H & R Block Inc (HRB) 2019 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the H&R Block Second Quarter Earnings Call.

(Operator Instructions)

Colby Brown, Vice President of Finance and Investor Relations, you may begin your conference.

Thank you, Matthew.

Good morning, everyone, and thank you for joining us to discuss our fiscal 2019 second quarter results.

On the call today are Jeff Jones, our President and CEO; and Tony Bowen, our CFO.

We posted today's press release on the Investor Relations website at hrblock.com.

Additionally, a presentation for viewing is available via the webcast and will also be posted to the Investor Relations website after this call.

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'll 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 such, our actual outcomes and results could differ materially.

You can learn more about these risks in our Form 10-K for fiscal 2018 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.

(Operator Instructions)

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

Thanks, Colby.

Good morning, everyone, and thanks for joining us.

We appreciate everyone being flexible with the change in call time in honor of the late President Bush.

We've been hard at work the past several months focused on executing our plans for the upcoming tax season.

I want to thank our associates, tax pros and franchisees for all they're doing to ensure we're ready to serve our clients as the season gets underway.

We're taking the right steps toward long-term growth in clients, revenue and earnings and, ultimately, value for our shareholders.

I continue to be excited for this season and for the future of our company.

On today's call, I'll give a brief recap of our key objectives for the year, followed by how we bring this strategy to life in tax season '19.

Tony will then provide details on our second quarter results and additional insight into our fiscal '19 outlook.

As a reminder, we announced our long-term enterprise strategy in June and provided more detail on our Q1 call in August, including our key objectives by channel.

To recap, in our Assisted business, we're focused on improving the value we deliver to our clients, developing and delivering on a clear brand promise to differentiate H&R Block and improving the quality and consistency of our service delivery in the tax office.

In our DIY business, we're investing to improve the product and user experience, pricing at a level that is competitive and provides value to our clients and communicating this value to grow awareness and compel DIY consumers to switch to H&R Block.

And in virtual, we will continue to innovate, leading the industry as consumer expectations evolve.

By combining digital technology with the unmatched scale and expertise of our tax pro network, we will ensure taxpayers can access H&R Block, whether they want little to no help, complete in-person assistance or anything in between.

With those objectives as a backdrop, I'd now like to talk about the tangible ways we're bringing the strategy to life in the upcoming season.

Let me start with an area in which we are making significant changes to improve our value proposition, our approach to pricing.

In June, we announced that we would be investing in price decreases for certain segments of our assisted clients.

Then in mid-October, we announced an important change in our approach, which is not only new for our business, but represents a complete shift for the industry as a whole, upfront transparent pricing.

So I'd like to share what led us to make these changes and what it means for consumers.

Over the past year, we took a critical look at all aspects of our business, and it is clear that pricing was a pain point.

And it was not just about the amount, but also the way prices were determined and communicated.

In the Assisted category, we, along with the rest of the industry, have traditionally determined the price after the return was completed, leaving many in the dark throughout much of the process.

This does not meet the expectations of today's consumers, who want as much information as possible prior to getting started.

This approach was a point of frustration for our current clients and also a barrier to attracting new clients who weren't willing to give our brand a chance without knowing what it was going to cost.

The feedback we received from our clients and tax pros clearly conveyed that the approach to pricing added even more stress to what, for many of our clients, is already a stressful event.

Specifically, they told us, pricing shouldn't be a mystery.

Nothing else they purchase in life feels this opaque.

Online, they don't want to start at one price and finish at another with no idea why, and a person's price should be unique, given their situation, not one-size-fits-all.

So we knew that pricing was something we had to address in a meaningful way, so this wasn't a surprise to us.

The decision to move to upfront, transparent pricing is one that we've researched the past 2 years and have tested in select markets.

We were pleased with the feedback and results from these price tests, giving us confidence in making this move was the right thing for our clients and for our company.

That's why I'm proud that H&R Block is leading the industry by offering upfront, transparent pricing, so consumers know the price before they begin, as well as throughout the entire process.

No mystery, no surprises and no hidden fees.

In the office, the process of determining price can be done in 3 simple steps.

First, the client identifies his or her price based on their life situation, then as the state return is needed and finally adds any additional item, such as investments or business income.

Nearly half of our clients will not have any of these items, meaning they will know their price in 2 simple steps.

And our tax pros will be there to help them to answer any questions and to provide a positive experience.

In addition to the move to upfront, transparent pricing, we are lowering prices for millions of our Assisted clients.

These reductions are targeted to consumer segments where we can compete most effectively and win.

A significant portion of our client base will see the positive impacts, with 1/3 paying at least 10% less than last year.

There's one additional update in the Assisted business I'd like to talk about.

Given the changes to the 1040 forms for the upcoming season, which included the elimination of the 1040EZ, we will no longer run the free 1040EZ promotion.

While free EZ brought new clients to our brand, they were increasingly expensive to acquire and had low lifetime value when compared to other client segments.

So while eliminating this promotion will have a negative impact on Assisted volume, it will partially offset the price decreases from a net average charge perspective.

These changes are contemplated in our revenue outlook for the year, which Tony will discuss later in the call.

In addition to pricing changes in our Assisted business, we're also making enhancements in DIY.

We will continue to price aggressively to encourage consumers to switch to our brand.

An extension of this aggressive posture is how we are taking price transparency to another level for the DIY consumer.

Our prices have always been stated up front, but as clients move through the process, the price would change, and they wouldn't know what they were ultimately going to pay until the very end.

To address this, we're launching DIY price preview, so clients will know in real time when their price changes and why.

We believe this will set a new industry expectation for DIY consumers over time.

Finally, in virtual, we will continue our upfront pricing approach with Tax Pro Go and Tax Pro Review products.

We will also continue to test throughout the upcoming season to ensure our products are optimally priced.

We're excited for our clients to experience upfront, transparent pricing as it will enhance the value they receive and create one more reason to choose H&R Block.

But a new pricing approach is just one of the many changes H&R Block is making to create a more modern, innovative, consumer-focused brand.

We're creating a client experience that demonstrates our expertise, is tailored to each individual, is available year-round and is backed by a company that cares.

And while this is not the first time we've discussed operational improvements, I believe the changes we are making this season are important steps to set us up for success over time.

In our Assisted business, we're making a number of improvements to enhance the client experience that will benefit both new and existing clients.

Our clients will receive greater help in planning for the future through an improved tax estimator to deliver key tax tips and more robust W-4 planning, both of which address the implications of tax reform.

We're responding to the feedback from those who've asked for a paperless experience, making it even easier to set up a secure MyBlock account for year-round access to their return.

We're increasing the prominence of our drop-off service, which some find easier and more convenient than sitting with the tax pro while their taxes are completed.

Drop-off service has always been available in our offices, but we haven't done a good job letting people know it's an option.

For our field leaders, we have simplified and focused their efforts on the most essential operational protocols.

We've dedicated significantly more effort to training and certification and have elevated the performance expectations for key seasonal roles, like office managers.

And finally, we're enhancing and differentiating the experience for clients who are new to H&R Block that demonstrate the value we provide in more tangible ways.

It's also important to note that our franchise network is as engaged and excited as they've ever been.

I've been delighted to see the number of franchisees who have embraced not only the client experience enhancements but also our upfront, transparent pricing model.

We also saw record participation by our franchisees at our convention in October and are seeing real momentum with our franchise base.

Moving to DIY.

We've made a number of enhancements to our product.

First, we've improved the experience for mobile users to give more visibility to where they are in the process.

We also continue to leverage data to make our products smarter and more personalized.

By targeting questions relevant to the user, we are reducing the amount of screens the client sees, in some cases, reducing the number of questions they need to answer by more than half.

Another key area is the significant improvements we've made in how we provide help throughout the user experience.

We've redesigned the help center to give clients easier access to self-help.

We're introducing a virtual assistant by leveraging machine learning to deliver quick answers.

And finally, we're making it easier to get live product help.

These improvements will eliminate break points in the experience and ultimately drive conversion.

Finally, I'm excited to announce a brand new online service we will be launching called ask a tax pro.

Those who choose this service will have unlimited immediate access to a tax pro to answer their tax-related questions at any point in the experience.

For years, our clients have had the ability to chat online with a highly qualified tax pro if they needed help.

This new service now includes co-browsing capabilities, allowing our tax pros to work directly on the client stream to guide them to the answers they need.

Clients can choose to interact with a tax pro through chat or phone, whichever is most convenient for them.

This is yet another innovation that connects our clients to the expertise of our tax pros.

We expect ask a tax pro to be the best value in the industry for those consumers who are confident doing taxes themselves, but have a few questions along the way.

This innovation mindset is driving our efforts to meet consumers' evolving needs, as we continuously evaluate new ways to connect clients to help.

To that end, we've made considerable improvement in our virtual products, Tax Pro Go and Tax Pro Review.

Tax Pro Go, our virtual Assisted offering, which was designed and optimized for mobile users, addresses the needs of consumers who want assistance, but don't want or have the time to visit one of our offices.

Clients upload their documents through the MyBlock portal and work virtually with a tax pro matched to them to have their taxes seamlessly prepared, signed and filed by H&R Block.

Our beta soft launch of Tax Pro Go last season had the goals of understanding who would be attracted to this product and refining the experience.

We were pleased with the client this product attracted to the brand, with 70% being new to H&R Block and 55% being under 35 years old, demonstrating Tax Pro Go's ability to drive new clients and millennials to H&R Block.

This year, we're continuing to improve the experience with more streamlined workflows, improved document upload and giving clients the ability to schedule an upfront phone consultation with their assigned tax pro.

Our second virtual product, Tax Pro Review, is a powerful way for our DIY clients to connect with one of our highly trained experts to review their source documents as well as their entire return and identify all available credits and deductions.

At the end of the process, our tax pro then signs and files the return, and clients can access the tax pro anytime during the year for any questions that may come up.

We continue to make enhancements to Tax Pro Review to better demonstrate the benefits of working with an expert in this capacity.

Additionally, we've optimized our network of tax pros completing these returns and have made improvements to the end-to-end mobile experience.

Everything we just discussed, across the Assisted, DIY and virtual spectrum, shows our commitment to unmatched capability to serve consumers in more ways than any other tax preparation company.

In addition to the improvements in pricing, client experience and virtual, we continue to look for ways to provide solutions through promotional offerings and partnerships.

That's why we'll bring back key promotions and partnerships this year that contributed to our performance in tax season '18.

We will again offer refund advance, providing our clients early access to their money, in most cases, on the same day in which they file their taxes.

Our loan amounts will be up to $3,000, and we're proud that our loans will remain 100% interest-free with no fee for the consumer.

This contrasts with other offers that will have higher loan amounts, but include interest charges.

We will again be the exclusive provider of desktop software at Walmart, and we'll have an aggressive program in place with Amazon.

Additionally, for self-employed filers, we are continuing our partnership with Stride to give our clients the ability to track and import expenses into their returns.

Finally, we will provide access to free credit scores for our clients in all our channels through our partnership with LendingTree.

None of this matters if we don't effectively reach consumers and communicate the value we're delivering, so we're making changes to systematically improve our ability to acquire, retain and engage clients.

We're utilizing improved data analytics and enhanced marketing techniques to optimize spend, deliver unique messages to discreet micro-segments of the market and ultimately improve our ROI.

This modern approach is key in building brand relevance and attracting new clients.

To wrap up, we've made many significant improvements to our business across a number of areas, including pricing, client experience, operational excellence, virtual products, promotion and partnerships, demonstrating our commitment to delivering for our clients.

Our product offering is the most robust it's been in the history of our company.

We're innovating and taking bold steps to disrupt the industry to ensure that we compete not only this season but for the long term.

In short, we're excited about our future and for the season to begin.

With that, I'll hand the call over to Tony to discuss our second quarter financial results and outlook.

Thanks, Jeff.

Good morning, everyone.

Before I get into the details of our Q2 results, as a reminder, we typically report a loss during the fiscal second quarter due to the seasonality of our business.

Therefore, second quarter results are not representative of our full year performance.

Starting with revenues.

We saw a year-over-year increase of $8 million or 6% to $149 million.

This is primarily the result of increased assisted tax prep revenues and the timing of revenues related to our Tax Identity Shield product, partially offset by lower international revenues, which were negatively impacted by foreign exchange rates.

Turning to expense.

Total operating expenses increased $7 million or 2% to $364 million, primarily due to onetime costs of $10 million related to our office footprint optimization as well as increased compensation expense.

These increases were partially offset by lower depreciation and amortization and marketing expense.

The increases in revenue and operating expenses, combined with an increase in interest income resulting from higher interest rates and higher cash balances, drove an improvement in pretax loss from continuing operations of $4 million or 2%.

While we saw an improvement in pretax loss, our loss per share increased $0.12 to $0.83.

This was due to our lower tax benefit compared to last year as the lower corporate tax rate negatively impacts quarters with a seasonal loss.

Turning to discontinued operations.

There were no changes in accrued contingent liabilities related to Sand Canyon during the quarter.

For additional information on Sand Canyon, please refer to disclosures in the company's reports on Forms 10-K, 10-Q and other SEC filings.

Turning to capital.

Our priorities remain unchanged.

We, first, focus on maintaining adequate liquidity to fund the business.

We then look to invest in the business to drive long-term growth.

We then fund our dividend, which we have done consistently since going public.

And then finally, we look to opportunistically return capital to shareholders through share repurchases and, at a minimum, plan to repurchase shares to offset dilution from equity grants.

We did not repurchase shares during to the most recent quarter, but have repurchased 4.2 million shares at a total cost of $97 million for the fiscal year.

I'd now like to provide some thoughts on our fiscal '19 outlook.

Starting with the tax industry, we anticipate overall returns to grow 1% to 2% in tax season '19, consistent with historical trends and the current low unemployment environment.

As we shared on our Q1 call, we don't anticipate the recent tax legislation to have a material impact on the method filers use to prepare their taxes.

Our research confirms that many filers are confused and will be looking for help this tax season.

As a result, we anticipate Assisted industry volume to be flat to slightly up, with the remainder of the industry growth coming in DIY.

Overall, we expect the industry volumes to be very similar to the trends we've seen over the last few years.

Specific to H&R Block, we expect to continue our trend of achieving overall client growth, driven by DIY and partially offset by a decline in Assisted due to the discontinuation of the free EZ promotion.

The change in free EZ will impact the early part of the season and will be reflected in the results through February that we will release in early March.

With respect to pricing, our new approach will result in a lower net average charge in our Assisted business.

While we expect the net average charge to decline, it will be impacted by positive mix as we expect to serve fewer free EZ type clients.

In DIY, we expect our net average charge to be consistent with last year, as we continue to focus on outpacing the category in returns and gaining market share.

While there is some trade-down risk within DIY due to the new tax legislation, which would negatively impact our net average charge, we believe that risk will largely be offset by ask a tax pro and favorable mix.

We are confirming our previously provided guidance, as we continue to expect total revenues at $3.05 billion to $3.1 billion, which takes into account the volume and pricing expectations I just shared.

We're also maintaining our previously provided outlook of EBITDA margin of 24% to 26% and an effective tax rate of 23% to 25%.

Moving on to the other items in our financial outlook.

As we previously shared, fiscal '18 represented our high-water mark for depreciation and amortization, as we see the impact of office upgrades and franchise buybacks from several years ago roll off.

We expect D&A to decline in fiscal '19 and be $165 million to $175 million.

As a reminder, approximately 2/3 of our D&A is related to CapEx, while the remaining 1/3 is related to acquisitions.

We expect to spend approximately 3% of revenues on capital expenditures in fiscal '19 or $95 million to $105 million.

With respect to acquisitions, we anticipate repurchasing approximately 125 franchise locations, which was better than we originally expected, and adding approximately 45 independent locations to our network for a total capital investment of approximately $30 million.

As a reminder, both franchise repurchases and independent acquisitions are typically completed at levels below our current trading multiple and, as such, are accretive to earnings.

Beyond this year, we expect our franchise repurchase activity to moderate.

For fiscal '19, we expect total interest expense to be $80 million to $85 million, driven by lower borrowing needs, offset by higher interest rates.

Before I turn it back over to Jeff, I just want to share my excitement for the upcoming tax season.

We have a great plan to put H&R Block on the path to long-term sustainable growth, and I'm looking forward to seeing our plans come to life in the coming months.

With that, over to you, Jeff, for some closing thoughts.

Thanks, Tony.

I hope the additional information we shared today provides more context regarding our plans for the upcoming tax season as well as the full fiscal year.

We are taking bold steps and innovating to improve the value we deliver for our clients to position us well not only for the season but for the long term.

We're at the early stages of our journey but are confident in our plans.

We look forward to talking with you after this fiscal third quarter.

With that, we'll now open the line for questions.

Matthew?

(Operator Instructions) Your first question comes from the line of Scott Schneeberger with Oppenheimer.

Just interested on what you just mentioned.

Tony, could you quantify on the acquiring franchise locations?

You mentioned it was more than anticipated.

What type of positive revenue impact will that have on the year?

Yes.

I don't know if I have the exact number, Scott.

We were originally thinking more like 80 to 100 locations, so the incremental amount is approximately $25 million, a typical location doing $200,000 to $300,000 of revenue.

And obviously, the incremental amount to us would be the 70% that we weren't getting before.

So I think that gives you a sense of the incremental revenue that should drive.

Okay.

And then Jeff, the transparent pricing, it's certainly a transformational initiative.

I'm curious, what will we see with regard to marketing spend and marketing timing this tax season relative to those of the past?

Yes.

Thanks, Scott.

So our overall investment is contemplated in our guidance, so that -- that's all consistent.

And this will be a core message for the company, where we haven't announced yet exactly all the shifts we're making in our marketing messaging but, suffice it to say, upfront transparent pricing will be very clear to the market.

It will be a major focus of how we go to market for the year.

Your next question comes from the line of George Tong with Goldman Sachs.

Investing in pricing is a key objective for the upcoming tax season.

Based on your study of the competitive backdrop so far, what would you say is the approximate pricing premium that H&R Block has over competitors?

And is your objective to remain premium-priced based on the value provided?

Or is it to bring pricing more in line with the competition?

Thanks, George.

This is Tony.

Really good question.

Our goal isn't to be the low-priced leader, so I think H&R Block will demand some level of premium relative to a lot of the other offerings in the marketplace.

Specific to your question on what type of premium were we at, it really depends.

I think, across the spectrum, at different client complexity, our premiums varied, obviously, on the simple land or the free EZ.

And we were very competitive last year, given we had the free EZ promotion.

I think, given how our pricing had evolved over time, we definitely identified certain client segments where we were very much above the market average, if you will.

The consumers don't really feel the average and it's impossible to shop the average, but we know in certain segments, in certain geographies, there's definitely places that we were well above the market.

And we've taken the opportunity as part of this reset to try to fix most of those and bring us much more in line and use pricing as a catalyst to try to return us to client growth.

That being said, it's well beyond pricing.

Pricing is just 1 aspect of what we're trying to do.

And it's the overall value proposition and all the elements that we're making -- the changes we are making that are eventually going to allow us to be successful.

So George, this is Jeff.

I would just reiterate that we're not trying to be the low-price provider and to echo Tony's comments about all the other initiatives that have been put in place to demonstrate value.

We also have seen that it's just not the price the consumer was paying.

It was the fact they had no idea what it was going to cost.

And so when I think about our approach to pricing, there are really 3 different components.

The first component is really about the fact that they'll know the price before they begin.

The second is how easy it will be for them to figure out what their price is.

And then the third will be the actual price.

And so we're really thinking about all 3 of those elements.

Very helpful.

And as a follow-up, as a result of your new pricing transparency, you've indicated that about 1/3 of filers will pay 10% less than last year.

Can you help unpack that and detail which filing segment will see the most change?

Yes.

It's a fairly complicated answer.

I mean, as you know, George, the way we priced historically was extremely complex and made up of hundreds of individual billing items.

So what we're able to do in this change is simplify our overall approach, which allows us to be transparent and share the price with the clients upfront.

When you think about who's going to get the bulk of that decrease, there's individuals, like self-employed filers, homeowners, middle America families that are really going to see the bulk of it.

But it really depends on the specific situation and the types of complexity that, that client had last year and the types of complexity that they'll come back with this year.

Your next question comes from the line of Jeff Silber with BMO Capital Markets.

Tony, you broke up a little bit, at least on my line, when you were talking about the outlook.

Can you review what you said about Assisted in terms of volume and the pricing, what you're expecting this year?

Now starting with price, I mean, just the price, obviously, Jeff, will be down this year, lower in price.

We're not sharing the exact amount it will be down.

Obviously, it's contemplated in our overall revenue guidance.

I mean, that's one of the changes we tried to make this year.

I mean, last year, we provided a volume and more of a directional MAC.

There's a lot of moving parts this year, which is why we thought it was important just to drive guidance around an overall revenue number given there are so many parts.

As far as volume, the only comment I made was we do expect Assisted to be down.

I think we are really optimistic about the changes we're making around upfront pricing, the other value proposition.

But obviously, we have a headwind with the elimination of the free EZ promotion, which we expect most of that will occur during the first part of the tax season.

Okay.

Great.

And in talking about your new price transparency strategy, I'm just curious what the competitive response has been so far.

Well.

Yes, this is Jeff, Jeff.

I mean, obviously, we haven't really entered the season yet, so it's difficult to know what the competitive response will be.

We know that, as we've continue to evolve exactly how we will message this and communicate it, the way that we've structured, how easy it is for a client to figure out their price, we've been doing a lot of additional testing on that with consumers, and that has been very positively received.

But we don't know yet exactly how competitors will respond.

We'll see once we get into the season.

Yes.

And the one thing, Jeff, I would add to that, I mean, obviously, we expect competitors will respond.

I mean, as the market leader, they typically react to whatever offer we have in the marketplace.

I think the one thing that makes H&R Block a little bit unique is the fact that we're able to go out and market a message on a broad scale, which is quite a bit different than most of the other competitors in the space.

And we think that's going to provide us an advantage.

Your next question comes from the line of Alex Paris with Barrington Research.

This is Chris Howe sitting in for Alex.

I had a question in regard to the millennial market segment.

Can you perhaps add some additional color or some granular detail about the engagement and the utilization of H&R Block's product suite that you're seeing within millennials and what you're doing heading into this tax season to increase retention efforts towards new millennials that were acquired last tax season?

Chris, this is Jeff.

I'll kick us off and see if Tony wants to add anything.

So obviously, we're looking closely at who we're attracting in our ability to grow new clients.

We mentioned on the last call that, in tax season '18, over half of our new clients to H&R Block were millennials.

And so one of the things we continue to see and understand is the power of the brand name, how trusted it is on the topic of taxes.

With Tax Pro Go, I think what we saw was that the method of sitting down for an hour in a tax office isn't for everybody.

And so I think that's why we're continuing to broaden the way the millennials and others can access the brand.

Again, in a -- we think so digitally, Tax Pro Go is a great way to do that.

They get the full assisted experience, but they don't have to physically visit an office.

It actually turns out, for a lot of people, as well, given our retail footprint, that simply dropping off your documents is very convenient for people, too.

So we'll continue to build out that continuum of all the ways people can access Block and pay close attention as these products grow on their ability to attract new clients to the brand, but also younger demographics to the brand.

Your next question comes from the line of Michael Millman with Millman Research Associates.

I believe New York City has had, for some time, upfront pricing.

Can you talk about how that's worked in New York City, how -- and what -- how you saw that differing in terms of clients for places that didn't have upfront pricing?

And so that is your now upfront pricing nationwide similar to what it is or has been in New York City?

And I was also interested in -- you talked about first half of the season, Assisted would be down for reasons you gave.

Could you talk about what you expect for the second half of the season?

Sure.

I'll start off, Michael.

This is Tony.

Well, I'm not exactly sure what you're alluding to with respect to New York.

We have run various tests that we're constantly doing on different pricing approaches.

Several years ago, we used to have a version of a pricing board in our offices, and that may be what you're remembering.

It's probably been 4 or 5 years ago.

I think the main difference between that and what we're rolling out now is that gave clients an indication of a range of where they may fall based on the particular life situation.

But the challenge with that model was the ranges were incredibly wide.

So you might have a range of $99 to $199, which isn't that helpful.

And what we're rolling out this year is every client will know the pricing in its entirety and can place themself in the appropriate life situation and then whatever particular add-ons they have based on the documents they're bringing into the office to know their exact price.

Because the feedback we got from several years ago is it's helpful versus nothing, but it still doesn't tell me my price.

And some clients were worried that they were at the top end of the range and that maybe it was more hurtful than anything.

So I think that's specific to what you may be remembering as far as what we would have done in New York.

What we are rolling out is nationwide, so it [won't] be in every company office.

Obviously, franchisees have the ability to opt in.

We're very pleased that we've had incredible opt-in rates.

The vast majority of franchisees will be following the model this year on a national level.

Franchisees, though, as you remember, do set their own individual prices, so their price points may and will be different from the company offices, but they will be following the model because they believe in it so much, which we were very pleased to see that result coming out of our franchise meeting.

I think your earlier question was specific to volume.

I mean, we're not going to get more specific than saying that the first half will be where we expect to see some level of loss given the free EZ promotion.

Our goal is to continue to grow clients in all segments, in all parts of the season, whether it be first half or second half, but we just know that given the free EZ promotion ran through 2/28 last year, it will be a bit of a headwind.

So will that overcome?

Or will the second half gains overcome that loss?

Overall, we did mention in the opening comments that we expect Assisted to decline, so we do expect a slight decline in Assisted, which was obviously disappointing for us given that, obviously, our goal over time was to grow clients.

But we felt with all the changes happening with the simplification of the 1040 this year and it just didn't make sense to launch the free EZ again, so that's going to be a bit of a headwind.

Your next question comes from the line of Kartik Mehta with Northcoast Research.

I wanted to go back to your previous answer on the franchisees and participation.

I'm wondering just, I guess, if you could give a ballpark range of the level of participation you're anticipating from the franchisees in the new plan.

Is it 80% or over?

Is it less?

Just to get a perspective on how the franchisees are thinking about the new program.

Kartik, this is Jeff.

So we rolled this out in October at the franchise convention and did a lot of work to educate in a broad way and then, with individual franchisees, to sit down with them at scale and help them understand, in their business, what this would mean to them.

And just to put a percentage on it, we saw north of 80% adoption of the model.

We would say, the vast majority of franchisees.

And so we were very, very happy with their receptiveness, their response.

And frankly, their feedback was what consumers told us.

From their business perspective, they knew that our pricing model was causing friction for their clients as well, so they really applauded the change.

And then yes, just on the digital side.

I noticed you lowered prices the beginning of this season compared to last year.

Now there's a -- there is a decent price difference between you and TurboTax.

I'm wondering if you intend on marketing that price difference?

Or how you might go about marketing that to try to gain market share?

Yes, absolutely.

And the way I would think about it is there are 3 core strategies in the DIY business, broadly.

One is we will continue to evolve and improve the product experience, making it more personalized, making it more simple and making it more mobile.

So that's the focus of how we want the product to get better year-over-year.

We will price competitively versus the marketplace.

And we will aggressively market the total value proposition of DIY.

I've said before, we will act like a challenger brand in DIY, and that's definitely our posture going into the year.

Your final question comes from the line of Hamzah Mazari with Macquarie.

This is actually Mario Cortellacci filling in for Hamzah.

Just could you give us a sense of how long the investment cycle will be?

Is 2019 expected to be the bottom in the margins?

Or how should we think about this longer term -- or just the margin potential longer term after the increase in 2019?

So we've gotten 24% to 26% for the year.

Obviously, that was a reduction versus what it would have been historically.

And our guidance isn't changing today.

One of the things that we've been talking a lot about is where we had been historically in the high 20% range, as we assess the business and the places where we need to invest and the way we need to drive growth, we just believe that in the high 20s is -- represents a margin level that is the company not investing in itself to grow and to be more relevant to the consumer.

So we're definitely not setting a goal to get back to the high 20s.

We are focused on margin expansion over time as we grow volume, and that's really the key to how we're thinking about the next several years.

We believe we have to grow clients and revenue and earnings over time.

But again, the high 20s feels like a level where we're just not investing in our business appropriately.

Got you.

Okay.

And just regarding the free EZ, I mean, was there a conversion rate year-over-year for those clients?

Just trying to see if you're ever using it as an acquisition tool to go from a client that maybe got their stuff done for free and then actually converted to a paying client in a year or 2 years from now.

Just seeing if you're actually missing out on any revenue from there.

Yes, Mario.

This is Tony.

I mean, they definitely -- over time, some of those clients migrated up to more complexity.

I mean, your tax situation tends to change from one year to the other.

And to they qualify for the free EZ promotion, you would have essentially had to only have a W-2.

So if you bought a house the following year or had children or became self-employed or something else, then that would provide a monetization opportunity to move up.

When we looked at the data over the last several years, clients aren't migrating up at the pace that we need to justify the program, which is part of the impetus for eliminating it this year.

The other thing that's happened, it's just become increasingly expensive to even acquire the free EZ clients.

So a number of clients that you're bringing in relative to the dollars you're spending on marketing and the discount you're giving, it became increasingly expensive.

And why -- that's why we're really pushing free clients to go into our DIY products, and we still obviously have those products on the DIY side, and focus more on more middle America clients on the Assisted side.

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

In your response to Kartik's question about increasing digital year-over-year at this early part of the season, I'm aware you've done that in deluxe and premium.

It looks like -- for price reduction, it looks like self-employed increased.

Is that material enough to be an offset?

Or Jeff, based on your response, I got the sense that, over the year, we will have a net reduction in pricing in digital.

So the big question -- if you could confirm that?

And the bigger question is what type of pricing reductions will we see in digital versus Assisted from H&R Block this season?

Which will be the more meaningful and any degree of magnitude you may be able to share?

Thank you, Scott.

This is Tony.

I'll actually take that.

I mean, we'll definitely going to see a bigger reduction on the Assisted side.

I mean, if you remember, we did a bit of a price reset on our DIY business a few years back, resetting our lineup.

So overall, this year, in DIY, we expect the net average charge to be maybe slightly down to even flat.

And part of that is going to be driven by our attach of ask a tax pro, which is a new offering we announced today as well as just overall mix.

We're going to continue to be aggressive on the price side in DIY, but we've had favorable results last year from the launch of the self-employed SKU, as you mentioned.

So overall, DIY will be essentially flat in that because our base expectation.

We have no further questions at this time.

I'll turn the call back over to our presenters for any closing remarks.

Thanks, everyone, for joining us this morning.

This concludes today's call.

This concludes today's conference call.

You may now disconnect.