Q3 2022 H & R Block Inc Earnings Call
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 one on your telephone.
Please be aware that todays call may be recorded should you require any further assistance. Please press star zero I would now like to turn the call over to Mikael Galena Vice President Investor Relations. Please go ahead.
Thank you Latif and good afternoon, everyone and welcome to H&R block third quarter fiscal 2022 financial results Conference call. Joining me are just 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 got HR block dotcom.
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 Brian .
For a description of these risks and uncertainties. Please see H&R block 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 will 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 10 2022.
H&R block undertakes no obligation to revise or otherwise update any statement to reflect events or circumstances. After the date of this call with that I will now turn it over to Jeff. Thank.
Thank you Mikael good afternoon, everyone and thanks for joining us we're 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 imperatives.
Small business, we've been successful in driving new assisted tax clients in wave continues to show strong growth.
In financial products, we brought spruce the market with a robust competitive platform this quarter.
And then 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 task spoke 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 up approximately 8%.
Primarily driven by favorable mix as we serve 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 book, keeping and payroll offerings and test new operating models.
Turning to wage growth continues to be healthy as revenue grew 25% in the third quarter. Despite no longer lapping endemic impacting coworkers.
We've been successful in attracting new clients and increasing the value of existing clients.
As both average revenue per user and average invoice volume, so accelerating growth trends year over year.
As one client recently shared wave has grown with her from the very beginning when she was bootstraps and needing re accounting software.
Our platform helped our growth due to the full support of invoicing in integrated payments and even 10 90 nines for contract workers, which allowed her to focus on her actual business. She said quote if I didn't have waived 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 believe there was an opportunity to combine leading technology and features with our trusted brand and establish financial relationships we.
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 improve the product.
We're pleased with our early results and see ways to improve the account creation and Onboarding flows.
And just a few months through April we have 150000 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 dollar spend 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 work 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 my blocks features such as uploading documents and improving 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 theres, 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 tax pro training to handle these complexities.
In all we saw a nearly 20% increase in our retail and crypto filers and assisted this year.
We continue to improve our labor efficiency through a number of initiatives, resulting in strong tax grow productivity. This season.
First our innovative fulfillment network Leverages, our nationwide task ROE base to get returns done as quickly as possible clue.
Clients are no longer limited by tax pro availability and a local office and can leverage the power of our network.
Coupled with my block, 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, and 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 am 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 18.
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 filed in the industry.
Last year, there were $138 6 million unit vials.
This decline is likely due to an increase in extensions of drop in onetime violence in 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 in tax pros working to ensure we capture as many returns as possible during the extended period.
We'll provide more thoughts on the industry and our year end earnings call in August .
Turning to assisted the last few years, where time when it could've 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.
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, 'twenty, which ended in July we've increased clients by nearly 300000.
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 reach aylwin crypto investors and some first time filers rolling off.
The remaining one third was due to planned modest price increases as.
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 300000.
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 knack improvement of approximately 3%.
And over the last two years, we've driven a material increase in online revenue of $37 million or 18%.
The desire for human health continues to increase even among do it yourself violence.
In fact tax group review again grew double digits.
<unk> Street 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 will 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.
A growing dividend continue to be opportunistic with share repurchase and are making great strides with our blocked horizons growth strategy.
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 for 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 than.
When we are comparing results to last year's tax season was extended through May 17.
In the third quarter of fiscal 'twenty, two 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 our 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.
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 five 5% maturing notes that were originally due in November and as we shared will result in material savings given the new notes, we issued or at a two 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 nine.
The $4 six due.
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 sand canyon during the quarter.
For additional information on sand Canyon, please refer to disclosures in the Companys 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 'twenty, two we have 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've retired nearly one third of our shares outstanding.
On that note I wanted to take a moment to emphasize our capital allocation practice.
We have a robust history of generating strong free cash flow and 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 is 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 is 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 topline growth and our capital allocation practice.
And plan to provide an update to our free cash flow yield in August once we complete our fiscal year.
Finally, turning to our outlook for fiscal 'twenty two.
As Jeff shared financial results continued to be strong across the P&L and we are increasing our outlook.
Previously, we guided to revenue of $3, two five to $3 $35 billion.
We now expect revenue to be in the range of $3 $3 75 to $3 <unk> $5 billion.
Our prior EBITDA guidance was $765 to $815 million and we now expect EBITDA to be in the range of 850 $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%.
It's been a great year and I'm pleased we're able to increase our outlook.
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 in small business owners.
Our success has been made possible by our hardworking associates franchisees in 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 Wade, 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.
Joe was 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 blocks 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 one on your telephone to withdraw your question press the pound King we ask that you. Please limit yourself to one question and one follow up please standby, while we compile the Q&A roster.
Our first question comes from the line of Kartik Mehta of Northcoast Research. Your line is open.
Hey, Jeff.
Jeff talked a little bit about market share gains.
That market I was wondering I'm wondering now what client phase III, you're doing well.
Gaining share.
Hey, Kartik thanks for the question.
I heard you. Your question was about market share in assisted and what kind of clients do we think we're gaining share from.
I guess, let me just a dog in the background.
That's all right I got it.
I mean, obviously, we have been on a multiyear journey to improve our trajectory in assisted and that includes <unk>.
Price quality value Digitization and I think what we're starting to see now two years in a row of seeing the benefits of those investments.
And.
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 knack increase which was about two thirds explained by mix and so those were filers that.
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.
Yes.
Okay.
Your expectations for where our market share for us.
I know, it's been difficult I think you said probably more than normal number of extension.
We're kind of comparing today's numbers last year.
Number so.
H&R.
H&R block's expectations or where they expect market share between assisted and DIY.
Yeah.
Yeah. So we we absolutely expect so hold or gain share for the full season, obviously, we're up now and Theres 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.
I think last year showed us that we can be effective in competing in the post season.
So we want to go after every client we can and I feel like we're well poised to do that.
In DIY, you know Theres a lot of goodness year. We we grew new clients. We grew revenue. We grew knack. 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 in DIY filers.
So even though we're still competing in seeing good days I don't think I would expect our share to dramatically improve as we get deeper into extension season.
Thanks.
I was hoping for an industry outlook. Thank you for being so first block but.
Just thoughts on just the industry outlook between assisted and DIY.
Yes, 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 those extensions all convert over the next couple of 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.
God I can't hear you at all if youre trying to ask another follow up.
Thank you I appreciate it alright.
Alright, 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.
The season isn't over the year isn't over so we will obviously dig into this more at the year end call and cover all of 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 independent that charge less and independents that charge more than us.
We took modest price increases this year and then benefited from mix to drive our overall Mac, we did not see any significant competitive move across the base of independents of course, when we get all independent data and really assess the total industry. Much later this summer.
<unk>.
We'll have more insight and we'll share that at the year end call and the only thing I would add George as Jeff said Theres 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 modestly go up the last few years as Theyre, 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.
Got it that's helpful and just following up on the last point on modest pricing increases.
At block how do your price 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 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.
And our local offices as well and there's definitely been some pressures we absorb those in the P&L this year.
We will 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 in industry volume questions.
Jeff You had mentioned in prepared remarks, the $134 7 million E filed through the through the end of the season compare that to mid May last year of 138, six and you broke that out that the delta of extension filers.
And.
And the one time filers could you. Please just.
Delve into that a little bit more I heard you just say kartik that there might be a chance that once the.
The extension teams in there where you could be up year over year. So just what you saw on behavior of onetime filers.
Last year they came back.
And maybe how they compare.
You know how they were monetize last year, how they would monetize this year. Thanks Hal mahalo.
Scott This is Tony.
Asking specific to the industry or for more per block just want to make sure.
Let's start with the industry and any color you can share on block would be helpful. But you. Obviously made the opinion you thought you could get there Jeff did.
As you know as as becoming full by the end of the extension season. So it sounds like you're expecting a lot 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 are you compared against but if.
If you go back and look to taxis and 19 for example, which is the last time that tax season ended at a comparable time period around mid mid April .
Cintas look like Theyre, probably up north of $4 million right now.
So if you look at the data that we compare that we shared in the opening comments on an E file basis, where the industry is down 4 million ish right now 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 and when we don't have a crystal ball, but but it feels like theres a lot of filers.
So normally would've filed by the deadline, who did file an extension probably because of behaviors that they picked up the last couple of years is 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.
There's more people working to make sure that we're taking advantage of that.
Thanks, Tony and following up on that.
I didn't see him. Please please tell me if I missed it and tell me overall, if you 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 gonna give it now or not when might we expect that if you. If you don't care to share it now and how is.
Uh huh.
Are you kind of waiting to see extension season before you do and how does the the anticipated block specifically now as opposed to industry.
Revenue and profitability expected by keeping the stores open in this time period.
Yes, I mean to hit to hit the last part of your question. Obviously, that's all contemplated in our outlook. We feel good about what we've delivered through April and then the early days of May are trending wellness 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 one through April 30 of this year January one through may 18th.
I believe last year and in January one through July 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 work down 300000, more assisted returns than we did two years ago, all the way through July .
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 300000 clients. We picked up our net average charge over that two year basis is also up about 5% our assisted tax prep revenue was up over 10%. So just a really solid story, obviously, it's hard to kind of.
Look at this tough year on year out because it is hard to what you compare against but.
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, sorry, one more quick follow up on that in fact, I had missed I see that slide 26, I hadn't seen it before so I'll 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 the two years ago, how do you compare to three years ago is that something that you have handy.
Yeah, I don't have it off hand, Scott, but I would say it compares very favorably you may remember from 19 to 2020. When the pandemic first started we were down and clients as we were forced to close locations.
So 19 was kind of a high watermark in that perspective, and I think we are fairing 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.
Alright, great. Thanks, Tony I'll turn it off thanks, Scott Thanks, Scott.
Thank you at this time I'd like to turn the call back over to Mikael Galena for closing remarks.
Thank you Latif and thank you everyone for joining US This concludes today's call.
Thank you for participating you may now disconnect.
Okay.
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