H&R Block : Q3 FY2023 Financial Results Conference Call Transcript

H&R Block Q3 FY23

Financial Results Conference Call Transcript

May 9, 2023

[Introduction & Forward-Looking Statements]

Michaella Gallina, Vice President, Investor Relations: Thank you, Lateef. Good afternoon, everyone, and welcome to H&R Block's third quarter 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

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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, May ninth, 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.

[Opening Remarks]

Jeff Jones, President, and Chief Executive Officer: Thank you, Michaella. Good afternoon everyone, and thanks for joining us. Today I will share highlights from the third quarter and discuss our tax season performance in context of the unusual market dynamics this year. Tony will share our financials in more detail later in the call. Then, we'll open it up for Q&A.

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[Tax Season & Industry Dynamics]

As you'll recall, we and others expected this to be a normal tax filing year with the pandemic largely behind us, no new Federal programs, a large number of stimulus filers having left the industry, and strong employment. Generally, tax return volume was expected to grow about 1%, which is in line with its historical average.

But, after an initial peak, the industry volume in fact declined about 1% year over year, which was about 200 basis points below our expectations. While we are still analyzing results, we believe a number of factors contributed to this outcome, including:

• More stimulus filers rolled off than anticipated,
• a decrease in average refund size and an increase in balance due returns, which may have driven low-income filers to the sidelines,
• And the IRS filing delay in several states including California, which we estimate to be about 100 basis points of the impact.

As a result of industry volume declines, our own Assisted performance, and the impact of foreign exchange, we have updated our full year outlook. Tony will share more detail later in the call, but I'm pleased that we still expect to deliver EBITDA and EPS growth this year despite these headwinds. Let's dig deeper into our performance, starting with DIY.

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[DIY]

As you recall, our goal was to return to share growth by increasing awareness that we offer a DIY product, improving quality, and making it easier to switch from TurboTax® by creating a customized experience in the product user flow. We also introduced new innovations like our industry first use of artificial intelligence that finds tax refunds that may have been missed on TurboTax® returns. This multifaceted strategy worked.

Through April 30, we grew DIY online clients by 2.5%, with many of them switching from TurboTax®. We also improved unaided awareness by 200 basis points, which is a significant move year over year. Our online net average charge was about flat. Our largest segment of new clients was Gen Z, between the ages of 18 to 25. Finally, our service quality scores were strong. These metrics are historically a good forward-looking indicator and confirm our progress and the prospects for our DIY business.

We also continue to see clients that begin in DIY choosing to upgrade by adding expert help, with one of our two products: Online Assist and Tax Pro Review. Online Assist offers on- demand access to an H&R Block tax expert. Clients can access this help before starting their return or while completing it, and AI is helping us get smarter about anticipating when the client may be struggling and needs this help. Tax Pro Review provides the benefit of having our

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tax experts check the entire return for accuracy, ensuring clients get their maximum refund, and then we file the return on their behalf. Tax Pro Review continues to grow double digits, which it has done nearly every year since we launched this capability more than a decade ago. Of course, both Online Assist and Tax Pro Review enable the client to access one of our tax experts without needing to visit an office.

[Assisted]

Now let's discuss our Assisted business.

Since I joined H&R Block, we have made numerous changes with the goal of improving relevance and driving growth among clients with greater lifetime value. For example, we introduced Upfront Transparent Pricing, eliminated FREE Assisted tax prep, and eliminated nationwide "50% off" promotions, to name a few. These efforts are paying off and this year we experienced client growth among each segment above 50 thousand dollars in income, with our fastest growing segment being clients over 100 thousand dollars in income.

However, this year the growth in higher value clients wasn't enough to offset the volume decline in the lower income segments. While we'll continue to learn more in the coming months, three key factors are clear:

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