H&R Block, Inc.

Thank you for standing by, and welcome to H&R Block's first quarter fiscal 2023 results 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 1 on your telephone. I would now like to hand the call over to Vice President Investor Relations, Michela Galina. Please go ahead.

Thank you, Operator. Good afternoon, everyone, and welcome to H&R Block's first quarter fiscal 2023 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. The content of this call contains time-sensitive information accurate only as of today, November 1, 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. Today I will begin with a summary of our Fiscal 23 Q1 results and share more about our Block Horizons progress. Then Tony will provide an update on our financials. While the first quarter is small in comparison to our fiscal year, just about 5% of our total revenue, our Q1 performance met expectations, and we are reaffirming our full-year outlook. We've done a good job of converting extensions, which increased 5% over prior year, and we saw healthy, ongoing adoption of virtual tools in the quarter. We also managed expenses well despite the high inflationary environment. On the capital allocation front, we bought back another 3% of shares outstanding, and in October paid our quarterly dividend of 29 cents per share, which is an increase of 7% to last year. Overall, I'm pleased with our start, and I'm looking forward to the rest of fiscal 23. We're in the third year of our Block Horizons transformation, and we're gaining momentum. Beginning with small business, we see a significant runway of growth and opportunity with both small business tax and WAVE. In assisted small business tax, we continue to see double-digit revenue growth driven by both volume and net average charge. In Q1, we broadened our marketing efforts with a bold message focusing on the value we deliver versus independent CPAs, which is meaningful. While early, bookkeeping and payroll are growing nicely. driven by our dedicated team of company bookkeepers and franchisees. We are also capitalizing upon the growth trends we saw last year in two ways. First, we're building an inside sales capability to convert tax leads into small business services. Second, we saw significant opportunity to help clients incorporate their small business. In response, we launched a self-serve business formation product in October that enables business owners to create an entity. This can result in significantly better tax outcomes and a greater level of legal protection for our clients, and simultaneously provides the benefit of having two returns filed with Block, both the individual and the entity. As you can see, we have a lot of good things happening in small business. Turning to Wave, our new CEO has successfully onboarded is completing a strategic review of the business, and is assessing levers to drive future performance. While Wave customers saw increased invoice volume, there was less payment activity than we anticipated. As a result, revenue growth was 18% in the quarter. Moving to financial products, recall that we brought our new mobile banking platform, Spruce, to market in the DIY channel this past tax season. Given most of our marketing efforts are currently timed around the tax season, our metrics are relatively unchanged to the results we shared last quarter with approximately 160,000 sign-ups and $98 million in customer deposits. We know that Spruce customers want to improve their financial health. One of the most proven and effective ways they can do this is by saving money, even in small amounts. which is why we've continued to focus on savings-related innovation within the app. We recently added capabilities that enable users to round up their purchases to the nearest dollar, with the difference automatically deposited to their savings account, as well as the ability to deposit checks with their mobile phone. We're also enhancing our unique smart tax refund feature, which allows customers to make a pre-commitment to save a portion of their tax refund rather than spending it right away. Last year, this feature empowered the average user to set aside more than a quarter of their tax refund. One of the greatest challenges of engaging clients to load money is the process of switching their payroll. In an upcoming release, users will be able to change their payroll deposit settings from within the Spruce app. without having to go back to their employer, making this process much simpler. Alongside product innovation, we're preparing for launch in the assisted channel by educating tax professionals on the clear and different value propositions between SPRUCE and the Emerald Card to help clients make the best decision for their needs. Regarding block experience, we're making great strides blending digital capabilities with human help. resulting in a better, more personalized process for our clients. We believe this is the key to winning in both assisted and DIY, and we have a multitude of exciting projects underway. Last year, we increased the number of clients using a virtual tool by more than three times. We're continuing to help the customer understand the benefit of these offerings, such as digital drop-off and approving returns online. Machine learning models are improving how we serve assisted and DIY clients, as well as driving advancements in matching the complexity of a client's return to the right tax professional. This makes for a better customer experience and increases our productivity. We've expanded remote work options for tax professionals and are seeing early positive signs in hiring and retention. Our first year TaskPro role has been reshaped to accelerate their expertise, which increases productivity by enabling them to serve more clients. In fact, we've already hired to 75% of our goal for this new role. Over the last few months, we've evaluated how we can more effectively highlight our DIY value proposition. We've been doing research with our clients and our competitors' clients And we know that our product is strong, our value is strong, and the number one opportunity we have is increasing awareness that we offer a DIY product. As a result, you'll see us come to market with a new approach. In all, expanding virtual capabilities enables us to be well positioned to help our clients however they want, completely virtually or completely in person and everything in between. Our block horizon's progress continues to build, and we're excited about the magnitude and the impact of this work. Lastly, I'd like to mention that we recently released our annual Environmental, Social, and Governance, or ESG, report, which can be found on our website. While this is our third annual publication, in many ways we're just getting started. Being a responsible corporate citizen that connects our people, communities, and planet, has been a part of our culture and aspirations from the very beginning, and I'm pleased with the work we're doing. With that, I now turn it over to Tony.

Thanks, Jeff, and good afternoon, everyone. Today, I'll review our Q1 results, our capital allocation practice, and our outlook for fiscal year 23. We delivered $180 million of revenue in the first quarter, which decreased approximately 7% or $13 million over the prior year. This decrease was due to the advanced child tax credit being loaded onto Emerald Cards last year, causing a $17 million impact in the quarter. We also expect a similar impact in the second quarter, both of which were contemplated in our fiscal year 23 outlook. In addition, we had a $4 million negative revenue impact from our foreign exchange and our Australian and Canadian businesses. These declines were partially offset by growth that waived and an increase in net average charge in our assisted business. Total operating expenses were approximately $389 million, an increase of approximately 6%, or about $22 million, primarily due to higher compensation and technology-related expenses, and partially offset by lower consulting and outsourced services. We just completed our annual merit process, which contributed to the increased compensation expenses during the quarter. While field and corporate salary positions increased more than historical levels, Tax Broke Compensation, which is our largest line item, is variable and fluctuates in line with return volumes. EBITDA was a loss of $172 million, an increase of 24%, or about $33 million. Interest expense was approximately $16 million, a decrease of about $7 million, or 31%. Recall that last quarter we paid off the $500 million 5.5% notes early. which will result in material savings as we issued new notes in June of 2021 at an interest rate of 2.5%. Given that we are in a rising interest rate environment, the borrowing cost on our line of credit will be impacted, but higher deposit rates on our cash balances are acting as a natural hedge. Pre-tax loss was $221 million compared to a loss of $197 million in the prior year, and our effective tax rate was 24.4%, compared to 24% last year. Loss per share from continuing operations increased from $0.84 to $1.05, while adjusted loss per share from continuing operations increased from $0.78 to $0.99. Turning to capital allocation, our practice remains strong. We repurchased 4.9 million shares for $220 million this quarter at an average price of $44.60. This equates to another 3% of shares outstanding, and we now have repurchased approximately a third of our shares since 2016. We also paid our 29-cent dividend in October, which was an increase of 7% to last year and an increase of 45% since 2016. In summary, we are reiterating our fiscal year 23 outlook. As we have discussed, I am pleased with this guidance given the roll-off of the Child Tax Credit the increase in our effective tax rate compared to last year, and the headwinds we are seeing in foreign exchange rates. We continue to expect top-line growth, EBITDA that outpaces revenue, and EPS that grows even faster. In addition, we are confident in the longer-term target we provided in August of adjusted EPS growing double digits annually through fiscal year 25. Overall, we're off to a great start. With that, I will now turn it back over to Jeff for some closing remarks.

Thanks, Tony. We're focused on building upon the momentum we've driven over the last couple years. I'm excited about what's ahead, and in closing, I'd like to thank our tax professionals, franchisees, and associates who embody our purpose every day to provide help and inspire confidence in our clients and communities. Now, operator, we'll open the line for questions.

Thank you. To ask a question, please press star 1-1 on your telephone. Again, that's star 1-1 on your telephone to ask a question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Kartik Mehta of North Coast Research. Please go ahead, Kartik Mehta.

Thanks. Hey. Hi, Jeff. Tony. I wanted to get a perspective on your expectations for total tax returns for the upcoming tax season. You know, looking at 2020 tax returns and looking at 2021, there was a huge increase, probably 7%, which was unusual. And I'm wondering maybe your thoughts on why such an increase and what your expectations are for the upcoming tax season.

Hey, Cardi, it's Jeff. I'll kick us off. There's no question the last couple years have had a lot of volatility and different things impacting volumes, changing dates, et cetera. We don't know for sure where the season ended until the IRS officially releases their data. But, you know, we know every year, historically, we've been in the zone of about 150 million e-files plus paper. And as we look ahead to the upcoming tax season and factor in the various puts and takes on employment, et cetera, we expect the industry to be back to normal growth rates, which we consider to be about 1%. So that's how we're looking forward to fiscal 23 tax season.

So Jeff, are you saying the kind of the baseline is somewhere on 150 million e-file and paper or for the upcoming tax season?

Yeah, I mean, we obviously don't know where the industry will end from last year until the IRS releases that data, so we can't comment on that specifically. But, you know, we expect that we'll be somewhere in the $150 million zone for e-files plus paper. So that's our working assumption going into the year. And, again, expecting the industry to get back to normal of about 1% growth. Perfect.

And then, Jeff, I think if I heard right on your prepared remarks, you talked a little bit about the DIY product having a different approach. And I'm wondering, I know you want to be cautious about what you say, but I'm wondering if you could talk about if it's marketing, if it's pricing, if it's product, maybe how you're looking at the DIY product and holistically what kind of changes you think you can make and gain market share.

Yeah, I appreciate the question. You know, when we look back over recent years, we're pleased with our new client growth. We're pleased with the pricing ability we've had and the revenue growth, but we're not pleased with market share. And so over the last several months, we have looked at everything. And I think most importantly, talking to our customers and talking to our competitors' customers to understand where we are relative to the market. And that work has confirmed for us that our product is strong. Now, make no mistake, we're always improving the product, and we know that faster and more personalized is the key. But we know we're starting from a really good place there. We know the same to be true about the value we're offering, especially relative to our number one competitor and what they have done historically in pricing. So we know it's not value. What customers consistently told us was, we just didn't know you offered this product. And it's something we've talked about before as we track our unaided and aided awareness. What that means is less about how much we're spending, our total spending is contemplated in our outlook, and more about the way we go to market, the messages that we deliver, You know, we know that customers are frustrated with the industry not being transparent in how they think about pricing and upgrades. We know that customers don't fully understand how easy it is for them to switch. And so you should expect us to lean into some of those kinds of things. And we're taking a holistic approach in marketing, in channels, in product. really across the board to make sure that we take a completely different approach for this year. Thanks, Jeff. I really appreciate it. Thanks, Cardick.

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

Hi, thanks. Good afternoon. You mentioned that you expect 1% industry growth in terms of tax volumes and the next tax season. Can you break that down into what you expect for the assisted category and what you expect for the DIY category?

Hey, George, this is Tony. If we expect the 1% overall growth, I think our base expectation is fairly consistent with what we've said for a number of years, which is assisted category flat to slightly up. and the DIY category likely growing faster, call it 3% to 4%, getting you to that 1% overall.

Okay, got it. And then secondly, with respect to online assist, which is an important virtual category for Block, can you talk about some of your initiatives there, how HRB is positioned, particularly relative to competitors, to win and potentially gain share in online assistance?

Yeah, George, this is Jeff. So in our DIY product offering two different ways for the consumer to get help. One is online assist, which is simply access to get your questions answered. The second is tax pro review, which is turning over that return to us to check and validate your work and file on your behalf. We feel very well positioned here, both because of our tax pro network. in our ability to utilize tax professionals, as well as our pricing and value proposition. As we've tested our product, we believe that we are very quick to get questions answered. We get somebody directly to a tax professional versus an intermediary step to a call center like competitors do. And so that continues to be a growth channel for us both to acquire DIY customers, but also if you start as a DIY filer, demonstrating the value of human help and expertise.

Great. Just a quick follow-up to that. Relative to perhaps TurboTax and TurboTax Live, how is that product compared or performed relative to the competition?

Our products in virtual, we feel very good about because of our leverage of the built-in TaxPro network, our ability to connect somebody with a true expert quickly, and the price. Pricing gets tricky to talk about in this forum because there are so many different SKUs and add-ons based on where you start, but across the board, our pricing is better, and so we know our value proposition for that assisted help to a DIY filer is very strong.

Got it. Very helpful. Thank you.

Thank you. Thank you. Our next question comes from Scott Schneeberger of Oppenheimer.

Thanks very much. Good afternoon. Jeff, just following up on that last question, discussing online assist and tax pro review, could you talk about kind of lessons learned last year and maybe some innovations for this year? I know you just mentioned, you know, the speed of connecting the customer to the tax pro, and you all had done that well last year. And a major competitor of yours, yeah, I think that they will have some innovations this year to increase their speed. So just curious, what should we see from the industry as a whole and H&R Block in particular with regard to this hybrid product of serving customers virtually, DIY and assisted? Thanks.

Absolutely. Obviously, for several years now, we've been talking about blurring the lines between these capabilities because what we see at the macro level is the customer seeking help. And so whether that's coming to an office, getting us to do the work virtually, or starting yourself but relying on an expert to help you finish, that gives us great confidence because of our position as experts and because of our tax pro network that's so well trained built in, we have a very strong asset that we can leverage in these growing and new channels. The thing that we see as the key is when a customer has a question and they hit that help button, they want to get answers and they want to get connected to somebody who actually has the tax expertise to help them answer those questions. and versus competitors where we've seen that first stop largely be at a call center, not with a tax expert. We've seen that to be a real point of difference and something we feel very good about. So we'll continue to lean into how do we make the experience as fast as we can, leveraging the expert network of tax pros, and making sure that our price proposition relative to the competition remains strong and, again, Across each lineup in the SKU, we feel very good about where we're priced today, especially as we see the competitor take more and more price increases. Do you want to add anything?

Yeah, the only thing I was going to add is just the piece we're also working on is figuring out when do we introduce the product. and making sure that we're introducing at the right moment within the experience and balancing being transparent but also providing the help at the right time. And I think that's a really important balance that we're trying to hit right because we want to make sure clients know we have these products. We want to provide that help at the right moment. but not provide an upsell screen at every single turn. So that's a really important part of the initiative this year as well.

Yeah, that's right. And what I mentioned about the machine learning models is this is one example where we can see if a customer might be getting frustrated in the experience and use that as a way to introduce the option to them that they can get help. That's exactly right.

Great. Thanks, guys. That brings up another side question that just came to me. Our inference is that you're going to be very proactive and visible with marketing of the DIY product because of what you were saying earlier, Jeff, about just brand recognition and a need for improvement there. Will we see that paired with your online assist and tax pro review products? Will we see enhanced products? visibility of that in marketing this year. I think Tony's response was, yeah, when the consumer is using it, we've got to pick the timing of when it gets shown. But how much attention will be given or how much marketing will be provided to that in the DIY push? Thanks.

Yeah, great question. And I guess the way I'd answer it is it depends if you're the audience we believe that message is best for. And so what I mean by that is, you know, we continue to get smarter and smarter about relying on the right channel to reach the right audience, not broadcasting every message to everyone. And so it's possible that you or I may not see that message at all, but based our ability to find the right audience who's most predisposed to that product, that's who it would be delivered for. But yes, it is part of our value prop and our communication.

Got it. Thanks. And then just one more for me, if I may. Last year, the 8% NAC growth in assisted was two-thirds from mixed. And that was, I believe, retail and crypto investors made up a portion of that and then the child tax credit. If you could just kind of give us a sense for what was I right with that and kind of what was the mix within the mixed category. And where this question is going is, next tax season, what type of headwind should we anticipate from the child tax credit not recurring this year? And thinking about that specifically. Thanks.

Yeah. Let's tag team this, Tony. But I guess I'd start off by saying that pricing and assisted, we feel good that we're able to continue our low single-digit price increases. Obviously, pricing in DIY is more dynamic, and we think about that differently than we do in assisted. As we've mentioned in our prepared remarks and even going back a bit, the number one headwind that we've contemplated in our outlook is the roll-off of the child tax credit. And so that's one we're aware of. It's one we've planned for. And that is the main headwind from a revenue perspective. Tony, you want to?

Well, yeah, and just going back to last year, I think the other one, Scott, that we talked about was first-time filer roll-off, which we did see in our assisted business benefit that we got in 21 that didn't recur in 22, and that provided a net average charge increase as well. So that was the other part of the mixed triangle that you alluded to. And for this year, when you think about that headwind, you know, call it one to two points. And but we're netting that against, you know, our targeted price increases to get us to the net average charge that we want to land on for the full year, which is that kind of low single-digit net average charge that we've been talking about.

Okay. All right. Thanks, Tony. Thanks, Jeff.

Thanks, guys.

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

Thanks, Lateef, and thanks, everyone, for joining us today. This concludes our first quarter 2023 earnings conference call.

Thank you for participating. You may now disconnect.