H&R Block Beats On Q4 Earnings As Tax Service Revenues Grow - Analyst Blog

H&R Block Inc. HRB reported earnings from continuing operations of $3.36 per share for the fourth quarter of fiscal 2014, ended Apr 30. Earnings outpaced the Zacks Consensus Estimate by 5.3% and year-ago earnings by nearly 34%.

The outperformance came largely on the back of an improved top line.

Shares of H&R Block gained about 3.18% in the pre-market session, indicating that the market has taken this release positively.

Quarterly Operational Performance

H&R Block's revenues came in at $2.56 billion, improving 16.5% year over year driven by revenue growth at both its segments. Revenues outpaced the Zacks Consensus Estimate of $2.46 billion.

Total expense of H&R Block was $1.1 billion, 2.6% higher than the prior-year quarter, primarily due to increased cost of revenues as well as higher selling, general and administrative expenses.

Operating income in the reported quarter was $1.46 billion, reflecting an increase of almost 30% as magnitude of increase in revenues more than compensated for the magnitude of increase in expenses.

Fiscal Highlights

Adjusted earnings from continuing operations in fiscal 2014 were $1.67 per share, which surpassed the Zacks Consensus Estimate of $1.63 and improved 5% over fiscal 2013.

Revenues for the full fiscal improved 4.1% year over year to $3.024 billion on strong Tax Services revenues. Revenues were ahead of the Zacks Consensus Estimate of $2.926 billion.

Segment Performances

Tax Services revenues in the reported quarter increased about 18% to $2.6 billion. Fiscal revenues increased 4.2% to $3.0 billion, fueled by better mix and changes to the pricing strategy in its retail locations, digital tax software product enhancements and monetization efforts, along with increased Tax Plus financial services product revenues.

Pre-tax income improved 29% year over year to $1.49 billion. Fiscal pre-tax income increased 5.5% to $866 million.

Corporate and Eliminations revenues of $7.3 million in the fourth quarter were up 4.4% year over year. Fiscal revenues decreased 11% to $24.8 million.

The segment's pre-tax loss in the quarter was $13.4 million, narrower than the loss of $26.5 million in the year-ago quarter. Fiscal pre-tax loss narrowed largely on account of a non-recurring gain from the sale of residual interests in mortgage loan securitizations.

Financial Position

H&R Block exited fiscal 2014 with cash and cash equivalents of $2.3 billion, up 21% on a year-over-year basis. Total outstanding long-term debt of H&R Block at year end was $506 million, improving 44.1% year over year.

Net cash provided by operating activities in fiscal 2014 was $10.7 million, comparing favorably with $111 million used in the year-ago period.

Dividend Update

On Jul 1, 2014, H&R Block will pay a dividend of 20 cents per share to shareholders of record as of Jun 16, 2014. The dividend will mark the 207th consecutive quarterly payment to shareholders since the company went public in 1962.

Peer Comparison

Intuit Inc. INTU reported adjusted earnings per share from continuing operations of $3.42 in the third quarter of fiscal 2014, which missed the Zacks Consensus Estimate of $3.50. Nevertheless, earnings increased 18.8% on a year-over-year basis.

Our Take

After five straight quarters of missing the expectation, the tax preparer is back on the positive surprise track on the strength of higher tax revenues. As most of the clients file their tax returns from January through April each year, substantially all of H&R Block's revenues from income tax return preparation and related services and products are received during this period.

H&R Block's leading position in the tax preparer market along with its strategic initiatives to grow its business by gaining and retaining customers augur well for long-term growth. Its efforts to return value to shareholders will also help retain investor confidence.

H&R Block presently carries a Zacks Rank #3 (Hold). Better-ranked stocks from the same sector include Outerwall Inc. OUTR and Weight Watchers International, Inc. WTW. Both stocks sport a Zacks Rank #1 (Strong Buy).