H&R Block reported a revenue growth of 4%, EBITDA growth of 6%, and EPS growth of 18% in Q3.
The company expects to finish the fiscal year near the high end of its outlook.
Tax Season Performance
Total industry growth was about 2%, with DIY growing 3% and assisted growing 1%.
H&R Block’s market share remained approximately flat, with gains in DIY offset by losses in assisted.
Paid DIY volumes grew by 6%, with significant customer acquisition from TurboTax.
The company saw strong growth in Tax Pro Review, which increased more than 15%.
Assisted Tax Performance
Assisted volumes declined by 1% through April 30, but net average charge (NAC) growth led to a 4% net growth.
Growth in higher-income client segments, particularly those earning more than $100,000.
The number of assisted clients working completely virtually increased more than 25% year-over-year.
Strategic Initiatives and Innovations
Launched AI-powered tax assist tool, which improved conversion rates among new clients.
Introduced new technologies and operational changes in field offices to enhance client experience.
Focused on small business tax and bookkeeping services, seeing MAC increase of 3% and double-digit growth in bookkeeping and payroll services.
Financial Products and Digital Platforms
Wave, H&R Block’s small business platform, saw 7% revenue growth in the quarter.
Spruce, the mobile banking platform, had 470,000 sign-ups and $852 million in customer deposits through April 30.
New features on Spruce include a variable interest rate feature paying 3.5% APY on savings account balances.
Financials and Capital Allocation
Q3 revenue was $2.2 billion, a 4% increase year-over-year.
EBITDA for the quarter was $964 million, up 6% from the previous year.
Completed $350 million of share buybacks in the first half of the fiscal year.
Anticipates finishing the year near the high end of outlook due to strong third-quarter performance.
Future Outlook
Continues to focus on top line growth, robust cash flow generation, and double-digit EPS growth.
Plans to return capital to shareholders through dividends and repurchases.
Question and Answer
EIT Market Share Loss and Mitigation Strategies
Question
How can the company mitigate the assisted market share loss on the Earned Income Tax Credit (EITC) side and potentially turn it around?
Answer
The company acknowledges the challenge and is focused on addressing it through a combination of the right message in the market, the role of refund advance, pricing and value adjustments, and improving the overall client experience, particularly for lower-income clients.
The company is also attracting higher-value clients with more complex tax situations, aiming to strike a balance between serving both lower and higher-income clients.
Factors Contributing to Market Share Loss
Question
Was the majority of the market share loss in the assisted category due to EITC clients?
Answer
While EITC clients were a significant factor, the company also observed experienced breaks in the overall client experience, particularly in managing expectations and demonstrating expertise, which led to a higher number of clients not completing their tax preparation.
Client surveys revealed that the top reasons for not completing tax preparation were a perceived lack of expertise and poor expectation management by H&R Block.
The company is focused on addressing these execution challenges to improve conversion rates and retain clients who choose H&R Block but do not complete the process.
Sustainability of NAC Growth
Question
Can the company sustain the current Net Average Charge (NAC) growth on both the assisted and DIY sides in the future?
Answer
The company’s strategy for NAC remains unchanged, with a focus on delivering value and evaluating client feedback to determine appropriate pricing.
In the DIY segment, NAC growth is expected to continue through mix changes and modest price increases, with attention to competitive dynamics.
In the assisted segment, the company will assess client feedback and continue to believe that price can play a role in driving growth.
Monetization of AI Tax Assist and Human Help
Question
How does the company plan to monetize the AI Tax Assist and human help features within its paid online DIY products?
Answer
The inclusion of AI Tax Assist and human help in the paid online DIY products has contributed to their growth and value proposition.
While it is too early to determine the specific monetization strategy for Gen AI, the company believes it can enhance the customer experience and is actively testing different approaches.
The company is successfully monetizing human help through the Tax Pro Review product, which has shown consistent growth over the years.
Impact of Filing Extensions
Question
What was the impact of filing extensions, particularly in California, on the company’s growth this year, and are there any extensions this year that could affect results?
Answer
Last year, filing extensions, particularly in California, had a significant impact on industry growth, with California alone accounting for approximately a 1% decrease in year-over-year growth.
This year, while there have been some extensions, they are relatively small compared to last year and are not expected to have a material impact on the industry’s overall performance.
Source of DIY Market Share Gain
Question
Was the DIY market share gain, particularly from TurboTax, in the paid online segment or across all segments? Can you elaborate on how this was tracked and what the company observed?
Answer
The DIY market share gain was observed across the board, with some clients coming from TurboTax’s free offering and others from their paid offering.
The company’s strong performance in the paid SKU suggests that a portion of the market share gain came from TurboTax’s paid offering, given their significant presence in the market.
IRS DIY Filing Data
Question
Do you have an estimate of the proportion of paid versus free DIY filings in the overall industry, given the IRS data showing 2.7% growth in the DIY category?
Answer
The company does not have specific data on the industry breakdown between paid and free DIY filings.
However, the company is pleased with its own performance, as its paid DIY growth significantly outpaced the overall category growth, indicating a strong year for H&R Block in the DIY segment.
Timing of Marketing Spending
Question
The press release and comments mentioned a shift in the timing of marketing spending. Was this a pull-forward or a pushback, and will it have any impact on the full-year results?
Answer
The shift in marketing spending was a result of more spending occurring in Q4 this year compared to Q3 last year.
The company does not anticipate a significant change in full-year marketing spend as a result of this timing shift.
Performance of Company-Owned vs. Franchise Operations
Question
Can you provide more details on why company-owned operations outperformed franchise operations, and was it solely due to franchise repurchases?
Answer
The difference in performance between company-owned and franchise operations was primarily due to franchise repurchases.
While company-owned operations drove revenue growth through higher volumes, the relative outperformance was not as significant compared to franchise operations due to the impact of franchise repurchases.
Assisted Market Share Underperformance
Question
Where is the company losing market share in the assisted category, given the 1.2% decline in volume compared to the category’s 1.2% growth?
Answer
The company does not have specific information on where it is losing market share but will have a better sense after filing the Freedom of Information report in the fall.
The focus is on addressing experienced breaks in the client journey, particularly in managing expectations and demonstrating expertise, to improve conversion rates and retain clients.
Impact of Tax Day Outage
Question
Can you provide an update on the tax day outage in the downloaded software business and its likely impact on fourth-quarter results?
Answer
The tax day outage, which affected a small number of clients and was resolved within a few hours, was not material to the business or its results.
While it may have been an inconvenience for those clients, it did not significantly impact the company’s operations.
IRS Direct File Program
Question
What are your thoughts on the IRS Direct File program, which recently achieved its goal of 100,000 filers in 12 pilot states?
Answer
The company remains confident in its stance on the Direct File program, believing that it is a solution in search of a problem given the availability of over 30 organizations offering free tax preparation services.
The company’s strong DIY paid growth performance suggests that the Direct File program has not had a significant impact on its business.
Competitive Dynamics in the Assisted Category
Question
Have there been any noticeable changes in competitive behaviors or dynamics from TurboTax in the assisted category, considering their increased focus on this segment?
Answer
The company has not observed any signs that TurboTax’s actions are impacting its assisted business.
The primary competitive difference noted this year was TurboTax’s promotional and sweepstakes-driven approach, which may have had some impact, but the company believes its own execution challenges were the primary factor in underperformance.
Reasons for Assisted Filers Not Completing
Question
Can you elaborate on the reasons why assisted filers did not complete their tax preparation, particularly regarding the management of expectations and the potential impact of tax credit changes?
Answer
The primary reasons for assisted filers not completing their tax preparation were related to execution, particularly in managing expectations and providing a clear understanding of the process, timeline, and cost.
The company acknowledges the impact of newness in the retail environment and virtual tax preparation methods on its ability to execute effectively but remains focused on improving the client experience.
Impact of Modified Tax Pro Compensation
Question
Will the changes in tax pro compensation, specifically the modified structure, have any material financial impact this year compared to the original guidance?
Answer
The changes in tax pro compensation are expected to be cost-neutral, with no significant financial impact beyond the original guidance.
