Industry Context. H&R Block Investment Community Conference. January 9, Market shift to professionally supported tax preparation

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1 Introduction H&R Block Tax Services Consumer Financial Services RSM McGladrey Financial Review Industry Context Market shift to professionally supported tax preparation Paid prep channels taking share from DIY DIY shifting to digital Non-digital DIY channels are declining as filers move toward software and online Integration of digital and professional services represent next stage of industry growth Other DIY Digital DIY Paid Prep U.S. Tax Filers 128 million million 100% 100% TS TS06 CAGR 0.8% -13.7% +13.2% +2.9% January 9,

2 Consumer Segment Context Drivers of Choice Speed of Refund Control Expertise Settlement products Convenience Stress reduction Control over process Ease of use Cost/value Expertise of Professional Referrals Relationship Client Characteristics Lower income (<$40k) Younger (<40) High school education Renters Software users have moderate to high income and are older Online users have low to moderate income and are younger Mid to upper income (>$50k) Older (>40) College education Homeowners Competitors H&R Block (30% share) JH/Liberty (<10% share) Other Paid (52% share) Intuit H&R Block TaxAct CPA/Accountants (64% share) H&R Block (10% share) Digital (15% share) Historical Mix of Tax Clients H&R Block Clients Served Record number of clients served Digital Retail IntÊl (millions) FY02 FY03 FY04 FY05 FY06 January 9,

3 Consumer Segment Context 133 million total tax filers (TS05) Dispersed across retail, CPAs, digital and other service platforms Hybrid Expertise 27% of Tax Filers 32% of Tax Filers Later season clients who have more complex tax situations In the market from late November throughout the tax season Control 22% of Tax Filers Speed of Refund 19% of Tax Filers Early-season clients who demand their money fast H&R Block digital share H&R Block retail share Consumer Segment Context 133 million total tax filers (TS05) 31 million Potential New Clients 13% Hybrid 35.9 million Tax Filers Expertise 42.6 million Tax Filers 38 million Potential New Clients 26 million Potential New Clients 3% 10% 10% 11% Control 29.2 million Tax Filers 10% 1% 9% Speed of Refund 25.3 million Tax Filers 30% 1% 18 million Potential New Clients 6% 29% 5% 5% H&R Block digital share H&R Block retail share January 9,

4 Speed of Refund Segment Speed of Refund 19% of Tax Filers 30% 1% 29% 45% of H&R Block retail office clients Dominated by tax prep firms and independents Product innovation driving segment dynamics H&R Block digital share H&R Block retail share Tax Season 2007 Focus: Win Speed of Refund Key Strategies Open Early Innovate Products Create Operations Excellence Strengthen Marketing January 9,

5 Open Early Opened 1,500 company offices and 3,100 franchise offices in November Opened all remaining offices first week of January Offer tax planning and Instant Money Advance Loan Set client appointments for tax preparation Innovate Products Instant Money Advance Loan Guaranteed Instant RAL Available in November Higher loan amounts, better approval rates, single-product structure and much lower cost than competition Guaranteed approval or tax preparation is free Nationwide roll-out of successful TS06 test Emerald Prepaid MasterCard Convenience, safety and savings on check cashing First step toward banking for many clients Emerald RAL Offer Classic RAL at 36% APR with Emerald card, a savings of 40% vs. last year for average loan January 9,

6 Innovate Products H&R Block Bank account accessed by prepaid MasterCard debit card No upfront fees No overdraft fees Low fees inside the product Reloadable Client loyalty opportunity in speed of refund segment Innovate Products For a $2,800 RAL 66% Savings $177 $132 40% Savings $100 $ RAL w/ Check 2007 RAL w/ Card 2006 RAL w/ Check 2007 Emerald RAL Competition H&R Block January 9,

7 Operations Excellence Client Management Continued focus on reduced wait times Improved Client Service Center approach Technology Infrastructure 17,000 new PCs 93% of company offices upgraded to broadband Rapid issue identification and resolution process Technology Development and Implementation New end-to-end testing approach New approach to field capacity and readiness Operations Excellence: Office Growth and Tenuring 300 New Clients per Retail Office Year 1 Year 2 Year 3 Year 4 Year 5 Single Office Economics (Fully Burdened) $2.1 $14.0 $ : 400 new offices Reduction in growth pace to ensure quality execution New offices contribute to client growth momentum for 4-5 years Disciplined return expectations from new locations $(21.9) $(15.7) ($ 000s) Year 1 Year 2 Year 3 Year 4 Year 5 January 9,

8 Strengthen Marketing Strengthen Marketing: Direct Mail January 9,

9 Strengthen Marketing: National Promotion Toss Out Your Bills promotion offering $10,000 debt relief Other prizes: Rent/mortgage $1,000 Groceries $100 Cable bill $50 Gasoline $20 Free lunch $5 Subway Second chance: go to hrblock.com to enter $50,000 Grand Prize Drawing Street Blitz In Your Neighborhood Alianza Soccer Sponsorship Strengthen Marketing: Latino Local Marketing January 9,

10 Strengthen Marketing Strengthen Marketing January 9,

11 Expertise Segment 25% of H&R Block retail clients Largest share of market, clients and revenue 75% use CPAs and independents Expertise 32% of Tax Filers 10% 1% 9% H&R Block digital share H&R Block retail share Tax Season 2007 Focus: Build Expertise Segment Key Strategies Market H&R Block Expertise Focus on H&R Block Tax Professionals Help Tax Professionals Build Their Client Base Re-launch Savings Products January 9,

12 Market H&R Block Expertise Launch New Campaign Drive Expertise Messages Focus on Tax Professionals Increased focus on Expertise segment with new You Got People campaign Research supports strength of advocacy positioning for H&R Block brand Occupational advice Access to personal relationships with Tax Professionals Speak to concerns of average people Position the expertise and experience of H&R Block Tax Professionals as key differentiator Impacts both consumer and Tax Professional choice Market H&R Block Expertise January 9,

13 Market H&R Block Expertise Market H&R Block Expertise: National Tax Advice Day Topeka, KS Boston San Francisco January 9,

14 Market H&R Block Expertise Focus on H&R Block Tax Professionals Tax Professional value proposition clarity Improved tools and training New compensation plan incorporating Tax Professional retention and seasonal benefits New campaign featuring Tax ProfessionalsÊ expertise Tax Professional Promise H&R Block... Stands behind me and my clients Provides me the most in-depth tax knowledge in the industry Provides me the tools and environment that I need to serve my clients well Offers me the chance to grow and develop as a professional Helps me make a real difference in the financial lives of my clients January 9,

15 Focus on Tax Professional Client Base Building Drive Tax Professional Engagement National Tax Advice Day, in-season local marketing Building Your Client Base toolkit and training Train on Client Base Building Develop Comprehensive Strategy Nearly 10,000 Tax Professionals enrolled in new Building Your Client Base course Revised core training incorporating tools and techniques to build business Integrated approach to training, career development and compensation Test mentoring and other new approaches Re-launch Savings Products H&R BlockÊs Savings Products vs. Competitive Benchmarks 5.25% 5.25% 5.05% 5.05% 5.00% 5.00% 4.50% 4.25% 2.10% 2.00% 2.00% 0.75% 0.20% 1.09% 0.50% 0.50% 0.50% 0.50% 1.09% 0.25% E-Trade ING Direct AllState Bank Bank of America JPMorgan Chase Wachovia Wells Fargo Citigroup WaMu IRA Savings January 9,

16 Control Segment Control 22% of Tax Filers 11% 6% 5% H&R Block serves 11% of segment fastest growth through digital TurboTax leads digital portion of market High incidence of pen and paper use H&R Block digital share H&R Block retail share Tax Season 2007 Focus: Grow Digital Business Key Strategies Simplify software line-up to differentiate Use digital presence to expand brand relevance Aggressively increase digital brand awareness January 9,

17 Simplified Software Line-up All SKUs are Premium Federal based Customer decision is based on filing intentions Easier choice for consumers Priced for better value Simplify Software Experience Simpler, faster start-up (sign-in, install, update) Simplified language and standardized Q&A Improved error prevention and correction Clear feedback to enhance client confidence End of experience/e-filing, printing WhereÊs my refund; refund/owe meter Expect significant decrease in live support contacts TaxCut 2006 TaxCut 2005 January 9,

18 Digital Presence: Brand Relevance A digital tax organizer Demonstrates our expertise Creates a tax preparation list Links to tax preparation options/tools on hrblock.com Usable with H&R Block tax preparation or stand-alone Distribution hrblock.com/online Direct mail via CD To Financial Advisor clients Test distribution strategies Digital Presence: Brand Relevance January 9,

19 Increase Brand Awareness Increase Brand Awareness January 9,

20 Hybrid Segment High dispersion across filing methods 30% retail 14% CPA 26% digital 30% other Dispersion results from inadequate choices to meet consumer desire for tax help 13% 3% 10% Hybrid 27% of Tax Filers Hybrid H&R Block digital share H&R Block retail share Tax Market Choices Professional Preparation Do it for me Customer Need Self Preparation Do it myself H&R Block Retail Office H&R Block Products and Services TaxCut Software Online CPAs Jackson Hewitt Key Competitors TurboTax TaxAct January 9,

21 Tax Market Choices Professional Preparation Do it for me Assistance Do it with me Self Preparation Do it myself H&R Block Retail Office H&R Block Online Office Signature Ask a Tax Advisor Tango TaxCut Software Online Online Office Client initiates relationship online; Tax Professional completes/files return Office visit not required Uniquely positioned to execute on a scaled basis, with consistent quality Leverages network, efficient workflow distribution Significant historical client growth rates January 9,

22 Online Office New Solutions New experience in tax preparation Targeted to do-it-yourself clients who want the assurance of extra support and guidance if needed Partnership approach between Client and Tango Tango and H&R Block January 9,

23 A New Category to Serve Tax Consumers Newly built technology platform Allows professional support inside product with intelligent cueing for Tax Professionals Unique to industry technology features Data files can have either local or central storage Accordion-style navigation Soft launch in TS07 to refine execution Tax Outlook Speed of Refund Outlook Core client target Aggressively competing to win Unique H&R Block competitive capability Tax Season 2007 Product innovation Product pricing impact and communication Expertise Core client target significant room for growth Multiple market approaches Promotion of capability Model development Control/DIY Limited number of scale competitors Product innovation can impact choice Aggressive product promotion Brand building Hybrid Unique H&R Block assets to create scaled capability New product development and launch Testing category promotion January 9,

24 Tax Season 2007 Outlook Unique impacts in TS07 Tax extenders impact nearly 200,000 early season clients Telephone tax rebate Split refunds Pacing Extra Wednesday in Q3 peak Early-season lending uncertain impact April 15th Sunday Pricing Mid-single digit price increase Value enhancement advice and client advocacy Tax Margins 28.3% 30.9% 29.1% 28.1% 29.0% 28.7% 26.9% 26.9% 26.1% FY02 FY03 FY04 FY05 FY06 FY07 Projected Reported Margin Litigation Impact Digital Impact Contribution to H&R Block Bank Estimated Negative Effect from Office Expansion Reduced pace of office expansion Intersegment margin sharing with H&R Block Bank Emerald Card affects segment margins by 80bp fully realized in bank FY07 projected margin impacts Early season lending as defensive strategy Incremental marketing targeted at high potential segments Digital acquisition strategy potentially creates negative margin impact but positive client growth with offsetting revenues January 9,

25 Tax Season 2007 Winning today Aggressive speed of refund actions consistent with H&R Block advocacy intent Product agreements and bank provide key competitive advantages Focus on Tax Professionals as key competitive advantage both front line and national positioning Multi-channel delivery as unique brand capability Tax Season 2007 And tomorrow Continued brand building Expert in Your Corner New hybrid category launch Multiple tests within each target segment to inform future Client loyalty strategies Client acquisition strategies Pricing structures January 9,