Executive Summary / Key Takeaways

• H&R Block leverages its extensive retail footprint and trusted brand to maintain leadership in the Assisted tax preparation market while strategically expanding its digital DIY, Small Business, and Financial Products offerings under the Block Horizons strategy.
• Recent performance, particularly in Q3 FY2025, demonstrates revenue growth driven by strong Net Average Charge (NAC) and company-owned volume increases in Assisted, coupled with robust DIY revenue growth fueled by higher online paid NAC and a mix shift to more complex returns.
• Technological advancements, including the GenAI-powered AI Tax Assist (offered free in paid DIY SKUs) and enhancements to the MyBlock app and tax pro matching algorithms, are key differentiators aimed at improving client experience, driving conversion, and enhancing operational efficiency.
• The company maintains a strong financial profile with consistent cash flow generation, supporting a shareholder-friendly capital allocation strategy including a growing dividend and significant share repurchases ($400.1 million year-to-date through Q3 FY2025).
• Fiscal Year 2025 guidance projects top-line growth, EBITDA slightly below the midpoint of the range due to higher legal fees, and double-digit Adjusted EPS growth, significantly benefiting from a one-time tax rate benefit.

The Enduring Franchise: Blending Human Expertise with Digital Innovation

H&R Block, a name synonymous with tax preparation for 70 years, stands as a cornerstone of the U.S. tax landscape. Founded in 1955, the company has evolved from a purely in-person service provider to a multi-channel platform offering assisted and do-it-yourself (DIY) tax solutions across retail offices, online, mobile, and virtual channels in the United States, Canada, and Australia. This deep history and broad accessibility underpin its core market position, particularly its enduring leadership in the Assisted tax preparation category, where its market share is approximately four times that of its next two largest branded competitors combined.

The company's strategic direction is guided by its Block Horizons imperatives: Small Business, Financial Products, and Block Experience. This strategy is designed to leverage HRB's foundational strengths – its trusted brand, extensive physical footprint of nearly 9,000 offices, and a vast network of experienced tax professionals – while embracing digital transformation and technological innovation. The aim is to serve clients across their tax and financial needs throughout the year, moving beyond the seasonal tax cycle.

In the competitive arena, H&R Block operates against a diverse set of players. In the DIY space, Intuit (INTU) with its TurboTax offering is the dominant force, characterized by its digital-first approach and aggressive marketing. HRB competes by enhancing its own DIY product, focusing on user experience, value, and ease of switching, while maintaining a price advantage relative to TurboTax. In the Assisted market, the primary competitor is the fragmented landscape of independent tax preparers, ranging from local CPAs to smaller regional firms. HRB differentiates itself here through its brand recognition, standardized processes, transparent pricing, and integrated service offerings that independents typically do not provide. The company also faces competition in the small business and financial services segments from players like Paychex (PAYX) and ADP (ADP), which offer broader HR and payroll solutions, and fintech companies with specialized financial products.

Technological differentiation is increasingly central to HRB's strategy and competitive positioning. The company is actively integrating artificial intelligence (AI) to enhance both the client and tax professional experience and drive efficiency. A prime example is the GenAI-powered AI Tax Assist tool, launched in DIY paid SKUs. This tool provides clients with easy access to extensive tax knowledge and expert help, designed to understand and respond to complex tax scenarios with greater precision. For the recent tax season, HRB significantly enhanced AI Tax Assist by expanding its topic coverage, deploying hybrid search and semantic ranking, and upgrading to ChatGPT 4.0 to improve accuracy. Crucially, this tool is offered free of charge in all DIY online paid SKUs, providing unlimited access to both the AI and H&R Block tax pros. The tangible benefit is clear: conversion was 13 points higher among clients who used AI Tax Assist than those who didn't, reinforcing the confidence it provides. This combination of AI and human expertise is positioned as a key competitive advantage, particularly as competitors may charge extra for similar levels of expert assistance.

Beyond AI Tax Assist, HRB is investing in other technological improvements. The MyBlock mobile app serves as a digital front door, allowing clients to manage various aspects of their tax and financial lives year-round, from uploading documents to interacting with tax pros and managing their Spruce account. Recent enhancements include tailored start screens and an outcome reveal screen to help clients better understand their tax results, reinforcing expertise and building confidence. Furthermore, the company is adding multiple new dimensions to its tax professional matching algorithms, aiming to enhance the client experience, optimize professional efficiency, and ensure more complex situations are handled by experienced pros. These technological initiatives are designed to strengthen HRB's competitive moat by blending digital convenience with human expertise, improving operational efficiency, and supporting client acquisition and retention across its service channels.

Performance Reflecting Strategic Execution and Market Dynamics

H&R Block's recent financial performance demonstrates the impact of its strategic initiatives and the dynamics of the tax season. For the third quarter of fiscal year 2025, the peak of the tax season, the company delivered total revenue of $2.28 billion, a 4.2% increase compared to the prior year period. This growth was primarily fueled by the U.S. tax preparation business.

U.S. Assisted tax preparation revenues saw a robust 6.6% increase in Q3, reaching $1.64 billion. This was driven by a 5.0% increase in Net Average Charge (NAC) and a 1.5% increase in company-owned tax return volumes. The increase in company-owned volume partially offset a decrease in royalty revenue (down 5.6% to $133.96 million) resulting from franchise acquisitions, where returns shift from the franchise to company-owned category. Total Assisted volume (company-owned and franchise) saw a slight decrease of 0.6% in Q3. Management commentary highlighted that the redesigned Assisted client experience, focusing on conversion and retention through improved tax pro matching and expectation management, contributed to an increase in Assisted client conversion for the second consecutive year and higher client satisfaction scores. The Second Look service, offering free review of prior year returns, saw a tenfold increase in new client participation and identified discrepancies in nearly a quarter of reviews, underscoring the value proposition.

In the U.S. DIY segment, revenues increased 8.1% to $214.67 million in Q3. This growth was primarily attributable to an 8.9% increase in online paid NAC and higher desktop software sales, despite slightly lower online paid volumes. The increase in paid NAC was significantly influenced by a mix shift towards more complex SKUs, indicating the product's ability to serve more sophisticated filers. Management noted that remaining disciplined in an "unprecedented promotional environment" in DIY contributed to the flat online paid volume, emphasizing a strategic focus on paid filers and those with potential for future monetization.

Financial services revenues showed mixed results. Emerald Card and Spruce SM revenues decreased slightly (down 2.3% in Q3), while interest and fee income on Emerald Advance loans saw a notable decrease of 32.5% in Q3, primarily due to lower loan origination volume. Refund Transfers also saw a decrease (down 4.4% in Q3). International revenues decreased 11.5% in Q3, mainly due to lower volumes in Canada and unfavorable foreign exchange rates.

For the nine months ended March 31, 2025, total revenues increased 4.0% to $2.65 billion. U.S. Assisted revenues were up 6.5%, DIY up 7.5%, and Wave revenues increased 12.8% to $79.68 million, reflecting growth in subscriptions and payments processing. These gains were partially offset by decreases in royalties and Emerald Advance income.

Total operating expenses increased 3.4% in Q3 and 4.8% for the nine months ended March 31, 2025. Key drivers included higher compensation and benefits (field wages due to increased company-owned volume, corporate wages due to salary increases, and benefits like payroll taxes and 401K match), increased marketing and advertising spend, and higher other operating expenses. Notably, legal fees and settlements increased significantly (50.3% for the nine months), primarily due to higher outside legal counsel spend and costs related to the FTC matter and proposed settlement, the amount of which is fully reflected in the loss contingency accrual. Technology-related expenses also saw a notable increase (12.6% in Q3), reflecting ongoing investment in digital capabilities.

Despite the increase in expenses, net income from continuing operations increased 4.5% to $722.93 million in Q3 FY2025, and diluted EPS from continuing operations grew 9.2% to $5.32, benefiting from share repurchases. For the nine months, net income from continuing operations decreased 9.0% to $309.04 million, and diluted EPS decreased 4.7% to $2.23, primarily impacted by a higher effective tax rate (25.3% vs. 17.6% in the prior year period) due to discrete tax items.

Financial Strength and Shareholder Returns

H&R Block maintains a robust financial position, characterized by strong cash flow generation, particularly during the peak tax season. As of March 31, 2025, the company held cash and cash equivalents of $772.95 million. Its primary sources of liquidity include cash from operations, its $1.5 billion unsecured committed line of credit (CLOC) which matures in June 2026 (with no outstanding balance as of March 31, 2025), and debt issuances. The company's Senior Notes due in October 2025 ($350 million) are classified as a current liability, and management is considering various financing options for their maturity, anticipating adequate liquidity.

The company's capital allocation strategy is a significant component of its value proposition for shareholders. It prioritizes investing in the business, followed by growing the dividend, and returning excess capital through share repurchases. H&R Block has a history of consistently paying quarterly dividends, recently increasing the quarterly dividend by 17% in August 2024. Dividends paid totaled $147.14 million for the nine months ended March 31, 2025.

Share repurchases are also a key focus. On August 15, 2024, the Board approved a new $1.5 billion share repurchase program with no expiration date. Through the nine months ended March 31, 2025, the company repurchased $400.1 million of common stock at an average price of $61.10 per share, retiring approximately 5% of shares outstanding year-to-date. The program has a remaining authorization of $1.1 billion. These repurchases are primarily funded through available cash and cash from operations and are accretive to earnings per share.

The company also continues its strategy of opportunistically acquiring franchise locations, converting them to company-owned offices. This supports long-term revenue and earnings growth, as revenues and returns shift to the company-owned segment. As of Q3 FY2025, 123 offices had been acquired fiscal year-to-date.

Investments in the business include capital expenditures, totaling $71.78 million for the nine months ended March 31, 2025, primarily for retail office improvements, computers, and software, as well as payments for business acquisitions ($35.32 million year-to-date). The company also entered into an agreement to purchase federal Investment Tax Credits (ITC), paying $22.9 million year-to-date with a remaining commitment of approximately $75.1 million.

Outlook and Key Considerations

H&R Block reiterated its outlook for fiscal year 2025, signaling confidence in its ability to deliver results despite market dynamics and increased legal costs. The company expects fiscal 2025 revenue to be in the range of $3.69 billion to $3.75 billion, representing top-line growth. EBITDA is projected to be in the range of $975 million to $1.02 billion, expected to be slightly below the midpoint of the range due to higher-than-anticipated legal fees and settlements.

The outlook assumes industry growth in line with historical trends, approximately 1%, with DIY expected to grow slightly faster than Assisted. The company aims to maintain overall market share while specifically focusing on improving performance and share trends in the Assisted channel. Continued low-single digit price increases are also assumed. Wave and Small Business are expected to remain revenue growth drivers, and opportunistic franchise acquisitions will continue.

A significant factor influencing the FY2025 outlook is the effective tax rate, which is expected to be approximately 13%, substantially lower than historical levels (typically low 20s). This is attributed to the anticipated closure of various matters under examination and the expiration of certain statutes of limitations, providing a one-time benefit of approximately $0.50 to EPS. Beyond FY2025, the effective tax rate is expected to return to the low 20s.

Adjusted diluted earnings per share for FY2025 are projected in the range of $5.15 to $5.35, reflecting the expected net income performance, the benefit from the lower tax rate, and the impact of share repurchases. The company anticipates another year of strong cash flow generation and double-digit EPS growth.

While the outlook is positive, investors should consider potential risks. The company is subject to various litigation and regulatory matters, including those related to the IRS Free File Program and DIY services, which could result in material liabilities or require operational modifications, although management does not currently believe these are likely to have a material adverse effect on the overall business based on currently known information. Competitive pressures, particularly in the DIY space with aggressive promotions and the ongoing evolution of the IRS Direct File program (which has not had a material impact to date but bears monitoring), remain factors. Shifts in filing behavior, such as the trend towards filing later in the season, require effective operational management, particularly concerning labor costs. Performance in financial products, such as Emerald Advance, is subject to credit risk and market conditions, requiring careful management of underwriting and origination volumes.

Conclusion

H&R Block's investment thesis is grounded in its resilient core business, strategic evolution, and commitment to shareholder returns. The company is effectively leveraging its foundational strengths – a trusted brand, extensive physical presence, and human expertise – while investing in technology and expanding into adjacent financial and small business services. Recent performance demonstrates solid revenue growth driven by pricing power and volume gains in key areas, supported by operational efficiencies and technological enhancements like AI Tax Assist.

The outlook for fiscal year 2025 signals continued growth and strong profitability, albeit with a temporary boost from a favorable tax rate. The company's disciplined capital allocation, marked by consistent dividends and significant share repurchases, underscores its financial health and commitment to delivering value. While competitive dynamics and regulatory risks persist, H&R Block's strategic focus on blending digital innovation with its unique hybrid service model positions it to navigate the evolving tax and financial services landscape and sustain its role as a key player in the industry.