H & R Block Inc (HRB) 2014 Q3 法說會逐字稿

Good afternoon.

My name is Aleah, and I will be your conference operator today.

At this time I would like to welcome everyone to the fiscal 2014 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 would like to now turn the call over to your host, Mr. Colby Brown, sir you may begin.

Thank you Aleah.

Good afternoon everyone, and thank you for joining us to discuss our FY14 third-quarter results.

Joining me on the call today are Bill Cobb, our President and CEO, and Greg Macfarlane, our CFO.

Jason Houseworth, President Global Digital and Product Management, will be available during the Q&A session.

In connection with this call we have posted today's press release on the Investor Relations website at www.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'd like to 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 2013 and our other SEC filings.

H&R Block undertakes no obligation to publicly update these risk factors or forward-looking statements.

With that, I'll now turn the call over to Bill.

Thanks Colby, and good afternoon, everyone.

Earlier today we released our US tax return volume through February 28, as well as our FY14 third-quarter results.

As you may know, we had one day of return filings included in our results and expected that we would see a timing variance between the third and fourth quarters.

We had a significant amount of returns pending at January 31, and you'll notice a much larger shift of revenues into the fourth quarter compared to last year.

In total, approximately $277 million of revenue shifted to our fiscal fourth quarter this year, representing completed returns that had not yet been e-filed with the IRS by January 31.

When taking this revenue shift into account, you'll find that our revenues in the US were essentially flat to the third quarter last year, despite a decrease in returns prepared.

Greg will offer more details on the third-quarter financial results later during the call.

With respect to the tax season, there's obviously been a lot of early noise in the market, so I'd like to provide a few key points about the industry and our performance so far this year.

First, for the second consecutive tax season, we've seen some unusual movement in the industry during the early part of the season, making initial year over year comparison very challenging.

Most notably, IRS data has indicated that the industry has experienced an early shift in the mix of assisted and DIY e-file returns.

During the first half of the season however the proportion of DIY filers typically is higher than in the second half of the season, due to the fact that DIY returns are generally less complex.

Additionally, as we mentioned at our Investor Day, we also believe that there is a real secular shift under way with earned income filers who also typically file their returns earlier in the year.

Heading into this season, we've seen a trend in which returns containing the earned income credit are increasingly being filed digitally.

In fact, without the shift in EIC tax filers over the last five years, the overall proportion of DIY returns in the industry would have declined.

And though the data is not segmented by filing channel, the IRS estimated in 2012 that there were between $12 billion and $14 billion in improperly issued earned income credit payments.

Increased standards have been put in place to address these improper payments in the assisted channel only.

If asking additional questions is a way to help reduce improper EIC payments, it makes sense that across all channels, all EIC filers, whether assisted or DIY, should have to answer the same questions.

Thus without significant changes in standards for filing DIY returns with these credits, we believe that similar shifts may continue to impact the mix of assisted to DIY filers, particularly in the early part of each tax season.

That said, we have seen this mix moderate over the last few weeks, and despite the unusual movements in the early season, recent IRS data has shown that total filings are now in line with our overall expectations for the year.

The IRS just released data earlier today showing industry filings through February 28, up 1.4% over the prior year.

Additionally, the data shows the continued and expected moderation in the assisted DIY split from earlier reports.

Therefore, we continue to expect total US filing growth in the industry of 0% to 1%, and believe that for the full year, the proportion of filers who choose assistance versus those that do it themselves will remain relatively consistent with past seasons.

The second point I'd like to make is that we are executing very well against our objectives.

You'll recall from our Investor Day in December that we detailed our multi-year tax plus strategy.

This strategy is centered on driving higher revenues and profits through a balance of improved return mix and increased product attachment.

To enable this strategy we talked about investing in our offices to enhance the client experience, and revamping our digital product to create a simplified and integrated user interface.

We also introduced new product features to provide greater value to our clients, and incented our tax professionals to promote the benefits of our tax plus products.

We entered this season with a deliberate and thoughtful plan to achieve this tax plus objective, and we are executing on this plan.

We are smarter in our approach to the market and it's showing in our results.

Most notably, we discontinued our Free EZ promotion in virtually all markets, which will result in an increase in revenues for the year.

We enhanced our digital offerings, tailoring the product to each client and making it simpler to use.

By better anticipating our clients' needs and matching them with the most appropriate product, we are seeing improved conversion and a substantial increase in product upgrades.

On the tax plus side, we've improved monetization through our financial services products, with attach rates on emerald card, refund transfers, and peace of mind up across the board.

We also continue to see improved usage metrics in our emerald card, with average deposit and reloader rates higher through the end of February compared to the prior year.

And the emerald card continues to receive accolades.

It was recently named by Paybefore, the leading information provider for the prepaid industry, as winner of their Top of Wallet and best in category awards as the best every day use card with the most features and lowest cost structure.

Finally, from a marketing perspective I'm thrilled with our campaign this year, which has served as a reminder that taxes are complex, and millions of Americans leave money on the table each year by not seeking professional assistance.

Taxes are more complex than ever and with the Affordable Care Act presenting the most significant change to the tax code in the past 20 years, filing taxes will not get any easier.

In fact, we conducted a study last year that found that tax returns from nearly half of Americans who did it themselves contained inaccuracies, and for those who left money on the table the additional amount owed to them was well over $1 billion.

Our simple message of Get Your Billion Back America, serves as a reminder that H&R Block is here to help.

Based on market research we know that our ads are resonating as 75% of Americans are familiar with the campaign slogan, and for those that are familiar, 90% associate it with H&R Block.

These results far exceeds our expectations and industry norms, and as a former marketer, I can tell you that these results are fabulous.

Put simply, we are serving an improved mix of clients this year and improving how we serve them.

Of course, we anticipated that our strategy, which focuses our resources on generating revenue growth, would create some headwinds from a return count and market share perspective.

In particular, these decisions had an impact on our early season volume results; however, this was volume on which we made little or negative profit in prior years.

This has also freed capacity in our tax offices, allowing us to better serve our clients, leading to improved net promoter scores for the season.

In assisted, our decision to eliminate Free EZ in virtually all markets, disproportionately impacts the first half of the season.

It is also expected to impact our client counts for the year, but we expect revenue from our EZ clients to increase, more than offsetting the impact from lower return counts.

Similarly, in digital.

We made certain changes that required some of our more complex filers who were filing for free in previous years to upgrade to a paid product.

Some of these clients have opted to use our competitors' free or heavily discounted offerings.

It simply does not make sense for us to focus our resources in areas in which we do not generate profits.

As a result, through February, total US returns for prepared by and through H&R Block were down 5.9%, with assisted returns down 9%, slightly offset by a 1% increase in digital returns.

While it's too soon to speculate exactly where we will land in terms of returns or share this year, we do expect that the actions taken this season will impact our overall client counts, and will likely reduce our return share in both assisted and digital.

It's important to note, however that this attrition is coming from returns that are prepared at little or negative profit.

The net result of these factors is that we're achieving exactly what we set out to do, driving higher revenue and earnings by focusing on improving our service to an improved mix of clients, and increasing the rate at which those clients take our best-in-class financial services products.

Finally, I'd like to discuss a topic that is extremely important to the industry and our country, fraud in the tax system.

We believe the industry should be actively engaged in addressing this growing challenge and we are doing our part to contribute to the effort.

We will host an event in Washington, DC on March 25 to stimulate conversation on this challenge among policy makers, influencers, and other stakeholders.

When we last spoke to you at our Investor Day we noted two specific short-term opportunities for improving fraud prevention: applying the eligibility questions asked of earned income credit filers in the assisted channel to those filing in the DIY channel, and IRS oversight and regulation of tax preparers and software developers.

I talked earlier to the earned income credit filers and the need for consistent standards between DIY and assisted EIC returns.

So I'd now like to mention a few thoughts on the IRS oversight and regulation issue.

Last month, the US Court of Appeals for the District of Columbia Circuit ruled that the IRS does not have authority under current law to regulate tax preparers; this, despite the fact that it was Congress who issued a mandate requiring the IRS to implement such standards.

With an ever increasing rise in tax fraud, this ruling represents a loss for honest taxpayers.

In a country where all 50 states regulate the way you get your hair cut, it's hard to understand why all consumers don't receive basic protections on what, for many, is their most significant financial transaction of the year, filing their taxes.

Now earlier this week, New York governor, Andrew Cuomo, announced a comprehensive set of regulations that will better protect consumers who hire tax preparers in the State of New York.

While this is a positive step forward, millions of consumers throughout the US still do not enjoy these basic protections.

Thus, we will continue to vigorously support efforts to better serve and protect consumers through minimum standards for, and the oversight of, all tax preparation.

While we will continue to work with states that are considering regulating tax preparation, we look forward to working with Congress and the Treasury department on any legislation that may be necessary to implement minimum federal standards, and we expect there to be a short-term effort to create a voluntary system for credentialling.

We welcome the opportunity to work with the IRS on this interim step to set the standards and begin to better protect consumers and prevent fraud.

So in conclusion, we're executing against our plans and are on track to achieve our primary objectives in growing both revenues and earnings this year; however, there is plenty of tax season ahead and we have a lot of work to do between now and April 15.

We expect it will take the balance of the season for the industry to normalize to expected levels, but we're well positioned to serve our clients in the second half and to drive improved top and bottom line results.

We look forward to sharing our second half tax results with you in late April.

With that, I'll now turn the call over to Greg to discuss details of our third-quarter financial results.

Thank you, Bill.

Good afternoon everyone.

Given the seasonality of our business and the fact that the significant majority of our revenue and earnings come in the fourth quarter, our third-quarter results generally are not indicative of the results we expect to achieve for the full year.

This was especially true as we experienced a delay to the start of the tax season for a second consecutive year, with the IRS opening its e-file system on January 31.

As this was the last day of our fiscal quarter, it led to a material shift of revenues from our third quarter to our fourth quarter.

Thus, for the fiscal third quarter total revenues decreased to $200 million.

For accounting purposes we recognize the revenue from a completed tax return once the return has been e-filed with the IRS.

As a result of completed tax returns yet to be e-filed with the IRS at the end of January, approximately $277 million of revenue shifted from the third quarter to the fourth quarter.

This shift was approximately $260 million more than the shift we experienced last year.

Thus, third-quarter revenues in the US would have essentially been flat when taking the shift into account despite lower return volume.

In international markets, revenues were lower by approximately $11 million due to timing differences in our Australian operations.

This overall decrease in revenues was partially offset by lower operating costs.

In total, our third-quarter adjusted net loss from continuing operations was $209 million or $0.77 per share, compared to $57 million or $0.21 per share in the prior year.

For the full fiscal year, we continue to target adjusted EBITDA margin of approximately 30%, consistent with fiscal 2013.

As we look at our overall financial position, our balance sheet and liquidity remain strong.

As of January 31, total unrestricted cash was $437 million, and total outstanding debt was $1.1 billion.

Reductions in cash from the prior quarter reflect our normal operating cash requirement.

Additionally, all outstanding commercial paper at January 31 was paid off in February.

Finally, our third-quarter effective tax rate was 38.8%.

As we discussed at our Investor Day, we continue to focus on lowering our effective tax rate.

As a reminder however, due to significant one-time tax benefit received last year, we expect our effective tax rate in 2014 to more closely approximate pre-2013 levels.

Turning to discontinued operations, which include results of Sand Canyon, our fiscal third-quarter net loss of $2 million was $1 million higher than the prior year.

Sand Canyon continues to engage in settlement discussions with the counter-parties from which it has received a significant majority of its asserted claim.

Sand Canyon's accrual for contingent losses relating to reps and warrants remains unchanged at $159 million.

Turning to H&R Block Bank, I realize that many of you are interested in updates as we continue to explore strategic alternatives.

All I can say at this point is that we're pleased by the progress we've made over the past couple of months, and continue to expect to have a transaction completed in time for the next tax season.

We will continue to provide updates as we make progress.

One final house keeping note before we turn it over for Q&A.

This quarter we've updated our reporting methodology for digital returns to be based primarily on accepted e-files.

We believe this methodology is a more appropriate way to measure our performance, enhances comparability within the industry, and also eliminates from our accounts certain returns that could potentially be fraudulent.

This change reinforces our position on fraud and is another example of our commitment to do the right thing.

It's important to note that this is a one-time change and it does not impact how we view our share growth overall in the digital category over the last few years.

We have included a table in our press release with historical return counts which reflects our updated reporting methodology.

I know we've covered a lot on today's call.

So with that, we're now ready for questions.

Operator?

(Operator Instructions)

Your first question comes from the line of Thomas Allen.

Hi, good afternoon.

So just doing some math here, according to your press release, assisted volumes through the end of the fiscal third quarter were down 10%, and you said revenues were flattish, so should we read into that that pricing is up around 10%?

And then going a step further in the press release it says that revenues in FY14 have been $200 million, and then you pushed off $277 million, and the previous year it was $472 million.

So that implies a 1% increase?

So just trying to understand pricing, or fee per return, or revenue in general a little better, thanks.

Thomas let me take it, and then Greg can maybe help you with the math, I'll tell you the theory.

It's very hard to just make a blanket statement like that -- that churn's down, pricing up.

A lot of this the component of mix comes into play.

So this will be the first of probably 14 times I'm going to say this.

We are at half time of the game.

There's a lot of season left to go, and really the full picture will emerge once we have completed the season after April 15.

But Greg you want to do some of the math stuff?

Let me just talk quickly about the return count.

So really the delta in our perspective is driven really by the Free EZ elimination, and as we mentioned in our prepared remarks that those are done at zero, like minimal to negative value on the bottom line, but on the revenue it was basically free.

So that elimination, a lot of those people are actually now paying us, so that's a price increase if you think of it that way.

But we just think of it more of just getting rid of the promotion that we've had running the last three years.

And more broadly on pricing, we've outlined to you that we know as an industry we've got pricing power.

That's not lost on us.

We go into the season wanting to be much more strategic in how we handle pricing.

We're quite pleased with how we've executed that, and we'll be able to talk about that more at the end of the season with you.

And also just closing off this thought with Bill's point, which is mix is a very important part of this conversation, and we have been pleased with our mix thus far in the season.

Okay.

And then going on to pricing, I think a lot of us and I think you agree that the Affordable Care Act is a big opportunity for you going forward.

So, just a little curious why you're willing to give up market share now, given the level of customer retention ahead of this big opportunity next year and going forward?

Yes, I think obviously, the intersection of taxes and healthcare really come into bear in FY15.

I think what we're trying to do is get our system ready to serve the clients that we want to serve.

We are very focused on this tax plus strategy, which is having tax returns and attaching our best-in-class financial services product.

So, I don't look at it as by giving away our service for free that we've given up a lot from that.

Okay.

Then just finally on the bank sale, great to hear that you still expect to get a deal done by next tax season, but can you just give us an update on how long you think it would take to get a transaction completed to get through all of the regulatory requirements and everything?

Thanks.

Yes, so we remain committed to obviously selling our bank.

We remain very much committed to selling word class financial products.

Those two things aren't changing.

We're simply transacting the bank for broader regulatory issues and capital issues related to the additional capital requirements that would be required, and we've been working on this for quite a while.

We actually know a lot about this specific in terms of what we're trying to solve for.

As we looked last summer when we made the initial announcement with our previous partner, we'd outlined a timeline that was really announced in July and we felt comfortable that we would be able to commercially and operationally get things done.

And we at the time, felt the regulatory process had enough time too.

We felt that would be a mid October, early November would be the window that was important for us to hit this tax season.

We sit here really half way through the tax season very much just focused on executing the tax season and running our business.

We continue to believe that getting a solution in place for next tax season is going to happen at this point.

Okay, thank you.

Your next question comes from the line of Hamzah Mazari.

Hello, this is [Ahm Singh] dialing in for Hamzah Mazari.

I was wondering if you can give us some color, one, on just more if you can be a little bit more explicit on what the attach rates and the metrics look like on the emerald card that you mentioned?

Yes, I think we'll be doing that at the end of the tax season.

Again, first half of the season is one part of the game.

All that data will be coming forward at the end of the tax season.

We spent a lot of time in December describing all the progress the team has made on developing features and functions.

We've seen double digit year-over-year improvement in annual users; as we sort of stand half way through the season we're very pleased with executing that strategy.

I think it will be a good story at the end of the season.

Okay, thank you.

And then the other question building on the bank sale question earlier, can you comment on what your view is on what the optimum leverage might look on the balance sheet post you being regulated as a bank holding Company?

I'll go back to what Greg said, and then Greg if you want to comment on this specifically.

Right now we have two major priorities in the Company.

One is to put together a great tax season and we are hopeful that that will happen and we feel good about where we're at.

And two is to get a transaction done so that we do execute the goal that Greg outlined earlier, that we will have a bank partner by next year's tax season.

That's what we're completely focused on.

We are having discussions, obviously, about other elements of our business, but we're not prepared at this time to have any announcements around that.

Okay, alright.

Thank you.

Your next question comes from the line of Gil Luria.

Yes, thanks.

I think that's Gil.

Hi, Gil.

Hi.

Good afternoon.

Wanted to ask a little bit about what -- now that we are a few months into Affordable Care Act, some of the new rules attached to it, you've been doing some trials and fee mix, you've been, you have an interface online for consumers to go buy health insurance.

How happy are you with the results so far?

Are the online results better, the physical store presence resonating more with your customers, what's the update on those initiatives?

Yes, we're not going to go through specific numbers.

Here is what I would say.

Obviously, this whole initiative got off to a rocky start.

There's now stability at healthcare.gov, I think the White House said today enrollment will definitely end March 31 next year.

We just got word there's now a 90 day enrollment period between November 15 and February 15, and the reason why I'm starting to answer your question in this way is this is such a fluid situation.

What I'm most pleased about is the fact that we are in the game, we are learning, we are talking to clients, we are seeing what matters, we're trying to reduce confusion.

It is still a very hazy initiative for a number of clients.

I think this is going to help us.

I think we've pointed out in the analyst day presentation there are 46 changes to the tax code associated with this initiative.

So, by being in the middle of this, both with the DIY product and a direct assisted product, we have learned an awful lot, and that really was the goal for this year.

We signaled that there would be an EPS hit of $0.03 to $0.04 Greg, and that really that was part of the cost of getting the website up to speed, getting the offices in Phoenix ready, and really just being prepared to learn in this business.

I don't know if you have anything Greg.

Just an observation, Gil, to share with you.

So we've outlined in December I think a fairly detailed explanation of why we think this is an exciting opportunity for the tax preparation industry, and now that we're half way through the tax season, we have spent a lot of time at our competitors' locations.

We've been spending a lot of time looking at the competitive offerings online, and it's our belief that the amount of investment, thought leadership that Block has done is disproportionately larger than the entire rest of the industry combined.

And that will benefit us as we think about next season, and I guess I would also say that we've over-invested this year, and it's highly likely we'll be over-investing next year because we continue to believe this is a good opportunity for Block.

How about the ability to charge directly for some of this, the IRS is likely to have a form next year and you charge per form.

In Massachusetts, we're hearing that you're now charging for their healthcare form around the neighborhood of $5; is that an indication for your ability to charge for this?

Should we think of $5 as the price point, or is there still work to do in terms of what an additional form would be priced next year at the national level?

Again, I don't mean to if you will side step your question, but I think we do have to see the form.

And I think the issue is there are other considerations with regard to Massachusetts.

As we look at this, we really need to see the form, we really need to see how the 1095s are going to rollout, which is what everybody is going to be getting along with their W2s next year.

So all that intersection, we have to figure out.

So I wouldn't make any assumptions on the particular price with regard to as we true-up folks next year and assess the impact of tax penalties on people who chose not to take insurance.

For what it's worth Gil, I'll just mention, so we are charging in Massachusetts, and frankly probably should have done that historically.

But part of the reason we're doing that is we're incurring work and training time, and we're doing value for our clients by that.

But of course there's broader lessons that we're trying to learn.

But keep in mind that the Massachusetts form may be materially different than what we see from the federal government, and that's what Bill was really trying to get at.

We have to wait and see.

Makes sense, thank you.

Thanks, Gil.

Your next question comes from the line of Kartik Mehta.

Good evening, Bill and Greg.

I wanted to get your thoughts on impact so far in this tax season at least through February because of no Free 1040EZ.

How much of that 9% would you say is the result of not offering free preparation of 1040EZ?

Most of it.

We're not going to get into specifics but the large, large majority of it is that decision.

Any thoughts on how much of it is -- I'm assuming it's weather and the Free 1040EZ, or has some of the weather so far been made up by now?

Yes I think the weather stuff, and actually we have a young executive here who actually did a very extensive weather analysis for us.

His geospatial work that he did to show the impact of how much snow had impacted literally each of the, I believe it was 7,100 offices that got hit by snow this year, so we have a very good understanding of what the impact of the weather was.

That is obviously starting to abate as the weather hopefully starts to normalize.

So I think that weather obviously did have an impact.

There were days especially in places like Georgia where we did 8% of the returns we're supposed to do on that particular day, so I would say that it was, again, a weird start to the season.

There was for all retailers and a variety of businesses big impacts from the weather.

The great thing about our industry is you have to come file.

So I think, and I think we said this in our prepared remarks, everything is starting to normalize now.

We have got 40 days and 40 nights left in the tax season, and we're really focused on a big finish here.

Bill you talked about, obviously, pricing, or revenue is going to be higher than what return count is going to be.

Would you anticipate that in the first half pricing will be better than the second half, or will it be the same throughout the tax season?

When you say pricing will be better I assume you mean it will be a higher percentage.

Obviously now charging $39 versus zero last year, that's a monumental price increase or will appear to be.

That's why Greg was talking about earlier the mix element of that, by not giving away our service for free, that is having an impact.

So as we get into the second half where we're overlapping the same pricing on something like EZ, you're certainly going to see that start to normalize.

In addition to that, and again, I think it's critical that we continue to focus on what is our core strategy and back to what we talked about at analyst day.

Tax plus or our ability to attach these financial services products that we are so proud of, that is a big component of our revenue drive.

And while we have not given specific indication, I think Greg and I certainly speaking for the Company feel very good about the way the field and the digital business has responded to attaching products.

Just one final question, Bill.

You talked a little bit about the online business, and I'm just wondering, the share loss you're seeing in the online business, is that strictly because of the pricing initiatives that you talked about, or is there a little bit more to it, or maybe how you're going about marketing the product this year?

Why don't I let Jason take a shot at that.

Thanks for your question, Kartik.

As Bill mentioned we had made changes in our product that require more complex filers to upgrade, and this has led to a significant portion of what we see as why we trail the industry from an online perspective.

But what I want to say is that I'm really pleased with the results of our product redesign.

And as I talked about in December, we're in year one of a two-year redesign.

And this year, we're seeing better conversion of our clients and a much better job of driving for growth in our average revenue per user.

But I think that you have to consider our results from a competitive perspective, and what I see is that we're in a maturing digital industry, and my main competitor Intuit, I have a lot of respect for frankly, has seen our growth in online segment share the last three years, and this season, they appear to be using price as a lever to grow volume.

This is likely because they see parity with us from a product perspective, and it's our viewpoint that this isn't sustainable really in the long run.

So with that said, there's a lot of season left, so stay tuned.

Thanks, I appreciate it Jason.

Thank you.

Thanks, Kartik.

Your next question comes from the line of Scott Schneeberger.

Thank you, good afternoon.

I'll start with the bank guys.

So it sounds like no update yet.

Sounds like you're confident you're on the timetable that you've been discussing recently.

Some other guidelines you provide us in the past were that you had the ballpark of five or six final suiters, with whom you were looking.

The first question is have you whittled that down, are you comfortable in saying yes you're at a final one or two right now.

And then the second question is you were also comfortable telling us not too far back that we should continue to think once a partnerships is announced that the dilution would be similar to what it was that of Republic.

Do you still feel that those are comfortable guidelines for us to think about as we move forward?

Yes, so the message is really the same as we've been talking about.

We're confident we're going to get this done, our goals and motivations remain the same.

We've had wide and varied interest in doing business with Block, and really not going to get too much more specific at that point.

But I want to make it clear even though the message has not changed from your perspective, I don't want that to be misinterpreted.

There's a substantial amount of work in the last three months from our side, and we continue to feel very comfortable and confident that this will get resolved for next tax season.

There's always a regulatory angle here that needs to be considered.

We learned a lot from that last time, but we should never ignore the fact that there will be regulator approvals that have to go on here.

And that, obviously we're trying to factor into our decisions here.

In terms of the form of the actual arrangement when we arrive at it, it would be really premature to speculate on what the actual commercial terms would be.

But in terms of a general expectation, Scott, we would say it would be fairly much in the ballpark what we did with our previous announcement.

Okay, thanks.

That's helpful on that.

I'm going to shift it over to tax now.

Whatever went on on our end of the phone is trying to figure out is how at this half time point are revenues progressing?

And Bill, one of your parting -- I think before you turned it over in prepared remarks to the CFO, you said we are looking to drive, or I don't know if you said, but drive improved top and bottom line results.

Is that, are we to take that literally in looking at the full year that you expect improved year-over-year top and bottom line results?

I think the answer is yes.

I don't know Greg if you want to give any more --

Yes, this is very consistent in how we've talked about what we believe the opportunity for Block is in this industry.

You've got core growth every year, in this case I think it will be 0% to 1%, in terms of more returns in the industry.

We continue to believe that even for the support in our view from the IRS release this morning.

The second thing is we know we have pricing power, and that should add another 1 point or 2 over time.

We believe at Block that getting to the 3% to 5% revenue top line is the right starting point for this conversation.

That hasn't changed at all here.

We, obviously, have come out of a several year period where that's not been true, but the trend has been moving in the right direction.

We had revenue growth last year for the first time, small growth, but still growth.

And of course we believe from a fixed cost leverage and focus on expenses and productivity that that should also have a bigger impact on the bottom line.

We've shared with you during today's conversation that we think margins this year, EBITDA margins will be in line with last year, which will be around 30%.

Okay, thanks.

And just because a bunch of my peers have obviously asked these questions, and in the same way you obviously don't want to quantify the price impact or the revenue impact here at half time, but I think it is implied in what's being discussed.

It will be a net positive by year end, is what you're continuing to anticipate.

Is -- and I think Thomas asked this, but are you comfortable saying within a couple hundred basis points, your pricing growth is a positive relative to the 9% negative, or maybe even just talking on the total volume number of 5.6%.

Is it fairly comparable at this half time point, a little ahead, a little behind?

Thanks.

So I'm going to be really clear here that if anyone is believing that price is up 9%, you're mistaken.

I think you're really misunderstanding mix and some other factors that will come in here in terms of attach rate and some of the other international things, so I think you really need to be careful in terms of conclusions there.

We're not going to go on record in terms of what the price increase is going to be.

We'll talk about that more at the end of the season.

But we're happy with how we're executing our pricing strategy this year.

I think we're being much more nuanced this year, much more thoughtful, because we're in this business for the long run.

Okay, and Greg are you making your rate versus yield comment in that response?

Obviously mix is something that helps revenue per customer go up, but you're saying rate is not increased 9%, but could in fact the revenue per return part of online and what people look at, could that still be in the same ballpark?

I want to make sure I understand the message.

My comments were really focused in on the specific price, the net price, or gross price, how you think about it.

Okay.

And then on marketing, I see that I'm just curious if this is a timing issue.

It looks like $77 million spent on that line item versus $99 million last year, please correct me if that's correct, but is that you're spending a lot less this year?

Or is that because of some timing of the third quarter versus fourth quarter?

And follow-up to that is how -- are you still -- are you looking to spend the same amount year over year, or are you going to get some efficiencies?

Thank you.

Yes, I won't get into specific spending plans, but what I will say is when you have a campaign like we have with the impact it's had, with the great reception that it's gotten from consumers, you can get a lot of bang for the buck, and that's what we've gotten this year.

It's a fabulous campaign, awareness is extremely high.

All our field leaders are calling into our marketing group and saying people are walking into the door saying give me my piece of the billion back.

It's really been very exciting to see.

So if Greg wants to comment on any of the numbers, but really, what we need to do as a marketing-driven organization is really make sure that the impact from the messaging that we do is high, and I think we certainly achieved that this year.

Okay, thanks.

If I could, two more.

One for Jason.

A comment from Greg mentioning the new reporting format of the digital category, and how that's adjusted out for what you believe could have been fraudulent returns.

Could you give us the old -- how it would have been reported otherwise or just a way for us to think about that as we compare you to some other industry peers.

And any thoughts on perhaps, I know it's a stretch, but if others had adjusted their numbers a similar way, I just want to understand the apples-to-apples comparison, thank you.

Let me, Scott if I can just give you a bit more of a mechanical view and then Jason can give you some broader thoughts.

But the spirit of this is right, which is we are trying to really give you all the best estimate of how many Americans we help to file their taxes.

And I think as time's gone on, we have missed that a little bit in some of the definitions; this changed was really in the spirit of fixing that problem.

It's really, and when you do the math, and by the way afterwards, if anyone wants to call, they can go through the math with you.

But in an absolute sense the numbers have changed, but relatively speaking they haven't changed at all.

The market share gains that we've reported are basically dead on as they were before.

But this I think is in the spirit of a much cleaner reporting.

We do think it has better comparability, and of course we're able to also spike out this fraud issue, which is a very real issue, and frankly it would be nice to see some of our competitors recognize that, as well.

Scott, the two things that we really took out specifically were online free returns that were printed instead of e-filed, and returns that were e-filed but rejected by the IRS.

And that makes up the approximately 600,000 reduction from the FY 13 digital return counts.

And I just want to make one last point, which is that there was no revenue associated with any of these returns that were counted.

Alright guys, thanks, that's helpful.

One more Bill for you if I could.

I know that you've had discussions with folks at the Treasury with regard to if there will be a healthcare form next year.

And you touched upon that a little bit today on what will be delivered with the W2, but as far as the tax form, do you anticipate there will be -- is there progress on that?

Just an update would be great, thank you.

Yes, Scott.

The only indications we receive is that we will see the form, I think the latest indication we have, this summer.

I have certainly indicated in my conversations with the government officials that the sooner you can get that to us, the more I think we can weigh in and give advice, and maybe we'll see -- fresh eyes will see something and that has been received well.

But we have not -- none of the people in the tax institute or anything have seen the form yet.

But we're hopeful that in the next few months we'll get a peak at it.

Okay, great.

Thanks for answering all my questions.

Thanks, Scott.

Your next question comes from the line of Michael Millman.

Thank you.

Following up on some of the many of the questions, just to make sure the IRS in counting their online, that's only accepted by the IRS, correct?

That's correct, Michael.

Regarding the $1 billion dollar marketing campaign, can you give us some ideas what impact that's had, I guess quantify the impact and the source?

Well again, I think I said this, what we track is we track consumer reaction to all of the ads we do.

Overall, the core message, which we've obviously have been very focused on and zeroed in on, and this was I think four weeks into the campaign, might have been five weeks, but we had three-quarters of all Americans could recite the line.

It's part of the consumer vernacular right now, and 90% of the people associate it with Block, which for a marketer, sometimes you have a message and you don't know what brand it is.

So we've been able to hit on both dimensions, which is very exciting for us.

Maybe I should ask this a little differently.

In terms of those coming in who cite the promotion, were they coming from do-it-yourself and coming to assisted?

Were they coming from other places, or were they Block clients who said boy I saw this, it was great.

We don't disclose the source of volume, but what I would say is it's coming from all places in terms of the way this campaign has caught the imagination of America.

In connection with I guess with the online, the assumption was that this was aimed at the online, and Scott discussed the numbers, but it just seems that the IRS is 7.5% day to day is so much bigger than the number you cite on a date to day, as well.

Is there some loss of share in there?

Sorry, can you just be clear on what the question is Michael, please?

So the IRS number today was self prepared, up 7.5%.

Yes.

And you indicated that you dropped some of non-profitable business.

Yes.

Trying to reconcile numbers, if they are comparable and you reconcile, or if you are gaining share or losing share.

I'd just point back to Bill's comments as far as our strategy to really do two things this season: one is to look at more complex and high-value clients from a digital perspective and how do we attract those, and then the other to look at our large number of historically-free clients, and determine how we can create more value.

And as you noted and how I also noted in my earlier comment, this decision has led to a significant portion of the delta that you mentioned.

Okay, thank you.

And moving on, you indicate 3% to 5% revenue growth over the long term, it's not been there.

Could we expect over the next several years better than 3% to 5% to get to average it out?

So the 3% to 5% that I outlined earlier doesn't include the ability to take market share, it doesn't include the ability to attach and grow financial services products.

As you all know, also our international business has been growing at a faster rate, but at this point let's just get to 3% to 5% and then we'll talk about what's beyond that.

This is consistent with what Greg laid out at the Investor Day.

This is as he puts it what we should expect over the long term, and we're certainly not talking about anything specifically about this year.

We'll play the season out and then we'll be reporting to you post season.

Okay, thank you.

At this time there are no further questions.

Okay, thank you.

We would like to just thank everyone once again for joining us and we can conclude the call.

Thank you, ladies and gentlemen for participating in today's conference call.

You may now disconnect at this time.