Categories Earnings Call Transcripts, Industrials

H&R Block Inc (HRB) Q2 2023 Earnings Call Transcript

H&R Block Inc Earnings Call - Final Transcript

H&R Block Inc (NYSE:HRB) Q2 2023 Earnings Call dated Feb. 07, 2023.

Corporate Participants:

Michaella Gallina — Vice President, Investor Relations

Jeffrey J. Jones — President and Chief Executive Officer

Tony Bowen — Chief Financial Officer

Analysts:

Kartik Mehta — Northcoast Research — Analyst

George Tong — Goldman Sachs — Analyst

Scott Schneeberger — Oppenheimer — Analyst

Alex Paris — Barrington Research — Analyst

Presentation:

Operator

Thank you for standing by, and welcome to H&R Block’s Second Quarter Fiscal Year 2023 Earnings Call. [Operator Instructions] After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the call over to Vice President, Investor Relations, Michaella Gallina. Please go ahead.

Michaella Gallina — Vice President, Investor Relations

Thank you, Lateef. Good afternoon, everyone and welcome to H&R Block’s second quarter fiscal 2023 financial results conference call. Joining me today are Jeff Jones, our President and Chief Executive Officer; and Tony Bowen, our Chief Financial Officer. Earlier today, we issued a press release and presentation, which can be downloaded or viewed live on our website at investors.hrblock.com. Our call is being broadcast and webcast live, and a replay of the webcast will be available for 90 days.

Before we begin, I’d like to remind listeners that comments made by management may include forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties, and actual results could differ from those projected in any forward-looking statement due to numerous factors. For a description of these risks and uncertainties, please see H&R Block’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, as updated periodically with our other SEC filings.

Please note, some metrics we’ll discuss today are presented on a non-GAAP basis. We’ve reconciled the comparable GAAP and non-GAAP figures in the appendix of our presentation. Finally, the content of this call contains time-sensitive information accurate only as of today, February 7, 2023. H&R Block undertakes no obligation to revise or otherwise update any statements to reflect events or circumstances after the date of this call.

With that, I will now turn it over to Jeff.

Jeffrey J. Jones — President and Chief Executive Officer

Thank you, Michaella. Good afternoon, everyone, and thanks for joining us. Today, I will begin with a summary of our Q2 results, progress on Block Horizons, and the momentum we have entering the tax season. Then, Tony will provide details on our financial performance, and we’ll open it up for Q&A.

Second quarter results met expectations and we’ve performed well in the first half of fiscal 2023. I feel confident about our positioning as we move into tax season and the third quarter, and I’m pleased to reaffirm our full year guidance. In the second quarter revenue grew 5% to last year on continued business momentum and a strong ending to the 2022 tax season. We are seeing signs that consumers are feeling more pressure this year versus last year given the rollback of government stimulus and the broader inflationary environment. As a result, clients turned to H&R Block in Q2 to bridge the gap in their time of need, and we saw higher demand for our Emerald Advance product in December, which we view as a good leading indicator for tax season. On the expense front, we managed well, despite the macro environment, and our capital allocation practice remains solid as we repurchased another 2% of shares outstanding in the quarter.

Turning to Block Horizons, I continue to be pleased with the progress we are making. Starting with Small Business, revenue growth was strong as a result of the extended filing season and our bold marketing of the up to 30% price advantage we provide over CPAs. As we’ve talked about, we’re also building out our year round services for bookkeeping and payroll, and we are seeing positive adoption signals on these products. We are also feeling good about the value our new business formation tool is offering clients. There are often tax and legal benefits to small business owners from being incorporated, and we built this product with a partner to answer this clear need, with the added benefit of being a revenue driver to Block. It also provides an opportunity to increase tax prep revenue if we file both a personal and business return the following tax year.

Another way we’re moving this segment forward is increasing training and certification levels. Half of our small business tax pros have achieved the advanced level, which focuses on levers to directly drive customer and revenue growth through 13 hours of additional training. In all, I’m very happy with the results we are producing in Small Business. The second component of our Small Business imperative is Wave, which is a one stop money management platform for small business owners offering invoicing, payments, accounting, banking, payroll, and advisory services. For the quarter, revenue growth was 13%. Our main focus is accelerating revenue growth and determining the ways we’ll drive long-term profitability.

Moving to Financial Products, we were pleased to roll out Spruce in the Assisted channel via all company and franchise offices in January. We knew that educating our tax pros on the clear and different value propositions of Spruce and the Emerald Card would be critical to the success of both products. As such, we added dedicated training and feel good about the readiness of our field and how we’re informing our clients. The goal for Spruce this season is to educate clients on its value, generate signups, and ideally have all or a portion of the tax refund deposited as an initial step. The next steps are about ensuring that once an account is open, clients are engaging with the platform, setting up direct deposit, and using Spruce for their day-to-day purchases.

In just the first few weeks, Spruce is living its purpose of helping our clients to be good with money and enabling them to grow in their own personal financial confidence. In fact, our very first Spruce sign up in the Assisted channel came from a longstanding H&R Block client who came to her appointment with an interest in Spruce because she had seen our marketing beforehand. This client had historically deposited her refund at another bank, but after learning about Spruce’s specific value proposition and features, such as low fees, the ability to easily deposit cash at retail locations, the fee-free ATM locator in the mobile app, and FDIC backing, she chose to put her refund balance on Spruce.

At the same time, we are continuing to innovate the platform. Importantly, we are making it easier for clients to convert their payroll to Spruce. They will soon be able to set up direct deposit electronically from within the app, skipping the manual forms and phone calls to HR. Building on our learnings from the DIY launch last year, our marketing approach for Spruce was strategically planned for before, during, and after the tax event. As of December 31st, we had 171,000 Spruce sign ups and $117 million in customer deposits. Given the initial launch in the Assisted channel, we look forward to updating you on the trends and learnings after tax season.

Turning to Block Experience, we are blending technology with human expertise, and we continue to make great progress. This imperative underpins many of the ways we will win in both Assisted and DIY, and our go to market strategy reflects these advancements this year. Let me share more about it and why we feel confident in our ability to execute this season, which just began with e-file opening on January 23rd. I’ll start with the Assisted channel. We are leveraging our technology to empower clients to choose how they want to be served, fully virtual or fully in person, and everything in between. You’ll recall that last season we increased the use of virtual tools by more than three times and we are continuing to make progress on client adoption.

We are also improving the operational efficiencies within our innovative fulfillment network. You’ll recall we piloted this last year and are further rolling it out this season. The network benefits our clients by allowing them to more quickly access tax professionals who have capacity and increases our productivity. While the employment market is currently a challenge for many companies, we have successfully met our hiring and staffing goals. Our tax pros tell us that they return to H&R Block year-after-year because of our culture. They build strong relationships with their clients and teams, and are passionate about helping people. In addition, we hear positive feedback about the flexibility we offer related to scheduling and remote work.

In Assisted, we are taking modest price increases this season. Despite inflation being materially higher, we feel that these modest price increases are appropriate as we continue to deliver a great value for price. We’ve done the work to position ourselves for success and I’m looking forward to the rest of the season.

Turning to the DIY channel, we have spent a significant amount of time understanding how we can return to share gains by speaking to both our clients and our competitor’s clients, and we came away with clear learnings: there is a large awareness gap that H&R Block has a competitive product, DIY filers do not believe that it’s easy to switch to new software, and they do not want to be surprised on pricing when they get to the end of the experience and are ready to file. With these three challenges in mind, we responded.

First, on the awareness front. We’ve allocated more of our marketing spend to DIY-specific messaging and are boldly addressing the clear advantages of our product, such as a better product experience, a price advantage to our largest competitor, how easy it is to switch, and the access to our network of expert tax professionals for assistance. We’re also identifying underpenetrated markets where we have a large opportunity and are going deeper in these regions with even more personalized messaging.

As you may have seen already, our television advertisements are focused on bringing top of funnel awareness and addressing the ease of switching, which we know is the biggest barrier. We then leverage digital to optimize conversion, such as search, display, and social content, like TikTok, Instagram, and Pinterest, to deliver messaging on the value proposition I just discussed. In addition, reflecting trends of the creator economy, we have targeted campaigns for groups such as the self-employed and students.

Second, we made it easier than ever to switch, including customized flows for clients moving from TurboTax. With just a couple of clicks, clients can drag and drop their previous year’s TurboTax return into the H&R Block online flow, which then auto populates into the current year tax flow. We’ve also created simple, step by step instructional videos to demonstrate this to our clients. At the same time, we launched newly built AI technology, which is powered by models from millions of returns and AI algorithms, and other technology such as optical character recognition.

This new feature automatically scans the prior year TurboTax return to identify if the client may have missed out on refund dollars. If it identifies opportunities, we notify the client and connect them to one of our expert tax professionals who can help them file an amendment. Clients only pay if they amend their return to get an additional refund. This technology is a gamechanger, and as the possibility of a recession looms, it’s important that consumers get every available dollar of their tax refund.

Finally, to solve for pricing transparency, we present price previews to clients throughout the DIY experience so there are no surprises when they get to the end. Like in Assisted, we are taking modest price increases this year. We feel very good about our improved positioning and go to market strategy in DIY this season. The progress we continue to make across the business is significant, and I am excited about what is ahead. With tax season upon us, and after spending time in the field already, I can’t wait to see what we’ll accomplish for clients this year.

With that, I will now turn things over to Tony to discuss our financial results.

Tony Bowen — Chief Financial Officer

Thanks, Jeff, and good afternoon, everyone. Our performance continues to be on track for the first half of the year and, as a result, we are pleased to reaffirm our full year outlook for 2023, as Jeff mentioned earlier.

In the second quarter, we delivered $166 million of revenue, which increased 5% or $8 million to the prior year. This was primarily driven by client volumes and net average charge improvements as we had a strong end to the 2022 tax season, partially offset by lower Emerald Card revenues. As we mentioned last quarter, we expected this impact due to Advanced Child Tax Credit payments being loaded on Emerald cards last year.

Total operating expenses were approximately $450 million, an increase of about 3% or about $13 million, primarily due to higher corporate and field wages, along with increased bad debt expense. This was partially offset by lower consulting and outsourced services as well as favorable developments in insurance loss reserves. EBITDA was a loss of approximately $246 million, an increase of about 3% or $6 million to prior year.

Interest expense was approximately $19 million, a decrease of about $4 million, or 18%. Recall that in June of 2021, we issued notes at 2.5% and paid off our $500 million, 5.5% notes early, in May of 2022. This was partially offset by increased interest expense on our CLOC due to higher interest rates. Although we are seeing higher interest expense on our short-term borrowings, this will be more than offset with higher interest income in the fourth quarter when we enter a positive cash position, assuming interest rates remain similar to current levels.

Pretax loss was effectively flat to prior year at $298 million and our effective tax rate was 25.9% compared to 36.7% last year. As a reminder, our effective tax rate in fiscal year ’22 was 15%, and we expect it to increase to approximately 22% in fiscal year ’23. Loss per share from continuing operations increased from $1.09 to $1.43, while adjusted loss per share from continuing operations increased from $1.02 to $1.37, primarily due to larger net loss from lower income tax benefits in the quarter and fewer shares outstanding. As a reminder, the only adjustment we are currently making to adjusted earnings per share is amortization related to acquisitions.

Turning to guidance, we’re pleased to reiterate topline growth, EBITDA that outpaces revenue, and EPS that grows even faster. As a reminder, we did not assume any benefit from 1099-Ks in our outlook. We also remain confident in the longer-term target we provided in August, of adjusted EPS growing double digits annually through fiscal year ’25. Our capital allocation practice remains strong. In Q2, we bought a total of 3.2 million shares for $130 million at an average price of $40.22.

As Jeff mentioned, this was another 2% of our shares outstanding, for a total of $350 million, or 5% of shares repurchased in the first half of the year. Given our narrow trading windows, we have historically executed most of our share repurchase in the early part of the year. Overall, I believe this is a great use of capital and I feel good about what we have accomplished this year.

Before moving into Q&A, I’d also like to highlight the strength of our business during periods of economic downturns. Both the tax industry and H&R Block have a history of resilience. The industry is most correlated with employment, which remained strong in calendar year 2022, boding well for the tax season in ’23. And as trends over the last couple of decades have shown, when times are tough clients want to ensure they are getting their maximum refund by turning to our trusted brand.

We’ve also seen more small businesses formed during tough economic times, and if the backdrop deteriorates more meaningfully, our government has a history of stepping in to provide stimulus distributed through the tax filing system. You’ll recall our biggest compensation line item is for tax pros, which is largely variable in relation to filing volumes, meaning we can flex expenses in line with business trends.

And as I mentioned before, rising interest rates are actually a near term positive for H&R Block. The bottom line is, our industry volatility is low and our business is resilient. In summary, we feel very good about the performance of our business and are looking forward to the rest of this tax season. Our next update, including filing volumes, will be on our Q3 call in early May.

With that, I will now turn it back over to Jeff for some closing remarks.

Jeffrey J. Jones — President and Chief Executive Officer

Thanks, Tony. In summary, we are pleased with our first half performance and are confident in our ability to drive value for shareholders through our business results and capital allocation practice. As we end our prepared remarks, I would like to sincerely thank our hard-working associates, franchisees, and tax professionals, who inspire confidence in our clients and communities everywhere. With tax season in full swing, our Block family is hard at work, and I cannot thank them all enough.

Now, we’ll open the line for questions.

Questions and Answers:

Operator

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

Kartik Mehta — Northcoast Research — Analyst

Thanks. Yeah. Hi, Jeff, Tony. Jeff, just, I know it’s early and whatever color you can give would be appreciated. Just how the tax season has started and is it in line with your expectations better than expectations, I guess, worse than expectations? Any commentary you could give from what you’re seeing early on?

Jeffrey J. Jones — President and Chief Executive Officer

Hey, Kartik. Thanks for the question. Yeah, obviously we won’t get into details about the current quarter and season, but I will say that we have seen clients filing earlier in both the Assisted and DIY channels. And we think that’s true for the broader industry as well. And if it makes sense, when you think about those that really need their money, their refund and with stimulus payments ending from last year, so that’s one insight I can provide, otherwise we probably don’t want to get too deep into our current performance.

Kartik Mehta — Northcoast Research — Analyst

Okay. That’s fair. And Jeff, just I know Block Horizons strategy small business, when you look at the end of the season, what would you define as success? I guess what metrics are you looking at to see if the program is working up to your expectations? Or if there is some tweaks that might be needed?

Jeffrey J. Jones — President and Chief Executive Officer

That’s a great question. And obviously there are a number of different metrics we’re looking at financial performance, operational, because there are a number of pieces to the small business strategy. I think if I start at the top, we’ve had two really good years in small business performance. And so we expect to continue to see Assisted tax growth for small businesses, that’s a core component of the strategy. We’re also building year round capabilities in bookkeeping and payroll. So we want to see that we’re not only growing those businesses, but operationally we’re able to deliver the kind of experience that we want and we know clients expect.

And then, as you know, we’re also launching new products like the business formation service, that’s a brand new product. And so for a year like this, when it’s coming out of the gates, we’re looking closely at operational performance and making sure that we’re really delivering for clients when they raised their hand and say they’re interested in that service. So a lot of different metrics. But we feel very good about the small business imperatives performance over the last couple of years and the expectations that will continue.

Kartik Mehta — Northcoast Research — Analyst

Thanks, Jeff. I really appreciate it.

Jeffrey J. Jones — President and Chief Executive Officer

Thanks, Kartik.

Tony Bowen — Chief Financial Officer

Thanks, Kartik.

Operator

Thank you. Our next question comes from the line of George Tong of Goldman Sachs. Your question please, George.

George Tong — Goldman Sachs — Analyst

Hi, thanks. Good afternoon. We’ve seen estimates out there that this year refunds on average will come in lower, which could potentially make consumers more price sensitive. Can you discuss your expectations on how lower refunds might impact the elasticity of consumers, especially the lower end with subprime consumer that may be a little bit more stretched given the effect of inflation? And what the ultimate impact could be on market share performance given some of those dynamics?

Jeffrey J. Jones — President and Chief Executive Officer

Hey, George, it’s Jeff, I’ll kick this off. I mean I think at the highest level to start, we don’t control the size of the refund. So we do the work for the customer, we deliver the experience and the outcome, but what we do control is the price and the experience and how that adds up to value for the customer. And I think that’s one of the reasons why we are taking the steps, we’re taking on pricing this year is one example, knowing that every dollar matters, so expertise matters. And despite a much faster, higher inflationary backdrop, we’re only taking nominal price increases in Assisted to make sure that value is really strong. So that’s really what we can control. And we just continued to be focused on the best experience providing expertise in making sure that the price value equation continues to be strong, because we see it strong and that’s been several years of building that as we’ve talked about.

Tony Bowen — Chief Financial Officer

Yeah. And George, I would just layer on. I mean, I think we do expect that refunds could come down a little bit this year as you remember, last year they increased. But even if they do, I mean early season clients in particular, still getting very large refunds relative to obviously the price they’re paying for their services and many of them are leveraging products like Refund Transfer to pay for that tax preparation. So we don’t expect that to be a near term issue that would impact any kind of client volume.

George Tong — Goldman Sachs — Analyst

Got it. That’s helpful. And then can you refresh your views around the topic of tax filing complexity this year, and its impact on Assisted net average charge? What are some of the puts and takes that you expect in this tax season compared to last year’s tax season?

Jeffrey J. Jones — President and Chief Executive Officer

Yeah. We can tag team again, but I think starting with, it’s obviously been a few unusual years with a number of different things that were causing the filer to how to think about federal stimulus, unemployment benefits et cetera, and we expect this to be a more normal year in general. That said, we continue to see consumer opting for expertise, even in the DIY channel and looking at growth of products like Tax Pro Review, for example, where they start as a DIY filer, but at some point in the process, recognize they have questions in — push to help button to get their questions answered or also may turn over to work for us to finish for them. So even with a normal in air quotes a normal year, we still see the consumer opting for expertise in, that’s why we like the way that we’re positioned with our network of experts.

George Tong — Goldman Sachs — Analyst

Got it. Thank you.

Jeffrey J. Jones — President and Chief Executive Officer

Thank you.

Tony Bowen — Chief Financial Officer

Thank you, George.

Operator

Thank you. Our next question comes from the line of Scott Schneeberger of Oppenheimer. Your line is open, Scott.

Scott Schneeberger — Oppenheimer — Analyst

Thanks. Good afternoon. I guess, let’s start with the advertising campaign with regarding DIY really stepped it up this year and very much going against your largest competitor. Just wanted to delve into that a little bit more, how are your marketing dollars, advertising dollars allocated this year? What type of increase year-over-year this year versus last, if any? And then how are you approaching Assisted in DIY, as far as balancing those dollars versus past years? And then also kind of your media channels, certainly have been very active on TV with the DIY. Just curious what more you can share about the marketing approach? Thanks.

Jeffrey J. Jones — President and Chief Executive Officer

You got it. Let me try to break that down a bit and keep me honest, if I miss a piece of the puzzle. I mean just starting at the highest level, we know that the brand H&R Block has tremendous assistance. And we know that people know that we have tax pros in locations. What they don’t know is that we offer a DIY software product. They don’t know that to the same degree. So our allocation this year is skewed more than in the past to DIY messaging.

And over the summer, we did a lot of research to understand why had we been growing revenue and volume and new clients in DIY, but not market share in DIY. And there were three real reasons: Number one, far and away number one was the lack of awareness that we offered the product broadly; number two was a misunderstanding about how easy it is to switch; and number three, is about pricing and a little bit about the actual price, bit more about the frustration that comes when you’re surprised by what you’re charged when you get to the end of the process. And so we’ve really gone out of three of those head on.

You see it reflected in television really top of the funnel, as we think, building awareness, but we are more active than usual in digital channels, really delivering the details about the value proposition. And then once you arrive at the website, having built a custom flow, particularly for TurboTax switchers to really educate them on how easy it is to switch, video content to teach the filers how to find your TurboTax return and upload it to Block, so a number of things, very specifically to really go at those exact barriers that we understood clearly from clients from the summer.

Scott Schneeberger — Oppenheimer — Analyst

Thanks, Jeff. Appreciate it. You did a great job, as you say, getting all the pieces of the puzzle there on the multi-part question. Just a follow-up on that with the one piece I think we missed was just, was there more overall marketing dollar spend? Or was it relatively in line with last year or a normal increase? And then a follow-up on that, just on the same topic, is this the AI driven technology that you’ve highlighted? How differentiated is that in the industry, clearly you’re promoting it a lot? But is it truly differentiated? Or your peers, they’re not promoting it as much, but is that something that you have that is truly differentiated? Thanks.

Jeffrey J. Jones — President and Chief Executive Officer

Yeah. Absolutely. So on your first question, think dollars about flat all contemplated in the outlook. It’s really more about allocation and allocation between Virtual/Assisted and DIY and then within the channels like I just walked through.

On your second question, we haven’t actively run any advertising or marketing for the AI technology, and have no plans to do that. We announced in a press release and it is an industry first. There is no one who has ever used AI to proactively and retroactively look at a prior year return to see if there are any available refund dollars. And in the product if any are identified, we notify the client and then we connect them with a Tax Pro to actually do the rest of the legwork to figure out exactly what it could be and then decide if they want to file an amended return. So that’s how it works. Again, we announced it in a press release. We’re not actively advertising it, and don’t have plans to actively advertise it.

Scott Schneeberger — Oppenheimer — Analyst

Got it. Thanks. I appreciate that. If I can just go up one or two more in there and maybe get Tony involved. The — just curious, Tony, first-off, how are you progressing on buying in franchisees this year consistent with expectations? And just any mention of comparison to last year? And then my other question is just say — and then Jeff, I think we’ll bring you back to this as well, but I heard Tony mentioned in the guidance, there is no consideration for 1099-K, which is a good thing. But I’d just like the big picture view of what H&R Block is expecting on that front in future years? And how that would impact the industry and H&R Block, specifically? Thanks for let me put them all through there. I’ll stop right there. Thanks.

Jeffrey J. Jones — President and Chief Executive Officer

Hey, you got it.

Tony Bowen — Chief Financial Officer

Thanks, Scott. I appreciate you get me involved.

Scott Schneeberger — Oppenheimer — Analyst

Yeah.

Tony Bowen — Chief Financial Officer

So franchise acquisitions are going well this year. We’ve done that for a number of years. It’s ebbed and flowed a little bit, but kind of been in that 100 to a 150 location range. And I think it will be in that range again this year. We still have some active kind of negotiations that are occurring and some deals that are yet to close, but we’ll probably be in that zone and feel good about franchisees’ willingness to sell to us is obviously a willing buyer.

Jeffrey J. Jones — President and Chief Executive Officer

And Scott, on your second question. I mean, it’s obviously hard to speculate on what might be the impact of a piece of legislation that isn’t final or passed. I mean, 1099-Ks are topic that depending on how it was implemented could impact lots of people or fewer people. We don’t really worry about trying to judge, win something, might get passed, we just every single year learn what the changes are, train on the changes and communicate to client the value of expertise. We’d see doing the same thing next year, but again we didn’t build any assumptions of 1099-K into this year’s financials.

Scott Schneeberger — Oppenheimer — Analyst

Okay, great. Got it guys. Thanks a lot.

Tony Bowen — Chief Financial Officer

Thanks, Scott.

Operator

Thank you. Our next question comes from the line of Alex Paris of Barrington Research. Your question please, Alex.

Alex Paris — Barrington Research — Analyst

Hi, guys. Thanks for taking my questions. I have just a couple of follow-up or clean-up calls, most of the questions have been asked and answered. On the Wave side, I know we have a new CEO there, who is completing a strategic review. I think last time we were together on a call like this. In Q1, revenues were up 18% year-over-year. In Q2, they’re up 13%. Is there anything to read into that?

Jeffrey J. Jones — President and Chief Executive Officer

I appreciate the question. And I think the only thing I would read into it, is that we’re not pleased with that progress. Zahir has been in role for a handful of months. He’s doing a phenomenal job of interrogating all parts of the business. We want to return that business to a higher growth rate. Obviously, it is growing, but we want to return it to a higher growth rate. And importantly, he is looking very carefully at how do we accelerate the path to profitability in addition to restoring to a higher growth rate. So we will have more to share in the future, but for now, that’s the message for me about what we’re seeing in Wave.

Alex Paris — Barrington Research — Analyst

Is there a particular area or product offering within Wave that is lagging the others?

Jeffrey J. Jones — President and Chief Executive Officer

Well, it could get complicated fast just recognizing all the things they do in their business. So I try for now to just keep it at a high level and say that the way that they — the way that their clients use the product to send invoices and receive payments isn’t performing at the level that it used to. And so that’s the primary place that we’re interrogating, but to be clear his work is looking at the entire business every piece of performance, what we can do for monetization and what we can do on the expense side.

Tony Bowen — Chief Financial Officer

Yeah. I just put a finer point. I think what Jeff is saying is, where the small businesses that are sending out those invoices or [Phonetic] sending fewer invoices than they were previously, which obviously is probably more of a macro-environment type issue. But beyond that, we know that we can do better within our own control and own performance.

Jeffrey J. Jones — President and Chief Executive Officer

Yeah. Thanks, Tony.

Alex Paris — Barrington Research — Analyst

Got you. That’s helpful. All right. And then moving on Spruce. It was launched last year in DIY only, I believe that’s correct. And this year, starting in January, it’s being rolled-out to the Assisted offices as well. How — again, it’s very early in the tax season, but what has been your experience so far with the tax pros and with consumer driven demand?

Jeffrey J. Jones — President and Chief Executive Officer

Yeah. Again, I appreciate the question. You’re exactly right. Last year, we launched a beta version of the product in the DIY flow only. This year we’re back in DIY. We’re marketing direct to customers and we have launched it in the retail channel. I feel very good about the way it was received, the plans we built to make it easy for the tax professional at the desk to explain the value proposition. We’ve only been at it a few weeks. And so it’s way too early to comment beyond the operational clean-up things that we’re working on to improve the experience. We’re focused on account creation, ideally it is the tax desk, but ultimately loading funds into the account and then, keeping those clients engaged by spending. And so there’s a number of pieces that go way beyond account creation, because this really is the formation of a year round relationship with the clients. And as we get to Q3 and beyond we’ll be updating you on what we’ve seen in performance.

Alex Paris — Barrington Research — Analyst

Great. And then last question for Tony. In your prepared comments, you talked a little bit about within operating expenses, insurance loss reserves, providing a favorable impact. Just wondering if we can get a little bit more color on that. And then the increased bad debt, what is that related to?

Tony Bowen — Chief Financial Officer

Yeah. So I’ll start with the bad debt. I mean, part of that is driven by the fact that we had a stronger EACs and when we participate in those EA loans, we book our portion of the bad debt all upfront. As you know, Alex, a lot of that revenue is recognized over several months as there is an interest income component through the period to where those loans are ultimately paid off. On the insurance loss reserve, it’s a fairly technical topic, but essentially we have an actuarial assumption based on some expected losses that actuarial assumption changed during the quarter, and that’s what that positive benefit resulted from. So not something that typically occurs, but it’s a change from kind of pre-pandemic and post-pandemic, some of the expectations on losses, specifically related to workers’ compensation.

Alex Paris — Barrington Research — Analyst

All right. Well, thank you very much. I appreciate it. Thanks for answering my questions.

Jeffrey J. Jones — President and Chief Executive Officer

Thank you.

Tony Bowen — Chief Financial Officer

Thanks, Alex.

Operator

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

Michaella Gallina — Vice President, Investor Relations

Thank you, Lateef, and thanks everyone for joining us today. This concludes our second quarter 2023 financial results conference call.

Operator

[Operator Closing Remarks]

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