H&R Block, Inc. (HRB) on Q3 2021 Results - Earnings Call Transcript

Operator: Ladies and gentlemen, thank you for standing by and welcome to the H&R Block Third Quarter Fiscal 2021 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. Please be advised that today’s conference maybe recorded. I would now like to hand the conference over to your host, Vice President of Finance and Investor Relations, Mr. Colby Brown. Colby Brown: Thank you. Good afternoon, everyone, and thank you for joining us to discuss our fiscal 2021 third quarter results. Jeff Jones: Thank you, Colby. Good afternoon, everyone. And thanks for joining us. I’m excited to provide an update today on the progress we’re making on our Block Horizons strategy, as well as some perspective on the first half of the tax season. Tony will follow with thoughts on our third quarter results, outlook for fiscal ‘21, and additional detail on our strategic investments. So, let’s jump right in. Following our Investor Day in December, we’ve connected with many of you and have enjoyed hearing your perspectives. Based on these conversations, I thought it would be helpful to start with an update on Block Horizons, our long-term strategy focused on three imperatives: Small business; financial products; and block experience. As a reminder, small business and financial products are both categories with structural tailwinds, where we have a right to compete, and advantages that will help us win. While these have been components of our business for years, historically, we haven’t made a concerted effort to target either opportunity. By leveraging our trusted brand, client relationships and technology platform, we will accelerate growth in both areas. Over the next five years, they will become a more meaningful part of our business, helping to balance our current once a year purchase frequency. And given our existing assets in these areas, these will not require significant investment, as Tony will outline in more detail later. Tony Bowen: Thanks, Jeff. Good afternoon, everyone. Today, I’ll provide an update on our third quarter results, thoughts on our outlook for the fiscal year and additional color on the investments we’re making to support our strategic imperatives. Starting with the third quarter, our results were significantly impacted by the delayed start to the tax season, which resulted in industry-wide shift to returns from the first half into the second half. This resulted in both, lower return volume through January as well as a deferral of revenue related to the efile open date moving to February. As a result, we reported revenue of $308 million for our third quarter, a decline of 41%. This was primarily related to the delayed return volume, while approximately $69 million was due to the deferral of tax prep fees and the delayed recognition of refund transfer fees to Q4. Partially offsetting this decline was continued strong performance at Wave, where we posted an increase of over 30% for the second consecutive quarter. Additionally, Emerald Card revenue improved due to additional loads from the second round of stimulus in January, and we saw improved performance in our international businesses. Jeff Jones: Thanks, Tony. Before Q&A, I’d like to take a moment to thank our franchisees, tax pros and associates who continue to deliver for our customers and who deserve all the credit for the progress we’re making on Block Horizons. The dedication and resolve they’ve shown over the past 12 months are truly remarkable. I’m confident in where H&R Block is heading. We’re redefining the tax category, blending human expertise and care with technology and data, delivering more value for our customers, and we’re making good progress in our small business and financial product strategic imperatives, which will be key growth drivers in the future. We’re not only poised to deliver on this year’s outlook, but are also well-positioned for an even stronger future. I look forward to sharing more with you when we report our full year results in June. With that, we’ll now open the line for questions. Operator? Operator: Thank you. Our first question comes from the line of Jeff Silber of BMO Capital Markets. Jeff Silber: Thank you so much. I appreciate the color. I just was wondering on your reiteration of your financial outlook for this year. If you can give us some color on what we should expect from both a volume and a net average charge perspective by your different product lines? Thanks. Jeff Jones: Hey Jeff, it’s Jeff Jones. I’ll start us off and Tony can tag team on if he wants. So, as part of our overall financial outlook for the year, we expect to hold share in the assisted business. We like where we’re positioned today. Obviously, a lot of business left, but we think we’re on track to do that. We expect to grow share in the DIY business, really building on the strength of this combination of a great competitive pricing, much improved product and continuing to build awareness of that offering in the market. With respect to pricing, again, I’ll split it out. This is another year where we have held NAC flat in the assisted business. And we believe as we pay close attention to client satisfaction scores that continue to be very strong that clients are seeing the value for price paid, and we expect to be able to get back to inflationary level price increases moving forward. In the DIY business, this was a year where we felt our price advantage versus our largest competitor had gotten too great. And so, we intentionally took price in DIY this year, and you can see that starting to play out in the results to date. Jeff Silber: Okay. That’s really helpful. I appreciate it. I know we were only a couple of weeks or two, three weeks in the tax season. And I know sometimes comparisons to the IRS data are a little bit misleading. But, based on what you know, do you think you gained share in both channels so far this tax season? Jeff Jones: So far, this season, we’re really pleased with our results. We like where we are. To your point, there’s a lot of noise, given the delay in the season. And when we look ahead to the balance of the season, we know we have to continue to execute the playbook. It’s the right value continuing to reiterate the digital capabilities. We’re seeing nice consumer uptake of our virtual capabilities. We’re seeing DIY clients continue to upgrade into human health. So really, all of those things, we feel good about the progress, and we like where we stand so far in the season. Operator: Our next question comes from Jeff Goldstein of Morgan Stanley. Jeff Goldstein: Hey guys. Can you add some more color about what you’re seeing in terms of the assisted customer base so far? So, is it new customers? Is it better retention of existing customers? And then, are there more people coming to the platform because tax situations have gotten more difficult, given COVID and things like working from home or maybe opening a new brokerage account? Just anything to call out on the trends and demographics of what you’re seeing in the assisted channel. Jeff Jones: Yes. Jeff, you had a number of little nuance questions there. Let me see if I can catch them all. But, I think just in general, in the assisted channel, we continue to see nice uptake of our digital capabilities. We think that’s a reflection probably of some of the pandemic and just people embracing new ways of doing their taxes. We also see about 50% of all of our new clients in assisted being millennial. We think that’s another important demographic shift that we have seen for a couple of years. That remains true. What else -- what other pieces do -- Tony? Tony Bowen: Well, yes. I mean, the one thing I would mention is, when we look at our performance of new and prior, Jeff, news are doing relatively well. So, we know we’re attracting incremental new clients of the brand, which is a really good sign. Our market share right now looks really strong on the assisted side, but we also know that we over-indexed in market share earlier in the season. And with the tax season being delayed, comparability year-over-year is a little bit unusual. Obviously, that will moderate a bit by the end. But to Jeff’s point, a really good start across the business, and there’s a lot of positive metrics to point to, but we also know there’s a lot of tax season to go, and we’re preparing to execute. Jeff Goldstein: Okay. That’s all very helpful. And then, this may fall under what you said about long-term baseline earnings and giving guidance later this year, but I just wanted to ask it a slightly different way. So, if you look at the EBITDA guide for the year, and I know it’s an odd year, given the tax deadline shift. But if you normalize it, it seems like you’re below the EBITDA margin you were at in 2019. So, maybe just high level, you could talk about the puts and takes there? Is it conservatism? Is it investments around some of the new initiatives? Maybe just help us through kind of like the EBITDA bridge from then to now? And anything you could talk about moving forward? Thanks. Tony Bowen: Yes. It’s a great question, Jeff. And there have been a lot of moving parts from FY19 to FY21, for sure. I think, one of the things I would call out is, in this year, obviously, we’re talking about it relative to outlook, to your first point. We also know that this year is going to include some onetime expenses related to COVID that I don’t view as kind of run rate, and that’s some of the things that we’ll adjust out for when we get to the end of the year, because there are a lot of unusual things when we think about compensation being higher this year due to a lot of the tax season happening in Q1, and obviously, a full tax season happening in part of Q3 and into Q4. We’ve also had some expenses related to some of the things we’ve done in our offices around sick leave as well as just buying different materials to keep our clients and associates safe. So, all of those things add up and I think are impacting our margin. When we think about comparing back to FY19, that’s probably a longer conversation because there have been a lot of moving parts. Part of this is the client volume and change from FY19 through FY21. As we talked about last year, we were really pleased with how we ended the tax season in both assisted and DIY, but we’re operating with a suboptimal network for a good portion of the tax season. Where we didn’t have all of our offices open, we didn’t have all of our tax pros at full force, and that definitely resulted in some modest client decline that is now built into the new baseline going forward. We’ll see where we end this year. But those are all pieces of the puzzle that help kind of connect the dots from FY19 to FY21. Operator: Our next question comes from Scott Schneeberger of Oppenheimer. Scott Schneeberger: I guess, for first question, DIY, the net average charge change plus 15% year-over-year, which is very strong. Jeff, you referenced narrowing the gap with the leader in the industry. But this year, you didn’t really raise rates on your products. So, I’m curious, could you break down a little bit more what’s driving the NAC? Is it less free returns is what’s driving the mix, or I think you did increase price or rate in self-employed. Is that particularly strong? If we could just call a level deeper on that, please. Thanks. Jeff Jones: Yes. I think you really hit on a couple of the things that are driving that increase was having more people move into Deluxe was a piece of the puzzle. Self-employed, as you commented on, those were all intentional strategies to grow NAC this year. If you take a step back, we believe that it’s important for us to maintain a price advantage, but we just saw that gap widening. So, these are some of the first moves we’ve made to start to close that gap and you’re seeing that reflected in the NAC improvements in DIY so far. Scott Schneeberger: And Jeff, following on that. You mentioned just now a move up, presumably from basic or free to Deluxe, do you view this as primarily the dynamic of a lot of new brokerage accounts being opened? And it’s my understanding that if someone has some stock transactions, that would drive them into premium as opposed to Deluxe. Could you just speak a little bit to the tier level? And what’s being delivered by new brokerage accounts? Do you see that as a meaningful driver of the tiering up? And also, if you can qualify what effects and which tier level? Jeff Jones: Yes. We’re obviously aware of just the growth in retail investors and what that’s meant to brokerage accounts so far in the pandemic. We tend to under index in those type of clients, in general. So, that’s not really a driving force behind the move from free to Deluxe in our product. Tony Bowen: Yes. And the other thing I would add, Scott, is we aren’t seeing a lot of those type of clients, so far the season either. A lot of those brokerage statements come out later. So, even if that’s a bit of a driver by the end, we aren’t seeing a lot of that early on. I think, it really is the upgrade triggers that we have in the free product and across the lineup that’s causing clients to upgrade is one of the main drivers of the NAC increase for sure. The other thing I’d point out is Online Assist increased take rate as well as obviously a big tailwind for NAC as well. Scott Schneeberger: Sounds good, Tony. And just one more, if I could follow-up. How are you with -- in the assisted, how are your stores open? There were times last year due to COVID that you had half of the platform was unavailable to be open. You’re doing a great job with this hybrid model of digital and store front. But just curious, how open are you if you can compare to last year during the COVID period, how open are you as far as store fronts? Jeff Jones: Yes. Great question, and you have good memory as well. That’s exactly right. Last year, there was not a single office open in what we would call normal and about half the network was closed. This year, the network is open. What we’re dealing with this year in a much, much more minor way, are those states that have capacity restrictions, where they limit the number of people based on the square footage of the location, that hasn’t presented as a major issue at all to this point in the season, but that’s the degree that we’re operating in COVID situation is state level capacity restrictions. Operator: Our next question comes from the line of Kartik Mehta of Northcoast Research. Please go ahead. Kartik Mehta: Hey Jeff and Tony. Jeff, as you look at the season, I know it’s early, but your thoughts on kind of how -- what type of transition or mix we’ll see from assisted and DIY standpoint? Any change from the past, or any change in your expectations for the growth rate of those two segments? Jeff Jones: Yes, Kartik, for sure. Let me kick us off. Before I talk about the mix, I mean, obviously, we’re focused on the total market to compete in, and we’re focused on continuing to digitize the assisted business and continuing to offer human help in the DIY business. So, we literally see those lines continuing to blur. I think, it’s also important to remember that we always see any migration that happens being greater in the early part of the season. And then, every year, that moderates to a much different level toward the end of the season. We’re seeing that happen now. In just the last week, we’ve seen it moderate over 100 basis points headed in the direction that it’s headed in every year. And the final point I’d make about it, I guess, until I hear your follow-up is, we are really the only business that has a large assisted business and a large DIY business, and we’re not seeing any signs in our own data of a major shift from one channel to the other. Kartik Mehta: And Jeff, just -- I know this might be way too early, but I’m curious on your Emerald Card. Obviously, you’re trying and you have improved that product. Any signs or statistics that you can talk about that could show that consumers are using it just for more than getting their tax refund and taking that and spending that tax refund? Jeff Jones: Yes. And I appreciate the question a lot because I want to make sure to distinguish what we’re doing this year with Emerald Card versus what we’re building is separate from Emerald Card for the future when we talk about financial products because those are really different things. This year in Emerald Card, as Tony mentioned, we definitely saw some benefit from stimulus payments being loaded onto the card. This year, we enabled the ability to digitally provision the card into Google Pay or Apple Pay, and we’ve seen a significant increase in the usage of the card as it relates to that. That’s this year. That’s quite different than building a fully featured mobile bank that we’re in development and now, and that will start to launch in iterations over the next year. And a lot more to say on that as we get deeper into the next year, but I just wanted to make sure to draw that distinction. Operator: Our next question comes from Hamzah Mazari of Jefferies. Please go ahead. Hamzah Mazari: You touched on this in your prepared remarks a little bit and in the Q&A, but just kind of flushing it out a little bit. With the line blurring between DIY and assisted, what exactly are the implications to your business? Does the store base shrink a lot? How do you handle that? I know it’s early innings, but just thoughts as to how that impacts your business from just a margin standpoint. I know the net average charge matters too in both of those businesses, but just any thoughts there would be great. Jeff Jones: Absolutely, and let me try to hit a few points, which I think are all real potential implications for the business. I think, I would start with an important choice we made for this year on NAC and assisted that was different from our past, and that was that the consumer will pay the assisted price, no matter how many digital capabilities they use. So, using digital is not a downgrade in NAC for assisted clients. If you start as a DIY client, given the take rate we’re seeing with Online Assist and with Tax Pro Review, that’s an important add-on to NAC in the DIY business. So, the more digital capabilities in human help get blurred, the more we see positive benefit in really both our assisted and DIY businesses. Specifically, in the assisted business, we’ve really been focusing on building capabilities to serve the client, frankly, faster than consumer demand has been happening over the last few years. So, we think we’re in a really good position now with ability to digitally upload your docs to have video and chat with tax pros, to approve and pay online, using MyBlock as the centerpiece to that. We’re paying close attention to consumer adoption because the business benefit as we see the consumer take rate accelerate is our ability to look closely at the physical retail footprint. As we’ve talked about, that footprint is 100% leased. And every year, we have flexibility to open, close or reposition. And then, the second is with respect to labor utilization, both the number of pros and how those pros are deployed when you’re not limited to a physical environment. So, really important upside in the P&L, important impact to margin, and that’s why we’re paying such close attention to building the right capabilities that can shape consumer behavior over time. Hamzah Mazari: Got it. Very helpful. And just my follow-up question is just around -- it’s more of a clarification. I think, you had said M&A is not part of the core strategy. Does that mean you just don’t need to do M&A to sort of execute on the strategy around either financial products specifically or small business? I know you did Waive a while back, but just any thoughts on M&A there? Jeff Jones: Yes. So, the important message we want to leave everyone with is a Block Horizons strategy is not a strategy dependent on M&A. We also know and we’ve talked about that we will stay open if we see capabilities that would accelerate our growth in small business or financial products and that they made the right financial sense, they generated the right returns for the business. We are open to those, but we’re not trying to build an M&A dependent growth strategy. And that’s how we’ve tried to be transparent on both sides of that question. Operator: Our next question comes from George Tong of Goldman Sachs. George Tong: The tax season this year was delayed because the IRS accepted the efile just a little bit later. Could you estimate perhaps, how much revenue and volumes were shifted from fiscal 3Q to fiscal 4Q due to the delayed start based on prior years and based on what you’re seeing so far this tax season? Tony Bowen: Yes. George, I don’t know if I have the exact way -- the number, the exact way that you ask it. I mean, what we shared in the opening comments was for the volume we did do, and the tax returns, we already essentially processed through the Q3 period, it was about $69 million of revenue that was directly shifted to Q4 because of the efile delay alone. I think, the bigger part of it is the delay of the overall tax season. And that, I would just refer to you to look at the volume released by the IRS and then our volume tables as well. I mean, the IRS is still showing, whether it’s 20% to 30% decline across the industry. So, there’s obviously a large volume delay that is now starting to catch up. We see that on a week-over-week basis based on the data the IRS is released. But that would be the bigger impact, I think, for us in the overall industry through that January 31 period. George Tong: And I guess just as a follow-up to that, perhaps in the season that you’ve seen so far, could you talk a little bit about how competitors are responding with respect to price in assisted? How competitive pricing is? And how HRB intends to respond with its go-to-market as it relates to pricing? Jeff Jones: Yes, George, I’ll kick that off, and Tony can add in. Our pricing strategy in the assisted business is unchanged for this year. We feel very good about the reset we did a couple of years ago. We feel very good about the client feedback we’re getting year-over-year in the value for price paid. And we feel very good about the results that we’re starting to see in terms of attracting new clients and where we’re at from a share position. As we’ve talked before, we’re not trying to be the low price provider. There will always be local competitors that offer a lower price. That’s not where we’re trying to play. And I think you’ll also see from time to time, different promotions that will be offered in the market. But, we’re focused on building a strong value offering that’s not dependent on lowering price more and is trying to stay out of the high-low promotion game that you see others playing. But again, we feel very good about our results and the clients that are choosing Block. Tony Bowen: Yes, nothing to add. I think that was well said. Operator: Our next question comes from Michael Millman of Millman Research. Please go ahead. Michael Millman: Thank you. So, a couple of things. One, are you seeing any impact from into -- basically getting into assisted? And if so, how much? Secondly, this is the second year that we’ve had the virus come, be strong, at least around the heart of the tax season, with the people who now had two years sitting at home doing their taxes, say, kind of may as well continue to do this and change the long-term slope of the business? Jeff Jones: Yes. Mike, I’ll jump in first. I think, on your first question, we feel very good about our leadership stand in the assisted business, adding the digital capabilities that we’re adding, the results that we’re seeing, the client satisfaction scores, improvements year-over-year. I think when it’s all said and done, we’ll report our business, perhaps they’ll report their business and break out their volume in assisted, who knows. But, where we stand right now, we feel very good about the progress we’re making year-over-year and where we are in the assisted business. And your second question is just impact of the pandemic, and is that causing a migration between channels, I think, is the essence of your question. And every year at this time, we see the shift being a bit higher. That has always moderated every year to be much lower by the end of the season. We’re already seeing that happen. There’s been over 100 basis points moderation just in the last week in terms of that migration. And then, I think the final point I’d reiterate is, given that we have business in both the assisted and DIY categories, we’re not seeing any significant shift from one channel to the other season-to-date as a result of COVID. Tony Bowen: And the only thing I would add on, Jeff, is last year, if we look at the assisted category, through October 15th, it essentially ended flat. So, despite there being an incredible environment where people were forced to stay at home, encouraged to stay at home, I think it showed the resilience of the industry. And we’ll see where this year ends, but we’re seeing a lot of demand for our assisted products. And to Jeff’s point, we’ve got the ability to see it across both business lines, and just doesn’t feel like there’s a big shift in how people think about doing their taxes. Michael Millman: And just one quick follow-up. If -- as the chatter suggests and you’re kind of suggesting that we have now the July 15th, will this increase your costs kind of in the same way last year, or is that already built into your forecast? Jeff Jones: Yes. Obviously, we’re paying close attention to all the same chattered and headlines. We don’t see a reason to delay from a consumer perspective, but we respect everything the IRS has on their plate. When that decision gets made, if that decision gets made, there’s a number of things that we’ll have to evaluate. When is the decision made? What is the ultimate date of the extension? Is it the same as last year? How much business remains? And then, we’ll have to reforecast our business to execute against that remaining part of the business. Obviously, it’s the second year in a row. If that happens, we would go through that process. So, I would expect this to be smarter this year as we’ve been through it once. Tony Bowen: Yes. I mean, we said this in the opening comments, but the outlook we provided was assuming the tax season ends April 15. So, to your point, Michael, if that gets pushed out, and there’s not only expenses that would get pushed into Q1, but also revenue. Last year, we were in the middle of the pandemic and people, again, were forced to stay at home. So, even though the tax season is extended, we may not see the same level of volume shift that we saw last year. But, if it were to happen, who knows, obviously, still a lot of questions up in the air. Operator: Thank you. At this time, I’d like to turn the call back over to Colby Brown for closing remarks. Sir? Colby Brown: All right. Thanks, Latif. And thanks, everyone, for joining us. This will conclude today’s call. Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.
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H&R Block Shares Gain 5% on Q4 Beat, Raises Dividend

H&R Block (NYSE:HRB) released its fourth-quarter results today, surpassing the consensus expectations. Following the announcement, shares rose more than 5% after-hours.

The tax preparation firm disclosed that it achieved an adjusted EPS of $2.05, with revenue amounting to $1.03 billion. These figures exceeded the predictions of Wall Street analysts, who had anticipated earnings of $1.88 per share on revenue totaling $1.01 billion.

As it looks forward to the fiscal year 2024, the company anticipates an adjusted EPS falling within the range of $4.10 to $4.30, while revenue is projected to be between $3.53 billion and $3.59 billion. Wall Street analysts had predicted earnings of $4.01 per share on revenue of $3.57 billion.

Furthermore, the company also announced a 10% increase in its dividend.