Thank you for standing by, and welcome to H&R Block's Second Quarter Fiscal Year 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation there will be 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.

Thank you, Lateef. Good afternoon everyone and welcome to H&R Block's second 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 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 7, 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.

Thank you, Michaella. Good afternoon, everyone, and thanks for joining us. Today I will begin with a summary of our Q2 results, progress on Block Horizons, and the momentum we have entering the tax season. Then, Tony will provide details on our financial performance, and we’ll open it up for Q&A. Second quarter results met expectations and we’ve performed well in the first half of fiscal 2023. I feel confident about our positioning as we move into tax season and the third quarter, and I’m pleased to reaffirm our full year guidance. In the second quarter revenue grew 5% to last year on continued business momentum and a strong ending to the 2022 tax season. We are seeing signs that consumers are feeling more pressure this year versus last year given the rollback of government stimulus and the broader inflationary environment. As a result, clients turned to H&R Block in Q2 to bridge the gap in their time of need, and we saw higher demand for our Emerald Advance product in December, which we view as a good leading indicator for tax season. On the expense front, we managed well despite the macro environment, and our capital allocation practice remains solid as we repurchased another 2% of shares outstanding in the quarter. Turning to Block Horizons, I continue to be pleased with the progress we are making. Starting with Small Business, revenue growth was strong as a result of the extended filing season and our bold marketing of the up to 30% price advantage we provide over CPAs. As we’ve talked about, we’re also building out our year-round services for bookkeeping and payroll, and we are seeing positive adoption signals on these products. We are also feeling good about the value our new business formation tool is offering clients. There…

Thanks, Jeff, and good afternoon, everyone. Our performance continues to be on track for the first half of the year and, as a result, we are pleased to reaffirm our full year outlook for 2023, as Jeff mentioned earlier. In the second quarter, we delivered $166 million of revenue, which increased 5% or $8 million to the prior year. This was primarily driven by client volumes and net average charge improvements as we had a strong end to the 2022 tax season, partially offset by lower Emerald Card revenues. As we mentioned last quarter, we expected this impact due to Advanced Child Tax Credit payments being loaded on Emerald cards last year. Total operating expenses were approximately $450 million, an increase of about 3% or about $13 million, primarily due to higher corporate and field wages, along with increased bad debt expense. This was partially offset by lower consulting and outsourced services as well as favorable developments in insurance loss reserves. EBITDA was a loss of approximately $246 million, an increase of 3% or $6 million to prior year. Interest expense was approximately $19 million, a decrease of about $4 million, or 18%. Recall that in June of 2021 we issued notes at 2.5% and paid off our $500 million 5.5% notes early, in May of 2022. This was partially offset by increased interest expense on our CLOC due to higher interest rates. Although we are seeing higher interest expense on our short-term borrowings, this will be more than offset with higher interest income in the fourth quarter when we enter a positive cash position, assuming interest rates remain similar to current levels. Pretax loss was effectively flat to prior year at $298 million and our effective tax rate was 25.9% compared to 36.7% last year. As a reminder, our…

Thanks, Tony. In summary, we are pleased with our first half performance and are confident in our ability to drive value for shareholders through our business results and capital allocation practice. As we end our prepared remarks, I would like to sincerely thank our hard-working associates, franchisees, and tax professionals, who inspire confidence in our clients and communities everywhere. With tax season in full swing, our Block family is hard at work and I cannot thank them all enough. Now we will open the line for questions.

[Operator Instructions] Our first question comes from the line of Kartik Mehta of Northcoast. Your line is open, Kartik.

Thanks, Yes, hi Jeff, Tony. Jeff, just, I know it's early and whatever color you can give would be appreciated. Just how the tax season has started and is it in line with your expectations better than expectations, I guess, worse than expectations? Any commentary you could give from what you're seeing early on?

Hi Kartik. Thanks for the question. Yes, obviously we won't get into details about the current quarter and season, but I will say that we have seen clients filing earlier in both the Assisted and DIY channels and we think that's true for the broader industry as well. And if it makes sense, when you think about those that really need their money, their refund and with stimulus payments ending from last year, so that's one insight I can provide, otherwise we probably don't want to get too deep into our current performance.

That's fair. And Jeff, just I know Block Horizons strategy small business, when you look at the end of the season, what would you define as success? I guess what metrics are you looking at to see if the program is working up to your expectations or if there is some tweaks that might be needed?

That's great question and obviously there are a number of different metrics we're looking at financial performance, operational, because there are a number of pieces to the small business strategy. I think if I start at the top, we've had two really good years in small business performance and so we expect to continue to see Assisted tax growth for small businesses, that's a core component of the strategy. We're also building year-round capabilities in bookkeeping and payroll. So we want to see that we're not only growing those businesses but operationally, we're able to deliver the kind of experience that we want and we know clients expect. And then, as you know, we're also launching new products like the business formation service, that's a brand new product and so for a year like this, when it's coming out of the gates, we're looking closely at operational performance and making sure that we're really delivering for clients when they raised their hand and say they're interested in that service. So a lot of different metrics. But we feel very good about the small business imperatives performance over the last couple of years and the expectations that will continue.

Thanks, Jeff. I really appreciate it.

Thanks Kartik.

Thanks Kartik.

Thank you. Our next question comes from the line of George Tong of Goldman Sachs. Your question please, George.

Hi, thanks, good afternoon. We've seen estimates out there that this year refunds on average will come in lower which could potentially make consumers more price sensitive. Can you discuss your expectations on how lower refunds might impact the elasticity of consumers, especially the lower end with subprime consumer that may be a little bit more stretched given the effect of inflation? And what the ultimate impact could be on market share performance given some of those dynamics?

Hi, George, it's Jeff, I'll kick this off. I mean I think at the highest level to start, we don't control the size of the refund. So we do the work for the customer, we deliver the experience and the outcome but what we do control is the price and the experience and how that adds up to value for the customer and I think that's one of the reasons why we are taking the steps we're taking on pricing this year is one example, knowing that every dollar matters, so expertise matters and despite a much faster, higher inflationary backdrop, we're only taking nominal price increases in Assisted to make sure that value is really strong. So that's really what we can control and we just continued to be focused on the best experience providing expertise in making sure that the price value equation continues to be strong, because we see it strong and that's been several years of building that as we've talked about.

Yes, George. I would just layer on, I mean I think we do expect that refunds could come down a little bit this year as you remember, last year they increased. But even if they do, I mean early season clients in particular, still getting very large refunds relative to obviously the price they're paying for their services and many of them are leveraging products like Refund Transfer to pay for that tax preparation. So we don't expect that to be a near-term issue that would impact any kind of client volume.

Got it. That's helpful. And then can you refresh your views around the topic of tax filing complexity this year and its impact on Assisted net average charge? What are some of the puts and takes that you expect in this tax season compared to last year's tax season?

Yes. We can tag team again, but I think starting with, it's obviously been a few unusual years with a number of different things that were causing the filer to how to think about federal stimulus, unemployment benefits et cetera, and we expect this to be a more normal year in general. That said, we continue to see consumer opting for expertise, even in the DIY channel and looking at growth of products like Tax Pro Review, for example where they start as a DIY filer but at some point in the process, recognize they have questions in -- push to help button to get their questions answered or also may turn it over to work for us to finish for them. So even with a normal - in air quotes a normal year, we still see the consumer opting for expertise in, that's why we like the way that we're positioned with our network of experts.

Got it. Thank you.

Thank you.

Thank you, George.

Thank you. Our next question comes from the line of Scott Schneeberger of Oppenheimer. Your line is open, Scott.

Thanks, good afternoon. I guess, let's with the advertising campaign with regarding DIY really stepped it up this year and very much going against your largest competitor. Just wanted to delve into that a little bit more, how are your marketing dollars, advertising dollars allocated this year? What type of increase year-over-year this year versus last if any? And then how are you approaching Assisted in DIY as far as balancing those dollars versus past years? And then also kind of your media channels, certainly have been very active on TV with the DIY. Just curious what more you can share about the marketing approach? Thanks.

You got it. Let me try to break that down a bit and keep me honest If I miss a piece of the puzzle. I mean just starting at the highest level, we know that the brand H&R Block has tremendous assistance and we know that people know that we have tax pros in locations. What they don't know is that we offer a DIY software products, they don't know that to the same degree. So our allocation this year is skewed more than in the past to DIY messaging. And over the summer, we did a lot of research to understand why had we been growing revenue and volume and new clients in DIY but not market share in DIY and there were three real reasons, number one, far and away number one was the lack of awareness that we offered the product broadly. Number two was a misunderstanding about how easy it is to switch and number three, is about pricing and a little bit about the actual price, bit more about the frustration that comes when you're surprised by what you're charged when you get to the end of the process. And so we've really gone out of three of those head on. You see it reflected in television really top of the funnel, as we think, building awareness but we are more active than usual in digital channels, really delivering the details about the value proposition and then once you arrive at the website, having built a custom flow, particularly for TurboTax switchers to really educate them on how easy it is to switch video content to teach the filers how to find your TurboTax return and upload it to Block, so a number of things, very specifically to really go at those exact barriers that we understood clearly from clients from the summer.

Thanks, Jeff. Appreciate it. You did a great job, as you say, getting all the pieces of the puzzle there on the multi-part question. Just a follow-up on that with the one piece I think we missed was just, was there more overall marketing dollar spend? Or was it relatively in line with last year or a normal increase? And then a follow-up on that, just on the same topic, is this the AI driven technology that you've highlighted? How differentiated is that in the industry, clearly you're promoting it a lot? But is it truly differentiated? Or your peers, they're not promoting it as much, but is that something that you have that is truly differentiated? Thanks.

Yes. Absolutely. So on your first question, think dollars about flat all contemplated in the outlook. It's really more about allocation and allocation between virtual/assisted and DIY and then within the channels like I just walked through. On your second question, we haven't actively run any advertising or marketing for the AI technology and have no plans to do that. We announced in a press release and it is an industry first. There is no one who has ever used AI to proactively and retroactively look at a prior year return to see if there are any available refund dollars. And in the product if any are identified, we notify the client and then we connect them with a Tax Pro to actually do the rest of the legwork to figure out exactly what it could be and then decide if they want to file an amended return. So that's how it works. Again, we announced it in a press release. We're not actively advertising it and don't have plans to actively advertise it.

Got it, thanks. I appreciate that. If I can just go up one or two more in there and maybe get Tony involved. The -- just curious Tony, first-off, how are you progressing on buying in franchisees this year consistent with expectations and just any mention of comparison to last year? And then my other question is just -- and Jeff, I think we'll bring you back to this as well, but I heard Tony mentioned in the guidance, there is no consideration for 1099-K, which is a good thing, but I'd just like the big picture view of what H&R Block is expecting on that front in future years and how that would impact the industry and H&R Block specifically? Thanks for let me put them all through there. I'll stop right there. Thanks.

Hi. You got it.

Thanks Scott. I appreciate you getting me involved.

Yes.

So franchise acquisitions are going well this year. We've done that for a number of years. It's ebbed and flowed a little bit but kind of been in that 100 to a 150 location range and I think it be in that range again this year. We still have some active kind of negotiations that are occurring and some deals that are yet to close, but we'll probably be in that zone and feel good about franchisees' willingness to sell to us is obviously a willing buyer.

And Scott, on your second question. I mean, it's obviously hard to speculate on what might be the impact of a piece of legislation that isn’t final or passed. I mean, 1099-Ks are topic that depending on how it was implemented could impact lots of people or fewer people. We don't really worry about trying to judge, win something, might get passed, we just every single year learn what the changes are, train on the changes and communicate to client the value of expertise. We'd see doing the same thing next year, but again we didn't build any assumptions of 1099-K into this year's financials.

Okay. Got it guys. Thanks a lot.

Thanks, Scott.

Thank you. Our next question comes from the line of Alex Paris of Barrington Research. Your question please, Alex.

Hi guys, thanks for taking my questions. I have just a couple of follow-up or clean-up calls, most of the questions have been asked and answered. On the Wave side, I know we have a new CEO there who is completing a strategic review. I think last time we were together on a call like this. In Q1, revenues were up 18% year-over-year. In Q2, they're up 13%. Is there anything to read into that?

I appreciate the question and I think the only thing I would read into it, is that we're not pleased with that progress. Zahir has been enrolled for a handful of months. He's doing a phenomenal job of interrogating all parts of the business. We want to return that business to a higher growth rate, obviously, it is growing but we want to return it to a higher growth rate and importantly he is looking very carefully at how do we accelerate the path to profitability in addition to restoring to a higher growth rate. So we will have more to share in the future, but for now, that's the message for me about what we're seeing in Wave.

Is there a particular area or product offering within Wave that is lagging the others?

Well, it could complicated fast just recognizing all the things they do in their business. So I try for now to just keep it at a high level and say that the way that they -- the way that their clients use the product to send invoices and receive payments isn't performing at the level that it used to. And so that's the primary place that we're interrogating but to be clear, his work is looking at the entire business every piece of performance, what we can do for monetization and what we can do on the expense side.

Yes. I just put a finer point. I think what Jeff is saying is, where the small businesses that are sending out those invoices are sending fewer invoices than they were previously which obviously is probably more of a macro-environment type issue but beyond that, we know that we can do better within our own control and own performance.

Yes, thanks Tony.

Got you. That's helpful. All right. And then moving on Spruce. It was launched last year in DIY only, I believe that's correct. And this year, starting in January, it's being rolled-out to the Assisted offices as well. How -- again, it's very early in the tax season but what has been your experience so far with the tax pros and with consumer driven demand?

Yes. Again I appreciate the question. You're exactly right. Last year we launched a beta version of the product in the DIY flow only. This year we're back in DIY, we're marketing direct to customers and we have launched it in the retail channel. I feel very good about the way it was received, the plans we built to make it easy for the tax professional at the desk to explain the value proposition. We've only been at it a few weeks and so it's way too early to comment beyond the operational clean-up things that we're working on to improve the experience. We're focused on account creation, ideally it is the tax desk, but ultimately loading funds into the account and then, keeping those clients engaged by spending and so there's a number of pieces that go way beyond account creation, because this really is the formation of a year-round relationship with the clients. And as we get to Q3 and beyond we'll be updating you on what we've seen in performance.

Great. And then last question for Tony. In your prepared comments, you talked a little bit about within operating expenses, insurance loss reserves, providing a favorable impact. Just wondering if we can get a little bit more color on that. And then the increased bad debt, what is that related to?

Yes. So I'll start with the bad debt. I mean part of that is driven by the fact that we had a stronger EACs and when we participate in those EA loans we book our portion of the bad debt all upfront. As you know, Alex, a lot of that revenue is recognized over several months as there is an interest income component through the period to where those loans are ultimately paid off. On the insurance loss reserve, it's a fairly technical topic, but essentially we have an actuarial assumption based on some expected losses that actuarial assumption changed during the quarter, and that's what that positive benefit resulted from, so not something that typically occurs, but it's a change from kind of pre pandemic and post-pandemic, some of the expectations on losses, specifically related to workers' compensation.

All right. Well. Thank you very much. I appreciate it. Thanks for answering my questions.

Thank you.

Thanks Alex.

Thank you. At this time, I'd like to turn the call back over to Michaella Gallina for closing remarks. Madam?

Thank you, Lateef and thanks everyone for joining us today. This concludes our second quarter 2023 financial results conference call.

Thank you for participating. You may now disconnect.