Q4 2023 H&R Block Inc Earnings Call
Thank you for standing by and welcome to H&R Block's full year 2023 financial results conference call.
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I would now like to hand, the call over to Mikael at Galena, Vice President Investor Relations. Please go ahead.
Thank you Latif and good afternoon, everyone and welcome to H&R block full year 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 V 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.
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.
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 its index of our presentation.
Finally, the content of this call contains time sensitive information accurate only as of today August 15th 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 Josh.
Thanks, Mikael today will provide an update on our fiscal year 'twenty three results.
Then I'll share more on the progress we continue to make within our block horizon strategy provide initial thoughts on fiscal year, 'twenty, four and Tony will discuss our financial performance and outlook in more detail.
Starting with 2023 results.
We had a good finish to the year and delivered revenue growth material EBITDA growth and adjusted EPS growth of 9%.
As we discussed at the beginning of the year, we knew we were facing headwinds due to the rollback of the advanced child tax credit payments that were loaded onto the Emerald card.
During the year, we also had foreign exchange impacts stimulus filers that returned to the sidelines and California's deadline extension.
Overall I'm pleased with the results we produced despite these challenges.
Our DIY strategy delivered this year, resulting in meaningful share gains.
We demonstrated pricing power in the assisted channel and saw positive customer satisfaction metrics.
<unk> business tax continued to be a growth driver and we also added about 150000, new sign ups to our spruce mobile banking platform.
In addition, our capital allocation story is driving ongoing value for shareholders.
We completed another $200 million of share repurchases in Q4 alone.
And today announced a 10% increase to the dividend.
Entering fiscal year 'twenty, four we are well positioned and expect to return to ordinary industry growth, which Tony will discuss in more detail later in the call.
Before that let me share more about our block horizons progress.
Let's start with our small business imperative that includes tax and wave.
Small business assisted tax continues to be a growth driver.
This business delivered 6% revenue growth for the fiscal year on top of strong growth last year led by net average charge for NASA, which grew 5%.
We also see a nice runway of longer term opportunities in services.
While early bookkeeping and payroll are gaining traction in this year, we launched a business formation tool.
Our new internal sales team more than doubled appointment to sale conversion rates accelerating growth in services.
All in all we are pleased with the trends in small business and continue to see significant opportunity ahead.
Turning to wave our top priorities are driving revenue growth and improving profitability.
For the full year revenue increased 12%.
In the fourth quarter, we grew average revenue per user while also becoming more efficient with our customer acquisition spend.
We also launched a new feature for receipt processing that scans and imports data in seconds, who reducing manual bookkeeping.
Its uptake has been faster than anticipated and we are now working on a robust roadmap of other new features to rollout in the coming months.
Moving onto our financial products imperative regarding spruce, our mobile banking platform, we've been utilizing learnings from its first year in the assisted channel to address and solve the needs of our clients.
Since launch through June 30, we had about 300000 sign ups and $334 million in customer deposits.
Spruce is committed to helping customers be good with money and we're seeing progress towards that impactful.
A higher percentage of users are now saving money.
And the balance is accumulating and savings accounts continues to grow.
These savings accounts allow users to customize goals in order to save for the things they want in their lives whether it be emergency savings or a new car.
Our newest feature a budget watch list utilizes flexible guardrails to help build healthy spending habits.
Back from users indicate that these tools give them the visibility and control that they have been missing in their financial lives.
From here, we are focused on acquiring clients, both in and out of the tax season.
Now, let's turn to block experience, which is all about blending digital tools with human expertise to serve clients. However, they want to be served.
Fully virtual to fully in person and everything in between.
In DIY, we delivered on what we set out to do and we were especially pleased with the results.
As you recall, our goal was to return to share growth by increasing awareness that we offer a DIY product by improving the product and by making it easier to switch from turbotax.
This multifaceted strategy worked and as we reported last quarter, we saw online client growth of two 5% through April 30, and 35 basis points of share growth.
We are looking forward to continuing this momentum in fiscal 'twenty four.
In assisted through April 30, we successfully increased company masked by 4%, while receiving strong customer satisfaction metrics.
We also attracted higher income clients and sold over 10% growth in those with more than $100000 of income and as we shared last quarter. We continue to see progress in the adoption of virtual tools.
Although we saw stimulus filers returned to the sidelines. The data shows that dynamic is now behind us and we're focused on bringing more new clients into the assisted channel next year.
As you may have seen from our recent announcements we entered into an industry, leading partnership with Microsoft to leverage its Azure open AI services, and leading Gen AI technology to fuel faster and better experiences for taxpayers.
While we had been building in house capabilities for some time, we believe we can further accelerate our progress by leveraging the most advanced AI models in the world.
While continuing to keep data security a top priority.
We will initially be focused on two areas.
First using gen AI to reduce expenses and increase productivity and second to deliver enhanced customer experiences.
We have dedicated teams working on these efforts and we are excited about the possibilities for H&R block.
Looking back over the last few years, we've made significant strides in our products services and features within our block horizon strategy and we're looking forward to what lies ahead.
Now, let me turn it over to Tony to discuss our financials and outlook. Thanks, Jeff Good afternoon, everyone.
Today I will review results for fiscal year, 'twenty, three provide detail on our outlook and share more on our strong capital allocation practice.
We delivered nearly $3 5 billion of revenue an increase of $9 million over last year.
The increase was due to higher U S assisted tax preparation revenues, partially offset by a decrease in Emerald card revenues.
As a reminder, the impact from the Emerald card was over $30 million due to the roll back of the advanced child tax credit.
We also had a negative foreign exchange impact of $19 million.
Given these variables I'm pleased they were able to grow the top line this year.
Total operating expenses were $2 7 billion.
An increase of approximately $5 million.
Primarily driven by higher field wages, and partially offset by lower consulting and outsourced services.
We saw about $5 million of savings from our footprint optimization efforts as we continue to eliminate unnecessary square footage.
Interest expense was $73 million, a decrease of $15 million or about 17% due to lower interest expense on our notes compared to last year, partially offset by higher interest expense on our line of credit due to higher interest rates and higher draws.
Other income increased $33 million.
Primarily due to higher interest income.
As we've discussed higher interest rates for a net benefit given our cash position throughout the year.
<unk> income was $711 million, an increase of $52 million or about 8%.
Earnings per share from continuing operations increased from $3 26 to $3 56.
And adjusted earnings per share from continuing operations increased from $3 51.
At $3 82 or.
Or 9%.
This is meaningful growth despite the aforementioned headwinds as well as our effective tax rate increasing from 15% to 21%.
Lastly, we acquired just over 200 franchise locations and 23.
We feel great about franchisees willingness to sell to US and are pleased with how this opportunity supports our longer term revenue growth.
As you can clearly see in our results our capital allocation story remains strong.
We completed another $200 million of share repurchases in the fourth quarter at an average price of $30 94.
After already completing $350 million of repurchases in the first half of the year.
In fiscal year 'twenty, three we retired 9% of shares outstanding at an average price of $37 59.
Over the last five years, we have reduced shares outstanding from $209 million to $146 million or approximately 32% of flow.
We continue to believe share repurchase is a great use of capital.
As Jeff mentioned earlier today, we also announced a 10% increase to the dividend over.
Over the last five years, we've increased the dividend by about 30%.
What is great about our capital allocation approach is that despite increase in the dividend. The total dollars paid has been decreasing because we've acquired so many shares which has created a nice flywheel.
As we've consistently shared we produced significant and stable cash flow pay a growing dividend and buyback a meaningful amount of shares.
Our goal is to return, 100% or more of free cash flow to shareholders annually.
This year alone, we generated over $700 million of free cash flow and returned a similar amount to shareholders.
For fiscal year 'twenty, three our free cash flow yield calculated as free cash flow divided by market cap was over 16%, which is more than three times the S&P 500.
Now turning to our fiscal year 'twenty for outlook.
First let me share more about the assumptions we've made.
We believe next year will return to typical industry growth of about 1%.
This is in line with the historical average and we do not foresee any industry dynamics that would change this assumption.
Data shows that stimulus filers are now behind US there are no major tax law changes anticipated.
And employment has remained strong this year, which is usually correlated to filers in the next year.
We are also assuming mean maintain overall U S tax market share, but our goal is always to increase share.
We expect to continue to take low single digit pricing as we successfully executed in fiscal year 'twenty three.
Our customer satisfaction scores specific to price for value have remained strong.
Additionally, we continue to see value in repurchasing franchise locations and remain committed to our capital allocation strategy with ongoing opportunistic share buybacks.
As a result, our fiscal year 'twenty four outlook is for revenue to be in the range of $3 53 billion to $3 $5 5 billion.
EBITDA to be in the range of $930 million to $965 million.
Our effective tax rate to be approximately 23% and.
And adjusted earnings per share to be in the range of $4 10.
To $4 30.
In summary, we feel great about how we are positioned with that I will turn it back over to Jeff for some closing remarks.
Thank you Tony as I reflect on the passing of another year 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 everywhere.
I'm looking forward to all we will accomplish in the next year and sharing our results for the first quarter in November .
Now operator, we will open the line for questions.
As a reminder to ask a question you will need to press star one one on your telephone again Thats Star one one on your telephone to ask a question to remove yourself from the question queue. You May Press Star one one again, please standby, while we compile the Q&A roster.
Our first question.
Comes from the line of Kartik Mehta of Northcoast research.
Hey, Jeff Hey, Tony.
Jeff I know you and Tony both said that you.
Page next year going back to kind of that normalized 1% total growth for tax returns I'm wondering.
What do you anticipate in terms of assisted and DIY.
Changes.
Growth.
Okay.
Hey, Kartik, Yeah, I mean, when we work through our assumptions for the year you know we always go through the normal thoughts what do we think about employment what do we think about potential changes from the IRS, what do we see in trends by channel.
And obviously you know.
It hasn't been a normal year for a while but as we look on the horizon anticipate.
<unk> been strong we've seen some general trends in the industry. We are not aware of any potential changes coming from the IRS and really those are the things that we put together about.
What we see the industry Don next year do you want to add anything Tony Yes, I mean your question about assisted versus DIY Kartik I think we believe assisted is going to be fairly flat.
Even though we had an unusual year in DIY. This year, we think over the long term DIY. It continues to grow a couple percent so probably a slight migration from.
Assisted to DIY.
Okay, and then for Tony obviously, you've been returning a lot of capital to shareholders.
A 10% dividend growth. This year was the dividend increase this year unusual or is that something that.
Yeah.
Would it be sustainable.
Okay.
Yes, I can take you and I think it's definitely sustainable I mean, we talked about our adjusted EPS growing 9%, we raised the dividend 10%. So essentially in line, obviously, it's a bigger dividend increase and we've been doing over the last few years, even though we've been increasing the dividend I think.
All else being equal we prefer to do share buybacks, given the flexibility and advantage. We can take when do we see volatility in the stock price.
But the fact that we can buy back shares which is obviously reducing shares outstanding and as I mentioned in my opening comments, we've actually been reducing.
Dividends paid in.
In total amount, so even though we've been increasing the dividend and even this amount going up 10%. This year I think youll see dividend dollars being flat to even slightly down which is I mentioned is creating that nice flywheel effect, which we think is very beneficial for shareholders.
Perfect. Thank you I appreciate it.
Thanks Kartik.
Thank you please standby for our next question.
Our next question.
Comes from the line of George Tong of Goldman Sachs.
Hi, Thanks, good afternoon.
To dive into some of your market share assumptions for next year can you talk a little bit about what youre assuming for share performance in the assisted and DIY categories.
With a particular focus on the assisted side. This past year you had lost some share in the lower income category. What are some internal initiatives to help improve that performance. Thank you.
George Great questions. Thank you this is Jeff I'll kick us off.
Yes, I think the starting point is the clarity about what happened. This year, we talked on the last call about the three reasons why we lost business in assisted this year.
The low income filers ITC in particular being a real focus for the teams as we prepare for next year in.
In simple terms, we think we have to do a better job of communicating our value proposition earlier in the year. When those consumers are most in the market looking for their refunds and I feel good as we sit here.
In August that the teams are very clear about what has to happen.
In terms of looking to next year at our share expectations. As we said in her opening comments, we expect assisted share ought to be flat, but we're always trying to grow share in assisted so it doesn't change our plans, it's just tempering our expectations and in DIY we.
We feel very good about the three pronged strategy that we took this year.
And we anticipate being able to continue to improve our performance and take share again in DIY next year.
Got it that's helpful. And then there are a number of moving parts in the broader tax prep industry two of which are.
The IRS free file program and generative AI can you talk about how internally if youre doing anything strategically.
Spots to these to the changing landscape and.
And how you would assess the potential impact of these two developments.
In this space.
Yeah, Yeah excellent again, so I mean first of all we're very excited about the opportunity with Gen AI and I want to start there we talked a little bit in our prepared remarks about this but.
We have dedicated teams who are absolutely leaning in in building integrations, given our partnership with Microsoft and open AI. Those initial two use cases, one on the expense side, one on the customer experience side.
Obviously, a lot more detail to share as we are ready to make those public specifically.
The technology is generally well understood the customer adoption is not.
So we're very excited to begin that learning journey by deploying two very specific use cases.
We've identified a number of use cases, and so based on that learning, we see real opportunity for the business in various parts.
More to come in detail, but I think the punch line is we're very excited about what it could mean, both in cost savings and customer experience and teams are leaning in and moving fast to get ready for the year.
On the IRS free file option in simple terms, we do not see it as a material threat to the business.
We know that there is a real concern about the irs's ability to ultimately market and support a product like this.
The ultimate cost to taxpayers of what that would entail.
And we've seen consumers make it clear that there really isn't a problem here there are over 30 organizations.
Tax prep companies and not for profits that are already offering free tax prep and so we standby those remarks and are very focused on building great experiences to continue to do what we do and with respect to Gen. AI like I said, we're very excited about that opportunity.
Got it thank you very much.
Thanks George.
Thank you.
Okay.
Yes.
Standby for our next question.
Yeah.
Our next question comes from the line of Scott Schneeberger of Oppenheimer <unk> company.
Thank you and good afternoon.
For my first question I want to touch upon the revenue guide for next year looks like it implies about 2% to 3% growth, which I think it's a little bit lower than what.
To which you aspire longer term more in the mid single digits.
So I guess the way outweigh I'll ask the question is what do you see.
Sure.
As the puts and takes the headwinds of tailwind in this upcoming year.
That have a little lower and.
The second part of this titles for you as is.
Slide 17, you talk about the assumptions that go with the first full five bullet four bullet points are all revenue related.
Industry growth market share low single digit pricing ongoing franchise acquisition could you rank order those so we get a sense of what's what are the bigger drivers of the <unk>.
The revenue growth.
For next year. Thank you.
Yes, Thanks, Scott, there's a lot in there I'll try to unpack and as I go through it.
Looking at 'twenty four.
Youre right I mean, our guidance is getting in the range that we set for the long term perspective of 3% to 6%.
But I think it's a little bit more moderated theres not a specific headwind that we're looking at which.
Which is contrary to what we saw in 'twenty three as we talked about going into 'twenty three we expected the impact of the Emerald card related to the rollback of the child tax credit.
A number of other things essentially being a headwind than we had to offset.
Obviously, we had a very unusual tax season in 'twenty, three and we're overlapping that we think in a return to normal.
So we don't have a crystal ball either so I feel like we've set the revenue outlook at a place that's achievable.
We've also set EBITDA outlook in a place thats growing faster.
<unk> faster than revenue.
And essentially said EPS outlook at growing 10%.
And I think all three of those combined I feel really great about the outlook and as we've talked about to get to more of the mid to higher end of the 3% to 6% revenue range. We have to have the imperatives delivering growth that we're still in the early innings up whether that be from spruce growing in services and small business doing things in <unk>.
Experience.
But even without those we have a business that's growing top line at a healthy level.
We've got EBITDA growing faster than EPS growing like I said double digits, which is which is incredible on top of 9% growth. This year and then one thing I said in the opening comments is we're overlapping a pretty incredible tax rate change I mean, we were about 15% ETR in 'twenty, two and 'twenty three we went up to 21%.
But there's still show EPS growth of 9% I feel really really good about.
As far as how do we stack rank these things.
Don't think in my head I have that completely clear I think all of them are additive I mean, it starts with having healthy client volume in both the assisted and DIY.
That's kind of the foundation, we then layer on pricing of low single digits as we've talked about the franchise buybacks can drive a point of revenue growth.
And then that is essentially the key drivers of revenue there are some other smaller puts and takes but those are those are the big ones.
But then we're obviously managing our expenses in a way that we can grow EBITDA faster than revenue and then obviously the last driver getting the EPS is is executing the share repurchase that that obviously, we have been doing consistently so that's how I think about it I think theres a lot of a lot of moving parts, but like I said at the end of the day growing EPS double digits is.
Pretty incredible feat and I feel good about it.
Thanks, Tony Good answer you've covered covered what I was looking for.
As a follow on to that what are you expecting for.
Expense inflation, you're obviously guiding EBITDA growth faster than revenue growth.
Just technology labor rent overhead marketing.
Anything changing dramatically year over year, there and how are you thinking about the inflation year over year, and you mentioned pricing.
Low single digits.
So just curious what the inflation assumption is on the cost side.
Yes.
Our default plan, assuming inflation I think it's a little more moderated versus what we had last year.
As you know Scott our largest expense line item, which is tax per labor is essentially variable with revenue. So no direct inflation impact, but when you look at things like full time wages have the broader team we're seeing those moderate in cost relative to where they were running in a year ago. We're also seeing.
Less turnover and less people, leaving little bit less competition in the broader labor market I think in some buckets like supplies and utilities will continue to see costs go up.
I'm hopeful and we built into our plan at a more moderated rate than what we were running that last year.
So I think youll see inflation, I think there'll be a little bit more moderated from what we saw last year. Obviously, we have to do things like think about what our bonus accrual is and other items as well, but overall.
Being able to grow.
Earnings faster than revenue as the ultimate goal and obviously, we've guided to that this year.
Thanks, and one more if I may maybe getting Jackson volunteer too.
Really curious what you saw in the extension season, the impact of the California, I know that we're not even up to that deadline, yet, but just since we last heard from you on a public call what have been the trends.
I assume a little bit better than expected you would get a little bit better than your guide but.
Just want to make one curious on your comments on this extension season versus last thank you.
Yes. Thank you I was feeling lonely Scott.
Yes.
Yes.
Yes, I mean, we specifically to California and extension seasons.
No that extensions were down generally this year and we experienced our share of that in California, We still expect that most of volume will come in closer to the deadline of October 15th we are keeping additional offices open.
To capture volume, but it's Tony always reminds me, we're not fully opened everywhere. So we're doing what we can to balance the expense side and the revenue side trying to capture our fair share and grow.
But most importantly, I think the teams are focused on just preparing based on the learning for this year to get ready to compete for tax season 'twenty four.
Thanks, so much.
Thank you.
Thank you.
I would now like to turn the conference back to Mikael at Galena for closing remarks Madam.
Thanks, Latif and thanks, everyone for joining us today, we look forward to speaking with you again next quarter.
This concludes today's conference call. Thank you for participating you may now disconnect.
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