H&R Block, Inc. (NYSE:HRB) Q2 2024 Earnings Call Transcript

H&R Block, Inc. (NYSE:HRB) Q2 2024 Earnings Call Transcript February 6, 2024

H&R Block, Inc.isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by, and welcome to H&R Block’s Second 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. [Operator Instructions] I would now like to hand the call over to Vice President, Investor Relations, Michaella Gallina. Please go ahead.

Michaella Gallina: Thank you, Latif. 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 Web site 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.

Jeff Jones: 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 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 Horizons 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 two weeks of the filing season given the October 15 deadline, we feel great about the start of the year. We have 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’re 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 roadmap 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 shore-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 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 316,000 sign-ups and $456 million 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 save 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 cost, 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 in 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’re pleased with the speed that we’re 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 innovative, make it easy for clients to switch, and price competitively. We executed this plan last year and returned the 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’re 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 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 interest 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 leave 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’s 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’re in the process of engaging a search firm to find his replacement, and we’ll share more at a later date. I am 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.

Tony Bowen: 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 CFO will not change in the coming months. With that, I will now turn to the Q2 results. We delivered $179 million of revenue, which increased 8% or $12.7 million 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 decreased by $3 million 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, an improvement of 6% or $15 million to the prior year. Interest expense was $21 million, an increase of $2 million or 13% due to higher withdrawals on our line of credit coupled with higher interest rates compared to the prior year. Pre-tax loss decreased by $15 million to $283 million, 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 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 fiscal year ’24 outlook. Turning to capital allocation, our practice remained strong. In Q2, we bought a total of 4.8 million shares for $218 million at an average price of $45.88. This was another 3% of share outstanding. In the first-half of fiscal ’24, we repurchased a total of $315 million or 5.5% of shares outstanding. As a reminder, given our narrow trading windows, we have historically executed more of our share repurchase in the first-half of the fiscal year. I believe this is a great use of capital, and I 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.

Jeff Jones: Thanks, Tony. I’m 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.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Kartik Mehta of Northcoast Research. Please go ahead, Kartik.

Kartik Mehta: Thanks. 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 noted from a competitive standpoint that might be different than you had anticipated?

Jeff Jones: Hey, 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 since 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.

Kartik Mehta: And then just — I guess that segues into my next question. Just from an Assisted standpoint and DIY standpoint, you started [probably slower there] (ph). One that’s different than the other, or do you think both are a little bit slower than you anticipated people waiting on some of this tax stuff to get through Congress?

Jeff Jones: It’s so hard to try to get that precise at this early point and tease apart by channel. 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 be a little slower than we expected. And when we do some of our consumer poll surveys, we think one of the reasons really is about Child Tax Credit.

Kartik Mehta: 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 weeks of the season?

Jeff Jones: 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 plan, 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 email 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.

Kartik Mehta: Perfect, thank you very much.

Jeff Jones: Thanks, Kartik.

Operator: Thank you. Our next question comes from the line of George Tong of Goldman Sachs. Your line is open, George.

George Tong: Hi, thanks. Good afternoon. You’ve reiterated your revenue guide of 2% to 3% 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?

Tony Bowen: Hey, George, this is Tony. I can take a stab at that. 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, where obviously there’s a few reasons why, and specifically client volume was the most — what we wanted. We wanted to make sure, this year that we set guidance that was achievable and, frankly, took into account some potential curveballs that inevitably be get thrown at the industries. So, those were 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.

George Tong: 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?

Jeff Jones: Yes, absolutely, George. Remember again that the Assisted loss last year we identified three reasons, two 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 position to assisted clients, all of that comes together to our value proposition and the way we organize the field to execute for the season.