Houlihan Lokey (HLI) Q3 2026 earnings review
Restructuring Resurges as M&A Normalizes
Houlihan Lokey demonstrated the power of its counter-cyclical hedge in Q3. While the Corporate Finance (M&A) engine decelerated to 12% growth against tougher year-ago comparisons, Financial Restructuring shocked to the upside with 19% growth—its fastest pace in over a year. The result was a 13% top-line expansion and significant operating leverage, driving Adjusted EPS up 18% to $1.94. With margins locked in by disciplined compensation ratios and a tax rate tailwind, HLI delivered a 'beat and raise' style quarter without explicit guidance.
🐂 Bull Case
Financial Restructuring revenues jumped 19% YoY to $156M, sharply accelerating from the 2% growth seen in Q2. This contradicts earlier fears of a slowdown in distressed activity and proves the segment can deliver upside even while capital markets remain open.
The firm maintained its disciplined 61.5% adjusted compensation ratio while non-compensation expenses dropped to 13.1% of revenue (down from 15.0% in Q2). Combined with a lower effective tax rate (30.6% vs 33.3% prior year), this drove outsized earnings growth.
🐻 Bear Case
M&A revenue growth slowed to 12%, the lowest rate in five quarters. While facing a tough +36% comparable from last year, the sharp drop from Q1/Q2 levels (+21%) suggests the easy recovery gains are over.
Compensation expenses (GAAP) rose 14% YoY, outpacing the 13% revenue growth. While the adjusted ratio is fixed, the absolute dollar cost per employee is rising, and aggressive hiring continues.
⚖️ Verdict: 🟢
Bullish. HLI proved its 'all-weather' thesis. As the M&A recovery matures and growth rates normalize, the Restructuring business unexpectedly accelerated, picking up the slack. Double-digit revenue growth with expanding margins validates the premium valuation.
Key Themes
Financial Restructuring Accelerating
Financial Restructuring (FR) was the standout surprise. After languishing in low-single-digit growth territory for quarters (2-6%), FR revenue surged 19% YoY to $156M. This acceleration suggests that despite improved capital markets, the 'long tail' of distress and liability management is finally converting to fees.
Corporate Finance Deceleration
Corporate Finance revenue growth decelerated significantly to 12% YoY, down from 21% in H1 and 44% in 25Q4. While improved average transaction fees helped, the momentum is clearly slowing as the firm laps the start of the M&A recovery cycle. The upcoming 25Q4 comp (+44%) poses a significant hurdle for growth optically.
Transaction Fee & Volume Mix
Corporate Finance revenue increased 12% driven by higher average transaction fees (due to mix) and a higher volume of closed transactions (177 closed vs 170 last year). This indicates HLI is moving up-market or closing more complex deals, offsetting a potential slowdown in pure volume velocity.
Tax Rate Tailwinds
Earnings benefited significantly from a lower tax rate. The GAAP effective tax rate dropped to 31.3% (from 34.3%), and the adjusted rate fell to 30.6% (from 33.3%). Management cited decreased state taxes and fewer non-deductible expenses, providing a structural boost to net income conversion.
European Expansion
CEO Scott Adelson explicitly highlighted 'two transactions in Europe' as key talent additions. This aligns with the long-term strategic goal of making the European fee pool comparable to the U.S., signaling continued aggressive investment in the region despite slower macro recovery there compared to the U.S.
Other KPIs
Accelerating. Up 18% YoY, outpacing the 13% revenue growth. This demonstrates strong operating leverage driven by non-compensation expense control (down to 13.1% of revenue vs 15.0% in Q2).
Stable/Decelerating. Growth slowed to 6% YoY, down from 10% in Q2 and 16% in Q1. While Fee Events rose to 1,103 (vs 1,005 last year), the revenue conversion per event appears to be compressing slightly.
Strong. Cash/investments grew to $1.18B from $1.11B in Q2, despite share repurchases of 418,000 shares. This massive liquidity pile ($17+ per share) supports the dividend and continued M&A.
Guidance
Stable. Maintained at $0.60, payable March 15, 2026. The company typically raises dividends in Q4 (May release), so this hold is expected.
Stable. The company continues to manage strictly to this long-term target, providing high earnings visibility. Any revenue upside directly flows through to pre-tax income at a ~38.5% margin contribution.
Key Questions
Financial Restructuring Spikes
Restructuring revenue accelerated significantly to +19% YoY after several quarters of low-single-digit growth. Was this driven by the closing of a few large 'mega-cases' that were in the backlog, or does it signal a structural increase in run-rate activity?
Corporate Finance Comp Headwinds
Corporate Finance growth decelerated to 12% this quarter. Looking ahead to Q4, you face a massive +44% comparable from last year. Should investors brace for flat or negative growth in this segment given the optical hurdle?
FVA Deceleration
Financial and Valuation Advisory growth slowed to 6%, the lowest in recent memory. Is this a function of lower M&A opinion volume, or is pricing pressure appearing in the portfolio valuation business?
Non-Comp Expense Sustainability
Adjusted non-compensation expenses dropped to 13.1% of revenue. Is this level sustainable, or was there timing on marketing/travel spend that will reverse in Q4?