Houlihan Lokey Inc (HLI) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Houlihan Lokey's Fiscal Third Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note that this conference call is being recorded today, January 29, 2018.

I will now turn the call over to Christopher Crain, Houlihan Lokey's General Counsel.

Thank you, operator, and hello, everyone. By now, everyone should have access to our third quarter fiscal 2018 earnings release, which can be found on the Houlihan Lokey website at www.hl.com in the Investor Relations section.

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. 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. 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, 2017, when it is filed with the SEC.

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.

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'll open the call to questions.

With that, I'll turn the call over to Scott.

Thank you, Christopher. Hello, everyone, and welcome to our third quarter fiscal year 2018 earnings call. We are pleased to report strong third quarter results and a continuation of year-over-year revenue and earnings growth. Our financial performance over the last several quarters is a result of executing on various strategic initiatives that we have pursued over the last few years combined with favorable market conditions.

We reported $259 million in revenues this quarter, up 5% from last year and the highest quarterly level in the firm's history. Once again, all 3 of our business segments increased their quarterly revenues when compared to the same period last year.

With respect to earnings, our adjusted earnings per share for the quarter were $0.69, up 21% from the $0.57 in the same quarter last year. For the 9 months ended December 31, 2017, adjusted earnings per share were $1.74, up 35% from $1.29 for the first 9 months of last fiscal year. Our continued strong earnings performance this quarter is primarily driven by record revenues and improvement in other income and expenses and a lower effective tax rate as a result of tax reform as compared to the same period last year.

The major event during the quarter was tax reform. Since a significant portion of our revenue and profitability is U.S.-based, the reduction in U.S. federal tax rate to 21% results in significantly lower taxes for the firm. Equally important, the new tax law represents certainty for organizations and individuals, allowing them a greater ability to plan for future growth. This is an improvement from the uncertain tax environment that we believe had an impact on short-term decision-making during the quarter just ended. While the law has only been effective for just over a month, the early indication from our client base is a renewed positive attitude towards the economy and interest in deal-related activity. In Corporate Finance, our new engagements and pipeline activity have increased since the bill was signed into law, and we hope that this momentum continues throughout the year. The new tax law should produce more analytical work for our business valuation and strategic consulting teams as they advise a variety of firms affected by the new law. Furthermore, the limitations associated with interest deductibility and the recent ongoing increase in interest rates suggests future restructuring opportunities could develop.

Subsequent to the end of the quarter, we announced the signing of our acquisition of Quayle Munro. The acquisition of this premier boutique firm headquartered in the United Kingdom continues our disciplined growth into the U.K. and Europe. When this transaction closes, we will strengthen our investment banking bench by adding 40 experienced London bankers, including 9 managing directors, and we will substantially add to our data and analytics, financial services and other ancillary industry expertise. Quayle Munro marks our 11th acquisition or joint venture over the last 8 years. We believe Houlihan Lokey has become one of the premier investment banking and financial advisory firms which consistently and successfully attracts acquisition opportunities that benefit our clients, employees and shareholders.

Now for some comments about each of our 3 business segments. Corporate Finance generated revenues of $129 million for the quarter, up 5% year-over-year. And although we recorded our second best Corporate Finance quarter ever, the growth in new engagements, the number of closed transactions, and the growth in revenues was less than what we've experienced over the last several years. As we have stated in previous earning calls, the first half of this fiscal year in Corporate Finance and especially the second quarter was exceptionally strong and we expected the second half to continue our positive momentum but without the seasonality that usually results in a stronger second half than first half. This occurred in the third quarter, and we expect a similar dynamic in the fourth quarter of this fiscal year.

We have continued to grow our Corporate Finance business against a relatively flat M&A market backdrop. We believe that this suggests that our market share for mid-cap M&A transactions continues to grow, reflecting the same trend that we have experienced over the last several years. Furthermore, our capital markets business has more than doubled year-to-date versus the same period last year, which is indicative of the continued investment and success in that business. We remain focused on developing and supporting our existing MDs in Corporate Finance, and we have seen revenues per MD increase significantly year-to-date versus the same period last year.

Financial Restructuring generated $94 million of revenues for the quarter, up 4% year-over-year. The revenue for our Financial Restructuring business tend to be more volatile by quarter than our other business units and can periodically exhibit unusually high or low revenue quarters. This quarter in particular was positively affected by a couple of large fee transactions. Having said that, we continue to see diversification away from oil and gas related revenues as they had much less of an impact on this quarter's results and currently represent a more normal flow of business for us.

Short term, a challenge for our restructuring business is our new deal momentum heading into fiscal year 2019. Year-to-date, the number of new engagements that we have signed up is significantly below what we experienced over the last couple of years, which will likely result in lower segment revenues in fiscal 2009 (sic) [2019]. Over the intermediate and long term, however, we see several positive signs for our restructuring business, including rising interest rates, changes to the U.S. tax code, above-average valuation multiples and a continued buildup of high-yield bonds and leveraged loans in the global marketplace.

Financial Advisory Services generated revenues of $36 million for the quarter, up 4% year-over-year. Year-to-date, the growth in this business segment has been led by our portfolio valuation and transaction advisory services business as well as our new tech and intellectual property practice. We continue to invest in senior level banking talent in our FAS business, which has resulted in increased diversity of the services we offer to our clients.

Firm-wide, we remain disciplined to develop and search for talent through adding new capabilities and strengthening existing capabilities. This quarter, we added 6 MDs. Three were added through our newly constituted government services group, one in our consumer group and one in our oil and gas industry practice. Additionally, we added another banker in our Australian business. During the quarter, 6 MDs left our firm, most of which were planned retirements and departures. Overall, we believe the depth and strength of our senior employee base continues to improve.

Since we are in the investment banking field, I can't help but mention a couple of 2017 league table awards of which we are particularly proud. We are pleased to announce that once again, Houlihan Lokey has been ranked as the #1 M&A adviser for all U.S. transactions under $1 billion for the 12th year in a row by Thomson Reuters. In addition, several of our industry verticals were ranked as the #1 M&A adviser for all U.S. transactions under $1 billion in their respective verticals. We're also pleased to announce that our Financial Restructuring business was ranked as the #1 global financial restructuring adviser both in terms of number of transactions and value by Thomson Reuters. In addition, our Financial Restructuring business was named by IFR as the financial restructuring adviser of the year.

As we enter 2018, we are optimistic about the business climate that we face and the significant opportunities that exists for our firm. We believe that tax reform will be a net positive for our clients and for our business. We're excited about our pending acquisition of Quayle Munro and continue to believe that acquisitions are an excellent, complement to our internal employee development and external hires.

And with that, I'll turn the call over to Lindsey.

Thank you, Scott. In Corporate Finance, revenues were $129 million for the quarter, an increase of 5% from the prior year. We closed 54 transactions in the quarter compared to 50 in the same period last year, and our average transaction fee on closed transactions was down only slightly. Consistent with our expectations, Corporate Finance continued its positive momentum in the third quarter. However, the quarter did not follow the seasonality that has existed in our Corporate Finance business in the past given the exceptional performance experienced in the first half of the year.

Financial Restructuring revenues were $94 million for the quarter, an increase of 4% from the prior year. We closed 19 transactions in the quarter compared to 23 transactions in the same period last year. However, our average transaction fee on closed deals was significantly higher compared with the same quarter last year. We continue to see broad-based restructuring activity across several of our industry verticals, with oil and gas returning to a more steady state revenue stream for the quarter.

In Financial Advisory Services, revenues were $36 million for the quarter, a 4% increase from the prior year. Revenue growth was driven by an uptick in fee events compared to the same quarter last year, along with revenue growth in portfolio valuations, transaction advisory services and help from our relatively new product line, Tech+ IP Advisory, which we acquired in January last year.

Turning to expenses. Our adjusted compensation expenses were $164 million for the third quarter versus $159 million for the same period last year. The increase in adjusted compensation expenses was primarily due to the increase in revenues for the quarter.

For the third quarter of fiscal 2018, we had an adjustment of $10 million related to the vesting of grants that were issued in connection with our IPO, and we expect this adjustment to continue until our last tranche of pre-IPO grants vest in April of 2020. This resulted in an adjusted awarded compensation ratio of 65% for the third quarter of fiscal 2018, compared with 65.5% for the third quarter last year. We continue to target an adjusted awarded compensation ratio between 65% and 66%, and our GAAP compensation ratio adjusted for pre-IPO grants should be between 125 and 175 basis points lower than our adjusted awarded compensation ratio. This is consistent with the 150 basis points difference that we experienced in Q1, Q2 and Q3 of this fiscal year.

Our adjusted non-compensation expenses in the third quarter were $29 million or 11.1% of revenues versus $26 million or 10.5% of revenues in the third quarter last year. This quarter, we adjusted out $1.3 million in primarily legal and accounting costs associated with our registered block trade, which closed in October 2017.

With respect to taxes, there are a number of items that are affecting our effective tax rate that relate to the recently passed tax reform bill, and I would like to spend a few minutes walking you through them.

Because we are a March 31 fiscal year-end company, we are required to adjust our expected effective federal tax rate for the fiscal year to account for the change in the corporate tax rate that took effect on January 1, 2018. Therefore, we are now reporting a 31.5% effective federal tax rate, which is simply the average of 3 quarters at 35% through December 31, 2017, and 1 quarter at 21% through March of 2018. Because the true-up to 31.5% year-to-date occurs in our third fiscal quarter, our adjusted effective tax rate for the quarter, including federal and state taxes, was 31.2%. Next quarter, we expect our adjusted effective tax rate to be between 35% and 36%, which is a 31.5% effective federal tax rate plus state taxes. Beginning in our fiscal year 2019, we expect to see a normalized adjusted effective tax rate of between 27% and 29%, which includes an effective federal tax rate of 21% plus state taxes.

With respect to the adjustments that we made to the effective tax rate this quarter, they include nonrecurring adjustments related to tax reform, including both a remeasurement of our deferred tax assets and liabilities based on the new rate and a onetime gains repatriation tax on our foreign earnings. Additionally, we made a nonrecurring adjustment related to the acceleration of unvested shares in October 2017, whereby the tax rate is affected by the positive difference between the current price of our stock that is vesting and the price of our stock at the time of grant.

Turning to the balance sheet and use of cash for the quarter. As of December 31, 2017, we had $330 million of unrestricted cash and equivalents and investment securities and we had debt of $12 million. In late October, we accelerated the vesting of approximately 1.7 million shares in connection with the registered block trade that we completed. The value of these shares is treated as income to our employees and we withheld approximately 806,000 shares in order to satisfy our tax withholding obligations. In addition, in November 2017, we made a deferred cash payment to our financial staff for bonuses that were earned and deferred in fiscal year 2017. As a reminder, each year, we defer a portion of our cash bonuses that are awarded in May until the month of November.

Lastly, we paid our quarterly dividend to our shareholders in December, and I am pleased to announce that the board has declared a regular quarterly dividend of $0.20 per share to be payable on March 15, 2018. At our next board meeting in May of this year following our fiscal year-end, our board plans to discuss our regular dividend for fiscal year 2019 in light of tax reform.

With that, operator, we can open the line for questions.

(Operator Instructions) We'll go to our first question from Conor Fitzgerald with Goldman Sachs.

Just trying to dig a little deeper on some of your comments around Corporate Finance not having a typical seasonality and just matching that up to your comments around a more robust dialogue with clients that you've seen post the closing of tax reform. Should we interpret that as the revenue pipeline may not show up over the next 3 months but your dialogue's kind of significantly stronger than it was, say, a year ago?

Yes. So I think how we characterize it is we have seen new activity throughout the whole year being good. We've seen an acceleration of new activity just in the month of January, which, as you said, we'll take many more months before that deal flow could close. And then we've always signed -- seen some seasonality in the closing of our business, so a very strong first half in Corporate Finance. So I'd say more of an average-sized amount of closing in the third quarter. And we do think as we probably hit a little into the December time period, there were certain people who were probably unsure whether tax reform would go through or not and some deals maybe got delayed a little, nothing significant but just a little more noise probably occurring around the tax reform or the potential for it.

That's helpful color. And then what about just kind of the secondary impact on your business from tax reform? I know it's very early days, but do you have any thoughts on whether some of the benefit could be competed away either through upward pressure, your compensation expense or longer term as you expect any increased competition on things like deal pricing, et cetera?

So really, well too early to have any evidence one way or another, but at this juncture, we don't see any change in terms of the ability to hire and retain people. It's driven by a lot of other factors, I think, having almost nothing to do with tax reform; and same thing, I think, with most of our costs, some of which are going up. Just as the economy is continuing to improve, we see rank costs, we see certain travel costs go up. But like I said, all of the changes that we see in the cost side related at this juncture have nothing to do with the tax reform.

And we'll go next to Ken Worthington from JPMorgan.

So following up on the tax comments with your tax rate falling, how should we think about your use of the windfall of cash flow here? So I guess maybe one is as you think about investing in your own business, do you use the extra cash flow to increase the pace of investment? Or have you always been investing at appropriate pace and, therefore, there's no real impact there? And then, I guess, the follow-up questions are, if you are going to increase the pace of investment in the business, how are you thinking about doing it? And then I guess, the last follow-up here is, what does this do in terms of your view of capital return to shareholders?

Right. I love the 3-part question. It's kind of how I ask questions. So at this juncture, I think our business has never really needed cash to do the things it wanted to do. And in terms of acquisitions, for what we've done the last half a dozen years and what I would anticipate for the foreseeable future, we will continue to look for opportunities as they present themselves and we will not necessarily increase our appetite for acquisitions just because we have a little more cash flow. I think the same thing holds true in terms of hiring. When there are good people that we think can be added in the business, we'll continue to hire them and we're not influenced to go accelerate that because all of a sudden, we'll have higher net income. And then that gets us to what will we do with that excess capital. And as Lindsey mentioned, it's something we plan to take up with the board at our typical fiscal year-end when we have our next board meeting in May. Obviously, we paid a dividend ever since then we've been public. We've -- well, we've only been public for roughly 2 years. We've annually increased it, and we continue to look at what is our cash flow, what is our net income, what are our other needs, what incremental cash do we do have because of tax reform. And I think we'll make a new determination on where our new, I'll call it, base, at least, dividend rate will be coming for the next quarter.

Okay. Does that seem the most likely changes on the dividend side as opposed to buyback or deal related?

So I think how we'd answer that is we've always wanted to maintain some level of a dividend, some hopeful increases in a normal dividend, and then we'd always look at what do we have in terms of excess capital above and beyond that, above and beyond whatever is used in that particular time period for acquisitions. And then we'd look at, do we further supplement a dividend? Or do we repurchase stock? And like I said, I think we would take a look at all of that. And we did announce roughly a year ago about a share buyback. We did buy back pretty close to what we said we would in the last rolling 12 months, and we'll address a -- probably a new share buyback program as well -- comes our next board meeting.

Okay. And then just on M&A, does tax reform seem to be more or less beneficial to middle-market M&A when comparing that to large-scale M&A? Like is there a reason for the middle market side to be either more or less active than other parts of M&A because of tax reform? Just want to hear what you had to say on that.

Yes, I think on the larger deals [meaning], which we don't participate in and had certain cross-border and other antitrust and other issues, I think there's clearly been some help in that regard with tax reform, but that's not our typical client at least on the M&A or our Corporate Finance side. And right now, we just see people generally don't like uncertainty. And there was some buildup, I think, of uncertainty as we got closer and closer towards the end of the calendar year and would there be tax reform and what it looked like. And now that we actually do have tax reform -- as we said, we think that takes some level of uncertainty. And therefore, it's easier for corporations and individuals to do more planning. And we see already once again in -- albeit only 1 month's worth of activity. But everything that we hear and talking with some of the others in the industry, there has been increased activity in terms of people talking about doing deals and about a number of engagements getting signed up, and we think that will continue for the foreseeable future as different people digest what may be positive or negative or different growth profiles that they think they might have with the incremental cash flow that they're going to have.

Okay. But no reason to think that middle-market M&A grows either faster or slower than other parts of M&A? Both will see an improvement?

Yes. I don't -- there's nothing that we can point to right now that would suggest you're better off being in middle market or a larger M&A as it pertains to tax reform.

And our next question comes from Devin Ryan from JMP Securities.

Maybe one here on restructuring. So the business has been around $300 million the past several years. And so I'm just trying to calibrate the comment that you made about assignments being down significantly. I mean, I guess, that's not surprising, but is there any reason that would change, I mean it just seems like that's probably the backdrop that we're in if we were kind of rolling forward the M&A view. And just trying to calibrate that, I guess, relative to the $200 million that you were doing in 2015, '16, which was more of a trough. I mean, is there still enough idiosyncratic activity to maybe outpace that? Are we operating above that level? I'm just trying to kind of think, are we somewhere in between at this moment?

I think what we would describe -- I think your numbers are reasonably accurate, but we did feel like we troughed in the $200 million plus or minus area a couple of years ago. We and others in the industry benefited from especially a oil and gas and commodity restructuring environment that pushed our revenues up. We did note and have noted probably the last several quarters that the amount of oil and gas revenues has been coming down. We did happen to have several large projects that did close this particular quarter that were not necessarily oil and gas. So it's good to see that we're continually getting some diversified business across different industries. But the default rates are still in the -- clearly in the lower half and arguably the lower quartile and what we've seen in the different cycles. So until that turns, we're not expecting to see very large restructuring revenues likely peak in other cycles. I think that's about as much of a perspective as we can give you just we do see in this business, like I said, a little bit more volatility and sizable deals and when they might close. And we do go through periods where sometimes, you're bringing in a lot of businesses. Sometimes, it's a weaker new business environment. And we noted just in the last quarter or 2 the amount of new business being signed up has been less than the amount of new business that we have seen in some previous quarters over the last year or 2.

Got it, okay. That's helpful color. And then maybe one on the capital markets business. Caught that comment and I know there's been some focus there, and expectations are pretty bullish longer term. But I'm just trying to get a sense of, if we can get a little bit more -- since you gave kind of how much better it's been doing, kind of how much is contributing to revenues today if at all or just some general sense and then where you think that could be in a few years if that business continues to grow?

Yes, Devin. I think that we have mentioned this in the past. Capital markets, we are extremely excited about and believe that business over the -- certainly the medium and long term have as much or more growth than our traditional M&A business. I think at this point, we're just not intending to announce the revenues or disclose the revenues or even really the portion of the revenues that make up capital markets relative to our Corporate Finance business. But I will tell you it's a large enough impact for us to have a conversation about it, but I think in terms of size, we're just not there yet.

Got it, okay and appreciate that. And then just last quick one here. So the accelerated vesting of the 1.7 million stock awards, it doesn't sound like the comp ratio guidance changed at all. I just want to make sure, are those pre-IPO shares? I'm just trying to think about where I should be essentially making an assumption around the change in the amortization tied to those or if I should at all.

So I don't think you're going to need to. We essentially accelerated the vesting for shares for the year in October, which was basically 2 quarters. It did include some pre-IPO grants, but that wasn't a significant portion of it. And essentially, because of the way we managed the business in the quarter that we accelerated, we issued a corresponding amount of new shares in that quarter to offset the acceleration. And so as a result, for Q4, you're likely to see little or no vesting stock for accrual purposes and you're likely to see little or no new shares issued as part of our regular quarterly share issuance. And so we essentially mirror the 2 as they go. And then because it all occurred in the third quarter, we accelerated our share issuance in the third quarter from an accrual standpoint, our expectation of share issuance, and it offset the doubling of compensation as a result of the share vesting.

Devin, effectively, all we did is the shares that otherwise would have vested at the end of our fiscal '18 year, we accelerated by roughly 2 quarters. So that it has no impact on our payout ratio or how we think about our business for the full fiscal year, and we did not accelerate anything beyond this particular fiscal year. And we just moved it up by effectively 6 months.

And we'll take our next caller, Michael Needham from Bank of America Merrill Lynch.

So I just wanted to touch on, like, inorganic growth opportunities. You guys have done deals pretty regularly. And then recently, you did the Bluestone (inaudible) and Quayle Munro. Can you just kind of go through those, like, acquisitions, particularly Quayle, what you offered these firms to get them to join the platform, kind of the advantages of being a part of Houlihan? And then more broadly, how good is the opportunity set for doing deals for you guys today?

So I think each deal is different, but ultimately, we're looking for organizations that for whatever their reasons might be, they may have hit a wall. They might not have the global scale that we do. They may not have the private equity or hedge fund coverage benefits that we do. They may not have the multiple products of restructuring and the FAS product line to go along with M&A. They may feel that to get to different-sized deals or complex deals, they need to be part of a larger organization. They may get to a point they -- if they keep growing, they're going to need to develop a standalone accounting or compliance or IT department and they can't of don't want to do that. So that's a lot of the motivating reasons. I think it really starts from the bankers at these companies proceed, as do we ultimately, that will collectively be able to do better by joining forces than being separate. So I think that's some of the benefits they see joining with Houlihan Lokey. And from the Houlihan Lokey standpoint, we're always debating, can we deploy internal people or develop them in a particular industry or product or geographical set? And/or do we find a group and do we hire them? Or do we hire a bunch of individuals or do we acquire them? And really, throughout the years, we've done all 3, both internal development, hirings as well as acquisitions. And we think when you look at us versus some of our either public or private peers, I think it's because of our diversification of product lines and industry mix, the size deals we do, et cetera, it is -- makes more sense in some regards for firms to want to align with Houlihan Lokey or for Houlihan Lokey to want to buy them than some of our other peers. And so we think really since we continue to announce deals and since we've done, I think, a good job with those acquisitions -- and being public does help, we continue to get inbound inquirers and more receptiveness when we're talking with people. So I think that's why we've been able to do as many as we have over the last 8 or so years. And would expect it will continue to be an important tool for us to help grow the business.

Okay. And for Quayle Munro, one thing I noticed is I think selectively, they provide growth capital -- or they did from their balance sheet. Is that something they'll continue to do at Houlihan?

Yes, I think for Quayle Munro, if they do any growth capital, then it is an insignificant amount of their business. They are a traditional M&A shop much like we are. And they may do some capital raising and they may call it growth capital raising but that's not a meaningful part.

Okay, got it. That -- and then just the only other one I had was just ORIX. I know you guys don't know when they might sell, but assuming they reduce the stake in the company, if it happens over the next couple of years, would you expect any changes from a government standpoint for the company?

It's spelled out in our documents going all the way back, I think, to -- before our IPO when ORIX, owned a certain amount of shares, they're entitled to certain -- they had certain veto rights. They had certain rights to board membership. None of those terms and conditions have changed. Then as they've dropped their ownership percentage and if they do continue to drop their ownership percentage, a few of those governance things along the lines set forth 2.5 years ago would continue to move downward.

And next, we have Brennan Hawken from UBS.

So just a quick one following up on restructuring. I know that you spoke to the fact that activity seems to be -- the oil and gas [rolls] off. It got replaced, seems like we've been regularly flinching in this business, thinking it's going to slow down as you work through what's left of the oil and gas. And you spoke certainly to the intermediate to long-term attractiveness, but can you maybe help us understand what's caused the better-than-expected quarterly results? Is it just the nature of the chunkiness of the business over these last few quarters since you first started to signal a slowdown? Or is it that there have been surprise mandates that have fallen in as the quarters progressed? Maybe if you could just help us understand that dynamic, that would be helpful.

Brennan, I might say 3 things. Yes, there is some, as you described, chunkiness or volatility and you don't really know what deals will close in one quarter or another. So we'll -- you'll get a little of that. I think the nature of the business at the moment also tends to have a certain amount of true, signed engagement letters and then a certain amount that you're starting to process of getting hired on kind of a verbal basis. And so some of those, you never know if they will just fall away and actually not turn into engagements or some of them will actually turn in new engagements. It's a little harder to predict with verbal hires versus written hires, if you might, but that's just a nature of that business. And the third thing around the edges that we have is sometimes, we've had this, a couple of times, on projects both this quarter and the previous half. We will jointly, if you might, work on projects with our restructuring staff and our Corporate Finance staff. Ultimately, we will only book it in one place albeit we move those, in theory, the revenues and bonus pools around and it's footnoted in our financials. But in this last quarter, we had a sizable project or 2 that was jointly worked on by restructuring and Corporate Finance but it happened to get booked in restructuring. And likewise, in the first half of our year, we had a couple sizable projects that were jointly worked on by Corporate Finance and restructuring, and they happened to be booked in Corporate Finance. So we try to book them by what the core of the assignment is, but sometimes, we are doing both the restructuring and maybe a refinancing or some M&A. And sometimes, it's an M&A and there's some restructuring component to it. And unlike some of our peers, other than, I think, Lazard and ourselves who do distinctly come up with restructuring revenues versus Corporate Finance revenues and everybody else just wants them together, you kind of have to look at the business at least the way we do together. But just because we report in business segments, sometimes, you can get slight variations of one segment looking a little better or a little worse than others. So those would be the 3 reasons I'd kind of describe and what you saw as very good results in restructuring. But what we've said is the new business activity just doesn't suggest we're going to keep at that same kind of pace that we've been at for maybe the last year, 1.5 years at least over the short term.

I appreciate that, Scott. That's helpful. And I guess, relating to that or following up on that, when we think about this new tax law and all the changes and basically taking previous decades of tax code and turning it around rather materially, I'd expect there would be even a sustained business case for having your Corporate Finance folks work with your restructuring people just as not only firms want to get more optimistic and then buy or look to pursue deals, as you laid out already, but then change around their businesses in order to make sure they're optimized fully for the new code. Is that fair? Are you starting to see a pick-up, I mean that type of engagement? And does that just mean more cooperation going forward? Or am I reaching a bit too much here?

Well, we'd say 2 things. I think the new tax code does suggest whether you're a banker, an adviser, an accountant, lawyer, there is just more activity for people to be talking to potential clients about until all of these -- and it may take years and beyond just quarters for it all to shake out. And then I think we tried as best we can in all of our mixing and matching between products and industries and geographies and skill set. I'm not sure I would say that the interaction or cooperation is better or unchanged, does not change really because of the tax reform. I think when the business opportunities suggest that we need to put multiple disciplines and skill sets together, we'll do that. It doesn't matter whether it's caused by tax reform or something else, and I think it really comes down to when groups figure out how they can successfully do better for their clients. They'll always do it together. And if they don't think that they need help from other parts of the firm, they're going to tend to do it with the skills that they have within their own little subdiscipline.

And our next question comes from Ann Dai with KBW.

So I just have one -- a bit of a higher level question for you guys. I guess to me, the environment for M&A feels pretty good today. And so I'm wondering, from your view, how much potential is there really to improve very meaningfully from here at this point in the cycle? And then if you had to characterize the top factors that are holding your clients back from engaging in M&A, what are their top concerns? And have those shifted with market valuations, taxes or anything else or is it much more secular in nature?

The best example we can give you is if this was a baseball game, we think tax reform has extended the game a little longer. Is that 1 inning or 2 innings? Don't know but it does feel like there is more legs left to the M&A activity than prior to tax reform. And I think everybody at this juncture is trying to determine what might be the new value of their business, where they helped or not. Are there new alignments that make more sense and whether that's cross border, whether it's getting to certain kind of industry should they change the kind of capital expenditures they make? Are they in the right ownership configuration, whether that's a C Corp or pass-through? So all of this stuff is going through people's minds. It will take some time for people to sort out what they perceive is the best strategy, but I think people are interested in talking about more opportunities today than they were 6 weeks ago. And it feels like it's going to continue for the foreseeable future.

And we'll go next to Vincent Hung from Autonomous.

So you've done a few deals in recent years in Europe with McQueen, Leonardo, et cetera. Can you just talk about what progress you've made with those acquisitions?

Yes, I think taking them one at a time, with respect to McQueen, which was a acquisition in an industry vertical where we had a great presence in the U.S. including consumer, that has been an extremely successful acquisition with us. It's fully integrated. We now truly offer a global presence within one of our largest industry verticals, and we're really pleased with what we've accomplished with respect to the McQueen acquisition. With respect to Leonardo, a little bit different. Leonardo was more of a geographical acquisition for us. And so with Leonardo, we beefed up our presence in Germany. We increased presence into Italy. We had none; increased presence into the Netherlands. We had none; and beefed up our presence in Spain. And so really, if you think about it from a geographic standpoint, EU, if you want to feed the geographies, the best way to do that is to add industry groups. And what we've done with Quayle Munro is we've added 2 significant industry groups that should benefit all of our geographic expansion that we've got with Leonardo. So Leonardo was really creating the base and allowing that base to help sell our industry groups to their respective countries is really the next step, and I think Quayle Munro is -- was the first step we've made, significant step we've made, in industry group penetration, since the Leonardo transaction. And it should serve the bankers in those respective countries very well because it provides them additional industry knowledge and expertise.

And on restructuring, would you say the level of engagement is now maybe back around 2013, '15, types of levels? And also, is part of the weakness on the new engagement side due to maybe tax reform giving companies a lifeline?

Yes, hard to compare it exactly onetime period another back to -- like I said, there's just more in today's marketplace of signed contracts and verbals -- engagements than we've had in the past. It's definitely a global business. It's evolved different sizes. And on the tax reform question, there's 2 sides of that. To some extent, it probably provided some cash flow and flexibility for some companies that may have needed a restructuring and now may not; on the other hand, the change in the interest deductibility starting at the EBITDA level and then eventually the EBIT level. And just as important, kind of combined with increases in interest rates that we've already seen, so far, I'd say modest increases, but most economists are expecting further increases in interest rate. The coupling of those factors, we think, could start increasing for certain companies, the financial distress that they might have. So short term, like I said, I think we see some softness. And when we look out midterm and long term and you couple it with the absolute size of leveraged loans and high-yield debt out there, there's a big marketplace that eventually will -- some component of it will run into some distress. We've always seen it.

Got it. And on a related note, just lastly, so in your M&A discussions so far, has the capital and interest deductibility led to any companies rethinking how they finance deals? Or have the measures in tax reform, such as the full expensing of CapEx or the lower tax rates, really superseded that loss?

I haven't seen enough data points to give you some comments on which way people are leaning. And I think also in some cases, it's probably a more relevant question for people who are doing some of the larger capital-intensive type of transactions and are more mid-cap businesses, a lot of which just don't have the same level of capital expenditures that probably the others would be better equipped to answer that question with maybe more input than what we've seen at least with our client base so far.

(Operator Instructions) We'll go to our next question from Jeffery Harte with Sandler O'Neill.

I'm through most of the questions. One, on non-comp, it seems that, that comes in a little better than at least I'm expecting quarter after quarter. How should we be thinking about that, outlook-wise, whether it's -- what's the ratio likely to be dollar amounts or even just versus growth going forward?

Yes, I think we have kind of provided long-term guidance around that 12% to 13% number. I think we talked a little bit about it, as you would imagine, (inaudible) of this call. And we're still comfortable with the long-term guidance of 12% to 13%. I think in the short term, we're certainly performing better than that, and that may continue for some period of time. But this is a business that requires significant technological investment. This is a business where we do have large thesis that require usually in a significant move, significantly more rent expense. And so I think in anticipation of that, we'd like to keep it at 12% to 13%. But again, right now, we're operating much better than that. We expect that good strong performance in that category to continue, and we'd like to maintain that target at 12% to 13% over the long run.

Okay. And finally, as we look back historically, it seems large deals pick up and then eventually deal counts kind of follow along. We've kind of seen that, but now we're seeing a recent acceleration of kind of the big deals after a pause for a while. Is there room for kind of another acceleration of middle market activity and kind of overall deal counts in the wake of what we've seen being some decent big deals picking up again at least last 6 to 8 weeks or -- in this cycle? Or is it just too hard to tell?

Yes. So usually, in the middle market, if you look back in history, it lags due to performance of the larger market and could lag in terms of quarters -- measured in terms of quarters. So I think there's no reason to believe. It's been a very flat and sometimes even down middle market, M&A market. And there's no reason to believe that given what we've seen with tax reform and certainly the early indications that we may not see some positive gains there versus kind of a flattish environment. And again, that may take a quarter or 2 given the strength of the large-cap M&A market, but I certainly wouldn't be surprised by it. But again, if large cap is up 8%, the middle-market might be up 2%, so much less volatile, much slower to react, but it generally follows the trend.

And we have no further questions at this time. So I'd like to turn it back over to Scott Beiser for closing remarks.

I want to thank you all for participating in our third quarter call, and we look forward to updating everyone on our progress when we discuss our fourth quarter results for fiscal 2018 in the spring.

And that concludes our call for today. Thank you for your participation. You may now disconnect.