H&R Block, Inc. (HRB)

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H&R Block (HRB)

Q3 2012 Earnings Call

March 07, 2012 4:30 pm ET

Executives

Derek Drysdale - Director of Investor Relations

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

Jeffrey T. Brown - Chief Financial officer and Senior Vice President

Jason Houseworth -

Philip L. Mazzini - President of Retail Tax Services - HRB Tax Group Inc

Analysts

Michael Millman - Millman Research Associates

Kartik Mehta - Northcoast Research

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

Vishnu Lekraj - Morningstar Inc., Research Division

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Thomas Allen - Morgan Stanley, Research Division

Presentation

Operator

Good afternoon. My name is Diane, and I will be your conference operator today. At this time, I would like to welcome everyone to the H&R Block Earnings Call. [Operator Instructions] I would now like to turn the call over to Derek Drysdale, Director of Investor Relations. Sir, you may begin.

Derek Drysdale

Thank you, Diane. Good afternoon, everyone, and thank you for joining us. Today, Bill Cobb, our President and CEO; and Jeff Brown, our CFO, will review our third quarter results, as well as our fiscal year-to-date interim U.S. tax results through February 28. Phil Mazzini, our President of Retail Tax Services, and Jason Houseworth, our President of Digital Tax Services, will be available to participate during the Q&A session.

I'd like to remind everyone that today's remarks will include forward-looking statements as defined under the Securities Exchange Act of 1934. 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 2011 as well as our other SEC filings.

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

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

William C. Cobb

Thanks, Derek, and good afternoon, everyone. At December's Investor Conference, we outlined our strategy to better position ourselves for long-term growth. Our top priority heading into this season was to serve more clients through aggressive marketing and promotional efforts, as well as initiatives to improve our clients' service and retention. With the first half of the tax season now behind us, I'm pleased that these decisions have worked, and we are executing well against our long-term strategy.

Through February 28, we've served nearly 700,000 more U.S. clients, a 5.1% increase from the prior year. From our analysis, it is clear that we are gaining share in all digital categories: online, software and the Free File Alliance. In the assisted category, the external data is still murky at this point, which I'll explain in a moment.

The conclusion we believe you should walk away with, however, is that we are growing clients, which is our #1 stated goal.

That said, there are still millions of tax returns yet to be filed, and we are committed to finishing the season strong to further improve our position.

Now looking at the industry as a whole, the first half of this tax season was highly competitive as we expected. In recent years, we've continued to see the first peak of the tax season shift well into February. Additionally, congressional tax code changes passed in December of 2010 caused a delay at the IRS in processing Schedule A forms prior to February 14 last year. Since we serve a significantly lower mix of Schedule A clients in the industry as a whole, the effect of last year's delay is almost certainly -- is almost entirely normalized in our return volumes at the end of February. However, it may take the balance of March for total filings to normalize for the rest of the industry.

Some industry observers have estimated that IRS returns are up about 5% through February after factoring in the ongoing decline in pen and paper. We believe most of this growth is due to timing from the industry normalizing Schedule A filers from March last year into February of this year.

Ultimately, we believe that the best indicator of IRS growth is nonfarm employment, which was up 1.3% at the end of December. As a result, we anticipate that total IRS filings will grow about 1.5% for this tax season.

Now with that overview, let's turn to our assisted tax business. At the Investor Conference, we committed to an aggressive growth plan to drive traffic and accelerate trial in the first half of the tax season and to retain the millions of new clients we attracted last year.

Our targeted value offerings, such as free 1040EZ, free RAC and free Second Look, required a material investment in national advertising, which we committed to in December. These initiatives are both current and long-term investments designed to build our brand strength, client acquisition and retention, as well as our overall competitiveness. That said, now I'd like to review our performance against each of these growth initiatives, starting with the free 1040EZ.

I am pleased that the EZ program is continuing to exceed our expectations in its second year. This initiative is all about targeting 18 to 24-year-olds so they can experience the benefits of an H&R Block tax professional.

Once clients experience our expertise and begin forming relationships with our tax professionals, we are confident that they will return to us as their lives become more complex. In the short term, this program is essentially revenue neutral for us because in most cases clients pay for a state return or another product like our Peace of Mind guarantee, or they trade up to a different form.

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