H&R Block, Inc. (HRB)’s Taxing Future

For H&R Block, Inc. (NYSE:HRB), taxes aren’t a pain, they’re the livelihood for more than 10,000 storefronts and nearly 100,000 tax preparers. But is that going to change in coming times? The company is the world’s largest provider of affordable tax and personal finance services. With the rise of nearly costless online tax services, what incentive is there for price-conscious tax filers to visit their local H&R Block, Inc. (NYSE:HRB)? Let’s take a look at recent earnings and evaluate the business to determine if this is a company headed toward trouble.

The year in review
H&R Block, Inc. (NYSE:HRB) recently released its fiscal 2013 earnings, which showed gains across the board yet fell short of analyst expectations.

On the top line, revenue bumped up nearly a half point to $2.9 billion, mainly on higher volume of digital filings (we’ll address this in a minute). Earnings per share from continuing operations increased dramatically — up 25% to $1.59. Management credits the company’s cost-cutting efforts, which accounted for $126 million in savings for the year. The company’s EBITDA margins grew substantially, up 4 points to 30%.

Assisted tax filings in the United States were down 2.7%, with the average filing price up 1.7%.

Overall, the company seemed to do well in the face of sudden changes in tax law and a delay in IRS filing services.

So, given the decent performance, why the dire opening paragraph?

Sea change
As with many industries, tax prep is witnessing a period of technological disruption in the form of Web-based software. Intuit Inc. (NASDAQ:INTU) is the leader in the space with its Turbo Tax product. Lesser-known Blucora Inc (NASDAQ:BCOR) has its hand in the game as well with TaxACT. The latter is a small but healthy business. TaxACT maintains strong margins and grows at roughly 8% to 10% annually. Currently, the company maintains around 12% of online tax-prep market share.

Turbo Tax is the gorilla in the space, with 60% of the business. For most (including myself), this is the go-to service for online tax prep. It’s easy and it’s relatively inexpensive. TaxACT is even more price-conscious, with filings under $10, and there is belief that as the company continues to market its product and gain stickiness among consumers, it could steal market share — but from whom?