H & R Block Inc
NYSE:HRB
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H & R Block Inc
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Good day. My name is Ian and I will be your conference operator today. At this time, I would like to welcome everyone to the H&R Block Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session [Operator Instructions]. Thank you.
I'd now turn to turn the call over to Mr. Colby Brown, Vice President of Finance and Investor Relations. Sir, you may begin.
Thank you, Ian. Good morning, everyone, and thank you for joining us to discuss our fiscal 2018 third quarter results. On the call today are Jeff Jones, our President and CEO and Tony Bowen, our CFO.
We've posted today’s press release on the Investor Relations website at hrblock.com. Some of the figures that we’ll discuss today are presented on a non-GAAP basis. We’ve reconciled the comparable GAAP and non-GAAP figures in the schedules attached to our press release.
Before we begin our prepared remarks, I will remind everyone that this call will include forward-looking statements as defined under the Securities Laws. Such statements are based on current information and management’s expectations as of this date and are not guarantees of future performance. Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict. As a result, our actual outcomes and results could differ materially. You can learn more about these risks in our Form 10-K for fiscal 2017 and our other SEC filings. H&R Block undertakes no obligation to publicly update these risk factors or forward-looking statements.
At the conclusion of our prepared remarks, we will have a Q&A session. During Q&A, we ask that participants limit themselves to one question with a follow-up after which they may choose to jump back into the queue.
With that, I’ll now turn the call over to Jeff.
Thank you, Colby. Good afternoon, everyone and thanks for joining us.
We're off to a strong start to the tax season and I am very pleased with our results. Before I jump into the details, let me outline the areas we'll cover on today's call. First, I'll give a brief update on our long term strategy work; next, I'll provide our perspectives on what we're seeing in the industry, followed by our mid-season results, then we'll talk about our expectations for the second half of the season and finally Tony will review our third quarter financial results and outlook for the fiscal year.
First let me provide a few thoughts on our strategy. As we discussed on our Q2 earnings call in December, we're talking a fresh look at our long-term strategy. While we don't have specifics to share today, I can tell you that I challenged the team to go deeper than we had in the past and to think differently about our business and their delivery.
This work will allow us to make informed decisions about ways to continue to improve our assisted and DIY business and to position us for long-term sustainable growth. We expect to provide an update in late fall.
Turning to the overall industry performance, the latest result from the IRS show decline in returns of 0.4% on a day-to-day basis till February 23. While better than last year, these results are fairly consistent with what we've seen in years prior, as it is typical to see year-over-year declines on a day-to-day basis at this point in the season.
Consistent with prior years, industry results till February show a shift from assisted to DIY. Early season filers are more likely to change tax preparation methods, so the shift in the early season is typically greater and then moderates in the second half. Last year the season ended within an assisted to DIY shift of approximately 40 basis points, which is about half of what the industry experienced the previous few years.
At this point in the season, we're seeing a shift consistent with last year. Based on the early season results, we continue to expect total federal fillings to increase approximately 1% this tax season with industry assisted volumes flat to slightly up than the remainder of the growth coming from DIY.
Turning to our performance, our goal for the season was to build our momentum for last year, continuing to improve the client trajectory. We brought a more client-centric approach to everything we do, which is focused on three areas; one, improving operational excellence, two, new products and partnerships and three, marketing and promotions that drive demand for the H&R Block brand.
In the Assisted business, we outpace the industry in the first half on the strength of our promotions and improved execution. We again offered Refund Advance in three federal 1040EZ. This is the second year for these two promotions, which attract new clients and help us improve retention.
Refund Advance is an interest-free loan that is especially relevant to early season filers who face delays in receiving their refunds due to the tax act. This has been an extremely competitive season for Refund Advance with multiple tax prep providers including H&R Block offering larger loan than in previous years.
Given our strong offer and execution, our results were positive and we stabilized EITC clients for the second year in a row, an area of significant historical client declines.
While promotions don't drives filers to H&R Block, we must exceed their expectations in the office. Our clients are now more engaged in the process and our tax pros are providing more value-added expertise including our people like new enhancement, which utilizes machine learning to provide occupation-specific advice for Schedule C filers.
Additionally, we're offering our clients personalized assessment of the future impact of the new tax laws. The many variables in this new law make it difficult for taxpayers to know how they are ultimately affected.
Our clients will learn, if they were to pay more or less under the new tax law and then determine how to appropriately adjust the withholding. This is a great example of how our nearly 80,000 tax pros offer value to our clients and provide the personalized advice, so many of them need.
Collectively these efforts have translated into positive assisted results driven by increased retention. Client volume is in line with our expectations and we achieved early season share gains in the overall assisted category with IRS assisted e-files down 3.2% on a day-to-day basis this February 23 and comparable H&R Block volume down just 2.1%. And while, we're pleased with these results, we do expect our performance to moderate in the second half.
Turning to DIY, this year marks the second season for our H&R Block More Zero promotion, which allows a significant portion of the tax filing population to file both their federal and state taxes for free. We also strengthened our partnerships to bring H&R Block to more consumers in the places they frequent the most.
Additionally, we continue to make enhancements with improved drag and drop and further capture capability, making it easier than ever to switch to our product and pre-populate information from tax forms and we're seeing positive results with our new online products for self-employed filers.
These efforts have translated to strong results and market share gains in DIY driven by new clients. Till February 23, IRS DIY e-files increased 2.4% on a day-to-day basis and comparable H&R Block volume increased 6.2%.
Now I'd like to provide an update on virtual tax, which includes redesign tax per review and our new product Tax Pro Go. These innovative products have been designed to meet evolving consumer needs and begin to represent the range of ways taxpayers can count on H&R Block whether they want little to no help, complete in-person assistance or anything in between.
We watch Tax Pro Review, an improved version of an innovative product previously called Best of Both. This is a powerful way for our DIY clients to benefit from the peace of mind of knowing that one of our highly trained experts has identified all available credits and deductions and has also reviewed their return for accuracy.
We also did a soft launch of Tax Pro Go, our virtual assisted offering. This product recons the needs of consumer who want assistance, but don't want or have time to visit one of our offices. Clients did upfront pricing, upload their documents through the secure MyBlock portal and work virtually with one of our tax pros to have their taxes seamlessly prepared.
The focus on Tax Pro Go this year has been to understand the client experience in order to optimize the product going forward. Initial feedback on both products has been positive. We're forming a more comprehensive view of the types of filer who are attracted to these products and while in order to update a meaning volume with this season, our learnings will assist us in enhancing these products over time.
Now that I've covered early season results, I'd like to discuss our plans for the second half of the season. Last week, we brought back the half off promotion as we look to drive more new clients to the H&R Block brand. Additionally, in order to deliver more value, we're partnering with LendingTree to provide our clients easy access to information that can help them improve their credit and financial help. And in the DIY space, we continue to optimize our product to drive conversion and deliver an exceptional client experience.
In summary, we are pleased with our results so far. Our focus on operational excellence, new products and partnerships and value-enhancing promotions is driving results and we remain laser-focused on execution for the second half of the season.
With that, I'll hand the call over to Tony to discuss our financial results and outlook.
Thanks Jeff. Good afternoon, everyone. As Jeff mentioned, we are pleased with our results at the midpoint of this tax season. Our third quarter financial results were in line with our expectations and we're on track to achieve the financial outlook we provided in December.
Before I get into the details, as a reminder we typically report a loss during the fiscal third quarter due to seasonality of our business. Therefore, third quarter results are not representative of our full-year performance.
Starting with revenues, we saw year-over-year increase of $37 million or 8% to $488 million. This is primarily the result of an increase in total U.S. client volumes of 4% through January 31 and planned inflationary increases in net average charge in our [safety] business.
Turning to expense, total operating expenses increased $9 million or 2% to $586 million primarily due to increased compensation cost, which were partially offset by the timing of marketing and advertising expenses. The increase in compensation is due to variable labor related to revenue increases in the U.S. as well as planned conversion of higher cost contractors to lower cost full-time associates.
As Jeff mentioned, we saw positive results in refund advance this season. In the program ended on February 28, applications for refund advance totaled $1.2 million a 14% increase over last year and while the average loan amount increased 40% due to the addition of the $3,000 loan tier, we were able to maintain the cost per loan at approximately the same level of last year.
Moving through the remainder of the income statement, we saw interest expense decrease $1 million due to lower draws on our line of credit compared to the prior year. Putting this all together, pretax loss from continuing operations improved by $30 million.
However, loss per share increased $0.67 from $0.49 to $1.16 solely due to changes in the company's effective tax rate, resulting from the recently enacted federal tax legislation. The negative impact from these corporate tax rate changes was anticipated and is unique to our fiscal third quarter as the impact will be favorable on a fiscal year basis.
We now expect our fiscal year effective tax rate to be in the range of 6% to 9%, which is an update to the range provided in our previously filed 8K in January. For fiscal '19 and beyond, our effective tax rate is expected to be in the 23% to 25% range.
As a reminder, we don't anticipate any impact to our core business in fiscal '18 from the recent changes to individual taxes. We will offer more clarity on the potential impact of these changes on our core business when we provide our fiscal '19 outlook in December.
Turning to discontinued operations in Sand Canyon Corporation made settlement payments of $4.5 million in the quarter, which were previously accrued and related to a settlement agreement from fiscal '16. For additional information on Sand Canyon, please refer to disclosures in the company's reports on forms 10K and 10Q and other SEC filings.
As a reminder, Sand Canyon is and always has been operated as a separate legal entity from H&R Block. We continue to believe our legal position is strong on any potential veil-piercing arguments.
I'd now like to provide thoughts on our financial outlook for fiscal '18. Overall, we expect results to be in line with the outlook we provided in December. In Assisted, we continue to expect improvement in our client trajectory driven by our promotional offers and client experience enhancements.
We are on track to deliver moderate, inflationary price increases as outlined in December. In DIY, we anticipate growth in client volumes with net average charge consistent with fiscal '17. The net result is that we continue to expect overall revenue to increase modestly this year.
Considering the revenue projection and the impact of inflationary cost and investments, we continue to expect EBITDA margin at the high end of the 27% to 30% range. With respect to capital allocation, consistent with the message we shared on our Q2 call regarding share repurchases, we did not repurchase any shares in Q3. No significant share repurchases are planned for the remainder of fiscal '18.
With that, I'll now turn the call back over to Jim.
Thanks Tony. In summary, we're pleased with our performance so far this season as we outperformed the industry and are delivering for our clients in both Assisted and DIY channels. While we expect our future result to moderate in the second half, we are keenly focused on executing our plans for the remainder of the season. We look forward to sharing more when we report our full-year results in June.
With that, we'll now open the line for questions. Ian?
[Operator instructions] Our first question is from the line of Scott Schneeberger from Oppenheimer.
Thanks. Hey, just to start off, if we could have a clarification Jeff or Tony, if you could just rehash the 2.23% versus 2.28% IRS versus HRB performance in Assisted and DIY and also any commentary on what we might expect to see from the industry results at the end of this week when IRS reports it and I have a follow up please.
Yes so, going back to Jeff's opening comments, in the Assisted category, the IRS assisted e-files are down 3.2% and our business was down 2.1% and then in DIY IRS is down 2.4%, or excuse me, increased 2.4% and we increased 6.2% and those are both day-to-day through February 23.
Thanks Tony. Just following up, it looks like you guys were strong out of the gate, a lot obviously throughout February and congratulations for that, January looks very strong as well and it was a little later start to the season this year versus past. So, if you guys could comment please on what you attribute to that initial strong start be it marketing the products, just a little bit more honing the feel for that immediate strong start, thanks?
Hey Scott, it's Jeff, so I'll kick this off and Tony may add in as well. So, I think starting in early January, our network was open and ready for business despite the delay in e-file open date and we did come out strong early season with great promotions and so we see that play itself out and changing the trajectory of EITC clients as an example, refund events.
We came in this year with a higher loan tier than we had in the past and so as I travel around the country, I also saw just really solid execution in the offices. So, I think the combination of those things did really help us get off to a good start in the assisted business.
Yeah and just to add to that Scott, I think the refund advance product definitely pulls clients in earlier than we saw last year. I think having that product for two years in a row, we're seeing prior clients take advantage of it and it's obviously driving new clients that really a lot of benefit is coming from retention lift and just clients coming in earlier.
So then knowing that we have the product for the second year, tax growth fee income that we're offering, I think definitely got us off to a strong start early.
And our next question is from the line of Jeff Silber from BMO Capital Markets.
Thank you so much. In your comments, you talked about expectations for some moderation in the second half of tax season. I am specifically focused on Assisted, but if you want to talk about DIY that will be fine as well. But is Assisted solely because you're not offering refund advance in the second half of the season or is there anything else we need to understand?
Hi Jeff this is Jeff Jones. I'll do the same and let Tony chime in as well. So obviously feel really good about how we started the season. In DIY I think, what I'd say is we expect to see the continued positive momentum as we move through the season. When we look at our second half performance, last year we kind of consider what we're seeing the last couple weeks in terms of assisted performance.
Even when we factor in the 50% of promotion that we just launched last week, we factor all that in. We see our results moderating as we move through the balance of the season. Obviously, we are about halfway through, so there is still a lot of business to come. But based on what we know, that’s really our best estimate.
I don't think I have a lot more to add. As Jeff said, I think we got a lot of tax season to go, so we're trying to forecast a fairly small range here. But if you look at the second half of our performance last year, even though it improved from the first half, we were still down settling claims and we also lost little bit of share.
And while we add 50% off running this year in March which we didn't have last year, we do think that we will get back a little bit of a gain we're seeing in the early part of the tax season on the assisted side.
Okay. And just to clarify few things in terms of the promotions that are available now, refund advance is no longer available is that correct? And if you can just describe the half-off promotion, is this just for specific clients?
Yes, so refund advance and Free 1040EZ promotion both ended on February 28. So those are done. 15% off is essentially client pay half of whatever they paid last year at a competitor. So, they bring in their receipt from an independent for example and we will do their taxes for half.
And really, it's a trial offer to get him into the store to experience our tax pros, experience our expertise and it's only available to new clients.
And our next question is from the line of Michael Millman from Millman Research Associates.
Thank you. Could you talk a little bit more about the RAs, to what extent was existing, I think you mentioned it broadly and what was new number that new and could you do the same thing for Free EZs in particular how much were free EZs this year, how many? And what kind of repeat business did you get? What kind of upgrade did you get for last year’s free EZs business? Thank you.
Michael, take this offline, your RA question, I think what was especially new this year was the new loan amount, the higher loan tier of $3,000. So, this year we offered $500, $750, $1,250 and then $3,000. We saw increases in applications and loans -- but we did as awareness grows about this product and clients understand its value, that really is interest free, no fees, quick access to funds, all that value proposition that it will continue to be a solid product for us.
And whether it was on national advertising or in local office execution, I just think we did a really nice job of executing in all channels to make sure that value was clear to our clients.
And just to add to that, I think specific Michael your question about and to drive new clients or priors. I think I will talk about old programs together, both Refund Advance and for EZ, really did a nice job of lifting prior clients. They obviously brought in new clients, but we were a little disappointed with the volume of new clients we saw from those two programs and I think it's still an opportunity for us when you think about how we get better in out years specifically focused on new clients.
As far as how many have we upgraded and that detail that we don’t want to share at this point. But programs that were all did a nice job of bringing in clients, but like I said more skewed towards prior clients than new.
Could you give us rough idea of the size of the Free EZ program last year and this year?
Yeah, we are not sharing by form at this point Michael.
Can we assume it was bigger or smaller this year than last year?
Well, I think you said for Free EZ, so for Free EZ, we are not going to share the specifics because I think that provides much information from a competitive perspective.
Okay. Thank you. I tried.
And our next question is line of Alex Paris from Barrington Research.
Good afternoon. This is Chris Howard filling in for Alex Paris. I had a question in regard to the increase of 6.2% you saw in DIY, as it relates to the additional partnerships that you announced last quarter. How are those partnerships been going versus your internal expectations?
And I guess, what is the structure of these partnerships? Is it possible to, I guess from my knowledge push it to a multi-year agreement or is that something that comes up for rebid or proposal each tax season?
Chris, its Jeff. I will take this off, so I think overall in the DIY business, I think to keep it very simple what we're seeing is a very good product at a great value and we're starting to tell people about it. And not to oversimplify it, but I think those three things are helping us drive a lot of DIY growth.
Now in the partnerships, Amazon and Wal-Mart were two partnerships that we announced this year and we’re not going to break out individual customer channel performance, but in both cases, we're seeing improvements in the units sold.
And I think we believe it represents a way that we can just continue to bring the H&R Block brand to more consumers than all the places where they shop. So, we feel good about those partnerships and the DIY business overall, we feel good about its performance.
And specific to your question about structure, we've had long term relationships with both Amazon and Wal-Mart. But typically, you negotiate those each year as they determine what products they want to promote in their various stores on online sites.
Okay. That's helpful. And then one last question in regard to Review and Go, you mentioned that Go has had a soft launch and it'll be more of a material contributor later on. Are there any trends that you're seeing that you would be able to share or perhaps attach rates in regard to these new offerings?
No. I think both of those products, we love the role they play in the portfolio. It's starting to fill in the gaps between all Assisted business and DIY, therefore fundamentally, about providing help and leveraging our tax pros to do that. So, we think we're incredibly well positioned to provide that kind of service versus our competition.
Tax Pro Review, it's a redesigned product from Best of Both. Tax Pro Go brand new. Tax Pro Review we are marketing. Tax Pro Go we're not. And in both cases, we're really trying to understand more about the kind of clients that we attract and more about the user experience, just trying to keep it as easy as possible for people to engage with us on whatever terms they choose to engage.
So not large volume contributors this year, but really important products in the portfolio and we're getting some very positive learning that I expect us to integrate and improve for what we do next.
Thank you for the color.
Thank you.
And our next question is from line of Hamzah Mazari from Macquarie.
Hi guys. This is [indiscernible] filling in for Hamzah. Could you walk us through, how we should think about your pricing strategy and your current customer retention rates versus targets?
Yeah, I think our pricing strategy obviously very different in Assisted and DIY. You're probably asking more about Assisted. We went into the year expecting inflationary modest price increases and that's exactly what we're delivering.
I think over the last couple of years, we tried to be much more targeted in our pricing approach and that includes not only the price, but the value we're delivering. Refund Advance for example, the additional value we're delivering to that early season client who wants a refund quickly and no cost, no fee loan and there's definitely been a change in trajectory for those clients, but we know we got to be nimble from a pricing perspective.
We got to figure out places where we're not bringing enough new clients from incremental clients and think about how do we adjust our pricing model going forward and its definitely living, breathing thing, but we feel good that we made significant progress over the last couple of years a change in our client trajectory.
Thank you and just one and I'll turn it over. Could you update us on any changes that you might be seeing from a competitive dynamic perspective and in the DIY side?
Generally, we feel like we're well positioned relative to the market leader in DIY. As I mentioned earlier we have a really good product. We're starting to see more and more third-party review celebrating our DIY product. We got a very competitive value proposition in price versus TurboTax and we're starting to tell that story.
So relative to TurboTax that's how we assess it. I think beyond that it's kind of hard to tell for sure at this stage who else might be doing what, but what I'm most excited about for us is that we continue to improve the product and we're seeing good results from network.
Thank you, guys.
Thank you.
And at this time, I'm showing there's no other audio questions. I'll now turn it back to Mr. Colby Brown.
Okay. Thanks again, everyone for joining us. This concludes today's call.
Ladies and gentlemen, this does conclude the H&R Block third quarter earnings conference call. We thank you for your participation. You may now disconnect.