Q4 2025 Houlihan Lokey Inc Earnings Call
Speaker Change: Good day ladies and gentlemen, and thank you for standing by. Welcome to Houlihan Lokey's fourth quarter in fiscal year 2025 earnings conference call.
Speaker Change: 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, May 7, 2025. I will now turn the call over to the company.
Thank you operator, and hello everyone.
Speaker Change: By now, everyone should have access to our fourth quarter and fiscal year 2025 earnings release, which can be found on the Houlihan Lokey 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 on them [inaudible]
Speaker Change: 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.
Speaker Change: We encourage investors to review our regulatory filings, including the Form 10K for the fiscal year ended March 31, 2025, 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.
Speaker Change: These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAP.
Speaker Change: and Reconciliation of these measures to the most directly comparable GAAP measures is available in our earnings release and our investor presentation on the hl.com website.
Speaker Change: Hosting the call today, we have Scott Adelson, Houlihan Lokey'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 fourth quarter and fiscal year 2025 earnings call.
Scott Adelson: We ended the quarter with revenues of $666 million and adjusted earnings per share of $1.96. Revenues for the quarter were up 28%, and adjusted earnings per share were up 54% compared to the same quarter last year.
Scott Adelson: We ended the fiscal year 2025 with 2.4 billion in revenues, the highest annual revenue in the firm's history, up 25% versus last year, and surpassing our high water revenue mark in fiscal year 2022.
Scott Adelson: Both financial restructuring and financial evaluation advisory produce record revenues for the year and our corporate finance business had its second best year ever
Scott Adelson: A significant driver of our growth has been our ability to execute on acquisitions
Scott Adelson: This year was our most active year ever, closing three acquisitions [inaudible]
Scott Adelson: that altogether expanded our industry, geographic and product reach. Acquisitions continue to be an important component of our overall growth strategy, and we're pleased with how well they are performing, demonstrating the success of our strategy.
Scott Adelson: The indicators in our corporate finance business outside the US continue to move upward in the fourth quarter
Scott Adelson: The average size of our transactions and the average transaction fee continue to grow and the quality of our senior hires and importantly our overall brand perception strengthened.
Scott Adelson: Finally, we had a record year in our capital markets business, now rebranded its capital solutions to better reflect the breadth of our offerings.
Scott Adelson: This business is a strategic and expanding part of corporate finance, significantly enhancing our platform with diversified high growth and less volatile revenues.
Scott Adelson: Looking back at the fourth quarter, all three of our business lines perform well, particularly in a challenging economic environment. [inaudible]
Scott Adelson: Corporate Finance continue to see improving metrics in the fourth quarter.
Scott Adelson: Waller cyclical service lines in FDA also perform well in a volatile market.
Scott Adelson: Our financial restructuring business had a strong fourth quarter to close the year, reinforcing our view that fiscal year 2026 could also see elevated revenues in financial restructuring.
Scott Adelson: We hired four managing directors in the fourth quarter, bringing our total hired and acquired for the fiscal year to 37 and we are also pleased to announce that we have promoted 16 colleagues to managing director in our current quarter.
Scott Adelson: I would like to congratulate all our new partners and promotes and wish them success in the coming years.
Scott Adelson: I'm incredibly proud that we delivered strong results in a market environment like this [inaudible]
Scott Adelson: These results are a testament to our business strategy, our diversified business model, and the perseverance of our colleagues around the globe.
Scott Adelson: We begin the new fiscal year with momentum across all our product lines, even as the early weeks have been marked by turmoil in global markets and the economy.
Scott Adelson: And although current volatility makes meaningful forecasts for the weeks and months ahead more difficult, our business model is built to handle volatile market conditions, like what we are experiencing today.
Scott Adelson: There will be winners and losers in this market environment and our business model is set up to advise both [inaudible]
Scott Adelson: I would like to thank our more than 2700 employees for continuing to deliver excellence to our clients and to one another.
Lindsay Alley: as well as our clients and our shareholders who continue to sport us with confidence as we are committed to building the best investment banking advisory business in the world and with that I will turn the call over to Lindsay.
Lindsay Alley: Thank you, Scott. Revenees in corporate finance were 413 million for the quarter, up 44% compared to the same quarter last year. We closed 147 transactions this quarter from 121 in the same period last year, and our average transaction fee increased.
Lindsay Alley: Corporate Finance exhibited the typical seasonality we see in this business, with revenues declining slightly compared to the third quarter. We expect fiscal 2026 to exhibit similar seasonality to fiscal 2025, assuming similar market conditions remain throughout the year.
Lindsay Alley: Financial restructuring revenues were 165 million for the quarter, a 6% increase versus the same period last year. We closed 38 transactions this quarter compared to 35 in the same quarter last year and our average transaction fee on closed deals increased.
Lindsay Alley: As in previous years, the natural restructuring closed out the fiscal year with a strong fourth quarter [inaudible]
Lindsay Alley: For financial evaluation advisory, revenues were 89 million for the quarter, a 15% increase from the same period last year.
Lindsay Alley: We had 1,224 fee events during the quarter compared to 1,025 in the same period last year. FDA ended the year with a strong fourth quarter performing well in a challenging environment.
Lindsay Alley: According to expenses, our adjusted compensation expenses were 410 million for the quarter versus 320 million for the same period last year [inaudible]
Lindsay Alley: Our only adjustment was 21 million for the fervor tensor payments related to certain acquisitions.
Lindsay Alley: In both fiscal 2025 and 2024, our adjusted compensation expense ratio for the fourth quarter and fiscal year was 61.5%. We expect to maintain our target of 61.5% for this ratio in fiscal 2026.
Lindsay Alley: Our adjusted non-compensation expenses increased to 85 million for the quarter compared to 81 million for the same period last year [inaudible]
Lindsay Alley: This resulted in an adjusted non-compensation expense ratio of 12.8% for the quarter compared to 15.6% for the same period last year and the fiscal 2025 adjusted non-compensation ratio of 13.8% versus 16.4% for the same period last year.
Lindsay Alley: On a per employee basis, our adjusted non-compensation expense for the quarter was $32,000, versus $31,000 for the same quarter last year. And we ended the fiscal year at $124,000 per employee, versus $121,000 for the same period last year.
Lindsay Alley: We expect our adjusted non-competition expense to grow in the high single digits for fiscal 2026 as we continue to increase head count, make investments in technology and invest in our brand across the globe.
Lindsay Alley: For the quarter, we adjusted out of our non-competition expenses 9.7 million in non-cash acquisition related amortization and 1.8 million pertaining to professional fees associated with streamlining our global organizational structure referred to as project solar.
Lindsay Alley: Our adjusted other income and expense produced income of approximately nine million versus income of approximately six million in the same period last year. The improvement was primarily due to an increase in dividend and other income generated by our investment securities.
Lindsay Alley: We adjusted out of other income and expense again of approximately two million related to the reduction in value of an earn out liability associated with one of our prior acquisitions.
Lindsay Alley: We had strong performance in this line item in fiscal 2025 as interest rates remained elevated throughout the year Performance in fiscal 2026 will be directly related to the level of interest rates around the globe [inaudible]
Lindsay Alley: Our adjusted effective tax rate for the quarter was 24.5% compared to 29.9% for the same quarter last year. The decrease in our adjusted effective tax rate was a result of lower than expected state taxes and lower non deductible expenses.
Lindsay Alley: We ended fiscal 2025 with an adjusted effective tax rate of 29.8% versus 29.5% in fiscal 2024.
Lindsay Alley: For the fourth quarter, we adjusted out of our effective tax rate, the effects of a successful local tax audit, acquisition related non deductible expenses, and the partial reversal of a tax benefit from stock besting. [inaudible]
Lindsay Alley: In fiscal 2026, we will no longer exclude the effect of our deferred compensation shares investing in the first quarter from our effective tax rate.
Lindsay Alley: This will result in a benefit to our adjusted effect of tax rate in the first quarter of fiscal 2026 and the lower adjusted effect of tax rate for next year, assuming all else remains equal.
Lindsay Alley: According to the balance sheet, as of quarter end, we had approximately 1.2 billion of unrestricted cash and equivalence and investment securities.
Lindsay Alley: As a reminder, a significant portion of our cash is earmarked to cover a crude but unpaid bonuses for fiscal year 2025 that will be paid this month and in November .
Lindsay Alley: There's issued this month as part of our fiscal 2025 compensation. We'll dust into the fully deluded share count over four-year period from the data sheet.
Lindsay Alley: In our fourth quarter of fiscal 2025, we repurchase to approximately 371,000 shares as part of our share repurchase program. We expect to continue our long term objective of repurchasing shares through the open market and withhold to cover to offset the eventual delusion associated with the issuance of deferred compensation shares in May.
Lindsay Alley: Finally, the Board approved a 5.3% increase to a quarterly dividend to 60 cents per share. The dividend will be paid in June . With that operator, we can open the line for questions. [inaudible]
Thank you.
Speaker Change: At this time, if you would like to ask a question, please press star one on your telephone
Lindsay Alley: You may remove yourself from the queue at any time by pressing star 2
Once again, that is star one to ask a question.
Speaker Change: And our first question will come from Brandon O'Brien with Wolf Research. Your line is open.
Brendan O'brien: Questions. You know, I guess just to start, you know, I understand that it's difficult to forecast, you know, near term, just given the volatility, but I was hoping you could help frame, you know, how revenues have been tracking quarter to date, and whether there's been any dispersion between, you know, some of your sponsor and strategic clients.
Brendan O'brien: You know, it really is too early to be able to give you any meaningful indication. I mean, I think I've set it in the prepared remarks. It is just, it is a more difficult environment to be
Brendan O'brien: predicting the future, and there's no doubt about that. Having said that, I can certainly say that there are things are continuing to move in terms of...
Brendan O'brien: and deals moving through processes at a pretty normal rate. I mean, then as we've been saying for a very long time now
Brendan O'brien: Things have been getting better not month by month but quarter by quarter and this is an environment where it's still unclear exactly all the ramifications of what has occurred but what is clear is there are certain sectors that are far more impacted than others and certain geographies that are more impacted than others.
and Chris Hedges. Thank you. Thank you. Thank you.
Brendan O'brien: Just for my follow-up, you alluded to this a bit in response to the question, but a theme that starts to emerge a bit is that there's some bifurcation in the M&A market between sectors that are more or less impacted by tariffs. Just want to get a sense as to what you're seeing across the different sectors within your own business. I know you're very large in industrials, which feels like an area that might be disproportionately impacted by the terror of implementation.
Speaker Change: Yeah, I mean, I think, again, even you can't even paint all industrials with one brush and I think that that
Speaker Change: that tends to be people's desires, say, the terracer impact they're having. First, you got to start with...
Speaker Change: That is a fairly US-centric view of the world. I will tell you the example I've been giving if we're selling a pasta company in Italy that doesn't sell in the US. It's not overly impacted by tariffs, right? That's not relevant to it.
Speaker Change: There certainly are components of things like industrials that are more impacted and so it is sector by sector and geography by geography.
Christopher Crain,
Thank you.
Speaker Change: Our next question will come from James Yaro with Goldman Sachs. Please go ahead
James Yarrow: Good afternoon, and thanks for taking the questions. Scott, that really excellent restructuring results again. Could you help us think through the moving parts of restructuring here in terms of liability management versus chapter 11? And then, you know, has anything that has happened over the past few weeks affected your outlook that you've given previously, which I think was a strong multi-year restructuring cycle? [inaudible]
James Yarrow: Yeah, I think we've said that we expect restructuring to remain at elevated levels, and that is...
James Yarrow: Continuing in certainly based fund, more recent events, I think that only gives us more confidence in those statements And in terms of mix again, we've talked about this a lot over time to us These are all just restructuring how they wind up manifesting themselves as a little [inaudible]
James Yarrow: We don't never know exactly going into a situation how it will result, whether it will be a ledily management or a chapter or...
Speaker Change: Distressed Nancing, or whatever the case may be, but we can certainly say that we continue to see a good level of activity in the restructure or arena. And James, I know I said this in my comments, but
Question, I'll put an exclamation point on it.
Speaker Change: We tend to see a very strong fourth quarter in restructuring year after year after year, so that is not necessarily a reflection of what each quarter is going to look like next year. So I encourage everyone to take a look at the seasonality, if you will, the business over the last couple of years and think through that in terms of how you think of fiscal 26.
Speaker Change: Yeah, I was just referring to the fact that it was up 6% a year and a year or so, but thank you for that, that's really, really helpful. Could I just ask another one which I was somewhat different topic, which is related to private equity firms and the fact that it appears that small and private equity is having a harder time raising capital than some of the very largest sponsor firms. And so you have a strong relationship with the...
Scott Beiser, Christopher Crain
Speaker Change: I mean, I think it's safe to say that the primary fundraising business has been
Speaker Change: Constrained for the past couple of years, no doubt about it, no great surprise because there has not been an adequate level of recycling of capital.
so that that...
Speaker Change: I would I still believe and we certainly can't continue to see meaningful dollars float to the broadly defined alternative asset class
Speaker Change: But the capital that is allocated to private equity needs to come back to be recycled. I mean, so that doesn't really surprise me a great deal Having said that we see those voids being filled in many different ways and you see that in continuation vehicles you see it in direct. I mean, there's there's lots of different sources of capital besides you know, the capital needs to come back to be recycled.
Speaker Change: that are available to the private equity community above and beyond just incremental new funds.
Thank you.
Speaker Change: Our next question will come from Ben Rubin with UBS, please go ahead [inaudible]
I Scott Highland Z. Hope you're both doing well.
Again, welcome.
Speaker Change: I was hoping to double click on corporate finance. Obviously a great deal of optimism is in coming into this year around the pickup and M&A and IPOs. So just want to get your general thoughts on the backdrop for cat markets. Does the outlook kind of differ as you move between the middle market, which is kind of your core business versus large scale M&A. And then lastly, if you could just comment on how your deal backlog is looking for fiscal year 26 and whether there's been any movement there in recent weeks. Thank you.
Speaker Change: I'm not sure I understood the first question to be really honest, the second question in terms of our backlogs continue to be
Strong and Growing .
Speaker Change: and so that continued, that has for a while been the case and it's a matter of those we've talked about on prior calls, the velocity or throughput of those deals and we've been saying that has continued to improve, you know, the most recent events on
Speaker Change: Does give one and pause while that will continue to improve, but certainly at this point still feeling comfortable that we're heading in the right direction.
Speaker Change: That was a spoiler you may have to ask, starting
Speaker Change: Sorry. Yeah, I was kind of asking how you're feeling. Does the outlook differ in terms of the middle market M&A versus large scale M&A as a result to the potential impact of recent volatility?
I mean the answer is you
Speaker Change: Yes, I mean, but that is true in every every cycle, and I'm at Furberlabor when you look at the volume mid cap volumes are much more resilient than large cap volume. And that's we could go on for a very long time on the reasons why but you can look through virtually every cycle that is the case.
Speaker Change: One of the things we love about the differences between us and some of our peers is if you ask that same question to our peers, they'd be able to answer half of it, if you ask it of us and we're able to answer half of it.
Speaker Change: I appreciate it. Well, thank you both for trying. For my second question, obviously you guys were active in fiscal year 25 on the strategic acquisition front. So it's just hoping if you could share any color on the state of your bolt on pipeline as we look to fiscal year 26 and is there any areas of white space you're looking to backfill or look more attractive here in your view. Thank you.
Speaker Change: I've talked about it in previous calls, but we always have a very active dialogue occurring within a array of opportunities, and that is no different today.
at any other point in time, and we've stated...
Speaker Change: In our prepared remarks and previously how important this is to our strategic direction and we're continuing to see the benefits of it, so you can expect it to continue.
Thank you.
Speaker Change: Our next question will come from Devin Ryan with Citizens. Please go ahead.
Great. Hey, Scott. Hey, Lindsay. How are you?
We're done, good [inaudible]
Speaker Change: Good. One last question first on just the capital solutions and kind of the private capital part of the business. Obviously sponsor M&A still recovering from
Speaker Change: a pretty low level, but you know, just seems like there's a lot going on within that community, you have
Speaker Change: and Continuation Funds have been really active. So I just love to get a sense of kind of the sizing of that business. If you can give us anything on just kind of contribution in the quarter, and what some of the biggest factors are that are driving kind of year results right now, and then just kind of how you see that business growing over the next year, and really kind of longer term as well, but just love to kind of just dig in a little bit given the confidence of things going on there and within that business as well. [inaudible]
Speaker Change: Yeah, as we've stated before and in the remarks, I mean, that continues to be a really...
Speaker Change: growing in significant part of our business and we feel very good about our position in the market in it.
Speaker Change: and a lot of the trends that you just articulated are a part of that. I mean, there's many components to our now called capital solutions group and that, and certainly the continuation area and it's just one of those.
Speaker Change: There is an environment like we are in today clearly needs for different forms of capital to solve various situations and we are quite active in that area today.
Speaker Change: And Devin, you'll see this in our materials. I mean, not commenting on the fourth quarter, but the whole call it financial sponsor community still remains roughly 50% of our of our client base. And that I don't have the numbers in front of me, but that doesn't feel any different in Q4 versus the balance of the year.
Speaker Change: and Robert Bishop. Good night. Have a good evening. Good night. All right. Good night. Good night. Good night. Good night. Have a good morning. Good morning. Good morning. Good morning.
Speaker Change: Okay, appreciate that. And then a follow-up here just on restructuring and liability management.
Speaker Change: Love to just kind of think about the capacity to do more in that business today than in the past. So if I look at you know the number of management directors is up I think 35% from COVID time you're obviously generating strong results today but we're not really even in a stressed market. So you know a lot of liability management, a little bit of kind of restructuring but
Speaker Change: Well, let's just hear about how much bigger you think the contribution could be in a more stressed
Speaker Change: Macro Environment, assuming the deals would change in size, the fees would be larger, probably more complex, but just based on the team you have today versus the past.
Speaker Change: kind of how you think about capacity to do more from here in a, you know, call it more challenging
Speaker Change: Yeah, every cycle is different, but just sharing a little bit of metrics with you, the restructuring folks into the year at roughly 9.
Speaker Change: It looks like 9.5 million revenue per MD and during the height of the great recession we were 40% higher than that in revenue per MD. So I mean there is plenty of capacity.
and restructuring to handle a much larger
Speaker Change: Restructuring Environment. I mean, you started saying it. What ends up happening is you end up...
Speaker Change: going from an environment where you're hitting singles and doubles to an environment where you're hitting triples at home runs So you don't necessarily see linear growth in terms of number of transactions that close You just see higher fees and so but from a capacity standpoint, we've seen it much higher than where it was last year [inaudible]
Thank you
Ken Worthington: Our next question will come from Ken Worthington with JP Morgan. Please go ahead.
Ken Worthington: Hi, good afternoon. Thanks for taking the question. We're doing a round trip around your income statement here. So big step up in FDA this quarter and after a big step up in 3Q.
So maybe...
You know, uh...
Ken Worthington: We know there's fairness pins in there, but walk through some of the other...
items that have sort of come together here.
Ken Worthington: to really drive that business and the results in 4Q, and then maybe bigger picture on the same topic.
Speaker Change: Do you see a more dynamic policy under the new U.S. administration as sort of a tailwind or a headwind for valuation tax and advisory needs? I assume it's the former not the, I'm sorry, yeah, the former not the latter, but, you know, I thought I'd throw that one out there too.
Speaker Change: Thank you, Bruce. I mean, I think that what you beginning to see, you got a number of factors who we talked about before you have the less cyclical components of FDA, which is really portfolio valuation, which is continue.
Speaker Change: Constant Grower, effectively, as the world just continues to be interested in more marks on things and on a more regular basis.
Speaker Change: You then have the opinion business that is somewhere in between, non-cyclical and cyclical and can be impacted more by, if you will, at what larger fee?
Speaker Change: situations on any given opinion. And then lastly, you have more of our, what we call our transaction advisory business. And that is more cyclical. And in the fourth quarter, well, the, as you can imagine, the transaction advisory services is still ramping back up as the M&A continues to be a bit muted. But the others were continuing to grow nicely. And it just all came together.
Okay, great. I'll leave it there. Thank you
Thanks again.
Thank you.
Speaker Change: And as a reminder, that is star 1 to ask a question,
Speaker Change: And our next question will come from Ryan Kenny with Morgan Stanley . Please go ahead.
Hey, good afternoon. Thanks for taking my question in.
Ryan Kenney: So, on restructuring, are there any numbers you can share on just how much conversations or mandates have picked up since the beginning of April ? Is it a wave of in-bounds coming in? Is it more of a modest increase? Is the material enough to really drive the P&L over the next couple of quarters? How big of an increase in in-bounds are you seeing?
Ryan Kenney: We're not going to share specific numbers, but as you would expect, we've started to have conversations around what's happening in the markets and whether those end up
Ryan Kenney: Resulting and restructuring revenues is just too early to tell. I mean, if it's such a dynamic situation that this could all change in three days. So look, but there are some companies that are concerned about what's happening and those conversations have started but we're too early to tell whether they actually have an impact, certainly on the next couple of three quarters. First.
Speaker Change: Yeah, I was going to say in the way researching works we likely wouldn't see that the hit in the dark square and or two anyway.
Speaker Change: Alright, thanks, that's helpful. And then as a follow-up on Europe , it sounded like you're a little bit more positive on the non-US side of the business.
Speaker Change: Is that just tariff driven or is there anything else going on behind the surface with regulatory changes that are driving more demand for M&A outside of the U.S.?
Speaker Change: I mean, I think we've talked about it before. Our non-US business is just step-wise different than it was a few years ago, and we continue to just...
Speaker Change: Game Share in other parts of the world differently even than the U.S.
and Wendy U. [inaudible]
Speaker Change: Look at all the disruption that is occurring in the U.S.
Obviously.
Speaker Change: The other parts of the world are impacted by that, but in a much more muted basis. And again, that's another reason area where our mid market focus, certainly in the corporate finance side, it makes it so a mid market company in Europe is going to be far less impacted than a large cap company in Europe due to the actions in the US. And that's what we're going to do in the future.
In most cases.
Thank you.
Again, that is star one to ask a question.
Scott Adelson: Alright, we have no further questions in the queue, so I'll hand the call back to Scott for any closing remarks.
Scott Adelson: Thank you. I want to thank you all for participating in our fourth quarter and fiscal year 2025 earnings call. We look forward to updating everyone on our progress when we discuss our first quarter results for fiscal 2026 this summer.
Scott Adelson: Thank you, ladies and gentlemen. This concludes today's program and you may disconnect at any time.