10-Q: Houlihan Lokey Reports Strong Q3 FY26 Earnings Growth

Houlihan Lokey announced robust financial results for the third quarter and nine months ended December 31, 2025, driven by strong revenue growth across its Corporate Finance and Financial Restructuring segments.

Summary

• Net income increased by 22% to $116.5 million for the three months ended December 31, 2025, and by 17% to $325.9 million for the nine months ended December 31, 2025, compared to the prior year periods.
• Total revenues grew 13% to $717.1 million for the quarter and 15% to $1.98 billion for the nine months, primarily fueled by Corporate Finance and Financial Restructuring.
• Diluted earnings per share rose to $1.70 for the quarter and $4.74 for the nine months, up from $1.39 and $4.05, respectively.
• Operating income increased by 18% to $160.7 million for the quarter and 11% to $401.9 million for the nine months.
• The effective tax rate decreased to 31.3% for the quarter and 23.8% for the nine months, mainly due to increased stock-based compensation deductions and decreased state taxes.
• Cash and cash equivalents increased to $1.06 billion as of December 31, 2025, from $971.0 million at March 31, 2025.
• The company closed the acquisition of Audere Partners, a prominent French corporate finance firm, on February 2, 2026.

Sentiment

Score: 8

Explanation: StockSavvy.ai views this as a strong performance, with significant growth in key financial metrics and strategic expansion. The slight increase in compensation ratio and decrease in operating cash flow are minor concerns against overall positive trends.

Positives

• Strong revenue growth across Corporate Finance (+12% Q3, +18% 9M) and Financial Restructuring (+19% Q3, +10% 9M) segments.
• Significant increase in net income (+22% Q3, +17% 9M) and diluted EPS (+22.3% Q3, +17.0% 9M).
• Improved operating income (+18% Q3, +11% 9M).
• Decreased effective tax rate due to increased stock-based compensation deductions and lower state taxes.
• Positive net cash provided by investing activities of $51.8 million for the nine months, a substantial improvement from a net outflow of $158.7 million in the prior year.
• Successful completion of the acquisition of Audere Partners, expanding international presence.
• Increase in the number of closed transactions in Corporate Finance (+4% Q3, +13% 9M) and Fee Events in Financial and Valuation Advisory (+10% Q3, +10% 9M), driven by favorable market conditions and M&A market improvements.

Negatives

• Financial and Valuation Advisory segment profit decreased by 4% for the three months ended December 31, 2025, despite a 6% revenue increase, primarily due to higher compensation expenses as a percentage of revenues.
• Net cash provided by operating activities decreased by 16% to $411.1 million for the nine months ended December 31, 2025, primarily due to changes in operating assets and liabilities, including cash bonus payments.
• Net cash used in financing activities increased by 68% to $400.2 million for the nine months, driven by higher payments for employee tax obligations on share-based awards, dividends paid, and share repurchases.
• Compensation Ratio increased to 64.0% for the three months and 64.3% for the nine months ended December 31, 2025, compared to 63.5% in the prior year periods.
• Corporate expenses increased significantly by 30% for the nine months ended December 31, 2025, primarily due to increased compensation expense and revaluation of acquisition contingent consideration.

Risks

• The filing states, "There have been no material changes to the risk factors disclosed in our 2025 Annual Report."
• The success of Corporate Finance and Financial Restructuring segments is highly dependent on the successful completion of transactions, which can fail for reasons outside of the company's control, limiting fees to retainers and progress fees.
• Fluctuations in foreign currency exchange rates may affect the reported value of non-U.S. Dollar denominated assets and liabilities.
• The company's liquidity is highly dependent on cash receipts from clients, which are generally dependent on the successful completion of transactions and the timing of receivables collections.

Future Outlook

The company is currently evaluating the potential impact of the One Big Beautiful Bill Act (OBBBA) signed into law on July 4, 2025. Management expects to continue to be in compliance with financial covenants under its revolving line of credit. The company anticipates continued granting of cash and equity-based incentive awards to attract, motivate, and retain talent.

Management Comments

• "The increase in revenues was primarily driven by higher revenues from our CF and FR business segments."
• "The increase in compensation expenses was primarily a result of an increase in revenues for the quarter when compared with the same quarter last year."
• "Revenues increased due to an increase in the average transaction fee on closed transactions, which was driven by transaction mix and does not represent a short-term trend in the average fee on closed transactions." (CF segment)
• "Revenues also increased due to an increase in the number of closed transactions during the quarter, which was driven by favorable market conditions." (CF segment)
• "Revenues increased due to an increase in the average transaction fee on closed transactions, which was driven by transaction mix and does not represent a trend in the average fee on closed transactions." (FR segment)
• "Revenues increased due to an increase in the number of Fee Events, driven by improvements in the M&A markets." (FVA segment)
• "Our management, with the participation of our chief executive officer and chief financial officer, evaluated... the effectiveness of our disclosure controls and procedures... and concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2025."

Industry Context

StockSavvy.ai notes that Houlihan Lokey's strong revenue growth in Corporate Finance and Financial Restructuring, coupled with increased Fee Events in Financial and Valuation Advisory, aligns with broader improvements observed in the M&A markets. The company's ability to increase average transaction fees in CF and FR, even if not a short-term trend, suggests a robust demand for its specialized advisory services in a competitive landscape. The acquisition of Audere Partners further indicates a strategic move to expand international reach and capitalize on global corporate finance opportunities.

Comparison to Industry Standards

• StockSavvy.ai notes that the filing does not provide specific comparable company data for direct benchmarking against industry standards.
• However, the reported revenue growth rates of 13% for the quarter and 15% for the nine months, along with net income increases of 22% and 17% respectively, suggest a strong performance relative to the general financial advisory sector.
• For example, while not directly comparable, larger diversified investment banks like Goldman Sachs or Morgan Stanley typically report M&A advisory revenue growth in line with overall market activity, which has seen periods of volatility.
• Houlihan Lokey's specialized focus in areas like restructuring and middle-market M&A often allows for more resilient performance during varying market cycles.
• Without specific peer data on average transaction fees or segment profitability ratios, a precise comparison to industry leaders or specialized boutiques is limited by the filing's scope.

Corporate Governance

Legal Proceedings

• The company has been named in various legal actions arising in the normal course of business.
• In the opinion of the Company, in consultation with legal counsel, the final resolutions of these matters are not expected to have a material adverse effect on the Company’s financial condition, operations and cash flows.
• There has been no material change in the nature of our legal proceedings from the descriptions contained in our 2025 Annual Report.

Related Party Transactions

• Loans receivable from certain employees of $35,117,000 as of December 31, 2025, and $44,290,000 as of March 31, 2025, are included in other assets.

Stakeholder Impact

• Shareholders: Positive impact from increased net income, EPS, and declared quarterly cash dividend. Share repurchase program provides ongoing capital return.
• Employees: Continued equity-based incentive awards and cash bonus payments. Unrecognized compensation cost of $349.4 million indicates future benefits.
• Customers: Strong performance in advisory segments suggests continued client engagement and successful transaction completions.
• Creditors: Company remains in compliance with financial covenants under its HLI Line of Credit, indicating financial stability.

Next Steps

• Payment of a quarterly cash dividend of $0.60 per share on March 15, 2026, to stockholders of record as of March 2, 2026.
• Evaluation of the potential impact of the One Big Beautiful Bill Act (OBBBA).
• Evaluation of the impact of ASU No. 2024-03 (Expense Disaggregation) and ASU No. 2023-09 (Income Tax Disclosures) on consolidated financial statements and disclosures.
• Continued granting of cash and equity-based incentive awards under the 2016 Incentive Plan.
• Potential future share repurchases under the existing $280.1 million authorization.

Key Dates

Recommendation

The filing demonstrates robust financial health with significant year-over-year growth in revenues, net income, and EPS, driven by favorable market conditions in M&A and strong performance across core advisory segments. The strategic acquisition of Audere Partners expands international reach, and the company's consistent dividend payments and ongoing share repurchase program signal confidence in future performance and commitment to shareholder returns. While operating cash flow saw a slight decrease, the overall positive trends and strategic initiatives make Houlihan Lokey an attractive investment.

Keywords

Financial Advisory, Investment Banking, Mergers and Acquisitions (M&A), Financial Restructuring, Valuation Services, Corporate Finance, SEC Filing, Earnings Report, HLI, Houlihan Lokey