H&R Block - Q4 2023

Transcript

Operator (participant)

Thank you for standing by, and welcome to H&R Block's full year 2023 financial results 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 one on your telephone. To remove yourself from the question queue, press star one one again. I would now like to hand the call over to Michaela Gallina, Vice President, Investor Relations. Please go ahead.

Michaela Gallina (VP of Investor Relations)

Thank you, Latif. Good afternoon, everyone, and welcome to H&R Block's 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 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've reconciled the comparable GAAP and non-GAAP figures in the appendix of our presentation. Finally, the content of this call contains time-sensitive information, accurate only as of today, 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 Jeff.

Jeff Jones (President and CEO)

Thanks, Michaela. Today, we'll provide an update on our fiscal year 2023 results. I'll share more on the progress we continue to make within our Block Horizons strategy, provide initial thoughts on fiscal year 2024, 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. Small business tax continued to be a growth driver, we also added about 150,000 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 today announced a 10% increase to the dividend. Entering fiscal year 2024, we are well-positioned and expect a 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, or NAC, which grew 5%. We also see a nice runway of longer-term opportunities and services. While early, bookkeeping and payroll are gaining traction, and 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, reducing manual bookkeeping. Its uptake has been faster than anticipated, and we are now working on a robust roadmap of other new features to roll out in the coming months. Moving on to 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 have had 300,000 sign-ups and $334 million in customer deposits. Spruce is committed to helping customers be good with money, and we're seeing progress toward that impact goal. A higher percentage of users are now saving money, and the balances accumulating in 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. Feedback 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 2.5% through April 30, and 35 basis points of share growth. We are looking forward to continuing this momentum in fiscal 2024. In Assisted, through April 30, we successfully increased company NAC by 4% while receiving strong customer satisfaction metrics. We also attracted higher-income clients and saw over 10% growth in those with more than $100,000 of income. As we shared last quarter, we continue to see progress in the adoption of virtual tools.

Although we saw stimulus filers return 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 announcement, we entered into an industry-leading partnership with Microsoft to leverage its Azure OpenAI Services in leading GenAI technology to fuel faster and better experiences for taxpayers. While we have 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 GenAI 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 Horizons strategy, and we're looking forward to what lies ahead. Now, let me turn it over to Tony to discuss our financials and outlook.

Tony Bowen (CFO)

Thanks, Jeff. Good afternoon, everyone. Today, I'll review results for fiscal year 2023, 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 rollback of the advanced Child Tax Credit. We also had a negative foreign exchange impact of $19 million. Given these variables, I'm pleased that we're 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 were a net benefit given our cash position throughout the year. Pre-tax income was $711 million, an increase of $52 million, or about 8%.

Earnings per share from continuing operations increased from $3.26-$3.56, and adjusted earnings per share from continuing operations increased from $3.51-$3.82, or 9%. This is meaningful growth despite the aforementioned headwinds, as well as our effective tax rate increasing from 15%-21%. Lastly, we acquired just over 200 franchise locations in 2023. 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 repurchases in the first half of the year. In fiscal year 2023, 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-146 million, or approximately 32% of float. 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 the last five years, we've increased the dividend by about 30%. What is great about the capital allocation approach is that despite increasing the dividend, the total dollars paid has been decreasing because we have acquired so many shares, which has created a nice flywheel. As we've consistently shared, we produce significant and stable cash flow, pay a growing dividend, and buy back 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 2023, our free cash flow yield, calculated as free cash flow divided by market cap, was over 16%, which is more than 3x the S&P 500. Turning to our fiscal year 2024 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 we 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 23. Our customer satisfaction scores specific to price or 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 2024 outlook is for revenue to be in the range of $3.53 billion-$3.585 billion, EBITDA to be in the range of $930 million-$965 million, our effective tax rate to be approximately 23%, and adjusted earnings per share to be in the range of $4.10-$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.

Jeff Jones (President and CEO)

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.

Operator (participant)

As a reminder, to ask a question, you will need to press star one one on your telephone. Again, that's 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 stand by while we compile the Q&A roster. Our first question comes from the line of Kartik Mehta of Northcoast Research.

Kartik Mehta (Executive Managing Director and Director of Research)

Hey, Jeff. Hey, Tony. Jeff, I know you and Tony both said that, you anticipate, next year going back to kind of that normalized 1%, total growth for tax returns. I'm wondering, what you anticipate in terms of assisted and DIY, changes or growth?

Jeff Jones (President and CEO)

Hey, Kartik. Yeah, I mean, when we work through our assumptions for the year, you know, we always go through the, the normal, 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 you know, obviously, you know, it hasn't been a normal year for a while, but as we look on the horizon and anticipate, employment's 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, you know, what we see the industry doing next year. Do you wanna add anything, Tony?

Tony Bowen (CFO)

Yeah, I mean, your question about assisted versus DIY, Kartik, I think we believe assisted is gonna be fairly flat. you know, even though we had an unusual year in DIY this year, we think over the long term, DIY continues to grow a couple %, so probably a slight migration from assisted to DIY.

Kartik Mehta (Executive Managing Director and Director of Research)

Yeah, then Jeff or Tony, obviously, you've been returning a lot of capital to shareholders. You had a 10% dividend growth this year. Was the dividend increase this year unusual, or is that something that would it be sustainable?

Tony Bowen (CFO)

Yeah, I can take it. 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 than we've been doing over the last few years, even though we've been increasing the dividend. I think, you know, all else being equal, we prefer to do share buybacks, given the flexibility and the advantage we can take when we see volatility in the stock price. 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 total amount.

Even though we've been increasing the dividend and even this amount going up 10% this year, I think you'll see dividend dollars being flat to even slightly down, which, as I mentioned, is creating that nice flywheel effect, which we think is very beneficial for shareholders.

Kartik Mehta (Executive Managing Director and Director of Research)

Perfect. Thank you. I appreciate it.

Jeff Jones (President and CEO)

Thanks, Kartik.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of George Tong of Goldman Sachs.

George Tong (Business and Information Services Analyst)

Hi, thanks. Good afternoon. wanted to dive into some of your market share assumptions for next year. Can you talk a little bit about what you're assuming for share performance in the assisted and DIY categories? and with the 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.

Jeff Jones (President and CEO)

George, great questions. Thank you. This is Jeff. I'll kick us off. Yeah, I think, you know, the starting point is the clarity about what happened this year. You know, we talked on the last call about the three reasons why we lost business in assisted this year. The low-income filers, EITC in particular, being a real focus for the teams as we prepare for next year. 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. I feel good as we sit here, you know, in August, that the teams are very clear about what has to happen.

In terms of looking to next year and our share expectations, you know, as we said in our opening comments, you know, we expect assisted share to be flat, but we're always trying to grow share in assisted. It doesn't change our plans, it's just tempering our expectations. In DIY, you know, 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.

George Tong (Business and Information Services Analyst)

Got it. That's helpful. There are a number of moving parts in the broader tax prep industry, two of which are the IRS's Free File program and Generative AI. Can you talk about how internally, if you're doing anything strategically to in response to these, the to the changing landscape and how you would assess the potential impact of these two developments in this, in the space?

Jeff Jones (President and CEO)

Yeah. Yeah, excellent again. I mean, first of all, we're very excited about the opportunity with GenAI, and I wanna start there. You know, 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 OpenAI, 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're ready to make those public specifically. You know, the technology is generally well understood, the customer adoption is not. We're very excited to begin that learning journey by deploying two very specific use cases. We've identified a number of use cases, based on that learning, we see real opportunity for the business in various parts.

More to come in detail, but I think the punchline 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. You know, we, we know that there's real concern about the IRS's ability to ultimately market and support a product like this, the, 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.

So, you know, we stand by those remarks and are very focused on building great experiences to continue to do what we do. With respect to GenAI, like I said, we're very excited about that opportunity.

George Tong (Business and Information Services Analyst)

Got it. Thank you very much.

Jeff Jones (President and CEO)

Thanks, George.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Scott Schneeberger of Oppenheimer and Company.

Scott Schneeberger (Managing Director and Senior Analyst)

Thank you. Good afternoon. For my first question, I wanna touch upon the revenue guide for next year. Looks like it implies about 2%-3% growth, which I think is a little bit lower than what to which you aspire longer term, more in the mid-single digits. So I, I guess the way I'll, way I'll ask the question is: What do you see as, as, as the puts and takes, the headwinds, the tailwinds in this upcoming year that have you a little lower? The second part of this, and I probably turn this for you, is, is on your 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 of the revenue growth for next year? Thank you.

Tony Bowen (CFO)

Yeah, thanks, Scott. There's a lot in there, as I'll try to unpack it as I go through it. I mean, looking at 2024, you're, you're right. I mean, our guidance is getting in the range that we set from a long-term perspective of 3%-6%. I think it's a little bit more moderated. There's not a specific headwind that we're looking at, you know, which is contrary to what we saw in 2023. As we talked about going into 2023, we expected the impact of the Emerald Card related to the rollback of the Child Tax Credit and a number of other things, you know, essentially being a headwind that we had to offset. Obviously, we had a very unusual tax season in 2023, and we're overlapping that. We think it'll return to normal, but obviously, we don't have a crystal ball either.

I, I feel like we've set the revenue outlook at a place that's achievable. We've also set EBITDA outlook at a place that's growing faster than revenue and, you know, essentially set EPS outlook at growing 10%. I think all three of those combined, I feel really great about the outlook. You know, as we've talked about, to get to more of the mid to higher end of the 3%-6% revenue range, we have to have the imperatives delivering growth that we're still in the early innings of, whether that be from Spruce, growing in services and small business, doing things, you know, in, in Block Experience. You know, even without those, we have a business that's growing top line at a healthy level.

We've got EBITDA growing faster and EPS growing, like I said, double digits, which is, which is incredible, on top of 9% growth this year. The one thing I said in the opening comments is, you know, we're overlapping a pretty incredible tax rate change. I mean, we were about a 15% ETR in 2022, and then in 2023, we went up to, you know, 21%. To still show EPS growth of 9%, I feel really, really good about. As far as, you know, how do we stack rank these things? You know, I, I don't think I've-- 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 assisted and DIY. I mean, that's kind of the, the foundation.

We then layer on pricing of, you know, low single digits, as we've talked about. The franchise buybacks can drive, you know, a point of revenue growth. You know, that's essentially the key drivers of revenue. There are some other smaller puts and takes, but those are, those are the big ones. We're obviously managing our expenses in a way that we can grow EBITDA faster than revenue. Obviously, the last driver getting to EPS is, is executing the share repurchase that, that obviously we've been doing consistently. That's how I think about it. I think there's a lot of, a lot of moving parts, but like I said, at the end of the day, growing EPS double digits is a pretty incredible feat, and I feel good about it.

Scott Schneeberger (Managing Director and Senior Analyst)

Thanks, Tony. Good answer. You covered covered what I was looking for. As a follow-on to that, what are you expecting for, you know, 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? How are you thinking about the inflation year-over-year? You know, you mentioned pricing of, of low single digits, just curious what the inflation assumption is on the cost side.

Tony Bowen (CFO)

Yeah, we're definitely 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 pro labor, is essentially variable with revenue, so no direct inflation impact. When you look at things like full-time wages of the broader team, we're seeing those moderate in cost relative to what they were running a year ago. We're also seeing, you know, less turnover and less people leaving, a little bit less competition in the, in the broader labor market. I think in some buckets, like supplies and utilities, we'll continue to see costs go up, but I'm, I'm hopeful, and we built into our plan at a more moderated rate than what we were running at last year. I think you'll see inflation.

I think it'll be a little bit more moderated from what we saw last year. Obviously, we have to do things like think about what our, you know, bonus accrual is and other items as well. Overall, you know, being able to grow earnings faster than revenue is the ultimate goal, and obviously, we've guided to that this year.

Scott Schneeberger (Managing Director and Senior Analyst)

Thanks. One more, if I may, maybe getting Jeff involved here, too. Really curious what you saw in the extension season, the impact of 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 did a little bit better than your guide, but, just wanna, curious on your comments on this extension season versus last. Thank you.

Jeff Jones (President and CEO)

Yeah. Thank you. I was feeling lonely, Scott. I appreciate that. Yeah, I mean, we specifically to California in extension seasons, I mean, we, we know that extensions were down generally this year, and we experienced our, our share of that. In California, we still expect that most volume will come in closer to the deadline of October 15th. We are keeping additional offices open, to capture volume, you know, but as Tony always reminds me, we're not fully open everywhere. You know, we're, we're doing what we can to balance the expense side and the revenue side, trying to capture our fair share and grow. 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 2024.

Scott Schneeberger (Managing Director and Senior Analyst)

Thanks very much.

Jeff Jones (President and CEO)

Thank you.

Operator (participant)

Thank you. I would now like to turn the conference back to Michaela Gallina for closing remarks. Madam?

Michaela Gallina (VP of Investor Relations)

Thanks, Latif, and thanks everyone for joining us today. We look forward to speaking with you again next quarter.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.