H&R Block's (HRB) CEO Bill Cobb on Q4 2014 Results - Earnings Call Transcript

Jun.11.14 | About: H&R Block (HRB)

H&R Block, Inc. (NYSE:HRB)

Q4 2014 Results Earnings Conference Call

June 11, 2014 8:30 AM ET

Executives

Colby Brown - Investor Relations

Bill Cobb - President and CEO

Greg Macfarlane - Chief Financial Officer

Jason Houseworth - President, Global Digital and Product Management

Analysts

Gil Luria - Wedbush Securities

Thomas Allen - Morgan Stanley

Kartik Mehta - Northcoast Research

Hamzah Mazari - Credit Suisse

Scott Schneeberger - Oppenheimer

Michael Millman - Millman Research Associates

Operator

Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions)

Thank you. Colby Brown, you may begin your conference.

Colby Brown

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

In connection with this call, we have posted today's press release on the Investor Relations website at hrblock.com. Some of the figures that we'll discuss today are presented on a non-GAAP basis. We reconcile the comparable GAAP and non-GAAP figures and the schedules attached to our press release.

Before we begin our prepared remarks, I'd like to remind everyone that this call will include forward-looking statements as defined under the securities laws. Such statements are based on current information and management's expectations as of this date and are not guarantees of future performance.

Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict. As a result, our actual outcomes and results could differ materially. You can learn more about these risks in our Form 10-K for fiscal 2013 and our other SEC filings. H&R Block undertakes no obligation to publicly update these risk factors or forward-looking statements.

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

Bill Cobb

Thanks, Colby, and good morning, everyone. Earlier today, we announced our financial results for fiscal year 2014. I am very pleased with our results this year. We entered this season with a strong plan to achieve our Tax Plus objectives and we executed very well.

In fiscal 2014, we enhanced our service levels while improving return mix and increased attached rates on our best-in-class financial services products. We successfully launched the first year of our digital product redesign enhancing the client experience.

We continue to educate our clients on the upcoming changes resulting from Healthcare Reform and gained some key learnings from our healthcare initiatives that will serve us well going into 2015 and beyond. And most importantly, we served our clients better than ever.

The result of these efforts was that we grew revenue, expanded margins and improved our customer satisfaction, while also continuing to invest in our business. I will provide a greater level detail on our performance for the year, but before doing so, I would like to provide some overall context on the tax season.

As many of you know, there was a lot of noise in the market this year due to the delayed opening of e-file, our decision to eliminate the free federal 1040EZ promotion and aggressive pricing actions from our digital competitors.

Total IRS filings return to historical norms and exceeded our expectations, with returns up 1.4% from last year. The assisted category as a whole was essentially flat, while total digital returns increased nearly 6%.

There are few reasons for the difference in growth rates between the assisted and digital categories. First, we believe that our decision to discontinue the free 1040EZ promotion in virtually all markets, contributed to the growth in digital returns this year as low loyalty filers motivated solely by priced move to DIY methods where they could file for fee.

Second, the digital category continues to benefit from the migration of pen and paper filers though at a slower pace than in prior years.

And third, based on our experience this year and consistent with industry results for the past several years, we continue to believe there is an increase mix of digital returns filed with the earned income credit or EIC due to the inconsistent fraud prevention standards in filing returns containing this credit.

As a reminder, the EIC is one of the largest government social programs in the country and the IRS estimated that approximately $13 billion to $15 billion of improper payments were made to the EIC in 2013. This is obviously a significant issue for the U.S. Treasury Department and for the country.

In fact, under federal law very government agency is require to disclose their highest risk financial transactions and the EIC is the only risk noted on the consistent basis by the IRS.

Several years ago, the IRS took actions to address this concern that were not comprehensive, creating standards only for returns prepared by a paid tax professional. Thus current standards for filing a return with the EIC are different for assisted returns and DIY returns which have resulted in a shift from assisted to DIY over the past five years.

Importantly, the assisted category would have gain share during that time had there not been a shift in EIC filers. We have taken an industry leadership position against tax fraud and continue to advocate for consistent standards in both assisted and DIY tax returns in all respect and in particular, those that contain the EIC.

Until such parity standards are in placed, we believe the improper payment issue will persist and the industry will continue to see a shift in returns containing these credits from assisted to DIY.

With that overview on the industry, let’s turn our performance for the year. We executed very well against our multi-year Tax Plus strategy in 2014. You recall from our conference call in March and our Investor Day in December that we are squarely focused on this strategy, which is centered on delivering value for our clients and driving higher revenues and profits through a balance of improve return mix and increased product attachments. Put simply, we served our clients better than ever and in the process drove profitable growth.

In retail we discontinued our free 1040EZ promotion in virtually all markets, which as anticipated contributed to a significant increase in revenues despite lower revenue counts -- lower return counts.

We also made changes to our pricing this year to be more strategic in how and when we provide discounts and what we charge for filing extensions. Despite these price increases, retention of non-EZ filers was essentially flat for the year continuing to outpace our branded retail competitors.

Another important element of our strategy was to improve how we serve our clients by making investments in our retail locations, technology and in our people. Specifically, we are nearing completion in our initiatives to update our offices and upgrade our retail tax preparation software.

These investments have enabled our tax professionals to serve our clients better which resulted in improve service metrics across the Board, with walkout and wait times down and satisfaction up.

In fact, our Net Promoter Score increased 2 points this year. These initiatives will require continued investments which we are committed to making in order to improve our value proposition.

From a marketing perspective, I’m very pleased with our campaign this year which served as a reminder that taxes are complex and Americans leave over a billion dollars of refunds on table each year by not seeking professional assistance. Our simple message of Get Your Billion Back America resonated very well and it showed in our results.

In digital, we enhanced the user experience by customizing the product to each client in making it simpler to use. By better anticipating the needs of our clients and tailoring the user experience, we saw improved conversion and a substantial increase in product upgrades.

I’m pleased that the multi-year effort that Jason Houseworth and his team have undertaken to redesign the online client experience has been successful. We will continue to invest in our digital products to customize and simplify our offerings which will result in better attention, conversion and monetization.

On the Tax Plus side, our strategy is working and I’m very pleased that we increased the overall proportion of clients who use our financial products. We made specific changes to how we position our Peace of Mind warranty like product. We’re successful at increasing the take rate on our refund transfer product and effectively manage the Emerald Advance program to drive increased profit this year.

We also continue to see improved usage metrics in our Emerald Prepaid Mastercard with reloader rates and average deposits higher in 2014. The net results of these efforts was an increase in revenues from our Tax Plus Financial Services products of 11% this year.

On the international front, we had solid seasons in Canada and Australia despite significant industry and macro challenges, including the extension of the Canadian tax season into May, considerable changes in the Australian tax law and the stronger U.S. dollar. Our teams did an outstanding job of working through these challenges, serving more clients overall and increasing revenues more than 5% on a local currency basis.

And finally, we made progress this year in our healthcare initiatives. We demonstrated our expertise by providing tax and healthcare review for our clients on the upcoming changes resulting from the Affordable Care Act. This effort to educate our clients over the past two seasons has positioned us as the trusted experts that our clients can rely on when navigating the intersection between taxes and healthcare.

We also successfully launched our partnership with GoHealth to provide health insured enrollment services to online and assisted platforms. Due to these efforts, we continue to learn about the needs of our clients and how we can better serve them in this area during the upcoming season and beyond.

Our goals this year were to continue positioning H&R Block as the expert in healthcare and taxes and to lay a foundation upon which we could build in future years. And we succeeded in these goals.

It’s important to note that although the ACA begins to impact the tax event next year, it will take time for the healthcare and tax preparation industry to fully adapt to these changes and for the ultimate opportunity to unfold. Though 8 million people enrolled for these changes in 2014, the CVO has estimated that full adoption will occur over the next several years as individuals make decisions based on their perceived need for healthcare coverage, the overall cost and potential tax penalties associated with non-compliance.

That said, we know some of our clients will be significantly impacted by the Affordable Care Act and we believe they will naturally turn to their tax professional as a trusted source for help. We're working closely with the IRS and have our organization focus on integrating ACA related changes into our work streams in order to successfully serve our clients next season. We look forward to sharing with you our thoughts and plans regarding the ACA as the potential impact from this long-term opportunity becomes clear.

In conclusion, we made considerable progress in 2014 toward our long-term objectives and are well positioned for 2015 and beyond as we remain committed to our Tax Plus strategy. We anticipated that our strategy which focuses our resources on generating profitable growth would result in declines in unprofitable return count and unit market share this year.

The net result however is that we achieved exactly what we set out to do, deliver higher revenue and earnings by improving return mix, enhancing client service and increasing the rate at which clients take our best-in-class financial services products. Additionally, we made progress in our healthcare initiative this year, educating our clients, improving our value proposition and positioning H&R Block as the leader in taxes and healthcare. I'm excited about the future of H&R Block and look forward to a successful 2015.

With that, I'll now turn the call over to Greg to discuss further details of our fiscal 2014 financial results.

Greg Macfarlane

Thanks Bill and good morning everybody. From financial perspective, we executed well, growing revenues and operating more productively which drove improved margins, earnings and cash flows for the year. Total revenue increased $118 million or 4% to over $3 billion and on an adjusted non-GAAP basis, earnings per share from continuing operations increased 5% to $1.67.

On a GAAP basis, our net income from continuing operations was up 7.5% to $500 million and our earnings per share from continuing operations increased 7.1% to a $1.81. EBITDA margins expanded one point to 31% with EBITDA increasing $66 million to $940 million.

On a quick side note, we report certain non-GAAP financial measures such as EBITDA which we find relevant in measuring our performance. The non-GAAP financial measures we use are based on well defined, consistent and published standards which you could find in our earnings release.

In our tax services segment, revenues increased to $121 million or over 4% to nearly $3 billion due to improved mix and changes to our pricing strategy in our assisted channel, increased Tax Plus Financial product revenues and product enhancement and improved monetization in our digital tax software.

The largest impact on total revenues came from an increase in U.S. assisted tax preparation fees and royalties which grew 4% to $2.1 billion despite the overall decline in returns prepared. This increase is due to general price increases in an overall improvement in the mix of non-EZ client. Additionally, the decision to discontinue our free federal 1040 EZ promotion in virtually all markets and other changes in our pricing strategy related to discounts and tax return extension contributed to the increase.

Let me take a few moments to offer more details on each. Overall we had a general price increase of approximately 3% as well as an overall improvement in the mix of other non-EZ returns prepared. Next as many of you know, the decision to discontinue the free federal 1040 EZ promotion in virtually all markets impacted return count particularly related to less complicated return filed in the first half of the season.

Before coming into the season, we thoroughly analyzed the results of our free 1040 EZ promotions in prior years. I’d like to provide some additional insight behind our thought process and our decision to discontinue the promotion.

First, we know our free EZ clients quite well and recognize that they have historically been more price sensitive and less loyal than other clients. Second, because these returns were prepared for free, this was volume in which we made little or no profit in prior years. Third, our analysis shows the majority of these clients were not likely to be eligible for an advanced tax credit in future years under the Affordable Care Act. As such, we did not believe the decision regarding the 1040 EZ promotion would have a significant impact on our efforts regarding health care reform opportunity.

Finally, by offering our service for free during one of the two busiest times of the year, we were essentially stressing our system, increasing wait times that may have deterred paying clients from completing their returns with us. The end result was that there were -- we were giving our service away for free to clients who were not loyal and who provided limited lifetime value to the detriment of our paying client.

Considering the support, expertise in Tax Plus financial services products provided for our clients, our 1040EZ offering is truly the best in the industry. So this year, we decided to charge tax preparation fees for 1040EZ returns at a fair price that is competitive within the industry. This decision also freed capacity in our tax offices allowing us to better serve our clients leading to improved Net Promoter Scores for the season. From a revenue standpoint, the decision to eliminate the 1040EZ promotion resulted in a one-time increase of over $30 million in 2014, despite the decline in return.

The final driver of increased tax preparation and royalty revenue came from targeted one-time changes to our pricing strategy for a limited number of clients who were receiving significant discounts that were not service break driven. Thus, discounts have served as a drag in our topline performance in prior years. We also began charging for extensions and for those clients who found extensions through us and then come back to file their tax return, this charge will be netted against their total tax preparation fees. Collectively, these and related decisions increased revenues by approximately $50 million this year.

Turning to Tax Plus, as Bill mentioned earlier, our strategy is working. Revenues related to Tax Plus financial products increased $44 million or 11% to $432 million, primarily due to pricing changes in the company’s refund transfer offering, increased revenues in our Peace of Mind warranty like products, and increased usage and average deposits per card on our award winning Emerald Card product. Overall, a greater proportion of our clients are taking at least one financial product during the tax event and those taking two or more products increased as well.

With respect to our Emerald Card, while volumes were impacted by our decision to discontinue the free federal 1040EZ promotion, I am pleased that we were able to make significant progress in card usage. Average revenue per card increased 13% to $44, driven by double-digit increases in both reloader rates and deposits per card. Looking ahead, the Emerald Card continues to represent opportunity for us and they will continue our focus on driving more cards and more usage.

Turning to expenses; total tax segment expenses increased at a lower rate than revenues, up 2.9% to $2.1 billion. This increase was driven primarily by increased compensation and benefits, including variable wages resulting from higher tax prep fees, higher depreciation and amortization expenses, and investment in growth initiatives such as the healthcare opportunity arriving from the Affordable Care Act. Importantly, we were able to offset this expense increases in other areas and I am pleased that we were able to drive margin expansion while continuing to make investments in the business.

In our corporate segment, our pretax loss improved by $20 million or 17% to $99 million. This improvement is primarily due to a nonrecurring gain from the sale of residual interest in mortgage loan securitizations that were owned by Sand Canyon Corporation. Corporate expenses declined by $7.6 million primarily due to lower interest expense. Our effective tax rate was 34.8% due to discrete tax adjustments related to tax settlements and adjustment of reserves taken on uncertain tax positions in prior years. Although we have now had two consecutive years of significant discrete benefits, we don’t anticipate such benefit next year. Thus, our overall effective tax rate will likely increase but will be lower than pre-fiscal 2013 rates.

Looking at our overall financial position, our balance sheet and liquidity remains strong. As of April 30th, total unrestricted cash was $2.2 billion and total outstanding debt was $906 million. Cash flows from operations continued to increase as we’ve continued to focus on smart profitable business and operational efficiencies.

As mentioned on our call in April to discuss the exit of the bank, we expect to have considerable amount of excess capital on our balance sheet following the closing of the bank transaction, and it is the current sense of the Board and management to use this capital and also incur some incremental net debt to return capital to shareholders, such as through share repurchases following consummation of the transaction. In connection with incurring incremental net debt, there was also a current sense that there was value in maintaining investment grade metrics.

The excess capital is the result of several different actions. First, we have generated significant free cash flow net of dividend in each of the past two tax seasons. Second, as previously disclosed, upon the completion of the bank transaction, we will unlock capital that has been held at the bank, a portion of which will be immediately available. Third, there are still unused proceeds from the divestiture of RSM McGladrey. Finally, we have been efficiently managing our balance sheet over the past 24 months and through effective tax planning and other changes in our working capital needs, we freed additional capital. In total, we expect to have between $850 million and $1 billion of excess capital on the balance sheet once the bank transaction closes.

Regarding the bank transaction itself, all required applications have been submitted to each parties respective regulators. As part of its review, the regulator presents the transaction for public comment. The public comment period is now closed and no comments were submitted. This is an important milestone in the process and while we don’t have additional updates to provide on the bank transaction or our specific capital structure plans, we continue to expect that the bank transaction will close in time for the next tax season. As always, we will provide update as appropriate.

Another important component of our capital allocation strategy I would like to discuss is the capital we invest back into the business. During the year, capital expenditures totaled $147 million or 5% of total revenues. This exceeded our previous guidance of 4% due to additional investments in apps upgrades and information systems which we felt were necessary due to under investment in these areas in prior years. As I mentioned earlier, we believe further investments back into the business are appropriate to enable us to execute on our Tax Plus strategy in the medium and long term. Thus, we expect capital expenditures in fiscal year 2015 to be between 4% to 5% of revenues, with the return to normal levels of around 3% to 4% of revenues thereafter.

Moving to discontinued operations, which include results of Sand Canyon, our net loss of $25 million was $6 million lower than the prior year. Sand Canyon continues to engage in settlement discussions with the counterparties from which it has received a significant majority of its certain plans. Based on continued settlement discussions with these counterparties during the fourth quarter, Sand Canyon reported a provision of $25 million for potential losses related to its representation of warranty obligation bringing the total accrual at April 30th to $184 million.

As a reminder, Sand Canyon is and always has been operate as a separate legal entity from H&R Block. We believe our legal position is strong on any potential corporate veil-piercing arguments.

In conclusion from a financial perspective, we delivered an exceptional year of revenue growth and margin expansion and I am pleased that we continue to find ways to operate more efficiently and productively. We have an exciting few years ahead of us with substantial challenges taxpayers will face in dealing with an increasingly complex tax codes. We are confident in our ability to help our clients navigate through these changes and we will continue to make the appropriate investment to continue executing on our multiyear Tax Plus strategy.

I know we’ve covered a lot in today’s call. So with that, we are now ready for questions. Operator please?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Gil Luria. Your line is open.

Gil Luria - Wedbush Securities

Yes. Thanks for taking my question. You gave us a lot of great commentary about the market this year and what helped you drive the revenue increases. As you look to next year, you already gave us the hand that you think that as long as BIC is not handled at the digital level, there should be still some shift in volumes there. But in terms of the pricing actions that you took this year, is that -- did you come away from the season feeling that you’ve now exercised that muscle or do you feel that you could go into next year and make some more moves like that and refine your pricing in some other places to get a similar kind of benefit?

Bill Cobb

The goal here is what I would say, first of all I’m not going to talk about next year. We’re still digesting this year running all our analytics and next year will be next year. We continue to work rigorously on the EIC issue and trying to get parity between the documentation requirements between the assisted and DIY. So again, I wouldn’t say that we have much of the comment on any of those points except say that we have a lot of months between now and the next tax season. And we certainly have updates for you as we get toward Investor Day in December.

Gil Luria - Wedbush Securities

Fair enough. And then the excess capital of $850 million to $1 billion, does that include the ability to add leverage or is that just a calculation you went through of where you would be after a bank sale without taking on additional debt?

Greg Macfarlane

The $850 million to $1 billion number that we talked about earlier is just excess capital and is independent of any potential additional leverage that we may want to get into.

Gil Luria - Wedbush Securities

Excellent. Thank you very much.

Operator

The next question comes from Thomas Allen. Your line is open.

Thomas Allen - Morgan Stanley

Hey good morning guys. Some housekeeping things, how many rack did you do this year? And then how -- why was Peace of Mind revenue up so much? And then if you could just talk a little bit about Emerald Advanced, revenue was down but bad debt was down, kind of -- what you do in terms of strategy there? Thanks.

Bill Cobb

I’ll let Greg run through the numbers but we had a very considered strategy around as we talk about December on what we call Tax Plus. It was stamped on the head of every field leader, every office leader. Jason and his team in digital did a terrific job on that. And so Tax Plus really became a real operating approach for us throughout the company. So that’s why you see the numbers that we talked about that contributed to the Peace of Mind.

With regard to Emerald Advanced, I think we just managed the overall process well in terms of our underwriting, our collections et cetera. So we’re pleased with the effort there. And we think, we had a very controlled approach and had a successful season. Greg and Jason, anything you want to add?

Greg Macfarlane

Yeah. So this is specific question you asked Thomas but we did $5.5 million refund transfers this past season. And then I agree very much with what Bill said, Peace of Mind is a great product. This product has not received lot of attention here a lot for many years. And under our Tax Plus strategy, we did pay some attention to it and you got to see the kind of result perhaps from that, which I think is really good news.

Thomas Allen - Morgan Stanley

And then on the marketing front, you guys obviously had a very planned marketing campaign this year. I have no assumptions that you had used, spend less this year than you had last year? Do you think, this is sustainable or really that kind of one-time things going on there? Thanks.

Bill Cobb

I mean obviously when you have the kind of campaign we had, the awareness we generated in a very short amount of time and the consideration that everyone recognize that this is a H&R Block. And you got a lot of bank credit above there. Again, not going to comment on marketing strategy going forward or level of spending but I think we’re pleased with the way the campaign was received, the way we bought our media, we bought it very efficiently. And overall I think it was a win all around.

Thomas Allen - Morgan Stanley

Again, I’m trying to squeeze two more quick ones in here. Just on the bank sale, once you do sell the bank, how do you plan to telegraph your capital return plan? Do you expected to just start executing on buyback, I know you have $858 million on your authorization or do you think you’ll lay out a plan? And then second question is you announced in April a strategic alliance was Xero, can you just try and give us some more color on that? I don’t think you guys have really talked about that. Thanks.

Bill Cobb

I’m not sure we’re going to use a telegraph Thomas but I will let Greg take those two questions.

Greg Macfarlane

Yeah. So I’ll start with the bank first. I mean, its not real much new news here. I mean, I think it was good that the public commentary came and went. Really everything sits with the regulator right now and the regulators are plural should say. And they have a process, they follow. There is good communication going back and forth between them and us and DIY. But as I said in the prepared comment, we continue to believe that the best estimate is to have in this place for next tax season.

Ideally we’d like to get it done as soon as possible but there is a process and time when it’s going to have to workout here. There’s always risk though when you’re working with regulators. Their timelines are different. Their decisions may not we want but we still that’s what we’ve kind of our best estimate is. As things develop at the point which material things come up we would share those with you as we have that’s our normal practice.

On the Xero comment or the Xero question, so Xero, if -- those who are on the phone who are not familiar with Xero -- Xero, you go to their website at xero.com, it’s a great company and we have at Block have been in the business, services, small business, accounting business for a long time.

And it’s not an area that received a lot of attention, it’s not really that big and we have been thinking about what is kind of the next way to reinvigorate that and we began thinking about the software and the service offering that we provide to our clients and we found Xero and they really have developed, what they would describe a beautiful software and it would be software that we would use as part of our value proposition to our clients and new client. So it’s a new venture. I would say that we are hopeful but it’s going to take time to build into that, so I wouldn’t get too excited by it in the short-term.

Thomas Allen - Morgan Stanley

Okay. As I just elaborate on the first question. Once you -- the bank sale is done, how are you going to communicate to the street kind of your capital return plans?

Greg Macfarlane

Yeah. So, we haven’t -- I mean, these are question that are always contingent on getting the approval from the regulator. So job wanted to get approval with the regulator. We’re not sitting idly here at Block for that happen, but these are things that have to go between our Board of Directors and we have to think about it. But might kind of answer ultimately its going to be at the appropriate time we’ll share those decisions and timelines with you.

Thomas Allen - Morgan Stanley

All right. Thank you.

Operator

Your next question comes from Kartik Mehta. Your line is open.

Kartik Mehta - Northcoast Research

Hey. Good morning, Bill and Greg. Greg, I think in your prepared remarks you said price increase of 3%. I’m wondering is that 3% excluding the 1040EZ or is that 3% include the 1040EZ pricing change you had this year?

Greg Macfarlane

It’s excluding Kartik.

Kartik Mehta - Northcoast Research

So excluding the 1040EZ do you have all other forms at 3% price increase and that does not include anything you would do on the rack side or any of the other Tax Plus products, correct?

Greg Macfarlane

Yeah. The 3% that we communicated would be really, think it as a base form increase, not anything with the products, the additional Tax Plus margin.

Bill Cobb

I think, Kartik, just to put a little bit more context on that. I think what Greg was trying to do in his scripts was really give you context for some of the operating decisions we took around freak and fore, we didn’t raise prices 12% or in that neighborhood or 10%. We wanted to give you some color around the dimension of that, so that’s why. But if you just wanted to “look at what might be called general pricing that’s what the 3% refers to.”

Kartik Mehta - Northcoast Research

And Bill, what were your digital strategy next year be, if into it goes along with their half price date, like this year, I know you tested that a little bit? Would the strategy change it all, is your thought that you are going to continue on the same path that you did this year?

Bill Cobb

So, Jason, why don’t we reveal our strategy for 2015 here on digital, and Kartik, you know we’re not going to do that. But why don’t I let Jason kind of give his perspective, which is I think always helpful. We’re not going to get into next year, but I want him to talk a little bit about how we’re viewing things.

Jason Houseworth

Thanks for your question, Kartik. This is Jason. So I’ll remind you just how we started this season, which was a near one of the two-year redesign, which was a ground-up redesign focused on creating a Mobile First and personalized product experience and within this our focus was to figure how can we continue to improve conversion, improve retention and monetization our average revenue per user through an enhance value perception and customization that the redesign creates.

So, for this tax season, we really had a plan to begin to realize part of the benefits of this redesign and we executed this plan. We continue to improve our conversion and more importantly, as Bill noted, we saw substantial improvement in online monetization and that was specifically from gains in free-to-basic or free-to-paid upgrades delivering double-digit revenue growth for the digital business.

As far as pricing, we are always testing in order to figure out the right way to monetize and the right way to create an experience is going to improve our overall product and we can continue to do that and that will be factored into our product strategy as it always does.

Kartik Mehta - Northcoast Research

So, Bill, maybe, a question might be a little bit more bigger answer to or better answer to would be the Phoenix project, I know, you tested some stores in Phoenix with GoHealth. I am wondering if you could talk a little bit about how those went and maybe what you learned and if you be able to be expand on that?

Bill Cobb

Yeah. I’ll let Jason way in, Mark Ciaramitaro, who many of you met at Investor Day runs our Healthcare business reporting to Jason, so Jason is very intimately involve with the Healthcare business also. So that’s our enrollment service. We run three pilots last year. Phoenix was one of them kind of the in-store piece.

Again, not ready to comment on how we go forward. But suffice to say that, I think, we learned a lot. We certainly enroll thousands of people and I think our service, our user experience we got high marks from, in terms of this being a guided experience versus just going to the exchange.

There is a lot of things we’re still unfolding in real time. So it was a little bit of a season lumpy really based on more external than ourselves. But we are very pleased with how our teams executed against that. I don’t know if there is anything you want to add to that Jason.

Jason Houseworth

I think, what I would add, Bill, talked about trying to figure out. How we do we add a valuable service to our clients. But, specifically, we are trying to figure out what’s the model that best fits into our overall business and we look at. We are really testing a number of factors like relevancy, various operational aspects and either our marketing approach and we feel like that we gain insights that we can really apply to our offerings in this tax season and we will discuss this in more detail in December, our Investor Day.

Kartik Mehta - Northcoast Research

Thank you very much. I really appreciate it.

Bill Cobb

Thanks, Kartik.

Operator

Your next question comes from Hamzah Mazari. Your line is open.

Hamzah Mazari - Credit Suisse

Good morning. Thank you. Bill, you touched on pricing on the 3% figure? Could you give us some color as to, is that a normalized pricing number we should think about on a go forward basis. I know you mentioned you are going to be strategic about pricing? Just curious how we should think about that number on the go forward basis and is the portfolio pruning over or do you have more pruning to do as you look forward?

Bill Cobb

Sure. Let me take that, Greg, and if you want to add anything. In terms of, I think, we've indicated on, Greg, does a great job with our investment thesis, that generally we believe pricing actions into 2% to 3% range would be consistent with what investors could expect. So I think we are within that -- we are in the higher end of the range. This past year we have been on the lower end.

I still think that, Greg, I think you agree with that, probably, whole as a go forward and obviously, we will talk about that more. But I think that’s consistent with what we have said going forward.

As far as additional pruning, I assume, you are talking from a corporate perspective. We are -- obviously, we have the bank deal which we have talked about and you are all very familiar with. But, no, I think, we have, the company we want to have. We have the strategy we want to have with Tax Plus. So this is our go forward.

We have got all of our field leaders in this week. We've been meeting with them. We are again way ahead of where we were last year in terms of planning. So Tax Plus, as I said earlier, stamped on everyone forehead and you know that’s how we are going forward.

Greg Macfarlane

Let me just comment on, it was the pruning question that I wanted to kind of spoke a couple comment on. So, Bill, said, the main points, which is we in our industry enjoy low price elasticity, that’s not changing. We know a lot of about that.

What we are trying to do is evolve pricing from, I think, what it’s been historically at Block and at least in the last several years as a tactical weapon and make it more of strategic opportunity for us.

And so the things that we change this year were more about getting a system aligns to what we are trying to do more at a micro level and so those would be outputs which is in this case we are very positive in terms of revenue were good outcomes from that, but that wasn’t the goal necessarily of the things, the changes that we made.

So we are going to continue to think strategically about pricing, knowing fundamentally that there is price elasticity in this business, but also fundamentally that we are going to be here another 60 years and we have to think about the client, what’s the right thing for the client over their lifetime.

Hamzah Mazari - Credit Suisse

Right. And Greg, just a question on your investment grade comment, that there is value in investment grade? Could you maybe walk us through the rationale of how there is value for your business within investment grade? And you also said, we are not going to sit ideal for the bank sale, the close, we are going to continue to do work? Any conversations you’ve had with the rating agencies and maybe talk about, how they're going to look at your business differently? Investment grade can mean a lot of different things in different businesses? So any color around those comments would be very helpful?

Greg Macfarlane

Yeah. Okay. So we do talk to the rating agencies on a regular basis. We've got good relationships established with Standard & Poor's and Moody's as you can expect and appreciate getting our 2014 financial results finalize is an important part of the discussion as we shape what’s likely to be a busy 12 months ahead of us if our timelines hold up as it relates to the regulatory process and so on.

But that’s really the extent of the conversations because really until we are kind of past the regulatory approval process and getting a closing process finalize it would be premature for us, I think to get too specific with the rating agencies.

In terms of the justification behind investment grade, what we’ve said before, I am just going to say again is, we at Block over last several years in conjunction with the Board and a lot of external help have looked at all the consideration that most companies would look at and then the unique aspects of Block around seasonality in our history and the conclusion was that investment grade is the right place for us, but we haven't really gone much further than saying exactly what that means at this point in time, but as things develop we will update you at the appropriate time.

Bill Cobb

Hamzah, let me, add a little perspective on this and this is more if you will from my chair. Because, I think, there is a lot of talk around investment grade and I want to make sure everyone understands, what we are saying. We have been very clear that upon the completion of the bank progress.

We are looking at returning capital to shareholders as we have done, I am only going to talk about the time I have been here, we have done previously, when we raise the dividend 33% and bought back 12% of the shares.

So we want to have a return of capital. We indicated today that our excess capital expectations are approaching a $1 billion and as Greg mentioned earlier, we will take on incremental net debt beyond where we are today as part of that return process. What I tried to do is be very deliberate thoughtful, et cetera, an investment grade is obviously a decision any company faces. Our liquidity needs are real.

So I think shareholders are going to be very pleased as we go through this process, that the combination of incremental net debt plus excess -- the excess capital return will be very shareholder friendly or whatever term you want to use. And that, I think, that we can balance everything and I think it’s very consistent with the approach I have tried to take with the company. And obviously we’re going to be -- as Greg indicated earlier, we’re planning on being here for 60 years or so. So we’re going to manage this company with both an eye toward an event like that but also with an eye towards the long term.

Hamzah Mazari - Credit Suisse

That’s very helpful. I appreciate the color. Just one last question, I’ll turn it over. The push out of the tax season in Canada or the extension, any idea how much revenue that has pushed out. I know Canada is not massive for you but any quantification of that? Thank you.

Greg Macfarlane

Glad you asked that because it was actually an interesting little wrinkle to this year but with the heart bleed security weakness that everyone is probably familiar with, the Canadian taxing authority, the CRA said essentially that we’re going to shut down if that e-files would turn out to be five full days. And the message that was delivered to the tax payer in Canada was really received as were, kind of, there is no need to files your taxes until we tell you too.

And as a result of that decision, the CRA, the Canadian Revenue Authority extended the tax season for all intents and purposes extra five days. So it went from April 30th normally to May 5th. So we’re actually calling it April 35th this year. And so that resulted in us having to keep our stores open longer five extra days, staffing them. We actually spend additional marketing money behind that. There were a lot of operational things that frankly the Canadian team really did a great job with. In terms of specifically quantifying that, we’re not going to get to that level of the detail with you. It’s not material and we don’t dispose that level of detail.

Hamzah Mazari - Credit Suisse

Okay. Great. Thanks a lot.

Operator

Your next question comes from Scott Schneeberger. Your line is open.

Scott Schneeberger - Oppenheimer

Hi. Thanks. Good morning to everyone. Few questions, Bill, I’d like to start off. This is a re-ask of off something we’ve heard already but just your level of conviction on growing revenue going forward. Was that one-year strategy you’ve touched on, what you think is an appropriate rate increase as we go forward. I think everyone is just kind of wondering, might be we see something where you go back and grab market share. So just trying to gauge the conviction on the multi-year strategy around that? Thanks.

Bill Cobb

Yeah. I mean, the answer I’ll give you, we’re not going to get into specifics but let me just try to answer your question specifically or from a strategic point of view. We ultimately want to grow revenue and that does include -- there are various ways you can grow revenue and its price and mix and unit volume et cetera and we will look at all of those leverage as we look to go forward.

But the emphasis on that we indicated this year that I talked about with our field leaders this year continues to be Tax Plus revenue growth. So that will be the focus as we go forward. And that is the emphasis we think we have best-in-class financial services products. So we’re attaching those products to our clients, servicing them, providing those at value. It is an important part of our story. So I don’t know if that specifically answers your question but yes we will be very focused on that again as we go forward.

Scott Schneeberger - Oppenheimer

Thanks. And then, one of you mentioned earlier in the presentation that the folks that were 1040 EZ that you changed pricing on this year are not really core ACA target. And I was just hoping if you could elaborate a little bit on that? And then second part of the question would be any discussion on what you’re seeing in form creation for ACA that could -- any early insights into next year? So two-parter, thanks.

Bill Cobb

So let me take the first part and then Jason, do you want to talk about the form, situations with the forms. I think again we’re learning about this. We still don’t have a lot of data other than the 8 million enrollees number. We don't know how many people are staying in, paying et cetera. So there is still a lot that needs to happen there. Specifically the 1040 EZ, a number of very low-income people actually would not be subsidy eligible because they are medicated eligible and that puts them into in effect of different category.

So why you would think right away everybody would subsidy eligible, it gets a little tricky especially when it comes to the Medicaid aspect and then there were different states who handled Medicaid in different ways. So that's why it’s not a simple 1040 EZ equals Affordable Care Act enrollees. It actually gets cut down pretty significantly from that.

So again the whole healthcare discussion, you heard us say this numerous times, I think we are well positioned. I think we understand this better than anybody but this opportunity is going to enfold over the next several years. Now specific to the forms, Jason, do you want to talk about broadly what’s going on there?

Jason Houseworth

Sure. Thanks for your question, Scott. So the IRS hasn’t released the final forms or instructions related to ACA. We do hope to get these details later this summer. What the IRS has shared with us and the industry is that first there will be a new reconciliation form, Form 8962 in order to reconcile the advanced tax credit. We also know that there will be a 1095 series of notices to taxpayers with the 1095 A from the healthcare marketplace, which is required to do a reconciliation and then 1095 B and C which are voluntary from employers and insurance companies, which means the client who may not receive a 1095 B or C will actually have to self attest for insurance coverage for their household.

And then finally, there will likely be a combined penalty and exemption worksheet. We think this will be 8965 that will be required to be e-filed with the return for people that have to calculate their penalty or qualify for an exemption. And we know many of the exemption reasons today but there will likely be more in the final instructions when the IRS provides the final version of this worksheet.

Scott Schneeberger - Oppenheimer

Thanks. Appreciate that. A few more, if I may. On -- you guys outperformed your EBITDA margin versus last year. Your goal was to come in about the same. So congratulations on that, just curious your long term 32% is at the high end of the range and you’re obviously trending well. Greg, an update if any on how you're feeling about that long term and in what shape or form would it come -- coming on expense management or more leveraging the top line? Thanks.

Greg Macfarlane

So we’re likely to talk about this obviously and December has been kind of more of what we’ve been doing last few years. But I think just the broad thought I would share with you is our objective is not to maximize margin percentage but is to maximize obviously revenue growth and then net income dollars at the end of it at acceptable levels of margin percentage. And so we’ll continue to think about that.

But as also I shared, we shared with you and you can see in our numbers, we decided to increase the investment this year into the business. We did that last year too. Those were actually higher than we originally thought, which is actually a good thing because the investments we're making, I think, were smart for the medium and long-term but that can have a natural pressure going to next year. We’re going to have the bank transaction ideally done, that’s going to have impact on margin next year.

So we have to digest that plus other things. But in terms of our range, this point we’ve guided historically 27% to 32%. We were 30% last year. We were above that this year. That’s a good thing but we’ve not -- we're not at this point prepared to change that range.

Scott Schneeberger - Oppenheimer

Okay. Thanks. Then two more, they are separate questions but just to sneak them in, one, love to hear about the Sand Canyon approval increase and how you’re going on tolling agreement that sounds like an interesting update? And then last one, hopefully, you’ll touch on a little bit but the comments on incremental net debt going forward, we’d love to hear initial thought on shape or form of that net debt? Thank you.

Bill Cobb

I’ll give those both over to Greg.

Greg Macfarlane

So Sand Canyon continues to be in discussion with the majority of its counterparties that have made rep and warranty claims. They operate those specifically with tolling arrangements which are certainly agreement to say let’s put the clock, the statute of limitations on hold while we have productive conversation. And those conversations continue to develop and that’s why the tolling arrangements continue to in place. And so I’ve always viewed that as a good thing. The fact that the reserve was adjusted upward, I don’t believe it was a huge number. It is an indication that there's progress being made in my view. So I thought it’s a good step forward because I think while at least I can speak for management, the objective here is to help -- to really Sand Canyon to wind down its affairs in an orderly way and that’s by the way going to -- will still take years at this point, but the fact they are able to continue to make forward progress is a good thing.

The second question is really on the incremental net debt, at this point we are not going to talk very specifically about that. We’ve indicated that we’re prepared to take incremental net debt. It will be involved the point at which the bank transaction is closed and then the point at which we have more information we will share that with you.

Scott Schneeberger - Oppenheimer

Okay, great. Thanks for taking on my questions.

Operator

The final question comes from Michael Millman. Your line is open.

Michael Millman - Millman Research Associates

Thank you. Maybe you can discuss some of the differences in terms of monetization or lack of monetization between the EZs and the free online and semifree online products that the industry has been using?

Bill Cobb

Yes. So the EZ client, we are talking very specifically Mike about the people that come to our stores that were under the promotion for free EZ. We have ran a program for three years and so we’re able to track at a client level our experience with them and we’ve modeled out their propensity to take additional products and ages and how long we think they will be in the system, retention rates, etcetera, etcetera. Some people we had spillover. They thought they were free EZ, they weren’t. So we modeled all that out and we calculated lifetime values and we just found that the program was useful for point in time, but it was really declining pretty quickly.

I think we provided broader kind of thoughts on that specifically related to these were people coming in the first peak when the stores were quite busy and we just felt for a lot of reason, this was the right decision and it was very much the right decision. Now you compare that to what Jason does within the digital channel, it’s just a different business model because the variable costs involved there are negligible. There is no service issues because they are doing it themselves, and that’s something that Jason will take at length about AB testing and we’ve just learned a lot over the years as our competitors have that these are offers that are compelling for people and it’s something that’s an important part of how we build our presence in the DIY space.

Michael Millman - Millman Research Associates

I see. And let me relate to that I suppose, could you talk about what your assisted and online retention rates were last year, how they changed, increased from previous year?

Bill Cobb

Do you want to talk about the DIY?

Greg Macfarlane

About DIY. So DIY was relatively flat. Overall, it’s about 64%, software is substantially higher and online is a little bit lower.

Jason Houseworth

Yes. When it comes to retail, there was a slight decline driven almost entirely by free EZ discontinuation. But as I said with our customer SAT scores and our NPS which is frankly two of the biggest measures, we are looking at right now. And all the operating metrics Greg talked about earlier with walkouts down and wait times reduced, I am very pleased with how we -- our client service overall I think was outstanding.

Bill Cobb

We are very satisfied with the retention rates this season.

Michael Millman - Millman Research Associates

When you look forward, you see that there is profitable growth online for (indiscernible) at this point, both that you received from paper and pencil has disappeared?

Bill Cobb

Yes, I mean, I think and Jason if you want to comment. I think we pride ourselves on a simple principal which is we want to serve clients the way that they want to be served. As we’ve talked about a lot, there are people who -- about 60% of the world wants to have assistance and about 40% of the world wants to do it themselves. And as kind of the name synonymous with tax preparation, we want to be there to provide those services, however we want. So we are very pleased with our digital business. Jason and team have done a remarkable job. As we said, we have double-digit revenue increases. We have enhanced user experience metrics, I think the redesign which is only going to get better. It’s terrific and our core business, our main business is the assisted retail business, we’re really proud of that and we understand it well. And we’ll continue to operate both businesses because our focus is on the client.

Jason Houseworth

I think the only additional color I would add, I mean, this is obviously a category that it’s a fastest growing category within tax prep and the digital category grew about 6%. We grew revenue a lot more than that. But what we see shifting actually within digital is really the growth in mobile. And that was the primary reason why we stepped it at the redesign and looked to try to make our products something that is completely flexible upon different form factors, from a tablet to a smartphone etcetera. And this year, we saw the mobile access to our online product increase about a 165% which says we’re well ahead of this curve even after beginning to last year and so we feel like we’re well positioned as we look ahead to finish the redesign and really look to have nice gains in retention as we go into next year.

Michael Millman - Millman Research Associates

Is there a significant -- just to bring it up revenue per return on the mobile versus I guess desktop?

Bill Cobb

We don’t break out the revenue between actually for digital at all but certainly not between desktop and online users. But one thing I would say is that when I talk about mobile, it’s really hard to differentiate between a mobile user and an online user because really we see even what I would call a prototypical online client or one that acts in a browser also using a mobile device in some aspect of the tax preparation experience. So we’re seeing this blending a kind of an omnichannel experience and that's why we redesigned our products and that’s why we feel like we’re well positioned going forward.

Michael Millman - Millman Research Associates

I guess, what I was asking and I guess, just to make sure is that thought that the mobile user was typically a simpler return and therefore a lower price return?

Bill Cobb

I won’t say that Michael.

Michael Millman - Millman Research Associates

Thank you. Appreciate that.

Operator

There are no further questions at this time.

Colby Brown

Okay. Thank you everyone for joining us today. That will conclude today’s call. Thank you.

Operator

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

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