H&R BLOCK INC Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Second Quarter Recap: First half of the year in line with expectations. Total revenue flat year-over-year due to lower Emerald Advance volume. Continued disciplined capital allocation with $190 million share repurchase in the quarter, bringing total repurchases for the year to nearly 5% of the float.
• Block Horizon Strategic Imperatives:
  • Small Business: Assisted small business tax grew, DIY had new custom experiences, bookkeeping and payroll services saw double-digit growth, Wave had 15% revenue growth.
  • Financial Products: Refund Advance loan max increased, Spruce grew users and deposits, Smart Tax Refund and high-yield savings offered.
  • Block Experience: DIY user experience improved, AI Tax Assist tool expanded, Assisted had price match guarantee, Second Look service, and MyBlock enhancements.
• Financial Results: Total revenue $179 million, flat year-over-year. Operating expenses up 6% due to higher wages, healthcare, occupancy, and marketing. Pretax loss $312 million, EBITDA loss $261 million. Reaffirmed fiscal '25 outlook with revenue range $3.69B - $3.75B, EBITDA range $975M - $1.02B, effective tax rate ~13%, adjusted diluted EPS range $5.15 - $5.35.

Segment Performance

• Small Business: Assisted small business tax performed well with strong revenue growth. In DIY, new custom experiences for small business clients were launched, increasing conversion. Bookkeeping and payroll services saw double-digit revenue growth year-over-year. At Wave, revenue grew 15% in the quarter with positive monetization trends for high-margin subscription products like ProTier and Receipts.
• Financial Products: Refund Advance loan maximum amount was raised to allow filers to apply for up to $4,000. Spruce mobile banking platform had 491,000 total sign-ups (a 55% increase year-over-year), customer deposits more than doubled, and introduced Smart Tax Refund feature. Spruce offers 3.5% APY high-yield savings with no minimum balance or monthly fees.
• Block Experience: In DIY, improved user experience with simplified onboarding, enhanced import capabilities, and expanded GenAI-powered AI Tax Assist tool with broader tax topic coverage. In Assisted, transparent pricing, price match guarantee for new clients, Second Look service (reviewing last three years of tax returns for free), and enhanced MyBlock features for a better user experience.

Guidance

• Reaffirmed fiscal '25 outlook with revenue expected to be in the range of $3.69 billion to $3.75 billion.
• EBITDA expected to be in the range of $975 million to $1.02 billion.
• Effective tax rate expected to be approximately 13%, providing a one-time benefit of approximately $0.50 to EPS this fiscal year.
• In Q2, repurchased 3.2 million shares for $190 million, bringing first half total share repurchases to $400 million or about 5% of the float.

Risks

• Industry challenge of taxpayer identity fraud, which H&R Block is committed to combating.
• Potential impact from changes in IRS operations and administration, such as the appointment of an IRS commissioner and changes related to Direct File.
• Competition from other players in the tax preparation industry, including potential moves by competitors in the Assisted and DIY spaces.

Question and Answer

• Q: Hey, Jeff. Hey, Tiffany. I know it's early, way early for the tax season, but I'd be interested to just get your perspective on total volumes for the industry, how you think they're trending and maybe how Block is faring so far? A: Yes, obviously, we're just getting started with e-file opening last week and we still are anticipating a normal year, which, as we know, is back to 1% volume growth. That's in line with the historical trends. And we still see DIY growing slightly faster than Assisted in the industry. The one big news this year in the industry is 1099-K. We don't have any incremental volume contemplated in our outlook, but our teams have developed the plans and are ready to execute and I think it will be a year of good learning. Millions of people are going to receive these documents for the first time. And we know in the coming years, those thresholds are going to continue to lower. So that remains on the horizon. But right now I feel very good to see our strategy start to come to life in the market, both the changes we've made, the product experience and our marketing campaign. So all the business is still ahead of us.
• Q: Hi, thanks. Good afternoon. As you start to enter this tax season, can you talk about what you're seeing from the government, specifically from the IRS, both positive and negatives that could impact the industry and H&R Block? A: Hey, George. So listen, obviously, there's change underway as the administration comes in. We're waiting for final appointment of an IRS commissioner. We've been through that many times with administrations. They appoint an interim. They announced a new Head of the IRS. We expect that to come. Incoming Treasury Secretary, Bessent, has committed to Direct File remaining operational this tax season. So we're not aware of any changes coming there. And as we've said all along, we've not seen any impact from Direct File given how many companies, including us, already offer free tax prep. But we've been through many, many, many administration changes over time. And I think we have learned that you don't try to predict what will happen, you are ready for any changes that come because changes come every single year and then we operationalize those to serve our clients. And that's obviously what we're doing this season as well.
• Q: All right. Great. And then your comments with regard to Direct File. You said Secretary of Treasury, Bessent, has committed to it for this tax filing season. But I saw I think we all saw Elon Musk yesterday say that they have deleted the 18F agency. What is the 18F agency? A: Well, I certainly can't speak for how the IRS builds their products other than to know that they had a third-party organization who was responsible for building Direct File. That's all I can say about them. I don't know them personally. And listen there are many things that are under a foot and changes in headlines in counter headlines that Direct File is still up and running this year, right? So I think what's most important for us is we just stay focused on doing what we do in serving our clients and I can assure you that's the focus of the company.
• Q: Thanks. Good afternoon, all. Just following up on that last one, Jeff. In your evaluation of Emerald Advance. Is it something that you feel competitively differentiates or perhaps not? And maybe it's something that you may not discontinue in future seasons? A: Yes. I mean, listen, Scott, we don't -- we're not evaluating discontinuing the product. We see value in the product for the clients it serves. You may recall last year, we relaunched a wholesale new product. And in year one of that new product, we saw great loan volume growth, but we also saw bad debt growth. And so this year, we've managed that better. So we're definitely evaluating how do we improve it, both in terms of attracting prospects and delivering the right approval rates with our bank partner, but we have no plans that we're evaluating to discontinue it.