10-Q: Houlihan Lokey Q1 2026 Earnings Decline Amidst Market Shifts

Houlihan Lokey reports a 20% decrease in net income for the first quarter of fiscal year 2026, driven by lower revenues across its Corporate Finance segment.

Summary

• Houlihan Lokey's net income for the first quarter ended June 30, 2026, was $78 million, a decrease from $98 million in the same period last year.
• Revenues for the quarter were $511 million, down 16% from $605 million in the prior year's first quarter.
• The decline in revenue was primarily attributed to lower performance in the Corporate Finance (CF) segment, which saw a 24% decrease in revenues.
• Financial Restructuring (FR) segment revenues decreased by 8%, while Financial and Valuation Advisory (FVA) segment revenues increased by 13%.
• Total operating expenses decreased by 16% to $433 million, largely due to lower compensation expenses.
• The Compensation Ratio remained stable at 64.3% compared to 64.9% in the prior year.
• Cash and cash equivalents decreased to $745 million from $1,189 million at the end of the previous fiscal year.
• The company maintained compliance with its consolidated leverage ratio covenant of less than 2.00 to 1.00.

Sentiment

Score: 3

Explanation: StockSavvy.ai views this filing as negative due to the significant decline in revenues and net income, primarily driven by a slowdown in the core Corporate Finance segment, despite some positive performance in the FVA segment.

Positives

• The Financial and Valuation Advisory (FVA) segment showed strong growth with a 13% increase in revenues and a 34% increase in segment profit.
• The number of Fee Events in the FVA segment increased by 9% due to strong market demand.
• The company maintained compliance with its debt covenants, specifically the consolidated leverage ratio.
• Despite a decrease in overall revenue, the Compensation Ratio remained relatively stable, indicating cost management.
• The company has $180 million remaining under its share repurchase program.
• No material changes to risk factors or legal proceedings were reported.

Negatives

• Net income attributable to Houlihan Lokey, Inc. decreased by 20% to $78 million from $98 million year-over-year.
• Total revenues decreased by 16% to $511 million from $605 million year-over-year.
• The Corporate Finance (CF) segment experienced a significant 24% decrease in revenues.
• The Financial Restructuring (FR) segment saw an 8% decrease in revenues, primarily due to a lower number of closed transactions.
• Cash and cash equivalents decreased by $444 million during the quarter, ending at $745 million.
• Net cash used in operating activities was $(336) million, largely due to cash bonus payments.

Risks

• The company's liquidity is highly dependent on cash receipts from clients, which are tied to the successful completion of transactions.
• A significant portion of incentive compensation is paid in the first and third quarters, impacting cash flow.
• The company is subject to market risks, including exchange rate fluctuations, which can impact reported values of non-U.S. assets and liabilities.
• The company is named in various legal actions arising in the normal course of business, though not expected to be material.
• The effectiveness of disclosure controls and procedures provides only reasonable, not absolute, assurance.

Future Outlook

The filing does not contain specific forward-looking guidance on future financial performance. However, it notes that the decrease in Corporate Finance revenues is believed to be due to transaction mix and not a short-term trend, and the reduction in Financial Restructuring transaction volume was driven by timing. The company expects to continue to be in compliance with its debt covenants.

Management Comments

• The decrease in revenues was primarily driven by lower revenues from our CF segment, as described in further detail below.
• The decrease in revenues was primarily a result of a decrease in the average transaction fee on closed transactions, which was driven by transaction mix and we believe does not represent a short-term trend in the average fee on closed transactions.
• Revenues decreased primarily due to a decrease in the number of closed transactions. This was partially offset by an increase in the average transaction fee on closed transactions. The reduction in transaction volume was driven by timing of transaction closings, while the higher average transaction fee on closed transactions resulted from transaction mix and we believe does not represent a trend.
• Revenues increased due to an increase in the number of Fee Events, driven by strong market demand across our service lines.
• Management believes its disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2026.

Industry Context

StockSavvy.ai notes that Houlihan Lokey's performance in the first quarter of fiscal year 2026 reflects a challenging M&A and capital markets environment, with a notable slowdown in Corporate Finance deal activity. The resilience shown by the Financial and Valuation Advisory segment, however, suggests continued demand for specialized financial advice and valuations, a trend observed across the broader financial services industry.

Comparison to Industry Standards

• The decline in revenue and net income for Houlihan Lokey is consistent with broader trends in the investment banking sector, which has experienced a slowdown in deal-making activity compared to the peak periods of 2021-2022.
• Competitors such as Evercore, Lazard, and Moelis & Company have also reported varying degrees of revenue pressure in their advisory segments due to macroeconomic uncertainties and higher interest rates impacting deal volumes.
• The FVA segment's growth, however, outpaces some industry peers who may be more heavily reliant on transaction-based fees, indicating a diversified service offering.
• The company's Compensation Ratio of 64.3% is within the typical range for advisory firms, which often see compensation as the largest operating expense.

Legal Proceedings

• The company has been named in various legal actions arising in the normal course of business, which are not expected to have a material adverse effect on its financial condition, operations, and cash flows.

Related Party Transactions

• Other assets include loans receivable from certain employees totaling $27 million as of June 30, 2026.

Stakeholder Impact

• Shareholders may see reduced returns due to the decrease in net income and earnings per share.
• Employees may experience impacts on incentive compensation due to lower company performance, although compensation expenses decreased proportionally with revenues.
• Clients in the Corporate Finance and Financial Restructuring segments may face a more challenging environment for deal execution.
• Creditors are assured by the company's continued compliance with debt covenants.

Next Steps

• The company declared a quarterly cash dividend of $0.70 per share, payable on September 15, 2026.
• The company has $180 million remaining under its share repurchase program.
• Christopher Crain has entered into a Rule 10b5-1 trading arrangement for the sale of up to 30,500 shares of Class A common stock.

Key Dates

Recommendation

The company's performance shows a significant decline in key financial metrics, particularly in its Corporate Finance segment, which warrants caution. However, the stable Compensation Ratio, growth in the FVA segment, and continued compliance with debt covenants suggest underlying operational stability. The share repurchase program also provides some support. Given the mixed signals, a 'hold' recommendation is appropriate pending signs of revenue recovery and improved deal activity in the core segments.

Keywords

Investment Banking, Mergers and Acquisitions, Financial Advisory, Restructuring, Valuation Services, Corporate Finance, Financial Restructuring, Financial and Valuation Advisory