Houlihan Lokey, Inc. (HLI) Earnings

Management highlights

### Quarterly Result Context - Management characterized the weaker-than-expected first quarter results as a temporary disruption driven by macro headwinds, not a fundamental change to the firm's long-term outlook - Headwinds that emerged in Q4 FY26 persisted into Q1: extended deal timelines driven by Middle East geopolitical uncertainty and software sector valuation reassessment related to AI, with particular slowdown in inflation-sensitive consumer-facing sectors and technology. Most delayed transactions remain active in the pipeline, just with extended timelines. ### Strategic and Operational Updates - Announced the pending acquisition of Intrepid Financial Partners, an independent energy-focused investment bank. The acquisition is expected to close by the end of Q2 FY27 and will add 32 colleagues to the firm, expanding Houlihan Lokey's energy sector business - Added three new managing directors in the quarter; management notes a robust market for senior talent and will continue strategic hiring to expand into underweighted industry sectors, geographies, and product lines - The jointly branded CLO market benchmark collaboration with Morningstar (announced last quarter) is an example of continued investment in differentiated, data-driven client offerings that create a competitive advantage over smaller peers - The firm's acquisition pipeline remains active, and management maintains an aggressive appetite for strategic acquisitions - Expense profile: Adjusted compensation ratio remained constant at 61.5% year-over-year; adjusted non-compensation expenses grew 6% year-over-year to $100 million. The adjusted effective tax rate was 13% for the quarter, up from -1% last year, driven by lower stock-based tax benefits from annual May vesting. Share Repurchase: The firm issued ~1.3 million shares for FY26 year-end compensation, and repurchased ~1.1 million shares (800,000 via withhold-to-cover and 300,000 via the firm's open repurchase program).

Guidance

- Management reaffirmed the long-term target adjusted compensation expense ratio of 61.5% for full fiscal year 2027, and confirmed the target remains secure even if current challenging conditions persist - Full fiscal year 2027 non-compensation expense growth is expected to be similar to the prior year's growth rate - Full fiscal year 2027 adjusted effective tax rate is guided to be between 26% and 28% - Financial restructuring is expected to deliver solid performance at elevated activity levels for full year 2027, consistent with prior guidance, with upside potential if stress in software and private credit persists - Management confirms backlog and new business activity in corporate finance are at record levels, and maintains confidence in long-term consistent growth across the diversified business, though the timing of middle market M&A normalization remains uncertain due to ongoing macro and geopolitical headwinds

Segment performance

Total company revenues for the first quarter of fiscal 2027 were $511 million. 1. Corporate Finance: Revenues came in at $303 million, a 24% decrease year-over-year. This segment contributed approximately 59.3% of total quarterly revenue. Transaction volume was flat year-over-year at 127 closed deals, but average transaction fees decreased significantly, as extended deal timelines disproportionately delayed larger-fee transactions. Softness was more pronounced in the European business compared to the U.S. 2. Financial Restructuring: Performance was in line with management expectations. Activity levels remain strong amid continued energy market volatility and dislocation in the private credit and software sectors, and management expects solid full-year performance consistent with prior outlooks. 3. Financial and Valuation Advisory (FVA): Produced a strong quarter with growth across all three of its service lines. Backlog grew 13% year-over-year, and the segment recorded 1,042 fee events in the quarter, a 9% increase from the prior year period. FVA contributed approximately 40.7% of total quarterly revenue, and is seeing strong momentum in the large-cap transaction space, with some mid-cap M&A headwinds similar to corporate finance.

Risks & headwinds

- Ongoing geopolitical uncertainty from the conflict in the Middle East creates persistent macro headwinds that extend deal timelines and make the timing of market normalization unpredictable; renewed escalation can reverse early improvements in market sentiment - Extended valuation uncertainty and disruption in the software sector has delayed a large volume of technology transactions, disproportionately impacting Q1 corporate finance results - Middle market M&A recovery has been uneven, with large-cap M&A activity strong but mid-cap activity remaining sluggish in a K-shaped market dynamic - Larger-fee transactions are disproportionately exposed to delays due to higher complexity and sensitivity to macro volatility, creating uneven near-term revenue outcomes - While the firm sees long-term benefits from AI, AI adoption could create pricing pressure in valuation services, though management expects this to be offset by growth in total addressable market

Analyst Q&A

• Q: If current challenging market conditions extend, will Houlihan Lokey be able to maintain its 61.5% target adjusted compensation ratio? /

  A: Management states the 61.5% compensation ratio has been a long-standing constant for the firm, predating its IPO. They reaffirm the current slowdown is an anomaly, and while full recovery may not happen next quarter, they are confident in full-year results and the ability to sustain the target ratio.

• Q: What is the pace of middle market M&A recovery, and how quickly can activity normalize after a geopolitical clearing event? /

  A: Management notes new mandate and deal launch trends are positive and pointing to continued improvement, but closed deal activity remains slow. They compare the current environment to a rain delay: if geopolitical risks clear, the market will not normalize instantaneously, but will recover over months to quarters rather than years. Renewed escalation can reverse progress and extend delays.

• Q: How large was the impact of the software transaction slowdown on Q1 results, and are there early green shoots in the sector? /

  A: Management confirms total firm-wide technology (mostly software) revenue was down ~54% year-over-year, equal to $53 million in lost revenue for the quarter. They note investor sentiment has improved: after a broad 'software apocalypse' sentiment several quarters ago, investors are now differentiating between high-quality and low-quality software businesses, leading to resumed deal closing and financing activity for strong firms.

• Q: What is the outlook for restructuring activity, and can stress in software and private credit drive further growth? /

  A: Management confirms restructuring opportunities are continuing to increase, with software dislocation a key growth driver alongside other macro stresses. It takes time for stressed credits to work through the restructuring pipeline, and management expects activity to remain at elevated levels for full year 2027, with upside potential if sector stress continues.

• Q: What is your acquisition appetite in the current environment, and how does AI impact your valuation business? /

  A: Management maintains a robust acquisition pipeline, and remains as aggressive on pursuing strategic acquisitions as ever, with Intrepid as the latest example. For AI, management sees it as a driver of large 10x improvements to the business, and notes that while technology/AI can lower average pricing for some valuation services, it also expands the total addressable market, with volume growth outpacing pricing pressure. AI also widens the gap between larger, tech-enabled firms like Houlihan Lokey and smaller competitors that cannot afford similar AI investments.