Colby Brown - VP and Corporate Controller William Cobb - President and CEO Tony Bowen - CFO

Thomas Allen - Morgan Stanley Scott Schneeberger - Oppenheimer Anjaneya Singh - Crédit Suisse Kartik Mehta - Northcoast Research Partners Kayvan Rahbar - Macquarie Jeffrey Silber - BMO Capital Markets Michael Millman - Millman Research Associates

Good afternoon, ladies and gentlemen. My name is Shannon and I will be your conference operator today. At this time, I would like to welcome everyone to the H&R Block Fiscal 2017 Earnings Call. [Operator Instructions]. It is now my pleasure to turn today's conference over to Mr. Colby Brown, Vice President, Finance and Investor Relations. Mr. Brown, you may begin your conference.

Thank you, Shannon. Good afternoon, everyone and thank you for joining us. On the call today are Bill Cobb, our President and CEO; and Tony Bowen, our CFO. Today, we will discuss our fiscal 2017 results and our thoughts on the next tax season. 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've reconciled the comparable GAAP and non-GAAP figures in the next -- in the schedules attached to our press release. Before we begin our prepared remarks, I will 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 2016 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. [Operator Instructions]. With that, I'll now turn the call over to Bill.

Thank you, Colby, and good afternoon. We came into this season with a comprehensive and aggressive plan to change our planned trajectory and we delivered. I'm extremely pleased with our performance. We took market share in DIY and improved our assisted client trajectory and as a result, we outperformed the overall market. We accomplished this through promotions that were compelling, a new assisted client experience that resonated well and an enhanced DIY product that made filing easier than ever. And we achieved all of this while delivering outstanding financial results. Our EBITDA increased 11% or $92 million to $904 million. The resulting EBITDA margin of 29.8% represents an over-300 basis point improvement from last year and our earnings per share was the highest in over a decade, increasing 28% to $1.96 per share. I'm proud of what we have achieved which has given us great momentum heading into fiscal 2018. Our planning process is underway and we're laser-focused on our plan for next tax season. So with that brief overview, here's what we'll cover today, first, I'll provide our perspectives on the industry in this unique tax season; next, we'll review our performance; then Tony will review our fiscal year financial results; and finally, I will speak in more detail about the leadership transition announced in May. First, let's start by looking back at tax season 2017. Consistent with the past few years, the season started very slowly. What was different about this season, however, is that the industry never reached its expected growth with an IRS decline in returns of approximately 50 basis points compared to last year. This was unexpected as there have only been 4 times in the past 60-plus years in which overall tax returns declined following the year with employment growth. While we don't yet have full clarity as to the reasons behind the decline, we do have some hypotheses which center on 4 key factors. First, efforts of the IRS Security Summit members and stronger control of the IRS have helped reduce vulnerabilities that cyber criminals have exploited in the past, resulting in fewer fraudulent returns, including incidents of tax identity theft. An example of this is the elimination of the IRS PIN for e-filed returns. In order for taxpayers to unlock and electronically sign a self-prepared tax return, they must now provide their prior year adjusted gross income which is more difficult for fraudsters to obtain. Second, the PATH Act requirements may have also helped reduce fraudulent returns. Specifically, W-2s and 1099s were required to be submitted to the IRS on January 31 and the IRS held refund for returns containing the EITC and additional Child Tax Credit until February 15. Third, renewal requirements for certain high-PIN filers may have caused some to miss the filing deadline. Additionally, undocumented immigrants who previously filed with an i-PIN may have been more reluctant to do so given the current political environment around immigration. And finally, we saw a decrease in balance due returns which may simply be the late filings that will occur in the off-season or may be returns that may remain -- that will remain unfiled. Not only do these factors result in lower-than-expected return volume for the industry, they also resulted in a much slower shift from assisted to DIY than in previous years. Though complete IRS data is not available, we estimate that the shift will be less than half of the 70 to 90 basis points seen in the industry in each of the past few years. Now that we have discussed what happened in the industry, let's talk about our performance. In short, we delivered what we promised. We improved our client trajectory. And as I said earlier, I am very pleased with our results. In the assisted category, we saw a significant improvement over last season driven by successful promotions and our memorable marketing campaign, Get Your Taxes Won. We successfully launched Refund Advance, our interest-free, no-fee, early-season loan that bridges the gap for filers between the time they file their return and receive their refunds. Given the provisions of the PATH Act, this product was especially relevant to those filers who face delays in receiving their refunds in the early part of the season. We also reintroduced our free federal 1040EZ promotion, another offering that appealed to early-season filers. This successful relaunch was effectively timed, positioning us well against our competitors in what was an extremely competitive season. Additionally, we enhanced our client service delivery model by redesigning the tax preparation process, centering around our partnership with IBM Watson. Client feedback has been very positive. In fact, we saw noticeable increases on key client service metrics as we demonstrated our ability to maximize clients' refunds in a new and engaging way. These efforts have translated to improved results. New client growth was the highest it has been in years. We dramatically improved the client trajectory in EITC clients, an area in which we've seen declines over the last several years. We saw an improvement in retention rate of nearly 2 points which is the best single-year improvement during my tenure. Our net average charge increased approximately 2% despite the pricing impact of the free EZ promotion and was attributable to better discount controls in our company offices and improved pricing in our franchise network. And most importantly, in a category in which change typically happens slowly, we improved our client trajectory significantly with a 2.5% decline in return this fiscal year versus a nearly 6% decline last year. When placed in context of this year's decline in assisted IRS returns, this is terrific progress as we work toward our long term goal of client growth. Now turning to our DIY business. This was a recheck year for us. We realigned our product lineup and pricing to effectively compete in the category and made significant enhancements to our product. And as I mentioned on our third quarter call, we didn't just want to compete in the category, we wanted to win. That's exactly what we did. We aggressively went after clients and market share with our H&R Block More Zero promotion which was a more compelling offer than what we saw in many of our competitors. As anticipated, this resulted in a decrease in our net average charge. However, it drove tax filers to our online product, with new client growth increasing 28% and retention increasing over 350 basis points. While H&R Block More Zero helped us increase client volume, so, too, did these significant improvements we made to our product. Among these improvements were enhanced import capabilities for current year tax forms and prior year tax returns. Our clients can now import their W-2 information by photo capture right from their phone. They can also drag and drop prior year returns which allows them to pre-populate over 90 fields of data in their tax return. By allowing filers to import prior year returns completed by competitors, we're removing the barriers of switching to H&R Block. These efforts translated into meaningful progress in other key metrics. We improved our conversion rate 130 basis points. Data imports of prior year competitor returns increased over 120%. The number of clients who either started or finished their return using mobile devices increased 20% and awareness of our DIY product grew 2 points to 65% which shows progress but still represents a growth opportunity for us. The net result was that we got our DIY business back on track, growing online returns 6.8% and taking market share. Now with that overview of the business, let me provide a couple of thoughts on our financial performance. On the top line, I am pleased we're able to keep revenues flat despite our pre-pricing promotions in both the assisted and DIY channels. Regarding expenses, we made significant changes coming into the year through cost-cutting measures that allowed us to invest in our business and improve our margin. We were able to exceed our cost-reduction goals across the board which resulted in better-than-expected financial results. As I mentioned earlier, we dramatically improved our EBITDA margin over 300 basis points to 29.8% and increased our EPS by 28% to $1.96, both outstanding results. We achieved this while returning capital to our shareholders, repurchasing 14 million shares for an aggregate purchase price of $317 million. And I'm also pleased to announce that the board approved a significant increase in our quarterly dividend for the second year in a row. Overall, these outstanding results reflect thoughtful execution of our strategy and the hard work of our team. Tony will provide more details on our financial performance in a moment. So while we're very pleased with our operational and financial results for the year, we're already looking ahead to 2018 and beyond. We're well underway in our planning efforts for next year which began in earnest a few months ago. Our strong performance this year positions us well going into 2018, but we must continue to execute our strategy. So what can you expect next year? We will continue to aggressively go after client growth. We will continue to invest in innovative solutions designed to leverage our ability to serve our clients any way they want to be served. And we will continue to improve the value we provide to our clients and we'll effectively communicate that value. With that, I'll hand the call over to Tony.

Thanks, Bill and good afternoon. Today, I'd like to talk about our fiscal 2017 results and how we performed against our expectations. I'll also discuss our approach to capital structure and provide some thoughts around our outlook for fiscal 2018. Let me start with how we performed against the objectives that we outlined prior to the tax season. First, with respect to volume and price in our assisted business, we expected a significant improvement in client losses, along with a flat to slightly lower net average charge. We achieved our plan to change the client trajectory and delivered better-than-expected net average charge growth of approximately 2% due to better discounting discipline and improved franchise pricing. In DIY, we anticipated an increase in client volumes due to H&R Block More Zero promotion and we achieved just that, increasing DIY online clients 6.8% and outpacing the industry. And while we anticipate a decline in our net average charge, it actually came in better than expected due to favorable mix and product attach. From a bottom line perspective, we indicated in December that we anticipated a fiscal year EBITDA margin at the low end of the long term guidance range of 27% to 30%. More recently, we indicated an expected margin of approximately 28%. Given the significant changes we made to our core business this tax season, it is difficult to predict their ultimate impact on our results. That, combined with diligent expense management throughout the fiscal year, especially in the final months of the tax season which is when we see a significant amount of the fiscal year's expenses, helped us achieve a better-than-expected EBITDA margin at 29.8%. I'll provide more details on the drivers of this in a moment. In summary, we achieved or exceeded all of our primary objectives. With that context, I'd now like to provide additional details on our key financial metrics, starting with the income statement. Revenues are relatively flat at just over $3 billion. Assisted tax preparation fees and royalty revenue increased due to an increase in our net average charge, partially offset by lower tax return volume. In our DIY business, revenue declined as the pricing impact of H&R Block More Zero promotion was partially offset by the increase in return volume. From a product perspective, we were pleased with our overall attach rate which increased over the prior year. We successfully launched Refund Advance this year with approximately 1.1 million applications, an overall approval rate of approximately 78% and total funded loans of approximately $700 million. The launch of Refund Advance also helped us drive an increase in the number of Emerald Cards issued this year, resulting in a 140 basis-point increase in our card attach rate. In total, we issued 1.9 million Emerald Cards in tax season 2017, producing revenue per card of $50. As expected, Refund Transfer units declined slightly to 4.7 million from 4.8 million last year due to the free federal 1040EZ and H&R Block More Zero promotions. Refund Transfer remains a significant product for us, delivering $148 million of revenue in fiscal 2017. We continue to be pleased with our Peace of Mind attach rates which came in slightly higher than last year at approximately 28%. Turning to expenses. Operating expenses decreased 3.5% or $85 million from the prior year, primarily due to the cost-reduction measures we outlined at the end of the year. This decline in operating expenses are driven by, a $36 million decline in marketing expense; a $35 million decline in consulting expense, about half of which was attributable to onetime costs in fiscal '16 related to the bank divestiture and capital structure changes; and a $26 million decline in compensation expense. Additionally, we lowered bad debt expense by $23 million due to an improvement in early season client volume. These expense savings were partially offset by our investment in Refund Advance which was approximately $30 million. This result was made possible by the hard work of our associates. When enacting cost-cutting measures of this magnitude, cooperation across the entire organization is needed to succeed. Everyone from our field management to our marketing team to those working at our corporate headquarters displayed diligence in managing expenses. Some of the benefits from our cost-reduction efforts were reinvested into the business to fund promotions, product enhancements and the new client experience. The remaining savings helped improve the bottom line, driving an increase in our EBITDA of $92 million to $904 million and an EBITDA margin improvement of over 300 basis points. Moving through the remainder of the income statement. Total interest expense for fiscal 2017 was $93 million. This represented an increase of $24 million from the prior year due primarily to the full year impact of long term debt issued in September 2015. Our effective tax rate increased slightly to 33.1% mainly due to discrete items. While this result was better than our guidance, we continue to expect our long term effective tax rate to be approximately 34% to 36% which excludes the impact of unexpected discrete items and does not contemplate any impact related to potential corporate tax reform. As a result of the items I just discussed, net income from continuing operations increased $37 million or 10% to $421 million and diluted earnings per share increased $0.43 or 28% to $1.96. It's important to note that this outstanding result in EPS was driven not only by the increase in net income I just discussed, but also from share repurchases over the past two fiscal years. During fiscal year 2017, we repurchased 14 million shares for an aggregate purchase price of $317 million which was partially funded by the sale of our mortgage loan portfolio during our third quarter. The average price paid was $22.61 per share which compares favorably to our current market price. We currently have approximately $1.2 billion remaining of our $3.5 billion share repurchase authorization effective through June 2019. We will continue to be opportunistic in our approach to share repurchases. In addition to share repurchases, I'm pleased that our Board of Directors approved a 9% increase in our quarterly dividend to $0.24 per share. This represents a continuation of last year's catch-up for those years in which we were prevented from increasing the dividend while regulated as a savings and loan holding company. We remain committed to paying quarterly dividends which we have done every quarter since becoming public -- becoming a public company over 50 years ago. And we're also committed to an annual review of the dividend after each fiscal year. Now any decisions regarding future dividends will depend on operating results, marketing conditions and capital needs, among other factors. Turning to discontinued operations. Sand Canyon's accrual for contingent losses related to representation and warranty claims was unchanged from the prior fiscal quarter at $4.5 million as of April 30. As a reminder, Sand Canyon is and always has been operated as a separate legal entity from H&R Block. We continue to believe our legal position is strong on any potential veil-piercing arguments. As I mentioned earlier, we achieved or exceeded all of our primary objectives for the year and delivered better financial performance than expected. We intend to build on this momentum in 2018. We're still in our planning process. And consistent with last year, we will provide more specifics on our second quarter earnings call in December. Before I hand it back over to Bill, I want to express my appreciation for everything he has done for me and this company. He is a passionate leader who is focused on winning and has taught me some invaluable lessons over the past 6 years. I will miss our daily interactions, but I know we'll stay in touch as he continues to follow H&R Block in the coming years. Thank you, Bill and best of luck. With that, I will now turn the call back over to Bill for some final comments.

Well, thank you, Tony. I appreciate those kind words and have so enjoyed working with you during my time here. The company is in really good hands with you as a CFO. To recap, we delivered what we promised. We significantly changed the client trajectory. We came into the season with a comprehensive and aggressive plan and we executed. And we accomplished all of this while delivering extremely strong financials. I'm very proud of what we achieved this past season. As you know, I will be leaving the company on July 31. The timing is right given our strong performance this season, the excellent financial results and the outstanding management team we have in place that can lead this great company in the years ahead. As I mentioned before, the 2018 planning process is currently underway and I will see that process through during my remaining time at the company. We have great momentum coming out of fiscal 2017 and I'm genuinely excited about the plans we're developing for the upcoming tax season. The CEO search is in process and the board is considering both internal and external candidates. The board and I have developed a smooth transition plan. And regardless of the timing of a permanent CEO being named, I'm confident the company will continue its positive momentum with Tom Gerke as our leader. Tom has been my right-hand man for the last 6 years. He's a trusted adviser and a key member of my leadership team and has been instrumental in this -- developing our strategy. Tom proudly serves as our General Counsel and Chief Administrative Officer. Additionally, he has prior Fortune 500 CEO experience with Embarq Corporation and is Executive Vice Chairman of CenturyLink. On a personal note, I can truly say it has been an honor and a privilege to lead this great company. Over the past 6 years, we have refocused on our core tax business and built a culture of doing the right thing. And we've adapt to our promise of delivering value for our shareholders by repurchasing over 1/3 of shares outstanding and increasing the dividend 60% during my tenure. H&R Block is a strong company with an experienced, focused management team that I believe will deliver even better results in the future. It has also been my pleasure interacting with and getting to know those of you in the investment community. I truly appreciate your insights and the value of your input during my tenure. H&R Block is a great company and a great investment and I'm proud to be part of its legacy. With that, we're now ready to open the call for questions. Operator?

[Operator Instructions]. Your first question comes from the line of Thomas Allen from Morgan Stanley.

So I guess my first question, Bill, it's been fun working with you. Why are you leaving?

Well, Tom, as you know, I came out of retirement 6 years ago and Block was not in great shape right then, obviously the fifth CEO in 5 years. I was coming off the Board. And at that time what I wanted to try to turn the company in the right direction and I think that's what we've done. It's been 6 years. This has been a great run. I love this company, but it's just time for me to turn it over. I left the company in good shape financially, et cetera. So it's just the right time for a new CEO to come and take it to the next level.

Okay. Well, I wish you the best of luck. And moving on to the numbers. I think the biggest surprise for everyone is likely going to be the margins. So I estimate it's about a $60 million delta between what you had thought after tax season and the actual margins. And so can we just talk about kind of what the makeup of that $60 million delta?

Yes, Tom, this is Tony. Thanks for the question. As I mentioned in my opening comments, there's obviously a bunch of factors that drove the year-over-year performance. And if you look across the P&L, really, every category on the expense side is favorable. It obviously was a little bit more favorable than we even thought. We expected to come in north of 28% and then we ended up coming in closer to 30%, 29.8% from an EBITDA margin perspective. But there was really every category across the P&L from comp and benefits. We knew about the marketing reduction, but the management of our labor during tax season was phenomenal. Really, just management of expenses across the board, when you think about things like T&E, consulting expenses, just really every department in the company just did a phenomenal job this year and really took to heart our goal at the beginning of the year which is we have to be diligent on the expense side to give us flexibility to be aggressive to try to turn around the business and that's exactly what we've done. So we're pleased with the results. It's a little bit better than we expected, but we think it puts us in a really good place in FY '18 and beyond.

Great. And then just my last question. In Bill's prepared remarks, you talked about in 2018, you're going to continue to aggressively go after client growth. I mean, I think you guys -- your messaging is that you had a pretty good tax season this year where you were able to increase EBITDA, I think, 11%, but you still had a 3.5% decline in -- or a 2.5% decline in assisted volumes. So how are you thinking -- like is next year going to be a success if -- would a repeat of this year be a success for next year? Or do you really want to start going back to client growth?

Let me go first, Tom and then, Tony, if you want to add anything. I mean, I think Tony will comment more in December on -- as the team works through their plan for the year. I wouldn't hasten to add again, the industry decline here of really about 200 basis point difference. We were very surprised that the IRS declined 50 basis points. We all anticipated it was going to be 150 up or in that range. So that contributed also, the industry dynamics to the client decline. But I think one of the hardest things in any business is to change the client trajectory and that's what I'm most pleased about. We said coming into the year, for assisted, our goal was to change the client trajectory. We did that. And our goal was in DIY to grow share and we did that. And so I'm not going to comment on what the goals for next year are, but that'll come in December. But what I'm pleased about is we did exactly what we said we would do.

Yes, the only thing I would add, Bill, is in December, we talked about our expectations for both assisted and DIY. And at that time, we said we expected assisted to decline. Our goal for the year was to change the client trajectory. Obviously, coming off of 2016 where we had significant loss in assisted clients, we knew it would take a couple of years to turn that around. We made significant progress this year. But as I said from a guidance perspective, we didn't expect to basically be positive in assisted. And then you layer on what Bill said about the industry being really slow this year. I think overall, we're pleased with the results. We expect that could get even better next year. But as Bill said, we'll provide more clarity in December.

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

Bill, best wishes. The -- I guess, I'm curious for both of you guys, what do you anticipate with opportunity for expense savings going forward since, obviously, you were very effective in trimming this year? And the follow-on on that is what did the -- from the last question, what did the timing of the season allow for you to do at the end of the season to really be, I think, Tony you said, efficient with labor?

Yes. As far as expectation, obviously, this year, Scott, was a significant reset for us. If I take us back to what we started last March and April which was looking across the company for ways to reduce expense, give us flexibility to invest in turning the business around, that was really the start of it. And that being said, when you have a year when you take out as much expense as we did, that's obviously not going to recur every year. We do believe that most of the expense savings we took out this year, the vast majority is essentially run rate, so we're going to continue to get the benefit. And we're going to continue to look for opportunities to run more efficient, look for opportunities to reduce expense, but it clearly won't be at the level that we had in FY '17. It's just -- it's not possible. We went after things very aggressively and really did a phenomenal job of managing expenses. As far as the timing, our business is so seasonal. We do about 75% of our revenue in the fourth quarter. We do a little bit of less than 1/2 of our expense comes in the fourth quarter. And our biggest day of the year is April 18 which was the last day of tax season this year. So any time it comes in that quickly, not only from a revenue perspective, but obviously, a lot of our expenses, especially on the compensation side, frankly, I wish we would've done a little bit better job of being able to forecast that. But at the end of the day, we're extremely pleased and we're just pleasantly surprised that we were able to manage the P&L as tightly as we were all season long.

Great. And then just -- I'm curious. Lessons learned with this first year of the Refund Advance loan. Obviously, it had some benefit to you, particularly given the PATH Act. What are some things, [indiscernible] which can be improved and thoughts for the coming year?

I'll go first and then, Tony, if you want to add anything. And I'm not going to go into specifics. But I think we did learn more about this client. I think we learned some things when it comes to the messaging side that I think we can improve as we go forward and we plan on doing. I think what we're very pleased about is that the pull for the product was very strong. The -- operationally, it worked really well. And this was a really nice year of one program of $700 million and almost 1 million people getting the loan. So I think we're pretty pleased with the start we're off to. And there are some lessons we'll apply around messaging and -- but operationally, it really was smooth. So I think we're very pleased about that. Tony, if there's anything else.

No. I mean, yes. I mean, it worked really well. I think there's always more upside and as our tax grows and as well as our clients see the product, if we decide to do it again for a second year, I think that will give us additional upside. But I think it just takes a little bit of soak time for a product like this to -- for our 70,000 tax professionals to get used to offering it. We had clients saying, wow, this seems too good to be true which it is not. And I think having it for a second year will -- we expect the take rate to go up.

Your next question comes from the line of Anj Singh from Crédit Suisse.

And I also wanted to congratulate Bill on the retirement. I wish you my best. So nice -- it's nice to see the good results for the fiscal year. And I think your results were largely above expectations on all metrics. So not to sound nitpicky, but Bill, you've spoken to weaker execution last tax season. I'm curious how you would rank your execution this year in light of [indiscernible] strong performance. Were there any areas that you would have liked to improve on this tax season? And how should we think about your approach in 2018? Would it be right to assume that you guys have now sort of found your rhythm?

Yes. I think on -- and thank you for your comments. I think -- and Carolyn Roscoe who leads our sales and service team. We instituted a big cultural change in the field around a sales culture and going out and we're a great operational company. We manage -- we do accurate tax returns. We do them efficiently. But bringing on the sales culture, we knew it was going to be a multi-year initiative. I think we've got off to a good start. Carolyn and her team spent a lot of time this time last season just trying to figure this thing out. She's off to a great start this off-season in terms of getting ahead of the curve on sales. So I hope for the sales and service team next year, in year two of the sales culture, if you will, to really do a nice job on that. I think our franchisees had a very good year this year. And as Tony remarked, I think we've got a great culture here of expense savings that are going to recur. So a lot of things are hitting. I think we can always do better certainly on -- in terms of gaining clients and servicing them. So we're a long way from satisfied, but this was important for us to get the trajectory change, get on firm financial footing and be able to grow from here.

Okay. That's helpful color. And then as a follow-up, one for Tony. The question on your margin performance. I guess, how should we be thinking about the sustainability of these in light of them being at the top end of your long term margin goals despite still seeing volume declines? I realize you're not going to give guidance at this juncture, but hoping you can give us any thoughts on whether anything was under-invested in. Did you under-spend anywhere that would cause margins to, say, perhaps revert back to the lower end or mid-end of that range going forward? Or is that range perhaps conservative?

Yes, you're right, we're not going to provide the changing outlook on the guidance range. I would say there's a couple of things that occurred this year that were onetime in nature. Those are fairly minor relative to the performance we had year-over-year, kind of in the $10 million to $15 million range. So there was a little bit of year-over-year headwind, but I think the vast majority are essentially in our baseline. We're still going through our FY '18 planning process. And as we kind of figure out what that looks like, we'll provide more clarity in December. But there was just, I hate to say -- keep saying the exact same thing over and over, but just phenomenal performance across the P&L. And frankly, you assume some things are going to go your way and some things maybe not. And this year, we just, from top to bottom, did a phenomenal job managing it. So we'll provide more clarity in December. But for the most part, this is essentially a new run rate for us from an expense perspective.

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

Bill, I wanted to get your thoughts on why you think the shift from assisted to DIY this year was what it was and so much less than it has been the previous tax season.

Well, I think -- Kartik, I think this still has to be played out, but I'll give you my thoughts. I think the reduction in fraudulent returns that was a combination of the PATH Act being delayed and also all the work we've done on the industry really -- I think there were a lot of parts in the returns that were all coming through the digital channel and I think that, that slowdown was a major factor. I think the other thing was, frankly, some of the things that we did and some other independents and other branded assisted players did in terms of free -- our free EZ offering, certainly the Refund Advance, I think, slowed down the shift in that regard. So I think with the combination of good programming, good marketing and also the fraud controls kicking in and really taking a lot of fraudulent returns out of the system.

And then, Bill, just staying on the DIY side a little bit. You had a good season this year on the DIY side. Do you think you need to get more aggressive next year to kind of maintain that shared momentum? Or do you think the programs you have in place will allow you to continue to get share?

It's a very clever way of asking me what we're going to do next year, Kartik, so I'm -- even on my last earnings call, I'm proud of you. But I think, obviously, we'll talk more about this in December as a company. Look, I'm really pleased with what we did last year. I'm not only pleased with the promotions, the pricing piece, but really Heather Watts and her team did a terrific job on the product. We talked about it in the script, the prior year imports, the increase in retention was really due to client experience enhancements. So I think in a highly competitive category where you have a dominant #1 who's obviously a very formidable competitor, we're pleased to be the clear #2 now. We're pleased with our efforts. We're going to have to do better if -- we all realize that. But again, specifically, we're not going to talk about what we're going to do. But knowing that TurboTax is always going to be formidable and we've got to be on our A game.

And then just finally, Bill, you achieved about 2% of pricing this year. Do you think -- as we go forward, does this industry -- will it allow you to continue to get modest pricing like that? Or do you think there's anything changing that would make it difficult to get even that minimal amount of pricing?

Yes and I'll let Tony weigh in also. But I think, again, the pricing question always comes down to the mix and the mix of low-end offers. This is a very unique industry in the sense of you go from free returns all the way up to multiple thousand dollars’ worth of returns for complex situations. I think, as Tony mentioned, we're very strategic in our pricing. We look at it at a really granular level, geography, client segment and the like. So I think we still believe that we have to be aggressive in marketing. I think free is here to stay. But I think that there are some smart moves that we can make certainly on product attach and other areas that will still enable us to get some yield out of the pricing side. It's always tough. I think it will not be any easier next year. But I feel confident that our overall revenue mix, that there will be some benefit that we'll get, if you will, from the pricing line. It's probably not the right word that we should use, but it's something, obviously, we spend a lot of time on.

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

This is Kayvan Rahbar, filling in for Hamzah. I have a question on capital allocation. Can you just remind us again on what you guys are thinking in regards to your capital allocation, especially in regards to buybacks and then the current leverage on the balance sheet versus your target range?

Yes. So last year, we repurchased about 300 million -- $320 million worth of shares. If you look over the last couple of years, it's north of $2 billion. So obviously, we've been very focused on share repurchase over the last couple of years. We don't provide guidance on specific plans to the upcoming year. But obviously, we're committed to returning capital to shareholders through dividends and share repurchase and that will remain constant in the long term as well. As far as from a leverage perspective, we're happy with where the balance sheet sits today. We aren’t planning to issue any additional long term debt at this point. We're pleased -- we think, given the performance we had this year from an EBITDA perspective, it gives us some additional flexibility, but we have no plans of issuing an additional benefit soon.

And then, if I could just give one more follow-up question. On the digital side, can you talk about what inning we're in terms of artificial intelligence and other machine learning from a technology side positively impacting your product? Are we beginning in the mills?

Yes. I'll let Bill add on. I think we're at the early innings. I know TurboTax has talked about they're using artificial intelligence in their product. I think artificial intelligence just broadly is still in the early innings and obviously has a long way to go. So we're trying to think about ways we can provide the best tax outcome for our customers, in our DIY products. Obviously, all of our competitors are trying to do the same. But specifically, I think we're definitely in the early innings.

Yes. And I think we're very pleased with our partnership with IBM Watson which we have in the assisted channel. I think what it -- the excitement it brought to the retail experience for our clients, what it did for the tax pros, the combination of our really well-trained experienced tax pros, in combination with Watson and it's only going to get better. We're committed to this. Most companies are committed to this in the long term. So I think we see it as a weapon as we go forward to try to get the best outcome for our clients. That's why our marketing line is Get Your Taxes Won and that's what we want to continue to promise to our clients.

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

Just wanted to get back to the discussion about EBITDA margins again. I'm not sure if it was last December or the December beforehand when you reduced your long term margin target. What would it take for you to see or be comfortable enough to raise that back again either where it was before and I think it was 28% to 32% or some other number? Are there any strategic or secular changes in the business that would prevent you from doing that?

Yes. And I think, Jeff, one of the key drivers is we pull our plan together for this year, what our expectations, not only from an expense perspective, but obviously, revenue and client volume is a key driver in that. We did reduce it to 27% to 30% this last fall. So you're right in this -- for most -- right before the most recent tax season. It was 20% to 32% before that. If you go back to last year's performance, we were slightly below 28%. So we were kind of outside of the range, if you will. In FY '16, I think it was high 27s. That's why I felt it was appropriate to change it to 27% to 30%. And obviously, we did better than we thought we were going to do this year. But as far as longer term, I mean, it's really going to be driven by client volume and then just identifying additional opportunities to reduce spend to become more efficient and we'll try to provide additional clarity to that question in December.

Okay, fair enough. And I missed some of the beginning comments when you talked about the Refund Advance program. Did the costs from your perspective -- I think you had guided initially to $32 to $36 per loan. Did it come in line with that range?

It did. We ended up doing less than we originally thought, though. Based on the amount of capacity that we had, we did about $700 million in loans. And I think that was just year 1 of the program, it was difficult to predict the ultimate volume. And that was a benefit to us from an EBITDA perspective. Obviously, that was an expense we didn't have to pay. But yet, we still drove in a lot of clients and overall, really successful program for us. So that was part of the benefit, if you will, from an EBITDA margin perspective, but still got a lot of the benefit on the client side as far as offering a valuable product that drove in volume in their offices.

Great. And just a quick follow-up, did you talk at all about what type of clients took this? Were these new clients, existing clients, what kind of combination?

Took the Refund Advance?

Yes, please.

Yes. This is our strongest new client performance in a lot of years and I think what we're especially pleased by was the amount of EITC returns we did which has been a problem area for us in the last few years and that we were able to regain our footing with EITC clients. So it was the early-season client, obviously, that's when we had it out there, but it was a combination of new clients and EITC clients. And as I said earlier, our retention rates improved by almost 2 points on the assisted side. So that was a help, too.

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

So following up on a theme here is this year's fiscal '17 was helped by, as you pointed out, very heavy promotions with the cost of that basically seems offset by cost savings. So related to that, typically, you see diminishing returns from promotions as they continue. So kind of interested in whether you expect additional promotions. And if so how are you really likely to fund it? And secondly, I mean, this is probably going to sound kind of negative, but I kind of wonder why, with the upward momentum that you're leaving before the end of your contract, just when you may be breaking through the positive territory, I'm kind of curious as to why also Greg and Jason have left recently.

Yes. So let me start with the -- on the promotional side. I think, Mike, I think your comment is very fair that the task with promotions is always to either introduce new ones or certainly refresh the ones that you used. And that -- we're well aware of the challenges associated with that. And our plans are underway and we're very mindful of that. But our goal every tax season is to be impactful and that will be the same for this year. I'm not going to comment whether there are going to be new ones or not. We'll talk more about that, as Tony indicated a couple of times, more in December. So that's with regard to that. With regard to me, I think the contract was really just an employment agreement that really was about -- to me, it's kind of one of those things you put in the drawer. I came here six years ago when the company really was kind of going sideways and really needed, I think, a jolt of leadership and came out of retirement at that time as I've been with eBay for a number of years. And I fell in love with the company. I thought it was great. I really enjoyed the job, enjoyed the associates, enjoyed the tax pros, all the elements of it. And -- but it's a grind. It's a lot of work. So I just thought it was time to leave it. There was going to be a certain point where it was time to go. My youngest just graduated from high school. He's headed off to Notre Dame and it was just one of those -- it was a very personal decision for me. But I will -- also wanted -- I was not going to leave this company in a bad position. I promised the board that. I originally signed a five-year deal. I -- on that level, I actually stayed an extra year. So it's just the right time. There's nothing to read into it or anything else. I leave on good terms. We have a very smooth transition in hand. And so for me, it was a personal decision that this was the right time. And I think it's going to be a great time to hand this off to a CEO who I believe will have -- will choose a great CEO and they can take it to the next level. With regard to Greg and Jason, who I worked with for virtually the entire time I was here, who I'm a big fans of both of them, they -- we had long talks about their careers and it really, for them, also was a personal decision. They certainly were in good standing with the board, with myself and everyone else, but they both are very talented guys. They're in a stage in their career where they wanted to go do something differently. The great thing about it is we have a strong bench here and we were able to fill Jason's job a few years ago, when he was running digital, with Heather Watts who's been outstanding in his role; Tony took over for Greg; Kathy Collins running Marketing who's very experienced; Karen has been here 17 years, is just doing a great job on the sales and service side; Kip Knight; Alan Lowden's a terrific technology leader; and then, of course, there's Tom who we appoint to take over as the Interim CEO. So it's a real experienced management team. There's depth to it. And so we've been able to absorb these changes, I think, in a way where the new person can come in and work with this experienced team and really feel great about going forward here. But I know Greg and Jason are friends of the company. I saw them recently and they're going to be great in all their endeavors.

As there are no further questions at this time, I would return the call to Mr. Colby Brown.

Okay. Thanks again, everyone, for joining us. This concludes today's call.

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