H&R Block, Inc. (HRB) Earnings Call Transcript & Summary

Good morning, and thank you for joining us. I'm Michaella Gallina, Vice President of Investor Relations for H&R Block. Today, we're thrilled to share more about our new mobile banking platform, Spruce. As always, before we begin, please take note of our forward-looking statements. We'll start today's event with a recap of our Block Horizon strategic imperatives and then dive into the Spruce platform. You'll hear from a number of our business leaders, and then we'll open it up for a live Q&A session at the end. As you listen to the presentation, please use the chat icon in the bottom center of your screen to submit any questions you may have. And with that, I'll now turn it over to our President and CEO, Jeff Jones.

Thank you, Michaella. It is so good to be here today and to share this exciting update on Spruce. Now many of you were with us in December of 2020, when we launched Block Horizons, the next phase of our strategic transformation. This plan positions us for long-term sustainable growth by focusing on 3 strategic imperatives: small business, financial products and block experience. We have made meaningful progress in all 3 areas. And today, we're going to focus on the launch of Spruce within the financial products imperative. At H&R Block's core, we provide help and inspire confidence in our clients and communities everywhere. This imperative is about the solutions and experiences that create confidence, and help ease the financial burden of our clients. H&R Block has innate built-in advantages in financial products. We've been a trusted partner to millions of people in their most intimate financial event of the year, their tax filing. We spend over 12 million hours in conversations with customers annually. We learn about their financial hopes and dreams. And these deep relationships have resulted in a rich network of more than 20 million clients that we serve. In fact, $58 billion in refunds flow through block each year. Our decades of experience in financial services and extensive research have made the needs and opportunities in this market clear and we have answered. On January 20, we launched Spruce, our mobile banking platform. Spruce is a meaningful milestone in our transformation journey. We built this product over the past year. And I am so proud of the platform that we launched on day 1. While others have spent years building what their products are today, we came to market quickly with a very robust feature set. Over the next hour, you will hear from Les Whiting, our Chief Financial Services Officer; and John Thompson, our Vice President of Financial Services. Les is one of the leading experts on payments in North America, with more than 25 years of experience in technology, banking and financial services, and we are thrilled to have him leading the development and implementation of our financial products portfolio. John has a deep background in entrepreneurship and financial services product development, including tax refund and cash management products. We are grateful for the knowledge and expertise that John brings to the team. With that, I will now turn it over to Les.

Thank you, Jeff. I'm delighted to be here today and take you all on a deeper dive into H&R Block's new mobile banking platform, Spruce. Spruce is a modern financial technology platform that combines what we believe to be the best features of leading neo banks with H&R Block's trusted brand and insights gained from helping millions of clients, with one of their most important financial events of the year. As Jeff mentioned, the Spruce launch represents an important step in our evolution and is one more way for H&R Block to create confidence in our clients, and help ease the financial burden felt by far too many. Above all, it's the right thing to do for our clients as they are continuously looking for a financial partner that's in their corner, helping with all dimensions of their financial health. Let's take a listen to how many consumers think about their finances and money and achieving their dreams. [Presentation]

You heard what many consumers are up against. They think they're bad with money, but they want to be better. Sometimes being good with money seems insurmountable. And sometimes, it's hard to stay on track while life seems to throw one setback after another. Like me, you may connect deeply with the experience of our clients shared, whether it resonates with yourself or someone you may know and care about. This is why we are so passionate about the Spruce platform. We anchor all our products and design thinking around our vision of creating fair, friendly and progressive financial options for everyone because we believe all people deserve to be financially healthy. We brought Spruce to the market at a time when people need help. It's purposefully designed to support those that are financially vulnerable and financially coping, meaning they're struggling with one or more aspects of their financial lives, spanning spending, saving, borrowing and planning. In fact, research shows that nearly 2/3 of Americans fall into these categories. That's more than 166 million people who are not financially healthy across all incomes, geographies, ages and dimensions of identity. In our market research, more than 83% of people told us, the primary thing they want from their financial partner is improved financial health. The traditional banking system isn't working for far too many Americans and has largely been unchanged for decades. Consumers are increasingly dissatisfied with the outdated practices of many banks, and related fees and penalties, which have eroded trust. According to a report by the financial health network, financially coping households are spending as much as 5% of their annual income on fees and interest will financially vulnerable householder spending as much as 13%. That represents $255 billion in fees and interest spent on everyday financial services. Consumer behaviors are also changing. Recent research from the Boston Consulting Group showed that at least 1 in 4 consumers are planning on using bank branches less or stop visiting them all together. While many banks offer mediocre digital experiences, consumers are increasingly adopting digital products in all aspects of their lives. This trend is elevating what consumers expect from their financial services providers. And basic digital banking functionality is no longer meeting consumers' expectations. When we look at the competitive landscape, we see 2 themes. One, national banks who have brand recognition, but generally lack trust and modern digital experiences; and two, challenger banks that have features but don't have brand recognition and are trying to build trust and distribution. As Jeff shared earlier, we're leading the way with a mobile-first banking platform from a trusted brand with 66 years of knowledge from helping people with their land. Spruce bridges the gap in the market by combining leading technology and features with our trusted brand. We spent 12 million hours in conversations with clients every year about their financial challenges and dreams. And we are addressing their needs and desires with this platform. Financial service is not new to us. Our existing tax time financial products serve more than 2 million customers every year, providing borrowing and spending solutions. Spruce, however, is built on an entirely new modern financial technology platform and integrates the very best technology from leading fintechs. Traditional banks legacy technology stocks make it difficult and costly to launch feature-rich digital experiences. While other challenger banks have spent years building what they have today, we came to the market with a very robust feature set on day 1. Our new financial technology platform enables us to continue quickly rolling out features and innovation from here. Let's take a closer look. We designed Spruce to meet the needs of our customers by focusing on what they desire, improving their financial health. Financial health is a composite framework that considers the totality of people's financial lives, spending, saving, borrowing and planning in ways that enable them to be resilient and pursue opportunity. It recognizes how these are interconnected and change with time. It understands that behaviors and choices matter. It promotes the concept of outcomes rather than access or inclusion. And it represents what people ultimately want from their financial partners, higher confidence, lower stress, increased resilience and improved financial health. Let's walk through how Spruce's features help our customers improve their financial health. At the core is a powerful banking platform that includes a spending account, debit card and savings account. We have long believed in providing transparency to our clients. That's why we launched upfront and transparent pricing for our tax services a few years ago. And it is a core value of Spruce. There are no monthly fees, sign-up fees or overdraft fees. We also pride ourselves on low barriers to entry, such as no minimum balances to open accounts and clients get access to a network of 55,000 fee-free ATMs. And Next, clients have the ability to receive their money quickly for both paychecks and federal tax refunds deposited directly to their Spruce account. When utilizing direct to positive paycheck into Spruce account, customers can be paid up to 2 days early. While early access to paychecks is an emerging feature for many neo banks, traditional banks and credit unions typically do not offer this. This is a big deal for most of our customers. Additionally, when customers direct their federal tax refund into their Spruce account, we will make those funds available up to 5 days early. Given the tax refund is great, giving it up to 5 days early, is even better. Clients who direct deposit their paycheck into their account can enable a feature we call Courtesy Coverage. This provides clients the ability to overdraw their account by up to $20 at no charge. We notify the customer of the event in a number of different ways, providing them with options to transfer money from savings from another external bank account or simply wait if a deposit is coming soon. While some banks are finally reducing overdraft fees. From the start, we are focusing on helping customers avoid penalties for mistakes when balances are low. There are no overdraft fees with Spruce. One of the most important behaviors for financial health is saving and more specifically saving with a plan. In many ways, it doesn't matter what the plan is, just that one exists. Spruce helps people do that with automatic savings, whether it's saving for something big or small, Spruce will help. When a customer signs up, they automatically get a savings account. Remember that just having access to an account is a barrier for savings for many people. Clients can also create personalized savings goals, along with simple automations to help achieve those goals faster. Coming soon is an additional feature that rounds up spending transactions to the nearest dollar and automatically transfers a roundup amount of savings. Cashback rewards are automatically earned by simply using the Spruce debit card at select retailers. When these rewards are paid, they're automatically deposited into the savings account. Let me share more in this feature. Clients automatically get access to personalized cash back reward offers based on their location and spending patterns. We partner with Dosh, who has created a network with over 10,000 retailers, including Costco, Sam's Club, H&M, Adidas, Shake Shack and Finish Line. These rewards are funded by merchants in the network, meaning we continue to earn the full interchange fee on the transaction. It's a win-win. And as we just shared, when clients earn cash back rewards, they're automatically routed to the savings account, which helps fuel savings success. One regret many taxpayers have is they don't end up using the refund in the way they had planned or don't end up making a tax refund go as far as they'd hoped. The lumpy nature of tax refunds and the importance they play in families financial lives puts a premium on doing better. We've developed a simple but important option in helping clients achieve their goes. When they direct the tax refund to the Spruce account, we introduced the tax refund recommendation to save a portion of the refund in their savings accounts, which we then automatically transfer for them when the refund arrives. A number of in-markets experience have proven the effectiveness of such simple precommitment tactics such as this one. In fact, simplicity is often necessary in lieu of more configurable options. We're excited to provide these tools for our customers, which help support good financial habits happens. The 2 primary indicators of boring health are: one, maintaining a manageable debt load in relation to income; and two, having a prime credit score. Our first step is helping clients address borrowing health is to create regular visibility to the client's credit score for free. And help educate the customer on the components that make up the score. As changes occur, clients contract, credit score on Spruce. In the future, we'll introduce more tools to help connect activities with credit score outcomes. And help clients understand the specific steps that they can take that will impact both their credit score, their overall borrowing health and its impact on financial health outcomes. Lastly, I'll share more about the my life feature, which is a home base for our customer, a mix of insights, data and advice. Initially, my life is a launch pad to set up various features and learn about Spruce. Then as the customer uses Spruce over time, the my life future begins to offer insights advice and feedback to navigate their financial lives as the technology monitors deposit spending and savings behavior. My life is a dynamic feature that grows and changes with the customer, their engagement and needs. For example, when spending in a certain category like entertainment, groceries or clothing, starts to approach or exceed typical patterns, clients will receive a heads up in their my life fee to take a closer look. Or for example, if a year ago, a client had a large expense that they hadn't saved enough for in the current year, the my life feed serves up a reminder to potentially plan ahead. In summary, Spruce is designed to address the needs of our clients by helping them understand and improve all aspects of their financial health. We feel well positioned as we bridge what we believe is a gap in the market by providing a robust financial technology platform alongside each of our blocks trusted brand name that has a built-in distribution network to acquire customers and jump-start account deposits through a tax refund. I'll now turn it over to John, who will take you through a live demo of the Spruce mobile app.

Thank you, Les. Let's have a look at some of the features of Spruce in action. Now for a little bit of context, you're going to be seeing a live account of a new Spruce customer. Remember, this person has already done a few things with their account. They've downloaded a mobile application from the iOS app store, and they've opened a Spruce account. They've linked an existing bank account and transferred funds into Spruce. They've also activated access to their credit score and they've turned on courtesy coverage by signing up for and using direct deposit. And lastly, as we're going to show you, they've created a savings goal and set an automatic savings plan associated with that goal. So let's log in. Upon entry, the customer lands in an experience called my life, which is a mix of an account snapshot and a running feed. My life gives the customer a quick peek into their balances in the savings and spending accounts, recent money movement and ideas for how to enhance their experience with Spruce. Now you'll notice that this screen is organized a bit differently than a traditional digital transaction register. While that is available in Spruce, our clients have told us that they would also like to view their transactions in different ways, in ways that make more sense to them and so we designed accordingly. Along with the quick views into money in and money out, the client is also presented with cards like the one you see here about finding cashback offers. As the account matures and as our access to transaction activity grows, the my life experience grows as well, offering insights and tips on spending behaviors, upcoming challenges and more. Now the spending page does offer a running transaction register with a view into both pending and settled transactions as well as running balances. Clients can view transactions and balances as well as click to view more details about a specific transaction. From the spend page as well, a customer can also get access to primary account details, including routing and transit number, account number and full card details. Spruce can also be added to mobile wallets for ease of access and use. So we've talked a bit about the savings capabilities that Spruce has at launch, and those are available from the savings page. Now as you can see, this customer has set up a savings goal in addition to the default extra savings account that's established automatically with Spruce. With the existing goal, the customer has set up Spruce to save just a little bit each day. And a quick peek at the goal itself allows the customer to see more about their progress and manage the activity against this goal. The customer can pause or skip automatic transfers or they can add a little extra like I'll do here. Now remember that with cashback rewards, those are automatically routed to the extra savings account. If a qualifying purchase is made, the cash back shows up automatically. Nothing further the customer has to do. The customer can also explore available options, of course. I'll quickly create a savings goal just to show you some of the experience using the application. So first, we'll click at a goal. Spruce makes recommendations about the potential goals that a client might consider including the option to create an emergency fund for short-term use. For this example, I'll create a goal around saving for a down payment for a car. So I'll scroll that section, set an appropriate name, and then choose an icon to represent the goal. I'll set a goal amount, let's say, $750. I'll set a starting deposit, say $100s, and then choose some automation towards that goal. In this case, I'll choose $75 every 2 weeks to line up with my paycheck. Now Spruce tells me, I'll be there in just a few months. To end, I'll review everything and create the goal. That's it. Spruce's first offering to help clients with their borrowing health is an ability to access and understand their credit score. With just a couple of clicks, client can bring their credit score into the application and monitor changes over time. You can see here the customer's current score as well as the change since their last update just a month ago. The application also provide some information about the building blocks of the credit score as well. Going back to the profile page, the customer has complete digital control over their account, including locking and reordering cards, activating courtesy coverage, viewing statements, or managing notifications. It's all there. Clients can also move money around their spruce account with ease using the move money feature. It's easy to transfer funds between spending and savings goals. It's also easy to link Spruce with other fintech services. It's compatible in all the ways clients would expect from a banking platform. We'll be launching a check deposit capability soon as well as the ability to pay bills electronically or by check from the spruce account. So there's a quick flyby of the initial features on Spruce. It also gives you the taste of the experience using the application. The Spruce app is available on Apple's App Store and the Google Play store. Clients can also manage their account from the web at sprucemoney.com. With that experience in mind, let me take you through some of the elements of the business model. Now to begin with, Spruce allows us to expand our relationship year round. Today, we often engage with clients once a year when they come to us for their taxes. Spruce will enable us to acquire clients both digitally and eventually through our retail tax offices as well as provide us the opportunity to engage with them on a regular daily basis. Let me take you through some of the ways this Spruce generates revenue. Our primary source of revenue today is through interchange fees earned when clients use their Spruce debit card and spend their money. When a purchase is made, H&R Block earns transaction revenue. We have a terrific relationship and favorable economics with our partner, MetaBank. And as a reminder, in our model, the automatic cashback rewards we spoke about earlier are funded by the merchant directly rather than us. So our interchange revenue is not impacted. Now a secondary source of revenue is out-of-network ATM usage. Our clients can easily get cash back with pin debit purchases at the point of sale, and they have access to over 55,000 no-fee ATMs through our partnership with the point network. Clients can easily locate the nearest ATM and get directions to it right from within the Spruce mobile app. If a client does choose to use an out-of-network ATM, they are charged a small fee. In summary, we are really proud of Spruce and what it offers to clients. We will be monitoring our progress closely, including key metrics such as the number of sign-ups and direct deposits, and we look forward to provide updates along the way. As we've shown, Spruce Bridge is not only a gap in the market but importantly answers many of the needs and desires of clients across spending, saving, borrowing and planning. Spruce makes it easy to be good with money. And this is just the beginning. Our team has been and is hard at work, both in improving client experience, but also on introducing new features. We look forward to the opportunities ahead and all the future holds for our new mobile banking platform. With that, I'll hand it back over to Michaella for Q&A.

Thank you, John, and welcome back Jeff, Les and our Chief Financial Officer, Tony Bowen, who is joining us for the live Q&A portion of the rest of today's session. [Operator Instructions] I've been watching a few of these questions rolled through unless I think you might be the perfect first person to take a question that I've seen coming in a couple of times, which is investors are curious about how the launch is going since the product came to market just a few short weeks ago. Can you take that question?

Yes, absolutely. Thanks, Michaella. So as a reminder, we just launched Spruce on the [indiscernible] so it's early but we're off to a really good start both with our DIY customers and direct [indiscernible]. We're seeing engagement across the platform in [indiscernible] an entirely new fintech platform. We were able to bring Spruce to the market very quickly with a really robust feature set on day 1. So our early goals are quite clear. We're looking to acquire new Spruce users, get dollars deposited into accounts, learn how our customers are engaging with these features and finally, deeply understanding what are the levers of growth. We're glad we launched Spruce, when we did because we're learning a lot about how we acquire spruce users during the tax filing event and a reminder initially in our DIY tax channel. We're really deploying the best practices of fintechs having launched a good initial product but we're listening closely to customers carefully. We're closely monitoring engagement across the platform, and we're constantly iterating our software. We've actually already released 3 major updates in just last 40 days. So now that we've locked Spruce, we're shifting gears, and we're focusing on 4 key areas: one, the overall kind of customer experience in the app; two, launching some additional features, which John touched a little bit on just recently; and three, acquiring new customers on a year-round basis. And lastly, we're now integrating Spruce into our assisted channel from next tax season to activate that important distribution channel to acquire even more users for Spruce. So again, we're off to a great start.

Thanks, Les. And Kartik Mehta of Northcoast has a quick follow-up to that question. As you talked a little bit about how we're initially marketing the product, can you share any incentives that we're using for customers to sign up and load dollars into their account right away?

Yes. So we've got a couple of different promotions that we're running and testing right now. One of them is that there's an incentive, a cash incentive that customers receive when they open a Spruce account they sign up for a direct deposit and then we'll automatically load that cash deposit into their account. So again, we're in that learning phase. We're testing a bunch of different things, but we're certainly using some promotions as kind of customer acquisition strategies.

Perfect.

And the only thing I would add, Les is what we're seeing with the 5 days early, which is in a financial incentive, but the ability to get your refund loaded 5 days early is a very powerful consumer motivator.

Yes, absolutely. Thanks, Jeff. And that's something that we're seeing users really engage us. So we're excited about that, getting money into taxes, it can never be fast enough.

Yes, agreed. Les, I think I'm going to come back to you, a lot of questions coming in about how we position the Emerald Card versus Spruce. And how they overlap and how we're thinking about those 2 products. Is that something you can share more detail on?

Yes, sure, Michaella. It's something we get a lot of questions about generally speaking. So as a reminder, the Emerald Card is a prepaid debit card clients receive when they use one of our existing credit products, such as the Emerald line of credit or Refund Advance loan. So funds are loaded into the Emerald Card and client to leave the tax office with a card in hand, providing immediate access to their money anywhere [indiscernible] cards acceptable. So this product currently serves millions of customers a year, and it does this one thing extremely well. However, our customers -- they have much broader financial needs. And they've been asking us for years to have, frankly, more capabilities from Emerald Card. And so that's really where Spruce fits in. So in order to build all of the features and the rich mobile experience we just saw today, we knew we needed to start by building a new modern fintech platform capable of enabling this. And that's exactly what we've done. So Spruce is a modern mobile-banking platform that serves a much broader set of financial needs. And it's helping our customers be good with them. As John also kind of touched on, Spruce is transforming our relationship with clients from what is often a once-a-year transaction to now an ongoing year-end relationship. So we really believe the Emerald Card and Spruce serve really distinct needs and Spruce will allow us to serve even more customers in more ways.

Great. Thank you. Tony, I'm going to direct this next question to you. It comes to us from George Tong, sell-side analyst from Goldman. Can you please describe how you expect Spruce to impact our P&L over the medium to long term? And share a little bit more about what the revenue drivers of this product look like.

Yes. I mean it's less -- it's only been a few weeks since we launched. So we're in the early days. I mean the revenue drivers in the near term will be from interchange as well as ATM fees as we mentioned. We're not providing any specific guidance at this point, but we've talked about we have 3 strategic imperatives and this is one of them. So it's incredibly important, and we think it's going to drive meaningful client acquisition, revenue and earnings over the long term.

Great. And as a follow-up to that, George also asked if we have any interest in obtaining a bank charter or what our relationship with MetaBank will look like in the future with this product?

Yes, we definitely aren't planning to become a bank. As everyone knows, we used to be a bank. We sold it in 2015. We've got a great relationship with MetaBank today. They've been our partner for the last 1.5 years, providing all of our financial products. So when we thought about launching Spruce, we thought who's the best partner to go with, and Meta was the obvious choice. So we recently extended our relationship. We've got very favorable economics. They're the bank that holds to deposits. They're the issuing bank but we're the program sponsor. And as Les said, as well as John, in some of his opening comments, we're able to get and retain most of the economics from the relationship through interchange, ATM piece, et cetera. So we think the relationship works really well. The partnership is strong, and it really doesn't require us to become a bank. It really doesn't provide us any additional advantages that we don't already have today.

Thanks, Tony. Jeff, I think I'm going to move to you for this next question. We have some investors that are asking a little bit about the competitive landscape and would like to get a little more background as to why we believe we can be successful in this market. Can you take kind of the competitive trajectory and why we launched this Spruce platform into the marketplace.

Yes, absolutely. I mean, we -- I think we have a good sense of what the competitive landscape looks like. There are clearly multiple competitors. But what we realized is the consumer problem remains despite many brands working to solve this problem, as you heard from John, 2/3 of America still struggles with some aspect of their financial health, and millions of those are Block clients. So we see it firsthand, we serve them already. And as we look deeper into what the landscape provided, we just continue to see that we have a number of built-in advantages that we now have to exploit, starting with our experience in financial services as really what enabled us to build and move as quickly as we did. We just weren't starting from scratch. The trust and reputation of the Block brand, we know is an asset. Every year, people are turning to us, not for banking services, but sharing their most intimate financial details, and we know how important that is in building the Spruce brand. We start with an installed base of clients. Obviously, we've built a product that's really for everybody. It's not just for block clients, but as a starting point, our TAM is built into the business, which means our digital channels and our physical channels are distribution that we don't have to recreate and we think that's an incredible advantage. And then finally, getting funds into the account and spending on the account is ultimately one of the greatest challenges. We've built a product that's far beyond a tax refund distribution mechanism. But the fact is nearly $60 billion flow through Block every year in tax refunds, and that provides the potential for a great jump start in account. So when we look at the landscape, we put those advantages together. We think about the economic potential as one of our growth levers. And then we've talked in prior sessions that our fund the future initiative is really how we're cutting cost in the business to allow us to invest in these kind of initiatives and Spruce is really our answer in how we plan to build this adjacent business.

That's a great segue. Thank you, Jeff. John, I think that's going to lead into the next question that I'm seeing rolling into the chat here on TAM. Could you share a little bit more about how we view the TAM on this product, and then I'll come back to you with a follow-up.

Sure. the TAM, the total addressable market for Spruce. Maybe just a couple of things before I talk about that. In a lot of ways, Spruce is built for everyone regardless of your financial situation, regardless of your income, people are going to find value and benefit from the features that Spruce has brought to market across spending, saving, borrowing and planning, along with the things that we have on our road map that we're really excited about. But when we built Spruce, we had in mind that roughly 2/3 of the country that are not financially healthy. And according to the Financial Health Network, that represents about 166 million people today, even though financial health is constantly evolving and changing, especially through the last couple of years. And while we might naturally, as Jeff said, start with the customers that we provide tax services to, we think the market opportunity is much larger. And I think that's reflected in the competition that is present for that market opportunity. The consumer finance marketplace is in transformation right now. And we're really excited with Spruce to be an even bigger part of that transformation.

Great. Thanks for that, John. And I'll come right back to you with a follow-up. Some investors are asking a little bit more about some of the differentiated features that we have on the Spruce platform versus some of our competitors. Can you dig a little bit back into those? And one of them was asking specifically for a little bit more information on courtesy coverage and what that looks like on the platform.

Sure. Happy to expand on that. And when we talk about differentiation in our initial products of Version 1 of Spruce that launched about 45 days ago. We think about it, importantly, as the combination of features across spending, saving, borrowing and planning. It takes advantage of the, I guess, the dichotomy that we talked about earlier in this call, where banks have really strong brand awareness, but lack modern digital experiences, generally speaking, and while emerging fintech and neo banks do solve those kinds of experimental challenges that are new to the market, the young company is difficult to trust. And so it's a combination of a robust feature set across all dimensions, paired with a brand and a company that sits at the intersection of these 2 parts of the ecosystem, we think is a really important differentiator. Two differentiating features that I think I want to talk about just briefly here, the first we spoke about in our conversation earlier, the my life platform we think is a really important source of insight and advice about day-to-day management of financial life, the connection to spending, saving and borrowing all of these aspects of financial health to connect. And if you have an account today, you notice that it does take some time for us to gather information and be able to understand a bit more about a person's financial behavior in order to offer that advice. We're excited to get started with that. I think the second one that I would call out is relatively unique is the smart tax refund feature that Les mentioned, where we can really start to make sure that people make the most of their tax refund using today's simple precommitment devices really easy. They're also really powerful. There's a lot more to come there. The currency coverage feature, we're super interested to see how people engage with that and use them. We know many of our customers are looking close to the edge. Paycheck to paycheck. You saw it in the video. And what the currency coverage capability does. It allows customers to bridge a gap in timing between an expense and income and avoid some of the penalties that come from interacting with traditional banking or engaging with alternative financial services products.

Really helpful. And as a follow-up to that, we have some investors in the chat asking a little bit more about how you're tracking engagement and what are the key metrics that you're really paying attention to across the platform. Can you just share a little bit more about what you're seeing there?

Happy to talk about it. I think early on, I think Tony mentioned this, we're really focused on the acquisition of customers, understanding how accounts are originated and the efficiency of that process, as well as the movement of deposits into the platform, be that from tax filing and refunds or paychecks or cash flows or other electronic deposits. So those are some of the things that we're going to focus on. Some subordinate things that we're paying attention to, looking at the efficiency of engaging with the application, are people able to navigate, find the things that they're looking for and engage with other features is the application steady, stable? Is it performing fast? Are people able to solve the problems and answer the questions that they're proposing to the application. So we're still what, 6 weeks into the launch process and some of the most important metrics are still ones that we are discovering and understanding. But suffice it to say, we're looking at everything about how our customers are engaged with this experience right now.

Makes sense. Thanks, John. All right. Tony, I'm seeing a few follow-ups coming in from some of our sell-side analysts that I'll direct to you. First is from Kartik Mehta again of Northcoast. Can you speak a little bit to the margins on the product? Is it profitable? And what kind of scale do you expect to see out of it before it becomes meaningful again to the P&L?

Yes. I mean the margins similar to our Emerald Card product are very good. So I mean -- but you've got -- you obviously got to cover your fixed costs and the investment made upfront. I mean, Jeff talked about. For us, we started those investments with taking dollars out of the business and other places, which is our fund to future initiative. So we're able to maintain our overall profitability. But when you look at it on a gross basis, it is a very profitable product, but you've got to cover those initial investments in any variable costs that you have. So we expect that over the long term, once this reaches our business case goals. It will be accretive from a margin perspective relative to H&R Block's overall margins today, which are obviously very, very favorable. So we think it has a ton of upside. But just to reiterate again, we're in early days, we're 45 days in which is we're not providing any specific predictions. As we reach the end of this fiscal year, we're obviously talking about how we kind of went through this initial launch and we talk about expectations for fiscal year '23. But over the long term, we're really excited about not only the revenue generation, the client acquisition, but the margin profile of these customers.

And 2 quick follow-ups coming in from that. Maybe, Tony, if you could elaborate a little bit more to provide a description of what the costs look like associated with building this product, maybe a little bit of background of where that sits on the P&L. And then I'll turn it to -- probably to John to talk a little bit about the team with some questions coming in about how we built it.

Yes, there's a couple of buckets. So there were some consulting dollars. There was obviously some headcount we added. So that obviously show up in compensation. We also capitalized some of the build-out typical with software development. So that's essentially where it will show up. I mean we've talked for the last 8 months or so about this investment being in the tens of millions of dollars, it's not hundreds of millions of dollars, which is why we're able to take costs out in other parts of the business as a way to fund this. But a good portion will show up a year but then the headcount that we've added will obviously continue into next year and beyond and will be supported by the revenue and the client acquisition that will obviously myriad. But all that's contemplated in our guidance for fiscal year '22. Obviously, we reiterated our outlook on our most recent call and still feel good about where we're at.

Great. And then Les and John, as a follow-up to that, getting just a couple of questions in the chat here. If you could talk a little bit more about what it took to build the team. How much did we do internally? Can you talk a little bit about the technology that went involved? And if we -- those involved in building the product. And if we have any partners that helped, if you could just share a little bit of background on the platform, I think investors would appreciate it.

Yes, let me answer that. So first off, we've built a strong team. We work with some consultants early on to kind of help us jump started. Again, as a reminder, this is an idea on a whiteboard just a year ago to launch a full digital mobile bank in a year. When I talk to people in the industry, my network, it's somewhat unprecedented. So we're really proud of that. We talked a lot about the way in which we did this was building an entirely new financial stack. And so this wasn't even using a lot of the capabilities we have, although we were able to kind of leverage the components that made sense. We were already in the cloud. We had a lot of kind of capabilities there. But what we really have done is kind of partner with some of the best leading fintechs that allows us to focus on the experience in some of the things that we're showing around like my life and the savings goals where we're really building the things that customers want, and we're not investing a lot of the time in building sort of the infrastructure and components as I like to think about it. So I think we've got the best of breed of modern technology, great financial technology partners that are helping us build out leading-edge technology and experiences. And the team that we've built and assembled is fantastic, and we'll continue to grow that as we grow the business.

Michaella, I think one thing I would add to that, this is a different kind of business than our tax and small business offerings. It's a year-round business. It requires constant focus, examination and innovation. And so we really organized this team intentionally to operate in a slightly different way. And the rhythm of Spruce is a little bit different than the rhythm of the tax business. And so we've applied what we think are the most interesting and applicable components of agile methodologies and organize our teams and engineers and designers and to [indiscernible] to really focus on the build out of individual features in a way that it's going to allow us to go faster and be responsive to what we see from customers.

John, just to add on that real quick because it could be viewed as a minor piece of the puzzle. But if I just take a step back and think about our broad transformation and what's happening in each imperative, the work that Spruce is doing to change the rhythm of the business is incredibly important. And there are three consumer actions that the Spruce team thinks about every single day, creating accounts, funding accounts and spending on the accounts. And so the degree to which that business happens every day year around, and those learnings translate to in small business and building a business that's more year-round to start to complement the real seasonality of consumer tax. Culturally, from a talent perspective, it's an incredibly important part of the role that Spruce is playing beyond its commercial role.

Really important point. Thanks for sharing that, Jeff. John, I think I'll come back to you as a follow-up on some of the features that investors are asking about. One question coming in is that the Emerald Card used to have rewards. And we have an investor that's curious as to how that's evolved on Spruce platform. And if you could share a little bit more about Dosh and why we have confidence in using the Dosh platform within Spruce for customer rewards.

Sure. Let me talk a little bit about what the rewards profile on Spruce looks like today. And I'll say we have a lot of ideas here that we're both testing from a research perspective and trying to figure out how they fit into the product engagement process with customers. So today, the rewards that we use are focused on cash back rewards associated with purchases that are in response to offers that are personalized for each individual free user. And this is part of what Dosh does for us. They are integrated with our core processing platform, Galileo. They're able to see and understand how individual customers are interacting with their Spruce account and connect them with offers that both make sense to their spending patterns as well as interestingly enough to their geography, which in a lot of cases still matters for people. so the partnership with dosh has allowed us to really build what we think is a robust set of merchant-oriented offers, 10,000-plus merchants that would be really hard for us to do on our own, especially there at the beginning. So that's the component that they bring to the process for us today. Les talked about some of the other incentives that are available in the product. We are offering current offer in the market around the $20 offer for people who start up direct deposit and achieve certain levels. And we are also running some contests for customer enrollment in our marketing and social channels as well. There's more to come here. I think this is an area where there's a lot of experimentation in the market, both from fintech, from neo bank, even some traditional banks are starting to do some really creative things around acquiring customers. And so we're excited to bring our ideas to that as well.

Yes. Thanks, John. And a few other questions really Les, maybe taking this back to you on the marketing front. We have a few investors who like a little bit more detail on how we're marketing this platform within the tax channel this year and how you see that evolving next year, specifically within the assisted and retail business. Is that something you can share a little bit more about?

Yes, absolutely. So again, as a reminder, an idea on whiteboard a year ago, launch and build this platform is really our goals. And it was important that we do that for this tax season, so we could get the learnings that we needed about how we sell during the tax event, how we acquire customers, how we can get those deposits into the account, jump start the savings and get our customers on a path to sort of improve financial health. And so when we looked at just, frankly, the volume of work and what we needed to do, we made the choice to -- in its first year to integrate into the DIY tax share. So these are our customers that are filing taxes when they complete their taxes and ready to file and choose where they want the distribution of their refund to go is where we're introducing Spruce to them with offers and obviously, a really easy application and setup process that I think we did compare against any of the leading neo banks out there in terms of number of clicks. To do that, we're at the forefront of sort of speed to kind of account creation. So that's where we've started. We're getting lots of [indiscernible]. As I mentioned, the teams are already shifting gears this kind of current time, and we're starting to plan the work to integrate into our assisted panels from next year, so we can now activate obviously a really important distribution channel through our tax professionals, but also kind of highlight what we kind of refer to as direct to Spruce. So customers can go to the App Store, download the app, they can go to Sprucemoney.com and directly sign up for an account, they get started. And we're actually seeing strong engagement on the direct side as well. So I'd like to think about it. We've got 2 important acquisition channels already activated and a third one and an important one coming for next year.

Yes. I think just for me, it's a great example of we have so many eyeballs in the distribution that exist in tax. And so we have to take advantage of exposing Spruce in the right forms to the right customers. If you would go through our DIY user flow, you would see how Spruce is being exposed to the customer as they go through their tax filing process. And then at the end of the experience, being given that option of depositing their refund into the Spruce account, get your money up to 5 days early in really quick account creation, as Les said. The Assisted channel will obviously represent more potential for us next year. This year, it was really important to me to make sure that with all the things we're asking the assisted channel to do primarily embrace the virtual capabilities that are growing and how we serve our clients, certifying tax pros to be small business experts. We thought those 2 things this year in assisted, we need to give them more reps, while we're testing in a subset of retail channels this year to get ready to launch Spruce in full retail next year. So that's -- the channels are advantages, but we also want to make sure that we're moving into those channels the right way.

Great. Thank you for that, Jeff. And Tony, I'm going to turn it back to you for a follow-up from Alex Paris at Barrington Research. Can you talk a little bit more about kind of future monetization of this platform beyond interchange, beyond the out-of-network ATM fees. Is there a bigger picture vision beyond some of the basic monetization in the early stages that we talked about today?

Yes. I mean at launch, it's about acquiring customers, getting them set up with deposits and then ultimately, direct deposit, and that's going to drive the interchange in ATM fees. I mean we've got a product road map over the next 18, 24 months, it's going to highlight a bunch more features that could drive additional monetization. We're not announcing any of those today. And we're obviously going to be hear feedback from the customer and understanding what's important to them as the market evolves, as our customer base evolves. So we've got ideas on additional monetization, but those are the 2 key triggers today. and then additional ones that will be coming down the road, but too early to announce those at this point.

That makes sense. Thank you for that. And we have just a couple of minutes left on the hour. I want to make sure I turn it to Les. There's a few more questions coming in along those same lines, Tony on. Can you give us a little bit of a sneak peek of what's coming? What can we expect from future rollouts? And what does that time line look like? So I think Les, I'll turn it to you to talk a little bit about the vision of the product in a broad sense before we wrap, and then we'll turn it back to Jeff for closing remarks.

Thanks, Michaella. So we've got a big vision for Spruce. We mined to rebuild this for nearly 166 million Americans, who are struggling financially with one or more dimensions of financial health, and they want to be better with their money. So we've got a good strategy. We've got a really strong team and we've got a clear product road map to evolve Spruce from where we're at today to help customers with all of the dimensions of the financial health. So again, that's spending, savings, borrowing and planning. And so while we're not [indiscernible] mentioned any new announcements around new features or products today, we're really excited about the future for Spruce and our customers. And I think where you'll see us and our customers taking us is new features and products across that dimension of financial health that will help our customers keep better with their money.

All right. Thanks, Les. I think we've gotten through most of the question in the Q&A. And to keep us on track for the hour, I'll now turn it back over to our President and CEO, Jeff Jones, for closing remarks.

Okay, Michaella, and thanks Les and John and Tony as well. Listen, before I do any formal wrap-up, I want to make sure to thank the Spruce team who continues to do really, really interesting, important work on this product and on the road map. I'm incredibly proud of this product, not just the speed but to come to market like we did with such a strong starting point. As we introduced the Block Horizons strategy, our commitment to investors is to be transparent and keep you updated on our progress. And as I said in my opening, this is a really important milestone in that journey. Obviously, we're getting started here. We look forward to keeping you updated on those key measures of our progress as we move forward. And when we are back together to report the year-end results, to be able to take a more holistic view of what progress did we see in consumer tax, in small businesses and in financial products and to bring all those together for you. So thanks for being here, and have a great rest of your week.