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Edited Transcript of HRB earnings conference call or presentation 11-Jun-19 12:30pm GMT

Q4 2019 H & R Block Inc Earnings Call

KANSAS CITY Jun 13, 2019 (Thomson StreetEvents) -- Edited Transcript of H & R Block Inc earnings conference call or presentation Tuesday, June 11, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Colby R. Brown

H&R Block, Inc. - VP and Corporate Controller

* Jeffrey J. Jones

H&R Block, Inc. - CEO, President & Director

* Tony G. Bowen

H&R Block, Inc. - CFO

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Conference Call Participants

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* Huang Howe

Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst

* Jeffrey Marc Silber

BMO Capital Markets Equity Research - MD & Senior Equity Analyst

* Kartik Mehta

Northcoast Research Partners, LLC - Executive MD, Director of Research, Principal & Equity Research Analyst

* Keen Fai Tong

Goldman Sachs Group Inc., Research Division - Research Analyst

* Mario J. Cortellacci

Macquarie Research - Analyst

* Michael Millman

Millman Research Associates - Research Analyst

* Scott Andrew Schneeberger

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Thomas Glassbrooke Allen

Morgan Stanley, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the H&R Block Fiscal 2019 Earnings Call. (Operator Instructions) And as a reminder, this conference is being recorded.

I would now like to hand the call over to Mr. Colby Brown, Vice President of Finance and Investor Relations. You may begin.

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Colby R. Brown, H&R Block, Inc. - VP and Corporate Controller [2]

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Thank you, Amanda. Good morning, everyone, and thank you for joining us to discuss our fiscal 2019 results. On the call today are Jeff Jones, our President and CEO; and Tony Bowen, our CFO. We have 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 and presentation.

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 a result, 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'll have a Q&A session. (Operator Instructions)

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

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Jeffrey J. Jones, H&R Block, Inc. - CEO, President & Director [3]

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Thank you, Colby. Good morning, everyone, and thanks for joining us. 2019 was a great year for H&R Block. In what was the first step of executing the strategy we rolled out last summer, our associate and franchisees delivered significant improvement in how we serve our clients. We introduced a lot of changes to the business, and I couldn't be more proud of how the team responded. We ended the season with improved client service scores and overall return growth that outpaced the industry. And our associates are energized by the direction we're heading, which showed in our exceptionally strong associate engagement scores.

As a result of the progress we have made in our tax business, we delivered financial results at the top end of our outlook ranges. The strength of our business has enabled us to return a significant amount of capital to shareholders, and we just announced an increase in our dividend and an extension of our share repurchase authorization. I'm also excited to share details about the announcement we made this morning regarding our acquisition of Wave. I'll share more about this later.

We obviously have a lot to discuss, so let me walk you through what we'll cover on today's call. First, I'll provide our perspective on the tax season for both the industry and H&R Block. Next, I'll discuss Wave and how they fit into our long-term strategy. Tony will then review our fiscal '19 results, the financial impact of Wave, our fiscal '20 outlook and capital allocation.

Let's first look at tax season '19, beginning with the overall industry. It was an unusual season with the government shutdown affecting the start of the season and changes to the tax code impacting refunds. Both contributed to an overall delay, which continued throughout the season and likely resulted in an increase in extension filings. This led to industry returns being essentially flat to prior year, which was lower than expectations. Consistent with prior years, industry results show a slight shift from Assisted to DIY. When taking into account the decline in paper returns, which are typically more weighted to DIY, the Assisted to DIY shift was approximately 60 basis points, which is consistent with the last several years and in line with our expectations.

Turning to our results. Let me recap what we've set out to do this year. We made significant improvements this season in how we serve our clients. In our Assisted business, we focused on enhancing the value we deliver while developing a clear brand promise to differentiate H&R Block. In DIY, we made investments to improve the product and grow awareness while pricing competitively to deliver tremendous value. And in Virtual, we offer consumers 3 distinct ways to access the expertise of our Tax Pro network. We achieved our objective in each channel and are pleased with our results, outperforming the overall market and taking DIY share for the third straight year.

In the Assisted business, we're excited about the progress we made this year, with significant operational improvements across every aspect of the business, from field operations to experience for new clients to pricing. With respect to pricing, we addressed what was a significant pain points for our clients in 2 ways: first, we led the industry with upfront transparent pricing; and second, we invested in price decreases for certain client segments. And the feedback from both our clients and Tax Pros has been extremely positive. In fact, client satisfaction scores around price for value increased 9 points.

Additionally, we focused on improving Tax Pro training, operational improvements to drive consistency in our offices and an enhanced experience for new clients. Nearly 1/3 of our Tax Pros increased their certification levels. We converted clients at a greater rate, and we increased overall NPS by 9 points.

These initiatives are reflected in our volume result in Assisted. While U.S. Assisted volume declined 1.7%, this was expected due to the elimination of the Free EZ promotion. Excluding Free EZ, our Assisted results were in line with the industry, which represent an improvement in our client trajectory for the third consecutive year.

Turning to DIY. We achieved outstanding client growth of 6% driven by online growth of over 9%. We grew market share for the third year in a row, with several factors contributing to this performance. We enhanced the experience for mobile users, leveraged data and machine learning to make our products smarter and more personalized. We redesigned our Help Center and made significant improvements to price transparency by launching DIY Price Preview.

While we saw others in the industry continue to raise prices, we focused on winning clients through great value and transparency. As a result, we received tremendous feedback from our clients, as evidenced by our NPS improvement of 9 points. Our products also received numerous accolades, including the Editor's Choice Award from PC Magazine for online tax preparation.

Finally, our Virtual offering also saw significant improvements in NPS, and in total, grew 75% as we attracted new clients and gave DIY filers affordable ways to get the help they needed. H&R Block is the only company able to serve consumers no matter how little or how much help they want. This year, we introduced Ask a Tax Pro, an on-demand service designed for the DIY filer that wants immediate answers to their questions. We're excited about the opportunity with this product as over 1/3 of Ask a Tax Pro clients were new to our brand.

Our next virtual product, Tax Pro Review, is for the DIY consumer who wants an expert review before submitting their return. Our results demonstrate meaningful progress, with nearly 40% growth in new clients, signaling that consumers understand the value in this product.

Finally, this year was the national introduction of a mobile-first fully-assisted experience called Tax Pro Go, which is the easiest way for consumers to have an expert prepare their taxes. The initial results showed that this product appeals to a younger, higher-income filers and nearly 60% of these clients are new to H&R Block. Adding a digital layer to our network of over 80,000 tax professionals is a great combination of expertise and ease.

I'd like to now shift gears and discuss our enterprise strategy, which we first shared with you last June. As a reminder, our strategic journey is driven by 5 pillars: elevate our talent and culture, own a sustainable brand position, win on customer experience, build operational excellence, and invest for the long term. We made excellent progress against each of these pillars in the first year, and we will continue this work in fiscal '20.

I'd now like to spend some time talking about the last pillar, and specifically, about how we're investing for the long term through our acquisition of Wave. This acquisition strengthens our trajectory and expands our reach within the large and growing small business market. Wave is a strong strategic fit, and I'm extremely excited to welcome such an innovative company with great products and an outstanding team to H&R Block.

To start with why we see this as a great opportunity, let's first talk about the small business category and why it makes sense for us. There are approximately 31 million small businesses in North America and more than 100,000 new ones created every month. Additionally, roughly 57 million U.S. workers are freelancers, a staggering number that's expected to grow to nearly 87 million by 2027, representing over half of the U.S. workforce.

Small business owners struggle with cash flow, bookkeeping, payroll and tax preparation. In fact, the primary reason businesses fail in the first year is poor financial management. Most do not use bookkeeping services and are instead using old-fashioned methods, such as keeping receipts in a shoebox or tracking their numbers on a simple Excel spreadsheet. Given our role in helping clients navigate the challenges of their financial lives, this represents a significant opportunity to deliver value and help small business owners successfully manage their complex financial needs.

So this category clearly presents opportunity and is a market in which we have the right to compete. It's also aligns well with our existing assets. Within our current client base, we serve a significant number of small business owners through both DIY and assisted tax prep. We also currently provide clients with bookkeeping and other related services.

Acquiring this software platform allows us to accelerate our small business strategy. It also offers a unique opportunity over time to cross-sell and attract new clients to our tax business while helping our current tax clients with their small business needs through an innovative platform. Importantly, there is essentially no overlap between what we offer and Wave's existing services and technology, which further enhances the strategic fit.

And it goes beyond the services our 2 companies offer. During our first visit with the Wave team, it was clear that we share a common passion for building a great culture and delivering a superior user experience. The team at Wave is driven, and they understand what their clients need as over half of Wave's associates have, at one point, owned their own business and as a talented team of engineers, continued to evolve the platform, delivering innovative solutions to small business owners. Their dedication to quality has resulted in numerous awards, including being named to the CB Insights Fintech 250 and recognition by Deloitte and KPMG as one of North America's fastest-growing tech companies. In short, we are partnering with a fantastic team who are great at what they do.

Let me provide a little more detail about exactly what Wave offers to its clients. Wave was built for the small business owner, not the accountant or bookkeeper. Its simple user experience on a single comprehensive platform is designed to empower those who don't have the time, the knowledge or the desire to manage their finances. Wave's software platform includes accounting, invoicing and receipt tracking at no cost to the end user. Wave then generates revenue by providing payment processing, payroll services and bookkeeping services. This disruptive pricing model provides significant value to the customer and is built on a low cost of acquisition, which positions the company well against other competitive offerings. In fact, over 80% of its users have come to Wave through unpaid channels.

As a result, Wave has grown rapidly and organically. More than 400,000 small business owners actively use the platform each month, and the company has increased revenue in each of the last 25 quarters. And there's opportunity for additional growth as Wave increases brand awareness and expands the platform to offer additional features.

Turning to the transaction details. The purchase price of $405 million will be funded by available cash. We expect the transition to close within the next few months. Tony will provide additional details on its financial impact to the transaction and our approach to the capital allocation later in the call. Wave will operate as a separate business unit, and its strong management team will remain onboard post transaction, continuing the great work they've already started.

In summary, the Wave acquisition represents a strong strategic fit for H&R Block as we invest for the long term. Wave provided us the opportunity to accelerate our small business strategy, drive growth and enhance shareholder value. I couldn't be more excited to welcome the Wave team.

Before I turn it over to Tony, I'd like to thank our associates, Tax Pros and franchisees for embracing change and successfully executing year 1 of our strategic road map. Beyond delivering results for our clients, our team serves our communities in ways we haven't in the past. During our national convention, we dedicated over 6,000 associate hours to volunteering in the community, and later, at more than 300 local events. Collectively, these efforts clearly show that we live our purpose of providing help and inspiring confidence in our clients and communities everywhere.

With that, I'll hand the call over to Tony.

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Tony G. Bowen, H&R Block, Inc. - CFO [4]

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Thanks, Jeff. Good morning, everyone. Let me start with the financial objectives we outlined prior to tax season and how our performance measured up. Coming into fiscal '19, we recognized a need to make investments in price, technology and operational excellence in order to achieve long-term growth. We outlined fiscal '19 revenue expectations at $3.05 billion to $3.1 billion and EBITDA margin of 24% to 26%. I'm pleased to report that we hit the high end of both of these ranges.

Looking at the detailed results, revenue was $3.1 billion, representing a 2% decline from the prior year. This was expected and was driven by a decline in Assisted revenue resulting from targeted price reductions. Our strong growth in DIY volume as well as improved mix helped to offset the overall decrease in revenue. Regarding expenses. Total operating expenses increased 3% driven by planned investments in technology as well as an increase in marketing. The resulting EBITDA margin of 25.8% was at the high end of our outlook range.

Moving through the remainder of the income statement, we saw other income increased due to higher interest rates on cash balances. Despite these higher rates, interest expense decreased due to lower draws on our line of credit compared to the prior year. Our effective tax rate for fiscal '19 was 18.3%, which was lower than our initial outlook due to discrete items recorded in the fourth quarter but represents an increase from fiscal '18. As a reminder, fiscal '18 was unique as our effective tax rate of 6.3% was significantly lower due to the federal corporate tax rate change. The higher tax rate in fiscal '19, along with revenue and expense changes mentioned earlier, resulted in a decrease in EPS from $2.98 to $2.15.

Turning to the balance sheet. Our financial position remains strong. We ended the year with nearly $1.6 billion of cash, which was slightly higher than the prior year. In discontinued operations, there were no changes to 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 and 10-Q and other SEC filings.

I'd now like to provide some detail on the Wave acquisition and its impact to fiscal '20. As Jeff mentioned, we are acquiring all of Wave's outstanding shares for a purchase price of $405 million, which will be funded with available cash. We expect the transaction to close within the next few months.

I'll now provide our overall financial outlook for fiscal '20, which includes the impact of Wave. I'll also share the Wave-specific projections. Starting with revenues, we anticipate modest growth in the tax business following the reset year. Additionally, we expect that Wave will contribute $40 million to $45 million, which represents 9 months of ownership. The net result is total company revenue growth of 1.5% to 3.5%.

With respect to earnings, we anticipate total EBITDA dollars to be slightly higher than fiscal '19 as we return to revenue growth. And while we will absorb Wave's operating loss and related transactional cost of approximately $25 million to $30 million, we plan to offset these through other cost reductions to maintain the strong EBITDA level. As a result, we expect revenue growth will outpace EBITDA, which will impact our margin. Therefore, we are maintaining our EBITDA margin outlook range of 24% to 26% for fiscal '20.

As we execute Wave's growth plans, we do expect it to be accretive over time. However, given the choice to focus on top line growth, we do not expect Wave to be profitable in the near to medium term. Additionally, we expect amortization expense related to the Wave acquisition to be $40 million to $50 million in fiscal '20. This may change and will be ultimately determined by the final purchase price allocation.

With respect to corporate taxes, we currently anticipate our rate to be 23% to 25%. As always, this may fluctuate should unanticipated discrete items occur during the fiscal year.

I'd now like to switch gears and talk about our capital structure. Our capital allocation priorities remain the same. At the top of the list is maintaining adequate liquidity for our operational needs to account for our seasonality. As I mentioned earlier, we ended the year with a strong cash position after another year of solid cash flow generation. We then make strategic investments back into the business that we believe deliver value to our clients, ultimately benefiting our shareholders. In fiscal '19, we made significant investments in pricing, technology and operational excellence. And now with the acquisition of Wave, we are accelerating our growth. Making prudent investments to drive sustainable growth remains a key element of our capital allocation. Last, we will deploy excess capital through quarterly dividend and share repurchases. I'm pleased that our Board of Directors approved a 4% increase in our dividend to an annual rate of $1.04 or $0.26 per quarter. This represents our fourth consecutive year of increases. Over that time, our quarterly dividend has increased 30%. We remain committed to performing an annual review of the dividend after each fiscal year.

With respect to share repurchases, they are a key component of capital allocation, and we remain committed to, at a minimum, repurchasing shares to offset dilution from equity grants. As such, our Board extended our previous share repurchase authorization by 3 years to June 2022 with approximately $1 billion remaining. In fiscal '19, we repurchased a total of 7.9 million shares for $185 million at an average price of $23.51. This includes approximately 3 million shares repurchased for $75 million during the fiscal fourth quarter. We will continue to be opportunistic in our share repurchase approach.

Going forward, our capital allocation strategy will remain consistent. We will balance investments in the business to drive growth with capital returns to shareholders through dividends and share repurchases. Maintaining this balance as well as a strong liquidity profile will enable us to drive shareholder value over the long term.

In summary, I'm pleased with our performance this year. We delivered what we said we would, and we're well positioned as we begin the second year of our strategy. We ended the year with a strong balance sheet and cash position, allowing us to invest for future growth while still returning capital to shareholders. And I'm excited about the acquisition of Wave, and more broadly, about the opportunity to drive sustainable growth in the future.

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

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Jeffrey J. Jones, H&R Block, Inc. - CEO, President & Director [5]

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Thanks, Tony. To recap, we had a great year. We achieved our objectives for fiscal '19 and delivered what we promised with financial results at the top end of our outlook ranges. With the successful start on our strategic journey in the books, I couldn't be more excited about what lies ahead. We made significant improvements in our tax business, and we'll continue to innovate and drive operational excellence. And we're strengthening our growth trajectory with Wave, a great strategic acquisition.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Kartik Mehta of Northcoast Research.

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Kartik Mehta, Northcoast Research Partners, LLC - Executive MD, Director of Research, Principal & Equity Research Analyst [2]

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Tony, I just want to make sure I understood the EBITDA margin guidance. If not for the Wave Financial acquisitions, would EBITDA margins increase -- or so I guess, if you could just give a little bit detail -- a little bit more detail on how you are thinking the right EBITDA margin guidance for FY '20.

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Tony G. Bowen, H&R Block, Inc. - CFO [3]

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Yes. Thanks, Kartik. As we said, we do expect revenue growth of 1.5% to 3.5%. We do expect EBITDA dollars to increase in fiscal '20. But given that revenue growth will outpace EBITDA growth, there will be a slight degradation in EBITDA margin, but still in the 24% to 26% range.

Specific to your question about what would it have been without Wave, obviously, Wave is operating at a loss, and we're acquiring it at a loss and absorbing that into our EBITDA numbers. Now we're offsetting that with other expense reductions. It's hard to say what it would have been if we haven't done Wave. We've obviously have been working on this for several months, and it's been a key component of our plan for this year. So there would have been a lot of other moving parts and probably other investments if we haven't went down the Wave path.

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Kartik Mehta, Northcoast Research Partners, LLC - Executive MD, Director of Research, Principal & Equity Research Analyst [4]

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Okay. So I guess whatever the losses that are in Wave, you're able to offset those with other actions you're taking at the corporate level. Is that fair?

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Tony G. Bowen, H&R Block, Inc. - CFO [5]

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That's exactly right.

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Kartik Mehta, Northcoast Research Partners, LLC - Executive MD, Director of Research, Principal & Equity Research Analyst [6]

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Okay. And then Jeff, as you look at the tax season, and that -- what you'd thought happened, do you think there's a need for further price investment? Or are you satisfied with where you are? And do you think now, moving forward, you can get to a positive tax client comp?

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Jeffrey J. Jones, H&R Block, Inc. - CEO, President & Director [7]

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Great question. So on the pricing component first, obviously, there were 2 big pieces to this investment and this decision this year: One was strategically lowering prices for a select group of clients. The other was introducing the idea of upfront transparent pricing, which applies to everyone and really changed the conversation in the industry. We do not believe that we need to further reset prices. And remember, we're not trying to be the low price provider.

What was really important to do this year was to balance pricing investment with core value proposition changes in terms of quality, operational excellence and how we market and communicate the benefits of H&R Block, all of those things working together. And as we continue to make these investments, ultimately, we believe we can and will return to Assisted client volume growth. Obviously, 3 years in a row, we've been able to improve our trajectory. And when you isolate the impact of Free EZ this year, we were in line with the industry. So we think we're on the right path. But just to reiterate, we do not believe we need to make further investments to reduce price.

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Kartik Mehta, Northcoast Research Partners, LLC - Executive MD, Director of Research, Principal & Equity Research Analyst [8]

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And then one just last question, Jeff, there's been a lot of talk about the free solution as it concerns DIY. And I'm wondering your thoughts on all the conversations that happened and where H&R Block stands as far as your ability to offer the product and what's been set out there.

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Jeffrey J. Jones, H&R Block, Inc. - CEO, President & Director [9]

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Yes. Thanks. The Free File Alliance program is one of 4 ways that you can file for free at H&R Block, and it's a program that we've participated in for many years. This year at H&R Block, the Free File program grew about 8%, a little over 8% versus the free file industry overall grew about 6%. So we feel good about the program, we feel good about the consumer's ability to find and choose the Free File Alliance at H&R Block, as evidenced by the growth rate that we saw this year.

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Operator [10]

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

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Jeffrey Marc Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [11]

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Just wanted to go back to the tax season and the impact of tax reform specifically. I know, and maybe you guys didn't say that, but there was some thought in the industry that we might see less of a shift from Assisted to DIY this past year because of all the confusion over tax reform. And it sounds like we had another 60 basis points shift in line with historicals. Do you think that there was any impact of tax reform on the shift? Do you think we'll see more of a shift next year as customers get used to the new tax laws?

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Jeffrey J. Jones, H&R Block, Inc. - CEO, President & Director [12]

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Yes. This is Jeff. Thank you for the question. Just to take one step backwards, as we evaluate the tax reform going back over a year ago, we had done our own historical look at each time there have been a major change to tax law over history. And obviously with our history, we're able to look back a long time. And what we saw was never in history had there been a change to the tax law that created a significant shift in method type. So as we prepared for tax legislation changes, we had that as a backdrop.

And I think when we look at this season, there were a lot of interesting dynamics, starting with tax reform, then the government shutdown. We saw a shift from Assisted to DIY, as you said, consistent with what we have seen in the last 4, 5, 6 years. We didn't see it accelerate at all, and we saw consumers looking for help in lots of different ways, as evidenced by our trajectory in Assisted, as evidenced by our growth in things like Tax Pro Review, where consumers were looking for advice and making sure that they were making the right choice, whether it was choosing us to do their taxes or validating the work they had done themselves. We think that ecosystem that we're building to serve consumers in so many different ways is a great way to make sure we're listening to the consumer and being able to respond to them, again, whether they have a simple question or want someone to do all the work for them.

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Jeffrey Marc Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [13]

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So let me ask the question maybe another way or dig a little bit deeper. In looking at your 2020 guidance for revenue, what's implied on both the Assisted side and the DIY side in terms of volume and pricing?

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Tony G. Bowen, H&R Block, Inc. - CFO [14]

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Yes. Thanks, Jeff. This is Tony. I mean I think our base expectation would be a continued shift in a similar level to what we saw this year. Obviously, we don't know what every individual consumer will do. I mean every year, you have switching from DIY to Assisted and Assisted to DIY, the net migration, if you will, is for a net move to DIY.

This year, we saw DIY category grow 3% to 4%, which is in line with what we thought. Assisted category was down slightly, and we think that, as Jeff mentioned in his opening comments, was partly due to more people filing an extension, which we think impacts the Assisted side a little bit more. So that will work itself out as we go into the May to October filing season. But next year, I think we would expect our base view would be the same as we went into it this year, which is the DIY category will grow faster than the Assisted category. And ultimately, it will be determined by people's confidence in how they file their taxes, which taxes are still complex and people need help.

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Jeffrey Marc Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [15]

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And on the pricing side for both methodologies.

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Jeffrey J. Jones, H&R Block, Inc. - CEO, President & Director [16]

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We haven't announced exactly what our pricing strategy will be for next year for competitive reasons. But we do not intend to reset further in pricing.

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Operator [17]

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And our next question comes from the line of Thomas Allen of Morgan Stanley.

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Thomas Glassbrooke Allen, Morgan Stanley, Research Division - Senior Analyst [18]

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Just on the Wave Financial acquisition. Obviously, it sounds like it's an exciting company. But can you just talk more about like why it makes sense to fit into H&R Block? Like what's synergistic?

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Jeffrey J. Jones, H&R Block, Inc. - CEO, President & Director [19]

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Absolutely. This is Jeff. Maybe Tony and I will tag team that. So I think the point I would start is as we talked about on prior quarters, the reviews that we've been doing about the other pieces of our portfolio we already have beyond taxes. And as I mentioned in the prepared remarks, we serve small businesses today at H&R Block in terms of tax preparations, and we also serve them today in terms of bookkeeping, especially through our franchisees. And so that fact, combined with the macro conditions in terms of the growth of small businesses, really suggested to us that there was more we could do to serve small businesses.

We approached Wave months ago, really attracted by a few things about that company. Number one is, they're really designed for the small business owner. Their product is widely viewed as simple, easy to use and for people that are not great at managing their financials. That attracted us, the product road map and the consistent sense of innovation of introducing new products, how fast they've been acquiring new clients and their revenue growth trajectory. And finally, I would say, they have a very unique business model, which is the core accounting software platform is free. Most small businesses today don't use anything, and so a free proposition is a great way to get them off the sidelines.

We don't do that today. So we do core tax and some bookkeeping. It's a macro trend that makes sense to try to do more with. And this company is really positioned well with the small business owner, and there's essentially no duplication with what we do today. So sorry that's a bit more detailed, but all those things together is why we're so excited.

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Thomas Glassbrooke Allen, Morgan Stanley, Research Division - Senior Analyst [20]

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Okay. Helpful. And then just on the Assisted tax prep side, can you just talk about what the competitive response was like to your cheaper -- to your lower pricing? And maybe a bit around the loan programs that Mark was offering, and then how do you expect that to trend next year.

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Jeffrey J. Jones, H&R Block, Inc. - CEO, President & Director [21]

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Sure. So we went into the season, there were some anxiety, I think, by people of what the competitive response may be. And we didn't really see a lot of competitive response to pricing. Keep in mind that many of our competitors were already priced lower than H&R Block. That was part of the gap that we were trying to close. But the way we were able to take such a complex topic, simplifying down to 5 core prices and communicate to people that you would know that upfront was a heavy lift, and we didn't really see the market change as a result of it.

With respect to Refund Advance, our core product this year had a maximum loan tier of $3,000, and that was interest and fee-free, and that was something we felt strongly about this year. We didn't see competitors offer higher loan tiers, and we saw competitors offer higher loan tiers with tiered interest rates as the loan amount increased. And so when you take all that together, we will absolutely evaluate, as we always do, as we make decisions for what we do next year.

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Tony G. Bowen, H&R Block, Inc. - CFO [22]

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The only thing I would add, Thomas, is it looked like the overall number of loans in the industry was fairly flat, which is consistent with our results. Our number of applications, the number of loans that we provided was also fairly consistent with the prior years. So despite there being more competitive offers in the marketplace, it looks like the total Refund Advance loans was fairly flat year-over-year.

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Operator [23]

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

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Keen Fai Tong, Goldman Sachs Group Inc., Research Division - Research Analyst [24]

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Fiscal 2019 was an investment year for H&R Block from the perspective of pricing reductions and other technology and operational investments. Can you talk about how much of the technology and operational and marketing investments will carry over into next year?

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Jeffrey J. Jones, H&R Block, Inc. - CEO, President & Director [25]

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Absolutely. George, so a few areas as you mentioned. The first pricing, again, just to reiterate, that's a 1 year investment in price. And we came in really where we expected, and that will continue as we move forward. Operational excellence has a number of investments, including things like optimizing our footprint. And that actually came in $15 million to $20 million better than expected. Technology has 4 or 5 dimensions of our investment in technology. Those are all multiyear investments, and we do expect for the next couple of years to continue to invest at an accelerated rate. As we talked about last year, no change there.

We're making great progress on the IT road map. Our investment and work in building our omnichannel tax engine is ahead of schedule. And so we feel very good about the progress the technology team is making.

And marketing finally, this year, a combination of we have a number of new things introduced. The success that we saw and our ability to acquire customers with performance marketing and, frankly, the delay in the season all caused an elevated investment this year. Moving forward for next year, all of that's contemplated in the outlook we provided.

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Keen Fai Tong, Goldman Sachs Group Inc., Research Division - Research Analyst [26]

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Got it. That's helpful. You've previously indicated that long-term EBITDA margins will likely not return to historical highs due to needs to invest in the business. Can you help frame what longer-term EBITDA margins might look like given the work that you've done around required investments in the business?

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Jeffrey J. Jones, H&R Block, Inc. - CEO, President & Director [27]

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Yes. As Tony mentioned, this year, set Wave aside, we would have seen some small increases in EBITDA dollars. I mean we're absolutely focused on growing EBITDA dollars and margin expansion over time. We're not providing a long-term outlook and EBITDA margins today, reiterating that we think 27% to 30% probably is in a level we're trying to get back to really just a reflection of continuing to invest to drive growth in the business and serve the consumer in new ways. But 24% to 26% for next year, we feel good about. Over time, growing EBITDA dollars and with more growth ultimately being able to expand EBITDA margins as well.

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Operator [28]

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Our next question comes from the line of Scott Schneeberger of Oppenheimer.

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Scott Andrew Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [29]

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The first one I'd like to ask, H&R Block clearly took share in the do-it-yourself category this year. Another large player also appeared, too. Jeff, could you comment on what you see as far as share going forward? And this is really a question about the smaller players in the industry. And feel free to loop in anything with the Free File Alliance discussion that you addressed a little bit earlier.

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Jeffrey J. Jones, H&R Block, Inc. - CEO, President & Director [30]

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Yes. It's -- obviously, we took share, as you mentioned. Intuit took share as well. It's hard to know for sure all the players at this stage until we have all the full IRS data. Credit Karma likely gained a small amount of share. And so we'll pay close attention as the IRS publishes all the final data about who exactly did what.

But if I just take a step back, our investment in our DIY product is really focused on 3 simple parts of the strategy: continuing to make the product better and better and ensuring that consumers know about it, and we believe that we have a great value proposition, and we'll continue to ensure that we maintain the right price advantage versus the market leader and that consumers know that there's a great alternative to others they've been used to. So the combination of those 3 things have really made a difference year-over-year, and we'll continue to follow that strategy.

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Scott Andrew Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [31]

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And then my follow-up is a two-parter. Jeff, for you to start, please; and then Tony to finish. I'll ask it all together. When do -- and in a prior question, Jeff, you mentioned it sounds like it's still going to be a while before you can give a longer-term view of what Block may look like in 3 or 4 years. I realize it's still early days in this investment process. When do you think you might get a feel for long-term margin comfort, the return on the investments that you're making, thoughts for that. Just on the timing in the future and when we may get that.

And then obviously, you mentioned there's 4 or 5 dimensions to IT, and this Wave acquisition comes in, not really core tax but a complementary business. So Tony, if you'd kind of hop on the end of Jeff's comment and talk about free cash flow and capital spend for this upcoming year, fiscal '20, with obviously the increased dividend and the spend on Wave. Just a discussion of the cash position over the course of this year and what may be left over for repurchases and/or other investment. Sorry for the long multipart question, but would love an answer.

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Jeffrey J. Jones, H&R Block, Inc. - CEO, President & Director [32]

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I'll see if I can keep up with all the pieces. Let me just start with in the past, we were really anchored on an EBITDA margin level that reflected the fact that we just weren't investing in the business. So we reset to 24% to 26%. And when I look at the performance of our business in just year 1, our ability to deliver that range, invest in the business for long term and return capital to shareholders and share repurchase and the dividend increase, that's a really nice combination of elements that we were able to deliver, and we want to continue to do that. Obviously, the investments we're making are in order to enable growth. So we believe we have to return to growing clients, which means going volume, which means top line growth, which means higher EBITDA dollars. And we're more focused on doing that now than trying to pick a EBITDA margin range for some date in the future.

And so we'll continue to stay close with you all as we move into year 2 and year 3 of the strategy, but I feel so good about how we executed year 1. The plans as we put in place for year 2 and, obviously, the Wave acquisition gives us a new dimension to the strategy to both accelerate and expand work against small businesses. And I'll let Tony dive in.

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Tony G. Bowen, H&R Block, Inc. - CFO [33]

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Yes. And thanks, Scott. Our cash flow generation, as I mentioned in my opening comments, is still really strong. We ended the year with more cash than we have in probably the last 4 or maybe even 5 years with $1.6 billion at the end of the year. So even after the acquisition of Wave, we feel really good about raising the dividend, and we still have plenty of cash flow to acquire shares opportunistically. And that was our approach this year. We bought about $185 million in the open market. We'll continue to have that approach going into the next year and still have plenty of flexibility. I mean in addition to the cash on our balance sheet, we have a $2 billion line of credit that still has 4 years remaining until its maturity. So lots of liquidity to do what we need to fund future investments for growth, return capital through dividends and share repurchases.

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Operator [34]

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

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Huang Howe, Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst [35]

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This is Chris Howe sitting in for Alex. I had 2 questions. The first one is on Wave. Can you comment on the timing of the deal? What was attractive to its timing now? And were there any other bidders for the business? And in relation to Wave, you mentioned the -- it will be accretive longer term. And can you comment around their customer distribution, the geographic distribution of their customers versus yours and how you envision their 400,000 small business customers moving into H&R Block or vice versa?

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Jeffrey J. Jones, H&R Block, Inc. - CEO, President & Director [36]

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Sure, Chris. I'll kick it off and see if we catch all these pieces. So the timing of the deal was just what the timing was. We approached them months ago in the context of us doing this review of the assets we had inside H&R Block already. There were no other bidders. They weren't for sale, and so we began conversations, which resulted in today. And today was just how the timing worked out. There was no magic about that. It's just how it all converged. But there were no other bidders, and it all began with conversations within several months ago. I'll let Tony tag team on here with me.

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Tony G. Bowen, H&R Block, Inc. - CFO [37]

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Yes. Thanks, Chris. So when you look at their customers, they had 400,000 that we referenced in the opening comments. About 60% of those are in North America. And as you would expect the vast majority of those are in the U.S. with the remainder in Canada. They're only monetizing and charging for product features today in North America, so the 40% that's set outside of North America today are using the product and are very happy with it, and it's entirely free. There's definitely an opportunity to roll out payments and some of the other features they have in North America in those other countries as they kind of build out their future product road map.

And as far as opportunities for us to cross-sell H&R Block services, I mean, the reason, larger reason people are doing accounting for their small business is for tax reasons. And while that's why we think the strategic fit makes so much sense, you're doing it for kind of 2 reasons: one, cash flow; and the other one is for tax reasons. Today, they offer no tax services to speak of. Their clients are currently asking for tax help throughout the year, both with quarterly filings as well as year-end tax preparation, so we know there's going to be an opportunity down the road to put our capabilities together with their's to serve their clients in additional ways.

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Huang Howe, Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst [38]

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That's great. That's very helpful. I have lots of questions but one more question about H&R Block excluding Wave. You mentioned the new client growth that you're seeing within Tax Pro, the review product as well as Tax Pro grow -- Tax Pro Go. With the accretion that you're seeing in new clients and the tremendous growth here, what is your -- how do you -- what's your outlook on retention of these clients? You mentioned Tax Pro Go has a younger higher income. I assume some of these new clients have a higher flight risk given their experimentation with a new tax service. Can you just comment on how you retain these clients going into next tax season?

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Jeffrey J. Jones, H&R Block, Inc. - CEO, President & Director [39]

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Absolutely. So just again to frame the products that you're referencing that's in the Virtual platform. And the way that we thought about this is for most of history, the consumer only had 2 choices. And so as we build these products to allow them to access different degrees of help in digital ways, we think that attracts new people for the brand. We know the brand is well-known. It's highly trusted for taxes. And so we're now able to help people access us in new ways.

This year, when you remove the impact of Free EZ, we saw modest increases in retention in both DIY and in the Assisted channel. And one of the things that we're paying close attention to is, given the significant increases in positive client feedback from their experience this year, how that might translate into retention for next year. Obviously, that's an unknown, but because of the significant improvements in what clients told us about their experience with H&R Block, we go into next year optimistic about what could happen to retention.

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Operator [40]

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The next question comes from the line of Hamzah Mazari of Macquarie.

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Mario J. Cortellacci, Macquarie Research - Analyst [41]

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This is Mario Cortellacci filling in for Hamzah. Could you just walk us through how you think about your digital marketing -- I'm sorry, your digital market share today? I guess where that can go in the future. I know you've been doing a lot of your work in your brand awareness in digital, and just want to see if you can give us an update on, I guess, what your brand awareness is in digital as of today. And then maybe I don't know if -- outside of your satisfaction scores or NPS, are you able to quantify any of the benefits that you've experienced from the big marketing push this year.

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Tony G. Bowen, H&R Block, Inc. - CFO [42]

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Thanks, Mario. This is Tony. So we gained market share this year in DIY, as we shared. This is the third consecutive year of gaining that market share so we feel like we're on a nice trend to continue to grow. And as Jeff said, there's only 3 parts of the strategy that will continue, and we don't see any reason why that market share gains will kind of happen next year and into the future. I just totally lost my train of thought.

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Jeffrey J. Jones, H&R Block, Inc. - CEO, President & Director [43]

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On the benefits of the marketing push. We'll tag team a bit. There were several new things about the approach to marketing this year. At the highest level was a move away from advertising national promotions and instead, advertising what we think are the core elements of our value proposition: upfront transparent pricing, how that translated to what we call Price Preview in the DIY channel. Also more about expertise and care, things that make H&R Block differentiated and great.

And so at the highest level, we improved the awareness of our DIY channel. We're only continuing to be surprised by how much opportunity there is. People still don't know that H&R Block offers software and online products. We'll continue to work against that. And then our performance marketing channel, we talked a lot about last year, which is our ability to get very granular in targeting micro segments of consumers and delivering unique messages just for them.

And we saw meaningful increases in traffic through hrblock.com, which is really the starting point for those conversion to online and conversion to make an appointment in an office. So we were able to watch that from the funnel with awareness through traffic, through conversion and saw great improvements across the board.

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Mario J. Cortellacci, Macquarie Research - Analyst [44]

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Great. And to sort of touch on the Wave acquisition. I mean, just trying to understand the I guess what the return profile would look like versus -- I mean for you buying a company like Wave versus building something internally with the H&R Block brand behind it. I think -- maybe you can walk us through your thought process or why you chose one versus the other. It could have been timing, but maybe you can talk about returns as well.

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Jeffrey J. Jones, H&R Block, Inc. - CEO, President & Director [45]

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Yes. I think, obviously, we don't underestimate how hard it can be to start from scratch building a software platform that's both this complex, this expensive. And one of the things that done extraordinarily well is keep it so simple and user-friendly. And so they have an incredible product and engineering team. They've been working on this for 9 years. And so we just saw -- given all the things I said earlier, I won't repeat about why we were so excited about what they have done, that it was just a better way to accelerate how we expand what we offer to small business owners. Starting from scratch would just be a completely different profile, and we just thought this was, by far, the best choice.

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Tony G. Bowen, H&R Block, Inc. - CFO [46]

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Yes. And Mario, I mean they've got a proven customer acquisition model that's well on its way at a cost of acquisition per customer that's very, very attractive. As we said, 80% of their customers come to Wave, and it's quite organically, which is really phenomenal in this part of the category. When we look at the return, we expect revenue to obviously continue to grow at an aggressive pace. And as they continue to grow revenue, they're going to continue to fund investments to drive additional revenue opportunities. But they will turn profitable at some date in the future, which we have built into our model. And the overall ROI would be a really strong benefit to H&R Block and our shareholders.

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Operator [47]

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And our next question comes from the line of Michael Millman of Millman Research.

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Michael Millman, Millman Research Associates - Research Analyst [48]

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Several questions. Why do you think that tax returns this past season were flat? Do you think people aren't doing this much or buying -- thinking that they could get away with more?

So secondly on the tax, do you have a concern that the more taxpayers see that with a little bit of help, they could do it themselves, that they will turn to do it themselves? Could you tell us what your cost savings are expected to be this year and from what source?

Could you -- in terms of Wave, what is their R&D? And how do they compete with Intuit, who spends a huge amount on R&D and AI specifically in exactly what seems to be exactly the same market.

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Jeffrey J. Jones, H&R Block, Inc. - CEO, President & Director [49]

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Thanks, Michael, it's Jeff. I think we've got 5 or 6 things that we'll tick through. I think at the top of the list, I think we saw -- we don't know official data from the IRS yet. We saw pretty significant extension filing this year. And so we think that drove a lot of what created the industry to be flat. I think there were questions about outcomes. There was delay to the tax season, a number of things that caused an increase in extension filing. So that's our belief on the first point.

Your second question about this migration to DIY, and just rewind a little bit. Prior to tax reform, the lion's share of American taxpayers took the standard deduction, and that was even more at H&R Block. And so post tax reform, we still feel people -- lion's share, who not qualify for the standard deduction. And so we continue to believe and hear it from our clients constantly that even when we might judge their tax situation to be simple, they are not confident with the topic of taxes. And there's really 2 things we hear consistently. One is, I want to get everything I deserve; and number two is, I'm afraid I'll get in trouble if I get it wrong. And those are 2 consumer truths that have been true over time.

And keep in mind for someone who qualifies for the standard deduction, they also likely are eligible for various credits. That process of understanding and filing for those credits is completely unchanged. And so that adds the level of knowledge and detail that for many, many people is just they'd rather have help.

That said, there is a 50 bps shift, and that's been consistent year over year over year, which is why we're also investing to have a great DIY product and value proposition and ensure that consumers have choices between those 2. So that kind of represents the full spectrum and what we think we saw this year.

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Tony G. Bowen, H&R Block, Inc. - CFO [50]

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And specific to your question on cost savings, I mean, there's a number of moving parts, as you can imagine, a couple of buckets. One would be the office closures that we did in FY '19. It's a onetime cost that's rolling off, so that's going to be kind of a benefit year-over-year. We're also starting to see some save on the IT side. There's some data centers that we're able to close down as we migrate to the cloud. Obviously, we're continuing to invest broadly in IT, but there's definitely specific parts that are starting to provide a return.

And then specific to your question on R&D for Wave, obviously, they're a fraction of the size of QuickBooks, and we're not trying to show that the product is head-to-head with that market leader. But we do have a 200-plus team that is providing and building a great product. And we think, based on user feedback and the surveys and research that we've done, that the product is robust, the users are very happy with the experience, and they're continuing to invest in building out those capabilities for future, both revenue and product features. So it's a product that's been around for 9 years since its inception in 2010, and it's continuing to add team members to invest in R&D, both artificial intelligence; to do auto-categorization of different expenses. I mean there's a number of features that the product provide today, and we'll continue to get better over time.

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Jeffrey J. Jones, H&R Block, Inc. - CEO, President & Director [51]

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If I have my data right, there are 28 million, 29 million, 30 million small businesses in U.S. in North America, and just a few million currently use a product, QuickBooks online or QuickBooks Self-Employed. So the vast majority of the market today is not using any product, and one of the things we love about Wave's value proposition is the core accounting software being free is a great way for a small business owner to get off the sidelines and try something. And we've just seen over time that once a user tries Wave's product, we see great retention over time. So with everything Tony said being true, we also like the size of the market and the fact that most small business owners today are using nothing.

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Michael Millman, Millman Research Associates - Research Analyst [52]

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Can you give us any ideas what the R&D expenses are? And will Block support them or contribute to that expenditures?

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Tony G. Bowen, H&R Block, Inc. - CFO [53]

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Yes, Michael, I mean as we shared the revenue that we're expecting to pick up, for the 9 months if we own them in FY '20 would be $40 million to $45 million. We talked about their operating loss, including transactional expenses, being $25 million to $30 million. So that would give you a sense of kind of what the P&L looks like specific to Wave.

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Operator [54]

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And this does conclude our question-and-answer session for today. I'd like to turn the conference back over to Mr. Colby Brown for the closing remarks.

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Colby R. Brown, H&R Block, Inc. - VP and Corporate Controller [55]

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Thank you, Amanda, and thank you, everyone, for joining. This will conclude today's call.

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Operator [56]

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Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.