H&R Block, Inc. (NYSE:HRB) Q1 2024 Earnings Call Transcript

H&R Block, Inc. (NYSE:HRB) Q1 2024 Earnings Call Transcript November 7, 2023

H&R Block, Inc. beats earnings expectations. Reported EPS is $-1.05, expectations were $-1.13.

Operator: Thank you for standing by, and welcome to H&R Block’s First Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [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 first quarter fiscal year 2024 financial results conference call. Joining me today are Jeff Jones, our President and Chief Executive Officer; and Tony Bowen, our Chief Financial Officer. Earlier today, we issued a press release and presentation, which can be downloaded or viewed live on our website at investors.hrblock.com. Our call is being broadcast and webcast live, and a replay of the webcast will be available for 90 days. Before we begin, I’d like to remind listeners that comments made by management may include forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties, and actual results could differ from those projected in any forward-looking statement due to numerous factors.

For a description of these risks and uncertainties, please see H&R Block’s annual report on Form 10-K and quarterly reports on Form 10-Q as updated periodically with our other SEC filings. Please note some metrics we’ll discuss today are presented on a non-GAAP basis. We reconciled the comparable GAAP and non-GAAP figures in the appendix of our presentation. Finally, the content of this call contains time-sensitive information accurate only as of today, November 7, 2023. H&R Block undertakes no obligation to revise or otherwise update any statements to reflect events or circumstances after the date of this call. With that, I will now turn it over to Jeff.

Jeff Jones: Thank you, Michaella. Good afternoon, everyone, and thanks for joining us. Today, I will begin with a summary of our Q1 results and provide an update on our Block Horizons strategic imperatives. Then Tony will discuss our financials, including the strength of our capital allocation and balance sheet. While we are early in the year and Q1 is a relatively small portion of our results, we had a good start and are reaffirming our fiscal ’24 outlook. We were pleased given that we lapped a very strong extended season last year and our share in both DIY and Assisted slightly improved throughout the year. With favorability in NAC, we grew revenue, continued to manage our expenses well and demonstrated ongoing progress on our Block Horizons strategy, which I’ll share more about in a moment.

We also continued our share repurchase program, buying $132 million in the quarter. Let’s go deeper into Block Horizons, beginning with small business, which includes small business tax and services and Wave. Assisted small business total revenue growth was 6% in the quarter, and we’re pleased with the early signals we are seeing in bookkeeping and payroll services which are growing double digits. We see a long runway of opportunity and are focused on continuing our momentum, which includes growing clients in both tax and services and driving business formations, which we launched last year. Overall, we feel good about the trajectory of small business. Turning to Wave. Revenue growth was 6% in Q1, which was in line with our expectations. As we’ve shared, we underwent a strategic review of the business when the new leader was put in place.

We now have a plan to accelerate revenue growth and put us on a path to profitability. Before I share those plans, I want to recap Wave’s current business model, which provides tremendous value for small business owners by offering free invoicing and accounting. Wave has monetized its platform primarily through payment processing as well as payroll and advisory services. We are now beginning a strategic shift to solve customer pain points that will deliver value and monetize more premium features. In the payment space, customers are wanting additional options beyond credit cards which Wave historically has not provided. Today, less than 30% of invoices sent by small businesses through Wave’s platform are enabled for credit card or bank payments.

Thus, there’s a significant opportunity to unlock value as we enable our customers to be paid via alternative methods and expand our share of wallet. We also see an opportunity to build other premium features that help our customers run their small business. Last quarter, we launched the mobile receipts feature, which is a monthly or annual subscription that generates additional recurring revenue. This product’s uptake has been better than expected and is a good example of where we’re heading. I am excited about the shifts we’re making and the opportunities we see in this business. Now I’ll move on to financial products. Regarding Spruce, recall that tax season ’23 was the first time the product was introduced in the Assisted channel. Our learnings have informed our actions for the next tax season, and we are continuing to drive innovation for the customer experience.

We’ve made the account creation and sign-up process more seamless in all our channels and deposit trends from customers utilizing Spruce to receive their payroll direct deposit continue to improve. As of September 30, we surpassed 300,000 sign-ups and had almost $400 million in customer deposits. In fiscal ’24, we are focused on efficiently acquiring clients at tax time, which includes the DIY flow and driving customer engagement within the app. Now let’s turn to Block experience. This imperative is all about blending digital tools with human health to provide better experiences for clients while empowering them to be served; however, they choose, fully virtual to fully in-person and everything in between. We have made a number of enhancements to MyBlock this year.

Within the app, clients will now have visibility of where they are at each stage of the tax prep process through a status tracker on their home page. In addition, we’ll be delivering a personalized checklist to help clients be better prepared for forms they will need and how to upload them ahead of time. The app will provide help at each stage with a call to action that recommends clients’ next step, whether uploading new documents getting help from one of our expert tax professionals or notifying them that is time to review their return which was made easier and faster to approve and sign online. Clients also have the ability to access their tax documents and return digitally which aligns with our new print-less strategy to reduce paper consumption in our offices.

This is a benefit for our clients results in cost savings and is one of the many ways we live our commitment to environmental sustainability. Another priority within Block experience is leaning into GenAI. As we’ve shared, we are initially focused on two areas: first, enhancing the customer experience; and second, reducing expenses and increasing productivity. In the DIY channel, we’re working on exciting innovations that will support our clients throughout the tax prep experience, and we are testing the ability to use AI to field customer calls. Over time, we believe these initiatives can result in meaningful cost savings but we are not assuming any this fiscal year as we are in initial testing phases. All in all, we’re making tangible progress through our partnership with Microsoft.

In fact, they recently highlighted our work to thought leaders and industry experts during the Envision tour in New York. As you can see, our team continues to make progress, and we are well-positioned to deliver results this year. Before turning it to Tony, I want to mention that we recently published our fourth annual environmental, social and governance report for fiscal year ’23, reflecting our ongoing commitment to transparency, sustainability and responsible business practices. I encourage you to visit our Investor Relations website to read it in full. With that, I will now pass things over to Tony to share more about our financial results.

Tony Bowen: Thanks, Jeff, and good afternoon, everyone. In Q1, we delivered $183.8 million of revenue, an increase of 2% or $3.8 million over the prior year. The increase was primarily due to higher U.S.-assisted tax preparation revenues driven by an increase in net average charge, partially offset by lower Emerald Card revenues. Total operating expenses were approximately $390 million, an increase of about 30 basis points or $1 million. Corporate wages and bad debt were higher and marketing and advertising as well as consulting expenses were lower than last year. EBITDA was a loss of approximately $166 million, an improvement of 3% or $6 million from the prior year. Interest expense was about $16 million, which is essentially unchanged to last year.

Pretax loss decreased by $9 million to $212.4 million, primarily due to higher revenues and interest income in the current year. Our effective tax rate was 23.3% compared to 24.4% last year. Loss per share from continuing operations was $1.11 compared to $1.05 last year, while adjusted loss per share from continuing operations was $1.05 compared to $0.99 last year due to fewer shares outstanding. As a reminder, in quarters with the loss, fewer shares outstanding increase loss per share but is accretive as we generate earnings for the full year. As Jeff shared, we had a good start to the year and are reaffirming our full year 2024 outlook and longer-term total shareholder return algorithm that calls for topline growth, EBITDA that outpaces revenue and EPS, it grows even faster.

Turning to Capital Allocation. Our practice remains robust. In Q1, we repurchased a total of 3.3 million shares for $132 million at an average price of $40.43. This retired another 2% of our float. Since 2016, we have reduced shares outstanding by over 38%. Additionally, last week, the Board of Directors declared our quarterly cash dividend. Since 2016, we have grown the dividend 60%, yet the total dollars paid out continue to decrease because of how quickly we are buying back shares. Given the macro environment and the expectation of high interest rates for the foreseeable future, I’d also like to share more about the strength of our balance sheet. We continue to feel great about our relatively low leverage with $1.5 billion of long-term debt against our over $900 million of EBITDA in the most recent year.

Our next debt maturity of $350 million isn’t until October of 2025, which is our smallest tranche and we don’t have another tranche maturing after that until 2028. As we’ve shared before, as interest rates rise, it benefits our P&L on a short-term basis, as our interest income from our cash position will exceed our short-term recurring interest expense for the full year. Overall, we feel very good about our balance sheet and how we are positioned in the current environment. In summary, our financial story is positive. We drive topline growth, EBITDA that outpaces revenue and EPS that grows even faster. We have strong capital allocation practices to reliably return value to shareholders, and our balance sheet positions us well for the macro trends.

With that, I will now hand it back over to Jeff for some closing remarks.

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

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Kartik Mehta of Northcoast Research.

Kartik Mehta: Jeff, just your thoughts on marketing as we go into next tax season, I know last tax season, you’re focused on DIY at least from the marketing eyes on. I’m wondering, as we go into this tax season, do you follow the same strategy, or does that change?

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

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

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

Operator: Our next question comes from the line of Scott Schneeberger of Oppenheimer & Company.

Scott Schneeberger: Can you hear me?

Jeff Jones: Yes, Scott, we got you.

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