a look at kind of where we were a couple of years prior to entering into the pandemic and that's not a terrible proxy and I think as we sit here today.
I don't think any of our comments from previous calls have changed in terms of the restructuring market on our expectations for <unk>.
Fiscal year 2022.
Okay.
Understood and just for my follow up.
Also relating to G. C. A I was hoping to just better on pack.
Recognizing that the transaction is financially compelling, but it does appear to increase your gearing to more cyclical revenue streams I know talking to many investors I think.
A big part of their optimism and bullishness on the prospects for Houlihan is that balanced revenue mix and was hoping you could give us some context around how you are thinking is evolving around the increased gearing. It appears to corporate finance and it sounded like Scott you alluded to maybe them being a little bit less index to sponsor.
<unk>, although it does feel like Theyre pretty active there as well, but any context, you can give around like the pro forma revenue mix.
And how it changes at least your relative cyclicality would be really helpful.
Yeah, So Steven just to clarify on the financial sponsors comment they do a lot of work with financial sponsors. They just don't have as many dedicated.
Financial sponsor coverage officers as we do.
We clearly look at this as being very similar to what Houlihan Lokey does in corporate and it's predominantly M&A.
Sell side and buy side. They also have a capital markets activities tend to work in the both the middle market and upper middle market space, They add additional industry sub sector expertise.
While historically, they've not been focused on restructuring or evaluation like our firm does we think that as an opportunity just as we have those bankers in those capabilities. So we think it will enhance the overall growth of the business do recognize your comment yes, we are adding more I'll call it corporate finance activity.
Statistically versus adding incremental restructuring or valuation revenues, but I do think it's important to know when you go as deep as we would go with this acquisition and an industry space like technology.
That benefits the entire firm that benefits, our restructuring folks enables them to win technology transactions because of industry expertise that we might not have been able to do previously and benefits our FAA business in terms of credibility with sophisticated clients. So it's not like I mean, yes.
Our corporate finance their revenues are predominantly corporate finance, but 1 of the reasons. We do transactions like this is so that that revenue mix given the industry depth that we're acquiring here will improve.
For <unk> and for Houlihan Lokey on a go forward basis.
That's great color. Thank you both for taking my questions.
Thanks Steven.
Our next question comes from Michael Brown of K B W. Please go ahead.
Great. Thanks for taking my questions.
If I could start on TCA.
I guess first I wanted to ask on if there are about the structure of the transaction.
Given it's a.
<unk> tender.
Wanted to ask is there any retention component to the deal obviously thats kind of key to success and deals in the space. So.
Curious if that's contemplated here or that maybe comes down the road.
Yes, we do have a retention pool contemplated the exact details of that are not completely defined at this point.
Okay great.
And then obviously M&A activity in Europe, and in Asia have lagged the U S.
Yeah its been steadily.
Steadily improving and in Europe, and we're seeing that rebound there.
Kind of continue.
Continuing to lag, but there is clearly some pent up demand. There can you just speak a little bit more to your.
Your outlook for each of those regions and your expectations there.
As you look forward.
Alright, so if we have a very similar view for probably over the last set of its 3 years or 10 years, which is there's a lot of growth potential in Europe in Asia, having said that in the U S has been the kind of the star business recovery growth et cetera for quite some time, so we like to be able to have access to do.
Work in really all of those key geographies, because we think there's opportunities not only in the United States, but clearly in Europe, clearly in Asia and there's other places in the globe debt. We're still just touching on and would hope over time to eventually grow into some additional geographies.
Okay.
Okay, Great I'll leave it there Scott thanks.
Thanks, Thanks, a lot.
Our next question comes from Richard Ramsden of Goldman Sachs. Please go ahead.
Hey, guys. Just wondering if you could you just spend a few minutes talking about the judiciary process of what that looked like obviously, given the travel restrictions and given the fact that this is as you said 1 of the bigger deals that you have you have done.
I'll start with we've known some of the key people on the company for many years.
So that's helped.
We've been dialogue ing with them for a decent amount of time.
As you said, we've not been able to do the typical in person.
Diligence that you would like but we've done a lot of zoom and telephonic diligence and much like all of us in the investment banking business, we've all figured out how to do deals for our clients.
Not in person and feel the same way here.
Sure would prefer to have always been able to do more things in person, but feel we got accomplished what we needed on on both sides of the equation to get more comfortable with each other.
Okay, Great and then just briefly on the SBA business continues to do very very well. It's obviously an important driver of revenue growth for you.
So you touched on this in some of your upfront remarks, but can you just help us think through how much of this increase is recurring mandates that we should expect in future years. So to what extent do you think that this is a base from which you can grow just given the nature of the business.
The new business that youre getting in FBA.
So first I'd say, we're very optimistic overall about the growth profile of what's happening in the FDA.
When you asked the question about repeat clients.
Might look at it really 2 ways number of clients or potential revenue is truly under contract.
You can almost totally identify year by year.
On the somewhere probably in a third to a half of that business, but if you really look at almost any of our clients I would you could argue it's a much much higher number from a repeat standpoint, meaning we do a lot of work for the various financial sponsors we do a lot of work for a lot of companies. We may not know what that exact task is.
3 months from now or 2 years from now, but a lot of the work that we do is I would put in the repeat category. So it's both growing by doing more work for existing clients by adding additional clients as well as adding additional services over the last handful of years.
Okay. That's very helpful. Thanks, a lot.
Thanks Richard.
Our next question comes from Brennan Hawken of UBS. Please go ahead.
Good morning, Scott and Lindsey Thanks for taking my question.
So on G C E.
Dan that you can't speak to the pro forma combined entity and we will get more of that on the next quarterly call but.
When we look at the profit margins the operating margins for this business.
They look like they run about half of <unk>.
Houlihan's.
Low double digit maybe to teens.
So.
Is there something when you took a look at this company and you did your due diligence is there something structural.
To that is that the scaled profitability of this business or.
Is the idea that when you combine when you fold this company into Houlihan Lokey.
There's enough overlapping.
Duplication of whatever overhead and whatnot that you can deliver scale benefit.
Or.
Should we think about this as likely just reducing the longer run operating margin at Hawaiian.
So Brendan a couple of things I'd say, 1 most if not maybe all of the previous acquisitions. We've done those companies had had lower margins than houlihan lokey. So this is not an unusual fact pattern for us too much like the size that we were prior to going public we had a much lower margin.
Then we're currently performing so I do think there's a scale and size issue that occurs and 3 it's how they've historically operated and we do think while it will take some time, but effectively by adding once again the incremental.
Bench strength that we have combined with theirs will be able to find more clients do more work for clients at a higher fees increase close rates and that's net of what I've. Just said is unusual for this particular transaction that I'd say that similar to what we've experienced with most of our previous transactions.
Okay. Thanks for that and when you think about.
Geographic diversity, it's 1 it's 1 of the things that you mentioned is the benefits around this deal but.
Yeah, a little if.
If I could b.
Be a push back on that a bit when you look across this business.
Firms that are geographically diversed diverse.
We have grown at a at a pretty substantially slower pace and houlihan previously had a very unique proposition where you were focused on middle markets.
3 business units all came together really well and there was a clear.
Synergy is probably the wrong word, but quick clear benefits from being in these different businesses and now when you introduce a lot of European and APAC revenues much more.
On the corporate finance oriented.
Why is that necessarily going to continue to feed into this virtuous cycle that you have between your businesses.
And should.
Should we think that while while the revenue outlook for 2021 is good versus last year when.
When you go back and look at some of the history. The outlook for 2021 revenues is basically just going to get them back to where they were in 2018. So it seems as though the growth profile of the business that you're buying is it lower.
And that's what I'm hearing from you know a lot of investors. This morning, why is that wrong and why do you think that debt. This is a more attractive asset where that diversity can actually be a tailwind.
So I think he asked a couple of questions there Brennan.
Jake on the geographical growth, we have said to ourselves to our investors to many over many many years that we've wanted to increase our non U S presence, we recognize in finance finance is very much a global business and we've continued to lead the port I would say money time and effort in growing our non U.
<unk> business. That's the good news. The fact pattern is as the U S has just continued to grow as well and we've been at roughly probably an 80.20 mix.
For quite some time, we believe this will increase our non U S positioning not so much that it makes the USA statistical much much smaller place, but actually we think gets us more consistent with really where activity is across the globe and as we do more work and as we do work on larger deals. It's just more important habit.
Some access in different parts of the globe. So we think a deal like this and much like acquisitions. We made in the past has been very good opportunities for us and in terms of the growth profile.
Once again, we've looked at the space that they're in we've looked at the space that we're in we think it fill some holes.
We think.
They will with ourselves collectively continue to be able to grow over.
The years.
And you know.
Well like I said, we think they're doing well we think the markets are doing well. We think we can continue to do well on ourselves, but caution everybody. We do know when we do make acquisitions. It does take some time for all of those potential synergies to kick in.
A couple other things just to add Brennan.
We're not growing overseas for the sake of growing overseas, we think we have built.
And all 3 of our product lines, a phenomenal platform here in the United States.
Restructuring I think in particular has shown an ability to take that overseas incredibly effectively we think we can do the exact same thing with corporate finance, we have kind of a long term view of how we're going to get there and this is 1 step and so I think it's non how Europe is doing relative to the U S.
Today. It is a kind of long term vision on taking that corporate finance platform to Europe to Asia, and just globally and it's not just for the sake of growing it's because our clients are insisting on it.
Okay. Thanks for the color.
Yes.
Once again, if you have a question. Please press Star then 1 are.
Our next question comes from Devin Ryan of JMP Securities. Please go ahead.
Okay, great. Thanks, good morning, everyone.
Just another 1 here on GCI, but kind of a bigger picture just on kind of on the M&A strategy for Houlihan Youre clearly you guys had been <unk>.
Active on the M&A front. This is your largest deal on.
You alluded to several large deals.
Your year ago, or so I'm curious was this <unk>.
Included in that.
Contemplation and then does this put you guys out of the market just because it's a larger transaction integration is probably a little bit different year on somebody other deals or do you feel like you can continue to do a.
Deals over the intermediate term and our other actually other large deals that are being contemplated.
We're still talking to other companies still expect to be pursuing potential future acquisitions, I think it's probably unrealistic over the near term to do a similar sized type of acquisition as <unk>, but most of our historical deals have been much much smaller and at the right fact patterns present itself.
Over the next quarter next year et cetera, we will continue to pursue.
Transactions.
Okay.
Okay great.
Just a follow up.
Middle market M&A broadly.
If Ken Scott talk a bit about the competitive dynamics.
Okay.
The firm's throughout the last few quarters on earnings calls large bulge brackets independent firms have been talk.
Okay.
Heard some building out their capabilities, both in the middle markets, but more broadly with sponsors.
You guys have a leading position there.
Doing it longer.
And deeper than many firms, but I'm just curious.
How the competitive dynamics are shifting.
And what day.
More firms come in and.
You try to take share.
Yeah, I don't think the competitive landscape today is any greater than it was a year or 2 or 3 years ago. The market is more robust so theres more activity and more deals for everybody to do but I would say in terms of who do we see from competition, who do we compete against what do we have to do to win.
It's not dramatically different at least in this space in areas that we focus on from where it's been in the last year or 2.
Okay, great. Thanks very much.
Alright Devin.
This concludes the question and answer session I would like to turn the conference back over to Scott Blazer for any closing remarks.
Well I want to thank you all for participating in our first quarter fiscal year 2022 earnings call and we look forward to updating everyone on our progress when we discuss our second quarter results for fiscal 'twenty 2 is coming fall.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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