Houlihan Lokey, Inc. Second Quarter 2027 Earnings Conference Call - HOULIHAN LOKEY INC

Financial Performance:

• Reported Q2 fiscal 2027 revenue of $692 million, a 5% year-over-year increase; adjusted EPS was $1.85, flat year-over-year.
• Corporate Finance revenue reached $481 million (up 10%), driven by a 10% increase in average transaction fees despite a 17% drop in deal volume to 142 transactions.
• Financial Restructuring revenue was $118 million (down 12% YoY), with 27 transactions closed (down 27%), though average fees per deal rose.
• Financial Valuation and Advisory revenue totaled $93 million (up 7%), primarily driven by portfolio valuation growth.
• Adjusted compensation expense ratio remained stable at 61.5% for both Q2 FY2027 and FY2026.
• Adjusted non-compensation expenses increased 11% to $91 million, with the non-comp expense ratio rising to 13.3% from 12.5% previously.
• Other income/expense was $5 million (down from $9 million YoY) due to lower cash balances and investment yields.
• Adjusted effective tax rate was 30%, with full-year FY2027 guidance set between 26% and 28%.
• Ended the quarter with $888 million in unrestricted cash and investment securities; repurchased ~397,000 shares for ~$50 million.

Guidance and Future Outlook:

• Management expects a "unseasonably stronger" second half of the fiscal year driven by normalizing market conditions and robust backlogs.
• Anticipates growth in Corporate Finance and Financial Restructuring for the remainder of FY2027 and FY2028, particularly as software sector dislocations mature into closed deals.
• Restructuring revenues are expected to be elevated through FY2028, with significant software-related revenue contribution anticipated to begin in calendar 2027.
• Revenue growth is projected to be evenly distributed across Europe and the US by the end of the fiscal year.
• Full-year non-compensation expense growth is expected to track with FY2026 levels.
• Outlook excludes expectations to match prior software revenue levels for the current fiscal year.

Business Segments and Product Lines:

• Corporate Finance: Strategy shift towards higher-probability, larger mid-market deals ($200–$300 million average) within the middle market, avoiding speculative lower-end transactions.
• Financial Restructuring: Experiencing a significant rebound driven by the software sector dislocation, geopolitical instability, and higher interest rates; backlog is at record levels.
• Financial Valuation & Advisory: Growth concentrated in the non-cyclical portfolio valuation business; expanded team by adding 12 new Managing Directors, including eight from the Intrepid Financial Partners acquisition.
• M&A & Advisory Mix: Non-M&A advisory (including capital solutions) expected to perform similarly to core M&A advisory through FY2027, with no divergence anticipated.
• Sponsor Activity: Observing renewed conviction and urgency from private equity sponsors (Limited Partners) to drive transaction volume.

Market and Competitive Landscape:

• The software sector faces ongoing challenges but is improving; management expects a return to growth in software M&A in the future, though current revenues remain depressed.
• Healthcare sector performance is attributed to timing issues rather than fundamental weakness, with expectations of recovery.
• Geopolitical instability and interest rate volatility remain primary macro headwinds, creating "speed bumps" but not stopping deal execution for companies with capital availability.
• Restructuring market is characterized by a "debt maturity wall" approaching, particularly in Europe and the US, creating a favorable environment for the firm.
• Management views the software restructuring opportunity as substantial, potentially rivaling or exceeding the scale of the 2017 oil and gas dislocation.

Risks and Challenges:

• Macroeconomic volatility, specifically interest rates and geopolitical dislocation, poses a risk to deal timing and execution.
• Continued dislocation in the software sector presents near-term revenue pressure for the M&A segment.
• Transaction volume volatility in Restructuring remains a key risk, though revenue per deal is stabilizing upward.
• Potential for further deal elongation or cancellation due to unforeseen macro shocks.
• Deferred cash bonuses scheduled for November will reduce the current cash balance on the balance sheet.

Management Commentary and Tone:

• Tone was cautiously optimistic; management expressed confidence in the second half of the year and long-term positioning despite Q2 volatility.
• Emphasis placed on discipline, utilizing data to filter for higher-probability deals rather than chasing volume.
• Leadership noted a shift in client mentality toward "getting deals done" rather than waiting for perfect macro conditions.
• Management remains confident in the firm's ability to capitalize on industry trends over the next decade.

Analyst Questions and Answers:

• Deal Volume vs. Revenue: Explained that the disconnect between lower deal counts and higher revenue is due to a skew toward larger, higher-fee transactions and historical seasonality; affirmed mid-market focus remains unchanged.
• Restructuring Catalysts: Confirmed software is the primary driver of the current restructuring wave, alongside rates and geopolitics, with visibility extending into FY2028.
• Software Sector Outlook: Acknowledged current weakness but predicted a rebound; noted that software restructuring revenues will likely materialize as closed deals in calendar 2027–2028.
• Acquisition Strategy: Stated the M&A pipeline remains strong and the firm is continuously evaluating acquisitions, prioritizing cultural fit and organic growth.
• Non-M&A Advisory: Confirmed that capital solutions and portfolio valuation are tracking in tandem with M&A, with no expected divergence.
• Transaction Size Definition: Clarified "larger deals" refers to the upper end of the mid-market (closer to $200–$300 million), not a strategic pivot to large-cap.

Other Key Points:

• Announced the appointment of Sippy Bandari as Chief Legal Officer, succeeding Christopher Crane, who remains as a senior advisor after 22 years.
• Completed the acquisition of Intrepid Financial Partners in September, integrating eight new Managing Directors.
• Forward-looking statements were disclosed, with specific risks related to macro volatility and market conditions emphasized.
• Non-GAAP financial measures were discussed, with reconciliations available in the earnings release and investor presentation.