H&R Block posts 5 percent drop in 4th-qtr profit

AP News
Posted: Jun 23, 2011 9:08 PM
H&R Block posts 5 percent drop in 4th-qtr profit

H&R Block Inc. said Thursday that its fiscal fourth-quarter profit fell 5 percent, as revenue declined and the company booked charges related to its loss of its refund-backed loan program.

After the nation's largest tax preparation company lost its refund loan business due to regulatory decisions, it shifted its focus toward beefing up its online tax preparation offerings and targeting younger customers with free simple tax form preparation. The moves paid off in helping H&R Block gain market share during the quarter. Block prepared 21.4 million tax returns this year, up 6.5 percent from 2010.

While the free tax prep service contributed to lower revenue during the quarter, the company argues it has created a pool of new customers that can be converted to more expensive return preparation in years to come.

The latest quarter included other big changes for the Kansas City, Mo.-based company. Activist investor Richard C. Breeden stepped down as chairman at the end of this year's tax season and Block in April named board member and former eBay executive William C. Cobb as its new president and CEO, replacing Alan Bennett, who is retiring in September

Block said it earned $658.6 million, or $2.14 per share, in the quarter ended April 30, including charges of 6 cents per share related to the legal fight over its refund-anticipation loan at the end of 2010. That compared with net income of $690.8 million, or $2.11 per share, in the year-earlier period. Per-share earnings increased due to the company buying back outstanding shares over the course of the year.

Revenue slipped slightly to $2.33 billion from $2.34 billion last year. Revenue rose slightly in its tax services division but business services revenue _ its RSM McGladrey consulting unit _ fell 6 percent.

Analysts on average had forecast adjusted profit of $2.14 per share on revenue of $2.32 billion, according to data provided by FactSet.

Chief Financial Officer Jeff Brown said in an interview that the company invested a good deal of effort in improving its online products to make them more appealing to customers, and in marketing its tax preparation expertise.

Growth came in both its retail stores, which added 500,000 customers, and through its digital products, which added 800,000 customers, with online do-it-yourself preparation leaping 29 percent. That was a significant gain, because Block's digital products lag rival Intuit Inc.'s TurboTax.

He pointed to the retail store gains as important, especially following the loss of refund-backed loans.

"We really entered the tax season disadvantaged," he said.

Brown added that the client growth, particularly among younger customers lured by Block's free preparation of 1040EZ forms, bodes well for the future. The company maintains that as these customers grow older and their tax returns become more complex and more expensive, they'll stick with Block.

Reflecting the free 1040EZ promotion, Block's average fee for returns prepared at retail stores fell more than 3 percent to $182.96 for the 2011 season, compared with $189.25 for the 2010 season.

Digital remains an area that the company has targeted for more growth.

CEO Bill Cobb, during a conference call to discuss the results, said that Block plans to fight the government's recent move to prevent the company's planned acquisition of privately held 2SS Holdings Inc., which makes the tax prep software TaxACT.

The Justice Department filed an antitrust lawsuit last month to block the attempted $287.5 million buyout. Government attorneys say a tie-up would leave just two companies, Block and Intuit, controlling more than 90 percent of the tax software market.

"Both H&R Block and TaxACT remained committed to the transaction," Cobb said. "Combining H&R Block and TaxACT will do exactly what the Justice Department wants, bring competition to a digital marketplace that's currently dominated by one player, Intuit."

The CEO said Block and TaxACT will "vigorously pursue" litigation against the Justice Department, and is seeking a preliminary injunction hearing by the end of September.

Cobb also addressed the issue of mortgages written by Block's shuttered subprime mortgage unit, now called Sand Canyon Corp.

Investors are concerned the company could get hit with suits demanding that it buy back many of the mortgages written before the unit was shut down in 2007, and might not have enough reserves to cover such claims. The unit saw new claims for $55 million during the fourth quarter, on par with prior quarters. Cobb said he is "confident that Sand Canyon will continue to handle all valid claims, and we believe the process will not affect H&R Block."

For the full fiscal year, Block said net income fell 15 percent to $406.1 million or $1.31 per share, from $479.2 million, or $1.43 per share, in the prior year. Adjusted for various charges, full-year profit came to $1.52 per share.

Revenue for the year fell 3 percent to $3.77 billion, from $3.87 billion.

In aftermarket electronic trading, Block shares added 8 cents to $16.15, from their regular session close of $16.07.