Q3 2025 Houlihan Lokey Inc Earnings Call
Speaker Change: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Houlihan Loki'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 28, 2025. I will now turn the call over to the company.
Speaker Change: Thank you, Operator, and hello, everyone. Now everyone should have access to our third quarter fiscal year 2025 earnings release, which can be found on the Houlihan Loki website at www.hl.com in the Investor Relations section.
Speaker Change: Before we begin our formal remarks, we need to remind everyone that the discussion today will include forward-looking statements.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: A reconciliation of these measures to the most directly comparable gap measures is available in our earnings release and our investor presentation on the HL.com website.
Speaker Change: Hosting the call today, we have Scott Adelson, Houlihan Loki's Chief Executive Officer, and Lindsay 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.
Speaker Change: Thank you, Christopher. Welcome everyone to our third quarter fiscal 2025 earnings call.
Scott Adelson: 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.
Scott Adelson: 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.
Scott Adelson: 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.
Scott Adelson: 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 U.S. election have improved confidence.
Scott Adelson: 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.
Scott Adelson: 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.
Scott Adelson: Growth in our corporate finance business is widespread, occurring across geographies, industries, and driven by both strategic and private equity clients.
Scott Adelson: Financial restructuring produced $131 million of revenue for the third quarter, a 2% increase versus the same period last year.
Scott Adelson: During the quarter, we continue 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.
Scott Adelson: 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.
Scott Adelson: FDA 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 FDA business as well.
Scott Adelson: 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.
Scott Adelson: We added 17 new managing directors in the quarter, 14 through acquisitions, and 3 through individual hires.
Scott Adelson: 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.
Thank you, Scott.
Lindsey: 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.
Lindsey: Consistent with many past years, our third fiscal quarter was our strongest quarter year-to-date in corporate finance.
Lindsey: The natural restructuring revenues were $131 million for the quarter, a 2% increase versus the same period last year.
Lindsey: 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.
Lindsey: 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.
Lindsey: 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.
Lindsey: Our adjusted compensation expense ratio for the third quarter in both Fiscal 2025 and Fiscal 2024 was 61.5%. We expect to maintain our long-term target of 61.5% for this ratio.
Lindsey: 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.
Lindsey: On a per-employee basis, our adjusted non-compensation expense was $31,000 for this quarter, consistent with the same quarter last year.
Lindsey: 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.
Lindsey: This included transaction costs associated with our acquisitions of Waller-Helms and Pretania Solutions, as well as a real estate impairment charge associated with Waller-Helms.
Lindsey: 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.
Lindsey: Our adjusted other income and expense produced income of approximately $9 million versus income of approximately $6 million in the same period last year.
Lindsey: The improvement in this category was primarily due to an increase in interest income.
Lindsey: Our adjusted effective tax rate for the quarter was 33.3%, compared to 30.3% for the same quarter last year.
Lindsey: 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%.
Lindsey: Turning to the balance sheet, as of quarter end we had approximately 903 million of unrestricted cash and equivalents and investment securities.
Lindsey: 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. And with that, Operator, we can open the line for questions.
Thank you.
Lindsey: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone.
Lindsey: And your first question today will be from Brennan Hawking with UBS. Please go ahead.
Good afternoon, Scott, Lindsay, how are you?
Hey, Brandon.
Speaker Change: 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 You know
Speaker Change: Is there a period or a historical context that you could point to to help us think about how we should be refining and thinking about the potential for revenue growth in that business moving forward?
which is really just this steady...
Speaker Change: 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 the last three quarters and at least to date that has been a correct way to think about it.
Speaker Change: There is not an acceleration, it is just a continuation of improvements versus the same quarters last year.
but just wanted to flesh that out a bit.
Speaker Change: Yeah, look, I think without getting into the March quarter, I will say, you know, fiscal 24 had pretty reasonable...
Charles Yamarone: Scott Beiser, Charles Yamarone, Scott Beiser, Charles Yamarone, Scott Beiser, Charles Yamarone,
Charles Yamarone: We do seem to be seeing the same seasonality this year that we saw last year and in previous years and so that's not a bad, the historical is not a bad proxy.
Thanks a lot. Appreciate it.
Thanks, Brennan.
Speaker Change: Your next question today will come from James Yarrow with Goldman Sachs. Please go ahead.
Good afternoon and thanks for taking my questions.
James Yarrow: Hey, guys. So, if 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.
James Yarrow: Yeah, I mean look we've been saying for a while and actually 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
James Yarrow: You know, nets for actual numbers depends on an awful lot of factors that are kind of beyond our ability to completely predict.
Speaker Change: Okay, very clear. So we're now entering another year of, I think as you described, sort of a steadily improving, but clearly not, you know, snapping back M&A environment, and so that probably has some negative ramifications on smaller competitors given the deal environment's been somewhat weak for a number of years now. So if activity continues to improve at this slow and steady pace,
Speaker Change: 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 let's say?
Speaker Change: Yeah, I mean, I think a couple of things clearly. Again, things are improving, right? I don't want that to get lost in that statement, but we have kind of good markets and bad, I would say.
Speaker Change: continue to find opportunities to both acquire talent and and companies and I think that we are a believer that virtually regardless of markets that that will continue.
Speaker Change: Yeah, and I would say, James, look, I think from a market share gain standpoint,
Speaker Change: 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, you know, not just Houlihan. 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.
Speaker Change: And we do expect to take market share, but not any different than sort of pre this M&A recession that we just came through.
Great, that's very clear. Thank you.
Thanks, Aaron. Our pleasure.
Speaker Change: And your next question today will come from Michael Brown with Wells Fargo. Please go ahead.
Michael Brown: Great, good afternoon Scott and Lindsay. I wanted to ask a little bit more about the M&A Outlook here and as we
Michael Brown: have the administration change here. I tend to think that, you know, deregulation, less deal scrutiny, will be a positive for the large-cap sponsor, or not sponsor, large-cap strategic M&A activity.
Michael Brown: But what are kind of the potential knock-on impacts here for the small, mid-market portion of the market for M&A activity? And then, 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.
Speaker Change: I'd be interested to hear about how that could impact your business, or again, is it the size of deals you focus on somewhat more of you? Thank you.
Yeah, happy to. So a couple things on
Speaker Change: 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.
Speaker Change: 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 of the animal instincts of everybody wanting to get back to doing deals is something that
It is certainly noticeable when you take a look at
Speaker Change: 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
Speaker Change: I think there will obviously be a number of winners in that, and there will be some losers. 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.
Speaker Change: Okay, great, and then 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? Like, what's the right range we should think about?
Yeah, look, I had been saying, sort of...
Speaker Change: Scott Beiser, Charles Yamarone, Scott Beiser, Charles Yamarone, Scott Beiser, Charles Yamarone,
Speaker Change: applying to Q4. So really Q4 this year versus Q4 last year. I just think we had some, you know, some benefits this quarter that brought it down a little bit from what, you know, I had suggested, maybe, in that last quarter. So I'm still back on that same theme.
Thank you for watching.
Okay, great. Thank you both.
Speaker Change: And your next question today will come from Ken Worthington with J.P. Morgan. Please go ahead.
Ken Worthington: Hi, good afternoon. Thanks for taking the question. I wanted to talk about the deal environment from the perspective of Houlihan as an acquirer.
Ken Worthington: 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?
Ken Worthington: And given all the puts and takes, is it reasonable to think that Houlihan will be more or less or similarly active in calendar 25 versus what you were in 24?
Ken Worthington: So 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 those hit...
Ken Worthington: when somebody is interested in doing a transaction. Markets are a portion of it, but again, these are people's businesses and it has a lot more to do with the individuals than anything else quite honestly.
Speaker Change: 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.
Speaker Change: So 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, you know, as you said, a lot of different factors. But is there more dialogue happening now or...?
You know, is it just continuous?
I'm thinking about this from a geography perspective.
Speaker Change: I'm 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.
Speaker Change: It really, 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 they...
Speaker Change: But each of those regions, broadly defined, is really seeing a pickup, and both in, as we said, private equity and strategic.
Charles Yamarone: Scott Beiser, Charles Yamarone, Scott Beiser, Charles Yamarone, Scott Beiser, Charles Yamarone
Okay great, thank you much.
Thanks, Ken.
Speaker Change: And your next question today will come from Devin Ryan with Citizens JMP. Please go ahead.
Charles Yamarone: Scott Beiser, Charles Yamarone, Scott Beiser, Charles Yamarone, Scott Beiser, Charles Yamarone,
Great. Hi, Scott. Hi, Lindsey. How are you?
Speaker Change: A question on just deal size and the evolution there. In the presentation, one of the drivers of corporate finance growth that you guys have highlighted is just increasing deal size and deal fees. And so I'd love to 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 firm
Speaker Change: twice the size, so there's just that natural growth. Or, you know, is there anything else that the Hoolahound LOKI is doing here to drive higher fees per deal?
Speaker Change: combination of all of the above that you mentioned but I mean simple answer is we are squarely focused on the mid-cap space period right having said that within that we do continue to see
Speaker Change: year-over-year just a steady increase in both field size and for the most part feed size as well correspondingly. And that is, I'm not going to say it's perfectly linear, but that has been directionally correct for a very long time.
Speaker Change: And we don't really expect that to change. And, you know, a slightly different answer for restructuring and FBA, but for corporate finance, which I think was the sort of focus of your question. Thanks, Scott.
Speaker Change: Got it, thanks guys. And then just a follow up on the private capital financing efforts. Obviously some news of more hires there recently. You guys continue to invest. So love to just get an update on kind of the optimism for that part of the business and expectations there over the next year, thanks.
Speaker Change: Yeah, I mean obviously that is an area that is a newer, hotter area. There's none of that outside. It has been for a while now, but I mean we believe it's here to stay and really is as part of a greater
Speaker Change: 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.
All right, thanks so much, appreciate it.
Thank you.
Speaker Change: And your next question today will come from Brendan O'Brien with Wolf Research. Please go ahead.
Good afternoon and thanks for taking my questions.
Speaker Change: I guess to start, just to follow up on the capital markets business, you know, one of the bold fracket banks announced
Speaker Change: 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.
Speaker Change: And also, 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.
Speaker Change: To answer your question on the capital market side, there is not a business we're in that doesn't have competition, and so 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 that we'll obviously continue to be more...
Speaker Change: 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.
Speaker Change: And I'd say, if the article you're referring to is Goldman, kind of creating a solutions business, capital solutions business, you know.
Speaker Change: We kind of look at the capital markets business very similar to our M&A business. We're going to have competition, but that competition is likely going to come from other mid-cap companies.
Speaker Change: Goldman's capital solutions business is more likely going to compete with the Evercorse of the world, the Moluses of the world, some of our publicly traded peers. And yes, I'm sure they'll dip down into our business and we'll increase some 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.
Speaker Change: 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.
Speaker Change: Yeah, I mean, 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, if you, the
Speaker Change: 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.
Speaker Change: is really contributing to just more of those sick balance sheets needing to be taken care of.
Speaker Change: 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.
Thank you for taking my questions.
Thank you. Pleasure.
Speaker Change: And your next question today will come from Ryan Kenney with Morgan Stanley. Please go ahead.
Ryan Kenney: Hi, thanks for taking my question Just wanted to dig in a little bit more on your conversations with sponsor 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?
Ryan Kenney: Yeah, certainly the level of sponsor activity has picked up. No doubt about it. And it is there.
Ryan Kenney: 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 are feeling good about where that's heading.
Thank you.
Speaker Change: Again, if you have a question, please press star and then 1. And your next question today will come from Jim Mitchell with Seaport Global Securities. Please go ahead.
Speaker Change: Transaction velocity improving but not back to pre-pandemic levels. It sounds like it got a little better this quarter. So are we getting much closer or getting back to more traditional velocity levels or are still a ways away?
Speaker Change: We're still, we're not there yet. I mean, it is continuing to improve, just as I said, but we're not there yet.
Speaker Change: and so what what gets it there is it it seems like financing is pretty wide open what what is what is causing still this hesitation or slower yeah I don't want to be cavalier about it but time right it just takes time
Are bid-ask spreads still wide relative to...
still.
people are
That, to keep with our water base.
Speaker Change: examples. And because of that, over time, I think that you will just see that history and say that will continue to speed up, but it just takes time.
Right, okay, and just one follow-up on
Speaker Change: on restructuring. Is it is the story here higher for longer rates and and everything else you've described this sort of keeps
Scott Beiser, Charles Yamarone
Speaker Change: The next couple of years you can still see some decent upward trajectory in revenues and restructuring.
Speaker Change: I think, look, I think the former. I think it's, you know, so long as the M&A markets are robust, it's just hard to grow a restructuring business, you know, unless...
Speaker Change: unless you start to see pressure on interest rates in sort of higher versus pressure lower.
Speaker Change: So, I think we feel comfortable saying hire for longer, I don't think we're comfortable saying they're potentially in this market.
Speaker Change: 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.
Speaker Change: 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, you know, we think it's kind of a heroic effort from the team to keep us flat in an increasing M&A environment.
Yep, okay, understood. Thanks for your color, Lindsay and Scott.
of course.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to the company for any closing remarks.
Speaker Change: 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.
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.