Houlihan Lokey, Inc. (HLI) Q1 2027 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Houlihan Lokey's First Quarter Fiscal Year 2027 Earnings Conference Call. [Operator Instructions] Please note that this conference call is being recorded today, July 29, 2026. I would now like to turn the call over to the company.

Thank you, operator, and hello, everyone. By now, everyone should have access to our first quarter fiscal year 2027 earnings release, which can be found on the Houlihan Lokey 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-Q for the quarter ended June 30, 2026, 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 non-GAAP financial measures are not intended to be considered in isolation from, as a substitute for or as more important than the financial information prepared and presented in accordance with GAAP. In addition, these non-GAAP measures have limitations in that they do not reflect all the items associated with the company's results of operations as determined in accordance with GAAP. A 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 Lokey's Chief Executive Officer; and Lindsey 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 first quarter fiscal 2027 Earnings Call. We ended the quarter with revenues of $511 million and adjusted earnings per share of $1.35. We are disappointed with these quarterly results but believe the results are a temporary disruption and not a fundamental resetting of our outlook. Overall, our Financial and Valuation Advisory business performed well. Our Financial Restructuring business generally performed as expected, but our Corporate Finance business results suffered. On our fourth quarter call, we identified several macro factors that were beginning to impact corporate finance, namely the knock-on effects of the war in the Middle East and the disruption in the software sector as companies and the markets consider the potential long-term effects of AI. Headwinds that started in February and March persisted into April and May, as deal momentum slowed, specifically in consumer-facing sectors that are particularly sensitive to inflation and consumer sentiment and software as reduced valuations meant many technology deals were reassessed. As a result, a significant number of transactions that were expected to close in the quarter are delayed into subsequent quarters. These delays disproportionately affected larger fee transactions. So while our transaction volume was more or less the same year-over-year, our business mix was weighted more heavily towards lower fee advisory products. Notably, the vast majority of delayed transactions continue to move through the pipeline, but time lines remain extended. We have seen market disruptions like this in the past, and like others, we expect this one to be temporary. We are encouraged by the fact that public market valuations remain strong in both new business activity and backlog in CF are at record levels, and we see no meaningful change in the typical rates of dead or on hold deals. It is these metrics and others that provide us with the confidence of our comments. It is not, however, a call on when the broader middle market M&A environment will normalize. The macro uncertainties that persist, particularly around the situation in the Middle East create enough headwinds to make it difficult to predict when we will return to typical market conditions. Financial restructuring performed generally in line with our expectations and is expected to have a solid year, consistent with our views at the beginning of the year. We continue to see strong activity levels in our restructuring business amid continued volatility in the energy market and dislocation in both private credit and the software sector. Financial and Valuation Advisory produced a strong quarter with growth across all 3 service lines, underscoring the general health of the economy and FVA's balanced business model across industry and transaction size. We're optimistic this business will continue to grow as we invest in more sophisticated data tools and offerings for our clients. Further differentiating us from our smaller competitors. Our collaboration with Morningstar, which was announced last quarter to establish a jointly branded industry benchmark for the fast-growing CLO market, is one example of this. In Q1, we announced the acquisition of Intrepid Financial Partners, a premier independent investment bank specializing in the energy sector. We're excited about the momentum this combination is already bringing to our energy business. The acquisition, which we expect to close by end of the second fiscal quarter, will add 32 colleagues to the firm. As we've said over the last several quarters, our acquisition pipeline remains as busy as ever. In addition, we hired 3 new managing directors in the quarter, and we continue to see a robust market for senior talent which we will continue to capitalize on strategically as we diversify and expand into underweighted industry sectors, geographies and product lines. Despite a challenging first quarter in Corporate Finance, we remain confident in the continued growth in our business over the coming years. We have built a diversified global business that has repeatedly shown a remarkable ability to adapt and to thrive in a range of market conditions, and we remain committed to our goal of delivering consistent long-term growth for our shareholders, clients and employees. And with that, I will turn it over to Lindsey.

Thank you, Scott. Revenues in Corporate Finance were $303 million for the quarter, down 24% compared to the same period last year. We closed 127 transactions this quarter basically flat with the same period last year. However, our average transaction fee on closed deals decreased significantly. As Scott mentioned, deal time lines have extended and disproportionately affected our larger fee deals in the first quarter. Client mix between sponsor and nonsponsor work has been stable and we have seen relatively more softness in our European business than the U.S. since the fourth quarter of last year. Deal closings may remain uneven in the near-term as macro events could continue to affect the timing of transactions. What gives us confidence over the medium term is that our backlog, pipeline and new mandate activity have not deteriorated like what we have seen in recessionary markets. Financial Restructuring revenues were $119 million for the quarter, generally in line with our expectations. We closed 23 transactions this quarter, down 34% from the same period last year, but our average transaction fee on closed deals increased. For Financial and Valuation Advisory, revenues were $89 million for the quarter, a 13% increase from the same period last year. We had 1,042 fee events during the quarter compared to 957 in the same period last year, a 9% increase. FVA is benefiting from strong deal momentum in the large-cap space while experiencing some of the same headwinds we are seeing in mid-cap M&A. Turning to expenses. Our adjusted compensation expense ratio for the first quarter in both fiscal 2027 and 2026 remained constant at 61.5%. We expect to maintain our long-term target of 61.5% for our adjusted compensation expense ratio for fiscal 2027. Our adjusted non-compensation expenses grew 6% to $100 million for the quarter compared to $94 million for the same period last year. For the full fiscal year, we expect to see our non-compensation expense growth similar to last year's growth. Our adjusted effective tax rate for the quarter was 13% compared to negative 1% for the same quarter last year. The increase was primarily a result of lower stock-based tax benefits from our annual May vesting of compensation-related stock. We expect to see a fiscal 2027 full year adjusted effective tax rate of between 26% and 28%. In our first quarter, we issued approximately 1.3 million shares to employees as part of our fiscal 2026 year-end compensation, and we repurchased approximately 1.1 million shares, about 800,000 shares through withhold to cover and 300,000 shares as part of our share repurchase program. And with that, operator, we can open the line for questions.

[Operator Instructions] And our first question today comes from Brennan Hawken from BMO Capital Markets.

Scott, you spoke to the adaptability in the business and totally appreciate that you don't want to do anything rash here just because current environments aren't great. But do you think that there's some ability you have to make an adjustment to do something about the challenging environment and these extended time lines? Or is this just something you have to wait out?

That's a great question. Thanks, Brennan. The answer is we are constantly doing things to attempt to improve the business. I mean that kind of process improvement, if you will, is something that has always been part of our culture. Much of this is things that are driven by our clients, not by us and their willingness to move things forward. Some of it is where you have deals not moving through in a process fashion and more of a one-off fashion and the timing of some of that can be less predictable, I would say, and as well as the fact that you have a new set of broader alternatives that people have today that have really -- the market has adapted to. And some of that has elongated that time frame. We do think that most of it though is driven by what we have talked about.

Got it. Okay. And if these sort of challenging market conditions extend, at some point, does it begin to threaten your ability to hold the 61.5% comp ratio? Or do you feel as though that's still secure and something that you're able to sustain?

We -- you heard us joke about it, that it's engraved in our floors, right? It existed long before we were public. We had a very constant comp ratio and see no reason that, that would change. And I mean we -- as we said in our comments, we do believe that this is something that is an anomaly. That doesn't necessarily mean it completely reverts next quarter or whatever the case may be, but we feel very good about the year overall and just looking forward.

Our next question comes from Devin Ryan from Citizens Bank.

This is Noah Katz on for Devin. So to start, I think we should dive a bit deeper on the middle market M&A environment broadly. Over the past several quarters, activity has generally improved from the lows, although the pace of recovery has remained uneven. As you guys look at client engagement and transaction discussions today relative to a few months ago, do you feel conditions are continuing to improve? And are there particular areas where you see more encouraging signs of activity?

Yes. I think that we have talked about that in the past. We do see things continuing to improve from a new mandate perspective from the types of things that we are signing up, even more importantly, from the percentage of deals that are going into market. All of those trends are in the right direction and positive. So we would agree when you look at the closed deals in the middle market, obviously, those numbers have been -- not been great recently when talking about broader market as well as us, obviously, in this quarter.

Got it. And then as a quick follow-up on the international business. You've continued to invest in the platform globally and international markets have become an increasingly important component of the business. As you look across Europe, Asia and other regions today, where are you seeing the strongest transaction activity? And where does the environment remain a bit more mixed?

Yes. So if you look just at this -- it depends what time frame you're asking about. If you're talking about this quarter that we're reporting on, it was stronger in the U.S. than it was in Europe or Asia. If you go back to last year, we had stronger growth in Europe and in Asia than we did in the U.S. So it varies from quarter-to-quarter.

Our next question comes from James Yaro from Goldman Sachs.

This is Matthew in for James. So I just want to really dive deeper into the broader M&A cycle. You guys mentioned you guys are seeing activity starting to come back in the mid-market space. But overall, where do you guys think that we are in the M&A cycle today? And how long can they continue to grow from here?

Clearly, it has been described, and I wouldn't disagree as -- and this is the M&A market overall is K-shaped, right? The large-cap deals have been happening at obviously a very strong rate and a number of our public peers have done quite well. The mid-cap market has really not returned yet to normal. I would say the party has been going on for a while in the large cap and the party is -- either hasn't started or is just about to start on the mid-cap side.

Yes. I mean I'd say over the last few quarters, we have said pretty clearly, we're in the early innings in the mid-cap cycle. I think last quarter, think of it as a rain delay, and we're still in those early innings. I mean, as Scott said it best, the large-cap space has done extremely well. We're seeing it a little bit in our FVA business. And the macro events of really the last few months have had a small impact on our Q4 and a bigger impact on our Q1. But we -- for all the reasons Scott suggested, I look at that as a delay as opposed to anything structural at all.

Yes. That makes a lot of sense. Rain delay is a great analogy. And just to follow up on the restructuring outlook. So you guys mentioned restructuring activities has continued to be strong in the quarter as you guys expect. How much further in your view, can restructuring improve? And could the software and private credit issues catalyze this and over what time frame?

Yes. So the answer is yes. We are continuing to see opportunities increase in restructuring. Obviously, there's delays. It takes time for those deals to work their way through the pipeline, but continues to increase. Software has certainly been one of the drivers of that, not -- certainly not the only driver. There have been knock-on effects as we've talked about from war in other areas that have benefited restructuring. And we do -- as we've said and really the only way we've talked about restructuring is that we expect this year to continue to be at elevated levels. And obviously, if there continues to be trouble in those various sectors or other ones, it can rise above those, I would call it, elevated levels. But at this point, we feel good about the outlook for restructuring this year.

Our next question comes from Gabriel Angelini from Bank of America.

To your point in terms of the impact of the geopolitical events in the Middle East and sort of software and impact on first quarter revenues. I think it was one of the weaker first quarters maybe going back to 2025 in terms of revenue. But I just want to get a sense for once we have a clearing event, how quickly can this sort of turn back on? I guess, sticking with the rain analogy, how quickly can the tarp come off the field here if we see a clearing event?

I like the analogy, and let's stick with that for a while. So I think that the tarp does come off, but it doesn't come off instantaneously. And I think that's the way to think about it that it does take a little bit and that can be -- you can think about that usually as months or quarters, not years. And I think that one of the challenges is every time we -- it hits normal again in the geopolitical environment, we have things like we heard over the last couple of days where the war pops up again. And so do they start to take it off and then it rains again and they bring it back on. And that's, I think, the question mark.

Great. That was very helpful. And maybe one more strategic question. You previously talked about the big market share opportunity being that sort of 98% of middle market volume that you don't participate in right now. But then I think some of the larger bulge-bracket firms are also focused on expanding particularly in middle market space. There was an announcement from the bulge-bracket that they're going to be hiring in that space. So as you think about gaining share, who are the share donors? And is it becoming more competitive in the middle market environment?

I've been doing this a very long time, and I can tell you that there have been a number of entrants in and out over time in the mid-cap space. Very few are enduring in it. And the ones that are enduring in it obviously have seen the growth in the business overall. We have continued to, we believe, take share in that market over time, and we see no reason that, that will not continue. And that's really the new entrants are historically at least been visitors to the space.

And the other, I think, important way we think about it is the vast majority of our competition in the mid-cap space are smaller boutique firms. And given sort of the success of the Houlihan and some of our larger middle market peers, it is becoming structurally more difficult for boutiques to compete with us. We just have broader geographic reach. We have more depth in terms of private equity coverage. We're able to invest in technology that the smaller boutiques can't. And so a lot of those market share gains are just the larger mid-cap firms like Houlihan Lokey taking market share away from smaller boutiques or bringing those smaller boutiques underneath the Houlihan Lokey umbrella and having them thrive. And so that's, I think, more likely where we're going to take market share versus from a bulge-bracket firm that moves into the middle market for 15 minutes and then moves back out when the markets change.

Our next question comes from Alex Bond from KBW.

Wondering if you could drill down on the impact of the slowdown in software-related transactions this quarter and maybe what extent that impacted the Corporate Finance results, both on the M&A side and in Capital Solutions? And maybe if you could just compare activity levels there relative to the year ago period. And then also curious to the extent you are seeing green shoots within software? And any color you can provide on expectations there, specifically through the rest of this fiscal year?

I'll start and let Scott finish the green shoots comment. So our technology business, and it is technology in total, which we think the bulk of which is software, and I'll give it to you across the firm as opposed to just in Corporate Finance was down about 54% for the quarter or $53 million in 1 quarter just to give you a sense of how that affected our business in Q1. And then with respect to green shoots, I think, Scott.

Yes. I have an awful lot of client meetings, and it went from everybody believed completely a few quarters ago, SaaS-pocalypse was real. Nobody was ever going to touch another software company again. Clearly, today, just we're just doing financings. We do -- we are closing deals in the space. I would say a number of very smart investors have started to understand there is a difference between a good software company and a bad software company and just kind of throwing it all out doesn't make complete sense. So we are starting to see a bifurcation, if you will, in the software space.

Got it. Okay. Great. That's helpful color. And then maybe as a follow-up, just anything to read into the fact that the larger size deals or I guess, larger fee deals have been more susceptible to closing delays more recently. Is this just simply a result of there being more variables in the equation for these deals, so maybe they're more impacted by volatility or geopolitical uncertainty? Or just any sort of other additional color in terms of how we should be thinking about that?

I think you're really covering it. I mean, to a large extent, it is people saying, let me just get that one more piece of information. Hey, by the way, what about this? And the larger deals, the more they have to ask questions around, right? There's just more complexity of the businesses. And so it is just dragging out a bit. And it is, I would say, something that we have seen before, but that the larger deals, the smaller deals also people are just more willing to just close and move on because we're going to make so many operational improvements and things like that.

And our next question comes from Steven Chubak from Wolfe Research.

This is Sandy on for Stephen. I was wondering if you could just speak to your appetite to do deals amid a more challenging revenue backdrop. Are target valuations looking more attractive in the current environment? And what are some of the areas where it might make more sense to buy versus build?

I missed the very beginning of what you said that. I couldn't quite hear. Could you say the very beginning of that one more time?

I was wondering if you could just speak to your appetite to do deals amid a more challenging revenue backdrop and whether...

Got it. Thank you. Yes. From our own M&A perspective, we obviously disclosed the Intrepid deal. We -- as we also stated, we have as strong a pipeline as we ever have, and we are continuing to be as aggressive, if not more so than we have been. We continue to believe in our business exactly the way it is.

Great. And then just for one follow-up. Thinking through the long-term impacts from AI on your business, can you speak to how you're thinking through opportunities and threats to your 3 core businesses and specific to the valuations business, how you're handicapping the risk of greater pricing pressure in an AI world?

Yes. That's a -- I could go on for a very long time. That's a very fulsome question. So thank you for that. We are very much a believer in AI being a meaningful component of our business. And we have opted, I would say, for a belief that a 10% improvement is the enemy of a 10x improvement, and we are focused on the 10x improvement that we think we can drive by AI, and we are have -- it's a very long conversation, probably not appropriate completely for today, but we are big believers in it and the improvements it can have on our business. When you talk about valuation, we have said that there are components of our valuation business that we think our -- all of our valuation business for that matter, is already a large user of technology and will continue to be. We do think it creates a differentiator between the smaller players and the larger players that are able to be more technology forward. We certainly have seen in parts of our business where that technology has driven average pricing down and increased the total addressable market, the TAM considerably, and those businesses continue to grow even at, for example, in portfolio where an average cost of a mark may decline, the number of marks and the frequency of those marks is expanding at a faster velocity.

Our next question comes from Nathan Stein from Deutsche Bank.

We've talked about the impact from the geopolitical conflicts in the first quarter, particularly in the Corporate Finance business. But it seems like an outsized impact to you relative to your peers. Can you just remind us why that is? And separately, how much of this dynamic continued so far in the early weeks of the second quarter relative to last quarter?

Yes. I think that this has been something that really was March, April, May, we've seen the impact begin to decline in June and July. Now again, war picks up, don't know what happens, right? So to be clear about that. But from a month-by-month basis, that's what I would say. I'd say why we are impacted more. I think there's a couple of things. One is we do have a disproportionate amount of sponsor-based business. And I do think sponsors have -- are putting their toes back in the water kind of one at a time, very, very slowly. And so every time something happens, they pull a lot of water. That's one of the reasons. The other, I think we talked about we have a more global business. And as we talked about, Europe has -- was not performing at least this quarter at the same level as the U.S.

And I'd say the third piece is we have a decent-sized technology software. It's hard to tell what our peers do in that space, but we are quite strong in software. And look, I think it has benefited our comments and our activity levels vis-a-vis restructuring. I'd say that we are as well positioned to do software restructurings over the next 2 to 3 years. As we all know that unfolds and there's a lot of highly levered software businesses. What's affecting us today in M&A is going to have a positive impact on our restructuring business over the next 2 to 3 years because of the investments we've made in technology and specifically in software.

Okay. Sounds good. And then as a follow-up on the non-comp expense, it came in strong despite the lower revenue base. Just wanted to ask what the main driver of that was. Was it all tech or AI spend, investments for the future? Or was there some seasonality that we should be mindful of in the quarter?

It was pretty close to what we expected, maybe a little lower than expectations. I think it's just timing. There wasn't anything that I'd point out in non-comp in Q1. I think any positive benefits on timing that we had in Q1 will be made up for in the subsequent quarters. But not dissimilar to what we expected for the quarter, and I'd say mostly just around timing.

[Operator Instructions] Our next question comes from Connell Schmitz from Morgan Stanley.

Following up on restructuring. Last quarter, you called out 2 large restructuring mandates that were pushed out from fiscal '26 to the first half of fiscal '27. Can you clarify if one, both or none of those mandates have been reflected in the $119 million that you printed this quarter?

Not going to be specific on the 2 transactions, but I will tell you that those 2 transactions were one of the many reasons why we had expected decent results and elevated results in fiscal '27, and that hasn't changed.

Got it. Okay. I guess switching to FVA. Can you quantify any future revenue opportunities from the Morningstar partnership and then the DataBank initiative more broadly that we have not heard about in a couple of quarters now, both from a potential hard dollar payment perspective and any cross-segment synergies and any early signs of success to call out?

Yes. So I'd say think of the Morningstar partnership as one baby step in sort of the more medium, longer-term objective of utilizing what we think is quite unique data set that we have to drive client success and ultimately revenues. Any revenues from Morningstar would be de minimis. It's not about the revenues. It's about that first step. It's about the branding of combining with Morningstar, and I think look at it as a series of steps over the coming years to get to ultimately where we want to go. But nothing. No modeling change.

No reason to change our modeling. I mean it is. There will be more things like this over time.

And with that, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to Scott for any closing remarks.

I want to thank you all for participating in our first quarter fiscal 2027 earnings call. We look forward to updating everyone on our progress when we discuss our second quarter results for fiscal 2027 this fall. Thank you all.

The conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.