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

Explicit Guidance:

• Full-Year FY2027 Effective Tax Rate: Expected to range between 26% and 28%.
• Adjusted Expense Ratio: Long-term target to remain constant at 61.5% for compensation; non-compensation expenses expected to grow at a rate similar to fiscal 2026 levels by year-end.
• Corporate Finance Revenue Trajectory: Growth expected for the balance of the year driven by Q3 backlog and activity levels, despite macro volatility.
• Restructuring Revenue Trajectory: Stronger second half of FY2027 anticipated with elevated restructuring revenues expected to persist through fiscal 2028.
• Software Restructuring Revenue Contribution: Engagements resulting from software sector wins are expected to begin contributing to revenues in calendar 2027.

Business-Segment Outlook:

• Corporate Finance: Expects an "unseasonably higher" seasonality in the second half of the year, driven by a recovery in Europe and the US. Software sector performance is projected to remain below FY2026 levels, with no scenario envisioned where software revenue equals last year's total. Healthcare sector revenue is expected to recover due to timing, not structural issues.
• Financial Restructuring: Software sector identified as the primary driver of the current recovery cycle; expected to be a "huge opportunity" comparable in magnitude to the 2017 oil & gas dislocation. Growth expected to be materialized in calendar 2027 and 2028 as debt maturity walls approach and deals move from pipeline to closing.
• Valuation and Advisory: Non-cyclical portfolio valuation business is the primary growth engine; expected to continue strong growth. Cyclical opinion and advisory businesses tied to M&A environment are growing but less aggressively.
• Sponsor/PE Cohort: Growing willingness to transact within the sponsor community; LP pressure to act is already established and driving urgency.
• Geographic Performance: Return to growth expected in both Europe and the US across all industry groups by the end of the year; no divergence expected between M&A and non-M&A businesses through fiscal 2027.
• Deal Quality: Strategic shift toward a higher proportion of larger, higher-probability transactions within the middle market (sub-$2 billion range), resulting in a potential disconnect between deal volume and revenue growth. Average transaction size expected to incrementally rise from historical $100M to current $200–$300M ranges over time.

Market and Competitive Outlook:

• Mid-Market Dynamics: Pipeline activity is recovering as clients move past initial macro/geopolitical "speed bumps," with increased willingness to close deals once volatility settles.
• Industry Dislocation: Anticipated significant M&A pressure on smaller boutiques due to software sector disruption, creating opportunities for established firms.
• Software Sector: Recognized as a cyclical downturn for M&A but a catalyst for restructuring; market is differentiating between viable and non-viable software companies.

Macro / Industry Outlook:

• Interest Rates: Higher rates are viewed as a tailwind for restructuring activity but are not expected to have a dramatic negative impact on mid-cap corporate finance transactions as long as capital remains plentiful.
• Geopolitics: Ongoing instability is cited as a primary headwind and source of volatility, though deals are proceeding as economic fundamentals outweigh uncertainty.
• Software Sector: Identified as a specific area of dislocation driving restructuring demand; revenue impact expected to materialize in calendar 2027 and 2028.

Strategic Initiatives:

• Acquisitions: Strong pipeline remains for strategic acquisitions to deepen talent base; integration of Intrepid Financial Partners (8 managing directors) is complete. No strategic shift to move outside the mid-market focus.
• Talent Expansion: Continued organic hiring and strategic acquisitions expected to expand global footprint.
• Capital Allocation: Balance sheet flexibility remains a priority; cash used for share repurchases ($50M in Q2) and deferred cash bonuses (payment in November) versus M&A acquisitions.

Risks and Headwinds to Outlook:

• Macro Volatility: Continued uncertainty regarding geopolitical shocks and the broader economic environment.
• Sector Specifics: Software sector remains a headwind for M&A revenue; potential for further dislocation.
• Timing Uncertainty: Restructuring revenue impact depends on the time required for deals to move through the pipeline, particularly for large software sector transactions.
• Deal Execution: Macroeconomic events can cause "speed bumps" or "traffic jams," potentially elongating deal timelines or delaying closures.
• Cash Flows: Balance sheet cash is expected to decrease in November due to payment of deferred fiscal 2026 bonuses.

Management Tone on the Future:

• Confidence Level: Cautiously optimistic; confidence in restructuring is "at or better than last quarter."
• Outlook Sentiment: Expecting a "good, solid second half" that is "better than normal" for the company, contingent on market cooperation.
• Strategic Stance: Confident in the long-term business plan; view themselves as "best positioned" to capitalize on industry trends over the next decade.
• Guidance Changes: Shift from earlier year concerns to a view that "stronger economic fundamentals are outweighing macro uncertainty."