H&R Block, Inc. (HRB) CEO Jeff Jones on Q1 2021 Results – Earnings Call Transcript

H&R Block, Inc. (NYSE:HRB) Q1 2021 Earnings Conference Call September 1, 2020 4:30 PM ET

Company Participants

Colby Brown – Vice President, Finance and Investor Relations

Jeff Jones – President and CEO

Tony Bowen – CFO

Conference Call Participants

Kartik Mehta – Northcoast Research

Jeff Goldstein – Morgan Stanley

Hamzah Mazari – Jefferies

Scott Schneeberger – Oppenheimer

Michael Millman – Millman Research

George Tong – Goldman Sachs

Henry Chien – BMO Capital Markets

Operator

Ladies and gentlemen, thank you for standing by and welcome to the H&R Block First Quarter Fiscal 2021 Earnings 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] Please be advised that today’s conference maybe recorded. [Operator Instructions] I would now like to hand the conference over to your host, Vice President, Finance and Investor Relations, Colby Brown. Sir, please go ahead.

Colby Brown

Thank you. Good afternoon everyone and thank you for joining us to discuss our first quarter fiscal 2021 results. On the call today are Jeff Jones, our President and CEO, and Tony Bowen, our CFO. We’ve posted today’s press release on the Investor Relations website at hrblock.com. Also on the website, you will find a link for the webcast containing today’s presentation, which will be posted after this call.

Some of the figures that we’ll discuss today are presented on a non-GAAP basis. We’ve reconciled the comparable GAAP and non-GAAP figures in the schedules attached to our press release. Before we begin our prepared remarks, I’ll remind everyone that this call will include forward-looking statements as defined under the securities laws. Such statements are based on current information and management’s expectations as of this date and are not guarantees of future performance. Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict. As such, our actual outcomes and results could differ materially. You can learn more about these risks in our Form 10-K for fiscal 2020 and our other SEC filings. H&R Block undertakes no obligation to publicly update these risk factors or forward-looking statements.

At the conclusion of our prepared remarks, we will have a Q&A session. During Q&A, we ask that participants limit themselves to one question with a follow-up, after which they may choose to jump back into the queue. With that, I’ll now turn the call over to Jeff.

Jeff Jones

Thank you, Colby. Good afternoon everyone and thanks for joining us. When we last talked, we were in the middle of what was the most unique tax season in history. The pandemic resulted in the first ever extension of the filing deadline, and changes to nearly every aspect of our operating model. Throughout the season, our teams demonstrated agility and resilience. We adapted to an ever changing environment and we delivered for our clients when they needed us the most.

The result was a strong finish growing revenues 300% in the quarter and serving more clients than last tax season.

We’ve also made progress in other areas of our business. Our results at Wave have steadily improved, as they’ve returned to double-digit percentage revenue growth following the initial disruption caused by the pandemic. After the close of the quarter, we also successfully issued long-term debt and signed an important agreement with MetaBank to be the provider of our suite of financial products. These developments have resulted in a great start to our fiscal year as we continue to build positive momentum in the business.

With that backdrop, there’s obviously a lot of ground to cover on today’s call. First, I’ll talk about the recently completed tax season, providing perspectives on both our performance and the overall industry. Then I’ll give some thoughts on the progress we’re making on our strategic roadmap. Tony will then discuss our Q1 results, and share high level thoughts on the balance of fiscal 2021.

He’ll also provide an update on our capital structure, including details on our recently completed debt offering and will talk about our agreement with Meta. I’d like to start with the tax season. The majority of the season took place while the country was dealing with the pandemic. We navigated the various state and local orders and took steps to promote the safety and well being of our associates and clients. A significant number of our offices were closed and those that weren’t moved to a drop-off model with limited in-person interaction with our clients.

The reality is that from mid-March to the end of the season, there has been no such thing as business as usual in any of our offices. This was especially true during the May, through July timeframe with around half of our offices closed, and those that were open, subject to various local orders. And while this time has been challenging, we’ve looked at it as an opportunity to demonstrate our commitment to our clients and community. Additionally, we accelerated our efforts to transform our tax business as we innovate to deliver expertise to consumers in new and exciting ways. The capabilities would build to enable clients to digitally drop-off their forms, interact with Tax Pro’s virtually, review their returns online and sign and pay remotely provide them with the expertise they wanted, when they weren’t comfortable with in-person service, or when our offices were closed.

And these innovations helped us engage with our DIY clients in new ways, bringing our expertise to life within our software offering. In total, our digitally enabled returns grew over 150%. It’s clear that consumers are taking notice of how the expanded H&R Block platform is bringing digital capabilities to those who want assistance and on demand human help to those who prefer to use software to file.

Turning to category results. I’ll start with our Assisted business. We had a strong start to the tax season as we were tracking to our goals of improving our client trajectory and holding market share. Because of the impact of the pandemic and the changes we made to our operating model, we anticipated a decline in volume, as well as the loss of market share. Our results however were strong as we finished with a small share loss. This is attributable to the agility and resilience of our associates, Tax Pros and franchisees that I mentioned earlier, as well as the digital efforts I just discussed.

In DIY, we also finished strong, online growth was 10.6%, which led to total DIY return growth of 8% as we held share in the category when excluding stimulus returns, our product continues to evolve and win accolades from third-party and our clients love the experience as well as Net Promoter scores improved again following a significant increase in the previous season. We’re also seeing this in our retention rates, which improved over two points. Our strategy in DIY is working, we’re pricing competitively providing tremendous value and people are taking notice as we continue to drive awareness.

Turning to the industry, it’s important to consider two key factors when reviewing the data. First, there were millions of people who filed tax returns solely for the purpose of receiving stimulus payments. We believe there are between 7 million to 8 million returns with $1 of income and are being tracked as stimulus filers. However, there are likely more who filed solely for the purpose of receiving a stimulus payment, but reported additional income, making the exact number of stimulus filers unknown.

The second factor to consider is paper filings, which fluctuated significantly during the last few weeks of the season, making that key piece of the puzzle unreliable. Regardless of these two variables, there were a couple of significant learnings from this season. The first is that the industry itself is strong. The tax refund, which is typically the largest financial transaction for most Americans each year became even more important to people as they were adversely impacted by the pandemic. And second, the Assisted category is resilient.

Given the various stay at home orders, mandates for business to close and the general fear of physical interaction caused by the virus, many expected a dramatic decline in Assisted filings. Instead, we saw just a 40 basis point decline in Assisted e-files and a moderate change in mix between Assisted in DIY when excluding the estimated number of one-time stimulus filings.

In fact, during the pandemic, from mid-March through mid-July, Assisted filings actually increased 50 basis points which is telling considering the circumstances. With this tax season behind us, I’d like to look ahead and provide some thoughts on our strategy. As I mentioned earlier, the work of digitally enabling our business was a key enabler of our success this year. In other words, the investments we made allowed us to adjust our operating model, while still providing the expertise and service our clients expect. And these capabilities will continue to benefit us in the future.

Looking ahead, our strategy is evolving and we’ll go beyond the digital efforts we’ve undertaken in our tax business. We continue to evaluate and reprioritize our strategic imperatives and examine our cost structure as we remain focused on growing volume, revenue and earnings over time. When we speak in December, we’ll have more to share in addition to providing our outlook for fiscal 2021.

With that, I’ll now turn the call over to Tony.

Tony Bowen

Thanks, Jeff. Good afternoon, everyone. With a strong finish to the tax season, our fiscal year is off to a great start. Today I’ll share our results for the quarter, thoughts on the remainder of fiscal 2021, an update on our capital structure, and finally, some color around our recent agreement with MetaBank. Due to our seasonality, we typically report lower revenues and a net loss during our first quarter. This quarter’s results, however improved due to the significant tax return volume during the month of May, June and July.

Before jumping into the financials, I thought it would be helpful to provide some context on our volume and net average charge performance, which were reported in late July, as well as an update on Wave. In tax, we posted overall volume growth in the U.S. for the third consecutive year with a 3.3% increase in returns, this was led by continued strength in our DIY business with a 10.6% increase in online filings. In Assisted, given that we had approximately half of our total network open, and those offices were operating under a modified model, we expected a decline in return volume and a loss of market share. Our finish to the tax season was strong however, resulting in a decline returns of just 2.8% and a small share loss.

Regarding pricing, our net average charge in DIY declined due to mix, as well as our decision to keep our Free state filing promotion through the end of the tax season. In Assisted, we targeted flat net average charge through end of the year, though saw a slight decrease due to mix in our company offices, partially offset by improved pricing in our franchise network.

Turning to Wave, during last quarter’s call we talked about the impact of the pandemic has had on small businesses and consequently Wave’s growth trajectory. Following a couple months of flat year-over-year revenue, I’m pleased to report that we’ve seen progressively better results in the subsequent months, resulting in year-over-year growth of nearly 20% during the quarter. Considering the circumstances, this was a tremendous outcome and a positive sign that Wave’s innovative platform continue to provide value to small business owners.

The increase in tax filing volume in Wave’s contribution resulted in revenue of $601 million in the fiscal first quarter, an increase of $451 million or 300% compared to the prior-year. This improvement in revenue resulted in higher variable operating expenses, primarily in Tax Pro compensation and credit card transaction fees. While we anticipated this increase, it was lower than expected as we managed labor more efficiently. In addition to the variable expenses, we spent more in marketing due to tax season extension. These increases were partially offset by other expense reductions, resulting in an overall increase in operating expenses of just 30% to $448 million. Interest expense increased $11 million as a result of our line of credit being fully drawn, which I’ll discuss later.

The net result of revenues increasing at a greater rate than expenses was pretax income from continuing operations of $124 million, compared to last year’s pretax loss of $207 million which is typical for our fiscal first quarter. GAAP earnings per share improved to $0.48 compared to a prior-year loss of $0.72, while non-GAAP EPS improved to $0.55 compared to a loss of $0.66. In discontinued operations, there were no changes to improve contingent liabilities related to Sand Canyon during the quarter. For additional information on Sand Canyon, please refer to disclosures in the company’s reports on Forms 10-K and 10-Q and other SEC filings.

.

With that recap of the quarter, let me provide some perspective on our expectations for fiscal 2021. Before doing so, please note that our expectations assume next tax season is completed by the normal filing deadline of mid-April.

Overall, we expect to see a significant increase in revenue and cash flow this fiscal year, not just compared to fiscal 2020, but also in comparison to a typical year. This is due to both the carryover tax season 2020 into our first quarter, and our expectation for a normal tax season 2021. In addition to achieving these increases, we’re also focused on driving cost efficiencies in order to fund our growth imperatives.

These reductions include a hiring freeze, the elimination of merit increases, examining vendor spend, renegotiating rent across our retail footprint and limiting capital expenditures. So hopefully, that provides helpful context. We’ll provide more details during our Q2 call in December. I’ll now to capital allocation in the balance sheet. Despite the unique circumstances related to pandemic, our capital allocation priorities remain the same. At the top of the list is maintaining adequate liquidity for our operational needs, we then look to make strategic investments back into the business to drive growth. Finally, we return excess capital to shareholders through dividends and opportunistic share repurchases.

Given our priorities are unchanged, there are four specific areas, I’d like to provide additional clarity on given recent events. Our line of credit, the recent issuance of long-term debt, our dividend and future share repurchases. Let’s start with our line of credit. At the onset of the pandemic, we drew down the full balance of the line to maximize our liquidity given the uncertainty. The draw had a six month interest lock which matures this month. Given the strong finish to the tax season, we had a cash position of $2.6 billion at the end of the quarter. And as such, intend to pay down the full balance of the draw later this month. We anticipate returning to our normal cycle of seasonal borrowings on our line of credit later this calendar year as we head into the upcoming tax season.

In addition, given the strength of our financial performance in the first quarter, we met our debt covenants, and currently expect to be in compliance going forward.

Turning to our recent debt offering, I’m pleased with our successful issuance of $650 million of 10-year notes at a coupon of 3.875%. We intend to use the proceeds of these notes to retire existing debt that matures in October. This was a positive result for us as we’re replacing five-year notes with 10-year notes at a lower interest rate. It’s also a sign that investors have confidence in our future.

Moving on to our dividend, we have continued our streak of paying quarterly dividends consecutively since going public nearly six-years ago. As we shared in the past, we evaluate our dividend after each fiscal year, which we did in June. This review resulted in us maintaining the dividend at its current level. To be abundantly clear, we have no plans to change our dividend payout level for the balance of this fiscal year. Our next evaluation to dividend will be in June of next year and while we cannot guarantee future dividend payments, or the level of dividend would be at that time, we do have a goal of increasing the dividend over the long-term as evidenced by the 30% increase over the past five years.

Finally, turning to share repurchases, we have decided to resume our practice of repurchasing shares to offset dilution from equity grants. Consistent with prior practice, we will not discuss potential additional share repurchases other than mentioning they would be done opportunistically. The last thing, I’d like to discuss today is the agreement we reached with MetaBank to be the provider of our financial products including Refund Transfer, Refund Advance, Emerald Advance and Emerald Card. MetaBank is a leader in providing financial solutions to consumers and has significant experience in the tax preparation industry.

We’ve worked with Meta in the past and know them to be an excellent partner. Both of our teams are hard at work to make the transition as seamless as possible for our clients. From a financial perspective, we expect this agreement to result in savings of $25 million to $30 million on a run rate basis. Though that number will be approximately $10 million lower in fiscal 2021 as we’re transitioning mid-year and will incur some one-time expenses.

In summary, we’re off to a great start this fiscal year, recently had a successful debt issuance and are excited to be partnering with Meta for years to come. I’m looking forward to sharing more with you regarding our expectations for the fiscal year in December. With that, I will now turn the call back over to Jeff.

Jeff Jones

Thanks, Tony. Before concluding, I’d like to thank our associates, franchisees and Tax Pros for the agility and resilience they have demonstrated over the past several months. They truly make H&R Block a special place and why we were able to accomplish so much during such a difficult time. We’re now focusing on the future, and I’m looking forward to sharing an update with you in December. With that, we’ll open the line for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Kartik Mehta of Northcoast Research. Your question please.

Kartik Mehta

Hi, Jeff and Tony. I guess Tony maybe just to start-off with few thoughts on margins as we go forward. I know FY 2020 was odd year. But if you kind of look at FY 2019 as a base year, as we move forward and get to more of a normal tax season, what do you anticipate for EBITDA margin?

Tony Bowen

Yes, thanks, Kartik. We’re not going to provide a long-term outlook today. But obviously, as we grow the business both on the top line and then grow EBITDA basically, we would expect the EBITDA margin to grow with it. And that’s really what we’re focused on, both starting this year and in the future is investing where we need to invest to continue to grow. And then as we grow the top line that resulting in improvement on the margin as well. We’ve talked about how, when I have a specific goal of getting EBITDA margin to a specific number over the next several years, it’s more and growing that top line, which will eventually grow the bottom line as well.

Kartik Mehta

And, Jeff, I know this question, you could probably take an hour to answer, so I apologize for it, but maybe if you could just give some highlights. As you see more of the business migrate from traditional face-to-face to virtual, what kind of benefits could that have for H&R Block?

Jeff Jones

Yes, Kartik, thanks. And we could spend a lot of time but I think the first thing, I would say is we’re obviously building kind of platform of capabilities that mean a lot of different things, right? It means everything from digital upload of your docs, approve and pay online. Get help as a DIY filer, upload with mobile and let us do all the work for you. So there’s really an array of products obviously, the number one benefit is to the customer and continuing to make this experience as easy and personalized as possible.

From our perspective, we’re building these capabilities really ahead of consumer demand. We’re seeing high growth rates, but still a relatively low base, but we’re getting great feedback from clients about the products, we’re attracting a new younger client to the brand, those are all positive.

On the operating side, when we look into the future, this is not a 2021 thing, but it’s in the future, the more that we’re able to serve clients virtually in whatever way that means, it means we have an opportunity to look closer at efficiency in both our utilization of our experts, and that the physical footprint. And over the next several years, that has potential to be real benefit to us, while we’re also driving value for the customer.

Kartik Mehta

Thank you very much. I appreciate it.

Jeff Jones

Yes, good to hear from you.

Operator

Thank you. Our next question comes from the line of Jeff Goldstein of Morgan Stanley, your question please.

Jeff Goldstein

Hey guys, just thinking about the Assisted trajectory going forward, maybe just help us with what type of recovery you’re expecting from here. So I mean, you’re expecting a return to 2019 volumes, or maybe it’s maybe a return to someplace in between 2019 and 2020. And I know you’re not providing any specific numbers, but just in broad strokes, how should we think about the pace of recovery from here on the Assisted side given COVID seems to, at least this year seems to have altered the path forward in that business?

Jeff Jones

Yes, thanks for the question. Obviously, few different pieces there. Let me just start with, no this is the second year of making real changes to our Assisted business on the price value relationship, the quality of execution, digitizing the way we can serve customers and you may remember that in mid-March, when we had our call, we were on track to deliver our year which meant holding share in the category which was a real improvement year-over-year in the Assisted business, obviously that that got derailed a bit but nevertheless we’re very pleased with how we ended the year.

What we’re doing now is really trying to develop multiple different scenarios, given potential variables in the industry.

And starting with a large, large number of filers that were EIP only, when you remove those from the mix, and you start looking at unemployment rates for next year, how long and how rich the state and Fed unemployment benefits remain.

What the operating environment looks like in next tax season, that’s obviously a variable that could go different ways. When you net all of that, we’re expecting the industry to be flat to down slightly next year.

Our goal remains to grow the business, to grow Assisted clients, and we think we’re on a nice trajectory to do that. There are many variables, obviously that are weighing on next year. And that’s how we’re thinking about the industry overall and the scenarios that we have to develop. And again, when we’re in December, we’ll be providing our exact outlook on the year.

Jeff Goldstein

Okay, that was all great. And I think this one is for Tony, it just looks like you got a lot of leverage on your field wages line item relative to our overall revenue growth this quarter. So were there any added efficiencies in there that

could be more permanent in nature, just what was really driving that leverage?

Tony Bowen

Yes, I mean obviously, it was a challenging environment to try to think about how we were going to staff offices given really the unprecedented no history to really guide us. But we went into the quarter, expecting a certain efficiency level, we did a lot better than what we even thought, part of that was volume related in the Assisted side where we just had more returns and more clients that we served, which was a good thing. We also saw really nice management of labor by our field staff where it’s having the right Tax Pros and the right offices at the right times, all drove that efficiency.

But the way that we have our compensation model work during the Q1 period is a little bit different than how it typically works during tax season, just some of the changes we had to implement, to get tax professionals to work during this extended period. So there’s some learnings we can take out from that. No kind of immediate changes that we’re making, but there’s definitely a lot that we learned in that extended period from an efficiency perspective that we can think about going forward.

Jeff Goldstein

All right, thanks for the color.

Tony Bowen

Thank you.

Operator

Thank you. Our next question comes from the line of Hamzah Mazari of Jefferies. Your line is open.

Hamzah Mazari

Hey, good afternoon. Just a question on digital. Again, I think your digital market share, correct me if I’m wrong, today’s maybe 15% or so percent. And I think it’s historically you’ve talked about getting to 20%. Could you maybe talk about, do you view the timeline to get to 20%? If that’s the right number, has accelerated because of COVID and any kind of hurdles that you see in getting to that, is it more brand awareness or is it sort of additional features

thing, just any thoughts as to gaining more critical mass in digital and what you need to do there? And obviously, this was a very good year for you.

Jeff Jones

Yes, thanks. This is Jeff. I’ll kick it off. And Tony can chime in if he wants. But I think by digital, you’re referring to our DIY business.

Hamzah Mazari

Yes.

Jeff Jones

And we’re currently in 14%, 15% market share, to my knowledge, since I’ve been here, we’ve not provided any outlook to get to 20% market share. I don’t know in the prior years, there could have been something you’re remembering. But make no mistake, I mean our strategy in DIY remains three very clear things. Number one is just the continued evolution improvement in our product. I feel great about our product today, and we’re getting the kind of third-party accolades as well. Pricing is an area where we’re looking very closely at our pricing strategy.

What we’ve been doing meaning in the last couple of years is maintaining a price advantage to the category leader. And being very dynamic in terms of how we think about pricing. The reality is, they’re taking large price increases every year. And so we’ll be looking carefully at our pricing strategy as we move forward, more to come there. And third is telling the story.

We continue to build awareness, we continue to build retention and customer satisfaction. So we are in this business to compete, and I feel very good about the progress we’ve been making.

Hamzah Mazari

Got it. That’s very, very helpful. And just my follow-up question. I’ll turn it over is, is there still an opportunity to be buying back franchisees, I know with COVID things may have changed. Obviously, we’ve talked about liquidity in the balance sheet and Tony touched on that but just any updated view on franchisee buying back strategy? Thank you.

Jeff Jones

Yes, absolutely. Thanks for the questions. So this year, we did buy back more this year than the prior-year, call it around a couple hundred, which is then right in the zone of our five-year average. And the way I think about franchise buybacks moving forward is there’s really two different categories where I believe we’ll continue to look, one is those franchisees that for various reasons, decide they want to exit. We can buy them at the right multiple and we’re a good acquirer, so that will remain a category.

Another category is what I would just call cleaning up the footprint from how we’ve expanded historically and a good example of this is what we call a spot franchisee, further back in history, there were much more defined geographic boundaries between the company offices and franchise offices. Over many years that line got blurred to the point where we might have a franchisee in an urban area possibly down the street from a company location. And that doesn’t make sense to the franchisee. And that’s an opportunity where we can clean-up the footprint. And that’s a second category, that we’ll definitely continue to look at.

Hamzah Mazari

Got it. Thank you.

Jeff Jones

Thank you.

Operator

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

Scott Schneeberger

Thanks very much. Good afternoon. My first question is kind of a follow-up on that. Jeff, you kind of foreshadow potentially some sort of pricing in DIY in the coming year. DIY was down I think 4.5% this year and I think Tony called out predominantly that would have been you keeping Federal Free and State Free on all-year which you didn’t do last year. So I guess the question is kind of two-pronged, assuming that was the primary driver was it everything or was there some mix in there, just a little bit more granularity on what occurred this year on pricing. And then the follow-up is Jeff, just to squeeze out a little bit more of your hint there. How should we think about as we work our models, maybe your approach next year, I think can be confident in your volume growth in digital. How should we think about pricing? Thanks.

Jeff Jones

Yes, you got it. Let me start again, Tony will jump in. But a lot of different pieces there on DIY pricing, you may recall, we got off to a bit of a slow start in the season, we had some impact on ourselves. That impacted in the early part of the season, we made that change and we caught up. And then we made a strategic change to your point on State as a way to compete and grow volume. And so those were things that this year impacted and definitely some mix in there as well.

Moving forward, and again, I don’t want to get too far ahead of myself. But I believe we’re at a place now where our product is very competitive. And so we have to be looking for ways that we continue to grow and pricing could be one of those levers. If we’re not getting enough credit from the consumer for the price advantage, then where strategically, can we take price and be very transparent about it. That’s something that’s super important. Our overall positioning is price transparency. You may know today that if a consumer is in our flow and for any reason, the price changes on them, we call that price preview, we expose it to the client. So we want that to not feel like a bait and switch like it might at others, and be very, very straightforward how we think about price. But more to come on fiscal 2021.

Scott Schneeberger

All right, thanks on that. And then I guess, shifting gears a little bit for my follow-up. I guess if one of you could kind of speak for the board here, I’m curious in mid-August, every year for the last few years, you’ve increased the dividend, this year you chose not to. It is very good dividend, no doubt and Tony mentioned on the call, hey, we’re still a dividend growth company. But he also said we don’t plan to grow it this year. So that decision is kind of been made. The question is why I’m curious why not the increase this year on still solid cash flow?

Jeff Jones

Yes, well I obviously can’t speak for the board. But just to reiterate, some things that we’ve talked about. One is this company is committed to a dividend. As we’ve mentioned, we look at it once a year, the board makes that decision once a year. And I think this year, as we just looked at capital strategy in general, it was a year to be conservative, make sure that we were doing the right things to protect liquidity of the business.

We did that, we came out of that successfully in the board, we’ll evaluate if we’re what kind of increase we take again in June when we review the policy again. But I think, as Tony mentioned, 30% increase in the dividend over the last five years. So it’s definitely a company that’s oriented toward returning capital to shareholders and creating value through the dividend as well.

Scott Schneeberger

Okay, thanks very much.

Jeff Jones

Thanks, Scott.

Operator

Thank you. Our next question comes from Michael Millman of Millman Research. Your line is open.

Michael Millman

Thank you. I’d like to follow-up on what we’re just talking about DIY pricing and was wondering, I assume it once and just assuming that until it completes its purchase of Credit Karma and guessing that they’re going to be pushing price significantly downward in order to get the other business, where does that leave you in Do It Yourself and secondly, on Assisted assuming that you’re able to grow somewhat, but it does look like the industry declined somewhat. It doesn’t leave you with absolute growth. So where does Assisted go, going forward? Thank you.

Jeff Jones

Well, thanks, Michael. There’s couple of different questions, first on DIY pricing. It’s hard to speculate on what they may do, if that deal closes and what pressure it could put on the industry. The way that we think about it is, first of all, we remain committed to free, we have a very successful Free product today or commercial Free product that for example, college students can file for free at H&R Block, they can’t add into it.

People with unemployment income could file for free at block not there. So we’ll always compete with free, we think it’s an important entry point into the category with an opportunity over time for them to buy other services like Live Health as a great example. Absolute product pricing, we’ve maintained a price advantage for a number of years. And in part that was because of a belief that our product needed to significantly improve. So the customer didn’t feel like they were making a downgrade or a bad choice, and we’re there. So with a great product, we feel like we can start thinking about price as a lever more than maybe we have in the recent past.

On the Assisted question, again a couple pieces to what you’re asking, but first of all, just every year, there is another new reason why this is going to be the year that Assisted has a major decline. This year, it was going to be the second year of TCJA. And then obviously, the pandemic on top of that added another new layer. And I think what we continue to see and believe year-over-year is the fundamental truth that people need a system in one help with their taxes.

So the business shifted a little bit this year. But in the context of being told to stay home and people unsafe to go out and physical distancing, and all those things, we feel like the industry proved that it’s quite strong and resilient. So that means for us, it’s an industry worth continuing to invest to compete in. And again, when I look back over the last couple of years, the significant improvements we’re making in customer satisfaction, value for price paid, the trajectory that we’ve been on year-over-year improvements in volume, this year pre-pandemic getting back to holding share. Those are all meaningful changes in our business and meaningful changes in the results and we’ll continue to stay on that path. Digital capabilities unlock something entirely different and it’s important to remember that digital does not mean DIY.

Digital means things like, I can upload my docs while someone does the work, or I can drop them off at an office, but approve online, pay online. Those are ways we make the experience easier for the customer. And those ideas have no impact on that because the consumer still pays the Assisted price. So we come out of this year, very excited about where we’re headed and very pleased with the results that we drove.

Michael Millman

So you would think in three years Assisted should be — you should increase your earnings from Assisted? Is that the message we should take?

Jeff Jones

So I think, so a couple of messages. One is I think the definition of assistance will continue to evolve, that a Tax Pro may sign a return, but it won’t always because of client sit for an hour in a physical office with a Tax Pro that we’re unlocking capabilities to get human help, that’s changing the definition of what the old Assisted model used to look like. And when we do that, we’re able to attract people because of the ease and expertise that we’re known for. And our goal remains to grow Assisted clients, and that hasn’t changed.

Michael Millman

Okay, great. Thank you very much.

Jeff Jones

Thank you.

Operator

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

George Tong

Hi, thanks. Good afternoon. So H&R Block’s net average charge declined 1% in Assisted in the 2020 tax season. Can you talk about how you plan to approach pricing in Assisted next year, I think you touched on Digital DIY, perhaps flush out a little bit around your strategy within Assisted?

Tony Bowen

Yes, thanks, George. This is Tony. So as you recall, this is the second year of upfront transparent pricing, where we took a hard look and essentially changed our entire pricing model in Assisted business two years ago. And at that time, lowered price for several million of our customers. Going into this year, we expected our net average charge to essentially be flat. Each year for the last couple of years, we’ve continued to make tweaks to the model. We hear feedback from customers, we hear feedback from tax professionals. I mean like slight tweaks to that model. At the same time, we obviously serve several new clients, we also there’s a few clients that leave us. So the mix shift is always kind of plus or minus a zone of 1%, if you will.

So it was basically in that zone, there was no overall trends that were up to note. It was just more of a rounding error on the mix shift. Going forward, now that we’ve kind of stabilized in where we are from a price perspective, we’ve had really good feedback from customers on the price or value questions specifically been ask in our survey, we feel really good about the price that we’re charging for the value we’re delivering. And as we’ve shared in the past, we do expect to return to modest price increases in the future. We’re not saying today necessarily next tax season, but over the next several years, we do believe that we can take modest price increases as inflation continues to come into the P&L and we can offset that.

George Tong

Got it. That’s helpful. And the follow-up on an earlier point that was made, I think you indicated that you expect the industry to be flat to slightly down next year. Just wanted to confirm that this was specifically for Assisted and perhaps you can talk about what your expectations are for Digital DIY volume growth in the 2021 tax season?

Tony Bowen

Yeah, I mean, Jeff talked about this in his remarks and then on a couple of questions. I mean, there’s a lot of moving parts going into next year. The Assisted category and the overall, let me start with the overall industry will definitely be impacted by how many EIP returns are in the base that will roll-off. That’s going to be a pretty significant negative for the overall industry numbers. We believe there’s seven million to eight million that were kind of the official EIP. And then there were several returns that were on top of that, that were filed as part of the tax preparation process that weren’t necessarily tracked by the IRS.

You’re also going to have unemployment which we would typically think about one way but given the significant benefits that are being paid out for people that are unemployed, that could actually cause people to maybe file maybe otherwise wouldn’t file, so that may actually be in some ways a tailwind, not just a headwind. Obviously, the migration between Assisted in DIY or from DIY back to Assisted in year two of the pandemic for individuals that maybe

have switched, thinking they want to switch back to Assisted now that stay at home orders and other things may have lifted, and then the overall overhang of the pandemic still being around, there’s a lot a moving parts. And we’ve ran multiple scenarios and thinking about how this could impact the Assisted business and DIY business.

And thinking about being prepared for all those scenarios. What Jeff was alluding to is if you set the EIP returns aside to seven million to eight million plus, we think the overall industry is going to be flat to slightly down. And we’ve got several scenarios showing Assisted and DIY kind of been in that zone, depending on what you believe in each of the different variables. So it’s hard to predict each of those specifically. There’s a lot of moving parts. We’ll continue to update you guys as we learn more. And that’s probably all we could say at this point.

George Tong

Got it. Very helpful. Thank you.

Tony Bowen

Thanks, George.

Jeff Jones

Thanks, George.

Operator

Thank you, our next question comes from Henry Chien of BMO. Your question please.

Henry Chien

Hey, good afternoon. Yes, I wanted to ask maybe a little bit higher level, it’s somewhat related to some of the other questions, what are — when you’re looking for this next tax season? You understand that there seems to be some blurring between Assisted and Digital and that seems to be the strategy. I guess what is sort of your high level focus? Is it growing volumes? And how do you expect that to kind of shift between well, I guess how should we think about it just because of that blurring and I say that because I kind of see it firsthand as a filer with HRB in the digital side.

But yes, just kind of like high level goals and to kind of frame how you’re approaching next year? Thanks.

Jeff Jones

Yes, absolutely. Again, I will tag team a little bit but at the highest level, it remains our focus on growing volume, growing revenue and growing earnings mean that that has not changed in any quarter. I think what is definitely changing is the definitions of what these two historical businesses have been. And when you say digital, it used to mean DIY and we continue to find ways to make getting help easier for people, but Tax Pro’s are still doing the work. So that still makes it an Assisted return. It just over time is looking less and less like an hour waiting in a physical office every time.

Other we’re obviously still very focused on restoring Wave’s growth back to where they were. We’re seeing a nice recovery in the business. We’re seeing a nice change and how they’re thinking about customer acquisition. Wave Money is off to a really strong start. And that fits nicely into our overall belief that there’s opportunity for H&R Block in small business generally which is something we’ll talk to you more about in December. So, a number of things that continue to improve and grow the core consumer tax business, well we also think about growing businesses, we’re already in like small business, like Wave and like financial products.

Henry Chien

Yes, got it, okay. And then just as a follow-up, and so when you think about growth, either in consumer products or in Wave, how much of that or I guess how much of that strategy is dependent on taking share? Or is it — or is there like a specific segment that where it might be better suited to?

Jeff Jones

Yes, great, great question. And obviously, each of those businesses I mentioned has a slightly different dynamic. Obviously, in the consumer tax business, given it’s a defined number of filers generally every year maybe becoming one as an exception. That is about taking share, whether that’s in pure DIY or Assisted. We have obviously a very known set of competitors in DIY, a much broader set of independent competitors and Assisted. But there we have to have great quality, the right price value and continue to make it easier.

In Wave’s business, for example, they are laser like focus on that small business (inaudible) employees, that is currently not using any product. It’s much like the DIY Tax business would have been years ago where those small businesses are using pencil, paper, spreadsheet shoe box, and Wave has a core free accounting product has a low cost of entry to get them off the sidelines. So each business is a little bit different as we think about moving more into small business.

Those are other examples where there’s more industry tailwind and headwind and we know from the customer that the H&R Block brand building on the two million small business clients we serve today has a great right to win. So more to come in December, but each business has a slightly different dynamic.

Henry Chien

Got it, okay. Thanks so much.

Jeff Jones

Yes, thanks Henry.

Operator

Thank you. At this time, I’d like to turn the call back over to Colby Brown for closing remarks. Sir?

Colby Brown

Thank you, Latif and thanks everyone for joining. This concludes today’s call.

Operator

Thank you. This does concludes the conference call. Thank you for participating. You may now disconnect.

Credit: SeekingAlpha

Leave a Reply