H&R Block, Inc. (HRB)

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H&R Block (HRB)

Q3 2014 Earnings Call

March 06, 2014 4:30 pm ET


Colby R. Brown - Vice President and Corporate Controller

William C. Cobb - Chief Executive Officer, President, Director and Member of Finance Committee

Gregory J. Macfarlane - Chief Financial Officer

Jason L. Houseworth - President of Global Digital & Product Management


Thomas Allen - Morgan Stanley, Research Division

Anjaneya Singh - Crédit Suisse AG, Research Division

Gil B. Luria - Wedbush Securities Inc., Research Division

Kartik Mehta - Northcoast Research

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Michael Millman - Millman Research Associates



Good afternoon. My name is Alea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fiscal 2014 Third Quarter Earnings Conference Call. [Operator Instructions]

I would like to now turn the call over to your host, Mr. Colby Brown. Sir, you may begin.

Colby R. Brown

Thank you, Alea. Good afternoon, everyone, and thank you for joining us to discuss our fiscal 2014 third quarter results. Joining me on the call today are Bill Cobb, our President and CEO; and Greg Macfarlane, our CFO. Jason Houseworth, President, Global Digital and Product Management, will be available during the Q&A session.

In connection with this call, we have posted today's press release on the Investor Relations website at hrblock.com. Some of the figures that we'll discuss today are presented on a non-GAAP basis. We reconcile the comparable GAAP and non-GAAP figures and 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 our securities -- under the securities laws. Such statements are based on current information and management's expectations as of this date and are not guarantees of future performance. Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict. As a result, our actual outcomes and results could differ materially. You can learn more about these risks in our Form 10-K for fiscal 2013 and our other SEC filings. H&R Block undertakes no obligation to publicly update these risk factors or forward-looking statements.

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

William C. Cobb

Thanks, Colby, and good afternoon, everyone. Earlier today, we released our U.S. tax return volume through February 28, as well as our fiscal 2014 third quarter results.

As you may know, we had 1 day of return filings included in our results, and expected that we see a timing variance between the third and fourth quarters. We had a significant amount of returns pending at January 31, and you'll notice a much larger shift of revenues into the fourth quarter compared to last year.

In total, approximately $277 million of revenue shifted to our fiscal fourth quarter this year, representing completed returns that had not yet been e-filed with the IRS by January 31. When taking this revenue shift into account, you will find that our revenues in the U.S. were essentially flat to the third quarter last year despite a decrease in returns prepared. Greg will offer more details of the third quarter financial results later during the call.

With respect to the tax season, there's obviously been a lot of early noise in the market, so I'd like to provide a few key points about the industry and our performance so far this year. First, for the second consecutive tax season, we've seen some unusual movement in the industry during the early part of the season, making initial year-over-year comparisons very challenging. Most notably, IRS data has indicated that the industry has experienced an early shift in the mix of assisted and DIY e-filed returns.

During the first half of the season, however, the proportion of DIY filers typically is higher than in the second half of the season due to the fact that DIY returns are generally less complex. Additionally, as we mentioned at our Investor Day, we also believe that there's a real secular shift underway with Earned Income filers who also typically file their returns earlier in the year. Heading into this season, we've seen a trend in which returns containing the Earned Income Credit are increasingly being filed digitally. In fact, without this shift in EIC tax filers over the last 5 years, the overall proportion of DIY returns in the industry would have declined. And though the data is not segmented by filing channel, the IRS estimated in 2012 that there were between $12 billion and $14 billion in improperly issued Earned Income Credit payments.

Increased standards have been put in place to address these improper payments in the assisted channel only. If asking additional questions is a way to help reduce improper EIC payments, it makes sense that across all channels, all EIC filers, whether assisted or DIY, should have to answer the same questions. Thus, without significant changes in standards for filing DIY returns for these credits, we believe that similar shifts may continue to impact the mix of assisted to DIY filers, particularly in the early part of each tax season.

That said, we have seen this mix moderate over the last few weeks. And despite the unusual movements in the early season, recent IRS data has shown that total filings are now in line with our overall expectations for the year. The IRS just released data earlier today showing industry filings through February 28 up 1.4% over the prior year. Additionally, the data shows a continued and expected moderation in the assisted-DIY split from earlier reports. Therefore, we continue to expect total U.S. filing growth in the industry of 0% to 1%, and believe that for the full year, the proportion of filers who choose assistance versus those who do it themselves will remain relatively consistent with past seasons.

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