H & R Block Inc (HRB) 2006 Q3 法說會逐字稿

Good afternoon, my name is Dennis 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. [OPERATOR INSTRUCTIONS]

I will now turn the call over to Mr. Scott Dudley, AVP of Investor Relations.

Please go ahead, sir.

Good afternoon and thank you for joining us to discuss our fiscal 2006 third quarter results.

On our call today are Mark Ernst, Chairman, President, and CEO, and Bill Trubeck, Executive Vice President and Chief Financial Officer.

They'll each have some comments on our results, and then we will open the call to questions.

Tim Gokey, President of H&R Block Tax Services, and Bob Dubrish, President of Option One Mortgage, will be available during the Q&A.

To start off, I will provide our Safe-Harbor statement.

Various comments we make include certain estimates, projections and other forward-looking statements.

The words will, plan, estimate, approximate, project, intend, remain, expect, believe, and variations thereof, and similar expressions are intended to identify forward-looking statements.

These statements speak only as of the date on which they are made and are not guarantees of future performance.

Actual results may differ materially from those expressed, implied or forecast in the forward-looking statements.

Some factors that could cause actual results to differ include the uncertainty that the Company will achieve its revenue earnings and earnings per share expectations for fiscal year 2006 or any quarter thereof, and that actual results -- financial results for fiscal year 2006 and any quarter thereof will fall within the guidance provided by the Company, the uncertainty of the impact and effect of the Company's restatements of its financial statements, changes in interest rates, changes in the Company's effective income tax rate, changes in economic, political, regulatory or competitive environments, and the effect of such changes, the inability of H&R Block subsidiaries to successfully expand their businesses, litigation involving H&R Block and its subsidiaries, the uncertainty of the Company's ability to purchase shares of its common stock pursuant to its board of directors repurchase authorization, and other risks described from time-to-time in H&R Block's press releases and Forms 10-K, 10-Q, 8-K and other filings with the Securities and Exchange Commission.

H&R Block undertakes no obligation to publicly release any revisions to forward-looking statements to reflect events or expectations after the date of these remarks.

H&R Block provides a detailed discussion of risk factors in periodic SEC filings, and you are encouraged to review these filings.

You should note that, in conjunction with today's call, we've posted supplemental information to the investor relations section of our website, and we also have slides that will accompany our remarks today.

In addition, a copy of our prepared remarks will be posted on our website shortly after the conclusion of this call.

With that, let me turn the call over to Mark Ernst.

Thanks, Scott.

At the outset I want to take a moment to first thank the associates throughout our organization, including the tens of thousands of tax professionals hard at work in the midst of a busy tax season, for their dedication and commitment to serving our clients and, ultimately, delivering value for our investors.

We sincerely appreciate your efforts in helping serve clients.

I will begin with an overview of the quarter, followed by a more detailed discussion of each of the segments.

Bill Trubeck will follow with some comments on key aspects of our financial position and financial reporting.

In our earnings release today, we announced that we are restating our results for the first second quarters of fiscal 2006, and all periods of fiscal 2005 and 2004, to reflect adjustments to prior-period income tax expense.

As you know, we have been working to address past deficiencies in income tax accounting and to enhance our income tax reporting discipline.

As a result of these efforts to date, we have determine that corrections now need to be made to properly reflect income taxes in previously issued financial statements.

Bill Trubeck will discuss the details and impact of the restatement more fully in his remarks.

This restatement has no effect on our pre-tax results for any period.

Results for our fiscal third quarter in the current and prior year include two unusual items that I want to call out specifically. so we can focus more of our time on the underlying operating results reflected this quarter.

As we noted in today's press release, our third quarter comparisons include two items that collectively represent about $0.13 per share of the comparison.

December, we announced a settlement regarding a significant portion of our remaining RAL litigation.

As a result of this settlement and related legal costs, we recorded an after-tax charge in our tax segment of $32 million or $0.10 per diluted share to the third quarter.

In last year's third quarter, our corporate segment benefited by $10 million after tax from a legal recovery.

The benefit was worth about $0.03 per share last year for comparative purposes.

Total revenue for the quarter grew to $1.2 billion, a 12% increase over the prior-year period.

We achieved year-over-year revenue growth in our Business Services, Tax and Investment Services segments.

As expected, the mortgage business posted lower third quarter revenues and earnings versus the prior year, but achieved year-over-year origination volume growth and sequential quarter improvement, consistent with our expectations.

There are perhaps three key developments that are of significant note to investors.

Those are our application for a bank charter, the dynamics within the mortgage market and. of course. progress in the current fax filing season.

Related to our bank charter application, the office of supervision informed us last week that they need additional time to review our application.

They have extended the review period for 30 days.

As a reminder, the OTS deemed our application complete back in December.

We're pleased to have reached that important milestone and we remain committed to offering banking products to our clients.

Within the mortgage market, our efforts to raise coupons to achieve more appropriate levels of profitability are clearly working, and I'm pleased that we seem to be on course to the level of contribution from this business that we expect.

I'll share more details later in the call.

Perhaps of greatest note, our early tax reason results reflect a self-inflicted weak start to the first part of the tax season.

Technology problems in the first weeks of January, now resolved, had an impact on a crucial period of the filing season.

While we have recovered from these problems and have since been -- seen performance in line with our expectations for the year, those early weeks have created a hole out of which we are working to climb.

Before going into details, let me also note that H&R Block Financial Advisers and Business Services had results in the third quarde -- quarter that are consistent with the strengthening positions each of those businesses has been building over the past year.

With that introduction, let me discuss the results for each of our segments in more detail, starting with Tax Services.

For the quarter, our Tax Services segment which includes U.S. retail, international and digital tax services along with refund settlement products, posted a 3% increase in revenues.

Excluding the $52 million pre-tax charge for the RAL litigation settlement and related legal fees, earnings were up 3% to $65 million.

Additional costs from the start up of our office expansion, along with our investment in the development and stronger marketing of our digital services, offset the growth in revenues from the early part of the tax season.

For context, let me start by describing what we believe to be the case regarding the tax filing industry overall, thus far.

I'll use that context to describe how our businesses are faring thus far, and, finally, a brief discussion of what we see going forward.

Tax filing season started out significantly slower this year than anyone expected.

Data we have from industry sources suggest that the start of the season has been meaningfully slower, despite the continued adoption of electronic filing across the industry.

Our industry estimates are that, through January 31st, industry filings were about flat with a year ago, and that through February 15th, industry filings are down between 1 and 2%, all on a date-to-date basis, comparable to how we report our numbers.

The January 31st incomes are in comparison to an approximate 5 to 10% industry increase that we had expected due, to calendar differences year-over-year, and a cumulative industry increase in filing through February 15th that we thought would be close to an increase of 2%.

There's no evidence this later filing is due to things like W-2 timing.

As the season is progressing, this late start gap is closing, though the industry filings remain lower today than we would have expected, suggesting that this wasn't just a start of the season phenomenon.

Three other key industry factors that I would like to highlight.

The Free-File Alliance has, thus far, attracted substantially fewer filers than at the same time last year.

Telefilers appear to be migrating principally to either online filing or paper filing this season.

And while paid digital filers are up slightly, this does not appear to be coming at the expense of the paid professional market.

The digital filing market started slower this year and has -- as has the entire industry, though we have begun to see this part of the market pick up in the early weeks of February.

Competitors began marketing initiatives very early to season in response to our early season success last year.

Our early season performance has been impacted by a new pay stub loan product offered this year by a number of competitors that appeal to a segment of tax clients in the market.

As currently structured, this product does not fit H&R Block's standards for client value, and it remains to be seen what the final impact of this will have.

While the industry was starting off slow this season, we at H&R Block experienced a number of self-inflicted technology problems that severely hurt the start of our filing season.

We moved this year to a new software distribution strategy that, along with office setup issues, left us unprepared for the early weeks of the season, when clients' primary motivation is to find a provider who can help them access their refunds as quickly as possible.

At the same time, the early season success we experienced last year led to greater competitive intensity for early-season filers.

The consequences that many early season clients, who traditionally would have ser -- been served by H&R Block, went to others.

We estimate the impact of those start up problems, when compounded by the more aggressive refund lending products in the market, cost us the opportunity to serve approximately 250,000 clients in January.

The start up issues were fully resolved by the last week in January, but by then the impact was unable to be recovered.

We would estimate that the full-year effect of these problems will represent about 2% of full-year client growth.

For the month of January, tax clients served by Company-owned and franchise operations decreased 2.2% compared to the prior year period.

The interim period during the first 15 days of February performed in line with what we expected, given the difference in calendar year-over-year.

The table that accompanies these remarks shows the results compared to our day date adjusted information for this year, and indicates they were up 30 basis points in the first period of February compared to calendar year timing expectations.

Revenues associated with RAL participations decreased slightly in the quarter along with lower loan volumes.

We continue to provide a full range of refund settlement options and savings products that allow our clients to make the best decision for their personal financial situations.

We believe this approach increases client satisfaction and loyalty to the H&R Block brand.

As we've been discussing with you, we're taking several near-term actions expected to drive tax results this year.

One of those was expanding the capacity and size of our retail network, improving the client experience, and satisfaction, and increasing our marketing effectiveness, particularly in digital.

Our office expansion this year resulted in opening approximately 550 new Company-owned locations, and nearly 190 franchise locations.

We launched approximately 250 new kiosks within Wal-Mart and other shared locations, and have a presence in nearly 2,100 total alternative locations this year.

Our new offices in alternative locations were more impacted by our technology problems than our existing offices.

Given this impact, it's too early to assess the results of our new offices for '06, though I would note that we expect the biggest impact of new offices to occur later in the filing season.

We have a great deal of the filing season remaining.

Thus far during the season, gross average tax preparation and related fees per client rose 6% for both Company-owned and franchised operations.

Pricing increases are coming through in line with our expectations, based upon our pricing strategy and the mix of clients that we're seeing.

So we're disappointed with the issues we incurred early on.

Internationally we see much to compete for through the remainder of the filing season.

We knew our results through February 15th would be the most difficult comparison we had, given our early season success last year.

As you'll recall, we gave back in the second half of last year, the growth that we achieved in the first -- in last year's first half.

We've been intensely focused on a successful second half in all of our planning.

The combination of an organization highly focused on competing in the second half of our tax season, new offices that traditionally contribute more of their relative growth to the second half, extension of our popular double-your-refund promotion through the balance of the season, and an easier comparison, leaves us committed to making progress toward our growth goals for the season.

Indications within the digital market are that the share is shifting somewhat from software to online and, within online, from free to paid.

It's clear to us that we have stopped the erosion of our market share of the digital business, and we seem to be gaining share in both the paid and free portions of this market.

The actions that we took, including revamping our product's look and feel, building on strong retail partnership, launching an integrated tax cut marketing and brand building campaign, and modifying our pricing strategies, are having the effect we were hoping to achieve.

While there is a great deal of the filing season left for the digital business, as well, we're pleased with the start that we have in this business.

Our international tax operations generated revenues in the quarter of $13 million, a 10% increase over last year, and a pre-tax loss of $7 million compared to a loss of $8 million last year.

The Canadian tax season launched recently, and although early reports show return growth, we're just getting started there.

In summary, based on tax season results we have seen through mid February and with our focused efforts to execute well during the second half of the season, we are still focused on achieving retail client growth, while implementing a pricing increase in the 5 to 7% range.

We have a lot of work to do, and, frankly, it's still too early to predict the results we will ultimately achieve for this tax season.

Turning to mortgage operations, results were lower in the third quarter compared to prior year, but up sequentially, as we had anticipated.

Our third quarter operating margin was just below our expected range of 40 to 50 basis points, reflecting better-than-anticipated gains on sale, but weaker levels of origination.

The somewhat lower-than-expected levels of origination resulted in higher cost of origination, offsetting the sequential improvement in gain on sale.

Mortgage revenues for the third quarter were $296 million, down 4% over last year, but up about 4% from the second quarter.

Pre-tax earnings decreased 42% from the prior year to $67 million, reflecting lower year-over-year gain on sale, offset somewhat by increased contribution from loan servicing.

At our investor conference last month, we said that origination volumes for both the third and fourth quarters would be in the $9 billion, at the low end, and that's where we ended up.

Three quarter loan production grew 7% to $9 billion, versus the third quarter last year, but was down 29% from the record volume of $12.6 billion in the second quarter, as we had expected.

In response of the eroding margins in recent quarters, we are continuing to see rate increases, both ours and others in the industry, which is lifting funded WACs.

It appears that the higher rates had a larger impact on origination volumes than we expected.

The average loan balance to the quarter increased to $194,000 compared to $188,000 in the second quarter.

This is a trend we have seen over the last several quarters, and is driven by our continued emphasis on originated -- originating larger balance loans.

We continue to maintain strong credit quality in the loans we originate.

FIFO scores for our non-prime originations averaged 621 compared to 629 in the second quarter, while loan-to-value was sustained at about 80%.

In prior calls, we have noted that average loan balances and credit quality are influenced by interest-only loan product that generally required higher credit quality and have larger loan balances.

While the percentage of IO's has declined lately, 40-year loans have increased as a percentage of total original origination.

This is consistent with the broader industry trends and our strategy reflecting consumer demand.

O loans, as a percentage of originations, were 17%, down from 28% in the second quarter, and 40-year loans increased to 20% of overall production.

Our third quarter gain on sale was down year-over-year, but up sequentially.

As you'll recall, conditions in the secondary market were very challenging last quarter.

For most of the third quarter, whole loan bids were not very attractive and spreads on bonds and securitizations began to widen.

The environment improved toward the end of the quarter and into February, with spreads tightening and whole loan bids getting stronger, both in terms of depth and quality.

Although volumes were down, loan sale premiums did rebound somewhat in the third quarter.

We increased our funded WAC to 8.27% for the third quarter from 7.48% in the second quarter.

Meanwhile, the two-year swap rate moved up just 11 basis points to 493 at January 31st, so the spread between our rate and the two-year swap widened further.

Our January WAC was 8.57%, in the middle of the range that we mentioned we need to get to, in order to support a 200 to 225 basis-point loan sale premium expectation.

With the increase in our coupons, the slowing in the rate of increase in the two-year swap and stronger secondary market conditions, particularly near the end of the second quarter, our net gain on sale gross margin improved to 186 basis points compared to 101 basis points in the second quarter.

We recorded $5 million of hedge gains during the quarter, down from $31 million of hedge gains in the prior year, and $61 million in the second quarter.

During the quarter, we executed 85% of our non-prime loans in the whole loan market, with the remaining 15% securitized.

Our form of execution in the secondary market depends on which method produces the most value, while recognizing our bias for cash.

Toward the end of the quarter, and into early February, we started to see noticeably better pricing for securitizations.

In fact, we completed a $3 billion securitization on February 3rd. he value of retained mortgage servicing rights on loans originated and sold during the quarter was 67 basis points as compared to 69 basis points in the second quarter, which reflects the continuation of the factors we saw last quarter; higher loan balances, higher interest earnings, and lower cost service.

We continue to focus on aggressively controlling origination costs in the midst of lower origination volume.

Our emphasis is on using technology, automation and outsourcing, when appropriate, to streamline our processes.

The expectation we set was for our cost of origination to remain at about 175 basis points for the third quarter -- third and fourth quarters, based on lower anticipated volumes.

For the third quarter, our origination cost was 212 basis points.

This increase was primarily a result of volumes being lower than expected.

In actual dollars, our costs declined $20 million or 13% from the second quarter.

Our staffing levels in mortgage are being reduced.

In the third quarter, we reduced headcount by about 9% through a combination of attrition and some actions taken to reduce staff.

This week, we implemented a further reduction in force of about 600 associates, or an additional 13% within H&R Block Mortgage and Option One.

This action, combined with the closing of a number of offices, will result in a pre-tax charge in our fourth quarter that we estimate that will range between $10 million and $12 million.

Our net origination margin, that we defined as net gain on sale less cost of origination, was 39 basis points, up from a negative 20 basis points in the second quarter, and just below the 40 to 50 basis-point range we outlined in last quarter's call.

Option One servicing portfolio at quarter end was $77 billion, an increase of $18 billion over last year's third quarter, but down about $6 billion from the previous quarter, due to lower volumes in our sub-servicing business.

Servicing revenues increased 45% to $106 million for the third quarter year-over-year.

Servicing expenses also increased, reflecting higher amortization of MSRs and the result of the increased value recorded during the second and third quarters for MSRs.

Overall, service and pre-tax income improved by $7 million.

Those performance trends stayed positive with 12 months seasoned and beyond delinquence rates being maintained at about 12%.

A risk, as it relates to loan performance, is primarily limited to the tax-affected value of residual assets and mortgage servicing rights on our balance sheet.

As the value of these residual assets is based on future performance, we continually monitor the reasonableness of our valuation assumptions, relative to actual loan performance and performance in the market.

We realized a net write-up of $13 million in the third quarter, which was recorded in other comprehensive income net of deferred taxes.

We recorded $9 million of impairment to residual assets, which are reflected in the income statement.

With the return of stronger whole loan sale bids and tightening spreads, we've begun to see some competitors lowering their rates.

We responded this month with measured reductions in rates for certain of our products in selected markets.

However, we do not expect our WAC to drop significantly.

We believe our initiative to drive cost savings through technology implementation and staff efficiency will allow to us move closer to our cost of origination goal of 175 basis points by first quarter 2007.

The market will remain highly competitive and sensitive to interest rates.

We're focused on managing well the things that we can control to achieve the kind of success that we expect to have in this business for the long term.

Results for Business Services were down for the quarter, reflecting costs that are associated with the integration of the Tax and Business Services acquisition and the more fourth quarter-focused business that the American Express operations brought with them.

However, the core tax and accounting business had a solid performance for the quarter, and is seeing favorable shift in business mix toward larger clients.

Meanwhile, our emerging businesses are showing good momentum.

As we discussed at our January investment conference, RSM McGladrey has emerging businesses that are high potential, early-stage operations that initially operate at losses.

These businesses depress bottom-line results in the short term, but are expected to deliver solid earnings and margin over the long term.

Overall, third quarter revenues increased 77% to $236 million, which mainly reflects the addition of the TBS acquisition.

Excluding TBS, segment revenues were up 6%.

Business Services reported a $1 million pre-tax loss, which includes $6 million of losses associated with the TBS acquisition, compared with pre-tax earnings of $6 million last year.

Moving into the segment's most productive quarter, we're pleased by the strong market position we have with this business.

Investment Services delivered another quarter of improved performance, driven by continued strong revenue growth.

Investment Services revenues were $73 million for the quarter, up 18% over the same period last year, and up 5% sequentially.

Pre-tax loss of $8 million in the third quarter represented a $12 million improvement year-over-year, and was modestly better than the second quarter.

Each of these quarterly loss figures includes $9 million of intangible amortization.

Better results were primarily due to higher production levels, led by an increase in annuitized business, improved net interest revenue from a positive rate environment, and the benefits of lower costs.

We continue to be encouraged by the steady performance improvement.

Given year-to-date results, we believe Investment Services will reduce its full-year pre-tax loss by $30 to $37 million compared to fiscal 2005.

This is a little bit better than our previous outlook.

Along with progress toward positive financial performance, we continue to strengthen our success rate in converting our tax client leads into new accounts.

With the 2006 tax season in full swing, we are actively expanding the relationship between our financial advisors and our tax professionals in serving the financial needs of our clients.

For this season, we have nearly 9,000 tax professionals enrolled in our preferred partner program that strengthens tax professionals' effectiveness in identifying and referring tax clients to our financial advisors.

Year-to-date through January 31st, nearly 11,000 new funded accounts for tax clients have been opened, with assets of $542 million.

For the fiscal year-to-date period, we had $8 million in revenue from these accounts, representing a 55% improvement versus the prior year.

Total assets under administration at the end of the third quarter were $31.4 billion, up 11% year-over-year.

Our number of advisors decreased slightly to 956 at the end of the third quarter from 995 for the second quarter.

We continue to have success in our efforts to recruit new advisors with high production levels.

At the same time, we continue to enforce our minimum production standards, resulting in fewer lower-producing producers.

Before turning to the outlook, I'll now ask Bill Trubeck to cover the restatement, some balance sheet items and other financial highlights.

Mark mentioned earlier that I would give you some background and explanation on the restatement of our previously issued financial statements, so let me start there.

In the aggregate, the total amount of the restatement is approximately $32 million, which includes approximately $4.4 million that was reported in Q2 of this fiscal year.

We currently believe the restatement will result in a $0.07 reduction to fiscal 2005 diluted earnings per share, and a $0.02 reduction to fiscal 2004.

As stated in our Form 8-K filed today, the Company has not completed its analysis of the restatement adjustment, and, accordingly, the effects of the restatement on all prior periods are preliminary and subject to change.

As part of the Company's continued efforts to enhance the effectiveness of the corporate tax department processes, the Company has determined that an insufficient state effective income tax rate was used during fiscal years 2004 and 2005, resulting in a cumulative understatement of state income tax liability of approximately $32 million as of April 30, 2005.

The increase in the state effective income tax rate was due to a variety of items, including legislative changes, correction in apportionment computation, and fewer state net operating losses to offset taxable income than in prior years.

As I mentioned during our investors meeting in New York last month, we expected that we would refine our estimates and projections as a result of this continued review.

Our announcement of the restatement today reflects our best efforts to identify and correct all past adjustments that we have uncovered.

You will recall that the Company increased its efforts to remeditate the material weakness in its corporate tax function early last year.

Consistent with our plan, we engaged an outside firm to assist us with the development of a suggested tax department organization and staffing model to provide guidance for enhancing our SOX compliance requirements, and to assist in achieving an efficient and effective income tax provision and compliance function.

As a result of this review, we have begun to implement a number of recommendations.

I also want to mention that Peter Simpson, a former big four tax partner, has recently joined us as Senior Vice President of our corporate tax department.

His leadership will be an important component of the improvements we will continue to make in this very important area.

A more complete discussion of the restatement will be incorporated into our 10-Q filing for the third quarter.

And at this time, we plan to request an extension of our filing date under SEC rule 12b25 to March 17, and we hope to file within this extended period.

We now believe our effective tax rate for fiscal year 2006 will be approximately 39 to 39.5%.

The major changes with respect to the balance sheet this quarter are largely due to the seasonality within the tax-related businesses, and the Company's purchase of participation interest in refund anticipation loans.

As such, receivables were up considerably to $1.8 billion, compared to $693 million last quarter, and $419 million at April 30, 2005.

This is, of course, a seasonal increase, related to the funding of the refund anticipation loans.

Short-term borrowings were $2.6 billion at the end of the third quarter, compared to $498 million at the end of last quarter.

We had no short-term borrowings outstanding at fiscal year-end 2005, and we expect there to be no short-term borrowings at the end of fiscal 2006.

Our tax position was $1.5 billion, up from $1.1 billion at April 30, reflecting the usual seasonal increase related to our Tax Services segment.

Mortgage residual interest and securitizations were $175 million at quarter end, compared to $206 million at April 30, 2005.

This reduction was primarily a result of cash received, partially offset by net write-ups.

Share repurchases were not executed in the third quarter, so the remaining board authorization is unchanged at 10.5 million shares.

We issued three million shares from our treasury for option exercises, the employee stock purchase plan and restricted shares.

With regard to our debt ratings, I'm pleased to note that the Canadian agency, Dominion Bond Rating Service, launched ratings service on the debt of Block Financial Corp. in late January, assigning an A rating to Block senior notes and R1 load to commercial paper.

We now have top tier commercial paper ratings from U.S. rating agencies, which improved eligibility for investment by money funds and other regulated institutions.

With that, let me turn the call back to Mark for a wrap-up.

Thanks, Bill.

Let me briefly comment on guidance before we go to questions.

We are -- we believe that the problems of early January are behind us, and that the second half of the tax season is now tracking in line with our expectations.

There's obviously a great deal of tax filing yet to be done, but also significant ground to make up from the start we had.

We have a good plan that's being executed now for the second half.

We continue to make the necessary changes in our mortgage business to address the impact of market conditions.

In an environment of lower volumes, reducing costs while maintaining service and pricings disciplines will be the keys to our success.

With that focus, we have confidence in our ability to achieve improved net margins in the fourth quarter, which we expect to be in the 90 to 100 basis-point range.

We expect continued strong performance in our Business Services segment, Core Accounting and Tax Services, and we will continue to work toward our improved performance in our Investment Services segment.

Given our results to date in fiscal 2006, we've lowered our full-year earnings guidance to a range of $1.65 to $1.85 per share, before unusual items.

Our results for the full year will ultimately depend on our performance in the second half of the tax season, and the extent to which we were able to achieve the further improvements we're pursuing in mortgage services.

With that, thank you for joining us today.

As always, our focus remains on prudent management of all of our businesses, as well as efficient capital allocation to create long-term value for shareholders.

We believe our key strategies will continue to drive success for our businesses, and deliver stronger overall performance over time.

With that, Dennis, I think we will be ready to open up for questions.

[OPERATOR INSTRUCTIONS] Our first question is from the line of Steve Velgot with Cathay Financial .

Yes, a question on the guidance you're giving for the net margin on the mortgage business of 90 to 100 basis points for the fourth quarter.

Just looking at kind of where your WAC has gone from the third quarter to, I think you said 8.57 in January, it looks like the swap is up about 20 basis points from where third quarter was, how do you get to that 90 to 100 basis-point net margin?

What gives you confidence in that range?

Sure.

Well, it's a combination of several different things, so let me walk through the different components of that.

The increases that we're seeing coming through in the WAC relative to funding costs, I guess, would suggest that we are now kind of originating loans that would have gain on sale of the 200 to 225 range.

So that's up about 30 to 40 basis points over what we experienced in the third quarter.

In addition to that, we -- the actions that we've taken around reduction in costs we think will bring our overall cost of origination down another 25 basis points, so the combination of those two shifts are what get us in the 90 to 100 basis-point range.

Okay.

And then just a -- a quick question on the -- or clarification on the 250,000 taxpayers you estimate that you weren't able to serve in January.

That was a combination of the technical problems you had, as well as the incentives by competitors?

Yes, let me talk about that for just a bit, and I'll have Tim Gokey join in on this, as well.

The challenge we have, and we've tried to kind of pull this apart a bit, and we've done what we think we can to kind the get close to the -- kind of best explain what happened.

Fundamentally, it's hard to disaggregate, when we're having operating problems and our competitors are not, how much of the competitive impact might have been felt had we not had those same operating problems.

That is our fundamental challenge.

We believe the 250,000 is a pretty good estimate of the net effect of the clients we would have likely served, but were unable to because of our operating problems.

But, frankly, if there weren't any competitors, clients would have waited and we wouldn't have had that same effect.

So it's a little bit hard to disaggregate the two, but that's the best estimate we have.

Tim, what would you want to add to that?

I think my additions would be basically a restatement of the same fact.

Clearly, when we look at the impact of the operational difficulties that we had by -- we have all of our locations mapped out by [indiscernible] competitor intensity, and the impact was -- ranged from not very much in those places where there's no competitive intensity to a lot in the places where there is.

And when we add that all up, it came up to about 250,000.

And just one other quick follow-up.

The calendar shift that gave you an extra peak day in January, I believe that was just January 30th and 31st being week days, is that correct?

And were the technical problems cleared up by then?

I think you said by the end of the month they were cleared up.

Yes.

In fact, the one slide that we had with today's presentation -- I think it's Slide 9, if I've got it right -- kind of lays out the relative performance against what that sort of day-date shift that we had expected to see.

That effect was really kind of Monday, Tuesday versus last year, the 31st fell on a Monday.

That -- at that time of year, it could have that level of the effect.

We thought it would have not just that effect for us, but also that effect for the IRS.

Frankly, we didn't see as much impact of the day-date shift as we had anticipated, either for us or for the industry overall.

So, that is kind of what gives us some sense that there is a bit of a slower start to the filing season.

But clearly, by the last week in January, and into that week that covered the 30th and the 31st, the technical problems we were experiencing were resolved, and we were at full force.

Thank you.

Your next question is from the line of Michael Millman with Soleil Securities.

Thank you.

I guess covering some of the same ground, the -- its been clear that Jackson Hewitt's been very aggressive on making these loans, and, presumably, they've had a lot of success this year.

And, presumably, they'll continue to do this in future years, and yet you're standing off on that.

So I guess the question is how do you compete in the long term against their strategy to do that?

Also, when you look at the 250,000 loss and try to put some cost on that, you're probably talking about on the order of $0.04 or $0.05, and yet you've reduced your guidance -- call it $0.25 a share.

So, maybe you can somewhat reconcile those numbers.

In regard to the beginning of January, could you give us an idea of what -- everything else because equal -- on a tenure basis, what your growth should have been?

Thank you.

Sure.

Well, so let me first talk a little bit about this sort of new loan product that has shown up in the market this year.

You know, we frankly were aware that some of the refund lending providers were offering that, or were suggesting that people should offer that in the market.

We had made a decision earlier to not do that because, in our assessment, this product is really not a good value for consumers.

And while -- as the leader in the industry, we take a lot of the heat.

Even though we believe we have the best practices around traditional refund lending, this product, as it was structured, in our judgment, was -- it was really a much worse value for consumers and something that we really didn't believe was a good -- was consistent with where we are trying to get our brand and our market position.

Having said that, we also, I think at the time, believed that everybody -- all of our competitors would -- at least all of our reputable competitors would come to the same conclusion, having looked at the economics of this to consumers and, obviously, that judgment was incorrect.

I think we have sort of -- we are -- we've begun internally already discussing, so if this is going to become a new product in the market that is going to attract some very early season potential clients, what should our response be?

I mean, it's very clear to me, our intent is not to seed the early season to any competitors, and we are trying to figure out how do you do that, and at the same time, offer products that we can be proud to have associated with the H&R Block brand.

Obviously, that's -- it's too early for us to speculate at the moment on exactly what we'll do about that, because January of 2007 is still some distance away, but I think, philosophically, that's how we view it.

As it relates to the issue about the change in guidance, you know, guidance actually covers a lot.

It covers everything in our Company, not just the tax business.

So I think the one thing that we do believe we should be, at this point, is kind of cautious in the -- that guidance.

The last thing we want to do, frankly, is to have to lower guidance, and then find out that we should have lowered it further.

So we've taken a -- I think, a judicious or cautious approach to giving you a sense of where we see the balance of the year going.

And I don't recall what your fourth -- or your third question was, Mike?

Question was just first 15 days of February, what -- everything else being equal, what would have been the -- just the tenure effect?

I don't know that I have the data that looks at the tenures of office effect.

Clearly, we would have said that the tenure effect, overall, during the course of the season would have added one to two percentage points of growth to our overall network.

As you saw, sort of the day-to-date adjusted number was .3 -- 0.3%.

I don't know how much the tenuring would have been in that specific period.

I would also tell you, it's not clear to us exactly whether, you know, during what we were experiencing during that kind of first 15-day period, had some carry-over from the end of January that was hitting us in February.

We do estimate that the IRS was down during that same period relative to us, so there's a lot of moving parts here.

I just don't have that particular data point.

Thank you.

Your next question is from the line of Kelly Flynn with UBS.

Thanks.

I have a couple of questions.

I need to revisit the first question because, actually, what Tim said made me confused after what you had said, Mark.

The 250,000 estimate, I want to be clear, that is only your estimate for the technology problem?

And then you saw additional impact from competition?

Well, you know, at this point it's really hard to say what -- which is which, or what is what, I guess.

Before our perspective, we would estimate that, relative to what happened in the industry -- what's happening in the industry with the speed at which the filing is occurring early in the season, had we not incurred the -- or not had the sort of technology challenges that we had, we would have been in a position to serve about 250,000 clients that we were unable to serve because of the technology challenges.

Now,, had that not been the challenge, would some of those people still have not come to Block because competitors were offering a product that was more attractive to them or something else, we just don't know because we never got a chance to find that out.

So, the combination of the sort of early season technology problems we were having, as well as sort of the aggressiveness with which we saw competitors in the market this year, is a little bit kind of mushed together, if you will.

Okay.

And actually, can you elaborate more on the technology problems?

I mean, what exactly happened in your offices and --

I'll take a quick attempt at that, and I'm going to let Tim also add to that.

The key thing that happened for us -- I mean, there were several different things that I would -- were kind of involved with this, but the fundamental thing was we moved to a new technology this year for a significant portion of our offices.

In particular, more of our offices in the Company operations and fewer on the franchise side moved to this new technology that allowed us to push software changes down to the office rather than having the local offices implementing software changes directly, in-office.

And we believe that would improve efficiency and it would allow us to keep our technology or our software current in the offices, and the operating environment current.

And what we found was that the way that had been set up early, and through some of the changes we did to try to fix it, were causing random problems in the offices, and as the software was being updated overnight at different times, problems that had been resolved one day would suddenly crop up in a new form the next day, and were just simply, in some cases, disabling offices from being able to process returns; in other cases creating what looked to them like random problems, what looked to us like specific issues where we had made what we thought were good fixes, but didn't really work with our software.

So that's the kind of non-technical version, and here's Tim for the technical version.

Okay.

As Mark said, we implemented a new approach to [inaudible] software to our offices.

That is part of a multi-year project we have had to increase our operational efficiency, and the uniformity of our operating platform.

In addition to some glitches in the way the downloading has worked, this system also had reporting capabilities built into it, and those reporting capabilities had issues with them that were -- caused to us dispatch our technicians to offices where they were no problems, and not to dispatch them to place where there were problems.

In addition, this capability had a self-correcting mechanism.

Based on the reporting it would take action to correct things, and since the reporting was going bad, it's what led to the issues that Mark outlined in terms of things that seemed to be working.

And then the -- with incorrect reporting, you would make a change to something that was working and make it not work and vice versa.

Is the bottom line, basically, that offices were disabled and they weren't able to serve clients?

That's basically what you're saying?

Yes.

The -- there were -- in terms of client impact, in the offices that were up, it would result in delays and intermittent ability to transmit.

And we lost probably ten days worth of field technician time, which caused to us set up other offices on a delayed basis.

So, there's sort of two issues.

There's the issue on the offices that were already open and, then, later opening of other offices.

Particularly some of our new real estate offices in some of our shared locations opened considerably later than we had planned for them to open.

Okay.

Second question on the first half of February, you gave the day adjusted number, I think 0.3%, but I want to be clear.

You'd said at your analyst day that there was one fewer -- you lost a peak day in February.

Am I correct that that was in the first half of February?

That's right.

So what we would have expected during the first 15 days of February is that -- to be flat with prior year, we should have, during that reporting period -- that 15-day reporting period, we should have seen a decrease of 5.8%. 5.83%, to be specific.

What we actually saw an increase of -- or excuse me, a decrease of 5.7 -- I'm not sure exactly how the math translates -- but we saw a slight relative increase versus what we would have expected on a date-adjusted basis.

Okay.

Back to kind of the January issue, I think if you adjust for those 250,000 returns, it looks like you would have been up about 4%, which if you adjust for the calendar, would really be down 5%-plus.

Right.

If you think about it that way, what is that negative five resulting from?

Is that what you think is the late start or does that also impact competi -- does that also reflect competition?

We would clearly believe that -- I mean, our estimate is that the industry overall started down -- at January 31st, was anywhere from 5 to 10% lower start than would have been expected.

And the way we get there is -- basically our estimate is that at a January 31st, on a date-to-date basis, which is kind of our Interpellation so you can see apples-and-apples, the IRS, we believe, on a date-to-date at January 31st was about flat with last year.

So, we would have expected that they should have been up five to maybe as much as 10% at that same point this year, given the way the days fall.

So it would say clearly a slower start to the season for everybody in the industry relatively speaking, us included, and then compound our slow start the same way the industry slow started with our early season technology problems.

Okay.

And your new guidance, you said you were trying to be conservative.

What return growth are you assuming kind of at the midpoint of your guidance range for tax?

What we believe in the moment is that the best way to think about this is that we thought, as we said in January, that we would see zero to two percentage points of growth this year.

We think that the early season problems that we incurred or experienced will cost us about two percentage points of -- for the full year.

Okay.

So if we were going to just, you know, do the math, we'd say that the new guidance is going to be anywhere from down two to flat, and I think that's probably a reasonable place to look.

Okay.

Just a couple more quick ones.

The guidance excludes one-off items.

I just want to make sure, does it exclude the $10 to $12 million you mentioned would be a charge in Q4 for headcount reductions?

I believe it does, yes.

Okay.

And then finally, the restatement, I imagine that hurt the first second quarters of this fiscal year.

How is that reflected in your new guidance?

Did that bring down guidance at all?

No, it does not.

Right now, the -- as I understand it, that was a charge -- there was an addition to reserves taken back in the second quarter for state taxes.

Now, that has been -- that will be part of the restatement overall, but frankly, we'll also see some additional state income taxes in the first and second quarters that will basically offset that increase that we saw in the second quarter.

Okay.

Thanks a lot.

Your next question comes from the line of Scott Schneeberger with Lehman Brothers.

Hi, thanks.

Yes, I just want to follow up on the guidance line of questioning.

So, we just don't know the impact of the fiscal first half '06 restatement yet, so no impact and that's not associated in the guidance, but you don't think there will be a material impact from the restatement or it's too early no know?

Yes, I think that's right, we don't expect it to have an neck.

Is that right right, Bill?

Right.

Another question on the guidance.

The $0.10 impact in this quarter from the RAL litigation issue, is that in the guidance number or excluded from the guidance number for the full year?

It is excluded.

Okay.

Thanks.

The -- a question on -- you had mentioned just a few questions ago that you lost about ten field days on getting new locations set up.

I think it was about a 1,004 new office locations through -- was that through the 15th, I guess?

Yes, February 15th.

So are we going to see any additional after that, or are we pretty much done for the year with new location build-out?

We are done for the year with new location build-out.

Okay.

With some of the technology issues this year, just kind of a question on the forward strategy, are you going to continue strong with the new office build-out into the next year, and do you feel that these -- it sounds like it was mostly new offices that had the technology issues, confident that you can roll out new ones?

Yes, let me clarify.

It's not dominantly the new offices.

In fact, it's -- some of the new offices were slower to be set up because some of our technology technicians were busy dealing with issues in our high-volume offices and, therefore, were not available to ensure we were set up in some of the newer offices.

That's the effect we had.

It wasn't because of those new offices, per se.

And having said that, I think it's way too early for us to judge the office expansion strategy and how it has worked or will have have worked for this year.

Clearly, we will have to look at the analysis relative to what didn't occur because of the early season miss that we might have had in those offices because of technology issues, but we'll try to judge that independently of that effect.

Okay.

Thanks.

A question in digital tax.

You mentioned that you are seeing -- it's an obvious shift with Turbo Tax's numbers that looks like more is going to on-line and way from retail.

I believe, Mark, you mentioned you're seeing the same thing, and could you talk a little more detail on what you're seeing in both those channels, especially on-line?

Yes, the numbers that you've seen from Intuit are directionally the same numbers that we're seeing.

So from that vantage point, I think the industry phenomena of fewer people using software or somewhat reduced growth in the software channel, we're seeing overall, I think, a little bit of growth in the software channel, as well.

And the dominant share of increase in digital is clearly on-line paid, and I think, in general, that's a consumer shift, generally speaking, that is likely to continue, not just to the remainder of this year, but probably into the future.

Overall, I'd tell you, our -- it's a little bit early to judge this exactly, but we think we have kind of done what we were trying to do with our digital strategy, which is to get the tax cut brand name more prominently established out there, so that we can more effectively compete with that brand, and to ensure that we have the right kind of distribution strategies, both on-line as well as in software.

All those seem to be working reasonably well so far this year.

Sure, just a real quick follow-up on that and clarification.

Would you say in on-line that -- you've seen all the published Turbo Tax numbers, would you say that in on-line, you are maintaining share, gaining share?

I know you're happy with where you are, but could you quantify it a little more?

On-line specifically, we estimate that we are overall gaining share on-line, but not by a great deal.

And probably the place that we have seen the best success relative to what Turbo's numbers are, is we are losing less in the Free-File Alliance than what they are.

Otherwise, it all looks pretty much the same.

Alright, thanks.

I'll hop out.

Your next question comes from the line of John Neff with William Blair.

I wanted to follow up a little bit more on the last point about the Free-File Alliance decline.

I was just wondering if you could tell us the numbers that you're seeing, and elaborate on those trends you're seeing this year?

Well, we have some of our own estimates of what's happening with that channel, overall.

In general, it looks like the changes in the structure of the Free-File Alliance contract and the restrictions that have been put on it have lowered or reduced the number of people who are using that.

Clearly, the reduction in numbers of users coming through the FFA is greater than the number of people who would not have been able to use it because of income restrictions.

So that does not explain what is really happening.

I think for the most part, what we know, we and others are all trying to do is to take prior-year clients that came to us through the Free-File Alliance and to, in effect, ask them to come back to us, or offer that they come back to us with different offers through our channel directly, either through a paid offer or some other combination of an offer.

So I think that's probably the bigger effect that's going on that clearly I expect -- we know that's helping drive our paid numbers.

I suspect that's helping drive some of the other competitors' paid numbers this year, because they have a large pool of clients who have data in their system that can be rolled over.

But if you want to roll over, you probably have to pay something for that, in most cases.

That's a monetization strategy that a number of providers are using.

Do you have an estimate as to what the percentage reduction in the number of FFA filings is at this stage?

Yes, you know, what, I don't have it off the top of my head.

What I know is that the -- our reduction is less than the reported numbers from Turbo, and I think the best estimate I heard is we have gained some share in FFA so far this year.

So the net effect -- but the net effect of that is not exactly clear to me off the top of my head.

Okay.

Could you talk -- the day-over-day versus date-over-date, what wa -- and if you said this and I just missed it, I apologize -- what was the day-over-day decline in unit volumes in the retail channel?

We don't report that number and we don't report that way, so we didn't give you that number.

Okay.

We track it, but we -- to avoid kind of the confusion that comes with day-to-day, date-to-date, we chose date-to-date and try to kind of put all of our numbers in that format.

Can you comment a little bit more on the decline in the servicing portfolio?

You mentioned subcontracts -- or sub-servicing contracts.

I think we had one or -- one significant sub-servicing agreement that was moving to a different provider this quarter.

I think it's just one client, and they moved because the other people were buying the service center, so --

Sub-servicing is a nice business, but it's not a huge profit center for us, so --

Okay.

Two more quick questions.

Any update on the California lawsuit at this stage?

Yes.

You know, there really isn't.

I think what you've read is really all there is out there.

We don't think this has any merit.

We think this is -- it's tax season. so it's a great time to announce things relative to H&R Block.

But. frankly. we don't think this is our fight, and we will go to court to make that point.

Okay.

And lastly, I'm just having a hard time finding the slide show presentation on the website.

Is that under the investor section?

I don't know.

We will -- tell you what, we'll find out and I will -- as soon as I know, I'll announce it on the call.

Okay.

Thank you.

Thanks.

Your next question comes from the line of Jennifer Pinnick with Morgan Stanley.

Good afternoon.

I have a question on Option One.

Within your reduced guidance, could you talk about volumes that you're expecting for Q4 and beyond?

Yes, we were looking -- I think what we said in January at the investor conference probably still holds for our fourth quarter.

We're looking at the low end, $9 billion, and it could be as high as ten, but it's really hard at this time of the year to -- or this time in the month to exactly say that, because January, February, are kind of notoriously weak months.

But all indications are it's probably in the $9 to $10 billion range for originations, and so our guidance really anticipates something like that. ing into next year, I guess it's a little early to know exactly, also, but as we talked about a month ago in our conference, we're looking to a 10 to 15% reduction in overall industry level originations next year -- next -- this coming calendar year, so we would think that, if we held share, we're going to see some softening in the overall level of originations.

Now don't know if that's really the case, but that's what our internal estimates are built on.

And can you comment on the postponement of the bank charter until next month by the OTS?

Is this usual a practice, or is this something unusual?

I'm not sure I can comment on what's usual practice for the OTS.

I think it's probably safest for us to say we continue to respond to the questions they have in the review of that application.

I think we've got a good working relationship there, and we remain, sort of, dedicated and optimistic that this is going to resolve itself within the 30-day review period.

Sure.

And then in the tax business, given the disappointment in January, are you revising your margin outlook for a loss of 40 to 50 basis points for fiscal '06?

Can you -- I'm sorry, I'm sure I understood the exact question.

Is it about operating margin?

Yes.

I don't know that number off the top of my head in the way you're looking at it.

Certainly to the extent we have less origination -- or less tax season volume, at this point in the cycle, this is a -- a lot of those costs have been incurred.

We have some variable costs attached to tax returns and volume this time of year, but a lot of the costs are embedded in things like marketing programs and offices and people and that sort of thing.

So probably, realistically, 70% of any revenue shortfall is going to come off the bottom line.

Thank you.

Your next question comes from the line of Mark Sproule with Thomas Weisel Partners.

Thanks.

Just quickly to sort of rehash on the competitor product out there that you guys decided to stay away from, is there a worry that the type of sort of pay-stub loan that they're offering is -- that the rates that they're charging consumers are too high?

I mean, what is the different rate-wise versus sort of the RAL product?

I guess is there also a fear that maybe, given the litigation you've gone through on the past with the RAL product, this is sort of bound for that avenue in the short term?

I'm not sure I'm ready to speculate on kind of what -- there's a litigation that's associated with that product.

I suspect that the designers of the product have a pretty good understanding of its legal exposures.

But frankly, that was not our consideration.

Our consideration really had more to do with the cost of this product represents to the consumer.

The consumer basically had to pay for an unsecured loan when they came in with a -- with their pay stub, and then they had to effectively pay again when they came in to pay off the loan through a filing and a refund loan.

By the time you add in all the various fees that are being attached to this, even with some of the offsets that I think some of the competitors are offering, it started to make this a much, much more expensive product for what is amounted to, again, a couple of weeks of advance loan.

That's the kind of criticism refund loans themselves get.

This looks like another variation on refund loans, only worse.

That was our judgment about it.

And I think the other issue that we have had is, as the largest provider in this industry and the largest provider of refund lending, we become the standard by which many critics of these products look to hold people to.

We know we're in that position, and it's not that we're not sympathetic to the demand that a lot of people have for credit and would like to help them with that, but we would like to have a product that we think is much more consistent with the kind of brand position we're trying to carve out in the market.

Got you.

With the technology issues that you had at the beginning of the season, I guess you'd mentioned that some of it was related to your high-volume office locations.

How much of it was in sort of more your mature locations?

And are those stores now sort of back up and running at levels that you would expect?

And then, at the -- can you give any sort of indication as to what sort of mature vintage office performances this year versus in the past?

Certainly, I would tell you that the form that the early season problems took were -- was more randem in terms of where it affected us, initially.

However, we clearly deployed our first people and first responders to those offices that we knew were the highest volume, highest producing offices.

So we did what we could to kind of triage and do the best job we could against where we thought the greatest impact would be from adjusting -- deploying our resources.

That's probably the way to really think about what happened.

It wasn't that the technology issues were somehow specific to one type of office or another.

Clearly, those problems were resolved in -- about the third week of January, late third week of January.

I think we finally were seeing stability across the network, and into the last week in January, first week of February, we were no longer incurring those problems.

That continues to be the case to this day, I think we kind of learned the issues and resolved the issues that gave rise to this problem early.

There is nothing in the network today that is giving us any kind of problems like that.

Got you.

If you look at the industry-wide tax season, last year there was a lot of talk about late W-2's, and delayed season, and this year you're talking about a delayed season in IRS filings and how that might push out.

Are we seeing, potentially, the sort of historically the tightened three-week window at the end of January, early February maybe extending a little bit?

Should we expect that this week and the next, the end of February time frame, which has been maybe a little bit lighter in the past, as the early season filers go through, maybe that'll be picked up and be a more important part of the season?

That's actually an interesting and complicated question.

And one that we -- you know, we study this in any number of ways, and I can't tell you that we have a definitive answer to what seems to be going on.

I would tell you, first of all, we never thought last year was a later filing season.

We thought that last year's season kind of started as we would have expected.

It was a little bit later, but not dramatically later.

There's a noticeable difference in the pace at which this season is starting industry-wide, relatively speaking.

That could be an acceleration of a slight trend that might have been out there before, but we really don't know that.

There's also indication, frankly, in any number of aspects -- technical aspects of the tax filing this year that could have sort of explanatory value in looking at this problem.

Things like uniform definition of child, UDC, is a big effect in the filing of early season returns this year.

We're not clear yet what effect that's having on industry filings, but clearly for early-season filers, that's a big deal.

We've also seen surprisingly later filing relative to Hurricane Katrina so far this year.

We thought that that would actually accelerate filings.

We've seen it's doing just the opposite.

We're not sure that we know exactly why that is, but it could well be that a lot of consumers have bigger things on their mind than filing their taxes, even if it means a delayed tax refund.

Probably the other thing that is out there this year is telefile.

I mean, telefile cli -- or telefile users were typically early-season filers.

With telefile system no longer employed this year, it's not clear to us when those people who would normally have been telefilers early, would ultimately file, but that's having an effect as well.

So there's a bunch of moving parts this year, and I think until we get to the end of the season, we will not necessarily be able to tease it all apart and know exactly what it means for the industry and for ourselves going forward, until the end of the shown.

All right.

Thanks.

Your next question's from the line of Mike [Cristalu] with [inaudible] Capital.

Mark, in response to Kelly's question earlier, you suggested that the 250,000 customers weren't exactly customers who showed up and then walked out unfulfilled.

Is that an estimated number or I'm trying to get a sense for how many customers actually came into the bricks and mortar and then walked out?

We don't have a number that would be -- what you specifically asked.

The problem with this -- the people who file early in the season are typically refund-driven.

They're there to access their available tax refund.

In that community -- in those communities, the word of mouth about a provider that's having problems spreads very quickly.

We think that is probably the biggest effect that we were having, is that the word was out that there's problems at H&R Block's process this year, and so people were looking for -- in some cases to our competitors.

It's really hard to be how people showed up and walked out, as you specifically description, and that's not a number that we would exactly measure.

This is our -- the 250,000 is really our estimate derived from looking at offices in were in less competitively-intense areas, and offices that -- we have the analytics that look at offices that were and were not affected by some of these early-season technology problems and some degrees of impact that different offices had.

So we've really looked at sort of the analytics across the network, based on some of those statistical models.

Well, if I look at the Company-owned operations customer client count, it actually got worse into February.

Are you suggesting, then, that maybe there was some spillover from word of mouth, and that you permanently lost that 250, but then maybe it spread further?

Yes, you know, I don't want to make that suggestion.

I know your point, but frankly, if we were continuing to have challenges in the first part of February, I would tell you that is not due to technology problems, and I don't think that by then it's due to word of mouth issues.

I would -- I would tell you the Company-owned operations were more severely impacted than our franchise operations, because of the way we deployed that technology.

It was deployed, I think, almost universally in the Company-owned operations and only somewhat in the franchise operations, not that we didn't have issues with our franch -- in some of our franchise locations, many of our franchise locations, unfortunately, but it was not as severe as it was in the Company operation.

I'm just trying to see if I could take a glass half-full approach and add back that 250 -- 250,000, and then, instead of looking at it and saying they've got 11% more Company offices and they process 5% fewer returns, if I could add back that 250 and attribute it to a one-time fix, you're only down a percent or two, which is the guidance -- the reduced guidance you've given for returns.

I think what you just did is kind of mathematically what we think is happening.

But again, the problem with any -- we derived the 250,000 impact in a variety of different ways.

We looked at sort of the competitive intensity and the places that were most severely impacted by our early-season technology problems.

And looked at had they perfor -- had some of those offices performed the same way that offices that were not impacted by the technology were performing for us, what would be the differential in terms of numbers of clients.

Probably the simplest way to describe how we sort of came to that assessment.

But frankly, again, if competitors weren't out there, clients probably would have waited for us, but because competitors are out there, they didn't.

It's hard to know if, in fact, had our operations been working swimmingly, would that have continued.

And I would also tell you, as we look into the balance of the filing season, we think that there's a lot of business left to be done, slightly more business -- somewhat more business this year than in prior years.

We are coming into a second half of the season that has an easier comparable for us, and we think we've got a lot of programs that are designed to really drive the business in the second half.

So organizationally, I would tell you I think we're -- we have a very energized organization to go out and win the second half of the season, and we have a lot of tools to allow that to happen, so there's a lot to be played for yet.

Great.

Thanks for the additional color, Mark.

Your next question is a follow-up question from the line of Kelly Flynn with UBS.

Thanks.

Actually, it's a follow-up kind of to what you just said, Mark, on the timing of the season.

Can you tell us what you think the breakdown of total returns will be by month?

You know, what percentage you'll do in January, February, March, April when all's said and done?

When you say the breakdown of what we would expect or what the industry would -- we would expect for the industry?

What you would expect for Block.

In fact, we would -- probably the best way to get that exact number, we will -- as I we talked about in January, and we showed on slides today, we will report our information with this sort of date-adjusted comparison as well as the actuals, so that we give you the net sense of that.

But in our January investor conference, we laid out the month-by-month sort of percentage change we would expect in each of the four months of the filing season this year, and that's all specifically relative to our filings in those same periods last year.

I don't have those in front of me, but --

I just mean if you add to get to 100% of the total returns that you do this year --

Yes?

-- what percentage of them do you think will fall in each month?

Or stated another way, how much of the tax season do you think you've actually completed here?

Right now we would estimate that we are, as of February 15th, slightly less than 50% complete at that point.

Okay.

Thank you.

And at this time, there are no further questions.

You may proceed with any additional or closing remarks.

Great.

We are --

With regard to the slides, those will be up shortly, so you'll be going to the investor relations part of the website to the events area, and you'll just click on the third quarter icon and you'll see the supporting materials will be posted very shortly.

Thanks, guys.

And thanks for joining us today, and as always, if you have follow-up questions, please let us know.

Thank you.

This concludes today's H&R Block third quarter earnings conference call.

You may now disconnect.