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Executives

Darby Schoenfeld - Director of Investor Relations

John Hewitt - Founder, Chairman and Chief Executive Officer

Mark Baumgartner - Vice President and Chief Financial Officer and CEO of JTH Financials

Analysts

Arnie Ursaner - CJS Securities

Joe Janssen - Barrington Research

Scott Schneeberger - Oppenheimer

Michael Millman - Millman Research

Thomas Allen - Morgan Stanley

Stefan Mykytiuk - TIG Advisors

Ryan Augustitus - Northcoast Research

JTH Holding, Inc. (TAX) F2Q 2014 Results Conference Call December 9, 2013 4:30 PM ET

Operator

Good afternoon. My name is Hope and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter Fiscal Year 2014 JTH Holding Earnings Conference 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. Ms. Darby Schoenfeld, Director of Investor Relations, you may begin your conference.

Darby Schoenfeld

Thank you. Good afternoon everyone and thank you for joining us. With me today are John Hewitt, our Founder, Chairman and Chief Executive Officer; and Mark Baumgartner, our Vice President and Chief Financial Officer and CEO of JTH Financials. The press release announcing our second quarter earnings was distributed this afternoon. The earnings release may be accessed at the Investor Relations section of our website located at www.libertytax.com. A replay of this call will be available shortly after the conclusion of the call. The information to access the replay was in the earnings press release.

I’d like to remind everyone that today’s remarks may include forward-looking statements as defined under the Securities Exchange Act of 1934. 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 Annual Report on Form 10-K for the fiscal year ended April 30, 2013 and our other SEC filings. JTH Holding Inc. undertakes no obligation to publicly update these risk factors or forward-looking statements.

I would now like to turn the call over to our Founder, Chairman and CEO, John Hewitt.

John Hewitt

Thank you, Darby. We are focused on our preparations and our gearing up for taxes and that we believe will see an increase in filers. Even though the IRS has announced it will open one to two weeks later because of the government shutdown, we do not believe that it will have the same impact as it did last year.

For starters, everyone is aware of the delay well in advance. Second, our all the Form should be ready when the IRS does start accepting e-filings as opposed to being released as late as early March as was the case last year. Finally, a delay in the taxes isn’t new to us.

We have some lessons learnt from last year and are planning accordingly. In fact, we have already seen a rise in U.S. systemwide revenue this fiscal year indicating that some tax payers have just delayed filings beyond April.

Last year, the industry also suffered from the client and filers because the IRS -- of the IRS requiring a higher level of documentation from tax payers. That was a one-time change and we do not believe it will hinder these taxes. Also we belief that the Affordable Care Act will drive some traffic to our offices simply because of the confusions surrounding it.

We polled about 800 of our customers and found that approximately a quarter of them did not have health insurance and about 10% of them had unanswered questions about the ACA. Our franchises have worked hard in the past few months to position themselves as a source of information regarding the ACA by hosting seminars to educate not only individuals but also small business on what the ACA might mean to them.

Based on what we’ve seen so far, we believe the industry will see an increase in the range of 1.5 million to 2 million more filers this year. Down the road, there is also possibility of immigration reform that could impact the tax preparation business by generating additional new tax filers. This population aligns well with our current demographic and we are already making preparations to position Liberty, should a reform package pass in the near future.

At the company level, with the competitive front being what it is from Mom and Pops, we are being contacted by more often by those looking to either sell or convert to Liberty Tax franchise. And since we have pretty much the only game in town to buy a franchise, we continue to see if this is a positive impetus for us moving forward.

Our options continue to mature and as they do, their return kind of repeat customers grow. Our franchise base is maturing and that helps them get ready to expand enough more offices. We have said in many occasions that our model bent itself to a multiunit operator and we are looking forward to helping our current franchises to attain that.

We have solidified our relationship with Walmart and are moving into more locations as well as ones that have higher population density than our previous markets and are more or likely to have had a tax preparation station in them last year.

As we said in the first quarter, we and our franchisees intend to operate key assets in approximately 500 Walmarts in taxes in 2014. During the first half of fiscal 2014, the company added a 106 new franchisees, 48 of which purchased 53 new territories. The company sold a total of 65 new territories during the first half of fiscal 2014.

This does not include any rent to own or try before you agreements which many existing franchisees utilize to expand. On our last call, we told you that as we came out of the blackout period, we were redoubling our efforts to sell franchises with the goal of making up for lost time.

However, because of the time of the year and the time it takes to close deals, which often includes finding an office location. We do not anticipate being able to sell as many territories as we had hoped. We do not expect to add the same number of franchises this year as we have in the past or sell the same number of territories due to our inability to sell during that important part of the second quarter.

I would also remind you that if one of the Walmart location is in the territory that one of our franchisee already owns that franchisee does not have to purchase another territory to operate the Walmart. So there is no franchise fee revenue associated with their expansion. The number of new territories sold is not necessarily a proxy for the number of new offices we’ve open because some franchisees maybe opening a second office in the territory with the addition of the Walmart location.

While we are not giving any specific guidance today on the increase in our office count due to the blackout caused by the restatement, I can tell you that we do not expect our net new offices to match the growth we have had in previous years.

To give you an update on our executive team, shortly after our last call we announced the addition of Chris Carroll as Vice President of Sales and Marketing. Chris joins us with over 30-years of marketing and advertising experience with time at large franchisers such as Subway and Burger King. We are excited to have someone with such an extensive background of franchising, and look forward to utilizing his experience and ideas to help us reach our goals.

We have been interviewing some highly qualified candidates for the CFO role and have made significant process. While we are enthusiastic about the people we have talked to, we do not have a timetable at this time. We will keep you updated on this front and in the meantime, Mark continues to operate in this dual capacity as our company’s CFO and the CEO of our financial products business.

We also continue to restructure the responsibilities of our former COO position. To begin with, this was the hiring of Chris to head up the sales and marketing functions, the remaining responsibilities will be split up as we integrate a strong team that will build bench strength for our current executives.

We talk often about happy, successful franchisees being one of the most important things for our growth. So, I will like to share with you some recent awards and accolades that our franchisees have helped us win. USA Today named us as one of the Top 50 Franchisees for Minorities in October.

U.S. Veterans Magazine names Liberty a Best of the Best for veterans and Franchise Business Review named as a Top 50 Franchise for Veterans and Franchising. Finally, Entrepreneur magazine recently released its annual Franchise 500 list and Liberty was ranked number 21 of all franchisees. We are proud of the hard work in the financial customer services our franchises provide our customers and are very excited to have been honored with these awards.

Now, I would like to turn the call over to Mark Baumgartner, our CFO.

Mark Baumgartner

Thank you, John. First, I would like to update you on where we are in relation to the restatement. The final phase consists of re-filing all our 10-Qs from last year. We filed the first of those in the second quarter of fiscal 2013 in November and continued to be on track to file the remaining two during our third quarter.

Under the results of the quarter, total revenues for the second quarter of fiscal 2014, decreased 21.6% to $7.3 million compared to $9.3 million in the prior year period. The decrease in total revenues was primarily due to a decrease in the franchise fees because of our inability to sell franchises for a portion of the quarter.

These caused a few things to occur. First, the largest impact was a decrease in franchise fee revenue. Second, since some of our area developers utilized the corporate sales force to sell franchises in their area and the commission payments they make or recognized in our income statement and other revenue, this also decreased. Finally, we also charged a transfer fee when one of our franchisees sells to another. And with the ability to sell as part of the quarter, we were also unable to process transfers.

Operating expenses for the second quarter increased 11.1% to $20.9 million versus $18.8 million in the prior year. During the second quarter, we incurred approximately $693,000 in pre-tax cost related to the restatement. We also expensed approximately $614,000 pre-tax and the one-time severance costs related to the departure of a former executive. These items accounted for the bulk of the increase in expenses.

Our net loss for the quarter was $8.5 million, compared to $6.1 million in the prior year. Our results were not unexpected and mainly reflect one-time events, which we had previously announced as well as the typical seasonality of our earnings. The main drivers were the inability to sell franchises, causing our total revenues to decline combined with an uptick in expenses from costs associated with the restatement and severance payments.

Our balance sheet continues to be strong. As is typical of this time of year, our cash balance at the end of the quarter was $2.6 million, compared to $1.2 million on October 31, 2012. The amount drawn on our revolver was $38.5 million at the end of the quarter compared to $39.7 million last year. Loans to franchisees for operating purposes decreased $3.4 million, which was offset by an increase of $2.1 million in the purchases of area developer rights and company-owned offices.

As we look at the 2014 taxes and there are a couple of things we would like to share with you. As John mentioned, one of the franchisee opens a second office in a territory like a Walmart kiosk, we don't receive any revenue associated with that other than the ongoing royalty, advertising fees and financial products. With our inability to sell franchises for part of a quarter and the expectation that we will have fewer new territories this year than last, you should expect our franchisees revenue to decline.

Additionally, we have also said that we are over 80% sold out in our area developer program, so we will not be adding them at the same pace that we have in the past and we expect an increase in our ability to repurchase that, just some things to keep in mind as we are looking at how our revenue will fall out this year.

Turning now to financial products. Last year, we piloted the ICA loan program in 27 states during the early season and this season we plan to offer the ICA in 21 states. We believe this gives us a strong competitive advantage because we're the only company to offer tax settlement loans to our clientele.

Additionally, very late in the season last year, the OCC gave approval to one of our partners to offer a secured credit card loan based on a customer's anticipated tax refund. Recently, we learned that that re-approval of this product will be delayed because the OCC would like to review this product for consistency with all of its existing policies. We believe it is a good product for our customers, one that they will want and one that benefits consumers by providing them a path to build credit.

I would now like to turn things back to John. John?

John Hewitt

Thank you. And hopefully, we ready to take questions now.

Question-and-Answer Session

Operator

Okay. (Operator Instructions) Your first question comes from the line of Arnie Ursaner with CJS Securities.

John Hewitt

Welcome, Arnie.

Arnie Ursaner - CJS Securities

Hi. Good afternoon, John. I guess my real question is related to the timing of signing up franchises, which I fully understand you had an issue. How much of that do you hope to make up in Q3 and I have a follow-up after that?

John Hewitt

Arnie, I would say that our relative decrease year-to-date will likely continue to the end of the fiscal year.

Arnie Ursaner - CJS Securities

So originally you may have thought that you could easily make it up, you will have more than a enough time to get this done, but it doesn't sound like that's what you're thinking at this point?

John Hewitt

I’m not sure the phrase I would use is easily make it up, but we were -- we had hope to certainly close the ground between what we had anticipated before. We had the issue with the SEC and our original goal.

Arnie Ursaner - CJS Securities

Okay, two more quick questions if I can. You mentioned you didn’t include any rent to own or try before you buy agreements with existing franchises this quarter. Is that unusual or is that also related to this and may be you could explain why we didn’t have any of this quarter.

Mark Baumgartner

Arnie, this is Mark. We have not put in there. We couldn’t do those during the blackout period either and existing franchises utilize those programs to expand. So right now at the end of October whereas there is a number that are in process, they typically close those during calendar year fourth quarter, here at the end right before the season -- the season opens.

Arnie Ursaner - CJS Securities

Okay. My final question…

John Hewitt

So it would be similar to last year, yes.

Arnie Ursaner - CJS Securities

Got it. My final question is you mentioned you planned or hope to operate 500 WalMart this tax season, but you -- if I recall had 300 in place or so, so are we only adding a net 200, is that the way to think of this?

John Hewitt

That’s correct.

Arnie Ursaner - CJS Securities

Okay, were you hoping to have more?

John Hewitt

We hope to expand the relationship to be the only vendor in Walmart one day.

Arnie Ursaner - CJS Securities

Okay, I will jump back in queue. Thank you.

Operator

Your next question comes from the line of Alex Paris with Barrington Research.

John Hewitt

Welcome Alex.

Joe Janssen - Barrington Research

Actually this is Joe filling in for Alex. Just a follow up on your next question, is there any chance we can get a peak into the selling season in November and may be how that compares year-over-year. And second part to that like last year, around this time you kind of gave us the expectation of what the total store count would be going into the tax season. Do you think you will may be give a press release later in the month, may be disclosing how many new stores will have go into the tax season or is it is just somewhat we have to wait and play itself to the tax season?

John Hewitt

Joe, we’ll issue something when we have a good idea of what that number actually is. When we’re close to the final count, it could vary today as much as 100 to 200 offices depending on obtaining locations, opening in seasonal locations and so forth. As far as our decrease in November it was comparable with what had happened in previous months. And keep in mind this, we’re talking about a less than 3% of our office count is impacted by bringing -- this year by bringing in these new franchises.

Joe Janssen - Barrington Research

Okay, now let me switch gears a bit. Let me just focus on NextGen here for a second. I mean we could talk about what your international expectations are for during the year, may be in terms of the total filing as well as kind of how you think about pricing this in the market?

John Hewitt

We are going to have a couple of different pricing models with NextGen. Its going to be primarily online this year. And so we are going to have a Liberty brand and eSmart brand, several different methods of attack of gaining market share in the DIY market.

Joe Janssen - Barrington Research

And may be you just comment on may be your marketing strategy around that and how you plan to drive the customer traffic to the offering? I guess, before that we are just kind of sitting out there. I think you had about 150 filings last year. I mean do you planning to putting some market dollar behind this and actually push this product this year, or is it kind of more embedded test phase?

John Hewitt

We’re happy with the amount of money we spend last year and we expect to gain market share by offering different channels and different brands in the digital arena but the market expansion should be compared with last year.

Joe Janssen - Barrington Research

Okay. And then my last question, I will jump back in queue, staying with NextGen, can you kind of give me some financial context around this and what the impact in D&A as well as I know that is going to capitalize and not going into P&L, may be some of the expansion that are associated with running the program?

John Hewitt

Suffice to say that we’re not making any significant profit at our mind at this point. Our primary focus is to -- in the short run, in the next few years, is to drive customers into our store fronts. And we think it give us a competitive advantage of both into it -- and who has Turbo Tax and the Mom and Pops because there has many, many customers switch back and forth between online and store front. And we can keep them in our web if you will and the Mom and Pops can afford to have online and Turbo Tax into it do not have store front. So we are more likely to keep them in our realm if we have both vehicles. So that’s a primary purpose in the short term for our online approach.

Joe Janssen - Barrington Research

Okay. I will get back in queue. Thanks John.

Operator

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

John Hewitt

Hey Scott, how are you doing?

Scott Schneeberger - Oppenheimer

Hey, John, I am well. How are you?

John Hewitt

Superb.

Scott Schneeberger - Oppenheimer

Good. A couple, I am going to shoot around the board here. On your pacing on franchise sales, I heard that I think it was you mentioned only shop in town that’s aggregating. Just wanted to get more color on that, your trend is off a bit, was that primary restatement or is it a little softer outer there in acquiring new folks since you are the main aggregator?

John Hewitt

Yes, when Mark talked about us being able to get in the town, the way we viewed it this block is totally saturated and really hasn’t brought any significant amount of new franchises in since the ‘80s. Jackson Hewitt has stalled dramatically in the 21st century. They have even in the last 10 to 12 years, they have averaged less than 20 franchises a year, new franchises a year and much of their areas are sold out in the major metropolitan area.

So we have had a competitive advantage we’re normally the only game in town. As far as seeing a change in the landscape, no not at all. What happened is we knew that we were going to have to dark and we stopped our advertising and then we actually went out for about 30 days. So we lost seven very, very important weeks in our franchise development period. The period -- it's the most important period of the year, that was the August, September period.

And that’s because people in December or in January and February and March and April, aren’t acquiring franchised opening in the following January. And by the same sort, people in November and December, its too late for them to acquire franchise. So the really important period for us starts about July or August and ends about October. And so we lost in a very, very critical peak period. We lost seven weeks of advertising and four -- almost four and half weeks of being able to just talk to anyone about acquiring our franchise.

We believe that next year we will go back to our pace that we have maintained over the last five or six years of bringing over 300 new franchises a year.

Scott Schneeberger - Oppenheimer

Great, I understand on that timing. Thanks. Switching over to financial products, you have eluded to the OCC, with approving a product offer on a speed of refund and then delaying it on re-approval, will that influence your ICA product. If you can just provide a little more color on that and I missed when Mark said, how many state you anticipate to be in fiscal ‘14, so if I could just get back to you?

Mark Baumgartner

Okay, Scott. This is Mark. How are you doing?

Scott Schneeberger - Oppenheimer

Fine, thanks.

Mark Baumgartner

Its 21 states that we will be and at this point right now that partners and that program is operated under the state finance regulations of those individual states. So we don’t anticipate any issues with the OCC. And so -- and the program, the secured credit card program is one that we did get approval on very late last season and the OCC right now has just asked for more time to check it against all of their policies. So at this point we told our franchises not to expect it for the beginning of this season.

Scott Schneeberger - Oppenheimer

Okay. Thanks for that Mark. And then John, if I can flip back to you one more broad one on the ACA. It’s a broad question, just love your latest and greatest on -- you think, we heard a little bit where you think that the potential, what you think tax returns will increase this year and obviously ACA being one of the drivers. Do you still anticipate a significant pick-up in the tax season of 2015?

And then, your view on storefront versus digital and also do you anticipate an incremental form, it doesn’t look like it will be this year, do you still for next year? So a bunch of questions, all tightened to one there, please John, just whatever you can cover?

John Hewitt

Scott, what was the last question, incremental what?

Scott Schneeberger - Oppenheimer

A form, if there will be a specific federal healthcare form, an incremental form in the tax filing process.

John Hewitt

Okay. Yeah, the last ones is the simplest one. We do believe that there’s going to be another form. And it in possibly two, one could be a credit and one could be a penalty. As far as the impact of this year, we believe that, as I said in our study, about 10% of American type questions and many of those were reaching through seminars, many of them are calling our offices and we’re offering as much help as we can to get in front of those potential customers and many of them will turn into customers.

Now I would say that industry wide, there would be in the low single digits this year, the impact. Next year, amazing impact, there is 40 million or 50 million people that are impacted. Many of them are filing return today and will be required to file a form, a tax return. And so there would be more filers, we believe that storefronts assisted work will get their share. There are 60 plus share of that.

Many of them, the do-it-yourself customers will have changes in their returns. And one of the biggest two or three reasons that people come to an assisted preparation is they have a change in their tax return. And so, we believe that’s going to be the biggest impact in my -- that will be my 46th tax season in 2015, that’s the biggest change I've ever seen. So we’re very optimistic about what that means to our industry.

As far as digital and storefront, we continue to see the trend last year. As you know Scott, the Intuit TurboTax posted its worst year ever. In their forecast for next year, they are forecasting similar results for last year. And that’s just indicative of the fact that there are very few tax payers left that are doing paper and pencil at home by themselves, and primarily do-it-yourself online have taking share from do-it-yourself at home, pencil and paper. So, we don’t see that any significant change. We continue to believe it will be 61% or 62% of people will seek assisted -- assistance next year in the storefront.

Scott Schneeberger - Oppenheimer

Great. Thanks for covering all those, John. Appreciate it.

John Hewitt

Sure.

Operator

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

John Hewitt

Welcome, Michael.

Michael Millman - Millman Research

Thank you. How are you today?

John Hewitt

Super.

Michael Millman - Millman Research

Following up on some Scott's questions regarding the ACA, the low single digit impact, are those today non-filers or do you see them coming from other filing approaches?

John Hewitt

Well, I would say the vast majority of that would be from people who are filing returns already and required to file that are not covered by insurance that have questions as to which direction they should go. And so I see many of them in that process of us answering those questions will be converted into paying us for the tax returns.

Michael Millman - Millman Research

So to their current filers, to what extent are they your current filers? To what extent, are they doing it using other assisted approaches?

John Hewitt

Well, I’m not an expert in the percentage of income level related to those not covered by insurance. But I think it would be obvious. My gut feeling is that a higher percentage of lower income tax payers are not covered by insurance. Since we are after the bottom 85% of the income earners in this country, we are not after the people who make hundreds of thousands dollars. I would say, most of them are covered by insurance. And so, I think a greater percentage of our customers are impacted than the general population.

Michael Millman - Millman Research

And maybe I missed to ask that question, is really asking to what extent are some of those questioners current filers with you and with Liberty?

John Hewitt

I would say, since we have about a 3% market share than 3% of Liberty customers.

Michael Millman - Millman Research

I see. Okay. And talking about pricing, to what extent or and to what extent are limiting price increases, and what do you see price increases this year?

John Hewitt

I have always felt that H&R Block has been the -- the 800 pound gorilla is the benchmark against which we've had to price. And so H&R Block is a very important part of the pricing policy in this industry, just like McDonald's is in the hamburger industry. So we are little bit hyped. We have -- that we believe that are clearly divestible that we do better. But they maybe the limiting factor from what we have understood. They are going to go back to a more traditional pricing increase this year. And so, we’re looking at -- Liberty is looking at a 3% to 5% pricing growth throughout the industry this year.

Michael Millman - Millman Research

Do you see continued free or very low-cost [easies]?

John Hewitt

No, I’ve heard [Scott] about that after providing free tampered [easies] for three years. I’ve heard that they are going to drop that program. As you might remember, we tested that program in a few hundred of our offices. In the second year, the Block provided and found it to be very unsuccessful. So we quickly stop that program. We don’t believe it’s very successful. So it wouldn't surprise me. They will drop that program someday, I believe and this is probably the year they are going to drop it.

Michael Millman - Millman Research

And just maybe I misheard you talk about the SEC blockage. I was on the opinion that you were all settled with the SEC.

John Hewitt

So, I was talking about an alternative remark, but I was talking about that ran from early August until the end of September.

Mark Baumgartner

Yeah, Michael, in my comments, the one thing that we still have outstanding with the SEC is the re-filing of our Qs for our fiscal 2013. The first one we re-filed in November, and we publicly said that we anticipate getting the other two done here during our fiscal third quarter.

Michael Millman - Millman Research

Got it. Thank you.

Operator

Your next question is from the line of Thomas Allen with Morgan Stanley.

John Hewitt

Welcome, Thomas.

Thomas Allen - Morgan Stanley

Hey. John, good afternoon. You mentioned at the start of financing, you surveyed 800 customers in a quarter that didn't have health insurance. Did you guys have any sense of how many of them are planning to get health insurance?

John Hewitt

Yes, based on the response that only 10% had questions. So I guess, I got feeling is as a result of our survey and in talking to our franchisees and surveying our franchisees is the low penalties that are being imposed in the first year is going to get a low -- pretty substantial number of a percentage of tax payers not accordingly the necessary insurance.

Thomas Allen - Morgan Stanley

That’s helpful. Thanks. And then, I know that you said that you had -- you did ICI ones in 27 states last year and than this year you are going down the 21 states, why does it have a decline?

Mark Baumgartner

That’s a third-party product that we offer, and they’ve decided from an economic perspective, not to offer it in some of the states that they had piloted in last year.

Thomas Allen - Morgan Stanley

Okay. So should we assume and so -- does it needs scale or do we think that in certain states have high default rates, those states that are just not profitable basically?

Mark Baumgartner

No. It’s based on -- Thomas, this whole program is based on the states consumer finance racks and they differ state-to-state. So what could have happened in one of those six states is a passage of a new law that changed the fees that could be charged.

Thomas Allen - Morgan Stanley

That makes a lot of sense. And then just in terms of refund transfers for next year, have you changed your -- are you thinking about changing your pricing at all or have you changed pricing at all?

John Hewitt

We haven’t announced that yet.

Thomas Allen - Morgan Stanley

Okay.

John Hewitt

But I believe, Thomas, let me say this way that I believe that the pricing of the refund transfer products will continue to decrease going forward and we should be announcing that in the next three weeks.

Thomas Allen - Morgan Stanley

Okay. And just why you think it continue to go down?

John Hewitt

Because the one thing that helped keep the fee high in the past was that you could apply for a loan and since most there are very few loan products available in this country, I think that the product will come down and price to meet that. And I can’t say that our price won’t be -- won't be very much different at all from last year. It had a significant change but we will announce that. And over the years I suspect that those fees will be reduced to the consumer.

Thomas Allen - Morgan Stanley

Again and just final two questions just on the IRS, have you heard any movement on no return preparer sort of certifications? And then also, I read somewhere that there maybe a new head of IRS. I think one of the candidates that was going in front of incentive advanced committee today or maybe tomorrow, but any -- do you think that will have any change on the overall industry? Thanks.

John Hewitt

As far as the preparer certification, the IRS has appealed the decision, so that’s an appeal. It’s in the appeals court and they have asked for -- they expect the ruling soon on that and we believe to how much that if, even if the IRS loses that appeal that they will go to congress and ask for congress to pass the appropriate legislation to enable them to do this, because they originally -- the impetus to do this started with both houses of the Congress as three, four years ago actually. Both houses of congress passed bills requiring IRS to provide certification of preparer, so it came from congress and I think it’s a good thing. And I think most people agree on that and so I think it will come into play by next year or at worst the year after that.

Thomas Allen - Morgan Stanley

And just any update on kind of the IRS getting a new commissioner in their hub?

John Hewitt

Yeah, we’re not experts on that. We’ve got an expert on government, what Obama is doing or unmet, but our indications from our by weekly meetings with the IRS is they expect that to be their new commissioner name by December 31st.

Thomas Allen - Morgan Stanley

Great. Thank you very much.

Operator

Your next question comes from the line of Alex Paris with Barrington Research.

John Hewitt

Hey, Joe, welcome back.

Joe Janssen - Barrington Research

Hey, thanks. It’s Alex this time.

John Hewitt

Yeah. Good. We got the big guy.

Joe Janssen - Barrington Research

Yeah, two guys dial in up. Just a couple of quick clarifying question, so you did 106 new franchisees year-to-date -- fiscal year-to-date this year I look back on my note you did 227 last year during that same period of time, first half fiscal 2013. What you do in total last year and are you’re saying, I mean I see no reason why you would have any fewer people coming on in the balance of the year, right?

John Hewitt

Actually, the reason there’s fewer people is the time it takes to bring in a new franchise into the full. And it’s about a three months process from the time they first inquire until the time they come in. And so if some one inquires after September 30th, it’s very, very unusual for them to move forward in that fiscal year. They usually weigh the year before they all perceive, so because we lost that period from early August, until the end of September that had a similar impact on the remaining part of the third quarter.

Joe Janssen - Barrington Research

I got you. So, in other words, last year’s new franchisees that closed in the third quarter that was started in the second quarter and in this case -- so you really don’t expect too many more, new franchisees besides the 106 you already have?

John Hewitt

I’m not sure what you mean by not too many, but I think you can use a comparable percentage of decrease through the second quarter for the entire fiscal year.

Joe Janssen - Barrington Research

What was the number for last year’s fiscal year for the full year?

John Hewitt

I don’t have a number. It’s on my head. It was in the high 300s.

Joe Janssen - Barrington Research

High 300s, okay. And if you were down 50% year-to-date, you are going to be down 50% for the full year that’s what you are saying?

John Hewitt

That’s not far off.

Joe Janssen - Barrington Research

Okay. Then the fact that you are in 21 states with the ICA product as apposed to 27 states. As you had said in response to previous questions, it’s based on approval and that sort of thing, is that going to have a significant impact on financial services revenue this year versus last?

John Hewitt

No. We do not -- I mean last year, we only offered the program very early part of the season and then turn the program off. And on the loan side, a bit only about 2% to 3% of our customers get that product, so it’s very small impact.

Joe Janssen - Barrington Research

Okay. And then last year, again, looking back over my notes, in mid-December you gave guidance for fiscal 2013. You gave office growth number percentage. You gave total revenues in a range. You gave the effective tax rate and you gave net income, do you expect to do anything like that later this month for fiscal ’14?

John Hewitt

If you can tell me when the IRS is going to open for electronic filing and you can tell me when they are going to start paying refunds. There is just too many questions out there about what the IRS is going to provide this tax to. So we are not easily able to provide that kind of guidance.

Joe Janssen - Barrington Research

Yeah. That makes sense. Okay. I will follow-up with you guys. John, I will be seeing you tomorrow I think, so thank you very much.

John Hewitt

Look forward to seeing you.

Operator

Your next question comes from the line of Stefan Mykytiuk with TIG Advisors.

John Hewitt

Welcome, Stefan.

Stefan Mykytiuk - TIG Advisors

Hi. Good evening. Couple questions. I guess, Mark brought up earlier the concept of acquiring or buying and some area developers, can you just give us a sense of how many area developers do you have in total and come for the average size of the area developers?

John Hewitt

We have about a 140 area developers and I don’t know what you mean in average size. Since it’s 80% of our chain, you can take 80% of our offices and then -- then that will tell you about how many offices per area developed.

Stefan Mykytiuk - TIG Advisors

Okay. Yeah, I meant more in terms of how much revenue there -- how much of the royalty they would collect on average. But I guess, we can see…

Mark Baumgartner

You can see now the area developer expense which is both the royalty as well as the share of the franchisee.

Stefan Mykytiuk - TIG Advisors

Okay.

John Hewitt

Go ahead.

Mark Baumgartner

Go ahead.

Stefan Mykytiuk - TIG Advisors

I was just going to say is there a wide distribution of how big they are or do they fall into like as average a good way to characterize them or do they run from being very small to being very large?

John Hewitt

They run from anywhere from having two offices to 120 offices. So there are -- there is -- as Mark said there is a line item that shows the possible revenue that we can obtain by -- per year by buying them back.

Stefan Mykytiuk - TIG Advisors

Right. Well that’s right. For the whole system, if they vary so much in size than they may be -- may be kind of misleading to try average earner or look it at that way. I guess, the other questions is would you -- if you were to acquire area developers, would you want to do that kind of outside of the tax, the peak of the tax season, just from a management perspective.

John Hewitt

We have been -- we're acquiring area developers and the vast majority of them are exactly that in the first two quarters of each year.

Stefan Mykytiuk - TIG Advisors

Okay.

John Hewitt

In the planting season as we call.

Stefan Mykytiuk - TIG Advisors

Okay. And then kind of moving onto the back to the financial services, the refund transfer product. Do you think that the -- the take rate will be similar this year and do you continue to take -- increase your penetration of the internally offered product versus the external.

Mark Baumgartner

The take rate has been very consistent over the last four or five years, low 50%. We don’t anticipate any differences there. The take -- whether we bring a higher percentage in-house, let me just say that we anticipate keeping more of the economics in-house whether we do that by moving more products in-house or using our leverage of bringing an in-house to get a better pricing from the third-party providers.

Stefan Mykytiuk - TIG Advisors

Okay. So even in, I guess, where I was going with as John was talking about pricing potentially relatively flat this year. If you bring more in-house then -- or keep more of the economics then that’s still a net benefit to the P&L of the company?

Mark Baumgartner

Absolutely. Absolutely.

Stefan Mykytiuk - TIG Advisors

Okay. Terrific. Thanks very much.

Operator

Your next question is from the line of Arnie Ursaner with CJS Securities.

John Hewitt

Arnie, welcome.

Arnie Ursaner - CJS Securities

Couple of follow-ups. The 106 number just to clarify that’s a net number?

John Hewitt

No, that’s just a number of new franchisees.

Arnie Ursaner - CJS Securities

So what -- franchisees -- but is that a net number?

Mark Baumgartner

No, that is the new ones that we brought into the system.

Arnie Ursaner - CJS Securities

Okay. I guess, what I’m trying to head with is, we’ve modeled roughly 280 franchises locations for the year. And I know you obviously said you expected to be down. You did 337 the year before, 338 the year before that. Is that the magnitude of what you’re trying to have us think about for the upcoming year?

John Hewitt

We’re saying it’s greatly reduced from those years.

Arnie Ursaner - CJS Securities

Okay. I assume you don’t want to attempt to quantify on this call.

John Hewitt

Exactly.

Arnie Ursaner - CJS Securities

And just to clarify again the business model, you mentioned that the three-month process from an enquiry so you can wrap up a new franchise agreement. I’m trying to think more about next year. How you may guide us for next year to the extent that you’re not going to get them this year? Is there some backlogs or pent-up demand and how should we be thinking about next year’s new franchise adds and also could you comment on the timing of how we’re going to think the pattern, the seasonality of that should occur?

John Hewitt

I think from a conservative advantage point that -- I’m going to say that next year, we’ll revert to the same kind of years, it has been in the last several years. So we would say in the 300 plus range of bringing in new franchise. There is pent-up demand, there’s a number of people there. I mean, when you think of pent-up demand, think of there is 200,000 seasonal repairs at block in Jackson even in Liberty combined.

A certain number of percent of them are going to acquire a new franchise typically every year. That just didn’t happen this year because of our [doctorate]. So, they are sitting out, they are waiting a year to do it. So from a conservative -- from an optimistic advantage point, we can say, we’re going to get all of that -- those people who waited a year. From a conservative advantage point, we can say well, we’re going to do as well as we’ve done over the last five years before this year of averaging over 300 new franchisees a year.

Arnie Ursaner - CJS Securities

Okay, just to go back again on the Walmart, is any of that included in the 106?

John Hewitt

Yes, but most of the new franchisees are not acquiring Walmarts. They are acquiring territories with store-fronts. And we didn’t get the Walmart list until summer and so it’s very small percentage of the new franchisees, which just come in and owning a Walmart. The Walmarts work fast in an area that has a store-front and the Walmart is a supplement to the storefront.

Arnie Ursaner - CJS Securities

And you mentioned the re-approval of the OCC has been delayed and may not impact you at the beginning of the tax season. Is there more specific information they are giving you or is it just you trying to be conservative?

Mark Baumgartner

No, they just -- we don’t -- at this point the program, we just found out that it is not re-approved that they have to go through this policy group. And so we’ve gone to our franchises right now and told them with depending holidays and everything, we don’t believe it’s going to get through the approval process in time for the start of the season. That doesn’t mean we’re not trying everything we can to get it through. But at this point we’re not anticipating it for the current season.

Arnie Ursaner - CJS Securities

Okay. Thank you.

Operator

Your next question comes from the line of Ryan Augustitus with Northcoast Research.

John Hewitt

Welcome Ryan.

Ryan Augustitus - Northcoast Research

Hi, thank you. Good evening. I had a couple of questions, one is a clarification question and the tax forms regarded with the ACA. You said earlier that potentially 2001 with the credit one of the penalty, what are those 2015 or would any of those outturns before the upcoming tax season?

John Hewitt

That would just be in 2015.

Ryan Augustitus - Northcoast Research

Okay, great, thanks. And then last question is regarding there are regulations or the scrutiny and extra documentation on EITC returns and I was wondering, are you seeing any kind of trend-up independence, kind of, steering clear away from those returns and driving those EITC files in the tax stores.

John Hewitt

I think, the independence we’re last rigorous meaning the IRS requirements than the major players last year. So I think, we lost business all of us, the -- us and Block and Jackson, you would have lost business to some of the Mom and Pops that did not require or meet the standards of the IRS had set up.

But overall, I don’t think that was a large amount because there was a decrease in filers and everyone -- the industry in the IRS agreed that there was expected increase of about 1% to 2% in filers and there was actually a 1% decrease. Much of that came from the new due diligence required by the IRS that was a one-time event.

Ryan Augustitus - Northcoast Research

Okay, great, thank you very much.

John Hewitt

Thank you.

Operator

Your next question is a follow-up question from the line of Stefan Mykytiuk with TIG Advisors.

John Hewitt

Welcome back, Stefan.

Stefan Mykytiuk - TIG Advisors

Thanks. Hey, I just wanted to clarify because I think sometimes I mess up the terminology, but when you talked about a 106 new franchisees, is that locations or new franchisees?

John Hewitt

They are new franchisees. Most of them acquired are going to open an office. We have a percentage each year by an existing office and so that tend to be about 75% of them, will open new offices. And I think in my remarks I gave the exact number as to 53 of them.

Darby Schoenfeld

53 in new territories.

John Hewitt

Okay, that was 53 in new territories in the 106 franchise.

Stefan Mykytiuk - TIG Advisors

Okay. And the rest were existing?

John Hewitt

Right.

Stefan Mykytiuk - TIG Advisors

Okay. And then -- but if an existing franchisee were to open a new office, wouldn’t they typically do it sometime between now and when they do it, should more in your December or in the next couple of months before?

John Hewitt

90% of our offices opened in January, and we don’t start paying rent until January. So that’s why it’s a bit difficult to give exact numbers right now because there are many, many negotiations that are going on as we speak.

Stefan Mykytiuk - TIG Advisors

Right. So the 106 doesn’t capture much of new offices that an existing franchisee would open and I think you said before, it also doesn’t capture much of the Walmart new locations.

John Hewitt

It is correct. It does not capture any of the existing office growth, existing franchisee growth that would be -- this is just a brand new franchisee.

Stefan Mykytiuk - TIG Advisors

Okay. All right. Thanks very much.

Operator

And I would now like to turn the call back over to Mr. John Hewitt.

John Hewitt

Well, I thank everyone for the attention and we look forward to having a great season and talking to you shortly.

Operator

Thank you. This does conclude today’s conference call. You may now disconnect.

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