H & R Block Inc (HRB) 2024 Q2 法說會逐字稿

Thank you for standing by, and welcome to H&R Block's Second Quarter Fiscal Year 2024 Earnings Conference Call. (Operator Instructions) I would now like to hand the call over to Vice President, Investor Relations, Michaella Gallina. Please, go ahead.

Thank you, Lateef. Good afternoon, everyone, and welcome to H&R Block's Second Quarter Fiscal 2024 Financial Results Conference Call. Joining me today are Jeff Jones, our President and Chief Executive Officer; and Tony Bowen, our Chief Financial Officer.

Earlier today, we issued a press release and presentation, which can be downloaded or viewed live on our website at investors.hrblock.com. Our call is being broadcast and webcast live, and a replay of the webcast will be available for 90 days.

Before we begin, I'd like to remind listeners that comments made by management may include forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties, and actual results could differ from those projected in any forward-looking statement due to numerous factors. For a description of these risks and uncertainties, please see H&R Block's annual report on Form 10-K and quarterly reports on Form 10-Q, as updated periodically with our other SEC filings.

Please note, some metrics we'll discuss today are presented on a non-GAAP basis. We've reconciled the comparable GAAP and non-GAAP figures in the appendix of our presentation. Finally, the content of this call contains time-sensitive information accurate only as of today, February 6, 2024. H&R Block undertakes no obligation to revise or otherwise update any statements to reflect events or circumstances after the date of this call.

With that, I will now turn it over to Jeff.

Thank you, Michaella. Good afternoon, everyone, and thanks for joining us. I'll begin today with a summary of Q2 results, provide an update on our Block Horizons progress, and share more on why we are well positioned for the tax season. Then I'll discuss the announcement today regarding Tony's decision to retire, and finally, he'll provide context on our financials, including the strength of our capital allocation and balance sheet.

Turning to Q2 results, Performance continues to meet expectations and today we reaffirmed our fiscal year outlook. In the quarter, revenue grew 8% as we had a strong finish to the extended filing season. In addition, we saw consumers in need of cash, and many turned to H&R Block to meet their financial needs with our new Emerald Advance offering, which we believe bodes well for the tax season. We also continued our share repurchase program, buying back 218 million dollars in the quarter or another 3% of shares outstanding. Overall, I feel very good about our results.

Now I'll provide an update on our Block Horizon strategy where we continue to make progress.

Starting with small business, revenue grew over 20% in the quarter. Assisted Small Business tax volumes finished the extended season with momentum, we had nearly a 4% increase in net average charge, and we continue to see favorable trends in bookkeeping and payroll. While the second quarter only included 2 weeks of the filing season given the October 15 deadline, we feel great about the start of the year.

We've focused our marketing plan on the gig economy and specific industry segments we already do well in. Overall, I continue to be pleased with the growth we are seeing in small business.

Turning now to Wave, revenue growth was 5% in Q2. Last quarter I detailed the strategic shift in Wave's business model to build more premium features to meet the evolving needs of our customers.

This past week, we took another step forward by introducing a paid tier subscription service. This new tier incorporates features like automated bank transaction imports, preferred pricing on payments, and agent support, rather than self-service support. At the same time, Wave will continue to offer Payments and Payroll for an additional fee.

These recent moves reflect progress on our road map to accelerate revenue growth and drive long term profitability and aligns with our commitment to empower small business owners to start, survive, and thrive.

Moving to financial products, as I mentioned earlier, Emerald Advance performed well in the quarter. Although the name remains the same, significant changes were made to the product in collaboration with our bank partner, Pathward, to better meet client needs. A few of those include transitioning the product from a line of credit to a short-term loan with flexible repayment options, eliminating the annual fee and streamlining the application process and increasing the maximum available loan amount, which helped customers with their holiday spending needs. In total, over 380 million dollars in Emerald Advance loans were originated, up 25% to the prior year, and we received positive feedback from clients and associates.

Regarding Spruce, as of December 31, we had 316 thousand sign ups and 456 million dollars in customer deposits. We continue to enhance the user experience, have seen improved App Store ratings, and feel good about the increase in new client accounts and engagement. Our savings features are delivering on Spruce's mission to help clients be better with money. In fact, 20% of users who set and achieved a savings goal did so to build emergency savings, and another 17% successfully saved for vacations.

In addition, this year is the first time we are cross selling Assisted and DIY tax offerings in the Spruce App. More than 30% of customers that signed up during last year's season were not H&R Block tax clients, which we see as an opportunity.

I'll now discuss our Block Experience imperative, which underpins our ability to win in both Assisted and DIY by creating personalized experiences. Clients are empowered to be served however they choose- fully virtually or fully in person, and every way in between-whether uploading documents from home, having virtual calls with tax pros, or signing their return online. We also recently launched our initial two generative AI products that focus on improving the client experience and reducing costs, which I'll share more about in a minute.

Our progress across this imperative is one of the reasons we feel well-positioned for this tax season. Let me share some more, starting with Assisted tax.

To begin with, we achieved our hiring goals and saw continued strong trends in tax pro retention. We have heard positive feedback from our tax pros about the flexibility we offer. In addition, our innovative fulfillment network will now be available to our entire network of tax pros, which can improve the speed of our service and help us better manage our capacity.

Last quarter, I shared some of the many enhancements to the MyBlock app that were made with the client experience in mind, including a status tracker to help clients understand where they are in the flow, when to take action, and to give them easier access to their digital documents and return.

Not only are we focused on the client experience, but we also see an opportunity to reduce expenses with AI. We have already launched the technology in our call center operations and continue to learn from its use. Early signs indicate that customers are able to help themselves, which reduces related call center volumes. This should also enable our agents to assist with more complex issues. While we're just getting started, we are pleased with the speed that we were able to deploy this innovation, and how it will help us better serve our clients.

All of these advancements, alongside our positive customer satisfaction metrics from last year including value for price paid, give us confidence to take modest price increases this year, which we have previously discussed.

Turning to DIY, we believe the formula for success continues to be: offer an award-winning product that is continually innovated, make it easy for clients to switch, and price competitively.

We executed this plan last year and returned to share gains. This year, we'll continue to build on that momentum.

As you may have seen, we're excited to have launched AI tax assist in all of our DIY paid SKUs. This innovation enables customers to get real time tax answers and information, leveraging knowledge from our world class Tax Institute and decades of fielding client inquiries. It's simple to use and clients can ask as many questions as they would like. If live help is preferred, H&R Block's tax professionals are there to assist. We believe this offers significant value for clients with AI Tax Assist and access to human help included at no extra charge.

We know that a critical barrier for clients to switch is the cumbersome process of transferring their data. Last year we actively marketed how simple it was to drag and drop a PDF of the prior year return into our flow, which automatically imported up to 150 data fields. This year, we made it even easier for TurboTax customers to retrieve their prior year return, saving significant time and effort in switching.

In all, we feel really good about our DIY product and strategy. As discussed last quarter, we are taking modest price increases in this channel.

Finally, our marketing is aggressively promoting the reasons to switch to H&R Block and messages the strong value proposition of both our Assisted and DIY offerings. This year's campaign, 'It's Better With Block', demonstrates just how easy it is to switch, and showcases the simplicity of our experiences, which empower clients to file however they prefer, from easy-to-use DIY software to full-service assistance through our extensive local network across every corner of America. It also highlights our refund advance product that helps clients get their money sooner, our transparent and competitive pricing, our accuracy and max refund guarantees, and the expertise of our global network of tax pros.

In summary, we are well prepared to execute this season.

Before handing it over, I want to share more about Tony's decision to retire and focus on personal interests after nearly 20 years of service to H&R Block, including the last eight as CFO. Tony has been instrumental in driving results and will be leaving us in a strong position financially. Some of his most meaningful contributions include the rollout of our upfront transparent pricing model, driving material earnings growth in the business, and achieving a notable track record of returning capital to shareholders.

As part of Tony's decision, he has committed to remaining CFO through the end of August to see us through tax season, complete the fiscal year, and participate in our full year 2024 earnings call. We are in the process of engaging a search firm to find his replacement and will share more at a later date.

I'm proud of all we've accomplished together, Tony, and I only wish you the best as you prepare to enter this next chapter of life.

Over to you.

Thanks, Jeff. My tenure at H&R Block has been an incredible experience and I'm grateful for all I've learned and the opportunities I've been given. It's been an honor to be part of this transformation journey and I'm confident about the path that H&R Block is on. I'd like to reiterate that this is my personal decision, and as Jeff mentioned, nothing will change about my role in the meantime. I'm committed to ensuring a smooth transition through the end of August, and my engagement as H&R Block's CFO will not change in the coming months.

With that, I will now turn to the Q2 results. We delivered 179 million dollars of revenue, which increased 8% or 12.7 million dollars over the prior year. The increase was primarily due to higher volumes and net average charge in Assisted, combined with higher interest and fee income on Emerald Advance.

Total operating expenses of 446.5 million dollars decreased by 3 million dollars as a result of lower consulting and marketing expenses, partially offset by higher corporate wages in the current year.

EBITDA was a loss of 231 million dollars, an improvement of 6% or 15 million dollars to the prior year.

Interest expense was 21 million dollars, an increase of 2 million dollars, or 13%, due to higher draws on our line of credit coupled with higher interest rates compared to the prior year. Pretax loss decreased by 15 million dollars to 283 million dollars, and our effective tax rate was 33.1% compared to 25.9% last year.

Loss per share from continuing operations improved from $1.43 to $1.33, while adjusted loss per share from continuing operations improved from $1.37 to $1.27. Both were driven by a lower loss, partially offset by fewer shares outstanding.

While the first half of the year is a small portion of our overall fiscal year, I am pleased with our performance. And as such, we are reaffirming our FY24 outlook.

Turning to capital allocation, our practice remains strong. In Q2 we bought a total of 4.8 million shares for $218 million dollars at an average price of $45.88. This was another 3% of shares outstanding. In the first half of FY24, we repurchased a total of $350 million or five and a half percent of shares outstanding. As a reminder, given our narrow trading windows, we have historically executed most of our share repurchase in the first half of the fiscal year. I believe this is a great use of capital and am pleased with what we have accomplished.

Finally, as I shared on the last call, we continue to feel good about our balance sheet and how we are positioned in the current environment given our relatively low leverage.

All in all, I'm looking forward to the second half of the year. I'll now turn it back over to Jeff for some closing remarks.

Thanks, Tony. I am pleased with our performance and confident in our ability to drive value for shareholders through our business results and capital allocation.

As we end our prepared remarks, I would like to extend a sincere thank you to our team of tax professionals, associates, and franchisees, whose hard work, expertise, and collective spirit continue to deliver on our Purpose every day. Together, we provide help and inspire confidence in our clients and communities everywhere.

As a reminder, our next update on the tax season will be on our Q3 call in early May. Now we'll open the line for questions.

(Operator Instructions) Our first question comes from the line of Kartik Mehta of Northcoast Research.

Tony, surprised you're retiring, but congratulations, and I'm sure we'll get a chance to talk later, but it's been good working with you. Jeff, as you look at the early tax season, anything you've noticed from a competitive standpoint that might be different than you had anticipated?

Kartik, I'll let Tony respond to you shortly, and there'll be plenty of chances to say thanks and celebrate him for sure. Obviously, e-file opened a little over a week ago. And to date, we're not seeing anything competitively that we did not anticipate. I would say that in the industry, it is getting started maybe a little slower than we thought. We have no reason to believe that, that's anything other than probably related to child tax credit. And we're not worried about what we see for volume for the year, et cetera. So in the first week or two, I think that's really the only thing that we're seeing that wasn't expected, but nothing competitively.

And then just -- I guess that segues into my next question. Just from an Assisted standpoint and DIY standpoint, you start to kind of slow right there. One that's different than the other? Or do you think both are a little bit slower than you anticipated people waiting on some these tax stuff to get through Congress?

It's so hard to try to get that precise at this early point and tease apart by channel. Mean there's no question that filers for EITC or child tax credit filers are going to be in both channels. So I wouldn't want to call it like that this early. But we are seeing it being a little slower than we expected. And when we do some of our consumer pulse surveys, we think one of the reasons really is about child tax credit.

And then I know this is only possible on the margin, but any thoughts on marketing? Would you change your strategy or maybe the channels you're using just from what you're learning in the first couple of weeks of the season?

Great question. I think we're always trying to get the timing right. We obviously have plans going into the season. And by the way, the early season plans, we had a lot of emphasis on EITC and refund advance. We know that marketing creative is landing very positively with consumers. So it is more on the margins where the teams are thinking about search timing or shifting around a little bit of spending or the timing of an e-mail campaign, those kind of things. But again, it's still so early in the season, and we don't see real impact, overall. And so we don't want to make any really big knee-jerk reactions based on maybe a little slower start.

Our next question comes from the line of George Tong of Goldman Sachs.

You reiterated your revenue guide of 2% to 3% growth for this year. Your longer-term revenue growth target is 3% to 6%. What are some of the things that could cause growth this year to come below the long-term target?

George, this is Tony. I can take a stab at that. I mean, obviously, as you said, the top end of the range is within the longer-term range of 3% to 6%. I think coming off of last year, we're obviously -- there's a few reasons why specifically client volume was what we wanted. We wanted to make sure this year that we set guidance that was achievable and, frankly, took into account some potential curve balls that inevitably get thrown at the industry. So those are all built in.

The first half of the year was a really good start. The quarter we just reported was really strong. So I feel good about heading into tax season. And obviously, we've got a long way to go, but signs so far look good that we can achieve the guidance. And we still have confidence that, over the long term, we can grow north of 3%, possibly even this year. We'll obviously have to see how tax season goes. But regardless, I think we know we're going to generate a lot of cash flow, buy back a lot of stock, continue to pay an increasing dividend and ultimately create value for shareholders, and that's what we're focused on.

Got it. That's helpful. And can you talk a little bit about how your approach is changing this year in Assisted to help stabilize market share performance and potentially drive market share gains compared to last year?

Yes, absolutely, George. I mean, remembering again that the Assisted loss last year, we identified 3 reasons, 2 of which are behind us. And the one that has been of center focus this year is early season refund advance and strong value communication to EITC filers. But holistically, there are a number of things every year that we look at, and I'm feeling very good about today. How we prepare the field organization to serve clients, hiring, retention, training, that's essential, obviously, to deliver a great experience. The role of pricing, we've talked about low single-digit price increases, which is what we intend to deliver this year. And then broadly, the way we go to market and communicate the value proposition to Assisted clients, all of that comes together to our value proposition and the way we organize the field to execute for the season. And as Tony said, we have a really strong start to the season, a good first half, and now it's about execution for the balance of the year.

Our next question comes from the line of Scott Schneeberger of Oppenheimer & Company.

Congratulations, Tony. Guys, I guess, jumping up, I'm curious about -- it was strong revenue in the quarter, apparently from the extension season. So now that, that's completely in the rearview mirror, do you have a quantification of what that impact was? How that would contribute to this year, this fiscal year's revenue growth relative to expectations or just absolutely?

Yes. We don't have a specific number, Scott, and thank you, by the way, for the congratulations. We talked all along about California, obviously, being a bit of a potential tailwind going into this fiscal year given what happened last year. We saw some of that come to fruition definitely in October. I think just broadly, volume was kind of strong across the country. We obviously realize some net average charge on top of the volume in Assisted. And as Jeff said on his opening comments, Emerald Advance had a really good season. We made a number of changes to that product and the number of loans that we gave out was materially higher than last year, which obviously we participate in. So just a number of things on the revenue side.

Also on the expense side. I mean, expenses were down despite revenue being up. So that's obviously a really good start, but we always like to keep in mind the first 2 quarters is about 10% of our revenue for the year. So despite having a good start, we're still early in the game. We have a lot of business to do. Tax season looks like it's starting well from our perspective, even though it's a little bit slower for the industry. So a long way to go, but we feel good about the start of the year.

Just following on that last line you mentioned, you said starting well for you, but slow for the industry. So you are -- you think outperforming early or are you starting to slow as well? I didn't -- it was something I thought I heard you say earlier. And then -- let me just slide in a second part. I think Jeff attributed to EITC and that situation. Are you guys -- have you done survey work? Do you think that's why it is -- that's why you think it is or might it just be slow? I'm curious what you're seeing, hearing from consumers. Is there a need for money? I thought there might have been this year and that might have pushed them earlier, although I understand why they would wait under the EITC dynamic.

Let me start with the clarification because I probably wasn't clear enough. So I think the overall industry is starting slower. And that would include us. Obviously, we're a big part, especially the early part of the industry. And that's not atypical. I mean I think you see that, Scott. You've been around this business for a long time, a lot of times early in the season, especially when you compare on a day-to-day basis, typically shows softer volume. I think CTC is exaggerating that a little bit this year. We know we talked to clients who are waiting, even though they don't technically need to kind of see what eventually gets finalized and then just filing their taxes at that point. That's all just timing. I think when we look at the things we can control, our operational execution, our pricing mix, our volume of new clients, prior clients, everything looks good. So that's what I mean by starting well for us, even though volume is slower than where it will ultimately land. We know that's just timing. That's all going to catch up in the next few weeks.

I'll let Jeff at the EITC point.

Yes. I mean it's obviously, EITC and CTC clients, there's going to be some overall out there. So Tony just commented on that. But again, our focus early season on value prop and refund advanced messaging, that's strong. We are in the market. We're communicating that value. And what you may see the most is what you see on television that advertising creative is performing very well with Refund Advance. But underneath that is a lot of very specific targeted work we're doing with audiences. And we know that's an important segment to do better with this year.

Great. Thanks for all that clarification. AI taxes just -- I just want to -- it's early for you, but I just want your first read, if we could, about that and maybe a part 2 of this one because I like the part 2s and 3. Is the decision to price free on the paid SKUs, just kind of what was behind that strategy, not free and free, I get it, but just a little bit more elaboration on that approach. But more importantly, on the first question, just what are the early signs that you're seeing from that rollout?

Yes. I mean I'll reiterate your point, it is absolutely early, both in absolute terms about generative AI and certainly for us with AI Tax Assist. I'm very pleased with how quickly we brought this product to market, both in DIY and in our call center operations, 2 different products. And the team is looking at lots of things every day today. I mean, ultimately, what we want to see is what's the consumer behavior? How often are they using AI Tax Assist, versus self-help, versus opting for a tax professional to help them. That's unknown at this point. They have great choices. The user experience is very strong, but we're watching that kind of simple human behavior.

Ultimately, we want to see if this product can help drive higher conversion inside DIY, but we're looking at accuracy and quality and what consumers choose. So I think as this tax season plays out and we get into Q3 and Q4, we will know a lot more and be able to share a lot more about our learning. The idea about pricing it for free is just the ability to strengthen the value proposition we have versus competitors. It's really that simple. The technology is new in the world. We feel great about our core user experience and the SKU lineup and our pricing for value perception versus competition. And we thought this was a great opportunity to even strengthen the value we deliver for clients.

Our next question comes from the line of Alex Paris of Barrington Research.

Yes. I'll add my congratulations as well, Tony, but we'll talk later.

Thank you, Alex.

Question on pricing. I think you just said that it's low single-digit price increases on Assisted. And then you had said, I think, in the prepared text that you're taking modest price increases on the DIY side as well. Orders of magnitude, low single digits like Assisted is my first question. And second how has that changed, if any, the price discount versus TurboTax, for example?

So this is Jeff. Alex, I'll chime in first. I mean, yes, in consumer tax Assisted and DIY, 2%, 3%, 4% kind of range and similar in both channels. Obviously, in DIY, we can be more dynamic with the pricing, given the nature of the channel and what we see happening competitively in the market. For years now, we have maintained a price advantage relative to TurboTax. And as the quality of our experience has grown, we feel more and more confident about closing that price gap. They continue to take price dramatically. And so we're not trying to follow their lead necessarily as they continue to take significant price increases, but we do see the ability to close the gap. We want to be really intentional about that and make sure that the consumer is telling us that they're getting great value things like AI Tax Assist and the experience that they're getting is worth paying for. And so that's a little bit of the thinking about how we view pricing strategy. But in DIY, it obviously is a bit more dynamic than what we do in Assisted.

Great. So just a point of clarification. You said your price is up 2%, 3%, 4% on both sides, both channels, DIY, but they continue to take price dramatically. So I would take away from that, your price discount versus Turbo did not narrow, but you see the opportunity for it to narrow over time. Is that correct?

I think that's generally right. It gets complex fast because there are so many different SKUs. There are attaches to SKUs. All of those have different price gaps. So I'm definitely generalizing our philosophy on pricing versus trying to do a SKU-by-SKU lineup in comparison. Tony, would you add anything?

Well, yes, I think the only thing is on the paid SKUs that include AI Assist, we know we've got a much larger price discrepancy. So I think, to your point, it depends on which SKU and which product you're (inaudible), which time in the season. We definitely think that having an advantage is important. We're trying to lean into that. And we know, as the #2 player in the DIY category, we can use price as an additional piece of the value proposition to drive volume, but still drive overall revenue growth, and that's essentially been our strategy the last few years and it will continue this year.

Okay. Great. I appreciate that. And then complexity, tax code changes. While modest, do you expect any lift in NAC due to tax code changes this year?

Well, yes, I think we're both about to answer at the same time. Not really. I mean, this is a year where other than CTC, it's not a year where we see a lot of changes happening that benefit our customers. So that's really the one. And obviously, that's more about timing as we talked earlier.

Great. And then, I guess, last question for me. H&R Block has routinely repurchased franchise locations. I assume that's a first half affair given the tax season is awfully busy. I think you target 100 to 150 per year. Do you expect to be in that same neighborhood in this year?

You're exactly right. So we do almost all of those in the first half. We try to close those basically before tax season starts, which is now behind us. We're probably closer to 150 level at this point. So the team did a nice job of reacting to franchisees being willing to sell, which has been fantastic. We love acquiring them if they're willing buyers -- sorry, if they're willing sellers, we're the willing buyers. It's been a great use of capital. We've got a great ROI on those investments. The integration is very seamless, given they're already operating as H&R Block locations. So we're always willing if the locations are right, which they typically are. And like I said, this year, it probably is going to end up being about 150 in total.

Thank you. I would now like to turn the conference back to Michaella Gallina for closing remarks. Madam?

Thanks, Latif, and thanks, everyone, for joining us today. This concludes our second quarter fiscal 2024 financial results conference call.

Thank you for participating. You may now disconnect.