Houlihan Lokey, Inc. (NYSE:HLI) Q3 2024 Earnings Call Transcript
Houlihan Lokey, Inc. (NYSE:HLI) Q3 2024 Earnings Call Transcript February 1, 2024
Houlihan Lokey, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day ladies and gentlemen. Thank you for standing by. Welcome to the Houlihan Lokey's Third Quarter Fiscal Year 2024 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, February 1, 2024. I will now turn the call over to the company.
Unidentified Company Representative: Thank you, operator and hello, everyone. By now, you should all have access to our third quarter fiscal year 2024 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 the 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 December 31, 2023, 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. 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 Beiser, Houlihan Lokey's Chief Executive Officer; and Lindsey Alley, Chief Financial Officer of the company. 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.
Scott Beiser: Thank you, Christopher. Welcome everyone to our third quarter fiscal 2024 earnings call. We ended the quarter with revenues of $511 million and adjusted earnings per share of $1.22. Revenues were up 12% and adjusted earnings per share were up 7% compared to the same quarter last year. Our third fiscal quarter produced our first $500 million revenue quarter in 2 years. We’ve now reported two consecutive quarters in revenue increases with a 9% increase in our third fiscal quarter when compared to our second fiscal quarter. All three business segments reported their highest quarterly results for the fiscal year and all three businesses into our fourth fiscal quarter with continued momentum. This quarter we closed our previously announced acquisition of 7 Mile Advisors, an IT services business investment banking firm, adding four new MDs to our corporate finance business.
We also announced the pending acquisition of Triago, a private funds investment banking firm. Upon the completion of this acquisition, we believe our private funds group will be one of the few platforms with a fully integrated advisory business offering clients primary, secondary, direct, GP advisory services on a global basis. In addition to these acquisitions, we hired four new Managing Directors in our Corporate Finance, in Financial and Valuation Advisory business this quarter. Our corporate finance business produced $311 million in revenues for the quarter. New business activity remains strong, while the overall confidence of our Managing Directors in closing, active engagement and attracting new business continues to improve as we enter a new calendar year.
While the M&A market has shown signs of steady improvements for several months, we believe that we are still well below what would be considered normal market conditions. Consequently, we expect to see continued steady improvement in our corporate finance business throughout the calendar year when compared to the same periods in the previous year. Two positive signs of improved market conditions are the strength of year-to-date results in our capital markets business and recent strength in the technology sector. Historically, our capital markets business has been a leading indicator to improving M&A market conditions. Additionally, our technology business, which experienced one of the largest revenue declines over the last 2 years, as a result of very weak industry fundamentals, has experienced a meaningful increase in new business and transaction closings across geographies, and is a significant component of backlog leading into calendar 2024.
Our financial restructuring business produced quarterly revenues of $129 million, the highest since the COVID crisis. The business environment for restructuring remains very strong. New business activity has improved in the U.S since last quarter, and we are now seeing strength in financial restructuring across all geographies. While we expect our restructuring business to remain at elevated levels for the foreseeable future, we remind everyone that our financial restructuring quarterly results can be lumpy based on the timing of when certain transactions close. Financial and valuation advisory produced $72 million in quarterly revenues. This is only slightly above last quarter's results, but similar to corporate finance shows a consistent trend in quarterly improvements over the fiscal year.
Our market neutral service lines continue to show strong results as we add new clients globally, enabling us to expand our FVA business into new geographies. Our service lines tied to the M&A markets continue to slightly lag our M&A business, but we expect them to eventually catch up. I'd like to end today's comments by celebrating the success of our three business segments with as accolades similar to those I've announced for the last 9 years. In calendar 2023, Houlihan Lokey was ranked the number one investment banking firm globally for all M&A transactions based on transaction volume. We are again ranked as the number one investment banking firm globally for all financial restructuring transactions, both in terms of value and volume. And finally, we ranked as the most active fairness opinion provider globally when measured over the last 25 years.
Congratulations to every employee at Houlihan Lokey, who worked hard to achieve these accolades, and thank you to all our investors who throughout the cycles have continued to support our efforts to become a trusted advisor to our clients and a leader in investment banking worldwide. And with that, I'll turn the call over to Lindsey.
Lindsey Alley: Thank you, Scott. Revenues in corporate finance were $311 million for the quarter, up 6% when compared to the same quarter last year. We closed 117 transactions this quarter, compared to 125 in the same period last year. Although our transaction count decreased, our average transaction fee was higher for the quarter versus the same quarter last year. Financial restructuring revenues were $129 million for the quarter, 30% increase versus the same period last year. We closed 30 transactions in the quarter compared to 28 in the same period last year, and our average transaction fee on closed deals increased. In financial evaluation advisory, revenues were $72 million for the quarter, a 9% increase from the same period last year.
We had 926 fee events during the quarter compared to 876 in the same period last year. Turning to expenses. Our adjusted compensation expenses were $314 million for the quarter versus $281 million for the same quarter last year. Our only adjustment was $9.7 million for deferred retention payments related to certain acquisitions. Our adjusted compensation expense ratio for the third quarter in both fiscal 2024 and fiscal 2023 was 61.5%. We do expect to maintain our long-term target of 61.5% for our adjusted compensation expense ratio. Our adjusted non-compensation expenses were $82 million for the quarter, an increase of $10 million over the same period last year. This resulted in an adjusted non-compensation expense ratio of 16.1% for the quarter, compared to an adjusted non-compensation expense ratio of 15.9% for the same quarter last year.
On a per employee basis, our adjusted non-compensation expense was $31,000 this quarter versus $29,000 for the same quarter last year. We typically see some seasonality in our adjusted non-compensation expenses with the second half modestly higher than the first half. We expect that trend to continue in our final fiscal quarter this year. For the quarter, we adjusted out of our non-compensation expenses, $1.6 million in noncash acquisition related amortization, $4.3 million for acquisition-related costs, primarily related to the Triago acquisition, which is expected to close during our first quarter of fiscal 2025, and $2.6 million pertaining to professional fees associated with streamlining our global organizational structure, which we refer to as Project Solo.
Regarding Project Solo, we have completed 12 acquisitions since we went public in August 2015, and with most of these acquisitions, we have acquired multiple legal entities. Since the acquisition of GCA, the number of legal entities has become burdensome and costly enough that we decided to streamline our legal structure globally to simplify our operations and reduce our costs. We expect this project to last through fiscal year 2025 and will result in charges to both non-compensation and tax expense, which we plan to adjust out as nonrecurring. Our adjusted other income and expense increased for the quarter to income of approximately $6 million versus income of approximately $2.2 million in the same period last year. The improvement in this category was primarily due to an increase in interest income generated by our investment securities.
Our adjusted effective tax rate for the quarter was 30.3%, compared to 24.6% for the same quarter last year. Our taxes increased year-over-year due to adjustments for federal and state tax returns filed during the quarter and increased taxes due to our foreign operations. Overall, our effective tax rate has also increased for the year-to-date period as a result of the increase in corporate tax in the U.K from 19% to 25%, effective April 1 2023. Due to our increasing mix of foreign revenues and increase in the U.K corporate tax rate, we are slightly increasing the long-term range for our effective tax rate to between 28% and 30%, up from between 27% and 29%. Turning to the balance sheet. As of the quarter end, we had approximately $591 million of unrestricted cash and equivalents and investment securities.
In this past quarter, we did not repurchase any shares. We continue to take a conservative approach to share repurchases as we are prioritizing balance sheet strength and flexibility to be able to take advantage of acquisition and hiring opportunities in this market. And with that, operator, we can open the line for questions.
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