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Text: On the call today are Jeff Jones, our President and CEO, and Tony Bowen, our CFO.
Some of the figures that we'll discuss today are presented on a non-GAAP basis.
Such statements are based on current information and management's expectations as of this date and are not guarantees of future performance.
As a result, 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.
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.
We hope that you and your families are staying safe and healthy in these unprecedented times.
We're also saddened by the senseless acts of racial injustice which continue to plague our country and has tragically taken lives.
We are committed to continue building a culture of belonging at H&R Block and doing our part in our communities to help bring about needed change.
First, I'll discuss how we've responded since the start of the pandemic.
I'll then provide our perspective on the industry in our results followed by thoughts on how we are executing the remainder of the tax season.
I'll next discuss Wave, including an exciting new product that began rolling out to more small business owners last week.
Finally, I'll share perspectives on our future and Tony will review our fiscal '20 results, capital allocation and thoughts on fiscal '21.
The pandemic has created business challenges beyond anything we've experienced.
Our financial results have been impacted.
We've drawn our full line of credit and we've demonstrated agility and innovation, quickly making dramatic changes to our operating model to continue to serve clients.
And in doing so, we've accelerated our efforts to transform H&R Block.
Never has our purpose been more important as we help consumers gain access to their much needed refunds and assist small business owners as they navigate the financial uncertainty caused by the pandemic.
In mid-March, as the spread of the virus began to impact our business, we quickly turned to our crisis playbook, which enabled us to effectively and efficiently react to an extremely challenging situation.
In our retail locations, virtually every state pursued lockdown policies that both affected our ability to operate and prevented people from leaving home to be served the way they want it.
At the peak, nearly 20% of our office network was closed to the public.
For those offices that remained open, we made dramatic changes by limiting in-person service including requiring drop-off in nearly half the network and increasing the use of our virtual capabilities.
In short, our obligation to follow local orders is subject to far greater scrutiny than local independents.
Regardless of how we operated, one of our top priorities has been providing for the health and safety of our associates, franchisees and clients, while helping clients access their refunds.
The teams worked diligently to keep our offices clean, followed social distancing protocols and complied with ever-changing city and state guidelines.
Because of these changes, bringing digital solutions to our clients became more important than ever.
As you may recall, coming into this year, our primary objective was to digitally enable every aspect of our business to deliver our expertise to consumers in new and exciting ways.
These efforts have been instrumental in allowing us to meet the needs of our clients using methods we didn't have in the past.
We have seen a dramatic increase in returns, leveraging our digital capabilities, including Tax Pro Go, Tax Pro Review and Approve Online feature.
Approve Online allows filers to review their returns, approve it and pay their fees off from their mobile device.
With a significant portion of our clients historically visiting offices more than once to complete their returns, this capability provides tremendous convenience, especially during these uncertain times.
We also enhanced our digital capabilities for our tax pros because many of them couldn't serve clients from our offices.
Within two weeks, we stood up a work-from-home model, allowing thousands of tax pros to prepare returns without having to come into the office.
This capability will be invaluable moving forward.
Our efforts during this crisis to continue to meet the needs of clients, digitally enable our business, and serve our clients however they want, has led to strong feedback with service quality scores improving 2 points in Assisted and 5 points in DIY building on significant increases in both areas in fiscal '19.
Beyond taking care of our clients, we also took significant measures to take care of our associates.
Our tax pros are our greatest asset and I'm proud of the investment we made to create a leading benefit program for our seasonal associates if they were directly impacted.
And finally, I'm also proud of how we've responded in our continuing commitment to our communities.
We joined the American Express 'Stand for Small' coalition in support of small businesses.
At Wave, we provided instant payouts to all of our payments customers for free to give them instant access to their money.
And we offered free tax preparation to frontline workers through Tax Pro Go in May and June, which received overwhelmingly positive feedback.
With this context on our operations, I'd like to spend a minute on what we're seeing in the industry as a result of the pandemic, as well as our results.
Industry returned volume has been unusual due to the filing extension as well as the stimulus package.
Through June 5, the IRS reported total filings down 6%.
The IRS's volume includes millions of returns completed by those who typically don't file.
They did so this year to receive stimulus payments.
We believe the vast majority of these returns were completed through the IRS's fillable form site, which is inflating the number of DIY returns in the market.
Excluding these returns, we estimate DIY e-files are down approximately 4% compared to Assisted e-files, down 15% through June 5.
We expect this gap to moderate toward the end of the tax season and we'll provide more thoughts during our Q1 call.
With respect to our volumes in DIY, we've maintained relatively flat shares through early June.
In Assisted, we had share gains through the end of April, but are seeing that moderate in this extended filing season.
It's important to recognize that an extension like this has never happened in U.S. history.
So there is no precedent for forecasting consumer behavior.
Despite states beginning to reopen, there is no business as usual.
We have more offices open and have expanded our hours of operation compared to a typical first quarter but a substantial portion of these locations are not serving clients in the office.
Instead, we continue to interact with our clients either virtually or through drop-off.
And while we have more tax pros working than normal this time of year, it is far less than the number we would have at the end of a typical tax season in April.
For these reasons, client volumes may be impacted.
As such, we've updated our marketing plans for the quarter to make sure consumers know we're open and to help them understand the variety of drop-off and digital options we have available.
We're doing this through multiple channels to make sure we appropriately target those who haven't filed.
In addition to the help we're providing consumers, we're also doing everything we can to help small business owners during this difficult time.
We've added a free Small Business Resource Center on our website to provide regular updates on government assistance programs.
Additionally, in May, we launched our recovery action plan service, which helps entrepreneurs navigate the CARES Act, including loan programs and tax credits.
This is another great example of leveraging our human advantage.
Turning to Wave, after posting strong results of over 40% revenue growth through mid-March, we've seen flat revenues in April and May as small businesses were impacted by the pandemic.
We've taken measures to ensure we are limiting operating losses at Wave without sacrificing key investments in the business.
Despite these actions, we expect the near term performance and resulting valuation of the business to be negatively impacted similar to many other businesses during this pandemic.
As such, we have recorded a non-cash impairment of goodwill which Tony will talk about later.
While there has been a short term impact on the business, we remain confident in the long term viability and future growth of Wave.
One reason for this confidence is Wave's innovation and the pipeline of valuable products and services we are working on for the future.
A great example of this is Wave Money, which was expanded to more customers last week.
Wave Money is a business bank account that does what others can't, manage all aspects of bookkeeping automatically, giving entrepreneurs more time to focus on their business.
This is the first to market, software-powered small business bank account, which provide several unique benefits to Wave customers including no monthly fees or minimums, seamless integration to Wave's accounting platform for expense categorization and tax readiness and instant access to funds via Wave payments.
We are excited about this product as we continue to innovate to simplify the lives of small business owners.
In summary, as we navigate this new normal, we haven't lost sight of what we've accomplished this year making significant progress toward our strategic objectives in ways we couldn't have anticipated.
We are taking this opportunity to thoroughly and objectively evaluate our progress, determine what we can do better and to reinforce our sense of urgency in these efforts.
We remain committed to continuing the transformation of our business.
We're in the process of evaluating and reprioritizing our strategic imperatives, while simultaneously, examining our expense structure to identify areas where we can save to help fund the future.
This work is ongoing and will remain fluid given our current operating environment.
We'll be providing more detail later this year.
With that, I'll hand the call over to Tony.
The last time we spoke, we were on track to deliver on our outlook for the tax season in the fiscal year.
However, like most companies, the pandemic has negatively impacted our business and financial performance.
Because of the timing of the pandemic aligned with the time in our fiscal year in which we recognize the majority of our revenue, we withdrew our fiscal year '20 financial outlook.
As such, I won't be detailing our performance against those expectations as I normally would.
I will, however, provide insights regarding our fiscal year '20 financial results, how we see the remainder of the tax season impact in our financial performance in fiscal '21 and actions we're taking to enable continued investment for future growth.
In fiscal '20, we recognized revenues of $2.6 billion, representing a 14.7% decline from the prior year, driven by lower tax return volumes as a result of the extension of the federal tax filing deadline, partially offset by the contribution of Wave.
Regarding expenses, total operating expenses increased 3.4%, driven entirely by the impairment of Wave goodwill and Wave's operating expenses.
Excluding Wave, our total operating expenses would have declined, though at a lower percentage than the decline in revenue due to legal fees, COVID-19 related benefits, and planned investments in technology.
We recorded a $106 million non-cash goodwill impairment at Wave due to the pandemic and its impact on small businesses.
As Jeff mentioned, we've been pleased with Wave's performance since the acquisition with solid growth through mid-March.
However, revenue growth has slowed during the pandemic, which has impacted the invoicing and payments volume of small businesses.
We remain confident in Wave's future and in our ability to continue to deliver tremendous value to small business owners through Wave's innovative platform.
Turning to the rest of the income statement, interest expense increased by $9 million.
Approximately half of this increase was due to higher draws on our line of credit during the normal course of the business through our fiscal third quarter, while the other half was due to additional interest associated with the $2 billion draw in late March.
The changes in revenue and expenses resulted in a pre-tax loss from continuing operations of $3 million.
GAAP earnings per share was positive at $0.03 due to favorable discrete tax items.
Adjusted earnings per share, which excludes the impact of the impairment and amortization of intangibles related to Wave and tax office acquisitions, was $0.84.
In discontinued operations, there were no changes to accrued contingent liabilities related to Sand Canyon during the year.
I'll now turn to capital allocation and the balance sheet.
Despite the unique circumstances related to COVID-19, our capital allocation priorities remain the same.
At the top of the list is maintaining adequate liquidity for our operational needs.
Our current liquidity position remains strong as we ended the year with $2.7 billion in cash, which includes the full $2 billion drawn on our line of credit.
As we announced in late March, we believe we have sufficient funds to support the business at the start of tax season '21.
Our line of credit is subject to various conditions including a covenant, which requires us to maintain a debt to EBITDA ratio of 3.5 times on April 30.
Based on our fiscal year '20 financial results, we did not meet this covenant, but we have secured a waiver with our lenders with no changes to the terms of our line of credit.
After ensuring adequate liquidity, we then made strategic investments back into the business that we believe will drive sustainable growth, ultimately benefiting our shareholders.
As Jeff mentioned, given the pandemic's impact to our business, we have undertaken a review of our expense structure to eliminate any unnecessary spend in order to continue funding the initiatives that will fuel future growth.
I'll talk about these expense measures in a moment.
The last step of our capital allocation process is to deploy excess capital through quarterly dividends and share repurchases.
I'm pleased to announce that despite the financial impact of COVID-19 and the extended tax season, our Board of Directors has declared a $0.26 per share dividend payable July 1.
We've never missed a dividend payment since going public in 1962.
We remain committed to performing an annual review of the dividend after each fiscal year.
With respect to share repurchases, in fiscal '20, we repurchased a total of 10.1 million shares for $247 million at an average price of $24.36.
We made no share repurchases in the fourth quarter.
For the past two years, we have committed to, at a minimum, repurchasing shares to offset dilution from equity grants and opportunistic share repurchases thereafter.
Given the uncertainty created by COVID-19, we have not yet determined our share repurchase approach for fiscal '21.
I'll now discuss our thoughts on -- regarding fiscal '21.
As a reminder, last year, we provided our fiscal year financial outlook on our Q4 call.
Given, we haven't yet completed the current tax season and there remains uncertainty due to the pandemic, we will not be providing a financial outlook at this time.
Instead, we plan to provide a tax season recap on our first quarter call in September and our full financial outlook for fiscal '21 on our second quarter call in December.
Let me provide some high-level thoughts on how we expect to close out the tax season and our efforts to mitigate cost increases as a result of the extension.
First, while it's natural to expect all volume loss in Q4 of fiscal '20 to shift into the first quarter of fiscal '21, that may not necessarily be the case.
As Jeff mentioned, during this quarter, we are still operating under a modified model.
While we have more offices open than usual, we are still operating with just half of our total network and a substantial portion unable to serve clients face to face.
This may impact our ability to retain clients and attract new clients to the brand.
Regarding expenses, due to the extension of the tax season, we anticipate additional cost during the first quarter.
We expect an increase of approximately $10 million in marketing expense and approximately $10 million in interest expense.
Additionally, we expect variable expenses related to compensation benefits and bad debt to be approximately 40% of incremental Assisted revenues generated.
We are actively evaluating ways to mitigate any additional cost by taking a detailed look at all spend categories and making prudent reductions across our business.
We're still in the process of finalizing these plans but I can offer a few areas of focus, including renegotiating rents with landlords across our retail footprint, implementing a hiring freeze, eliminating merit increases for fiscal '21, examining vendor spend to renegotiate existing contracts, and reducing capital expenditures to only what is necessary.
In addition to these savings, we have entered into a non-binding letter of intent with MetaBank to be the provider of our financial products, including Refund Transfer, Refund Advance, Emerald Advance and Emerald Card, which will result in savings.
MetaBank is a leader in providing financial solutions to consumers and have significant experience in the tax preparation industry.
We're excited to partner with them to continue providing valuable products to our clients.
In summary, we've taken prudent steps to adjust to the pandemic, including our modified operating model, line of credit draw, and cost reduction efforts.
These measures will allow us to operate effectively, while enabling continued investments in our future.
We've been challenged during the last few months unlike any other time in our history.
The resilience and dedication of our team, our strong financial foundation, and our ability to adjust our operating model has enabled us to continue delivering tremendous value to our clients at a time when they need us most.
I am confident we'll come out of this crisis stronger than ever as we continue the work to transform our business.
I look forward to speaking with you in September.

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announced a quarterly dividend of $0.26 per share.
h & r block - have adequate liquidity to meet anticipated operating cash needs through start of tax season 2021.
evaluated wave's goodwill during q4, which resulted in an impairment of $106 million.

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