H&R Block, Inc.

Thank you for standing by and welcome to H&R Block's first quarter fiscal year 2024 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 1-1 on your telephone. To remove yourself from the queue, please press star 1-1 again. I would now like to hand the call over to Vice President, Investor Relations, Michela Galina. Please go ahead.

Thank you, Lateef. Good afternoon, everyone, and welcome to H&R Block's first quarter fiscal year 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, November 7th, 2023. 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 Q1 results and provide an update on our block horizon strategic imperatives. Then Tony will discuss our financials, including the strength of our capital allocation and balance sheet. While we are early in the year, and Q1 is a relatively small portion of our results, we had a good start and are reaffirming our fiscal 24 outlook. We were pleased given we lapped a very strong extended season last year, and our share in both DIY and assisted slightly improved throughout the year. With favorability in NAC, we grew revenue, continued to manage our expenses well, and demonstrated ongoing progress on our block horizon strategy, which I'll share more about in a moment. We also continued our share repurchase program, buying $132 million in the quarter. Let's go deeper into block horizons, beginning with small business, which includes small business tax and services and WAVE. Assisted small business total revenue growth was 6% in the quarter, and we're pleased with the early signals we're seeing in bookkeeping and payroll services, which are growing double digits. We see a long runway of opportunity and are focused on continuing our momentum which includes growing clients in both tax and services and driving business formations, which we launched last year. Overall, we feel good about the trajectory of small business. Turning to WAVE, revenue growth was 6% in Q1, which was in line with our expectations. As we've shared, we underwent a strategic review of the business when the new leader was put in place. We now have a plan to accelerate revenue growth and put us on a path to profitability. Before I share those plans, I want to recap Wave's current business model, which provides tremendous value for small business owners by offering free invoicing and accounting. Wave has monetized its platform primarily through payment processing, as well as payroll and advisory services. We are now beginning a strategic shift to solve customer pain points that will deliver value and monetize more premium features. In the payment space, customers are wanting additional options beyond credit cards, which Wave historically has not provided. Today, less than 30% of invoices sent by small businesses through Wave's platform are enabled for credit card or bank payments. Thus, there's significant opportunity to unlock value as we enable our customers to be paid via alternative methods and expand our share of wallet. We also see an opportunity to build other premium features that help our customers run their small business. Last quarter, we launched the mobile receipts feature, which is a monthly or annual subscription that generates additional recurring revenue. This product's uptake has been better than expected. and is a good example of where we're heading. I am excited about the shifts we're making and the opportunities we see in this business. Now I'll move on to financial products. Regarding Spruce, recall that tax season 23 was the first time the product was introduced in the assisted channel. Our learnings have informed our actions for the next tax season, and we are continuing to drive innovation for the customer experience. We've made the account creation and signup process more seamless in all our channels, and deposit trends from customers utilizing Spruce to receive their payroll direct deposit continue to improve. As of September 30, we surpassed 300,000 signups and had almost $400 million in customer deposits. In fiscal 24, we're focused on efficiently acquiring clients at tax time, which includes the DIY flow and driving customer engagement within the app. Now let's turn to block experience. This imperative is all about blending digital tools with human help to provide better experiences for clients while empowering them to be served however they choose. Fully virtual to fully in person and everything in between. We have made a number of enhancements to my block this year. Within the app, clients will now have visibility of where they are at each stage of the tax prep process through a status tracker on their homepage. In addition, we'll be delivering a personalized checklist to help clients be better prepared for forms they will need and how to upload them ahead of time. The app will provide help at each stage with a call to action that recommends clients' next step, whether uploading new documents, getting help from one of our expert tax professionals, or notifying them that it's time to review their return, which we've made easier and faster to approve and sign online. Clients also have the ability to access their tax documents and return digitally, which aligns with our new print-less strategy to reduce paper consumption in our offices. This is a benefit for our clients, results in cost savings, and is one of the many ways we live our commitment to environmental sustainability. Another priority within Block Experience is leaning into Gen AI. As we've shared, we are initially focused on two areas. First, enhancing the customer experience, and second, reducing expenses and increasing productivity. In the DIY channel, we're working on exciting innovation that will support our clients throughout the tax prep experience. and we are testing the ability to use AI to field customer calls. Over time, we believe these initiatives can result in meaningful cost savings, but we are not assuming any this fiscal year as we are in initial testing phases. All in all, we're making tangible progress through our partnership with Microsoft. In fact, they recently highlighted our work to thought leaders and industry experts during the Envision Tour in New York. As you can see, our team continues to make progress, and we are well positioned to deliver results this year. Before turning it to Tony, I want to mention that we recently published our fourth annual Environmental, Social, and Governance Report for Fiscal Year 23, reflecting our ongoing commitment to transparency, sustainability, and responsible business practices. I encourage you to visit our Investor Relations website to read it in full. With that, I will now pass things over to Tony to share more about our financial results.

Thanks, Jeff, and good afternoon, everyone. In Q1, we delivered $183.8 million of revenue, an increase of 2% or $3.8 million over the prior year. The increase was primarily due to higher U.S. assisted tax preparation revenues driven by an increase in net average charge, partially offset by lower Emerald Card revenues. Total operating expenses were approximately $390 million, an increase of about 30 basis points, or $1 million. Corporate wages and bad debt were higher, and marketing and advertising, as well as consulting expenses, were lower than last year. EBITDA was a loss of approximately $166 million, an improvement of 3% or $6 million from the prior year. Interest expense was about $16 million, which is essentially unchanged to last year. Pre-tax loss decreased by $9 million to $212.4 million, primarily due to higher revenues and interest income in the current year. Our effective tax rate was 23.3% compared to 24.4% last year. Loss per share from continuing operations was $1.11 compared to $1.05 last year. while adjusted loss per share from continuing operations was $1.05 compared to 99 cents last year due to fewer shares outstanding. As a reminder, in quarters with a loss, fewer shares outstanding increases loss per share, but is accretive as we generate earnings for the full year. As Jeff shared, we had a good start to the year and are reaffirming our full year 2024 outlook and longer-term total shareholder return algorithm that calls for top-line growth, EBITDA that outpaces revenue, and EPS that grows even faster. Turning to capital allocation, our practice remains robust. In Q1, we repurchased a total of 3.3 million shares for $132 million at an average price of $40.43. This retired another 2% of our float. Since 2016, we have reduced shares outstanding by over 38%. Additionally, Last week, the Board of Directors declared our quarterly cash dividend. Since 2016, we have grown the dividend 60%, yet the total dollars paid out continues to decrease because of how quickly we are buying back shares. Given the macro environment and the expectation of high interest rates for the foreseeable future, I'd also like to share more about the strength of our balance sheet. We continue to feel great about our relatively low leverage, with $1.5 billion of long-term debt against our over $900 million of EBITDA in the most recent year. Our next debt maturity of $350 million isn't until October of 2025, which is our smallest tranche, and we don't have another tranche maturing after that until 2028. As we've shared before, as interest rates rise, it benefits our P&L on a short-term basis, as our interest income from our cash position will exceed our short-term growing interest expense for the full year. Overall, we feel very good about our balance sheet and how we are positioned in the current environment. In summary, our financial story is positive. We drive top-line growth, EBITDA that outpaces revenue, and EPS that grows even faster. We have strong capital allocation practices to reliably return value to shareholders, and our balance sheet positions us well for the macro trends. With that, I will now hand it back over to Jeff for some closing remarks.

Thanks, Tony. I'm looking forward to all that we will accomplish this year. In closing, I'd like to extend a sincere thank you to our associates, franchisees, and tax professionals for all they do year round to deliver on our purpose of providing help and inspiring confidence in our clients and communities everywhere. Now, operator, we will open the line for questions.

Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone. To remove yourself from the question queue, you may press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Kartik Mehta of North Coast Research.

Hey, Jeff and Tony. Jeff, just your thoughts on marketing as we go into next tax season. I know last tax season you were focused on DIY, at least from the marketing I saw. And I'm wondering, as we go into this tax season, do you follow the same strategy or does that change?

Yeah, Kartik, so there's a few things I would share. I mean, the first is remembering that we're very audience-driven in our approach to marketing. So you know, it's very likely you don't see everything that we're doing for a particular audience. So that's number one. We obviously have several different jobs to do. We had a winning formula in DIY last year. We want to do all we can to replicate that kind of performance. We also know, you know, when we evaluated our client loss in assisted, and we broke that down into the three buckets at the end of the year, Really winning with the EITC client is the top of the priority list. And so that means several different things for marketing this year. It means a strong reevaluation of the message, how we think about refund advance, the media channels we use, and the timing of those messages. So all those things have been reevaluated as we prepare for the upcoming season.

And Jeff, just as a follow-on, I know you've said in the last tax season that you wanted to win with EITC this tax season. Does that require you to make changes to the refund transfer product, make the amount available bigger, or any other changes you feel you need to compete better?

Yeah, it's a great question, and one I signaled on the last call. We know that last year we didn't do a good enough job of being in the market with the refund advance message at the right time. And that's really the starting point for how we communicate the value proposition to the customer. We've done even more research with that audience since last year to understand pricing and other matters that we continue to feel good about. You know, we looked at and decided not to participate in the refund advance business where people are promising a much higher rate but coming with fees and interest. And so we've eliminated that as something that we think is the right business to be in for us. So it's really about that message earlier in the season communicating our total value proposition.

Thank you very much. Appreciate it. Thanks, Carding. Thank you.

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

Your line is open, Scott.

Oh, can you hear me? Yeah, Scott, we got you. Oh, good. Thanks, Jeff. All right. Good afternoon, everyone. Yeah, I just asked something on the quarter to get us started. The mild outperformance in revenue, nice to see. And it wasn't of a grand magnitude. I was just curious if the later California filings from last fiscal year had any impact. It looks like it's not going to affect this back half of the year very much as some had wondered. And so just comments on that and then also on just the current quarter the operating expense increase was relatively modest in an inflationary environment. So it looks like you did a nice job of managing wages, marketing, advertising, and then per Cardix question, obviously that's going to be heavier later in the year, but you also cited consulting. So just the second part of the question is just kind of curious how you manage expenses in the quarter and what should we expect prior to tax season and then in tax season to keep up the good momentum there. Thanks.

Yes, I'll pick the revenue piece, and Tony can comment on OpEx. But, yes, so first of all, I'd say, you know, remembering we lapped a strong extension season last year. And in light of that, we feel good about our volume performance, you know, against our expectations. You know, as we mentioned, we saw some slight share gain in both the assisted and DIY business in this first quarter. And then, you know, we saw continuation of the price increases we took last year and some favorable mix, which helped drive revenue. And then, you know, when we saw the extension happen in California, obviously we talked about keeping more offices open, more tax pros staffed. And we think we did a nice job of winning our fair share in California leading up to October 15th. So when you put all those things together, you know, it is a relatively small part of the business, as we always say, but we feel good about the start to the year.

Yeah, and on the expense side, you know, we are happy with the very modest increase we saw in Q1. We're continuing to see inflationary pressure, so it's not that it's completely dissipated. Obviously, we did an annual merit cycle this summer that's flown in the P&L in Q1. We're continuing to see rent prices go up as well as utilities, but we're doing what we can to offset that. You mentioned a few things in marketing being a little bit lower, consulting expenses being a little bit lower in Q1. So we're reaffirming our full-year guidance. We think we're off to a good start. Expense management is obviously a key focus for us, and we think that will continue in Q2.

All right. Thanks, guys. And as a follow-up, I think I'll just kind of ask industry level, what are you seeing here in which regard to the IRS and its pilot program associated with being a tax preparation organization itself? And then also just thematically, 1099-K, any developments there that you're hearing, and could that be something that is a new and different angle for this year? Thank you.

Yeah, I'll pick up 1099 first. Actually, we believe it will be in place. There is a possibility, as always, some, you know, year-end legislation could change that, like happened last year. It's not contemplated in our outlook, but we do have some real thoughtful plans in place, should it proceed, that we're ready to capture that opportunity when the season kicks off. So that's on 1099-K. And with respect to the IRS, even in their latest briefing, Scott, they really dialed back the size and magnitude of what they think they'll pilot this year. We expect that to be much smaller than they originally had planned. But if we just take a step back from that, you know, we know the consumers spoken loud and clear. They don't think the IRS should be in the business. You know, we've been very clear on our position about that. There are over 30 organizations, including us that already offer free tax preparation. So, you know, our view on it really hasn't changed. It does sound like their plans have changed. And I just, you know, We find it hard to believe over time that they'll be able to, you know, use taxpayer dollars to be in the business of building a product, marketing a product, and supporting a product year in and year out.

Great. Thanks for sharing your thoughts on that, Jeff. Appreciate it.

Thanks, Scott.

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

Goldman Sachs hi thanks good afternoon as you think about your strategy with EITC tax filers and in the prior tax season marketing the value proposition of refund advance for example is definitely an important part but also a decrease in the average refund size and an increase in balance due returns had an impact on that demographic can you talk about how those other factors which H&R Block has less control over and might materialize over the upcoming tax season?

Yeah, George, thank you for that question. I mean, obviously those are things that are out of our control except to the degree we can educate and communicate to clients. Um, and that's really where we focus in what we call this off season of how we deploy training to tax professionals to help them understand in that moment of truth, if someone's outcome has changed, why that is and what they can do about it for the next year. So we definitely have taken those steps to get ready for this tax season, in addition to the marketing comments that I made earlier with Cardick's question.

Yeah, the one thing I would add, George, is, you know, last year we saw a pretty big change in, as you said, the amount of refunds and who's getting refunds. And we've essentially believed we've got a new baseline going into this year. So We aren't expecting another drop in the amount of refunds. There's no major taxable changes that would drive that. So I think customers kind of understand now kind of what to expect based on last year's results. And to Jeff's point, EITC customers, while their refund maybe went down a little bit, they're all still getting refunds, obviously. And it's just really about the education side that's really important. Yeah, great point. Got it.

That's helpful. And then can you provide your latest thoughts on your pricing strategy with a normalization of inflation trends and how, um, pricing and assisted and DIY, uh, would evolve heading into next year?

Absolutely. And, uh, as, as you asked, we'll kind of split it into two parts on the assisted side. You know, we, we believe that we're able to take low single digit price increases, which is what's contemplated in our plan for this year. As you've heard me say many times, every year we reevaluate that based on customer satisfaction and value for price paid metrics. So we feel good about that continued movement, which we'll do this year. In the DIY business, obviously, it's more dynamic. There are more factors to consider between core SKUs, early season, late season, and attached products. In general, we still see opportunity to maintain a price advantage to Intuit, and we'll do that again this year and actively market against what we believe our advantage is and how easy it is to switch to H&R Block. Got it. That's helpful.

Thank you. Thanks, George.

Thank you. Our next question, excuse me, our next question comes from Alex Paris of Barrington Research.

Your line is open, Alex. And Alex, please make sure your line is muted, and if enough speakerphone, lift your handset. Alex, are you there? Alex, if you can hear us, you may need to rejoin using your call me feature.

And it doesn't seem to be anyone on Alex's line. And I'm going to pause just to see if he queues back up. And he has not. I would now like to turn the conference back to Michaela Galena for closing remarks. Madam?

Thank you, Lateef, and thanks, everyone, for joining us today. This concludes our first quarter 2024 financial results conference call.

And this concludes today's conference call. Thank you for participating. You may now disconnect.