Thank you for standing by, and welcome to H&R Block's Third Quarter 2022 Earnings Conference 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] Please be aware that today's call may be recorded. [Operator Instructions] I would now like to turn the call over to Michaella Gallina, Vice President, Investor Relations. Please go ahead.

Thank you, Latif. Good afternoon, everyone, and welcome to H&R Block's third quarter fiscal 2022 financial results conference call. Joining me 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.hrblocks.com. Our call is being broadcast and webcast live, and a replay will be available on the website for 14 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 reconcile the comparable GAAP and non-GAAP figures in the appendix of our press release and presentation. The content of this call contains time-sensitive information accurate only as of today, May 10, 2022. 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. We're happy to be here to discuss our third quarter results and provide an update on the tax season. As you know, we have had several unique seasons over the last few years, and we are feeling great about how H&R Block has emerged from the pandemic. I'm pleased with our business trajectory, and we have made a lot of progress across our Block Horizons imperatives. In small business, we've been successful in driving new assisted tax clients and Wave continues to show strong growth. In financial products, we brought spruce to market with a robust competitive platform this quarter. And in block experience, we are blending our digital tools with human expertise, resulting in a strong increase in virtual adoption this year. We are delivering, and I'm pleased to share that we are raising our fiscal 2022 outlook, which Tony will share more about later in the call. I'll begin by discussing the progress we have made across our imperatives, share more on the tax season and provide details on our results. Starting with small business, we are focused on growing our base of tax customers by leveraging the Block Advisors brand and serving more entrepreneurs through our Wave platform. Driven by strong marketing and more advanced tax grow training, our small business assisted tax clients grew 5% on top of the 4% growth reported last year. We also realized strong growth in net average charge this season of approximately 8%, primarily driven by favorable mix as we serve more complex businesses, and to a lesser extent, low single-digit price increases. As a result of the customer and net average charge growth, revenue increased double digits, a great sign that we're on the right path. Additionally, we continue…

Thanks, Jeff, and good afternoon, everyone. Today, I will review results for the third fiscal quarter, share more on our capital allocation strategy and provide an update on our outlook. As a reminder, this is our first year of reporting the tax season on our new fiscal year cadence, and we are comparing results to last year's tax season that was extended through May 17. In the third quarter of fiscal '22, we delivered approximately $2.1 billion of revenue, which increased 4% or $78 million over the prior year. The increase was primarily driven by positive mix from a higher net average charge in the assisted channel, partially offset by lower Emerald Card revenue due to last year's stimulus payments. Total operating expenses were approximately $1.2 billion, an increase of 4% or approximately $44 million, primarily due to higher field compensation and marketing expenses partially offset by lower amortization and depreciation. Interest expense was approximately $24 million, an increase of about $1 million or 6%, driven by the $500 million of notes we issued last June, partially offset by lower draws this year on our line of credit. As planned, in May, we paid off the $500 million, 5.5% maturing notes that were originally due in November. And as we shared, will result in material savings given the new notes we issued for a 2.5% interest rate. For the quarter, pretax income was $862 million compared to $829 million in the prior year. And our effective tax rate was 22% compared to 8% in the third quarter last year. We implemented tax planning last year that resulted in a discrete benefit, causing our rate to be lower. I will provide thoughts on our fiscal year tax rate in a moment. Earnings per share from continuing operations decreased from $4.09 to…

Thank you, Tony. We are proud of the progress we've made and where we're going. The last several tax seasons have been incredibly complex, yet once again, our team provided help and inspired confidence for millions of people and small business owners. Our success has been made possible by our hard-working associates, franchisees and tax pros, and I want to send a sincere and meaningful thank you. I'd also like to thank our Spruce team, who not only worked diligently to launch the new platform, but continues to rapidly adapt to customer learnings and build new features and of course, the team at Wave, who is driving ongoing innovation and growth. I'd also like to welcome Jill Kress, who joined this month as Chief Marketing and Experience Officer. Jill was one of the country's premier strategic consumer marketing leaders. She joined us from PayPal, where she led brand strategy and engagement across the PayPal and Venmo portfolios. I am thrilled to have her as part of the Block's executive team. In closing, I am confident in our ability to continue to drive shareholder value with both our capital allocation approach today and our picture with Block Horizons. Our team is focused on finishing the year strong. Now operator, we will open the line for questions.

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

Jeff, you talked a little bit about market share gains in the assisted market. And I was wondering what client base do you think you're doing well with and gaining share?

Kartik, thanks for the question. If I heard you, your question was about market share and assisted and what kind of clients do we think we're gaining share from, I guess -- let me just

[Indiscernible] background.

That's all right. I caught it. I mean obviously, we have been on a multiyear journey to improve our trajectory in assisted, and that includes price quality, value, digitization. And I think what we're starting to see now two years in a row of seeing the benefits of those investments. And Block is at its best when we're serving Main Street America. And we absolutely saw this year the benefit from some more complex filers. You see that show up in the NAC increase, which was about two-thirds explained by mix. And so those were filers that had the advanced tax credit or the earned income tax credit or crypto and retail traders. And so as we focus on multiple different segments of customers, we are being successful in attracting the right kind of customer to block.

[Indiscernible] Are your expectations for where market share was end up for us is in DIY? I know it's difficult. I think you said probably more than normal number of extensions and we're kind of comparing today's numbers to last year's May 18 number. So each our blocks expectations or were they expect market share between [Indiscernible] and DIY for this tax season?

Yes. So we absolutely expect to hold or gain share for the full season. Obviously, we're up now. And there's a lot of filing that remains. It's why we are open more hours, more places, more pros to be able to compete to win that business. And I think last year showed us that we can be effective in competing in the post season. So we want to go after every client we can, and I feel like we're well poised to do that. In DIY, there's a lot of goodness here. We grew new clients, we grew revenue, we grew NAC, we grew tax pro review, but we didn't do enough to grow share. And we know in this extended filing period, those kind of filers tend to be more assisted type filers than DIY filers. So even though we're still competing and seeing good days, I don't think I would expect our share to dramatically improve as we get deeper into extension season.

Actually, I was hoping for industry outlook. Your just thoughts on just the industry outlook between for [indiscernible] ]DIY?

Yes. So sorry about that. I misunderstood what you're asking me. So as we went into this year, we expected the industry to be flat to slightly down. And the real variable was the onetime filers that would roll off. And after the last year, there are being a real meaningful migration from DIY to assisted. We expected that this year, the migration would go back to more normal year, 40 bps to 60 bps. And so what we're definitely seeing based on the number of extension filers, if those extensions all convert over the next couple of months. We think the season, the industry may actually finish up a bit. That's good news for the industry. And as we see more extensions get filed we expect that, that DIY migration will end up in that range we talked about. It's a little ahead of that now, but we know that most of the filers that remain are assisted filers. Kartik, I can't hear you at all if you're trying to ask another follow-up.

Our next question comes from George Tong of Goldman Sachs. Your line is open.

As you look at your assisted category, can you describe the competitive dynamics that you're seeing in the independent category, changes that you're seeing there, especially as it relates to pricing and how H&R Block's pricing compares with independents this tax season?

George, thanks for the question. The season isn't over, the year isn't over, so we'll obviously dig into this more at the year-end call and cover all those dynamics. I think what I would say at a high level for now in this quarter is, when we've made our moves in pricing, we've never tried to be the low-price provider. We know that there are independents that charge less and independents to charge more than us. As we took modest price increases this year and then benefited from mix to drive our overall NAC, we did not see any significant competitive move across the base of independents. Of course, when we get all independent data can really assess the total industry much later this summer, we'll have more insight, and we'll share that at the year-end call.

Yes. And the only thing I would add, George, is as Jeff said, there's not a lot of data available. But from time to time, we do get industry views into what competitors are doing from a pricing perspective. And as you would expect, we've seen independent prices modestly go up the last few years as they're obviously trying to offset inflationary pressures in their own P&L. And we don't have data from this tax season. But I would be shocked if we didn't see a similar trend just given the macro environment.

And just following up on the last point on modest pricing increases at Block. How do your price increases compare with input cost increases that you're seeing with respect to labor and real estate in the current environment?

Yes. I would say it's fairly in line at this point. As you know, George, a lot of our key costs are variable labor tied to tax preparation. A lot of that is basically commission based. So as revenue goes up, it will go up commensurate. We do have some hourly wages as well with people that work in our local offices as well, and there's definitely been some pressures. We absorbed those in the P&L this year. We'll share more perspective when we get to the end of the year, but just the fact that we're guiding to better revenue. Obviously, our expenses were well managed as we're also guiding to really strong EBITDA performance as well.

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

I guess following up on the volume and industry volume questions. Jeff, you mentioned in prepared remarks the $134.7 million e-filed through the end of the season, compared that to mid-May last year of $138.6. And you broke that out the delta of extension filers and the onetime filers. Could you please just delve into that a little bit more? I heard you just say to Kartik that there might be a chance that once the extension season could be up year-over-year. So just what you saw in behavior of onetime filers last year, they came back and maybe how they compare just how they were monetized last year. How they were monetized this year? And I have a follow-up.

Scott, this is Tony. Were you asking specific to the industry or for more for Block? I just want to make sure.

Let's start with the industry and any color you can share on Block would be helpful. But you obviously made the opinion you thought you could get there adjusted as becoming full by the end of the extension season. So it sounds like you're expecting a lot. Just curious on industry and then Block there.

Yes. I think Jeff was speaking about the industry when you mentioned that. So this year, we estimate that extensions and it's what do you compare it against. But if you go back and look to tax season '19, for example, which is the last time the tax season ended at a comparable time period around mid-April, extensions look like they're probably up north of $4 million right now. So if you look at the data that we compare that we shared in the opening comments on an e-file basis where the industry is down 4 million just right now. If those extensions convert in this extended period, I think that's what we're seeing that there could be a path to the industry being flat to maybe slightly up, and we don't have a crystal ball. But it feels like there's a lot of filers who normally would have filed by the deadline who did file an extension probably because of the behaviors that they picked up the last couple of years, is just people got used to filing later. So that extension data is definitely elevated for us and the industry, and I think we'll see that play out in the extended period, which is why we're open more hours, more offices, more people working to make sure that we're taking advantage of that.

And following up on that, I didn't see and please tell me if I miss it and tell me overall, if you didn't, and you care to share, but I didn't see tax season and volume numbers and wasn't sure if you were going to give it now or not, when might we expect that if you don't care to share it now? And how is -- are you kind of waiting to see extension season before you do? And how does the anticipated block specifically now as opposed to industry revenue and profitability expected by keeping the stores open in this time period.

Yes. I mean, to hit the last for your question, obviously, that's all contemplated in our outlook. We feel good about what we've delivered through April and then the early days of May are trending well as well. So we feel good about the full year outlook. As far as the overall volume, so we mentioned a couple of metrics in the opening comments about our assisted business as well as our DIY business. But in the appendix slides, which are available on our website, we actually have a table that shows volume from January 1 through April 30 of this year. January 1 through May 18, I believe, last year and then January 1 through July, I think, 17 or something like that for two years ago. Just so you can see the full view. And you can reconcile back to the data point we're sharing, which is currently through April 30, we've done 300,000 more assisted returns than we did two years ago all the way through July. And obviously, we're continuing to gain on that every single day. And I think that's a really key data point just to show the progress we've made. On top of the 300,000 clients we picked up, our net average charge over that two-year basis is also up about 5%. And our assisted tax prep revenue is up over 10%. So just a really solid story. Obviously, it's hard to kind of look at this stuff year in, year out because it's hard to what you compare against. But I think the most conservative way to look at it is through April compared through July two years ago, and it's just a really solid story across the board.

One more quick follow-up on that. In fact, I missed, I see that Slide 26, I hadn't seen it before. So I'll give that a look. But just curious, how is your assisted volume at this point through, say, the end of April versus the year prior to the pandemic, have you recouped because you were comparing to two years ago? How do you compare to three years ago? Is that something that you have handy?

Yes. I don't have it off hand, Scott, but I would say it compares very favorable. You may remember from '19 to '20 in '20 when the pandemic first started, we were down in clients as we were forced to close locations. So '19 was kind of a high watermark from that perspective. And I think we're faring very well relative to that. That's something that we can come back at year-end and share more of an apples-to-apples view.

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

Thank you, Latif, and thank you, everyone, for joining us. This concludes today's call.

Thank you for participating. You may now disconnect.