Houlihan Lokey (HLI) Q2 2027 earnings review
Houlihan Lokey's deal fees rebound, but closed transactions fall
Houlihan Lokey, the investment bank that advises companies on mergers and bankruptcies, returned to growth as large delayed deals closed. Revenue rose 5% from a year ago to $692 million, rebounding from a 16% drop in the first quarter. Profit per share excluding one-offs edged up 1 cent to $1.85 as higher office rent and operating costs offset the top-line gain. Chief executive Scott Adelson kept his qualitative outlook intact, saying the firm expects solid performance for the rest of the year.
| Revenue | $692M +5% from a year ago |
|---|---|
| Corporate Finance revenue | $481M +10% from a year ago (+59% from Q1) |
| Profit per share, excluding one-offs | $1.85 $1.84 a year ago |
| Second-half business outlook | Unchanged expects solid performance across businesses |
โ๏ธ Verdict: ๐ข Bullish
The story got better because the rebound in Corporate Finance average fees to $3.39 million per deal by our math shows that last quarter's slump was a timing delay on large transactions rather than a collapse in demand. One caution: the bank closed 17% fewer Corporate Finance deals than a year ago, and Financial Restructuring revenue fell 12% to $118 million despite earlier hopes for an elevated year.
The question now is whether the jump in average merger fees marks a lasting recovery or a one-quarter catch-up from delayed closings while overall deal volume shrinks. If middle-market demand is healthy, closed transaction counts will climb alongside fee size; if demand is weakening, deal counts will stay depressed and revenue will slip once the delayed backlog clears. Third-quarter Corporate Finance deal counts and average fees will tell.
๐ Bull Case
Larger Deals Lifted Corporate Finance Back to Growth
Corporate Finance, the unit that advises companies on mergers and fundraising, suffered a 24% revenue drop last quarter when large deals took longer to close. In the second quarter, those delayed fees began to arrive. Chief executive Scott Adelson said "Improving market conditions resulted in a stronger second quarter".
- Corporate Finance revenue: $481 million, up 10% from a year ago and up 59% from last quarter
- Average fee per closed deal: $3.39 million by our math, up 32% from a year ago
- Last quarter's average fee: $2.39 million by our math, the lowest in two years
The company attributed the rebound to "an increase in the average transaction fee on closed transactions, which was driven by transaction mix and improved market conditions for M&A and capital markets transactions". Because average fees jumped by a็พ่ฌ dollars per deal from last quarter, one strong quarter of big closings eased the fear of a prolonged slump without yet settling it.
What to watch: Corporate Finance revenue and average fee per deal in the third quarter. A second straight quarter with average fees above $2.6 million would show that the backlog of large deals is converting steadily rather than in a single lump.
Valuation Fees Rose Faster Than Client Activity
Financial and Valuation Advisory (FVA), which values assets and provides fairness opinions for corporate boards and investment funds, has faced questions over whether artificial intelligence tools could push down the price of routine valuation work. Instead, the unit generated $93 million in revenue, up 7% from a year ago, driven by "growth in our non-cyclical businesses".
The division logged 1,071 fee events, defined as client engagements generating at least $1,000 in revenue during the quarter, compared with 1,075 a year ago. Because revenue grew 7% while the number of engagements stayed flat, revenue per engagement rose 7.3% to about $86,800 by our math, arguing against near-term fee compression.
What to watch: revenue per fee event in the third quarter. Another increase would indicate that complex portfolio valuations are lifting average fees faster than automated tools can lower them.
Senior Banker Hiring Kept Expanding Deal Capacity
Houlihan Lokey expands its revenue capacity by hiring, promoting and acquiring managing directors, the senior bankers who bring in client mandates. The advisory group ended the quarter with 370 managing directors across its three divisions, up 7.2% from 345 a year earlier and up from 365 three months ago.
Corporate Finance added seven senior bankers during the quarter to reach 267, an increase of 25 bankers from a year ago. Goodwill on the balance sheet also rose by $75 million from last quarter to $1.47 billion, reflecting completed acquisitions during the period, while acquisition-related integration costs totaled $3 million.
What to watch: annualized Corporate Finance revenue per managing director over the second half of the year. Rising productivity across this larger team would show that new and acquired bankers are winning fees rather than diluting margins.
๐ป Bear Case
Closed Deal Volume Still Dropped 17%
While larger fee checks lifted revenue, the number of completed mergers and financing deals fell. Corporate Finance closed 142 transactions in the quarter, down 17% from 171 a year ago, though up from 127 in the first quarter. Across the first six months of the fiscal year, closed deals fell 9% to 269.
Houlihan Lokey attributed the quarterly drop to "a decline in the number of closed transactions, which we believe does not represent a trend". That framing sits uneasily alongside the first half's numbers, because the firm now has 10% more Corporate Finance managing directors closing 9% fewer deals than a year ago.
What to watch: Corporate Finance closed transaction counts in the third quarter. A reading below last year's 177 closings would show that middle-market deal volume remains sluggish even as larger individual transactions finish.
Restructuring Revenue Kept Falling Despite Earlier Optimism
Financial Restructuring, which advises distressed companies and their creditors during debt workouts, is supposed to act as a counterweight when merger activity slows. Bulls have viewed debt stress in software and energy as a driver that would keep restructuring work high this year, while bears have warned that delayed mandates and calmer credit markets would pull revenue down.
- Second-quarter restructuring revenue: $118 million, down 12% from a year ago
- Second-quarter closed restructuring deals: 27, down 27% from 37 a year ago
- First-half restructuring revenue: $237 million, down 10% on 31% fewer closed deals
The company blamed the drop on "timing of transaction closings", partially offset by higher average fees per deal. However, two large restructuring deals that slipped out of last year's fourth quarter were supposed to close in the first half, and first-half revenue still fell 10%.
What to watch: third-quarter Financial Restructuring revenue against last year's record $156 million. Another double-digit drop would confirm that restructuring is stepping down from last year's pace rather than merely shifting between quarters.
Office and Operating Costs Outran Revenue Growth
Houlihan Lokey sets employee payExcluding one-offs at a fixed 61.5% of revenue each quarter, so operating margin moves entirely with overhead costs such as rent, travel and information technology. Those non-compensation expenses, excluding one-offs, rose 9.6% from a year ago to $91 million, growing twice as fast as the 4.8% rise in revenue.
The firm said the increase came from "an increase in rent expense and other operating expenses", with GAAP rent climbing 22% to $22 million. Overhead excluding one-offs took 13.3% of revenue vs 12.5% a year ago, a 0.8 percentage point rise that cut operating margin excluding one-offs by 0.6 percentage points to 25.3%.
What to watch: non-compensation expenses excluding one-offs in the second half. By our math, the full-year cost plan leaves about $213 million for the second half, up 13% from a year ago, which will keep squeezing margins unless revenue growth speeds up.
Risks this quarter didn't answer
Four standing concerns could not be tested because the earnings release does not break out pipeline metrics, industry mix or regional performance.
- Corporate Finance backlog: never quantified in dollars; the conference call will show whether management still calls pipeline activity a record.
- Software sector advisory demand: industry revenue shares appear only in quarterly presentations or filings, leaving the software slump untested after last quarter's drop.
- European performance after recent acquisitions: geographic revenue mix is not in the release; the quarterly filing's segment footnote will show whether Europe lagged the US.
- Competition from large banks in middle-market deals: not discussed in the release; any commentary on win rates will come on the call.
๐ Other Themes
Management Expects Solid Performance Despite External Volatility
Advisory firms depend on stable financing markets and corporate confidence to get mergers across the finish line. Adelson struck a measured tone on the broader environment, saying, "While we remain cautious due to the volatility of external factors, we expect to see solid performance across our businesses for the remainder of the year." The firm still provides no revenue or profit ranges to anchor that view.
๐ฒ Other KPIs
Combined client receivables ($285 million) and unbilled work in progress ($267 million, representing fees earned on active engagements not yet invoiced) rose 15.2% from last quarter and 24.8% from a year ago by our math. That buildup outpaced the 4.8% revenue growth, pointing to higher near-term cash collections as completed deals settle.
Cash and investment securities rose 11.4% from $797 million last quarter, rebuilding after the annual employee bonus payouts in the spring reduced the balance from $1.36 billion in March. The investment bank continues to carry no debt on its balance sheet, while accrued salaries and bonuses rose to $775 million from $589 million last quarter.
Diluted shares fell 2.3% from 68.6 million a year ago on a GAAP basis and 2.8% excluding one-offs, as the US advisory group repurchased 397,000 shares during the quarter after buying back 348,000 in the first quarter. That share reduction turned a 2% drop in net income into a 1% increase in profit per share.
๐ฎ Guidance
Unchanged. The board declared a regular quarterly dividend of $0.70 per share, payable December 15, holding the rate steady after raising it 16.7% from $0.60 two quarters ago.
Unchanged. Chief executive Scott Adelson reiterated that the firm expects solid results across its business lines for the second half of fiscal 2027 despite external volatility. Houlihan Lokey does not issue numeric revenue or earnings targets in its earnings releases; any updates to its full-year cost and tax targets will come on the conference call.
โ Key Questions
Did the two delayed restructuring deals finally close?
Management previously expected two large restructuring mandates that slipped out of last year's fourth quarter to close in the first half. First-half restructuring revenue still fell 10% on 31% fewer deals, leaving unclear whether those fees landed or slipped again.
Why did closed merger count fall while fees jumped?
Corporate Finance closed 142 deals, down 17% from a year ago, even as average fee per deal rose 32% to $3.39 million. Investors need to know whether smaller middle-market deals are stalling or simply taking longer to finish.
Did software and European advisory revenue recover in Q2?
Last quarter, technology revenue dropped by more than half and Europe lagged the US after several European acquisitions. Because the release omits industry and geographic splits, management should quantify whether those two areas participated in the second-quarter rebound.
Will second-half overhead growth step up to 13%?
First-half non-compensation expenses excluding one-offs grew 8% to $191 million. If the full-year cost plan of roughly 11% growth still stands, second-half overhead must rise 13% from a year ago by our math, creating a steeper hurdle for margins.