Houlihan Lokey, Inc. (NYSE:HLI) Q4 2023 Earnings Call Transcript May 13, 2023

Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to Houlihan Lokey’s Fourth Quarter and Fiscal Year 2023 Earnings Conference Call [Operator Instructions]. A question-and-answer session will follow the formal presentation. Please note that this conference call is being recorded today, May 9, 2023. And I will now turn the call over to Christopher Crain, Houlihan Lokey’s General Counsel. Please go ahead.

Christopher Crain: Thank you, operator, and hello, everyone. By now, everyone should have access to our fourth quarter and fiscal year 2023 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-K for the year ended March 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 fourth quarter and fiscal year 2023 earnings call. We ended the quarter with revenues of $445 million and adjusted earnings per share of $1.11. Revenues for the quarter were down 6% from a year ago, and adjusted earnings per share were down 15% from a year earlier. During fiscal 2023, we have little volatility in our quarterly revenues and our second half results were almost identical to our first half results. This fiscal year, we did not experience our typical increase in second half results likely due to current market conditions. However, our diversified service industry and geographic platform enabled us to achieve our second highest yearly revenues in the firm’s history, notwithstanding the difficult market environment.

For the quarter, we recorded $256 million in Corporate Finance revenues, down 8% versus last year. For the fiscal year, Corporate Finance revenues of $1.13 billion were down substantially from last fiscal year, but still the second best year in the firm’s history. Our Corporate Finance business continues to be a tale of two cities. On the positive side, we have more managing directors than at any other time in the firm’s history, covering more industry sectors and geographies than ever before. We closed more transactions this quarter than in any other quarter this fiscal year. The number of new engagements this quarter remained strong and consistent with previous quarters this fiscal year. Overall, the quality and size of the company’s hiring us, especially in Europe, continues to improve, driven by our investments in talent, build-out of industry verticals and geographic expansion.

On the other hand, there are headwinds that include continued uncertainty in global markets, challenging financing markets and a longer time to close transactions as measured between the time we are hired and the time we complete a transaction. Similar to my comments in previous quarters, this environment has resulted in strong new business activity as companies hire us in anticipation of market conditions improving, but lower current revenues as the time to close has extended and companies are cautious about the economic outlook. Financial Restructuring achieved $120 million in revenues, down 1% versus the same quarter last year, but up 22% versus last quarter. Fiscal year revenues of $396 million were the second highest in the firm’s history, and we enter fiscal 2024 with strong momentum in this business.

Several factors are contributing to financial restructuring performance. The period of easy government money and low interest rates no longer exist. With very tight debt markets, leveraged companies are turning to restructuring or liability management to find solutions. The pending debt maturity walls in 2024 and 2025 are putting increasing pressure on companies to do something as the volatility in the capital markets is showing no signs of letting up. These factors, combined with breadth and depth in our restructuring business are expected to contribute positively to our financial results throughout the year. The number of closed transactions, new quarterly engagements, active engagements and potential fees associated with active engagements are at highs not seen since the initial months of the Covad pandemic.

However, as expressed previously, the current environment for financial restructuring is not fueled by a crisis, but by a combination of factors that should allow this business segment to do well for an extended period of time. Financial and Valuation Advisory produced $68 million of quarterly revenues, down 4% versus the same quarter last year. Fiscal year revenues of $287 million were a record for FVA as they were able to grow revenue slightly this year in a challenging environment. FVA’s diversified service offerings enabled some segments to perform quite well, while other segments experienced the same headwinds as our Corporate Finance business. The disruption occurring in regional banking is having a short-term negative impact on FVA, but an increased banking regulatory environment, which most of us believe is likely, will benefit FVA over the long term.

Finally, FVA is experiencing strong new business activity, but the time and effort to complete engagements is decreasing overall employee productivity. This will likely result in FVA having a stronger second half of the year than first half. Looking forward, we continue to take advantage of a favorable market for adding talent by hiring 8 new MDs this quarter across the globe. We would also like to congratulate our 18 newly promoted managing directors, all effective as of April 1. On the acquisition front, we continue to be selective in ensuring targets fit both culturally and strategically. Finally, I’d like to thank our 2,600 employees for an exceptional effort in a challenging year and our clients and shareholders who continue to support us with confidence as we navigate the current market.

And with that, I’ll turn the call over to Lindsay.

Lindsey Alley: Thank you, Scott. Revenues in Corporate Finance were $256 million for the quarter, down 8% when compared to the same quarter last year. We closed 140 transactions this quarter, a high for fiscal 2023, but below the 144 transactions we completed in the same period last year. Our average transaction fee was lower for the quarter versus the same quarter last year. Financial Restructuring revenues were $120 million for the quarter, a slight decrease versus the same period last year. We closed 38 transactions in the quarter compared to 25% in the same quarter last year, but our average transaction fee on closed deals was lower. FR ended the year up slightly versus fiscal 2022. In Financial and Valuation Advisory, revenues were $68 million for the quarter, a 4% decrease from the same period last year.

We had 957 fee events during the quarter compared to 999 in the same quarter last year ended the year up slightly versus fiscal 2022, a strong performance in a challenging business environment. Turning to expenses. Our adjusted compensation expenses were $274 million for the fourth quarter versus $290 million for the same quarter last year. Our only adjustment was $9.4 million for deferred retention payments related to certain acquisitions. Our adjusted compensation expense ratio for the fourth quarter and fiscal year was 61.5%. We entered fiscal 2024 with no change to our target of 61.5% for our adjusted compensation expense ratio. Our adjusted noncompensation expenses were $68 million for the quarter, an increase of $9 million over the same period last year.

Our fourth quarter noncompensation expense was lower than the last couple of quarters, primarily driven by the timing of certain expenses. This resulted in a non-compensation ratio of 15.3% for the quarter. On a per employee basis, our noncompensation expense ratio was $26,000 per employee this quarter versus $26,000 for employees for the same quarter last year. Heading into fiscal 2024, there is continued upward pressure on rent expense and information technology expenses, which will likely result in our noncompensation expense growing faster than inflation. For the quarter, we adjusted out of our noncompensation expenses, $3.2 million in noncash acquisition-related amortization, the vast majority of which was related to the GCA transaction.

Our adjusted other income and expense decreased for the quarter to income of approximately $3.9 million versus an expense of approximately $300,000 in the same period last year. The significant growth in this category was driven by higher interest income on our cash balances across the globe. We adjusted out of our other income and expense, a benefit of $700,000 related to an earnout for one of our previous acquisitions. Our adjusted effective tax rate was 28% for the quarter as compared to 27.9% for the same quarter last year. We adjusted out of our GAAP effective tax rate, a onetime benefit of $5.9 million relating to the release of a valuation allowance in one of our foreign subsidiaries. Finally, we made a policy adjustment in accordance with GAAP relating to the retention shares and fiscal 2022 deferred shares issued as a result of the GCA acquisition, which reduced our GAAP fully diluted shares by approximately $1.6 million for the quarter.

This reduction in GAAP fully diluted shares will reverse itself ratably over the next 3 years. As a result, we are adjusting out this nonrecurring change in our fully diluted share count as if it had not occurred, and we are presenting adjusted fully diluted shares the same way we always have. Turning to the balance sheet. As of the quarter end, we had approximately $752 million of unrestricted cash and equivalents and investment securities. A significant portion of our cash is earmarked to cover accrued but unpaid bonuses for fiscal year 2023 that will be paid this month and again in November. Shares issued as part of our fiscal 2023 compensation will invest into the fully diluted share count over a four year period from the date issued. We did not repurchase any shares for the quarter, and we continue to take a conservative approach to share repurchases as we want balance sheet flexibility to take advantage of acquisition and hiring opportunities in this market.

Finally, the Board approved an increase in the quarterly dividend to $0.55 per share from $0.53. The dividend will be paid in June. With that, operator, we can open the line for questions.

Operator: [Operator Instructions] We do have a question from the line of Brennan Hawken with UBS.

Q&A Session

Operator: Our next question is from Ryan Kenny with Morgan Stanley.

Operator: Our next question is from the line of Matt Moon with KBW.

Operator: Next question is from Devin Ryan with JMP Securities.

Operator: We have a question from James Yaro with Goldman Sachs.

Operator: Our next question is from Steven Chubak with Wolfe Research.

Operator: And we have a question from Jim Mitchell with Seaport Global.

Operator: And we have a question from Ken Worthington with JPMorgan.

Operator: And there are no further questions at this time. I’ll turn the call back to Scott Beiser. Please go ahead.

Scott Beiser: Thank you. I want to thank you all for participating in our fourth quarter and fiscal year 2020 earnings call. We look forward to updating everyone on our progress when we discuss our first quarter results for fiscal 2024 this coming summer.

Operator: That concludes the call for today. We thank you for your participation, ask that you please disconnect your lines.