H&R Block, Inc. (HRB) Q2 2019 Earnings Report, Transcript and Summary

Good morning. My name is Matthew, and I will be your conference operator today. At this time, I would like to welcome everyone to the H&R Block Second Quarter Earnings Call. [Operator Instructions] Thank you. Colby Brown, Vice President of Finance and Investor Relations, you may begin your conference.

Thank you, Matthew. Good morning, everyone, and thank you for joining us to discuss our fiscal 2019 second quarter results. On the call today are Jeff Jones, our President and CEO; and Tony Bowen, our CFO. We've 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 reconcile the comparable GAAP and non-GAAP figures and schedules attached to our press release. Before we begin our prepared remarks, I would remind everyone that this call will include forward looking statements as defined under the securities laws. Such statements are based on current information and management's expectations as of this date and are not guarantees of future performance. Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict. As such, our actual outcomes and results could differ materially. You can learn more about these risks in our Form 10-K for fiscal 2018 and our other SEC filings. H&R Block undertakes no obligation to publicly update these risk factors or forward-looking statements. At the conclusion of our prepared remarks, we will have a Q&A session. During Q&A, we ask that participants limit themselves to one question with a follow-up. After which, they may choose to jump back into the queue. With that, I’ll now turn the call over to Jeff.

Thanks Colby. Good morning, everyone, and thanks for joining us. We appreciate everyone being flexible with the change in call time in honor of the late President Bush. We've been hard at work the past several months focused on executing our plans for the upcoming tax season. I want to thank our associates, tax pros, and franchisees for all they are doing to ensure we're ready to serve our clients as the season gets underway. We're taking the right steps toward long-term growth in clients, revenue, and earnings, and ultimately value for our shareholders. I continue to be excited for this season and for the future of our company. On today's call, I’ll give a brief recap of our key objectives for the year, followed by how we're bringing this strategy to life in tax season ‘19. Tony will then provide details on our second quarter results and additional insight into our fiscal 2019 outlook. As a reminder, we announced our long-term enterprise strategy in June and provided more detail on our Q1 call in August, including our key objectives by channel. To recap, in our Assisted business, we're focused on improving the value we deliver to our clients, developing and delivering on a clear brand promise to differentiate H&R Block, and improving the quality and consistency of our service delivery in the tax office. In our DIY business, we're investing to improve the product and user experience, pricing at a level that is competitive and provides value to our clients and communicating this value to grow awareness and compel DIY consumers to switch to H&R Block. And in virtual, we will continue to innovate, leading the industry as consumer expectations evolve by combining digital technology with the unmatched scale and expertise of our Tax Pro network. We will ensure taxpayers can access H&R Block whether they want little to no help, complete in-person assistance, or anything in between. With those objectives as a backdrop, I'd now like to talk about the tangible ways we're bringing the strategy to life in the upcoming season. Let me start with an area in which we're making significant changes to improve our value proposition, our approach to pricing. In June, we announced that we would be investing in price decreases for certain segments of our Assisted clients. Then in mid-October, we announced an important change in our approach which is not only new for our business but represents a complete shift for the industry as a whole, upfront transparent pricing. So, I’d like to share what led us to make these changes and what it means for consumers. Over the past year, we took a critical look at all aspects of our business, and it was clear that pricing was a pain point, and it was not just about the amount but also the way prices were determined and communicated. In the Assisted category, we along with the rest of the industry have traditionally determined the price after the return was completed leaving many in the dark throughout much of the process. This does not meet the expectations of today's consumers who want as much information as possible prior to getting started. This approach was a point of frustration for our current clients and also a barrier to attracting new clients who weren't willing to give our brand a chance without knowing what it was going to cost. The feedback we received from our clients and Tax Pros clearly conveyed that the approach to pricing added even more stress to what, for many of our clients is already a stressful event. Specifically, they told us pricing shouldn't be a mystery. Nothing else they purchase in life feels this opaque. Online, they don't want to start at one price and finish at another with no idea why, and a person's price should be unique given their situation, not one size fits all. So, we knew the pricing was something we had to address in a meaningful way, so this wasn't a surprise to us. The decision to move to upfront transparent pricing is one that we've researched the past two years and have tested in select markets. We were pleased with the feedback and results from these price tests giving us confidence that making this move was the right thing for our clients and for our company. That's why I'm proud that H&R Block is leading the industry by offering upfront transparent pricing, so consumers know the price before they begin, as well as throughout the entire process. No mystery, no surprises, and no hidden fees. In the office, the process of determining price can be done in three simple steps. First, the client identifies his or her price based on their life situation; then at this state return is needed, and finally adds any additional items such as investments or business income. Nearly half of our clients will not have any of these items, meaning they will know their price in two simple steps. And our Tax Pros will be there to help them to answer any questions and to provide a positive experience. In addition to the move to upfront transparent pricing, we are lowering prices for millions of our Assisted clients. These reductions are targeted to consumer segments where we can compete most effectively and win. A significant portion of our client base will see the positive impacts with one-third paying at least 10% less than last year. There's one additional update in the Assisted business I'd like to talk about. Given the changes to the 1040 forms for the upcoming season, which included the elimination of the 1040EZ, we will no longer run the free 1040EZ promotion. While free EZ brought new clients to our brand, they were increasingly expensive to acquire and had low lifetime value when compared to other client segments. So while eliminating this promotion will have a negative impact on Assisted volume, it will partially offset the price decreases from a net average charge perspective. These changes are contemplated in our revenue outlook for the year, which Tony will discuss later in the call. In addition to pricing changes in our Assisted business, we're also making enhancements in DIY. We will continue to price aggressively to encourage consumers to switch to our brand. An extension of this aggressive posture is how we are taking price transparency to another level for the DIY consumer. Our prices have always been stated upfront, but as clients move through the process, the price could change and they wouldn't know what they were ultimately going to pay until the very end. To address this, we are launching DIY price preview, so clients will know in real time when their price changes and why. We believe this will set a new industry expectation for DIY consumers over time. Finally, in virtual, we will continue our upfront pricing approach with Tax Pro Go and Tax Pro Review products. We will also continue to test throughout the upcoming season to ensure our products are all optimally priced. We're excited for our clients to experience upfront transparent pricing, as it will enhance the value they receive and create one more reason to choose H&R Block, but a new pricing approach is just one of the many changes H&R Block is making to create a more modern, innovative consumer-focused brand. We're creating a client experience that demonstrates our expertise, is tailored to each individual, is available year-round, and it's backed by a company that cares. And while this is not the first time we've discussed the operational improvements, I believe the changes we are making this season are important steps to set us up for success over time. In our Assisted business, we're making a number of improvements to enhance the client experience that will benefit both new and existing clients. Our clients will receive greater help in planning for the future through an improved tax estimator to deliver key tax tips and more robust W-4 planning, both of which address the implications of tax reform. We're responding to the feedback from those who've asked for a paperless experience, making it even easier to set up a secure MyBlock account for year-round access to their return. We're increasing the prominence of our drop-off service, which some find easier and more convenient than sitting with the tax bureau while the taxes are completed. Drop-off service has always been available in our offices, but we haven't done a good job letting people know it's an option. For our field leaders, we have simplified and focused their efforts on the most essential operational protocols. We've dedicated significantly more effort to training and certification, and have elevated the performance expectations for key seasonal roles like office managers. And finally, we're enhancing and differentiating the experience of our clients who are new to HR Block to demonstrate the value we provide in more tangible ways. It's also important to know that our franchise network is as engaged and excited as they've ever been. I've been delighted to see the number of franchisees who have embraced not only the client experience enhancements but also our upfront transparent pricing model. We also saw record participation by franchisees at our convention in October and are seeing real momentum with our franchise base. Moving to DIY, we've made a number of enhancements to our product. First, we've improved the experience for mobile users, giving more visibility to where they are in the process. We also continue to leverage data to make our products smarter and more personalized. By targeting questions relevant to the user, we are reducing the amount of screens the client sees, in some cases reducing the number of questions they need to answer by more than half. Another key area is the significant improvements we've made in how we provide health throughout the user experience. We have redesigned the help center to give clients easier access to self-help. We're introducing a virtual assistant by leveraging machine learning to deliver quick answers. And finally, we're making it easier to get live product help. These improvements will eliminate breakpoint in the experience and ultimately drive conversion. Finally, I'm excited to announce a brand-new online service we will be launching called Ask the Tax Pro. Those who choose this service will have a limited immediate access to a tax pro to answer their tax related question at any point in the experience. For years, our clients have had the ability to chat online with the highly qualified Tax Pro if they needed help. This new service now includes Pro browsing capabilities, allowing our Tax Pros to work directly on the client screen to guide them to the answers they need. Clients can choose to interact with the Tax Pro through chat or phone, whichever is most convenient for them. This is yet another innovation that connects our clients to the expertise of our Tax Pros. We expect as the Tax Pro to be the best value of the industry for those consumers who are confident doing taxes themselves, but have a few questions along the way. This innovation mindset is driving our efforts to meet consumers’ evolving needs as we continuously evaluate new ways to connect clients to help. To that end, we've made considerable improvements in our virtual products, Tax Pro Go and Tax Pro Review. Tax Pro Go, our virtual assistant offering which was designed and optimized for mobile users, addresses the needs of consumers who want assistance, but don't want or have the time to visit one of our offices. Clients upload their documents to the MyBlock portal and work virtually with a Tax Pro matched to them to have their taxes seamlessly prepared, signed, and filed by H&R Block. Our beta soft launch of Tax Pro Go last season had to goals of understanding who would be attracted to this product and refining the experience. We were pleased of the clients this product attracted to the brand with 70% being new to H&R Block and 65% being under 35 years old, demonstrating Tax Pro Goo’s ability to drive new clients and millennials to H&R Block. This year, we're continuing to improve the experience with more streamlined work for outflows, improved document upload and giving clients the ability to schedule an upfront phone consultation with their assigned Tax Pro. Our second virtual product, Tax Pro Review, is a powerful way for our DIY clients to connect with one of our highly-trained experts to review resource documents as well as their entire return and identify all available credits and deductions. At the end of the process, our Tax Pro then signs and files the return and clients can access the Tax Pro anytime during the year for any questions that may come up. We continue to make enhancements to Tax Pro Review to better demonstrate the benefits of working with an expert in this capacity. Additionally, we've optimized our network of Tax Pros completing these returns and have made improvements to the end-to-end mobile experience. Everything we just discussed across the existing DIY and virtual spectrum shows our commitment to unmatched capability to serve consumers in more ways than any other tax preparation company. In addition to the improvements in pricing, client experience and virtual, we continue to look for ways to provide solutions through promotional offerings and partnerships. That's why we'll bring back key promotions and partnerships this year that contributed to our performance in tax season 2018. We will again offer refund advance, providing our clients early access to their money, in most cases, on the same day in which they file their taxes. Our loan amounts will be up to $3,000, and we're proud that our loans will remain 100% interest-free with no fee for the consumer. This contrasts with other offers that will have higher loan amounts but include interest charges. We will again be the exclusive provider of desktop software at Walmart, and we'll have an aggressive program in place with Amazon. Additionally, for self-employed filers, we are continuing our partnership with Stride to give our clients the ability to track and import expenses into their return. Finally, we will provide access to free credit scores for our clients in all our channels through our partnership with LendingTree. None of this matters if we don't effectively reach consumers and communicate the value we're delivering. So we're making changes that systematically improve our ability to acquire, retain, and engage clients. We're utilizing improved data analytics and enhanced marketing techniques to optimize and deliver unique messages to discrete micro segments in the market, and ultimately improve our ROI. This modern approach is key in building brand or our relevance and attracting new clients. To wrap up, we've made many significant improvements to our business across a number of areas, including pricing, client experience, operational excellence, virtual products, promotion, and partnerships, demonstrating our commitment to delivering for our clients. Our product offering is the most robust it's been in the history of our company. We're innovating and taking bold steps to disrupt the industry to ensure that we compete not only this season but for the long term. In short, we're excited about our future and for the season to begin. With that, I'll hand the call over to Tony to discuss our second quarter financial results and outlook.

Thanks Jeff. Good morning, everyone. Before I get into the details of our Q2 results, as a reminder, we typically report a loss during the fiscal second quarter due to the seasonality of our business. Therefore, second quarter results are not representative of our full-year performance. Starting with revenues, we saw a year-over-year increase of $8 million or 6% to $149 million. This is primarily the result of increased Assisted tax prep revenues and the timing of revenues related to our Tax Identity Shield product, partially offset by lower international revenues which were negatively impacted by foreign exchange rates. Turning to expense, total operating expenses increased $7 million or 2% to $364 million primarily due to onetime costs of $10 million related to our office footprint optimization, as well as increased compensation expense. These increases were partially offset by lower depreciation and amortization and marketing expense. The increases in revenue and operating expenses combined with an increase in interest income resulting from higher interest rates and higher cash balances drove an improvement in pretax loss from continuing operations of $4 million or 2%. While we saw an improvement in pretax loss, our loss per share increased $0.12 to $0.83. This was due to a lower-tax benefit compared to last year as the lower corporate tax rate negatively impacts quarter with a seasonal loss. Turning to discontinued operations, there were no changes in accrued contingent liabilities related to Sand Canyon during the quarter. For additional information on Sand Canyon, please refer to disclosures in the company's reports on Forms 10-K, 10-Q, and other SEC filings. Turning to capital. Our priorities remain unchanged. We first focus on maintaining adequate liquidity to fund the business. We then look to invest in the business to drive long-term growth. We then fund our dividend, which we have done consistently since going public. And then, finally, we look to opportunistically return capital to shareholders through share repurchases and at a minimum plan to repurchase shares to offset dilution from equity grants. We did not repurchase shares during the most recent quarter, but have repurchased 4.2 million shares at a total cost of $97 million for the fiscal year. I’d now like to provide some thoughts on our fiscal 2019 outlook. Starting with the tax industry, we anticipate overall returns to grow 1% to 2% in tax season 2019, consistent with historical trends and the current low unemployment environment. As we shared on our Q1 call, we don't anticipate the recent tax legislation to have a material impact on the methods filers use to prepare their taxes. Our research confirms that many filers are confused and will be looking for help this tax season. As a result, we anticipate Assisted industry volume to be flat to slightly up with the remainder of the industry growth coming in DIY. Overall, we expect the industry volumes to be very similar to the trends we've seen over the last few years. Specific to H&R Block, we expect to continue our trend of achieving overall client growth, driven by DIY and partially offset by a decline in Assisted due to the discontinuation of the Free EZ promotion. The change in Free EZ will impact the early part of the season and will be reflected in the results through February that we will release in early March. With respect to pricing, our new approach will result in a lower net average charge in our Assisted business. While we expect the net average charge to decline, it will be impacted by positive mix as we expect to serve fewer Free EZ-type clients. In DIY, we expect our net average charge to be consistent with last year as we continue to focus on outpacing the category in returns and gaining market share. While there is some trade down risk within DIY due to the new tax legislation which would negatively impact our net average charge, we believe that risk will largely be offset by after-tax probe and favorable mix. We are confirming our previously provided guidance as we continue to expect total revenues of $3.05 billion to $3.1 billion, which takes into account the volume and pricing expectations I just shared. We're also maintaining our previously provided outlook and EBITDA margin of 24% to 26% and an effective tax rate of 23% to 25%. Moving onto the other items in our financial outlook, as we've previously shared, fiscal 2018 represented a high watermark for depreciation and amortization. As we see the impact of office upgrade and franchise buybacks from several years ago roll up, we expect DNA to decline in fiscal 2019 and be $165 million to $175 million. As a reminder, approximately two-thirds of our DNA is related to CapEx while the remaining one-third is related acquisitions. We expect to spend approximately 3% of revenues on capital expenditures in fiscal 2019 or $95 million to $105 million. With respect to acquisitions, we anticipate repurchasing approximately 125 franchise locations, which was better than we originally expected and adding approximately 45 independent locations to our network for a total capital investment of approximately $40 million. As a reminder, both franchise repurchases and independent acquisitions are typically completed at levels below our current trading multiple and as such are accretive to earnings. Beyond this year, we expect our franchise purchase activity to moderate. For fiscal 2019, we expect total interest expense to be $80 million to $85 million, driven by lower borrowing needs, offset by higher interest rates. Before I turn it back over to Jeff, I just want to share my excitement for the upcoming tax season. We have a great plan to put H&R Block on the path to long-term sustainable growth. And I'm looking forward to seeing our plans come to life in the coming months. With that, over to you Jeff for some closing thoughts.

Thanks Tony. I hope the additional information we shared today provides more context regarding our plans for the upcoming tax season as well as the full fiscal year. We are taking bold steps and innovating to improve the value we deliver for our clients, position as well not only for this season but for the long term. We're at the early stages of our journey but are confident in our plans. We look forward to talking with you after the fiscal third quarter. With that, we'll now open the line for questions. Matthew?

[Operator Instructions] Your first question comes from the line of Scott Schneeberger with Oppenheimer. Your line is open

Just interesting on what you just mentioned, Tony, could you quantify on the acquiring franchise locations? You mentioned it was more than anticipated. What type of positive revenue impact will that have on the year? Thanks.

Yes, I don't know if I have the exact numbers, Scott. We were originally thinking more like 80 to 100 locations, so the incremental amount is approximately 25, a typical location doing $200,000 to $300,000 in revenue and obviously the incremental amount to us would be the 70% that we weren't getting before. So, I think that should give you a sense of the incremental revenue that should drive.

And then, Jeff, the transparent pricing, it’s certainly a transformational initiative. I’m curious what will we see with regard to marketing spend and marketing timing this tax season relative to those of the past. Thanks.

So, our overall investment is contemplated in our guidance, so that's all consistent. This will be a core message for the company where we haven't announced yet exactly all the shifts we're making in our marketing messaging, but suffice it to say upfront transparent pricing will be very clear to the market. It will be a major focus of how we go to market for the year.

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

Investing in pricing is a key objective for the upcoming tax season. Based on your study of the competitive backdrop so far, what would you say is the approximate pricing premium that H&R Block has over competitors, and is your objective to remain premium-priced based on the value provided or is it to bring pricing more in line with the competition?

This is Tony. Really good question. Our goal isn't to be the low-priced leader, so I think H&R Block will demand some level of premium relative to a lot of the other offerings in the marketplace. Specific to your question on what type of premium were we at, it really depends. I think across at spectrum and different client complexity, our premiums varied, obviously on the simple land or the Free EZ, and we were very competitive last year given we had the Free EZ promotion. I think given how our pricing had evolved over time, we definitely identified certain client segments where we were very much above the market average, if you will. The consumers don’t really feel the average, and it's impossible to shop the average, but we know in certain segments, in certain geographies, there's definitely places that we were well above the market, and we've taken the opportunity as part of this reset to try to fix most of those and bring us much more in line and use pricing as a catalyst to try to return us to client growth. That being said, it's well beyond pricing. Pricing is just one aspect of what we're trying to do, and it's the overall value proposition and all the elements that we're making - the changes we are making that are all eventually going to allow us to be successful.

It's Jeff. I would just reiterate that we were not trying to be the low-price provider and to echo Tony's comments about all the other initiatives that have been put in place to demonstrate value, we also have seen that it's not just the price the consumer was paying, it was the fact they had no idea what it was going to cost. And so, when I think about our approach to pricing, there are really three different components. The first component is really about the fact that they'll know the price before they begin. The second is how easy it will be for them to figure out what their price is, and then the third will be the actual price. And so, we're really thinking about all three of those elements.

And as a follow-up, as the results of your new pricing transparency, you’ve indicated that about one-third of filers will pay 10% less than last year. Can you help unpack that and detail which filing segment we'll see the most change?

Yes, I’d say it's a fairly complicated answer. I mean, as you know, George, the way we priced historically was extremely complex and made up of hundreds of individual billing items. So, what we were able to do in this change is simplify our overall approach which allows us to be transparent and share the price with the clients upfront. When you think about who's going to get the bulk of that decrease, there's individuals like self-employed filers, homeowners, Middle America families that are really going to see the bulk of it, but it really depends on the specific situation and the types of complexities that that client had last year and the types of complexity that they'll come back with this year.

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

Tony, you broke up a little bit at least on my line when you were talking about the outlook. Can you review what you said about Assisted in terms of volume and the pricing, what you're expecting this year.

Yes, starting with price, I mean, just the price obviously, Jeff, will be down this year, lowering price. We're not sharing the exact amount it will be down. Obviously, it's contemplated in our overall revenue guidance. I mean that's one of the changes we tried to make this year. I mean last year, we provided a volume and more of a directional MAC. There's a lot of moving parts this year, which is why we thought it was important just to drive guidance around an overall revenue number given there are so many parts. As far as volume, the only comment I made was we do expect Assisted to be down. I think we are really optimistic about the changes we're making around upfront pricing and the other value proposition, but obviously we have a headwind with the elimination of the free EZ promotion which we expect mostly that will occur during the first part of the tax season.

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

This is Jeff, Jeff. I mean, obviously, we haven’t really entered the season yet. So, it’s difficult to know what the competitive response will be. We know that as we’ve continued to evolve exactly how we will message this and communicate it, the way that we’ve structured how easy it is for a client to figure out their price, we’ve been doing a lot of additional testing on that with consumers, and that has been very positively received, but we don't know yet exactly how competitors will respond. We'll see once we get into the season.

One thing, Jeff, I would add to that, I mean, obviously we expect competitors will respond. I mean as a market leader, they typically react to whatever offer we have in the marketplace. I think the one thing that makes H&R Block a little bit unique is the fact that we're able to go out and market a message on a broad scale which is quite a bit different than most of other competitors in the space and we think that's going to provide us an advantage.

Your next question will come from line of Alex Paris with Barrington Research. Your line is open.

This is Chris Howe sitting in for Alex. I had a question in regard to the millennial market segment. Can you perhaps add some additional color or some granular detail about the engagement and the utilization of H&R Block's product suite that you're seeing within millennials? And what you're doing heading into this tax season to increase retention efforts towards new millennials that were acquired last tax season?

I'll take this off and see if Tony wants to add anything. So, obviously, we're looking closely at who we're attracting in our ability to grow new clients. We mentioned on the last call that in tax season '18, over half of our new clients to H&R Block were millennials. And so, one of the things we continue to see and understand is the power of the brand name, how trusted it is on the topic of taxes. With Tax Pro Go, I think what we saw was that the method of sitting down for an hour in the tax office isn't for everybody. And so I think that's why we're continuing to broaden the ways that millennials and others can access the brand. Again, we think so digitally Tax Pro Go is a great way to do that. They get the full Assisted experience, but they don't have to physically visit an office. It actually turns out for a lot of people as well given our retail footprint that simply dropping off your documents is very convenient for people too. So we'll continue to build out that continuum of all the ways people can access Block and pay close attention as these products grow on their ability to attract new clients to the brand, but also younger demographics to the brand.

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

I believe New York City has had for some time upfront pricing . Can you talk about how that's worked in New York City, and what - how you saw that deferring in terms of clients for places that didn't have upfront pricing and so that as you're now upfront pricing nation-wide, similar to what it is or has been in New York City? I was also interested in, you talked about the first half of the season, Assisted would be down for reasons you gave. Could you talked about what you expect for the second half of the season?

I'm not exactly sure what you're alluding to with respect to New York. We have ran various tests that we're constantly doing on different pricing approaches. Several years ago we used to have a version of a pricing board in our offices and that maybe what you are remembering. It's probably been four or five years ago. I think the main difference between that and what we're rolling out now is, that gave clients an indication of a range, about where they may fall based on their particular life situation, but the challenge with that model was, the ranges were incredibly wide. She might have a range of 99 to 199, which isn't that helpful. And what we're rolling out this year is, every client will know the pricing in its entirety and can place themselves in the appropriate life situation and then whatever particular add-ons they have based on the documents they are bringing into the office to know their exact price. The feedback we got from several years ago is, it's helpful versus nothing, but it still doesn't tell me my price and some clients were worried that they were at the top end of the range and that maybe it is more hopeful than anything. So I think that's specific to what you may be remembering as far as what we would have done in New York. What we are rolling out is nationwide. So it will be in every Company office. Obviously, franchisees have the ability to opt in. We are pleased that we've had incredible opt-in rates. The vast majority of franchisees will be following the model this year on a national level. Franchisees though, as you remember, do set their own individual prices. So their price points may and will be different from the Company offices, but they will be following the model because they believe in it so much, which we were very pleased to see that result coming out of our franchise meaning. I think your other question was specific to volume. I mean, we're not going to get more specific than saying that the first half will be where we expect to see some level of loss given the Free EZ promotion. Our goal is to continue to grow clients in all segments, in all parts of the season, whether it be first half or second half, but we just know that given the Free EZ promotion ran through 2/28 last year, it will be a bit of a headwind.

So will that over comp or will the second-half gains over comp that loss?

Overall, we did mention in the opening comments that we expect Assisted to decline. So we do expect a slight decline in Assisted, which obviously is disappointing for us given that obviously our goal over time is to grow clients, but we felt with all the changes happening with the simplification of the 1040 this year and it just didn't make sense to launch the Free EZ again, so that's going to be a bit of a headwind.

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

Tony, I wanted to go back to your previous answer on the franchisees and participation. I'm wondering just if you could give a ballpark range of the level of participation you're anticipating from the franchisees in the new plan, is it 80% or over, is it less, just good to get a perspective on how the franchisees are thinking about the new program?

So, we rolled this out in October at the Franchisee Convention and did a lot of work to educate in a broad way and then with individual franchisees to sit down with them at scale and help them understand in their business what this would mean to them. And just to put a percentage on it, we saw north of 80% adoption of the model, we would say the vast majority of franchisees. And so we were very, very happy with their adaptiveness, their response. And frankly, their feedback was like what consumers told us. From their business perspective, they knew that our pricing model was causing friction for their clients as well, so they really applauded the change.

And then just on the digital side. I noticed that you lowered prices at the beginning of this season compared to last year, now that there is a decent price difference between you and TurboTax. I'm wondering if you intend on marketing that price difference or how you might go about marketing that to try to gain market share?

And the way I'm thinking about it is, there are three core strategies in the DIY business broadly. One is, we will continue to evolve and improve the product experience, making it more personalized, making it more simple and making it more mobile, so that's the focus of how we want the product to get better year-over-year. We will price competitively versus the marketplace and we will aggressively market the total value proposition to DIY. I have said before, we will act like a challenger brand in DIY and that's definitely our posture going into the year.

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

This is actually Mario Cortellacci filling in for Hamzah. Just could you give us a sense of how long the investment cycle will be? Is 2019 expected to be the bottom in margins or how should we think about this longer term - or just the margin potential longer term after the increase in 2019?

So, we guided 24% to 26% for the year. Obviously, that was a reduction versus where we've been historically. And our guidance isn't changing today. One of the things that we've been talking a lot about is, where we have been historically in the high 20% range, as we assess the business and the places where we need to invest and the way we need to drive growth, we just believe that in the high 20s is represents a margin level that is the Company not investing in itself to grow and to be more relevant for the consumer. So we are definitely not setting a goal to get back to the high 20s. We are focused on margin expansion over time as we grow volume, and that's really the key to how we're thinking about the next several years. We believe we have to grow clients and revenue and earnings over time, but again, the high 20s feels like a level where we are just not investing in our business appropriately.

And just regarding the Free EZ, I mean was there conversion rate year-over-year for those clients? Just trying to see if you're ever using it as an acquisition tool to go from a client that maybe got their stuff done for free and then actually convert it to a paying client in the year or two years from now. I'm just thinking if you are actually missing out on any revenue from there?

I mean definitely over time some of those clients migrated up to more complexity. I mean your tax situation tends to change from one year to the other and to qualify for the Free EZ promotion, you would have essentially had to only have a W2. So if you bought a house the following year, had children or became self-employed or something else, then that would provide a monetization opportunity to move up. When we looked at the data over the last several years, clients are migrating up at the pace that we need to justify the program, which is part of the impetus for eliminating it this year. The other thing that's happened, it's just become an increasingly expensive to even acquire the Free EZ clients. So the number of clients that you're bringing in relative to the dollars you're spending on marketing and the discount you're giving it's became increasingly expensive and that's why we're really pushing free clients to go into our DIY products. We still obviously have those products on the DIY side and focus more on more Middle America clients on the Assisted side.

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

In your response to previous question about increasing digital year-over-year at this early part of the season, I'm aware [indiscernible]. It looks like [indiscernible] to be an offset or Jeff, based on your response I got the sense that over the year we will have a net reduction in pricing in digital. So the big question, if you could confirm that? And bigger question is, what type of pricing reductions will we see in digital versus realistic H&R Block this season, where - which will be the more meaningful and any degree of magnitude you may be able to share? Thank you.

This is Tony. I’ll actually take that. I will actually take that. I mean, we're definitely going to see a bigger reduction on the Assisted side, I mean if you remember, we did a bit of a price reset in our DIY business a few years back, resetting our lineup. So, overall, this year in DIY we expect the net average charge to be maybe slightly down to even flat. And part of that's going to be driven by our attach of Ask a Tax Pro, which is a new offering we announced today, as well as just overall mix. We're going to continue to be aggressive on the price side in DIY, but we've had favorable results last year from the launch of the self-employed skew as you mentioned. So overall, DIY will be essentially flat and that is our base expectation.

We have no further questions at this time. I'll turn the call back over to our presenters for any closing remarks.

Thanks everyone for joining us this morning. This concludes today’s call.