Q1 2023 H & R Block Inc Earnings Call
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Thank you for standing by and welcome to H&R Block's first quarter fiscal 'twenty 'twenty three 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 one one.
And on your telephone I would now like to hand, the call over to Vice President of Investor Relations Michaella Gallina. Please go ahead.
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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 be it live on our website at investors got HR block Dot 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, and updated periodically with our other SEC filing.
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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 presentation.
The content of this call contains time sensitive information accurate only as of today November one 2020 to 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 Mikael good after.
Afternoon, everyone and thanks for joining us.
Today, I will begin with a summary of our fiscal 2000 <unk> 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 <unk> 29 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 'twenty three.
We're in the third year of our blocker rise this transformation and we are gaining momentum.
Beginning with small business, we see a significant runway of growth and opportunity with those small business tax and wave.
In assisted small business tax we continued 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.
Simultaneously provides the benefit of having two returns filed with block.
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 on boarded 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 160000 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 do 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 deposits settings from within this Bruce that 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 health, 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 our 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 improving returns online.
Machine learning models are improving how we serve assisted and DIY clients.
As well as driving advancements in matching the complexity of our clients return to the REIT 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 tax pro 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 have 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 will 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 Horizons 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 am pleased with the work we're doing.
With that I'll 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 'twenty three.
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 'twenty three 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 at wave 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.
Partially offset by lower consulting and outsource services.
We just completed our annual merit process, which contributed to the increased compensation expenses during the quarter.
While field and corporate salaried positions increase more than historical levels tax pro 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 five 5% notes early.
Which will result in material savings as we issued new notes in June 2021 at an interest rate of two 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 84.
To a $1 five.
While adjusted loss per share from continuing operations increased from 78.
To 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 2009 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 'twenty three 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 the foreign exchange rates.
We continue to expect top line growth.
EBITDA that outpaces revenue and EPS it grows even faster than.
In addition, we are confident in the longer term target. We provided in August of adjusted EPS growing double digits annually through fiscal year 'twenty five.
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 of 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 one one on your telephone again Thats Star one one on your telephone to ask a question. Please standby, while we compile the Q&A roster.
Our first question comes from the line of Kartik Mehta of Northcoast Research. Please go ahead Kartik Mehta.
Thanks.
Hi, Jeff Tony I wanted to get a perspective on your expectations for total tax churns for the upcoming tax season.
Looking at 2020 tax returns and looking at 2021, there was a huge increase probably 7% which was unusual and.
And I'm wondering maybe your thoughts on why such an increase and what's your expectations are for the upcoming tax season.
Hey, Kartik, it's Jeff I'll kick US off there is no question in the last couple of 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 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, do we expect the industry to be back to normal growth rates, which we considered it.
About 1%. So that's how we're looking forward to fiscal 'twenty three tax season.
So Jeff are you, saying the kind of the baseline is somewhere around 150 million E filing paper or.
For the upcoming tax season.
Yes, 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 we expect that will be somewhere in the $150 million zone for E files plus paper. So that's our working assumption going into the year.
<unk> and again expecting the industry to get back to normal of about 1% growth perfect.
Then Jeff I think if I heard right on your prepared remarks, you talked a little bit about the DIY product having.
Different approach and I'm wondering I know you want to be cautious about what you say, but im wondering if you could talk about if its marketing if it's pricing if it's product maybe how youre looking at the DIY product.
Politically what kind of changes do you think you can make.
And market share.
Yes, I appreciate the question 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.
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.
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 this 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.
No 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.
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 Kartik.
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 in 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 a 1% overall growth I think our base expectation is fairly consistent with what we said for a number of years, which has assisted category flat to slightly up and the DIY category likely growing fast or 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 for block can you talk about some of your initiatives there.
How <unk> is positioned.
Particularly relative to competitors to win and potentially gained share in online assist.
Yes, 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 returned 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.
And 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.
<unk> is 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 and just a quick follow up to that.
Relative to perhaps turbotax 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 tax pro network, our ability to connect somebody with a true experts quickly and the price pricing gets tricky to talk about in this forum because there are so many different skus and add.
Loans 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 on that last question discussing online assist in tax how review could you talk about kind of lessons learned last year and maybe some innovations for for this year I know you just mentioned.
The speed of connecting the customer to the.
<unk> had the tax pro and you all had done that well last year.
And a major competitor of yours, yes, I think that they will have some some innovations this year too.
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 this hybrid product.
Observing that 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 customers 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 in new channels.
The thing that we see as the key is.
When a customer has a question and they hit that help button. They wanted 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 our 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 will continue to lean into.
How do we make the experience as fast as we can let.
Leveraging the next the expert network of tax pros and making sure that our price proposition relative to the competition remains strong and again our COO.
Cross 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 you want to add anything 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 moments 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 trying to hit right. Because we wanted to make sure clients now we have these products, we want to provide that help with that.
Right moment, but not provide an up sell screen. It at every single turn so that's a really important part of the initiative. This year as well, yes, 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 <unk>.
Option to them that they can get help.
Right.
Great. Thanks, guys that brings that buy.
Another side question that just came to me.
Our inference is that youre going to be very.
Proactive and visible with marketing of the DIY product.
Cause of what you were saying earlier, Jeff about just brand recognition and the need for improvement there will we see that paired with the.
With your online assist and tax Pro review products, where we see enhanced.
Visibility of that in marketing this year I think Tonys response was yeah.
When the consumer is using it we got to pick the timing of when it gets shown but how much how much attention will be will be given how much marketing will be provided to that in the in the DIY push.
Yes, great question and I guess the way I'd answer is it depends if youre. The audience. We believe that message is best for.
And so what I mean by that is 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 that based our ability to find the right audience who's most predisposed to that.
<unk> not too it would be delivered four 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.
Yes.
Last year to 8% nap growth in assisted.
<unk> was with two thirds from mix and that was I believe retail in 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 next 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.
Yes, let's let's tag team this Tony but I guess I'd start off by saying that.
Pricing in 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, Toni one 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 'twenty, one that didn't recur in 2002 and that provided a net average charge increase as well so that was the other part of it.
The mix triangle that you alluded to.
And for this year, when you think about that headwind call. It one to two points and but we're netting that against our targeted price increases to get us to the net average charge and 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, Alright, thanks, Tony Thanks, Jeff.
Thanks, guys.
Thank you at this time I would like to turn the call back over to Michaella gallina for any closing remarks.
Thanks, Latif and thanks, everyone for joining US today. This concludes our first quarter 2023 earnings conference call.
Thank you for participating you may now disconnect.
The conference will begin shortly.
As Johan during Q&A, you can dial star one one.
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