Houlihan Lokey, Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Houlihan Loki's fourth quarter and fiscal year 2025 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note that this conference call is being recorded today, May 7, 2025. I will now turn the call over to the company.

Thank you, Operator, and hello, everyone. By now, everyone should have access to our fourth quarter and fiscal year 2025 earnings release, which can be found on the Houlihan-Loki website at www.hl.com in the investor relations section. Before we begin our formal remarks, we need to remind everyone that the discussion today will include forward-looking statements. These forward-looking statements, which are usually identified by use of words such as will, expect, anticipate, should, or other similar phrases, 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, and therefore, you should exercise caution when interpreting and relying on them. We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. We encourage investors to review our regulatory filings, including the Form 10-K for the fiscal year ended March 31, 2025, when it is filed with the SEC. During today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating the company's financial performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. And reconciliation of these measures to the most directly comparable GAAP measures is available in our earnings release and our investor presentation on the HL.com website. Hosting the call today, we have Scott Adelson, Houlihan Loki's Chief Executive Officer and Lindsay 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, Christopher. Welcome, everyone, to our fourth quarter and fiscal year 2025 earnings call. We ended the quarter with revenues of $666 million and adjusted earnings per share of $1.96. Revenues for the quarter were up 28% and adjusted earnings per share were up 54% compared to the same quarter last year. We ended the fiscal year 2025 with $2.4 billion in revenues, the highest annual revenue in the firm's history, up 25% versus last year. and surpassing our high water revenue mark in fiscal year 2022. Both financial restructuring and financial and valuation advisory produce record revenues for the year. And our corporate finance business had its second best year ever. A significant driver of our growth has been our ability to execute on acquisitions. This year was our most active year ever, closing three acquisitions that altogether expanded our industry, geographic, and product reach. Acquisitions continue to be an important component of our overall growth strategy, and we're pleased with how well they are performing, demonstrating the success of our strategy. Key indicators in our corporate finance business outside the U.S. continue to move upward in the fourth quarter. The average size of our transactions and the average transaction fee continue to grow, and the quality of our senior hires and, importantly, our overall brand perception strengthened. Finally, we had a record year in our capital markets business, now rebranded as Capital Solutions to better reflect the breadth of our offerings. This business is a strategic and expanding part of corporate finance, significantly enhancing our platform, with diversified high growth and less volatile revenues. Looking back at the fourth quarter, all three of our business lines performed well, particularly in a challenging economic environment. Corporate finance continued to see improving metrics in the fourth quarter, while our cyclical service lines in FDA also performed well in a volatile market. Our financial restructuring business had a strong fourth quarter to close the year, reinforcing our view that fiscal year 2026 could also see elevated revenues in financial restructuring. We hired four managing directors in the fourth quarter, bringing our total hired and acquired for the fiscal year to 37. And we are also pleased to announce that we have promoted 16 colleagues to managing director in our current quarter. I would like to congratulate all our new partners and promotes and wish them success in the coming years. I'm incredibly proud that we delivered strong results in a market environment like this. These results are a testament to our business strategy, our diversified business model, and the perseverance of our colleagues around the globe. We begin the new fiscal year with momentum across all our product lines. even as the early weeks have been marked by turmoil in global markets and the economy. And although current volatility makes meaningful forecasts for the weeks and months ahead more difficult, our business model is built to handle volatile market conditions like what we are experiencing today. There will be winners and losers in this market environment, and our business model is set up to advise both. I would like to thank our more than 2,700 employees for continuing to deliver excellence to our clients and to one another, as well as our clients and our shareholders who continue to support us with confidence as we are committed to building the best investment banking advisory business in the world. And with that, I will turn the call over to Lindsey.

Thank you, Scott. Revenues in corporate finance were $413 million for the quarter. up 44% compared to the same quarter last year. We closed 147 transactions this quarter, up from 121 in the same period last year, and our average transaction fee increased. Corporate finance exhibited the typical seasonality we see in this business, with revenues declining slightly compared to the third quarter. We expect fiscal 2026 to exhibit similar seasonality to fiscal 2025, assuming similar market conditions remain throughout the year. Financial restructuring revenues were $165 million for the quarter, a 6% increase versus the same period last year. We closed 38 transactions this quarter compared to 35 in the same quarter last year, and our average transaction fee on closed deals increased. As in previous years, financial restructuring closed out the fiscal year with a strong fourth quarter. For financial and valuation advisory, revenues were $89 million for the quarter. a 15% increase from the same period last year. We had 1,224 fee events during the quarter compared to 1,025 in the same period last year. FDA ended the year with a strong fourth quarter, performing well in a challenging environment. Turning to expenses, our adjusted compensation expenses were 410 million for the quarter versus 320 million for the same period last year. Our only adjustment was $21 million for deferred retention payments related to certain acquisitions. In both fiscal 2025 and 2024, our adjusted compensation expense ratio for the fourth quarter and fiscal year was 61.5%. We expect to maintain our target of 61.5% for this ratio in fiscal 2026. Our adjusted non-compensation expenses increased to $85 million for the quarter compared to $81 million for the same period last year. This resulted in an adjusted non-compensation expense ratio of 12.8% for the quarter compared to 15.6% for the same period last year, and the fiscal 2025 adjusted non-compensation ratio of 13.8% versus 16.4% for the same period last year. On a per-employee basis, our adjusted non-compensation expense for the quarter was $32,000 versus $31,000 for the same quarter last year. And we ended the fiscal year at $124,000 per employee versus $121,000 for the same period last year. We expect our adjusted non-competition expense to grow in the high single digits for fiscal 2026 as we continue to increase headcount, make investments in technology, and invest in our brand across the globe. For the quarter, we adjusted out of our non-competition expenses $9.7 million in non-cash acquisition-related amortization and $1.8 million pertaining to professional fees associated with streamlining our global organizational structure, referred to as Project SOLA. Our adjusted other income and expense produced income of approximately $9 million versus income of approximately $6 million in the same period last year. The improvement was primarily due to an increase in dividend and other income generated by our investment securities. We adjusted out of other income and expense a gain of approximately $2 million related to the reduction in value of an earn-out liability associated with one of our prior acquisitions. We treat all acquisition-related earn-outs as purchase priced and adjust out of our P&L any significant changes in the value of these earn-outs. We had strong performance in this line item in fiscal 2025 as interest rates remained elevated throughout the year. Performance in fiscal 2026 will be directly related to the level of interest rates around the globe. Our adjusted effective tax rate for the quarter was 24.5% compared to 29.9% for the same quarter last year. The decrease in our adjusted effective tax rate was a result of lower than expected state taxes and lower non-deductible expenses. We ended fiscal 2025 with an adjusted effective tax rate of 29.8% versus 29.5% in fiscal 2024. For the fourth quarter, we adjusted out of our effective tax rate the effects of a successful local tax audit, acquisition-related non-deductible expenses, and the partial reversal of a tax benefit from stock vesting. In fiscal 2026, we will no longer exclude the effect of our deferred compensation shares vesting in the first quarter from our effective tax rate. This will result in a benefit to our adjusted effective tax rate in the first quarter of fiscal 2026 and a lower adjusted effective tax rate for next year, assuming all else remains equal. Turning to the balance sheet, as of quarter end, we had approximately $1.2 billion of unrestricted cash and equivalents and investment securities. As a reminder, a significant portion of our cash is earmarked to cover accrued but unpaid bonuses for fiscal year 2025 that will be paid this month and in November. Shares issued this month as part of our fiscal 2025 compensation will vest into the fully diluted share count over a four-year period from the date issued. In our fourth quarter of fiscal 2025, we repurchased approximately 371,000 shares as part of our share repurchase program. We expect to continue our long-term objective of repurchasing shares through the open market and withhold to cover to offset the eventual dilution associated with the issuance of deferred compensation shares in May. Finally, the Board approved a 5.3% increase to our quarterly dividend to 60 cents per share. The dividend will be paid in June. With that, operator, we can open the line for questions.

Thank you. At this time, if you would like to ask a question, please press star one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, that is star one to ask a question. And our first question will come from Brendan O'Brien with Wolf Research. Your line is open.

Questions. You know, I guess just to start, you know, I understand that it's difficult to forecast, you know, near term just given the volatility. But I was hoping you could help frame, you know, how revenues have been tracking quarter to date and whether there's been any dispersion between, you know, some of your sponsor and strategic clients.

You know, it really is too early. to be able to give you any, any meaningful indication. And I mean, I think I said it in the prepared remarks. It is just, it is a more difficult environment to be predicting the future. And there's no doubt about that. Having said that, I can certainly say that there, things are continuing to move in terms of pitch level activity and and deals moving through processes at a pretty normal rate. I mean, as we've been saying for a very long time now, things have been getting better, not month by month, but quarter by quarter, and that this is an environment where it's still unclear exactly all the ramifications of what has occurred, but what is clear is there are certain sectors that are far more impacted than others and certain geographies that are more impacted than others.

Just for my follow-up, you alluded to this a bit in response to the question, but a theme that started to emerge a bit is that there's some bifurcation in the M&A market between sectors that are more or less impacted by tariffs. I just want to get a sense as to what you're seeing across the different sectors within your own business. I know you're very large in industrials, which feels like an area that might be disproportionately impacted by the tariff implementation.

Yeah, I mean, I think, again, you can't even paint all industrials with one brush, and I think that tends to be people's desires, say, that tariffs are impacting everything. First, you've got to start with that is a fairly U.S.-centric view of the world. I will tell you the example I've been giving. If we're selling a pasta company in Italy that doesn't sell in the U.S., it's not overly impacted by tariffs, right? That's just not relevant to it. So that would be an example. On the other hand, if you, there certainly are components of things like industrials that are more impacted. And so it is sector by sector and geography by geography.

Thank you. Our next question will come from James Yarrow with Goldman Sachs. Please go ahead.

Good afternoon, and thanks for taking the questions. Scott, really excellent restructuring results again. Could you help us think through the moving parts of restructuring here in terms of liability management versus Chapter 11? And then, you know, has anything that has happened over the past few weeks affected your outlook that you've given previously, which I think was a strong multiyear restructuring cycle?

Yeah, I think we've said that we expect restructuring to remain at elevated levels, and that is continuing and certainly based upon more recent events. I think that only gives us more confidence in those statements. And in terms of mix, again, we've talked about this a lot over time. To us, these are all just restructurings. How they wind up manifesting themselves is a little less relevant, quite honestly, and We never know exactly going into a situation how it will result, whether it will be liability management or a chapter or distressed financing or whatever the case may be. But we can certainly say that we continue to see a good level of activity in the restructuring arena.

And, James, I know I said this in my comments, but given that you asked the question, I'll put an exclamation point on it. We tend to see a very strong fourth quarter restructuring year after year after year and And so, you know, that is not necessarily a reflection of what, you know, each quarter is going to look like next year. So I encourage everyone to take a look at the seasonality, if you will, of the business over the last couple of years and think through that in terms of how you think of fiscal 26.

Yeah, that makes sense. Yeah, I was just referring to the fact that it was up 6% year-on-year. But thank you for that. That's really, really helpful. Could I just ask another one on a somewhat different topic, which is related to private equity firms and the fact that it appears that smaller private equity is having a harder time raising capital than some of the very largest sponsor firms. So you obviously have strong relationships with the smaller sponsors, but you've also increased your average deal size over the past few years. So maybe you could just talk about what you're seeing in terms of those fundraising trends and what that means for the sorts of clients that you're servicing and whether those have evolved or perhaps need to evolve going forward.

I mean, I think it's safe to say that the primary fundraising business has been... constrained for the past couple of years, no doubt about it, no great surprise, because there has not been an adequate level of recycling of capital. I still believe, and we certainly continue to see meaningful dollars flow to the broadly defined alternative asset class. But the capital that is allocated to private equity needs to come back to be recycled. I mean, so that doesn't really surprise me a great deal. Having said that, we see those voids being filled in many different ways. And you see that in continuation vehicles. You see it in directs. I mean, there's lots of different sources of capital besides that are available to the private equity community above and beyond just incremental new funds.

Thank you. Our next question will come from Ben Rubin with UBS. Please go ahead.

Hi, Scott. Hi, Lindsay. Hope you're both doing well. Hi, Ben. Welcome. I was hoping to double-click on corporate finance. Obviously, a great deal of optimism coming into this year around the pickup in M&A and IPOs. So I just wanted to get your general thoughts on the backdrop for cap markets. Does the outlook kind of differ as you move between the middle market which is kind of your core business versus large-scale M&A. And then lastly, if you could just comment on how your deal backlog is looking for fiscal year 26 and whether there's been any movement there in recent weeks. Thank you.

I'm not sure I understood the first question, to be really honest. The second question in terms of our backlogs continue to be strong and growing. And so that has, for a while... been the case, and it's a matter of those. We've talked about on prior calls the velocity or throughput of those deals, and we've been saying that has continued to improve. You know, the most recent events does give one possibility that will continue to improve, but certainly at this point still feeling comfortable that we're heading in the right direction. Yeah, that makes sense. The first question you may have to ask. Sorry.

Yeah, I was just kind of asking how you're viewing, does the outlook differ in terms of the middle market M&A versus large-scale M&A as a result to the potential impact of recent volatility?

I mean, the answer is yes. I mean, but that is true in every cycle. And I'm a firm believer when you look at the volume, mid-cap volumes are much more resilient. than large cap volume. And we could go on for a very long time on the reasons why, but you can look through virtually every cycle that is the case.

One of the things we love about the differences between us and some of our peers is if you ask that same question to our peers, they'd be able to answer half of it. If you ask it of us, we're able to answer half of it.

Appreciate it. Well, thank you both for trying. For my second question, obviously, you guys were active in fiscal year 25 on the strategic acquisition front. So I was just hoping if you could share any color on the state of your bolt-on pipeline as we look to fiscal year 26. And is there any areas of white space you're looking to backfill or look more attractive here in your view? Thank you.

Yeah, I've talked about it on previous calls. We always have a very active dialogue occurring with an array of opportunities, and that is no different today than any other point in time. And we've stated in our prepared remarks and previously how important this is to our strategic direction, and we're continuing to see the benefits of it. So you can expect it to continue.

Thank you. Our next question will come from Devin Ryan with Citizens. Please go ahead.

Great. Hey, Scott. Hey, Lindsey. How are you? Hey, Devin. Good. Good. I want to ask a question first on just the capital solutions and kind of the private capital part of the business. Obviously, Sponsor M&A is still recovering from a pretty low level, but it just seems like there's a lot going on within that community. universities now starting to sell positions, LPs more broadly are looking for liquidity and continuation funds have been really active. So just love to get a sense of kind of the sizing of that business. If you can give us anything on just kind of contribution in the quarter and what some of the biggest factors are that are driving kind of your results right now, and then just kind of how you see that business growing over the next year and really kind of longer term as well, but just I'd love to kind of just dig in a little bit, given the confluence of things going on there and within that business as well.

Yeah, as we've stated before and in the remarks, I mean, that continues to be a really growing and significant part of our business. And we feel very good about our position in the market in it. and a lot of the trends that you just articulated are a part of that. I mean, there's many components to our now-called capital solutions group, and certainly the continuation area is just one of those. There is, in an environment like we are in today, clearly needs for different forms of capital to solve various situations, and we are quite active in that area today.

And Devin, you'll see this in our materials. I mean, not commenting on the fourth quarter, but the whole call it financial sponsor community still remains roughly 50% of our, of our client base. And, and that I don't have the numbers in front of me, but that doesn't feel any different in Q4 versus the balance of the year.

Okay. Appreciate that. And then a follow-up here just on restructuring and liability management. Um, I'd love to just kind of think about the capacity to do more in that business today than in the past. So if I look at, you know, the number of managing directors is up, I think, 35% from COVID time. You're obviously generating strong results today, but we're not really even in a stressed market. So, you know, a lot of liability management, a little bit of kind of restructuring. But I'd love to hear about kind of how much bigger you think the contribution could be in a more stressed market. macro environment, assuming that the deals would change in size, the fees would be larger, probably more complex, but just based on the team you have today versus the past, kind of how you think about capacity to do more from here in a more challenging economy?

Yeah, I mean, every cycle is different. But just sharing a little bit of metrics with you, you know, the restructuring folks ended the year at roughly 9 point, looks like 9.5 million revenue per MD. And during the height of the Great Recession, we were 40% higher than that in revenue per MD. So I mean, there is plenty of capacity in restructuring to handle, you know, a much larger restructuring environment. I mean, you started saying it. What ends up happening is you end up going from an environment where you're hitting singles and doubles to an environment where you're hitting triples and home runs. So you don't necessarily see linear growth in terms of number of transactions that close. You just see higher fees. But from a capacity standpoint, we've seen it much higher than where it was last year.

Thank you. Our next question will come from Ken Worthington with JP Morgan. Please go ahead.

Hi, good afternoon. Thank you for taking the question. We're doing a round trip around your income statement here. So big step up in FDA this quarter after a big step up in 3Q. So maybe, you know, we know there's fairness pins in there, but walk through some of the other items that have sort of come together here to really drive that business and the results in 4Q? And then maybe bigger picture on the same topic, do you see a more dynamic policy under the new US administration as sort of a tailwind or a headwind for valuation, tax, and advisory needs? I assume it's the former, not the... I'm sorry. Yeah, the former, not the latter, but I thought I'd throw that one out there too.

Thank you, Bridget. I mean, I think that what you are beginning to see, you got a number of factors that we talked about before. You have the less cyclical components of FBA, which is really portfolio valuation, which is a constant grower, effectively, as the world just continues to be interested in more marks on things and on a more regular basis. You then have the opinion business that is somewhere in between non-cyclical and cyclical and can be impacted more by, if you will, a larger fee increase. situations on any given opinion. And then lastly, you have more of what we call our transaction advisory business, and that is more cyclical. And in the fourth quarter, as you can imagine, the transaction advisory services is still ramping back up as M&A continues to be a bit muted, but the others are continuing to grow nicely, and it just all came together.

Okay, great. I'll leave it there. Thank you.

Thank you. And as a reminder, that is star one to ask a question. And our next question will come from Ryan Kenney with Morgan Stanley. Please go ahead.

Hey, good afternoon. Thanks for taking my question. So on restructuring, are there any numbers you can share on just how much conversations or mandates have picked up since the beginning of April? Is it a wave of inbounds coming in? Is it more of a modest increase? Is it material enough to really drive that P&L over the next couple of quarters. How big of an increase in inbounds are you seeing?

We're not going to share specific numbers, but look, as you would expect, we've started to have conversations around what's happening in the markets and whether those end up resulting in restructuring revenues is just too early to tell. I mean, it's such a dynamic situation that this could all change in three days. So look, but there are some companies that are concerned about what's happening, and those conversations have started, but we're too early to tell whether they actually have an impact, certainly on the next couple, three quarters.

Yeah, I was going to say, in the way restructuring works, we likely wouldn't see that in the next quarter or two anyway.

All right. Thanks. That's helpful. And then as a follow up on Europe, it sounded like you're a little bit more positive on the non-U.S. side of the business. Is that just tariff driven or is there anything else going on behind the surface with regulatory changes that are driving more demand for M&A outside of the U.S.?

I mean, I think we've talked about it before. Our non-U.S. business is just step wise different than it was a few years ago. And we continue to just gain share in other parts of the world, differently even than the U.S. And when you look at all the disruption that is occurring in the U.S., obviously, other parts of the world are impacted by that, but in a much more muted basis. And again, that's another area where our mid-market focus, certainly on the corporate finance side, it makes it so a mid-market company in Europe is going to be far less impacted than a large-cap company in Europe due to the actions in the U.S.

Thank you.

In most cases.

Again, that is star one to ask a question. All right, we have no further questions in the queue, so I'll hand the call back to Scott for any closing remarks.

Great, thank you. I want to thank you all for participating in our fourth quarter and fiscal year 2025 earnings call. We look forward to updating everyone on our progress when we discuss our first quarter results for fiscal 2026 this summer.

Thank you, ladies and gentlemen. This concludes today's program, and you may disconnect at any time.