Houlihan Lokey, Inc. 2027 Q2 Earnings Call

Thank you, operator, and hello, everyone. By now, everyone should have access to our second quarter fiscal year 2027 earnings release, which can be found on the Houlihan Lokey website at www.hl.com in the investor relations section. Please note that the discussion today will include forward-looking statements. These forward-looking statements, which are usually identified by use of words such as indicate, suggest, see, will, expect, believe, or other words or phrases of similar meaning, 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. Therefore, you should exercise caution when interpreting and relying on them. We refer you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition.

Except as required by applicable securities laws, Houlihan Lokey is under no obligation to update any forward-looking statements if circumstances or management's estimates or opinions should change. We encourage investors to review our regulatory filings, including our Form 10-Q for the quarter ended September 30, 2026, when it is filed with the SEC. During today's call, we will discuss non-GAAP financial measures. These non-GAAP measures are not intended to be considered in isolation from, as a substitute for, or as more important than the financial information prepared and presented in accordance with GAAP. In addition, these non-GAAP measures have limitations in that they do not reflect all the items associated with a company's results of operations as determined 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, which can be found on the hl.com website. Hosting the call today, we have Scott Adelson, Houlihan Lokey's Chief Executive Officer, and Lindsey 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.

Thank you, Sipi. Welcome everyone to our second quarter fiscal 2027 earnings call. We ended the quarter with revenues of $692 million and adjusted earnings per share of $1.85. Revenues were up 5% and adjusted earnings per share were flat compared to the same period last year. Our results for the quarter reflect a normalizing market environment, which continued into October. Key metrics indicate solid performance for the remainder of the year across all three of our businesses, and we have seen a return to growth in both Europe and the U.S. and across our industry groups, except technology and healthcare. We do, however, remain cautious given the volatility of the macro environment. We continue to see headwinds from interest rates, ongoing geopolitical instability, and dislocation in the software sector. Our Corporate Finance business produced $481 million in revenue for the quarter, driven by higher average transaction fees.

Heading into the third quarter, our backlog and activity levels suggest growth for the balance of the year, even as we remain mindful of the macro volatility. Despite the higher interest rate environment of the last few months, transactions continue to move through the pipeline to closing, which tells us that the stronger economic fundamentals are outweighing macro uncertainty. Financial Restructuring produced $118 million in revenues for the second quarter, performing in line with our expectations. Based on our current backlog and new deal activity levels over the last several months, we see a stronger second half of the year and elevated restructuring revenues through fiscal 2028. Our reputation and experience in the software space has led to significant wins in the sector, and we expect these engagements to begin contributing to revenues in calendar 2027. Financial and Valuation Advisory produced $93 million of revenues for the second quarter.

Growth was primarily driven by our portfolio valuation business. We added 12 new managing directors in the second quarter, including eight who joined us through our acquisition of Intrepid Financial Partners, which closed in September. We are excited to welcome our new partners to Houlihan Lokey. Also in the second quarter, we welcome our new Chief Legal Officer, Sipi Bhandari, who you heard from earlier on the call. We are all delighted to have Sipi on board. I would like to extend my sincere gratitude to Christopher Crain, who served as our general counsel and a member of our executive team for 22 years, and who fortunately will remain a senior advisor. In terms of acquisitions, our pipeline remains strong, and we are confident that our combination of organic growth and strategic acquisitions will continue to deepen and expand and strengthen our talent base around the world.

I want to thank our shareholders for their support, especially during the volatile first half of the fiscal year. We continue to execute our long-term business plan and believe that we are the best-positioned investment banking advisory firm to capitalize on our industry trends over the next decade. With that, I will turn it over to Lindsey.

Thank you, Scott. Revenues in Corporate Finance were $481 million for the quarter, up 10% compared to the same period last year. We closed 142 transactions this quarter, down from 171 for the same period last year. However, our average transaction fee on closed deals increased as there was a disproportionate number of higher fee transactions relative to lower fee transactions for the quarter, the reverse of what we saw last quarter. Financial Restructuring revenues were $118 million for the quarter, down 12% compared to the same period last year. We closed 27 transactions this quarter, down 27% from the same quarter last year, but our average transaction fee on closed deals increased. We expect to see higher revenues for the second half of the year, and we approach calendar 2027 with record backlog and strong activity levels.

For Financial and Valuation Advisory, revenues were $93 million for the quarter, a 7% increase from the same period last year. The number of fee events remained relatively flat at 1,071 during the quarter, compared to 1,075 in the same period last year. When turning to expenses, our adjusted compensation expense ratio for the second quarter in both fiscal 2027 and 2026 remained constant at 61.5%. We expect to maintain our long-term target of 61.5% for our adjusted compensation expense ratio for fiscal 2027. Our adjusted non-compensation expenses grew 11% to $91 million for the quarter, compared to $83 million for the same period last year. Our adjusted non-compensation expense ratio for the second quarter was 13.3%, compared to 12.5% in the same period last year. Our other income and expense produced income of approximately $5 million versus income of approximately $9 million in the same period last year.

The decrease was primarily driven by lower cash balances for the quarter and lower return on our investment securities. Our adjusted effective tax rate for the quarter was 30%, remaining flat compared to the same quarter last year. We expect to see a fiscal 2027 full year adjusted effective tax rate of between 26% and 28%. Turning to the balance sheet, we ended the quarter with approximately $888 million of unrestricted cash and investment securities. As a reminder, we will pay our deferred cash bonuses related to fiscal 2026 in November, which will reduce our balance sheet cash. Also in our second quarter, we repurchased approximately 397,000 shares as part of our share repurchase program, for a total of approximately $50 million. We will continue to evaluate balance sheet flexibility for acquisitions versus excess cash for share repurchases. With that, operator, we can open the line for questions.