H & R Block Inc (HRB) 2016 Q3 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the fiscal third-quarter earnings conference call.

(Operator Instructions)

Thank you.

I would now like to turn the call over to Mr. Colby Brown, Vice President of Investor Relations.

Thank you Kyle.

Good afternoon everyone and thank you for joining us to discuss our third-quarter FY16 results.

Joining me on the call today are Bill Cobb, our President and CEO; Greg Macfarlane, our CFO; and Jason Houseworth will also be available during our question-and-answer session.

In connection with this call, we have posted today's press release on the Investor Relations website at HRBlock.com.

Some of the figures that we'll discuss today are presented on a non-GAAP basis.

We have 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 FY15, and our other SEC filings.

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

At the conclusion of our prepared remarks, we will have a Q&A session.

During Q&A, we ask that participants limit themselves to one question with a follow-up, after which they may choose to jump back in the queue.

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

Thanks Colby, and good afternoon, everyone.

Earlier today, we announced our results for the FY16 third quarter, which ended January 31.

As a reminder, due to the highly seasonal nature of our business, a majority of our revenues and all of our FY16 earnings will occur during the fiscal fourth quarter, and thus, fiscal third-quarter results are not indicative of expected performance for the full year.

We are just halfway through the tax season with millions of tax returns yet to prepare, and so far, we have seen broad sweeping changes affecting the tax industry, in what is really a transitional year for both the industry and H&R Block.

Some of the changes we've seen include aggressive and numerous fraud prevention measures implemented at both the federal and state levels; a decline in early-season tax filings, indicating a real delay to the season, possibly due to the overall impact of fraud, the Affordable Care Act, and other industry factors; the continued evolution of the DIY category, as a result of significant changes in pricing and client acquisition strategies; and the reintroduction of the refund anticipation loan into the assisted category.

Although it will take the availability of complete season results to fully understand the effect of these changes, I'd like to spend some time today talking about what we believe each of these could mean at the industry level, and how they are impacting H&R Block.

Then, I'll address the current season results to date.

Finally, Greg Macfarlane, our CFO, will walk you through the quarter's financial results.

Let's start our detailed look at the industry by first talking about the progress made this season at the federal and state levels in the battle against tax fraud.

As we have discussed for several years, fraud continues to heavily impact the tax preparation industry.

This season, however, is not merely a continuation of the same story that we have seen the past few years.

We are now seeing significant changes implemented at both the federal and state levels to combat fraud, and we're very pleased with the progress being made.

Although there is still much to be done, positive momentum is building.

At the federal level, we have seen refund processing slow noticeably from prior years, which we believe is an indication of the implementation of additional fraud filters.

For example, in 2015, the IRS had processed and refunded $66 billion in tax refunds by February 6. This year, that number had dropped 11% to $59 billion.

And the average time for taxpayers to receive their refund has increased from 10 days last year to 13 days this year.

Finally, our data shows that larger federal refunds are taking longer to process than smaller refunds, which may be another indication of stronger fraud prevention measures.

Additionally, state governments are not waiting for the federal government to fix this problem.

This season, we have seen initiatives in dozens of states designed to reduce fraud.

For example, 14 states implemented W-2 matching, to ensure taxpayers' reported earnings on their tax returns equals that reported by their employer on W-2s.

18 states now require some type of identification quiz to validate and receive a refund.

17 states are using an identity theft indicator on state returns, and we even saw Maryland shut down one competitor's ability to e-file state returns from several of its franchisee locations due to suspicious returns.

This is also the first year that increased security measures are required from tax software providers, as a result of the Security Summit, a public-private partnership between the IRS, state departments of revenue, and industry leaders.

Providers have implemented stronger security protocols, and now require additional online filer authentication methods.

Additionally, tax-preparation companies implemented better fraud monitoring processes, are required to report suspicious activity leads to the IRS in a timely manner, and some have increased their security infrastructure to better protect taxpayers' personal information.

H&R Block has been doing most of this for years, but it is good for the industry that other tax providers are now required to follow the same processes.

We applaud all of these new efforts, and know that more change is on the horizon.

Federal W-2 matching and further enhancement of information technology security protocols at both the federal and state levels are forthcoming.

Despite all these efforts however, fraud remains a huge issue for this industry, and our country, and there is still much more work to be done.

This is evidenced by the magnitude of fraud being perpetrated year after year.

We've discussed these numbers before, but they are so staggering, they are worth repeating.

The Treasury Department estimates that there are $14 billion to $17 billion in improper earned income tax credit payments, and at least $5 billion in tax identity theft losses annually.

We continue to advocate for EITC form parity, stronger DIY measures, and minimum standards for tax return preparers.

Such measures, combined with the steps already taken and those planned for next year, are needed to ensure that tax refunds are delivered to those that deserve them.

And while it's widely accepted that the level of fraud in the industry is significant, we don't have clarity in how fraudulent returns impact return counts, as reported by the IRS.

Additionally, it's not clear what our competitors are including in their return counts, which makes it difficult to understand changes in filings year-over-year.

We hope to have more clarity on fraud and its effect on the industry, but it's likely that such information will become available more slowly than we would all like.

Despite the uncertainty related to fraud, there has been a decline in the number of tax returns filed in the early season, indicating a shift from the first half of the season to the second half.

The latest numbers from the IRS show that tax returns received as of February 26 continue to be down 0.4%.

There are several possible reasons for this delay, including fraudulent activity and related efforts to reduce fraud, refunds taking longer to process, an increase in the number of balance due returns and the Affordable Care Act.

What is not clear, however, is how much of the reduction in tax returns is due to taxpayers taking longer to file their taxes, as opposed to a true reduction in returns being filed this year, due to effective fraud filters at the IRS.

It's worth spending some additional time on one of the possible causes for this delay that I just mentioned, the Affordable Care Act.

The ACA continues to influence consumer tax filing behaviors.

Last year was the first time many taxpayers truly felt the impact of the ACA on their tax returns.

This year, the ACA should affect even more taxpayers for a number of reasons.

First, increased marketplace enrollment means that more people will have to reconcile their insurance subsidies through their tax returns.

Next, this is the first year that the IRS will be able to confirm that taxpayers have private insurance through the issuance of forms 1095-B and C. This may make taxpayers reluctant to just check the box on their tax returns, given that the IRS will eventually be validating their claims.

That said, the deadline for issuance of these forms has been delayed until March 31, which may cause confusion for some.

Finally, the penalties for noncompliance have more than doubled, potentially costing taxpayers an estimated $500 per return, versus approximately $200 last year.

It's clear that there are a lot of moving pieces around the ACA, which may be contributing to the delay this season.

Of course, we won't have a full understanding of its impact until season's end.

Let me shift gears now and talk about the DIY category.

This category is also undergoing change, primarily due to the category leader's decision to focus on driving volume in low lifetime value price-sensitive filers.

This tactic centers around offering products for free, and creating movement in the DIY category, placing pressure on other competitors in this space.

From an overall industry perspective, the early-season results reported by the IRS indicate a share shift to DIY.

This shift is consistent with early season results in prior years, and will likely moderate as the season continues.

Finally, this year has marked the reintroduction of refund anticipation loans in the industry.

These loans are being offered by our branded assisted competitors, as well as independent tax preparers in varying forms.

These low-dollar loans are not widely promoted, and generally offer interest-free rates.

It's hard to quantify the impact of these products on the industry or our business, but we are watching this development closely.

With that overview of the industry, let's now shift our focus to H&R Block, and why this is a year of transition for our Company.

First, as many of you recall, in August, we were able to successfully divest H&R Block Bank and transition three of our core financial products to our bank partner.

We are pleased to say that the transition has gone well, and has been seamless from a client service perspective.

In addition to the operational changes, there were also changes to our financials as a result of the bank divestiture, which we discussed at the investor conference in December.

Greg will review these changes again later, but I wanted to provide a quick reminder that the divestiture impacted both the economics of the business, as well as the presentation of certain items on the income statement, diluting earnings, and giving our financials a different look from previous years.

We are also moving forward with our new capital structure.

During the quarter, we returned capital to shareholders by repurchasing approximately 12 million shares.

This brings total repurchases for the fiscal year to 19% of outstanding shares.

In fact, considering both share repurchases and dividends, we have returned over $2 billion to shareholders in FY16 alone.

Finally, we continue to innovate to ensure we are delivering exceptional value to our clients.

We're in the second year of our newest product, Tax Identity Shield, which provides real help to taxpayers facing the unwelcome threat of tax identity theft.

And we launched a new brand, Block Advisors, focused on delivering tax planning and small business services to those clients that have year-round tax and business needs.

Our new brand is up and running, with over 280 offices throughout the country, staffed with expert tax advisors, ready to assist clients with complex tax situations.

As we said at our investor conference, this is a long-term play for us, but we are pleased with the progress made this year.

With this overview on the season and our business, let's now talk about our third-quarter results.

As I mentioned earlier, it has been a slow start to the tax season.

We are seeing the impact of delayed filings on our volumes and our revenues.

Although assisted volume has declined compared to last year, the results were more positive from a share perspective, and as we said in December, it will take time to turn the early season client loss around, but we are taking steps in the right direction.

For the clients who we have served this season, we have seen positive increases in both price and form mix.

Clients with more complex tax preparation needs continue to see H&R Block as a trusted expert to help them navigate through their complex tax situations.

And our products continue to provide tremendous value to our clients.

Despite the early season decline in volume, we are pleased with overall product attach rates, which Greg will cover later.

In conclusion, this is a year of change for both the tax preparation industry and H&R Block.

Macro factors such as fraud and the ACA continue to impact the industry, causing filing and refund delays.

Although the first half of the tax season has been slower than expected, we are anticipating a stronger second half.

As is often the case, this will again be a tax season where results can't be measured until the tax return filing deadline has passed.

We look forward to sharing those results at the conclusion of the season.

With that, I'll now turn the call over to Greg to review the financial results.

Thanks, Bill, and good afternoon everybody.

First, it's important I reiterate what Bill mentioned earlier.

Because of the seasonality of our business, the majority of our revenues and all of our FY16 earnings will occur during our fiscal fourth-quarter, and as such fiscal third-quarter financial results are not necessarily indicative of expected performance for the full year.

Third-quarter revenues were $475 million, down 6.8% from the prior year.

As we discussed at the investor conference, we consider four components when evaluating revenue: volume, price, mix, and attach rate.

I'd like to take a moment to discuss each of these a little bit further.

From a volume perspective, we came into the season expecting industry-wide returns to increase 1% to 2%.

As of February 26, total industry returns actually decreased 0.4%, compared to last year.

As Bill discussed, this represents a possible industry-wide shift of approximately 2 million clients out of the first peak of the season, and into the second half.

Similar to industry statistics, H&R Block has also experienced lower volume in the first half of the season.

As of February 28, we were down 6% in total returns.

The decline in early-season returns doesn't come as a complete surprise, as we have communicated that this is a significant challenge, and solutions will take time to yield results.

And although we are disappointed with this decline, we have seen an improvement from a share loss in our assisted business, when comparing mid season results from this year to last year.

With that perspective on volume, let's talk about the progress we're seeing on the other three components of revenue: price, mix, and product attach.

In terms of price and mix, both continue to be a positive story for us.

We have once again been able to achieve reasonable price increases this year, and are also pleased with our form mix, as volume declines continue to be concentrated in lower-value forms.

We are again running our half-off promotion for new clients through March 31, which was very successful last year.

This promotion is designed to attract more complex, higher-value returns at a time when our offices historically have had available capacity, and we anticipated further improving the overall mix for this season.

Finally, our Tax Plus products continue to positively contribute to overall results.

Although sales are closely related to volumes, we are pleased with our overall product attach rate.

Specifically, our refund transfer attach in DIY has grown, following enhancements to the interview flow within our software product.

Additionally, Peace of Mind and Tax Identity Shield attach rates continue to increase.

Peace of mind provides a tremendous value to our clients considering its low cost, and Tax Identity Shield is an example of smart innovation: the right product at the right time.

As a reminder, revenue from these two products is deferred, and as such, only a small portion is recognized in the year of sale.

In addition to the factors just discussed, revenue was negatively impacted by foreign currency exchange rate fluctuation, which we expect to result in a 1% reduction in overall revenue for the full year.

The revenue decline is also part due to the divestiture of H&R Block Bank.

As a reminder, the Bank divestiture impacts our financial results in a couple of different ways: First, the economics paid to our bank partner result in lower revenues and increased expenses, and as such is dilutive to earnings.

Second, because we are no longer a Bank holding company, there are certain accounting classification changes that negatively impact revenues.

On a full-year basis, these changes are expected to result in a 1% decline in revenue, and a 1 point drop in EBITDA margin, consistent with the guidance provided at our investor conference in December.

Operating expenses increased $10 million, or 1.7% from the prior year, primarily due to expenses related to acquired businesses, as well as an increase in marketing expense.

Although the acquisitions of independents and franchisees add expense to our income statement, it's important to remember that these transactions are accretive from an earnings perspective.

Interest expense increased to $24 million, primarily as a result of the issuance of $1 billion in long-term debt in September of 2015.

Given all these factors, net loss from continuing operations was $79 million, or $0.34 per share, compared to a net loss of $35 million, or $0.13 per share in FY15.

As Bill mentioned earlier, this is a transition year for us.

So heading into the year we anticipated a drop of EBITDA margin percentage due to the impacts of the Bank divestiture and the acquisitions of our franchisees.

For the full fiscal year, we are now targeting an adjusted EBITDA margin slightly below the 29% to 30% we shared at the investor conference, but still within our overall guidance of 28% to 32%.

This is primarily due to the current year decline of returns in our assisted business.

Our long-term EBITDA margin guidance is unchanged at 28% to 32%.

Turning to discontinued operations, there were positive developments during the fiscal third quarter, as Sand Canyon was able to enter into settlement agreements with certain counterparties related to representation and warranty obligations.

The settlement of these claims is an ongoing process that began eight years ago.

During this time, the Sand Canyon management team has been diligently focused on bringing the representation and warranty contingency to its conclusion.

Although the wind down of Sand Canyon is expected to take time, this quarter's activity represents strong movement toward the resolution of its obligation.

This quarter settlement amounts were fully covered by prior accruals.

Sand Canyon's accrual for contingent losses related to representation and warranty claims decreased $89 million to $65 million as of January 31.

As a reminder, Sand Canyon is and always has been operated as a separate legal entity from H&R Block.

We continue to believe our legal position is strong in any potential veil-piercing arguments.

Turning to our balance sheet, certain balances are substantially different compared to the prior year, due to the divestiture of H&R Block Bank.

During the second quarter, cash balances and certain liabilities, including all the Bank's deposit liabilities, were transferred to our bank partner.

Additionally, the available-for-sale securities held to meet regulatory requirements were liquidated.

We did retain our mortgage loans held for investment, and will continue to evaluate options for this portfolio.

For additional information regarding these transactions, refer to previous 10-K, 10-Q and 8-K filings with the SEC during the last calendar year.

The increase in long-term debt is due to the issuance of $1 billion of senior notes in September of 2015.

Additionally, due to GAAP requirements, borrowings under the committed line of credit, which totaled $1.1 billion at January 31, are also recorded as long-term debt.

This does not reflect our intent regarding repayment of such outstanding amounts, as the current balance on the line of credit is anticipated to be paid off by the end of the fiscal year.

It is merely a reflection of the fact that the line of credit agreement runs longer than one year.

As a reminder, we did not utilize any commercial paper borrowings this tax season, instead relying on the line of credit for our funding needs.

Finally, as mentioned by Bill, during the quarter, we continued our practice of returning capital to you, our shareholders.

We repurchased and retired approximately 12 million shares of common stock at an aggregate price of $392 million, and at an average price of $32.72.

A quick side note, because I know a lot of you asked about this: some of these share repurchases were executed during the tax season.

As of January 31, approximately 224 million shares were outstanding.

These repurchases are an affirmation of our confidence in the future of H&R Block, and our desire to create value for our shareholders.

Altogether, we have bought back 19% of outstanding shares for a total of $1.9 billion since the beginning of this fiscal year.

I would now like to turn the call back to Bill for closing comments.

Thanks, Greg.

We have seen a lot of change in the tax industry over the past couple of months, but as I say every year, there's also a lot of tax season left, and we are focused on delivering a stronger second half.

We are now ready to open the call for questions, so let me turn it back to Kyle.

(Operator Instructions)

Gil Luria, Wedbush.

Very helpful commentary on why the tax season got pushed out for -- in its entirety, but could you help us bridge the 3% decline in the assisted category for the IRS numbers, as of their most recent update, and the 12% decline that you had in your assisted business year-to-date?

And how much of that is the refund anticipation loan, and can we really call it that, if they are not charging interest, if they are just pushing out the payment for the filing?

Gil, I will take the first part.

Apples to apples, because in our press release we did update volume through February 28, which matches up reasonably well to the February 26 minus 3, and our volume is not down 12%, it's down 7.9%.

I apologize for that.

Yes, 7.9%.

No, it's okay.

The second part of your question Gil, and actually I thank you for asking, because it's a good clarification.

So the refund anticipation loan is a product that many of you may be familiar with.

Historically, it was a loan, there was an interest rate, there was origination fees, it was a profit center for tax origination companies.

That's not necessarily what's in the market now.

As a technical matter, it's still considered under IRS definition to be a RAL, that's why we call it that.

But you're right, it's an interest-free loan.

The costs that are incurred, because there are very real costs to the loan itself, including bad debt, there's money to be borrowed, to lend out, et cetera, that is -- the best way to think about that is now a cost of acquisition or marketing cost, that will be incurred by the tax-preparation companies, that they really are not able to pass on directly to the consumer, itself.

So let me ask with the right numbers this time.

How do we bridge the gap between the minus 3.6% from the IRS and the minus 7.9% that you have?

So in other words, why are we below what the industry is, is that what your question is essentially?

Yes.

As we've said for the past couple of years, we have had an early-season client decline, that really was a combination of two factors: One, we made a decision to get out of the free EZ game, that has hurt our early-season client.

And then the EITC migration from the assisted segment to digital, due to the disparity in documentation requirements continues to make that a tougher piece for us.

So the real reason is we have chosen strategically to do that.

We've also said that this will take a few years, to turn this decline.

We do believe we have been doing better than last year, but at this point, there's a lot of tax season to go.

The numbers are what they are.

Got it.

Thank you.

Kartik Mehta, Northcoast Research.

Bill, as you look at this season, it seems like it started similar to last year.

Would you think as the season ends, you would see similar results where the back end, back half of your season really improves, yet because of the negative volume count so far on the assisted side, you are not able to make it up?

So you will have a similar trend to last year?

It's hard to say, Kartik.

The last two years have -- again you have, to the point of basically the end of February, you have overall, no matter what form you use, the number of returns is down, which has been odd for us.

We believe we will have a stronger second half, but at this point, we're trying to execute day by day.

But we believe the second half is usually where we really pick things up.

Yes, we believe that's going to improve, but every season is different, and we just have to keep grinding.

Importantly, and we said this in the prepared remarks, but there are effectively 2 million Americans that have not yet filed that this time last year would have filed, and when we get into the details of who those people are, they're going to be disproportionately ACA.

They will be disproportionately client sets that we do a lot of business with historically, so we do have, as Bill said, a good history of really doing well in the second half, and I think even better set up for this year, given the profile.

And then finally Bill, I'm not sure if you said this in your prepared remarks, but at least it was in the press release, you said early-season loss will take time.

And when you say take time, as in, do you think this can improve next tax season, or it's just going to take a couple tax seasons for this to wash out, and for your -- as you execute more, for it to improve?

I don't want to necessarily get into forecasting the next season or whatever, but I do think we have said that this is going to take a little bit of time.

But at this point, I'm not ready to talk about next season or the season after that.

I want to make sure we're clear, it's already improving.

From two years ago to last year, we saw an improvement.

From last year to this year in the first half, we have seen improvement.

It's not improved in that we're not at a point where we feel comfortable we're taking share, so that's really the question you are asking, and I think Bill said it's going to take time, because ultimately this is an issue that has got multiple layers to it.

It has very deep value, price-value type of discussions, but these are things that we are working on, and we see progress thus far.

Thank you very much.

I will get back in queue.

Thomas Allen, Morgan Stanley.

So just on your leverage, at your investor day you said as of October 31, you were 2.2 to 2.5 times, and you felt investment grade was 2.5 to 3. Can you just update where you are now and how to think about the significant cash flows coming in, in the fourth quarter, and how you're thinking about future buybacks?

Thanks.

Thank you, Thomas.

So, you are correct; we had, back when we announced our capital plan in the fall time, had indicated our ongoing commitment to investment grade.

We quantified what that means from a debt to EBITDA, so an adjusted debt to adjusted EBITDA was somewhere between 2.5 to 3 times, and we had indicated back in December that we would be in the low 2-ish range.

Generally speaking, when you annualize it out, that's where we are still at this point in time.

We did raise $1 billion back in the fall, that was included in those numbers, which obviously would imply there's additional capacity there.

But as a prospective statement, and I think you know the answer here, we are going to create shareholder value opportunistically, and so at the point at which the Board decides in which the right way to move forward is, then we would be able to execute that plan, and then after-the-fact typically would then share it.

The fall time announcements were unusual in we gave a proactive view, but our practice will going forward be more after-the-fact communication.

Yes, I didn't expect you to give any guidance on that.

I know where you stand there.

And then, just in terms, last season at this point, end of February, you were tracking down I think it was 8.7% on the assisted side, you ended down 4.6%.

Last year it was weird where the season started, your declines accelerated in mid-season.

This time, it seems like the declines are just improving, and so based off that negative 4.5% you saw last season, can you give us some kind of sense of if you think this year will be better or worse than that?

We're not going to give forward-looking guidance, like that, Thomas.

Okay, thought it was worth a shot.

I'll ask one more question.

This isn't a joke, what do you think would happen to your business if Donald Trump becomes President?

Thank you.

I know, and I've been asked this in interviews.

I don't know.

I think that any President will have to work with 535 members of Congress.

As I've said repeatedly, we are in favor of ways to simplify the tax code, we believe we have ideas around that, because we have to train all these people.

I've been quoted as saying, which is true, there are five different definitions of a child in the tax code, it's 74,000 pages long.

I do think that there are ways that we can aid in any effort to simplify, but the fundamental issue is, the tax return is the fundamental way that the federal government runs its social programs, and whether that's the Affordable Care Act or the earned income tax credit, or child care, dependent care, all of these various refundable credits are run through the tax return.

And those take a while to figure out how you would administer them, and whether they were even -- there has been talk about repealing the Affordable Care Act, but there's also been talk about deducting premiums for health care, which is not what's on there now.

So we have to wait until we see obviously who's elected, what the Congress, the makeup of the Congress is.

Right now, believe me, I'm all-in on this tax season, and any President would take office as the tax season would be already underway.

But we stand ready, and I spent enough time in Washington, we stand ready to work with whoever, so we'll figure out where that goes.

Thank you.

Anj Singh, Credit Suisse.

First off, I wanted to follow up on some of the earlier answers and questions.

Bill, you mentioned that there's been an improvement in the share loss that you've seen this year versus last year.

So could you just talk about what efforts you guys are putting underway, that are mitigating the share loss?

And the follow-up to that is, I think you mentioned that there is a free EZ impact.

If you could just clear that up for me, I think we had been under the assumption that the free EZ impact should had been lapped this year, and there shouldn't be any impact this year.

So if you could just touch on those points, I'd appreciate it.

I think part of the commentary on the free EZ is, you have seen in the early season the shift to digital, that the absolute zero promotion has done.

So I do think there is a lot of free conversation that goes out there.

I think that has had an impact.

I'm not sure I remember the other part of the question.

Yes, it was really some of the programs we have done around share loss.

Just to be clear, the ripple impact of free EZ, that happened as far as we can tell.

But you saw a different creative from us this year, some of the product that we made, detailed changes that we felt would be more appropriate for this target audience.

We've done some in-store distribution, so our in-store merchandising is different, some of the training has been different for the tax professionals themselves.

There's been changes to some compensation programs.

These are things, this is why we get into there's many, many things that have to be looked at, to solve this.

Of course, we've been tapping a lot of those and there will be more to come.

Got it.

And for my second question, just on ACA, any early indications how the behavior of ACA-impacted filers is trending this season?

Are you seeing the higher penalties drive any shift in the behavior?

Overall any differences that you'd call out in ACA behavior this year versus last?

I think this season is showing some unusual filing patterns, so I don't think we have a good sense for it yet.

We do believe that part of the delay to the season is due to the delays in these 1095-Bs and Cs going out late.

We have seen fewer clients than we expected, but as Greg said, there's still 2 million filers to come.

So we have to wait and see how the season plays out.

It's frankly a little hard to read right now.

Everything we talked about in December with you, which as you all probably painfully remember, we did a lot of detail on ACA, is still true, from our viewpoint.

I actually believe, it's just me speaking, I find it somewhat encouraging there's a delay in the season, because if carded, which I think is reasonable with ACA, that means people's behaviors are reflecting the realities of ACA now, how that plays out is still to be determined, and as we have said and will continue to say, this is a multiple-year opportunity for us, but the best time to ask that question will really be at the end of the season from our perspective.

Okay, got it, and a quick follow up on ACA, last one for me.

It seems we've seen some ACA enrollment forecasts getting lowered this year.

How are you feeling about that 20% to 25% ACA-impacted filer number longer-term?

Are you still confident in that, or any changes to that figure longer term?

Thanks.

We have not, at this point, updated that again.

We want to see where things land, but at this point, we are holding to that, but we'll see how things play out.

As we said, we're on a multi-year journey with this, and we'll adjust if need be, depending upon where enrollments land, and what the impact of the season is.

But at this point, we are holding to that belief.

Appreciate it.

Thank you.

Scott Schneeberger, Oppenheimer.

First question, guys, obviously you were pursuing early-season volume this year, via the ad campaign that we saw with the $1 million a day giveaway.

I'm curious what type of impact do you feel that had, and does that come into any part of this EBITDA margin revision, where you are saying you will still be above 28%, but slightly below the 29% level this year?

It's a two-part question, really how you feel about the ad campaign, and if there's any impact on the margin?

And Greg, if you could share on the margin, what the main components are, maybe in rank order?

Thank you.

I'll take the first part.

I think we felt very good about the program, it created a tremendous amount of in-store excitement, I was able to give a couple of checks out to winners, and it was very emotional that we were able to -- part of it is, obviously, $1,000, and part of it was just people feeling like I won something.

You heard that echoed, we were even getting thank you notes, which is very unusual for a tax preparation company.

We did have higher marketing expense in the third quarter in January, but with regard to the EBITDA margin, I'll turn it over to Greg, we don't break out specifically what -- essentially I think what we've said is, with the lower volume at this point, we wanted to alert you to, we're probably on the lower end here.

But I'll turn it over to Greg.

We've been very consistent, we've said to you all that 28% to 32% is the range for us in the short term and the medium term there.

I think you also know, for those of you that followed the story here for several years, we can change the margin when we want to.

It wasn't that long ago, frankly, we were at 26% EBITDA margin, and we been able to move it up.

We've also been clear that our goal is not EBITDA margin, as such.

Our goal is to get the revenue line moving.

We have been making cost effort decisions constantly, but we are reinvesting that, in fact, somewhat proportionally into the top line, and that's what we been doing.

The slight revision to our margin is more just to tighten it up in my viewpoint, and the main driver there of course is just the volume pressure that we're seeing because most of the other factors we look at actually are pretty good.

So we'll obviously be able to provide a more detailed reconciliation at the end of the tax season.

Thanks, that's a good segue to my second question.

I was catching in the press release, and in the commentary, some glimpses of silver lining with regard to revenue per return.

You all mentioned Peace of Mind, your ID product, ID theft product, and this is a two-parter again.

I'm curious what you're seeing thus far as a revenue per return offset, versus the volume results we have seen?

I know you're not going to give exact numbers, but anecdotally, if you could share a little bit more?

And the second part of the question, Greg is, you mentioned revenue deferral from beyond April, from one fiscal year to the other.

Is that going to have a meaningful magnitude this year, do you believe, from what you've seen in the early season?

Thank you.

So on the first part of your question, Scott, your analytical silver lining insight is correct.

We are seeing some positive movement across our entire business on revenue per user.

At this point, we don't want to -- we've seen some positive on the attach piece, as Greg indicated.

But again, we have got to let the full season play out.

We'll have full disclosure on all that, but we are seeing some positives on that.

So on the other question, which is the nuts and bolts of the way we account for things, and Scott, I know you know this, but for everyone else's benefit, if you go into our stores, you buy our products, which you should all buy our products, the Tax Identity Shield is a great product by the way.

But last year, we bundled that product with the Peace of Mind product.

This year they're sold separately, as well as in a bundle, but you will be able to see the Tax Identity Shield product is $30 for the year for the individual, the Peace of Mind is $35-ish.

And we collect the cash from the client upfront, but the way it gets accounted is the Tax Identity Shield pretty much is zero in the year it's sold, it's all recognized in the following year for the most part, and then Peace of Mind is spread over really a three-year period with very little in the first year or so.

As those attach rates have been going up, as the units we've been selling have been going up, there's an embedded accounting gain that will be realized in the next few years after that.

So that's just accounting; as I said, we collect the cash.

Thanks, I'll hop back in.

Michael Millman, Millman Research.

Following up on some things, RALs were around last year, and so this year, maybe some of the amounts have increased, but it's not new, so I'm not sure why it affected you maybe more this year.

So I assume that the $1,000 promotion was your answer to RALs.

And while you talked about people excited, not clear if it had much impact on your numbers.

When we look at the numbers, we see that from the beginning of the year, these IRS numbers have shown nice increases each week from the beginning until the latest statistics, I guess today's statistics.

We have also have seen good strength do-it-yourself.

Curious no one has asked , why you started the year up about 5%, and now you are down in do-it-yourself, when TurboTax was going strong in January, as well.

So I'm not sure what the change is there?

And then in terms of refunds, started off the year down 11%, but in the first week, I think the IRS released its money, and so basically, it's been flat, maybe refunds are down 2% now.

So a lot of out-of-mind commentary, but maybe you can give us some more flavor and more detail as to why some of these things seem to be different for you?

Greg, why don't you take that?

I think, Mike, if I got it right, you've got four questions there, so I will try to tackle each one for you, and if we missed it, just let us know.

The first one I think, just factually, I disagree with your statement on RALs.

So there were RALs in the market, last year, there were RALs the year before.

These were private, specific to state, quite small in nature.

Last tax season there was really only one provider that had RALs, and they had an okay experience with that, we're very familiar with the details there.

This season, you see both the other large branded competitors have them, as well as multiple providers that are also putting it through the independent channel, which, as we all know, is 40% of the revenue part of this market.

So the number of distribution points for RALs this year is a lot larger than it was last year.

We're saying it's a factor, we're not saying it's a large factor, we're just saying it's a factor.

But just to make sure we get the facts straight on that one.

The next one, I think was the $1,000, is that our response.

And you wanted that one, Bill?

I wouldn't say it was a response, it was the approach we took for the early-season client.

So I wouldn't say it was in response to the RAL.

And the next question was really about DIY trends, and we have Jason here.

Do you want to talk about that, Jason?

Sure.

Thanks for your question, Michael.

I think our results really reflect our strategy for the season, which is, we want to grow by attracting high-value clients at a rate that's faster than the category.

And similar to last year, we started out slow compared to the rest of the digital industry, but I'm really pleased with how we are serving these higher-value clients through our DIY products.

We have NPS and our revenue per user that are both up tax season to date, and from my perspective, there's a lot of season left, and the second half really holds the majority of these types of clients.

Lastly it was really about the refund volume and velocity.

You are correct in terms of the direction of that.

There is, and we mentioned this in the prepared remarks, directional differences within the types of people receiving refunds.

It has been a factor that we've been watching carefully this year, but really from our point of view, we're just pointing it out more than the analysis from an education perspective.

Okay, thank you.

George Tong, Piper Jaffray.

Can you elaborate on your launch of Block Advisors, and how effective that's been in driving mix towards a higher end and more complex demographic?

Yes, so we are now open at 286 locations around the country.

We are very pleased with the opening, obviously a first-year, we want to make sure operationally or getting all that wired together, that's worked very well.

Our tax pros, the clients who have come in, and effectively two things.

One, this is now the season where Block Advisors really starts to kick into gear, the more complex client, the second-half client and clearly there will be a fairly large extensions group, as we look to see clients who are year round, and it's a long-term play for us.

We're not going to break out any specifics around it.

It's just suffice it to say that I'm really pleased with the execution that has happened so far, but for the type of client that we're talking about, it's now starting to rev up for Block Advisors.

Got it.

That's helpful.

And can you discuss what you are seeing in market share performance in your digital DIY business?

Sure, as I mentioned, George, we feel like we started out a little bit slow.

I think that we have seen some shift move to the category leaders, as they really worked with absolute zero and price on the desktop side, in order to get that share.

I think that there's been more share that's gone to TaxAct and some of the smaller players, and that's really where we're at, at about halfway through the season.

Got it, and circling back to the assisted side, how would you assess the risk that some of the volume declines you are seeing this quarter are market share driven rather than simply a timing element?

We said this in the prepared remarks, but just to be clear, we've seen directionally continued improvement in our market share losses, so it's not a gain at this point, but from three years ago to two years ago, two years ago to last year, and this year, so the loss is getting better, so we're okay with that.

I wouldn't say that we are pleased, because we're still losing.

Great.

Thank you.

Jeff Silber, BMO.

It's Henry Chien calling for Jeff.

I was wondering if you guys could talk a little bit more about the price and the mix improvements.

Is there anything that you could share in terms of color of where you're getting these price increases, and some more color on where the mix improvements are?

Thanks.

One of the nice things about our industry is we have real pricing power, I think you're all intimately familiar with that.

But we measure elasticity on the assisted side, that's point one.

We have worked very hard the last several years to really, to use pricing strategically, not opportunistically, not tactically.

So we went into this tax season with a specific plan, a lot of nuances to it, but it's a way to really make sure that we hone our price/value messaging to recognize the fact that we have this opportunity, and so we've executed that quite smoothly, and generated some real value.

Historically, as you know, we have basically been raising prices double the rate of the inflation, we'll give you more guidance on what we did this year the end of the season.

And in terms of the mix, this is a very big issue for us, and we talk about units, units, units.

This time of the year that's the one thing we talk about.

I always believe it's very misleading, because the units themselves, there is vast differences in the values of those, and so we recognize that in Block.

We know the things that we do to help people, and we've had a really good story.

Where we continue to focus, of course, is the early-season clients; these are people where speed of refund matters.

And you get two types of people typically in the early-season.

The EZ, the most basic filer, and secondarily is the earned income credit filer, and we're more particularly focused on earned income credit.

We will be able to better digest and share results at the end of the season where that stands, but in total so far this year, we're pleased with mix, and as we look to the second half, we continue to believe that's a good driver of value for us.

Got it.

Okay.

Appreciate the color.

And in terms of industry trends, or what you are seeing from your clients, is there anything that you could call out, in terms of difference of your client demographic, or any trends you are looking at?

Thanks.

No, Henry, I think it's consistent with past years.

I don't think there's been any particular demographic shift at this point.

Got it.

Okay.

Thanks a lot.

Anj Singh, Credit Suisse.

Thanks for letting me back in.

Greg, a quick housekeeping question.

Should we still be expecting 260 franchises to be bought back this year?

Yes.

Okay, great.

Thanks.

Scott Schneeberger, Oppenheimer.

A couple more.

Greg, would love, just the first one would be an update on Sand Canyon and what has occurred this quarter?

And it sounds like a partial tolling agreement but maybe not complete?

If you could elaborate to the extent you can.

Thanks.

In my mind, it's a good step forward for the Sand Canyon team.

As we talked about earlier, there was, in my mind, a material reduction in the representation and warranty reserve by about $89 million, so we end up now with $65 million on the balance sheet for representation and warranty.

The same kind of general words we've been using, it represents a small number of counterparties, which the Sand Canyon management team are working through.

What you saw this quarter was resolution on a few of those.

I'm not going to get too specific on the number, but we're talking in total still just a handful, so it does at the same time, keep in mind, represent years of effort to get there.

Clearly, because there's still a balance in that account means there's still work to get done here, but it's a very positive step forward from our perspective.

Thanks.

Just a couple more.

One is open-ended, at Tax Plus, if you could please elaborate on the good and the bad, and you already have spoken a little bit to the accounting changes there, but anything else you feel you should highlight?

And then a quickie throw-on is, Greg, I think the guide for the year from the investor day for tax rate is 33% to 34%, it was a little off from that in this quarter from what we expected.

Is that still a good number to use, and was that just a timing thing?

So I'll take the first one.

There's a lot of good on the attach.

We're very excited about the increases we're seeing on the Tax Identity Shield which is a product that is just spot-on for what happens in the industry today.

I think we're also pleased with Peace of Mind continues to grow.

We'll obviously give more color on this fully when the tax season is over.

Emerald Card and Refund Transfer continue to be in line with history, and consistent with the volume that we are seeing.

But overall, we think the Tax Plus strategy is working quite well.

I'll turn it back to Greg.

You have to reverse your logic a little bit.

In those quarters you lose money, you actually want your tax rate to be as high as possible, but the guidance we provided at December that you outlined would be what we would continue to reinforce, Scott.

So as the year settles up, that would be the right range to think about for tax rate.

Thank you.

Kartik Mehta, Northcoast Research.

Thank you.

Jason, just a question for you on the digital side, I just want to make sure I heard you correctly.

Were you saying that even though right now unit count is negative from a revenue standpoint, the revenue would be positive?

Just to clarify my comment, Kartik, what I said was that our average revenue per user is up, and so we're pleased with the way the online product is monetizing.

But the answer to your question is yes.

The answer is yes at this point.

We're trying to be cautious, Kartik, as we go through the end of the season, and obviously like unto ourselves, a lot of money is made in the digital space just like the assisted space, as you get into mid-March and go to the finish line.

So we are not guiding anybody to anything, but that's where we are at.

I know maybe from basis points, this not that big of a number, but any thoughts, Bill, on the difference between Company-owned and franchise operations, why the difference?

Was there anything you saw within the numbers that you could point to as to this is why there is a difference?

Yes, not really Kartik.

We look at this, I don't have a good answer for you, other than I think our franchisees do a heck of a job, and I think they're doing marginally better than the Company side, which is driving the Company size crazy because they're competitive with each other.

But there's nothing of note with that 70 basis point difference.

To me, this is an example why I'm always very cautious on units, because as you know, a lot of our franchisees are more rural in nature, our Company are more city and suburbs, and when you actually neutralize for the mix within that, you find that the performance is actually pretty similar.

In the big picture, in terms of things that really matter, running businesses, the Company stores over time have shown their ability to sell the Tax Plus products at a much higher rate, thereby generating more value for the clients, and also value for the Company.

And so that's, when we said we think we manage the stores a little bit better, that's the main reason that we see differential over time.

And Greg just to make sure I understand, it's more a housekeeping deal, but diluted share count you are expecting for the year, any difference?

I know you bought back $392 million worth of shares, and for you it's a little complicated to comp a diluted share, so I just want to make sure.

The math on how to calculate the weighted average shares is a bit more complicated than it should be, but that's the way that GAAP works, and I think you know that.

So we've given you where the share count was at the end of the third quarter.

You can roll forward the math then using one, two, and three-quarter actuals.

You have to take a position, because we're not going to give you an idea what the fourth quarter number is going to look like, but mathematically speaking, it's not going to be much different just because of the way it works from a weighted perspective, so I don't know if that's helpful or not, but certainly that's my answer.

Thank you.

I appreciate it.

The final thing I do want to say and I encourage everyone on the phone, we'd love for you to be a client.

We have 20 Block Advisors open in the New York area, including four downtown in Hanover Square, two on 23rd Street, one on 31st, so I'm always pitching.

We have a big contest in the Company of trying to get additional clients, so I hope all you investors and analysts, would love to come visit us.

We can do any one of your taxes.

This concludes today's conference call.

You may now disconnect.