Houlihan Lokey(HLI) - 2025 Q3 - Earnings Call Transcript

Financial Data and Key Metrics - Revenues for Q3 2025 were $634 million, up 24% YoY, with adjusted earnings per share of$ 1.64, up 34% YoY [9] - Corporate Finance revenue was $422 million, a 36% increase YoY, driven by improved M&A and financing markets [11] - Financial Restructuring revenue was$ 131 million, a 2% increase YoY, benefiting from record leverage and higher interest rates [12] - Financial and Valuation Advisory revenue was $82 million, a 14% increase YoY, reflecting an improving M&A climate [13] - Adjusted compensation expenses were$ 390 million, up from $314 million YoY, with a compensation expense ratio of 61.5% [17] - Adjusted non-compensation expenses were$ 83 million, slightly up from $82 million YoY, with a ratio of 13.1% [18] Business Line Performance - Corporate Finance closed 170 transactions, up from 117 YoY, though average transaction fees decreased due to transaction mix [15] - Financial Restructuring closed 41 transactions, up from 30 YoY, with a slight decrease in average transaction fees [16] - Financial and Valuation Advisory had 1,005 fee events, up from 926 YoY, showing strength in both cyclical and non-cyclical businesses [17] Market and Geographic Performance - Growth in Corporate Finance was widespread across geographies and industries, driven by both strategic and private equity clients [11] - The company added 17 new managing directors, 14 through acquisitions and 3 through individual hires, indicating strong market expansion [14] Strategic Direction and Industry Competition - The company remains optimistic about fiscal 2026, citing improving M&A market sentiment, increased private equity activity, and strength in restructuring [14] - The acquisition of Waller Helms in December 2024 contributed positively to results, with new partners performing well [13] - The company expects to maintain its long-term compensation expense ratio target of 61.5% [18] Management Commentary on Operating Environment and Future Outlook - Management noted stable interest rates and inflation, with improved confidence following the US election [10] - The restructuring market is expected to remain elevated longer than anticipated, driven by higher interest rates [12] - The company is optimistic about continued growth in fiscal 2026, supported by improving M&A markets and private equity activity [14] Other Important Information - The company had$ 903 million in unrestricted cash and equivalents at quarter-end, with a significant portion expected to be used for cash bonuses in May 2025 [21] - Adjusted other income and expense produced $9 million in income, primarily due to increased interest income [20] - The adjusted effective tax rate for the quarter was 33.3%, up from 30.3% YoY, with expectations for the full year to settle between 31% and 32% [20] Q&A Session Summary Question: Corporate Finance revenue growth outlook [23] - Management indicated steady progress in Corporate Finance, with growth consistent over the past three quarters [24] - Seasonality in Corporate Finance is expected to follow historical patterns, with the second half of the fiscal year typically stronger [28] Question: Restructuring business growth potential [31] - The restructuring market is expected to remain elevated due to higher interest rates, though growth depends on various factors beyond the company's control [32] Question: Impact of improving M&A environment on hiring and acquisitions [33] - The company expects to continue acquiring talent and companies, regardless of market conditions, and anticipates market share gains [35][37] Question: M&A outlook and potential impacts of regulatory changes [39] - Management believes a more receptive M&A environment is beneficial across all deal sizes, though regulatory changes may create some uncertainty [41][43] Question: Non-compensation expense guidance [44] - Adjusted non-compensation expenses are expected to grow in the high single digits in Q4, consistent with previous guidance [45] Question: Acquisition strategy and feedback from potential targets [47] - The company remains active in acquisition discussions, with a focus on identifying opportunities regardless of market conditions [48][49] Question: Geographic engagement in Corporate Finance [53] - Growth in Corporate Finance is broad-based across regions, with no significant differences in engagement between North America, Europe, and Asia [54] Question: Deal size evolution in Corporate Finance [56] - The company is focused on the mid-cap space, with steady increases in deal size and fees over time [58] Question: Private capital financing outlook [60] - The private capital market is expected to remain strong, with the company well-positioned to capitalize on growth opportunities [62] Question: Competition in capital markets business [64] - While competition is increasing, the company believes it can continue to grow its capital markets business meaningfully [65][66] Question: Restructuring outlook and liability management [69] - Higher interest rates and sick balance sheets are expected to sustain elevated restructuring activity, with a mix of traditional restructuring and liability management [71][72] Question: Sponsor activity in Corporate Finance [74] - Sponsor activity has picked up significantly, with strong momentum expected to continue [75] Question: Transaction velocity and bid/ask spreads [77] - Transaction velocity is improving but has not yet returned to pre-pandemic levels, with time being the primary factor needed for further recovery [78][82] Question: Restructuring revenue growth potential [83] - Restructuring revenue is expected to remain flat in the current market, with potential for growth if M&A markets face pressure [85][86]