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H&R Block, Inc. (HRB) Q2 2024 Earnings Call Transcript

H&R Block, Inc. (HRB)

Q2 2024 Earnings Conference Call

Company Participants

Michaella Gallina - Vice President of Investor Relations

Jeff Jones - President and Chief Executive Officer

Tony Bowen - Chief Financial Officer

Conference Call Participants

Kartik Mehta - Northcoast Research

George Tong - Goldman Sachs

Scott Schneeberger - Oppenheimer & Company

Alex Paris - Barrington Research

Presentation

Operator

Thank you for standing by, and welcome to H&R Block's Second 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 second quarter fiscal 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 Web site 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, February 6, 2024. 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. I'll begin today with a summary of Q2 results, provide an update on our Block Horizons progress, and share more on why we are well-positioned for the tax season. Then, I'll discuss the announcement today regarding Tony's decision to retire, and finally he'll provide context on our financials, including the strength of our capital allocation and balance sheet.

Turning to Q2 results, performance continues to meet expectations and, today, we reaffirmed our fiscal year outlook. In the quarter, revenue grew 8% as we had a strong finish to the extended filing season. In addition, we saw consumers in need of cash, and many turned to H&R Block to meet their financial needs with our new Emerald Advance offering, which we believe bodes well for the tax season. We also continued our share repurchase program, buying back $218 million in the quarter or another 3% of shares outstanding. Overall, I feel very good about our results.

Now, I'll provide an update on our Block Horizons strategy, where we continue to make progress. Starting with Small Business, revenue grew over 20% in the quarter. Assisted small-business tax volumes finished the extended season with momentum. We had nearly a 4% increase in net average charge, and we continue to see favorable trends in bookkeeping and payroll. While the second quarter only included two weeks of the filing season given the October 15 deadline, we feel great about the start of the year. We have focused our marketing plan on the gig economy and specific industry segments we already do well in. Overall, I continue to be pleased with the growth we're seeing in Small Business.

Turning now to Wave, revenue growth was 5% in Q2. Last quarter, I detailed the strategic shift in Wave's business model to build more premium features to meet the evolving needs of our customers. This past week, we took another step forward by introducing a paid tier subscription service. This new tier incorporates features like automated bank transaction imports, preferred pricing on payments, and agent support rather than self-service support. At the same time, Wave will continue to offer payments and payroll for an additional fee. These recent moves reflect progress on our roadmap to accelerate revenue growth and drive long-term profitability, and aligns with our commitment to empower small-business owners to start, survive, and thrive.

Moving to financial products, as I mentioned earlier, Emerald Advance performed well in the quarter. Although the name remains the same, significant changes were made to the product in collaboration with our bank partner, Pathward, to better meet client needs. A few of those include transitioning the product from a line of credit to a shore-term loan with flexible repayment options, eliminating the annual fee and streamlining the application process, and increasing the maximum available loan amount which helped customers with their holiday spending needs. In total, over $380 million in Emerald Advance loans were originated, up 25% to the prior year. And we received positive feedback from clients and associates.

Regarding Spruce, as of December 31, we had 316,000 sign-ups and $456 million in customer deposits. We continue to enhance the user experience, have seen improved App Store ratings, and feel good about the increase in new client accounts and engagement. Our savings features are delivering on Spruce's mission to help clients be better with money. In fact, 20% of users who set and achieved a savings goal did so to build emergency savings, and another 17% successfully save for vacations. In addition, this year is the first time we are cross-selling assisted and DIY tax offerings in the Spruce app. More than 30% of customers that signed up during last year's season were not H&R Block tax clients, which we see as an opportunity.

I'll now discuss our Block Experience imperative, which underpins our ability to win in both assisted and DIY by creating personalized experiences. Clients are empowered to be served however they choose, fully virtually or fully in person, and every way in-between, whether uploading documents from home, having virtual calls with tax pros, or signing their return online. We also recently launched our initial two generative AI products that focus on improving the client experience and reducing cost, which I'll share more about in a minute. Our progress across this imperative is one of the reasons we feel well-positioned for this tax season. Let me share some more starting with assisted tax.

To begin with, we achieved our hiring goals, and saw continued strong trends in tax pro retention. We have heard positive feedback from our tax pros about the flexibility we offer. In addition, our innovative fulfillment network will now be available to our entire network of tax pros, which can improve the speed of our service and help us better manage our capacity.

Last quarter, I shared some of the many enhancements to the MyBlock app that were made with the client experience in mind, including a status tracker to help clients understand where they are in the flow, when to take action, and to give them easier access to their digital documents in return.

Not only are we focused on the client experience, but we also see an opportunity to reduce expenses with AI. We have already launched the technology in our call center operations, and continue to learn from its use. Early signs indicate that customers are able to help themselves, which reduces related call center volumes. This should also enable our agents to assist with more complex issues. While we're just getting started, we're pleased with the speed that we're able to deploy this innovation and how it will help us better serve our clients. All of these advancements, alongside our positive customer satisfaction metrics from last year, including value for price paid give us confidence to take modest price increases this year, which we have previously discussed.

Turning to DIY, we believe the formula for success continues to be offer an award-winning product that is continually innovative, make it easy for clients to switch, and price competitively. We executed this plan last year and returned the share gains. This year, we'll continue to build on that momentum. As you may have seen, we're excited to have launched AI Tax Assist in all of our DIY paid SKUs. This innovation enables customers to get real-time tax answers and information, leveraging knowledge from our world-class tax institute and decades of fielding client inquiries. It's simple to use, and clients can ask as many questions as they would like. If live help is preferred, H&R Block's tax professionals are there to assist. We believe this offers significant value for clients with AI Tax Assist and access to human help included at no extra charge....

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