HOULIHAN LOKEY, INC. Q2 FY2027 earnings call

• Market Normalization: Revenues rose 5% to $692 million, with adjusted EPS flat at $1.85. The market is normalizing, showing growth in Europe and the U.S., except for Technology and Healthcare.
• Corporate Finance Strength: Growth was driven by higher average transaction fees rather than volume. Despite closing fewer deals (142 vs 171 YoY), the mix favored higher-value transactions. Backlog suggests continued growth for the remainder of the year.
• Restructuring Tailwinds: Performance exceeded expectations due to software sector dislocations, higher interest rates, and geopolitical instability. Significant wins in software are expected to contribute to revenues starting in calendar 2027.
• Operational Discipline: The firm maintains an adjusted compensation expense ratio target of 61.5%. Non-compensation expenses grew to $91 million (13.3% ratio). The firm added 12 new managing directors, including eight from the Intrepid Financial Partners acquisition.
• Strategic Focus: Management clarified that while average deal sizes are increasing slightly over time (from ~$100M to $200-300M), the firm remains strictly focused on the middle market (sub-$2 billion), avoiding large-cap strategies.

Corporate Finance generated $481 million in revenue, up 10% year-over-year, representing the majority of the firm's business. Financial Restructuring contributed $118 million, a 7% increase from the prior year. Financial Valuation and Advisory produced $93 million, driven by growth in portfolio valuation services.

• Full-Year Tax Rate: Maintained guidance for the fiscal 2027 full-year adjusted effective tax rate between 26% and 28%.
• Compensation Ratio: Maintained long-term target of 61.5% for the adjusted compensation expense ratio.
• Second Half Outlook: Expects an unseasonably strong second half of fiscal 2027, better than historical norms, contingent on market cooperation.
• Restructuring Cycle: Anticipates elevated restructuring revenues through fiscal 2028, with significant revenue contribution from software-related mandates beginning in calendar 2027.

• Macro Volatility: Persistent headwinds from interest rates, geopolitical instability, and dislocation in the software sector create uncertainty.
• Deal Timing Delays: Geopolitical shocks and macroeconomic factors have acted as 'speed bumps,' elongating deal timelines and causing temporary disconnects between transaction volume and revenue.
• Sector Specific Weakness: Continued challenges in the technology/software and healthcare sectors, though software is showing signs of improvement.

Q: Analyst asked if the recovery in corporate finance can be built upon given rising rates and mixed signals.

A: CEO Scott Adelson stated that mid-market rates do not dramatically impact deals unless they accelerate greatly, as capital remains plentiful. He noted that geopolitical shocks are more concerning than rates, but metrics suggest confidence in the back half of the year.

Q: Analyst questioned the disconnect between lower transaction volumes and higher revenues in both Corporate Finance and Restructuring.

A: CFO Lindsey Alley explained that Restructuring is inherently lumpy, making volume-revenue disconnects common. For Corporate Finance, she attributed the Q2 anomaly to unique Q1 timing issues, noting that year-to-date trends show revenues and volumes moving together. She also highlighted a strategic shift toward selecting higher-probability, larger-fee deals within the mid-market.

Q: Analyst asked about the outlook for the software sector and whether other sectors are carrying the weight.

A: CEO Adelson confirmed software is down but improving as the market distinguishes good from bad companies. He described healthcare challenges as primarily timing-related. CFO Alley added that M&A and non-M&A businesses are expected to perform similarly by year-end, with no divergence anticipated.

Q: Analyst inquired if acquisitions are timely now due to industry disruption and if there are specific sector focuses.

A: CEO Adelson emphasized that their acquisition process is robust and not time-sensitive. They constantly evaluate targets based on cultural fit and talent expansion, expressing confidence in their current pipeline regardless of current market conditions in software.

Q: Analyst asked about the financial restructuring outlook, specifically regarding Europe and the timeline for software-driven revenue.

A: CFO Alley expressed bullishness on both US and European restructuring markets due to approaching debt maturity walls. CEO Adelson compared the potential software opportunity to the massive oil & gas dislocation in fiscal 2017, stating it is much larger. He clarified that software-related revenues will likely begin contributing in calendar 2027 and continue into 2028.