H&R Block, Inc. (HRB) Q4 2011 Earnings Report, Transcript and Summary

Good afternoon, my name is Zetania, and I will be your conference operator today. At this time, I would like to welcome everyone to the H&R Block Fourth Quarter and Fiscal 2011 Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to today's host, Mr. Derek Drysdale, Director of Investor Relations. Sir, you may begin your conference.

Thank you, Zetania. Good afternoon, everyone, and thank you for joining us. Today, Bill Cobb, our President and CEO; and Jeff Brown, our CFO, will review our fiscal 2011 results. Several other executives including Phil Mazzini, President of Retail Tax Services, Jason Houseworth, our President of the Digital Tax Services and Kathy Barney, President of H&R Block Bank will be available during the Q&A session. In conjunction with today's call, we have posted the press release and slide presentation to the Investor Relations website at hrblock.com. We also plan to file our 10-K for fiscal 2011 later this afternoon. Before we begin, I'd like to remind everyone that today's remarks may 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 could learn more about these risks in today's press release, our Form 10-K for fiscal 2011 and our other SEC filings. H&R Block undertakes no obligation to publicly update these risk factors or forward-looking statements. Finally, I'd like to remind everyone that some of the numbers we reference today are presented on the non-GAAP basis. We have reconciled the comparable GAAP and non-GAAP numbers in today's press release. At this time, I'd now like to turn the call over to Bill.

Thanks, Derek, and good afternoon, everyone. It's a pleasure to be here today on my first earnings call as H&R Block's CEO. Earlier today, we announced fourth quarter and fiscal 2011 results and I'm pleased to say that we have a lot of momentum going into fiscal 2012. Today, I'll talk a bit about that momentum. I'll also give you a sense of what I've learned during my first 6 weeks on the job. Let's start with our fiscal 2011 results. First, total returns prepared worldwide were up nearly 6% to 24.5 million. In the U.S., we grew returns by 6.5%, our best growth since 2001. We estimate that industry-wide IRS filings grew about 1%, so that we gained about 80 basis points of share in the U.S. In retail Tax Services, Phil and his team drove much stronger results than many expected. We gained more than 500,000 clients, and we estimate that we gained 60 basis points of share in the assisted category. We also showed significant improvement in key leading indicators, including client retention, satisfaction and new client growth. So how did we grow share? In retail, our growth this year was led by improved execution, client service and aggressive client acquisition programs, such as free federal 1040EZs and Second Looks. We also capitalized on industry-wide consolidation to convert competitor returns to H&R Block. I'm particularly excited about the success of the free federal 1040EZ program. Introducing young filers to the benefits of assisted tax-preparation is a critical component of our long-term growth strategy. Remember, the majority of these filers migrate to more complex tax returns within 2 years. Thanks to the program, we now have a solid pipeline of new and younger clients and the word of mouth referrals they generate. Expect more of this kind of innovative marketing in 2012. In digital, our share gains were the result of improved marketing, the redesign of our website and product simplification. Smart advertising and a clear call to action drove customer acquisition and trial. Our website turned visitors into clients and an improved product experience help clients achieve completed returns. As a result, our client base increased by nearly 800,000, led by online growth of nearly 29%. Thanks to the fabulous work from Jason and his team, we estimate that we gained 90 basis points of market share in online and about 60 basis points in software. In financial services, we leveraged H&R Block Bank this year to offset the loss of RALs. The bank processed nearly 6 million RACs and approximately 2.3 million Emerald Cards with $8 billion in total deposits. Finally, on the international front, total returns in Canada and Australia grew about 1%. International revenues increased about 8% to $206 million, largely due to favorable exchange rates. Altogether, our adjusted non-GAAP net income from continuing operations was essentially flat to last year, and we generated free cash flow of $450 million. Of course, there were some challenges in 2011. Our inability to offer RALs impacted our financial results, although the company did do an outstanding job dealing with the loss of the product. Another drag on both our top and bottom line came from RSM McGladrey, which had a disappointing year. Revenue and profitability there fell for the second consecutive year. Obviously, the challenges at McGladrey are on my radar screen. And like many S&P 500 companies today, H&R Block has had to deal with its share of legal threats and challenges. As you may have heard, some people with their own agenda have used the news media to imply that H&R Block might be liable for all claims in excess of Sand Canyon's ability to pay. We strongly disagree. We believe that Sand Canyon's financial position is more than sufficient to satisfy valid rep and warrant-related claims. We also believe that anyone pursuing rep and warrant claims will have no recourse to H&R Block. In short, we're confident that Sand Canyon will continue to handle all valid claims and we believe the process will not affect H&R Block. Jeff will go into more detail later in the call. As you might imagine, the past 6 weeks have been a whirlwind of activities for me. I've spent time with our associates, franchisees, and the best tax professionals in the industry. I've gotten to know the senior staff and we've spent hours reviewing and considering our plans for 2012 and beyond. Here are a few of my early takeaways. First, I believe there is a lot more value to be had across 4 key growth areas: retail tax, digital tax, the Emerald Card and internationally. H&R Block is well positioned to thrive in a sea of change and competition. And here is what is bolstering my confidence. First, our core retail business is strong and growing stronger as more clients turn to H&R Block. The assisted category remains very resilient, due to the complexity of the U.S. tax code and the value that tax professionals provide clients. There has been no change in the proportion of either assisted or do-it-yourself returns during the last decade. Today, assisted returns represent about 61% of IRS filings, the exact same percentage as 2002 and more than 90% of industry revenues. Second, our Digital business is acting as a springboard to a deeper relationship with our existing clients and is opening the door to new ones. As the digital category continues to grow at the expense of the shrinking pen and paper market, the goal in 2012 is to compete with a vengeance and continue to take digital share. Third, the Emerald Card is a fabulous product that makes H&R Block Bank a key asset. I believe we can significantly expand on the success of the Emerald Card, by increasing the number of cards in circulation, the amount of direct deposits and the frequency of use. Finally, I believe H&R Block's business outside the U.S. is underrated, and I'm excited about our prospects in this area. In 2012, we will focus on growing clients and market share in Canada and Australia, while continuing to explore additional countries in which to further build our global presence. And one of the highlights in my first 6 weeks was the opportunity to spend time with Henry Block. He patiently listened as I talked about a variety of ideas for the company he founded. He could not have been more gracious, and he had a wealth of suggestions to share. Towards the end of our conversation he said, "Remember, Bill, however you approach it, our clients come first. If we stay focused on them and on preparing error-free returns, we'll ultimately increase the number of returns we're a part of. And if we do that, we'll ultimately increase profitability." Mr. Block nailed it. His simple equation will be at the heart of our efforts in 2012. Now let me turn it over to Jeff to discuss our financial results.

Thank you, Bill. After a slow start, our tax season finished exceptionally well and our fourth quarter results reflect the strength of our finish. Fourth quarter earnings of $2.14 per share included an after-tax litigation charge in our Business Services segment of $17 million or $0.06 per share. Excluding this charge, we achieved quarterly earnings of $2.20 per share. For the full fiscal year, net income from continuing operations was $419 million or $1.35 per share. Excluding the fourth quarter litigation charge, as well as other previously announced charges, adjusted income from continuing operations of $471 million was essentially flat to the prior year. Adjusted earnings per share increased 7% to $1.52, due to reduced shares outstanding. Total revenues fell approximately 2.5% to $3.8 billion In our Tax Services segment, fiscal 2011 revenues fell about 2% to $2.9 billion, primarily due to the sale of company-owned locations to franchisees, as well as revenue impacts stemming from our inability to offer refund loans this tax season. Adjusting for special items, pretax income for the segment was essentially flat to the prior year at $830 million. Cost reduction measures put into place in the first quarter of this year, principally reductions in force and reductions in our office network, offset revenue declines and allowed us to achieve higher margins. Adjusted pretax margins improved from 28% last year to 28.5% in the current fiscal year. Our results this year included $45 million of pretax gains from the sale of company-owned offices and results last year included gains of $49 million. Our focus on rebalancing our office network is substantially complete, and we expect little of this activity in coming years. Gains in 2012 will be limited, primarily to the $7 million of deferred gains that existed at the end of the current year. At RSM McGladrey, revenues fell approximately 3.5% to $830 million, as growth in the professional services sectors in which we compete proved challenging. Reductions in both management fees from McGladrey & Pullen and services performed under a large multiyear engagement in our consulting practice also contributed to the decline in revenues. Adjusting for litigation and impairment charges, pretax income for the segment declined from $88 million last year to $77 million in the current year, and lower profitability was due almost entirely to the decline in revenues. In corporate, our pretax loss of $139 million compared to a loss of $142 million in the prior year. Declining mortgage loan balances yielded lower interest earnings, which were more than offset by reduced loss provisions on those loans. The net principal balance of mortgage loans held for investment at year end was $485 million, a decline of $110 million from the prior year, and losses on mortgage loans fell nearly $12 million compared to the prior year. Results of our discontinued operations principally reflect litigation and related costs associated with the ongoing wind down of the former mortgage origination and Servicing business of Sand Canyon. Losses from discontinued operations were $13 million in the current year compared with $10 million a year ago. During the fourth quarter, Sand Canyon received new claims for alleged breaches of representation and warranties in the principal amount of $55 million. Claims of approximately $45 million were reviewed during the quarter, with incurred losses totaling $4 million. At April 30, claims totaling $79 million remained under review and Sand Canyon's reserve for probable losses on representation and warranty claims totaled $126 million. As mentioned on last quarter's call, Sand Canyon made its final payment of $24 million during the quarter for reserved losses under a $50 million indemnification agreement dated April 2008, and Sand Canyon has now fully fulfilled its obligation to that party. As a reminder, with the exception of a few instances where H&R Block guaranteed the performance of Sand Canyon, representation and warranty claims are solely the obligation of Sand Canyon. Since its acquisition by H&R Block in 1997, Sand Canyon has been and continues to be operated as a separate legal entity. It has maintained separate executive and operational offices, its own management team, IT platforms and separate administrative functions. Sand Canyon secured its own independent warehouse lines to fund loan originations and provided separate audited financial statements to its lenders. There was no overlap of the Sand Canyon and H&R Block executive teams. Decisions on underwriting, originating and the sale of loans were made solely by Sand Canyon personnel. In addition, Sand Canyon never paid any dividends to H&R Block since the business was acquired in 1997. Based on claim activity that we have observed since Sand Canyon ceased operating activities, we continue to believe its reserve is adequate. Were ultimate losses ever to exceed reserved amounts, those losses would be charged against the remaining equity of Sand Canyon. At April 30, 2011, Sand Canyon had equity of approximately $300 million, in addition to its accrual for representation and warranty liabilities of $126 million. We believe Sand Canyon's equity is more than sufficient to satisfy valid third-party claims, and that claimants have no recourse to H&R Block, except for the 3 parties which H&R Block has guaranteed the performance of Sand Canyon. As a reminder, these parties were buyers of Sand Canyon loan pools that required apparent guarantee that Sand Canyon was exiting the Mortgage Loan Origination business. Guarantees were related to Sand Canyon's performance obligations under the applicable agreements and were not related to loan performance. Remaining guarantees involve 3 loan pools with an original principal balance of approximately $1.7 billion. Over the last 3 years, Sand Canyon has not received any claims related to 2 of these loan pools totaling $1.5 billion. And on the remaining pool, Sand Canyon has received claims of $7 million, with losses totaling less than $1 million. While we cannot predict what may happen in the event of a lawsuit or Sand Canyon bankruptcy, we have no reason to believe that a court would disregard the legal separateness of Sand Canyon and H&R Block under any veil-piercing argument. There have been no cases to date in which an H&R Block entity was held liable for the acts of Sand Canyon. Now turning to our overall financial position. We ended the year with unrestricted cash of $1.7 billion, total debt of $1.1 billion and equity of $1.4 billion. In fiscal 2011, the company repurchased and retired 19 million shares at a cost of $280 million, or an average cost of less than $15 per share, and we had 305 million shares outstanding at year end. Our effective tax rate for continuing operations was 38.1% in fiscal 2011 compared to 37.6% a year ago. And next year, we expect our full year tax rate for continuing operations to approximate 38.5% to 39%. Depreciation and amortization was $122 million for the current year, and we expect a similar expense level next year. Capital expenditures this year were $63 million and in fiscal 2012, we anticipate capital expenditures of approximately $90 million. And with that, I'll turn the call back to Bill for some final remarks.

Thanks, Jeff. In 2011, we proved that we can grow both our retail and digital channels simultaneously. Before we open the call to your questions, I'd like to provide an update on 2 areas. First, the Justice Department filed an injunction last month to block our pending acquisition of TaxACT. Both H&R Block and TaxACT remain committed to the transaction. Here's why. First, we continue to believe this merger is the right strategy and that our legal position is strong; second, combining H&R Block and TaxACT will do exactly what the Justice Department wants, bring competition to a digital marketplace that's currently dominated by one player, Intuit; third, and most importantly, we believe consumers will be the primary beneficiaries of the merger, through innovation, enhanced functionality and low prices. As a result, H&R Block and TaxACT have agreed to vigorously pursue litigation against the Department of Justice. We expect a preliminary injunction hearing will take place by the end of September. Finally, let me touch on capital allocation. As you all know, we generate a significant amount of free cash flow. As we look ahead, our goals are to grow clients and market share. I see some great opportunities to invest in our business and strategic complementary adjacencies to accomplish those goals. To do this, the board and I have decided to take a balanced approach to capital allocation. We will focus on strengthening our balance sheet, growing our net worth and maintaining the financial flexibility to grow clients and market share. We'll make strategic investments while continuing to return capital to shareholders. We are pleased to maintain our annual dividend of $0.60 per share, which represents a strong yield of nearly 4%, and we plan to continue share purchases on an opportunistic basis, while positioning our balance sheet to support our growth plans. With that, let's open up the call to your questions. Operator?

[Operator Instructions] And your first question comes from the line of Kartik Mehta with Northcoast Research.

Now that the tax season's ended, can you just walk through again, where you think that other 1040EZ program did in terms of what type of growth it provided and maybe what kind of impact it had to the NAC for this tax season?

So Phil, why don't you take that one?

I'd say, first of all, we're pleased with what the EZ program accomplished. First of all, it exposed a lot of new clients to our tax professionals, and we're very confident that, that exposure will turn into long-lasting relationships in many, if not most cases. So we believe that we're creating a pipeline for the future. The program exceeded our performance -- the performance we set out in a lot of our testing that we did the prior year. So we're pleased with that performance. And I think in terms of the NAC, I would focus more on revenue from the program versus NAC. It did have a -- it did drive the NAC down slightly by accomplishing objectives that we just talked about. And I think if you look outside of the EZ program -- outside of EZs themselves, our NAC was up around 3% for other forms. So as I said, we're pleased with the program and we're looking forward to future results moving forward.

Phil, that's helpful. And just to circle back on that question, any thoughts into the terms of how much growth was provided by the 1040EZ program for the year in terms of retail tax clients?

Yes, I think you know our growth results in general. And I would say the EZ program was a major contributor to that growth.

Okay. Maybe if we move to the Digital business. I'm just wondering if you could talk about impact to the Digital business from the IRS not mailing out tax forms, if you thought that contributed at all to the growth? And if so, any way to quantify what that was?

Jason?

Kartik, this is Jason Houseworth. Because we don't know which filers previously filed as pen and paper, it's really difficult to estimate the specific impact on our digital results. But I have to acknowledge that certainly, the changes at the IRS naturally caused some of these filers to prepare their taxes online.

And Jason, was there a change at all this year on pricing for the Digital business? You had excellent results and I know advertising was a big part of it. But did pricing play a role at all in your ability to acquire clients?

I think that what Bill talked about as far as our tactics that really, pricing was not one of the big drivers as far as our client growth. We had a lot of activity on our website last year, and we simply think that we were much better as far as executing on converting those clients into completed returns. We actually had slight increases in our pricing, and yet we continue to see strong client growth, new client growth and non-assist pay online of 42%.

I also would add, and Jason, I've spent time with he and his team. And I think the work they did, not only improving the website, but if you walk through the user experience and how they simplified the product, I think that was a big contributor in terms of a product like this, how easy it was to use.

And then just one last question, Bill, RSM, it obviously sounds like that's a business you want to improve, both from a growth standpoint and a margin standpoint. And I'm wondering, as the business is structured now, what do you see -- what are the revenue growth and margin profile of that company or that business, I apologize.

Yes. I mean I think the prospects -- it's an excellent brand name. They have an excellent set of professionals there. Two things have happened to them and basically, they've come together. The economy has hurt them, and it has driven increased competition in the industry. So the pressure on their billable hours and the pressure on their rates has been pretty strong. So I think they've had a tough situation and obviously, I've been getting up to speed on this, I'm spending time with CE Andrews on this.

Kartik, can I just -- I'm sorry to come back, but I want to go back to the EZ question for one minute, one second. One of the other things I wanted to add there is that our growth in the second half was stronger than our growth in the first half, and we ran the program in the first half. So we had pretty robust growth throughout the season, I just wanted to add that.

That's helpful. No, obviously, the results indicate that you had a very good year. I was just trying to parse maybe how much of a halt the 1040EZ had on the overall business. So that was my main reason for the question. And Bill, just a follow up on RSM, do you think that's a mid-single-digit growth business, at least the way its constituted now or do you think it's more of a low single-digit growth business?

Yes. It's -- I'm 6 weeks in, so I don't think I can make those pronouncements yet. But as I come up to speed on that, we're looking at where that business can take us. So I'll defer the question.

Your next question comes from the line of Scott Schneeberger. [Oppenheimer] Scott Schneeberger - Oppenheimer & Co. Inc.: Welcome again. I guess I want to start out with just a discussion of what you think can happen in the tax segment in the 2012 year. I know, no formal guidance but do you think next year will be an up year? It sounds like you're excited about free 1040EZ, I'd imagine that comes back. We heard a little Phil about pricing on the non-free. Just, care to give us a feel directionally what you think happens with regard to revenues, volumes in the out year?

As I learn this business I would defer to some of the others in the room specifically, but I think, I mean we're all aware of where the economy is. So I think what we're looking to plan for is a similar macro year. I do think though what does excite me about our prospects for 2012 and beyond, is I think the team hit its stride in 2011 on both the retail and digital fronts. And that I think we're going to have an ability to take that playbook, improve upon it, and I look for us to -- our goal is to grow clients and market share, and I think that we'll deal with whatever economic situation it is, but I know the team is very hard at work, both teams, in terms of developing their plans and building on what they started in 2011. Scott Schneeberger - Oppenheimer & Co. Inc.: All right. Jason, if you could hop in, with regard to share gains, in Digital, who do you believe that came from? Was it TaxACT predominantly? And just that's part 1. Part 2 is, what do you think happens in Digital next year, with regard to how all the actors participate? I know that's contingent on if you have success with closing TaxACT. But just thoughts on those 2.

It's harder to answer the first part of that question, Scott, because given that we don't have the data from all the smaller competitors, I can't tell you exactly where our share gains came from. But I think regarding the second part, I think within the digital category, we're still looking for online category growth in the mid-teens and a software decline in the low-single digits and that continues with the shift from pen and paper to online. I think the one thing to note about that is that our view is that there's probably only 2 or 3 years of continued mid-teens category growth for online, because that category is ultimately shrinking a point where we don't think that, that growth is sustainable outside that. Scott Schneeberger - Oppenheimer & Co. Inc.: Okay. That's helpful and interesting. One more if I could, it's kind of broad -- well, actually it's probably two. What impact do you think happened this year from mom and pops exiting the business and I think you mentioned consolidating business from mom and pops departing? Just thoughts on what type of industry impact that had in any way you may be able to quantify it?

Scott, I would say that the impact, I would say, right now are -- I would comment just anecdotally. We are seeing people be more attracted to our brand, given the dynamics in the industry, given some of the change that's taking place. It's becoming I think, more attractive to be part of a strong brand like H&R Block with the solid infrastructure we have, et cetera. So I would say there's certainly some momentum in that regard. I don't have clear analytics on it or anything like that. Scott Schneeberger - Oppenheimer & Co. Inc.: Okay. And one thing to clarify, it said it sounds like you're done with the shift from company -- I wrote down company-owned to franchisee, but I may have written that wrong. It sounds like you're willing to take mom and pops on as franchisees, and we might see that but, did I get it right? Any company owned shift to franchisee or franchisee to company owned internally as the program is done?

I think we're happy with our mix right now, and I think we'll do -- we will convert company offices into franchisee, into franchise locations or vice versa, where it makes good business and economic sense for us.

But I think on balance, we don't plan any significant changes in either the mix or our footprint for fiscal '12, which is a little different than what happened in '10 and '11, yes. Scott Schneeberger - Oppenheimer & Co. Inc.: And that leads into, well, the final part of what I said, one question, but CapEx $60 million this year, $60 million going up to $90 million next year. So that's an increase. Curious what that's about? And then more importantly, it sounds like you're looking to do a cash build, just doing buybacks opportunistically, and just -- if you could probably provide a little bit more color there about, I believe your wording was, "Strengthening the balance sheet." It sounds like you're going to hold more cash. Just a little more color on that? Thanks, guys.

I'll start with…

You can take the first part, so...

I'll start with the CapEx question. Most of the increase in CapEx that you're asking about comes from a specific program to improve or upgrade our offices. We have a program, we're accelerating that program a bit, and we think it's important that we create the right environment as we improve our client service and continue to drive client satisfaction up. So that's the first part of the question.

Now with regard to capital allocation, I think as we've discussed this, I think the key takeaway I think is that we're going to take a balanced approach to capital allocation. We do have as our number one goal, to grow clients and market share. We do want to maintain financial flexibility. We do think it is important, just as a principle, to not only return capital to our shareholders and we are committed to maintain our dividend. We will continue to repurchase shares. We're also looking to grow our net worth also.

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

I guess, follow up on some previous questions. Regarding the reverse on the EZ, could you tell us what was the volume, year-over-year volume change in the non-EZ retail returns?

Mike, we don't comment generally on form-specific results just for competitive reasons. So I think -- what I will say is, we had solid performance across all forms. The strongest results we had were on our EZ forms, no question, but we had solid performance across all forms.

But solid translated into up?

Solid translates into a strong performance.

So not clear what that means.

That's up.

That's up, great. Regarding Digital, could you tell us what the year-over-year changes in revenues and earnings was?

Michael, this is Jason Houseworth. Yes, in FY '11, the digital revenues were $173 million compared with $163 million in fiscal year '10.

And we're not going to disclose earnings in that segment.

Were the earnings up also?

The earnings were consistent with our growth across the board.

Okay. And who do you think will -- the OCC proposal will help beside Block? I guess I'm assuming that their proposal will allow you to have the advance loan next year.

This is Kathy Barney. And so we've looked at this very closely and we do believe that their most recent proposal does include the Emerald Advance. We have been very proactive with this product and have looked and anticipated that this would be formalized, such as the OCC is doing. So we have the ability to be able to offer our Emerald Advance product if we choose to, with a very little modification. There will be minimal changes to the product to ensure that we're in full compliance with the proposal.

I was looking for the addition to, during the rest of the tax season, as opposed to having it limited to the January? So I was looking at the advance loan product, the Emerald loan

So the product that we've offered in the past is our Emerald Advance, which is a personal line of credit, and we've offered that for the past 4 years. It is a year-round line of credit that we offer year round. We had been working on other products that had different characteristics and different terms. We have not rolled those out and we're under -- we're still evaluating what products that we want to offer for this upcoming year.

Yes, I think it's too early to tell what the array of financial products we'll be offering, but that -- we're working on that now.

Could you discuss that this -- what progress you have in updating your credit agreements? And maybe in the same line, why do you think you need more equity in the company?

So Jeff, you want to take the first part and I'll take the second part?

Yes, Mike, we really have nothing underway right now in the way of amending loan agreements or covenants, and I can comment on the equity or, Bill, if you wanted to comment on that.

Yes. No, I think, Mike, it's a fair question, but I think it's the right principle. I mean I'm coming in now, I think it is important to return capital to shareholders, but I do think it's important that we maintain our financial flexibility. We want to be aggressive, we want to grow our clients. We want to look for businesses to invest in, whether that be in our core business, which it will be, and also, adjacency. So basically, the Board and I have decided to take a balanced approach here. So we will maintain the dividend; on an opportunistic basis, we'll make share repurchases. But we also want to strengthen our balance sheet.

Your next question comes from the line of Mike Turner with Compass Point. Michael Turner - Compass Point Research & Trading, LLC: Just a few questions, most of mine have been answered. As far as your pricing, I guess tactics this year, did you change that around compared to last year? I don't know if you changed your pricing inter-quarter, or if there were any opportunities there that helped you out, that's my first question.

Phil, you want to take a shot at that?

Yes. I think you asked 2 questions. But you're asking about price changes during the year, inter-quarter?

Yes.

Okay. We don't do a lot of changes in pricing across our quarters. We didn't do anything real different in that regard. Michael Turner - Compass Point Research & Trading, LLC: Okay. And then on the, I guess, Emerald Advance, I think you've talked about this in the past, but maybe you could refresh my memory. This year, did you open it up to new clients? I seem to remember, it used to be only returning customers that you provided that line. And maybe just refresh my memory for this year, and then kind of what your thoughts are heading into next year?

So this is Kathy. We have tried different underwriting models. We have tried different offerings to find the best results for this product. So in the past, including this last year, we have offered it to both prior clients, as well as new clients of H&R Block. We have also opened it to the general public. Just want to remind you that it is not a condition to apply, nor to be approved for the Emerald Advance to be a Block client. And so, we have done it both ways and as we said earlier, we're still evaluating what our offer is going to be, going forward and we'll come out with that in the near future.

Okay. And then just last, I mean, you've touched on the capital allocation as best you can. I mean any thoughts on potential acquisitions, maybe even outside of the U.S.? Is that something you'd consider?

Yes. I think we plan to hold an investor conference in early December. I think I hope to have pretty well formed plans by them. I think this is a living, breathing approach, but we want to build a strategy, both for the next fiscal year, but also on the longer term. I think international, we have 2 very good businesses in Canada and Australia. We're investigating other countries we may want to enter. Acquisitions would be on the table with regard to that. But I want to be clear on international. My experience with international, I think the way you grow international businesses is not -- is I think in a continuous fashion. You don't go out and try to place a big bet there. I think you add a country, you learn, you add another one. So I think this is going to be more of a step-by-step approach there, but I do think that the capabilities we have in the company, the technology that underpins the company, is quite strong and will travel well. And obviously, I'm a big believer in the brand, and I think the brand will also travel well. So stay tuned. This is a longer-term play, but I think there is value to unlock there.

Your next question comes from the line of Sloan Bohlen with Goldman Sachs.

Really just have one, or I guess 2 on financial products. One specifically, of the $6 million of RACs and the $2.3 million of Emerald Cards, can you maybe -- I don't know if you've broken it out, but how many of those were new customers, just given the shakeup in the RAL market this year?

Sloan, I'm trying to recall the numbers for new versus prior and I'm not sure that I have those numbers. So let's see if we can get those quickly...

That's fair. But maybe…

Offline.

I'll get back to you, Sloan, this is Derek.

Sure. I guess maybe just a general question would be, how much activity do you think you saw because of the shakeup in the RAL market? And then looking ahead of those that were still providing RALs this year, I know it was very limited, but do you think there is still a pool to be captured? It sounds like you're pretty optimistic about being able to do that with the Emerald product.

So Phil, if you want to comment on the RAC, RAL and I'll follow up with the Emerald Card.

Well, I would just comment that, we've mentioned this before, but we were able to hold on to most of our prior RAL clients, at similar rates that we had in the past. So our new client generation was stronger this year across the board. But I don't think we have any big material differences in how the profiles might have changed new to prior clients in the RAL RACs area. Okay?

Okay, so specifically, you don't think that, that was a big driver of the market share increase in retail?

No, I think we -- I would say that we -- I would say it's not -- no, I agree with what you said. I don't think it's a big change.

Okay.

I'm sorry, I do think there was some impact from people losing -- from other independents, losing financial products, but I don't think it was a major driver, okay?

Okay.

And regarding the Emerald Card, we were very pleased to see that the take rate held very closely, we did see some variance but it was a very positive outcome, and it just reemphasized that there are many clients that are unbanked and underserved. And that this provides a great avenue for them not just for the tax time but for year-round. And additionally, that we saw large increases on clients using the Emerald Card for IRS direct deposit without any kind of settlement product.

And let me add something on the Emerald Card if I could because I've said this in a couple of calls and I talked about it earlier, the opportunity I see here. And I want to kind of step back for a second and then get into specifics. I think simplifying financial services for this user base is needed. And I think the Emerald Card can be the catalyst for that approach. It's a low-cost option, I don't think we probably marketed that as well as we could have, and I think that there's a way that this can potentially be a very big idea. Specifically this year, I think there's 3 ways we can do that. One, we've done a lot of education to our clients on the basics of using a debit card. But I think there are still aspects of this card that are well-kept secrets that we want to push further. We're going to use direct marketing this year. We've streamlined the process we use at the tax desk to issue cards, but we've never reached out to clients directly around the importance and the ease-of-use of direct deposit of our payroll, and the ability to load cash onto this. And finally, we're working to continue to improve that product. We do that every year, but I think we really have a zeal around the user experience. We think we can simplify the fees and reduce them, we think we enhance our service. So we are actively working to really take not only a tactful approach to 2012, but also look at the larger idea of simplifying financial services for this user base.

Your next question comes from the line of Mike Grondahl with Northland Capital Management.

If you learned 1 or 2 things this year throughout the tax season that you could apply to next year and kind of help you move the needle a little bit, what would they have been?

So Mr. Mazzini, anybody can take that one.

Well, I think, I might have something, Jason might have something. But I would say that we learned a lot about being very focused on specific initiatives for both client acquisition and for improving our client satisfaction. And we get this organization focused on a few of those big things, we can produce strong results.

Here's what I would say and this isn't what I learned, I'd have to say this is what I observed, being on the board and now getting into this. I think this company deserves an awful lot of credit for the -- and I think this is a lesson in power marketing, or really driving initiatives. I think we took some excellent marketing, a revamped ad approach. I think we took service initiatives to a new level. I think we had a focused organization. I think things came together in a coordinated way, as opposed to trying to do something that was one initiative and it either hits or misses. I think there was excellent product initiatives, and I would credit -- I didn't do this, so I get to just praise everyone because I think they did a heck of a job. And I think it was the way it all came together, and the way the organization rallied on the franchise side and the company side, and obviously, I've been just quite impressed with our tax professionals. So I think that in the end, that integrative ability was really how we won.

And does that have you pretty excited for next season?

Well, one thing I was going to add to Bill's comments, is that what I'm excited about is that there's strong demand for our digital products. I think that's what we learned this season. I think similar to Phil, we really put a singular focus to enhance or improve what I think of as the funnel, which is to take the broad set of customers, to attract them with strong marketing that's acquisition oriented, and then take those customers from the time they get to our website and ensure that they become a completed unit or an e-filed return. And I think that we're just looking at learning from the things that we really feel like we can continue to improve, and continue that momentum in order to sustain the growth into the coming year.

And I think wherever you look in the company, whether it be the retail organization, the digital organization, Kathy's organization, the real focus the teams have, and this is the time of year when we need to do that on the user experience, whether it's using the Emerald Cards, whether it's using the website and the online product, whether it's the experience they face at the tax desk, there is a relentless approach in this company now around user experience, and that usually is a winning formula.

Your next question comes from the line of Vishnu Lekraj with Morningstar.

Question here regarding DIY returns, can you help me understand a little bit clearer of what your strategy is going to be with that? Is that going to be more of an instrument we're going use to gain customers and then try to upsell them to more of your branch services? Or how do you plan on integrating that into your services more, Bill?

Well, our primary goal within DIY is to ensure that if a taxpayer wants to do the return themselves, that they use an H&R Block product. And that is the -- within that, I mean my focus is actually to help them do it in the best way that they can. It's not to give or let's say, to hand off the return to Phil, because we still feel like the digital, as a stand-alone business can grow, and can be profitable.

And I think what Jason's trying to do, whether it's the online product, downloads, retail software, is improve the user experience across the board, and that we will compete vigorously across all of those areas. Whether it be in retail, where we will compete vigorously, or across the spectrum of products that he has.

In the past, I've heard you're going to try to integrate the DIY products more with your branch services. So what I'm getting from you now is that you're going to try to run those 2 services or 2 products, maybe more separate than what I've heard in the past? Is that fair?

I'll let Jason and Phil -- no, I think, we think we can grow them both separately, but we think these are complementary businesses. And what we're trying to do is satisfy user needs. So if a user needs assistance, we have that offering. And if a user wants to do it themselves in a variety of fashions, we have that. So that's really what our approach corporately is to satisfy user needs. But I'd let Jason or Phil chime in.

And I think this might be just to repeat, but we have mantra, we talk about serving clients the way they want to be served. And that's something that we're focused on what the -- how the client looks at tax preparation, and we want to be there however they are looking at it, and be inside their heads on however they choose to do their tax returns. We want to be the provider.

And what we see as a benefit coming out of that is we see that when customers do migrate, that they migrate back to Block within the brand at much higher levels than you do coming from anywhere else, if they're coming from H&R Block Retail, to H&R Block Digital, or vice versa. So that's where I think, Phil and I believe that if we do the best job that we can to create a DIY or an assisted experience, then that's ultimately going to bring the client growth for H&R Block as an enterprise.

And your next question comes from the line of Scott Schneeberger with Oppenheimer. Scott Schneeberger - Oppenheimer & Co. Inc.: Thanks for taking the follow-up. I apologize if I missed it. That $0.06 onetime charge in RSM McGladrey for legal, could you elaborate a little bit on what that is?

Sure, Scott. I think actually, we filed our 10-K today, and you'll see some disclosure around that. But it's been an ongoing litigation matter that we've had and actually, entered into a settlement arrangement that's still subject to court approval, but it defendant and plaintiff entered into a settlement arrangement this quarter. Scott Schneeberger - Oppenheimer & Co. Inc.: Okay. I'll take a look at that. Two more, and I mean RSM, it's struggling, it is, I think predominantly the economy that's creating that. I don't know that there's a light at the end of the tunnel at this moment. What is the consideration for keeping it a part of the portfolio, or do you think there could be enhanced value, with it separate from the H&R Block corporate?

I mean, right now, our focus is on improving the operations. That's really what C.E. and the team are focused on. With regard to anything else, obviously I wouldn't comment on that, and right now, I'm really zeroed in on how we can improve the operation. Scott Schneeberger - Oppenheimer & Co. Inc.: And the final one, back on that Tax business. The Jackson Hewitt's contract with Wal-Mart has come up for expiration. Any commentary on what you think may happen, or I imagine that's something you're bidding on? Do you have a timetable for when you would expect that result, and how interested are you in perhaps getting in there?

Scott, this is Phil. So we have a dialogue with Wal-Mart that's ongoing, and has been ongoing since we were in there last time. And I think we shouldn't comment on any speculation of what may or may not happen there. But obviously, we're always looking at where we distribute our services and what the best and most effective ways are to distribute those services.

This concludes today's conference call. You may now disconnect.

Thank you, everyone.