H&R Block, Inc.

Thank you for standing by and welcome to H&R Block's third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be aware that today's call may be recorded. Should you require any further assistance, please press star 0. I would now like to turn the call over to Michaela Galena, Vice President, Investor Relations. Please go ahead.

Thank you, Lateef. Good afternoon, everyone, and welcome to H&R Block's third quarter fiscal 2022 financial results conference call. Joining me 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.hrblocks.com. Our call is being broadcast and webcast live, and a replay will be available on the website for 14 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 press release and presentation. The content of this call contains time-sensitive information, accurate only as of today, May 10th, 2022. 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, Michaela. Good afternoon, everyone, and thanks for joining us. We are happy to be here to discuss our third quarter results and provide an update on the tax season. As you know, we have had several unique seasons over the last few years, and we are feeling great about how H&R Block has emerged from the pandemic. I'm pleased with our business trajectory, and we have made a lot of progress across our block horizons and paradigms. In small business, we've been successful in driving new assisted tax clients, and WAVE continues to show strong growth. In financial products, we brought Spruce to market with a robust competitive platform this quarter. And in block experience, we are blending our digital tools with human expertise, resulting in a strong increase in virtual adoption this year. We are delivering, and I'm pleased to share that we are raising our fiscal 2022 outlook, which Tony will share more about later in the call. I'll begin by discussing the progress we've made across our imperatives. share more on the tax season, and provide details on our results. Starting with small business, we're focused on growing our base of tax customers by leveraging the Block Advisors brand and serving more entrepreneurs through our WAVE platform. Driven by strong marketing and more advanced TaxPro training, our small business assisted tax clients grew 5% on top of the 4% growth reported last year. We also realized strong growth in net average charge this season of approximately 8%, primarily driven by favorable mix as we served more complex businesses, and to a lesser extent, low single-digit price increases. As a result of the customer and net average charge growth, revenue increased double digits, a great sign that we're on the right path. Additionally, we continue to build our bookkeeping and payroll offerings and test new operating models. Turning to Wave, growth continues to be healthy, as revenue grew 25 percent in the third quarter, despite no longer lapping pandemic-impacted quarters. We have been successful in attracting new clients and increasing the value of existing clients, as both average revenue per user and average invoice volume saw accelerating growth trends year over year. As one client recently shared, Wave has grown with her from the very beginning when she was bootstrapped and needing free accounting software. Our platform helped power growth through the full support of invoicing and integrated payments and even 1099s for contract workers, which allowed her to focus on her actual business. She said, quote, if I didn't have Wave, I don't know where I'd be. I'm pleased with our overall growth in our small business imperative. In January, we launched our new mobile banking platform, Spruce. We believed there was an opportunity to combine leading technology and features with our trusted brand and establish financial relationships. We are proud of the product we brought to market on day one, and the launch of Spruce within the DIY flow was a meaningful milestone in our journey. Throughout tax season, we tested multiple iterations of our sign-up offer and shipped four major updates as we continually improved the product. We're pleased with our early results and see ways to improve the account creation and onboarding flows. In just a few months, through April, we have 150,000 sign-ups and $60 million in customer deposits. These early data points are meaningful when evaluating the first 90 days of competitor launches, and we're seeing positive monetization trends. For example, our client spending behavior is better than expected, with more dollars spent at merchants, which is driving higher interchange, and more out of network ATM withdrawals. These metrics and engagement indicate that we're on the right path and reinforce what we've been saying. Spruce bridges the gap that has existed in this marketplace. We're excited to release additional features later this fall. We're now entering a new part of the journey as we work to efficiently acquire Spruce customers directly outside of tax season. And I'm also excited about the prospect of adding additional acquisition channels like our assisted business next tax season. Now let's turn to our third imperative, block experience. This is all about blending technology and digital tools with human expertise and has the benefit of creating labor and footprint efficiencies. We've been successful in driving digital adoption by leveraging MyBlock features such as uploading documents and approving returns online. We're gaining traction with a quarter of our clients using at least one of our virtual tools as part of their tax preparation process, which more than tripled from last year. While I'm excited about the adoption, I know there's even more opportunity for clients to leverage these tools in the future. We also expanded our ability to serve retail and cryptocurrency investors. In DIY, we added a dedicated questionnaire to guide crypto clients through the experience, and in Assisted, we provide additional TaxPro training to handle these complexities. In all, we saw a nearly 20% increase in our retail and crypto filers in Assisted this year. We continue to improve our labor efficiency through a number of initiatives, resulting in strong TaxPro productivity this season. First, our innovative fulfillment network leverages our nationwide TaxPro base to get returns done as quickly as possible. Clients are no longer limited by TaxPro availability in a local office and can leverage the power of our network. Coupled with MyBlock, which enables components of the return to be completed virtually, We have the opportunity to reduce the square footage of existing locations over time and become more efficient with our real estate. We are also testing different office formats in larger remote workforces to better support clients and process data. These initiatives make us more efficient helping clients, however they want to be served, in person to fully digital and everything in between. In summary, we continue to execute against all our strategic imperatives, and I'm proud of the progress we've made in the second year of Block Horizons. Before I discuss our results, I wanted to provide some thoughts on the tax industry. As we've shared, we've had a few unique tax seasons in a row, including last year's unprecedented growth. As a reminder, this year's deadline was April 18th, Last year's tax season ended on May 17, and in 2020, it was July 15. It's important to have that context as we compare results, given that the prior two seasons included additional time to file. This year, through the latest IRS data as of April 29, there have been 134.7 million returns e-filed in the industry. Last year, there were 138.6 million e-files. This decline is likely due to an increase in extensions, a drop in one-time filings, and the filings that would typically happen in the extra weeks between now and mid-May. As the calendar becomes more comparable and extensions are filed, we expect this gap to narrow. We expanded our capacity with more open offices and tax pros working to ensure we capture as many returns as possible during the extended period. We'll provide more thoughts on the industry in our year-end earnings call in August. Turning to assisted, the last few years were a time when it could have been natural to move away from the channel, especially given pandemic impacts. Yet this category continues to demonstrate its strength and people's need for help. The same is true for block. we delivered another strong season. In addition to the meaningful share gains last year, we slightly gained share again this year. We prepared 11.3 million returns through April 30, which compares to 11.6 million through last year's May 17 deadline. Compared to tax season 20, which ended in July, we've increased clients by nearly 300,000. We also saw an increase in our net average charge, which was driven by two factors. About two-thirds was due to mix. We saw more complex filers driven by the expansion of the child tax and earned income tax credits, more retail and crypto investors, and some first-time filers rolling off. The remaining one-third was due to planned modest price increases. As a reminder, We've not taken price in the prior three seasons, and client feedback has been very strong. In total, our net average charge increased approximately 8% over the prior year. In our assisted business, we feel really good about the progress we've made. The key takeaway is that over the last two years, we've grown market share, grown clients by nearly 300,000, and increased our net average charge by 5%, resulting in overall revenue growth of 10%. Moving to our DIY results, this tax season we completed 8.2 million returns through April 30. This compares to 8.7 million through last year's May deadline. I was pleased to see us grow new clients and increase our net average charge. Improved mix and dynamic pricing resulted in an online NAC improvement of approximately 3 percent. And over the last two years, we've driven a material increase in online revenue of $37 million, or 18 percent. The desire for human help continues to increase, even among do-it-yourself filers. In fact, TaxPro review again grew double digits, continuing its streak in eight of the last nine years. Despite the new client growth I mentioned, we didn't do enough to hold share in the category. Throughout the season, we tested different marketing tactics, and in the second half, saw success with specific DIY messaging versus overall block brand messaging. We'll focus the next several months on improving our strategy for next year. In summary, we feel very good about this year's tax season. as well as the progress and value we've driven over the last several years, especially in light of the macro backdrop. We've grown revenue and improved our value proposition while returning significant capital to shareholders. The H&R Block story is strong. We produce significant cash flow, pay a growing dividend, continue to be opportunistic with share repurchase, and are making great strides with our Block Horizons growth strategies. I am quite optimistic about our future. Now, I'll turn it over to Tony to cover our financial results.

Thanks, Jeff, and good afternoon, everyone. Today, I will review results from the third fiscal quarter, share more on our capital allocation strategy, and provide an update on our outlook. As a reminder, this is our first year of reporting the tax season on our new fiscal year cadence, and we are comparing results to last year's tax season that was extended through May 17th. In the third quarter of fiscal 22, we delivered approximately $2.1 billion of revenue, which increased 4% or $78 million over the prior year. The increase was primarily driven by positive mix from a higher net average charge in the assisted channel, partially offset by lower Emerald Card revenue due to last year's stimulus payments. Total operating expenses were approximately $1.2 billion, an increase of 4% or approximately $44 million, primarily due to higher field compensation and marketing expenses, partially offset by lower amortization and depreciation. Interest expense was approximately $24 million, an increase of about $1 million, or 6%, driven by the $500 million of notes we issued last June, partially offset by lower draws this year on our line of credit. As planned, in May we paid off the $500 million, 5.5% maturing notes, that were originally due in November, and as we shared, will result in material savings given the new notes we issued were at a 2.5% interest rate. For the quarter, pre-tax income was $862 million compared to $829 million in the prior year, and our effective tax rate was 22% compared to 8% in the third quarter last year. We implemented tax planning last year that resulted in a discrete benefit causing our rate to be lower. I will provide thoughts on our fiscal year tax rate in a moment. Earnings per share from continuing operations decreased from $4.09 to $4.06 due to the higher tax rate, while adjusted earnings per share from continuing operations was $4.11 flat to last year. Regarding discontinued operations, there were no changes to accrued contingent liabilities related to St. Canyon during the quarter. For additional information on St. Canyon, Please refer to disclosures in the company's reports on forms 10-K and 10-Q and other SEC filings. Turning to share repurchase, in the quarter we bought almost 10 million shares at an average price of $23.29, totaling $226 million. This resulted in the retirement of another 6% of shares outstanding. In fiscal 22, we repurchased a total of 23 million shares at an average price of $23.84, totaling $550 million. This equates to more than 13% of our shares outstanding, and we have only $14 million remaining under our share repurchase authorization. Since 2016, we have retired nearly one-third of our shares outstanding. On that note, I want to take a moment to emphasize our capital allocation practice. We have a robust history of generating strong free cash flow, paying a growing dividend, and are committed to our share buyback program. These practices have remained stable even throughout the pandemic. As such, we believe that free cash flow yield, as defined by free cash flow divided by market capitalization, is an appropriate way to highlight the value of H&R Block. If you take the average of our free cash flow over the last five years and divide it by our current market capitalization, it's approximately 11%. That is more than double the current average of the S&P 500. We feel well-positioned to continue to drive shareholder value through top-line growth and our capital allocation practice and plan to provide an update to our pre-cash flow yield in August once we complete our fiscal year. Finally, turning to our outlook for fiscal 22. As Jeff shared, financial results continue to be strong across the P&L, and we are increasing our outlook. Previously, we guided to revenue of $3.25 to $3.35 billion. We now expect revenue to be in the range of $3.375 to $3.425 billion. Our prior EBITDA guidance was $765 to $815 million, and we now expect EBITDA to be in the range of $850 to $875 million. We also expect depreciation and amortization and interest expense to be near the low end of our previously guided ranges. and our tax rate to be lower in the range of 14 to 16 percent. It's been a great year, and I'm pleased we're able to increase our outlook. I look forward to finishing the year strong. With that, let me turn the call back over to Jeff for some closing remarks.

Thank you, Tony. We are proud of the progress we've made and where we're going. The last several tax seasons have been incredibly complex, yet once again, our team provided help and inspired confidence for millions of people and small business owners. Our success has been made possible by our hardworking associates, franchisees, and tax pros, and I want to send a sincere and meaningful thank you. I'd also like to thank our Spruce team, who not only worked diligently to launch the new platform, but continues to rapidly adapt to customer learnings and build new features. And, of course, the team at Wave, who is driving ongoing innovation and growth. I'd also like to welcome Jill Kress, who joined this month as Chief Marketing and Experience Officer. Jill is one of the country's premier strategic consumer marketing leaders. She joined us from PayPal, where she led brand strategy and engagement across the PayPal and Venmo portfolios. I am thrilled to have her as part of the Block's executive team. In closing, I am confident in our ability to continue to drive shareholder value With both our capital allocation approach today and our future with Block Horizons, our team is focused on finishing the year strong. Now, operator, we will open the line for questions.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. We ask that you please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from the line of Kartik Mehta of North Coast Research. Your line is open.

Hey, Jeff and Tony. Jeff, you talked a little bit about market share gains in the assisted market, and I was wondering what client base do you think you're doing well with in gaining shares?

Hey, Cardick, thanks for the question. If I heard you, your question was about market share and assisted and what kind of clients do we think we're gaining share from. I guess let me just... That's all right. I caught it. I mean, obviously, we have been on a multi-year journey to improve our trajectory in assisted, and that includes price, quality, value, digitization, and And I think what we're starting to see now two years in a row of seeing the benefits of those investments. And, you know, Block is at its best when we're serving Main Street America. And we absolutely saw this year the benefit from some more complex filers. You see that show up in the NAC increase, which was about, you know, two-thirds explained by MIX. And so those were filers that, you know, had the advanced tax credit or the earned income tax credit or crypto and retail traders. And so as we focus on multiple different segments of customers, we are being successful in attracting the right kind of customer to block.

Just your expectations for where market share will end up for us as an NDIY. I know it's been difficult. I think you said probably more than normal number of extensions, and we're kind of comparing today's numbers to last year's May 18th numbers. So just each in our box expectations for where they expect market share between assisted and DIY for this tax season?

Yeah, so we absolutely expect to hold or gain share for the full season. Obviously, we're up now. and there's a lot of filing that remains. It's why we are open more hours, more places, more pros to be able to compete to win that business. And I think last year showed us that we can be effective in competing in the postseason. So, you know, we want to go after every client we can, and I feel like we're well poised to do that. In DIY, you know, there's a lot of goodness here. We We grew new clients, we grew revenue, we grew NAC, we grew tax pro review, but we didn't do enough to grow share. And we know in this extended filing period, those kind of filers tend to be more assisted type filers than DIY filers. So even though we're still competing and seeing good days, I don't think I would expect our share to dramatically improve as we get deeper into extension seasons.

Actually, I was hoping for an industry outlook. Thank you for the answer, Vlad. But what are your thoughts on just the industry outlook between assisted and DIY?

Yeah, so sorry about that. I misunderstood what you were asking me. So, you know, as we went into this year, we expected the industry to be flat to slightly down. And the real variable was the one-time filers that would roll off. And after last year there being a real meaningful migration from DIY to assisted, we expected that this year the migration would go back to more normal year, 40 to 60 bps. And so what we're definitely seeing based on the number of extension filers, you know, if those extensions all convert over the next couple months, we think the season, the industry may actually finish up a bit. That's good news for the industry. And as we see more extensions get filed, we expect that that DIY migration will end up in that range we talked about. It's a little ahead of that now, but we know that most of the filers that remain are assisted filers. Carter, I can't hear you at all if you're trying to ask another follow-up. No, thank you. I appreciate it. All right, thank you.

Thank you. Our next question comes from George Tong of Goldman Sachs. Your line is open. Hi, thanks. Good afternoon.

As you look at your assisted category, can you describe the competitive dynamics that you're seeing in the independent category, changes that you're seeing there, especially as it relates to pricing and how H&R Block's pricing compares with independents? this tax season?

George, thanks for the question. You know, the season isn't over, the year isn't over. So we'll obviously, you know, dig into this more at the year end call and cover all those dynamics. I think what I would say, you know, at a high level for now in this quarter is when we've made our moves in pricing, we've never tried to be the low price provider. We know that there are independents that charge less and independents that charge more than us. As we took modest price increases this year and then benefited from MIPS to drive our overall NAC, we did not see any significant competitive move across the base of independence. Of course, you know, when we get all independent data and really assess the total industry much later this summer, you know, we'll have more insight and we'll share that at the year-end call.

And the only thing I would add, George, is as Jeff said, there's not a lot of data available. But from time to time, we do get industry views into what competitors are doing from a pricing perspective. And as you would expect, we've seen independent prices, you know, modestly go up the last few years as they're obviously trying to offset inflationary pressures in their own P&L. And we don't have data from this tax season, but I would be shocked if we didn't see a similar trend just given the macro environment.

That's helpful. And just following up on the last point on modest pricing increases at block, how do your pricing increases compare with input cost increases that you're seeing with respect to labor and real estate in the current environment?

Yeah, I would say it's fairly in line at this point. As you know, George, a lot of our key costs are variable labor tied to tax preparation costs. A lot of that is basically commission-based, so as revenue goes up, it will go up commensurate. We do have some hourly wages as well with people that work in our local offices as well, and there's definitely been some pressures. We absorbed those in the P&L this year. You know, we'll share more perspective when we get to the end of the year, but just the fact that we're guiding to better revenue, obviously our expenses were well managed as we're also guiding to really strong EBITDA performance as well.

Very helpful. Thank you.

Thanks, George.

Thank you. Our next question comes from Scott Schneeberger of Oppenheimer Group. Your line is open.

Thanks very much. Good afternoon, all. I guess following up on the volume and industry volume questions, Jeff, you had mentioned in prepared remarks that the 134.7 million e-file through the end of the season. Compare that to mid-May last year of 138.6, and you broke that out, the delta of extension filers and the one-time filers. Could you please just delve into that a little bit more? I heard you just say to Cardiff that there might be a chance that, Once the extension season is over, you could be up year over year. So just what you saw in behavior of one-time filers last year, if they came back, and maybe how they compared just, you know, how they were monetized last year, how they were monetized this year. Thanks, and I'll have a follow-up. Hey, Scott, this is Tony.

Were you asking specific to the industry or for more per block? I just want to make sure I'm...

let's start with the industry in any color you, you can share a block would be helpful, but you obviously made the opinion you thought you could get there or Jeff did as, as, you know, as, as becoming full by the end of the extension season. So it sounds like you're expecting a lot, just, just curious on industry and then block thereafter. Thanks.

Yeah. I think Jeff was speaking about the industry when he mentioned that. So this year we estimate that extensions and it's, you know, what do you compare it against? But, If you go back and look to tax season 19, for example, which is the last time the tax season ended at a comparable time period around mid-April, extensions look like they're probably up north of $4 million right now. So if you look at the data that we shared in the opening comments on an e-file basis where the industry is down $4 million-ish right now, if those extensions convert in this extended period, I think that's where we're seeing that there could be a path to the industry being flat to maybe slightly up. I mean, we don't have a crystal ball, but it feels like there's a lot of filers who normally would have filed by the deadline who did file an extension, probably because of behaviors that they picked up the last couple of years. It's just people got used to filing later. So that extension data is definitely elevated for us and the industry, and I think we'll see that play out in the extended period, which is why we're open more hours, more offices, more people working to make sure that we're taking advantage of that.

Thanks, Tony. And following up on that, I didn't see, and please tell me if I missed it and tell me overall if you didn't and you care to share, but I didn't see tax season and volume numbers and wasn't sure if you were going to give it now or not. When might we expect that if you don't care to share it now? And how... are you kind of waiting to see extension season before you do? And how does the anticipated block specifically now, as opposed to industry, revenue and profitability expected by keeping the stores open in this time period? Thanks.

Yeah, I mean, to hit the last part of your question, obviously that's all contemplated in our outlook. We feel good about, you know, what we've delivered through April and then, you know, the early days of May are trending well as well. So we feel good about the full year outlook. As far as the overall volume, so we mentioned a couple of metrics in the opening comments about our assisted business as well as our DIY business. But in the appendix slides, which are available on our website, we actually have a table that shows volume from January 1 through April 30th of this year. January 1 through May 18, I believe, last year, and then January 1 through July, I think, 17th or something like that, for two years ago, just so you can see the full view. And you can reconcile back to the data point we're sharing, which is currently through April 30th, we've done 300,000 more assisted returns than we did two years ago all the way through July. And obviously, we're continuing to gain on that every single day. And I think that's a really key data point just to show the progress we've made. On top of the 300,000 clients we've picked up, our net average charge over that two-year basis is also up about 5%. Our assisted tax prep revenue is up over 10%. So just a really solid story. Obviously, it's hard to kind of look at this stuff year in, year out because it's hard to what you compare against. But you know, I think the most conservative way to look at it is through April compared to through July two years ago, and it's just a really solid story across the board.

Great, thanks. One more quick follow-up on that. In fact, I missed, I see that slide 26. I hadn't seen it before, so I'll give that a look. But I'm just curious, how is your assisted volume at this point through, say, the end of April versus the year prior to the pandemic? Have you recouped because you were comparing to two years ago. How do you compare to three years ago? Is that something that you have handy?

Yeah, I don't have it offhand, Scott, but I would say it compares very favorably. You may remember from 19 to 20, in 20 when the pandemic first started, we were down in clients as we were forced to close locations. So 19 was kind of a high watermark from that perspective, and I think we're faring very well relative to that. That's something that we can come back at year end and share more of an apples-to-apples view.

All right, great. Thanks, Tony. I'll turn it over to you.

Thanks, Scott.

Thank you. At this time, I'd like to turn the call back over to Michaela Galena for closing remarks.

Thank you, Lateef, and thank you, everyone, for joining us. This concludes today's call.

Thank you for participating. You may now disconnect.