HOULIHAN LOKEY, INC. Q2 FY2025 earnings call

• Corporate Finance: Benefiting from M&A market improvements, revenues up 29%. Capital markets business strong with private capital strength and Triago acquisition integration. Deals coming to market are positive but with longer closing timelines.
• Financial Restructuring: $132 million in revenues, 15% increase y-o-y. New business activity strong from large-cap and middle-market opportunities, expecting benefits into fiscal 2026. Prepared for restructuring activity to turn into refinancing activity.
• Financial and Valuation Advisory: $79 million in revenue, 12% increase y-o-y. Driven by non-cyclical lines like portfolio valuation, new business generation up, and M&A-related services rebounding. Acquired Prytania Solutions (tech-enabled valuation platform) and Waller Helms (expanding financial services industry group), with Waller Helms acquisition on track to close by year-end. Hired 3 new managing directors in Corporate Finance.

Corporate Finance produced $364 million in revenues for the quarter, a 29% increase over last year’s second quarter, representing 63.3% of total revenue. Financial Restructuring had $132 million in revenues, a 15% increase versus the second quarter last year, making up 22.9% of total revenue. Financial and Valuation Advisory generated $79 million in revenue, a 12% increase versus the second quarter last year, accounting for 13.7% of total revenue. Total revenues for the quarter were $575 million.

• Outlook for second half of fiscal 2025 remains positive with momentum across business lines. Adjusted compensation expense ratio target of 61.5% to be maintained. Adjusted effective tax rate expected to end fiscal 2025 at the high end of the 28%-30% target range.
• Continues to benefit from balanced and diversified business model, with improving M&A sentiment and strong restructuring business as encouraging indicators.

• Macro environment challenges: High interest rates (though lower than peaks), geopolitical volatility (Middle East, Ukraine, U.S. elections) adding complexity. - Longer time lines to close transactions in Corporate Finance despite improving transaction velocity.

Q: Good afternoon and thanks for taking my question. Maybe just starting on Corporate Finance, which obviously had best-in-class trends, both year-on-year and quarter-on-quarter as you think about the outlook from here, in the near term, is there any risk of less-than-normal seasonality in the calendar fourth quarter and then longer term, how we should think about the trajectory from here? Is there anything in your view that could catalyze a notable acceleration other than perhaps the election?

A: Good question, as always. Thank you. I think if you look at it, it’s very consistent with what we have been talking about. Things have been improving month-over-month, quarter-over-quarter, and it’s really all been about what’s been the velocity of that improvement in Corporate Finance. And I think we’ve just continued to see it improving. Obviously, we – in our statements recognize there are a number of external factors that could affect that, at least which positive or negatively would be the election, but also the conflicts around the world, and we recognize that. But in spite of that, we do continue to see things going to market on a more regular basis and things moving along. But as we said, it is still an elongated period to close. That part, while getting shorter, is still not in the normal range yet.

Q: Hi, thanks for taking my questions. I’d like to follow up maybe on that last point on PSL. So this is the first FVA deal, I think, that we’ve seen. So helpful to get that fleshed out a little bit. It sounds like this is going to be sitting in largely that recurring portion of the FVA. Is that right? And pro forma for this deal, what percentage of that FVA revenue do you expect to be recurring?

A: Yes. Thanks for the question. And the answer is, yes, you are correct. That is where it will sit and that it is the recurring portion of the revenue, and that is another reason we do like it quite a bit. It is not going to materially change our results, not at that scale today, but we believe that it will contribute over time in a more meaningful fashion.

Q: Thanks. Good afternoon, everyone. Noted in your prepared remarks, Scott, the capital markets business performed well with strength in private capital, also the integration of the Triago transaction. Just wondering if there’s any update as to how we should be thinking about the contribution of this business to the Corporate Finance line just given the recent additions?

A: Yes. Look, I think we continue to sort of suggest to the market that you should think of that business as between 15% and 20% of our Corporate Finance revenues in any given year. The capital markets business over the last couple of years has done quite well. We are starting to see momentum in the M&A business, as Scott suggested. And so depending on how fast the M&A business recovers you are still likely looking at that range that we’ve sort of always told to the market.

Q: Hey, guys. This is Alex Jenkins filling in for Devin Ryan. Congrats on a nice quarter. I guess just to start on the MD head count over the last four quarters or so, obviously, it went down a little bit this quarter, but you’ve basically been growing in the low single digits. Maybe you could just touch on the environment and competitive dynamics and how we should think about framing out senior talent going forward over the next year or so?

A: I think that when you think about MD head count from our perspective, it’s a couple of things. It is obviously our annual process of promoting people. That’s one piece of it. You have – we are fairly regularly and certainly right now in the market looking to acquire additional individuals. And we do that, and as we stated in the quarter, hired 3 new people and then we have the acquisitions. Now there – as we’ve said before, we also do have some number of people both in acquisitions and other ways that don’t wind up being as good a fit as in some cases we might have hoped. But that number winds up netting over time. But overall, it has been a growing number.

Q: Thanks. Good afternoon, everyone. Noted in your prepared remarks, Scott, the capital markets business performed well with strength in private capital, also the integration of the Triago transaction. Just wondering if there’s any update as to how we should be thinking about the contribution of this business to the Corporate Finance line just given the recent additions?

A: Yes. Look, I think we continue to sort of suggest to the market that you should think of that business as between 15% and 20% of our Corporate Finance revenues in any given year. The capital markets business over the last couple of years has done quite well. We are starting to see momentum in the M&A business, as Scott suggested. And so depending on how fast the M&A business recovers you are still likely looking at that range that we’ve sort of always told to the market.

Q: Good afternoon and thank you for taking my questions. I guess to start, I just want to touch on capital allocation. You guys have done quite a few deals over the past year or 2 years. But just wanted to get a sense as to what the acquisition pipeline is looking like today, whether there is any need to take a bit of a breather here to focus on integrating all the deals that you have done recently and how that is influencing your thinking around capital return and buybacks?

A: Yes. I mean I will let Lindsey take the buyback piece. But the – we are always in dialogue. As we have stated before, this is a part of our strategy, and we will continue to do acquisitions. When they come in, when they hit is, it’s lumpy to use a term that Lindsey used earlier. And so while there have been a few recently in short order, that doesn’t mean that it will continue at that pace. But we are constantly looking. When we find things that we think are a good fit and will be beneficial to the organization and our shareholders, we will continue to work on doing them. And so that process will continue.

Q: Hi. This is Alex Bernstein on for Ken. Thanks so much for taking my question. I wanted to double-click on restructuring. I know you mentioned that some of the processes were taking longer to close. This quarter was strong, in part due to the timing and that your pipeline going ahead continues to look attractive. I wanted to help us think through the different interest rate environment. Obviously, we have had a significant rise in rates over the past handful of years, and that’s starting to abate and continuing to abate. I wanted to get your thoughts on how that impacts the rate cycle that is, the types of restructuring opportunities you are seeing. And as the pipeline continues to build today, do those building blocks look different than they did, say, 18 months or 12 months ago?

A: Yes. I want to make sure I am clarifying your other statement too. So, I am talking about elongated timeframe that is really relating predominantly to corporate finance business, more on the healthy side. I believe your question is relating to the restructuring business and the interest rates, am I understanding your question correctly?

A: Yes. And I think we are still in an elevated interest rate environment. And I think that this quarter and the activity levels that we have seen and continue to see are an indication that there are still a number of sick balance sheets out there that need to be dealt with in some form or another. And we expect that to continue as we have stated for the foreseeable future.