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00:03 Good day ladies and gentlemen. Thank you for standing by. Welcome to Houlihan Lokey’s Third Quarter Fiscal Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this conference is being recorded today, February 8, 2022.
00:22 I will now turn the call over to Christopher Crain, Houlihan Lokey's General Counsel.
00:28 Thank you, operator, and hello everyone. By now, everyone should have access to our third quarter fiscal year 2022 earnings release, which can be found on the Houlihan Lokey website at www.hl.com in the Investor Relations section.
00:46 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.
01:06 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.
01:20 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-Q for the quarter ended December 31, 2021, when it is filed with the SEC.
01:44 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.
02:12 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.
02:26 With that, I'll turn the call over to Scott.
02:30 Thank you, Christopher. Welcome everyone to our third quarter fiscal year 2022 earnings call. We are pleased to report another very strong quarter. We achieved 889 million in third quarter revenues, up 65% from the same quarter a year ago. All three of our business segments performed exceptionally well in their respective environments.
02:53 Corporate finance and financial and valuation advisory delivered record quarterly results in a robust market environment and financial restructuring delivered solid results in a challenging restructuring environment. We also experienced strong earnings growth, delivering $2.90 in adjusted earnings per share, up 63% from the same quarter a year ago.
03:17 More important than a single quarter results is our leadership position in each of our business lines. That is where we look to assess the long-term quality and durability of our earnings. Houlihan Lokey maintained its status as a leader across all three product lines for the calendar year 2021.
03:37 We rank as the Number 1 global M&A investment banking firm based on a number of transactions closed and we are proud to announce that we were the Number 2 M&A investment banking firm in Europe based on the number of transactions closed. We were also the Number 1 global restructuring advisor based on both the number of transactions closed and the dollar value of restructured debt.
03:59 And finally, we remain the Number 1 global M&A fairness opinion provider over the past 20 years based on a number of transactions announced or closed. Moving back to the quarter, our record third fiscal quarter results were driven by a combination of several positive events, some of which are not likely to fully repeat over the next several quarters.
04:21 First, corporate finance revenues for the quarter, included the results of GCA, which makes last year’s third quarter revenues not directly comparable and GCA’s contribution to the quarter exceeded expectations.
04:36 Second, in corporate finance we had a significant number of higher fee transactions close in our third fiscal quarter relative to previous quarters and a significantly higher number than what is expected to close in the next couple of quarters.
04:51 Third, for our corporate finance business not including GCA, the third quarter has historically on average represented a seasonal high relative to our [early quarters] [ph]. In addition, the fourth calendar quarter for GCA has historically represented a seasonal high for them as well. Both Houlihan Lokey and GCA performed extremely well for a third fiscal quarter highlighting the seasonality of both businesses.
05:18 Finally, our corporate finance and our FEA business are benefiting for the most robust M&A market we have ever seen with strength across industry and geography. It is well publicized that financial sponsors have been a strong influence on these markets and financial sponsor clients remain close to 50% of our client base.
05:37 As we head into calendar year 2022, we are still experiencing a very strong M&A and capital markets environment for our mid-cap clients. There remains historically high levels of private equity dry powder, large strategic clients remain [indiscernible] with cash and interest rates remain low.
05:55 However, we expect growth in the M&A market to level off in calendar 2022 and we have seen a slowing rate of growth in our new engagement activity levels over the last several months when compared to the same period last year.
06:11 Moving on to some comments more specific to FEA, this business has performed at record levels for us throughout our fiscal year, and our fiscal third quarter was no exception. For each of the last six consecutive quarters, FEA has achieved an increase over the prior year's quarter and year to date FEA is up 34% over the same period last year.
06:33 Given the diversification of revenues in this business, these results are extraordinary. Growth is broad based across all of the FEA’s major product lines with several of them benefiting from strong M&A market conditions. FEA continues to see higher average revenues per fee event, higher average productivity per banker, and increasing number of seven figure engagement fees. In fact, in the third fiscal quarter, FEA recognized one of the largest keys in its history.
07:02 Financial restructuring had another solid quarter despite ongoing limited opportunities in the marketplace. This business is currently experiencing new activity levels at or below pre-pandemic periods. Headwinds for this product line include a weak restructuring environment, which is impacting our near term revenue prospects and the completion of a couple of large fee events this year that may not repeat in fiscal year 2023.
07:27 Positives for this business include our belief that we are winning and closing more than our fair market share of restructuring mandates in the current environment and our continued success in Asia, particularly China as we take advantage of our leading market position in this very attractive market.
07:44 We are also starting to see an uptick in interest rates globally, which tends to drive restructuring activity. Before concluding, I wanted to highlight several factors that look beyond our third quarter results, and we believe set the stage for our mid-term and long-term success.
08:00 First, our brand and reputation are significantly greater and more recognizable than just a few years ago. This has and will enable us to attract better talent at all levels, as well as being an attractive acquirer of businesses. We've never seen a more attractive pipeline of talent than we’re seeing today.
08:18 Second, starting in fiscal year 2023, we will have a full-year of GCA results, which is only six months of results in fiscal 2022. We are quite pleased with the GCA acquisition to date and integration efforts are on track. Nevertheless, we expect it will take several years to fully realize potential revenue synergies between our businesses.
08:40 Third, FEA is experiencing a new growth profile beyond just current market conditions and we remain excited about the long-term growth prospects of this business. The growth in our continued investments in this product line has created enough scale for FEA to achieve ongoing growth and success as it enters new markets.
09:00 And fourth, while financial restructuring is currently experiencing a very lean market for its services, our strong leadership position for the absolute size of corporate leverage globally, the inevitable rise in interest rates, the expectation of less active central bank intervention, an ongoing technology and global trade disruption establish a clear path to long-term revenue growth.
09:24 We ended the calendar year with over 2,200 employees and 12-month proforma revenues in excess of 2.5 billion. In addition to adding over 75 new MD’s to our senior banking group through the GCA acquisition, we hired 5 Managing Directors this quarter, 3 in Corporate Finance, and 2 in Financial Restructuring. We are very proud of how well all of our employees have done over the last several years, and we welcome all of our new partners to the firm. Collectively, we look forward to continued success in the years ahead.
09:55 And with that, I'll turn the call over to Lindsey.
09:59 Thank you, Scott. Revenues in Corporate Finance were 716 for the quarter, up 134% when compared to the same quarter last year. We almost doubled the number of closed transactions this quarter, reaching 230 transactions closed, compared to 121 in the same period last year.
10:19 Corporate Finance benefited from some very favorable timing of closed transactions, our continuing trend towards higher close rates, and as Scott suggested a disproportionately higher number of large fee transactions. These large fee transactions drove our average transaction fee higher than what we would have reported for the quarter in a more normalized operating environment.
10:42 We expect that our average transaction fee next quarter will decline to a number that represents a more normalized mix of and Houlihan Lokey and GCA’s average transaction fee. From there, we expect it to resume a growth rate consistent with what we have experienced over the past two decades.
11:02 Financial Restructuring revenues were 89 million for the quarter, a 50% from the same quarter last year. However, last year's third quarter benefited significantly from pandemic closures and the disruption of business earlier in the year.
11:17 We closed 21 transactions this quarter, compared to 44 in the same period last year at our average transaction fee on closed deals was relatively flat. Financial Restructuring has benefited thus far in fiscal year 2022 with the closing of several larger e-transactions, while new business activity is generally made up of smaller fee opportunities.
11:38 In financial and valuation advisory, revenues were 84 million for the quarter, a 56% increase from the same period last year. We had 901 fee events during the quarter, compared to 639 in the same period last year. FEA is benefiting from strong M&A markets and continued productivity gains across all major product lines.
12:01 Turning to expenses, our adjusted compensation expenses were 547 million for the third fiscal quarter versus 335 million for the same period last year. Our only adjustment was for deferred retention payments related to certain acquisitions. Our adjusted compensation expense ratio was 61.5% for both the quarter and year to date.
12:23 Beginning in our fourth fiscal quarter and continuing for four years, any accruals associated with the previously mentioned retention pool of 133 million related to the GCA acquisition will be included in this adjustment.
12:37 Our adjusted non-compensation expenses were 59 million for the quarter versus 39 million for the same quarter last year, an increase of 52%. This considerable increase is primarily associated with the addition of GCA’s non-competition expenses, increases in TM&E, and general inflationary trends in several expense items.
13:00 We expect to continue to see accelerated increases in TM&E and marketing costs as a result of the easing of COVID restrictions. Our adjusted non-compensation expense ratio was 6.6% for the quarter versus 7.2% in the same period last year.
13:17 For the fourth quarter, we adjusted out of our non-compensation expenses, 15 million in non-cash acquisition related amortization. The vast majority of which was amortized related to the GCA acquisition. We expect significantly elevated levels of amortization relating to this acquisition through fiscal year 2023.
13:37 In addition, we adjusted out of our non-compensation expenses 16 million in acquisition and integration costs related to the GCA acquisition. We expect to continue to see some integration related costs in subsequent quarters, but we believe the bulk of those costs were in our third fiscal quarter.
13:57 Our adjusted other income and expense decreased for the quarter to an expense of approximately 0.3 million versus income of approximately 0.2 million in the same period last year. This was primarily due to a $900,000 reduction in the carrying value of our SPAC due to the requirement to mark to market that investment each reporting period.
14:19 Our effective tax rate for the quarter was 30%, compared to 25.3% during the same quarter last year. Taxes are up as a result of increased state taxes, increased non-deductible expenses as we recover from the pandemic and return to work. The addition of non-deductible GCA transaction costs, and increased foreign taxes.
14:44 Turning to the balance sheet and uses of cash, as of the quarter end, we had approximately 1.1 billion of unrestricted cash and equivalents and investment securities. As a reminder, a significant portion of this cash is earmarked to cover accrued unpaid bonuses.
15:01 Houlihan Lokey will pay cash bonuses in February and March for calendar year 2021 to GCA employees who joined us in the merger. We will pay additional cash bonuses in May, consistent with our historical schedule for our fiscal year 2022. Beginning next fiscal year, all employees will be on the same schedule.
15:24 Finally, in this past quarter, we have repurchased approximately 645,000 shares at an average price of 108.90 per share as part of our share repurchase program. Midway through our fourth quarter, we expect to issue approximately 215 million of HL’s stock to GCA employees, 133 million of that amount is for the retention pool previously mentioned, and the balance is the stock portion of GCA’s calendar 2021 performance bonus.
15:56 And finally, we are pleased to announce that we're paying a dividend of $0.43 per share payable on March 15 to shareholders of record as of March 2.
16:06 And with that, operator, we can open the line for questions.
16:10 [Operator Instructions] Our first question is from Ken Worthington with JPMorgan. Please proceed with your question.
16:40 Hi, good morning and you for taking my question. On, FEA, you stated in the press release that the number of deals increased across all parts of FEA, can you give us a little bit more detail on those bigger contributors and how they performed? And then I think more interesting to me is the jump in the fee per event in FEA. That fee growth has been sort of more stable over the last six or so quarters, but jumped a good bit in the December quarter, now you mentioned a particularly large fee event, so could you give us a little bit more flavor there, but really on the broader jump in the fee per event in FEA?
16:53 I think this has been a continuation of really work that we’ve focused on over the last couple of years. The business functions really under a variety of sub-product areas, some of it is focused on doing portfolio valuation work, some of it is focused on doing transactional work, some is focused on what we call transactional advisory services or corporate valuation type of work.
17:42 So there's a variety of services and effectively an ongoing orientation, I would say away from just a focus on a project to more a focus on doing work in multiple task per clients. So, over the years and quarters, we've built I think an increased relationship with key clients. We've continued to do more repeat work and that work has generated not only more fee events as we've described, but also the size complexity of that work has continued to increases, I think reputation of the firm has and just the market exists out there.
18:27 Regarding your question on a large fee event, this is a business by its very nature we do a lot of work at smaller sized fees, but more and more we have seen us doing work for a million or a couple of million dollars for clients, which was much more unusual a couple of years ago, not quite as unusual today.
18:52 Okay, great. Thank you very much.
18:55 Thanks, Ken.
18:58 Our next question is from Manan Gosalia with Morgan Stanley. Please proceed with your question.
19:05 Hi, good morning. Scott, in a recent interview, you spoke about the opportunity for independent advisors to offer help with private debt capital raising, and how we’re still in early days for that business, can you give a little bit more color on that? How are you seeing – how large you see this business growing? What the fee rates in that business and what the opportunity set is for your firm specifically? And also is that something you need a specialized team for or is that more involved existing senior bankers building deeper relationships with sponsors and their associated companies?
19:52 It's a business that we really like. We think it is rapidly growing and still has a lot of growth to go. I think we probably would have said not too long ago that the size of our capital markets business we think could rival the size of our M&A business. Considering how well we've done in M&A in the last couple of quarters here, it might be a little difficult to get to that 50/50 level, but what we're finding is, there's just a tremendous amount of interest by companies and private equity firms to source from advisors like ourselves to help them find the right kind of capital.
20:28 As we've mentioned for many times, that the number of providers of that capital have continued to grow and where you find that capital on the exact terms and conditions of that capital has become more and more important. We believe we've got one of the largest, if not largest staff dedicated in the mid-cap market for providing this kind of service.
20:51 We continue to hire in that area. We continue to grow geographically along industry lines, along particular specialties within the capital structure and think that over the years ahead, this will continue to be a major growth component of the firm, and a major component in totality – not only of the firm and Corporate Finance, but it helps in other parts of our product lines as well.
21:15 Got it. And would the rate environment matter for that business? Would [hire rates] [ph] be more beneficial?
21:23 It has some elements to it. We always want the availability of capital. At times making it a little more difficult for the CFO of the client or member of the private equity firm to be able to access the capital themselves [indiscernible] away from what we could do. So, a little bit of difficulty, a little bit of issues out in the marketplace actually help the business, just don’t want to get where interest rates get too high where the availability of capital dries up too much.
21:56 At this point, I think where the market is, maybe even where it's heading in the next couple of quarters, it looks like they are actually a very good opportunity set for a firm like ours.
22:08 Great. Thanks. That's helpful. And then can you talk a little bit about just the recent market volatility and how that's been factoring into your conversations with clients? I know that GCA gives you more exposure in the tech space where we've seen most of the [ban] [ph] recently, but just given the cohort of companies you advised and your sponsor relationships, these lower evaluations might actually [spud electivity] [ph] even more. So, just wanted to know how – what you're hearing from clients, on both the buy and sell side given what we've seen recently in the market?
22:41 Clearly for all of us, we're in the financial marketplace. We’ve seen and experienced more volatility, but a couple of things, I'd say. At this point, it mainly be a month-and-a-month half long in this volatility. Probably need a longer duration before it really impacts in some cases positive and some cases negative where our business might go.
23:03 We've also found that the volatility tends to impact public transactions more than private transactions and due to our mid-cap focus especially on corporate finance, we tend to deal more with private companies or companies owned by financial sponsors. So, we're sensitive to what's happened in the marketplace.
23:22 It impacts somewhat differently to all of our industry groups, but at this juncture, don't really see the increased volatility. I wouldn't be out there telling you. It's significantly helping to do more deals or conversely significantly slowing down or repricing deals. That might change in the quarters ahead, but sitting here in the early parts of February I think it's much more of a public traded stock issue than in many cases than what's occurring in the private marketplace.
23:55 Great. Thanks very much.
23:59 Our next question is from Devin Ryan with JMP Securities. Please proceed with your question.
24:06 Great. Good morning everyone.
24:09 Good morning, Devin.
24:12 First question, just want to maybe touch on the European sponsor market, and I guess specifically, kind of what you guys are seeing there today? And then also if you just can, given your strength there, just the maturation of that market. I know, you know there's been significant pools of capital raise there and you guys have made a [extorted effort] [ph] to be bigger in Europe and that's been successful, but can you just maybe talk a little bit more bigger picture around how the firm has been performing with sponsors in Europe, but also kind of where you see that market today versus maybe where it could be in three or four years just based on the pools of capital raised?
24:51 I think the European sponsor market started decade plus ago, primarily with U.S. firms that opened up European operations. It now has clearly all the major and mid-major firms with the presence in Europe. And then you have dozens or hundreds of also pure European based sponsor firms. So, the number of firms have continued to grow pulling up the size and what you see in the states of this juncture.
25:18 And then what we have found is, as we've added a significant amount of heft in terms of our coverage capabilities, of our industry expertise, our geographical substance in Europe. We're seeing a lot more deal flow. We're talking a lot more of prospects. We're having a lot more interaction.
25:38 We seem to kind of go through periods with the European marketplace, appears to be moving from a growth standpoint a little ahead of the states and then sometimes it comes back down, and the U.S. looks a little more favorable, but we feel very confident that Europe will continue for our business to be a significant contributor and we went from I think, also [also ran] [ph] player to a true dominant player in Europe and specifically with the sponsor community, and we've continued to actually add some dedicated resources that you're doing nothing, but calling on those sponsors out of Europe.
26:18 Okay. Appreciate the color. And then quick follow-up here, just on the restructuring business. Appreciate kind of the outlook commentary and kind of some of the normalization or even move below, kind of pre-pandemic levels of activity. We have heard from some of your peers that they're starting to see signs of more activity or those kind of early conversations? Are you guys seeing that as well – obviously higher rates or other geopolitical issues or other factors could drive more activity, but are there any early indicators that restructuring maybe, you're starting to improve from, kind of the currently quieter levels or is it just more if those factors play out and then it could? Just trying to think about what's actually happening on the ground today?
27:06 So, I'd say two things. If you look at the macro facts that are out there that can help the restructuring business, I think it's clearly more positive than negative. There's just a lot of potential as we've mentioned, total amount of indebtedness interest rates appears like they can only go more up than down less government intervention all the ongoing technology disruptions etcetera.
27:30 All of that lays the positive framework. What we don't know and none of us control is when will all that tend to impact the number of companies and default. So, the second point that I'd say is, it's been going on for maybe a year plus, if you can have a month where you tend to get far more positive feelers and then it tends to cool down. So, we just haven't seen a string of enough months together. That says, oh, yeah, the tide has definitely turned, would definitely start to see an increase that feels like it's going to last for a year or two in restructuring.
28:06 So, it really almost depends on what months you talked about, what day of the week you talked about? So that would be our commentary. We see clearly certain grassroots are increasing in certain areas they haven't really started to sprout yet. And we just haven't seen a consistent set of months that would get us to the point that says yes, we think we've definitely have hit bottom and up from here yet.
28:32 Yeah. Okay, perfect. That makes sense. I appreciate taking my questions.
28:37 Thanks, Devin.
28:38 Thanks Devin.
28:40 Our next question is from Michael Brown with KBW. Please proceed with your question.
28:47 Great. Good morning, Scott, Lindsay. How are you guys?
28:51 Good morning, Michael.
28:53 Good morning.
28:54 I wanted to, I guess follow-up on Europe and the Corporate Finance business, how much of the fiscal third quarter revenue came from Europe and any specific comments in regards to your outlook for the region there just given the rising geopolitical uncertainty there?
29:15 So, in our disclosure, not necessarily in the release, but when we come out with the Q and report, we do talk about where total revenues are from all of our business lines, otherwise we don't specifically discuss exactly what it is by product. I would tell you the statistical importance of our non-U.S. business is clearly grown since a, we've added people ourselves and clearly the acquisition of GAC, which significantly increased our presence in Europe and in Asia Pacific region.
29:50 So that continues, I think due to the size of our staff and where it's located will continue to increase and we are feeling that there is quite a bit of more activity going on in Europe, than we would have seen a couple years ago.
30:06 And I think part of that is the market itself and part of it is just because we have more bankers now in that geography, we're more tuned to what's going in the marketplace than where we would have been three, five years ago.
30:19 Okay. So, no real near-term pressure at this point in Europe?
30:26 No. Like I said, I think business consolidation and M&A activity, they're slowly falling along and some of the SPAC deals, clearly their importance out there, and sponsor activity continues to increase. We're seeing improvements, I think really across the board and opportunities for us in Europe.
30:51 Okay, great. And just as a follow-up, on Corporate Finance, you talked about the seasonal strength in the quarter. And also some other key drivers this quarter, but I wanted to clarify, is there any, was there kind of a larger proportion of your non-traditional M&A related fees this quarter? Was that somewhat elevated as well? And I don't think the pull forward is typically something that impacts Houlihan Lokey, but just wanted to check to see if there was any pull forward into the fiscal third quarter above normal levels?
31:28 Lindsey, you want to comment any there?
31:30 Yes. Sure. I think from a non-traditional M&A fees, the answer no. I think our mix of mergers and acquisitions and our capital markets business was not any different this quarter than in previous quarters. We have pull forwards, the way you describe it every quarter, we've had them for years, it’s just the way we accrue revenues, so there are no unusual circumstances around pull forward this quarter.
31:59 I think the unusual circumstances were, kind of what Scott had mentioned earlier, which was, we did have a disproportionately high number of larger fee transactions for this quarter. Relative to us the last several quarters and relative to what we're expecting the next couple of quarters. So, I think that's one of the things that drove significant revenues in Corporate Finance.
32:23 We had high close rates this quarter, which is a continuing trend. And maybe some favorable timing around some transactions as well, but not the mix of business and not pull forwards at all that had any impact on the quarter.
32:41 Okay, very helpful. Thank you, both.
32:46 Our next question is from Steven Chubak with Wolfe Research. Please proceed with your question.
32:53 Hi good morning, Scott. Good morning, Lindsey.
32:56 Hi, Steve.
32:56 Good morning, Steve.
32:56 So, wanted to really spend some time just unpacking some of the comments you made around the corporate finance fee rate. You noted the high fee rate per transaction helped move your results this quarter. It was up 19% year-on-year, and you acknowledge that it should begin to normalize. Since we don't have as much experience with GCA, was hoping you could just help frame how we should think about the normalized fee rate within Corporate Finance versus that $3 million level that we saw in the most recent quarter?
33:28 Go ahead, Lindsey.
33:29 Yes, we can't give you any specific numbers around what we expect the fee rate to be, it's just not something that we'll disclose, but what we can tell you is that if you separate the two businesses, which we don't like to do, but we'll do it for discussion purposes: The Houlihan Lokey, excluding GCA business, on average had extremely high average fee rates this quarter.
33:53 For most of the acquisitions that we've historically done those acquisitions have average fee rates. They tend to be a little lower than what Houlihan Lokey’s is, GCA is no different. So, GCA’s average fee rates were a bit lower than Houlihan Lokey’s for the quarter. When you blend the two of them, they tended to be right around that 3 million number that you're seeing in the earnings release.
34:19 Expectations are that the Houlihan Lokey business over the next couple of quarters, that average fee rate will come down and GCA’s will stay the same or go up, which will bring the 3 million down to some number likely in the twos. And so that's the dynamic that Scott and I were talking about is that we had an artificially high average fee rate this quarter, driven by Houlihan Lokey, expectations are that on a blended basis that will come down to something in the twos.
34:47 And then from there, it will start to grow at the average rates that it's been growing over the last couple of decades. And Scott and I had talked about the fact that on average, our average transaction size, our average fee rates tend to go up, but in baby steps. This quarter, it was not a baby step, it was a much larger step and we expect it to kind of come back down to a normalized level.
35:11 Thanks for that color, Lindsey. And just – I had a follow-up on some of the comments you made on the non-comp side, I was hoping you can give some color on how we should be thinking about the non-comp dollar run rate ex the acquisition costs recognizing there's fair amount noise, just so we can try to think about the appropriate jumping off point and how should we be thinking about T&E normalization? Now that travel is starting to come back?
35:39 So, as the first part of it, I'd say the quarterly – this quarter's not compensation expense on an adjusted basis is a probably a pretty good absolute dollar number to use. I will caution you though, we do have a little seasonality in the non-comp number. Remember, a portion of the non-comp number is reimbursable expenses from clients.
36:03 So, as revenues increase, the reimbursable expenses increase, non-comp increases. So, you're going to have some volatility and non-comp based on how the revenues performed for the quarter. There's also some seasonality and non-comp around things like recruiting and training, but this quarter number is actually a pretty good quarter number from an absolute basis for our third quarter.
36:29 And then with respect to TM&E, look, I think it's – as you can see significantly higher than it was this time last year, expectations are that you will see outsized growth in that number as we return to work. Where it settles, I think we're also trying to estimate that. I've heard peers say, anywhere from 60% to 80% of what it used to be, I think that's probably a pretty good number.
36:57 We don't think it will go to the same rates per MD or rates per average employee in terms of TM&E spend. I think people become more efficient in the way they think about travel. Having said that, we haven't seen the top yet in terms of upside to that number. So, it's anyone's guess on when it occurs, whether it's next quarter or the quarter after? It will likely happen sometime in this calendar year unless we find ourselves with a new variant and a new set of restrictions. But expectations for us is that sometime in this calendar year, we'll be back to what we think is a more normalized TM&E number. And we'll let you know when we get there. We just don't know when it's going to be.
37:42 No, I completely understand Lindsey. And maybe at the same time, your MD count is also up 40%, so certainly that's going to drive some upward pressure there as well?
37:53 It will. Yes.
37:54 Okay. And just if I could squeeze in one more, it is a topic that's coming up quite often as it relates to you guys specifically, which is around the earnings growth algorithm. And if there's one thing you guys have demonstrated consistently over time it's the durability, of your revenues. And if I look at Slide 26, it shows the historical contribution from Corp Fin, historically it’s been remarkably consistent in that 50% to 56% range, naturally proforma GCA, that contribution over the last nine months is north of 70. Certainly the subdued restructuring environment hasn't helped, but I was hoping you could just speak to your confidence in sustaining that more durable less volatile revenue stream despite the change in mix and whether you believe the legacy earnings growth algorithm that you guys have spoken to in the past, whether that's ultimately still where that paradigm still holds?
38:51 I would focus on, what I think we built this more diversification than we've ever had. And you have to look at it beyond just the cyclicality balance that historically people are focused on between maybe Corporate Finance and Restructuring. So, what do I mean by that? We have more core industry groups that we follow and we're much more balanced than we were before. We're much more balanced, I think in our geographical outreach that we have.
39:20 We're probably even a little more balanced in the amount of financial sponsored clientele we have versus corporate clientele we have. We've got a growing FEA business that tends to run generally less, at least historically less volatile than the transactional business of M&A or financial restructuring.
39:41 We continue to have really hundreds of key employees and not focused on a very small subset of employees, shareholders, clients, etcetera. So, it's always been I think in our DNA to try to find how we can continue to grow, but do it on a diversified basis that hopefully will minimize the volatility.
40:03 We can't obviously predict what will happen in the marketplace, so certain things we don't control. From interest rates to the stock markets to geopolitical issues, but I think we have continued to build a very diversified and hopefully sustainable and growing business.
40:18 And I think also since we tend to deal more in the mid-cap space clearly in corporate finance, the size, transaction aren’t nearly as important on restructuring or FEA, but that also provides some element of less volatility than the bigger cap space.
40:37 That’s great color, Scott. Thanks for taking my questions.
40:40 Thanks, Steven.
40:42 Our next question is from Richard Ramsden with Goldman Sachs. Proceed with your question.
40:48 Hey, good morning. So, just a quick question from me. Can you just comment on what you're seeing in terms of cross border activity? Has that started to pick up materially? And perhaps, I know it's early, but maybe you could just comment on whether or you think you see a materially – increases the opportunity to serve for you in terms of cross-border transactions? Thanks.
41:10 Yes and yes, I think a, as the market has continued to be healthy. As the size of our deals – as Lindsey mentioned, they grow, but they tend to grow in kind of baby steps. And the fact that we've always been a dominant player for many years decade plus in the U.S. and I think we're now also one of the most dominant players in Europe and a growing dominant player in Asia, all of that allows us to do much more cross border work. And we know, while we've only been together with GCA for a short number of months, we're pitching business that we would have never been able to pitch, we are winning business that we would never be able to win.
41:53 It’s still early days and actually executing on some of these newly hired [indiscernible], but as move forward in one firm, we think collectively, there will be more work force out there, and clearly a lot of it is cross-border work just to do, I think the increased presence we have across the globe.
42:13 Okay, alright. Thanks very much.
42:18 Hey. Our next question is from Jeff Harte wit Piper Sandler. Please proceed with your question.
42:24 Good morning, guys. Very nice quarter.
42:28 Thank you.
42:28 So, a couple left for me. One, on the sustainability of corporate finance activity levels, you guys mentioned, slowing revenue growth likely and slowing new engagements year-over-year, I want to make sure I'm interpreting that correctly, still growing, just growing at a slower pace, is that what you're saying, as opposed to actually declining on the new engagement side?
42:53 Yes. That is what we mean.
42:55 Okay. That's what I was hoping, but good to hear.
42:58 Yes.
42:59 And secondly, I was kind of surprised by the level of cash and investable securities in the balance given that you paid for GCA and a round of deferred cash bonuses this quarter. How should we think about that cash balance now for you as a larger company? And I'm just kind of maybe trying to see what that means as far as potential buybacks or maybe your willingness to enter into other transactions?
43:25 Yes. So, we did have an unusually strong cash quarter. We – our pre-tax margins and therefore our net income margins remain high as a result of favorable non-compensation expenses that I kind of alluded to that in an earlier question, particularly around TM&E. And as a result, we're just generating quite a bit of cash GCA’s additional revenues at similar margins to ours is also generating along with Houlihan some significant cash and we both had a very strong quarter.
43:59 And in addition, we had some favorable working capital trends this quarter that were – I think more timing than anything else, and so that added to our cash position. In terms of philosophy and what to do with that cash, it really hasn't changed. I mean, our primary goal is to find acquisitions that are attractive to the business, to kind of our strategic growth plan, and have that as the primary use of excess cash, and aside from obviously our quarterly dividends.
44:31 And to the extent, we are not able to do that, then we will look to repurchase shares in excess of what we issue to bankers as part of their compensation. And as you know, we've had a strategy in place to minimize dilution associated with compensation equity and we've essentially, since we went public been able to do that, we intend to continue to do that.
44:58 We've used acquisitions as the primary source of excess cash and we'll continue to do so and to the extent we don't have acquisitions available then we'll evaluate whether excess repurchases or a one-time dividend would be an attractive way to return cash to shareholders, but we don't expect to hold on to anything in excess for any long periods of time.
45:24 Okay. Should we think of you guys as being kind of open to additional acquisitions or is there going to – should there be a pause here while you digest GCA?
45:36 Go ahead, Scott.
45:37 I'd like to say, we're always looking, and if we find the right opportunities, we'll continue to do acquisitions. Having said that, I think practicality at least from a larger size transaction for the foreseeable future until we make more headway in the integration, makes those kinds of more sizable acquisitions less likely in the short-term, but it's part of the way we like to run the business the way we like to grow and so I would anticipate we will do acquisitions in the future.
46:09 Okay. One clean-up for you, Lindsey. The tax rate, should we think of, kind of last quarter as the kind of forward run rate, is that a good starting point?
46:18 It's not a bad starting point. I’m hoping this is still a combination of companies here and we're still working through taxes, but I think high-20s, 30% is probably a good way to think about it going forward.
46:32 Okay, thank you.
46:36 [Operator Instructions] Our next question is from Brennan Hawken with UBS. Please proceed with your question.
46:55 Hey, guys, good morning. Thanks for taking my question.
46:58 Hey.
47:01 So, you guys provide some pretty clear messaging around selling growth, although still growing, but given the remarkable strength in the current quarter, I'm a little unclear about what the baseline is that we're supposed to consider that growth off of? Are you talking about continuing to grow off of the pace of the recent quarter, are you talking about continuing to grow off the year to date results this year? I mean, year to date, you've already reported more revenue than you did in the full fiscal year of 2021. So, how are you supposed to calibrate and base user baseline to think about growth from here?
47:44 Go ahead, Lindsey.
47:46 Sure. Look, I think the year to date number, if you got any message from today's call is much better than the quarterly number. So, I'd say that we did have an extraordinary quarter. I think that we believe that our year to date results are reflective of an extremely strong M&A market that has really, I think risen all boats in our industry. Our reported results are not significantly different than many of our competitors or peers.
48:16 So, I'd say focus on year-to-date. That is a good stable normalized number to think about in terms of where to go from here. Having said that, recognize that we're in arguably the best M&A and capital markets environment that we've ever seen, certainly in my career. So, I think we as Scott suggested in his comments, expect some sort of moderation in this calendar year that should affect the entire industry and what that looks like no one knows, but yes, focused on year-to-date in our quarter.
48:58 Got it. And yes, I think pretty much most investors are in the same boat as you, expecting some moderation here in this calendar year. So, one more calibration question. Lindsey, I believe you indicated a growth rate similar to the last two decades. My [model] [ph] goes back to your fiscal 2005, but still using that and going up until fiscal year 2021, I get an average of about 11%. So, is that kind of low double-digit the right range? If I – this year to-date is such a monster that if I include that the year-to-date in the average and you bump it up a few more percentage points into the roughly 14% range. So, are those the sort of numbers that you are talking about, am I going back far enough to calibrate for that growth rate?
49:55 Are you talking about average fee increases, average fee rate increases specifically?
50:00 Yes, yes. A total fee revenue growth for the firm as a whole.
50:05 Yes. I don't know if 10% or 11% is the right number. I'd say that we over the last couple of decades and it changes every year. We have seen a good strong contribution from what I call fee inflation, it's unique to the middle market. If you're doing $6 billion deal, next year, you're not going to do $6.6 billion deal. It doesn't work that way. But when you're doing smaller transactions and you're moving up markets fully, you are going to see some inflation that definitely is one of the components of our growth and we don't expect that to change, whether it's 5% or 15%, I think it will vary, but I do believe that for the foreseeable future in our corporate finance business and in our FEA business, you are going to see some fee inflation because of the size of our structuring transactions and because of the seasonality of that business, you're not likely to see fee growth in restructuring other than in a period of distress. But yes, you could build that into your model, but I think it's anyone’s guess on what number that is and it is going to vary a little bit by year.
51:17 Sure. Sure. Thanks.
51:20 Go ahead, Scott.
51:21 Brennan, what I would add is , where do you look over 5, 10, 15 years? We have tended to grow at a very say, year-by-year consistent rate, but over a couple of year trends by the numbers that you've quoted. We have a couple of things going on. One, the largest transaction we've ever done is close the GCA transaction, which really only showed up in our financials in this quarter versus previous quarters.
51:48 So, you're going to have a statistical aberration in growth rate quarter-over-quarter because of this new acquisition. Obviously, as we have a full-years’ worth of results, it'll more stabilize. You also have some seasonality that always occurs in this calendar quarter. All, not only us, but our peers, I think they’ve all commented we're all operating in an extremely favorable business environment for the business that we do. And sometimes it's very favorable, sometimes it’s less favorable.
52:21 So, we clearly I think experience for some of those reasons, some growth rates in our revenues higher than obviously what we're going to expect in the foreseeable future, but we do still expect as the businesses reputation, as the businesses brand, as the businesses depth of skills, coverage etcetera continues to increase, still believe that there is quite a bit of growth potential for us. We're just probably in a little bit of an aberrational time period if somebody's trying to focus on the last quarter or two and what you do with that.
52:56 Right. Okay. Thanks for that additional color, Scott. Appreciate it. One more follow-up if I might? GCA, that’s focused on technology, some of the questions that I received from investors is whether or not the more [hawkish] [ph] antitrust rhetoric that we're hearing out of regulators might be problematic here. Could you just remind us about the average size maybe the range of your size for GCA in that tech practice what the geographic mix is and how many of the deals are cross border just because it's, sort of my sense that that would be a lower risk for their business model, based on how I understand it, but I'm curious you can provide some additional color, and I mean, if that's right?
53:48 The size of the deals that they do are similar to what we've described as mid-cap, so think of that generally speaking is of deals under 1 billion, probably for whatever currency you like into that. Clearly, there are some that we've collectively done in the billions, but I think most of the significant antitrust concerns are in the 10, 20, 50 etcetera billion type deals, which is not the typical kind of deal that we're getting involved.
54:19 So, I think whatever increase in antitrust issues will impact us normally, at least historically that's been our experience and don't have a statistic for you on the top my head on want is the cross-border work that we’re doing the organization. We clearly do work; I'll call it within the country and across countries and across oceans.
54:45 So, I think we're all aware and we read what we do about antitrust issues. I think it's going to be far less of an issue for the typical sized deals we're doing, including GCA, including the technology space compared to what might be occurring with some of our competitors who focus on much larger deals.
55:05 Great. Thanks for clarifying.
55:11 We have reached the end of the question-and-answer session, and I will now turn the call over to Scott Beiser for closing remarks.
55:18 I want to thank you all for participating in our third quarter fiscal year 2022 earnings call. We look forward to updating everyone on our progress when we discuss our fourth quarter and full-year results for fiscal 2022 this coming spring.
55:35 This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.