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Executives

David Kraut – VP Treasury & IR

Michael Yerington – President & CEO

Daniel O’Brien – CFO

Mark Heimbouch - COO

Analysts

John Healy - FTN Midwest Securities

Scott Schneeberger – Oppenheimer

Michael Millman - Soleil Millman Research

Jackson Hewitt Tax Service Inc. (JTX) F3Q08 Earnings Call March 4, 2008 11:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the Q3 2008 Jackson Hewitt Tax Service Incorporated earnings conference call. (Operator Instructions) I would now like to turn the presentation to your host for today’s conference Mr. David Kraut, Vice President of Treasury and Investor Relations. Please proceed sir.

David Kraut

Good morning and welcome to the Jackson Hewitt Tax Service third quarter fiscal 2008 earnings conference call. I’m David Kraut, Vice President of Treasury and Investor Relations. Joining me today are Michael Yerington, President and Chief Executive Officer, Mark Heimbouch, Chief Operating Officer and Daniel O’Brien, Chief Financial Officer.

Earlier this morning we issued a press release announcing the company’s third quarter fiscal 2008 financial results. You may access that press release at the Investor Relations section of our website located at www.jacksonhewitt.com. Today’s call will begin with Michael Yerington reviewing the company’s performance during the first half of the tax season and providing an outlook for the second half of the season. Mike will also review the company’s long term strategic objectives and the actions being taken by the company to achieve those objectives. After that Dan O’brien will discuss financial highlights from the quarter, review the company’s capital structure and provide the full year financial outlook. Following the prepared remarks we will leave sufficient time for questions.

Please note that this conference call contains statements that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied. In addition this conference call contains time sensitive information that reflects management’s analysis, expectations and assumptions as of the date of this live call. For further information concerning issues and risk factors that could materially affect the company’s business and financial performance please refer to the press release we issued earlier this morning, our Annual Report on Form 10-K for the fiscal year ended April 30, 2007 and our other SEC filings. Jackson Hewitt does not assume or undertake any obligation to update or alter any forward-looking statements made or information presented during this call. This call is open to the public and is being webcast simultaneously on our website at www.jacksonhewitt.com. Additionally the webcast will be available for replay on our website. Now let me introduce Michael Yerington.

Michael Yerington

Good morning, before I begin I’d like to thank our employees, franchise partners and vendors for all the efforts that went into the preparation of this tax season. Our systems were ready, our enhanced compliance initiatives were in place and our franchise and company owned locations were open for tax season. With all the changes that have occurred in the company and in the industry during the past year, this was a great accomplishment for our team.

That being said, the industry experienced a slow start this year and January tax return volumes were clearly disappointing both for the industry and for Jackson Hewitt. Let me summarize the market and company-specific dynamics that affected tax return results during this period. We will also review some of the initiatives underway to drive improvement for the remainder of the current tax season and aggressive growth in future tax seasons.

First we understand that overall tax volumes with the IRS were down significantly through January 31. We attribute this decline in part to the ongoing shift in consumer filing patterns that we have seen each year in the industry since 2005, as well as to publicity of a potential delay to the start of the tax filing season due to late AMT legislations. From a company-specific perspective, we believe our season was and will be impacted in several ways. First the lack of a preseason product placed us at a significant disadvantage. Our preseason products in the past legally solved a need for our customers in the early season by allowing them to apply for a loan with our banking partners. We would prepare the tax return but would not file it with the IRS until the W-2 was obtained. While we earn no financial product fees from the bank for these products, the preseason products did serve as a retention tool and drove the early season customer.

This year the banks no longer offered these products. The need still existed for those consumers however we believe some independent operators not focused on quality tax preparation met that consumer demand by violating IRS regulations and filing tax returns for their clients with the IRS based on paystubs and not W-2s. Additionally the impact on our business and on our brand from the Department of Justice claims against one of our former franchisees last year was more significant than we had anticipated and more significant than our market research from last summer suggested. In addition to conducting the research we also increased our marketing and charitable efforts in those cities and Mark Heimbouch and I personally visited the franchisees in those markets. Despite the resolution of all related matters last fall well in advance of the tax season, the media continued to reference the story in the five cities affected as well as nationally this tax season.

Our volume in those stores acquired from that franchisee were down dramatically from prior year results and franchisee volumes in those cities were also down as compared to the rest of the system.

To drive aggressive growth in the future Jackson Hewitt has embarked on a strategy to develop a pipeline of innovative products and services that is intended to attract customers into our offices on a recurring basis and to differentiate Jackson Hewitt’s customer experience. I will address these strategies in more details shortly.

Now let me address our prospects for the full tax season. We did see improvement in tax return volumes in February and we are looking to build on those results for the late season. For instance we are making broader use of our direct mail campaigns that were successfully tested in several markets last year and we increased the targeted direct mail that is being sent to previous Jackson Hewitt customers and prospects during the February and March time frame. Over the past two years we have invested in people and technology to better analyze our customers and prospect database. We anticipate continuing to develop this experience in current and future years.

We also work closely with our franchisees to prepare for the late season. We have just conducted 42 regional workshops with our franchise to highlight that there are normally about 45 million paid preparation tax returns still to be filed in the market and to remind them that these are high margin returns since most operating expenses in their offices have already been incurred. And we believe that the industry could experience unusually strong growth in the last season as a result of the government’s economic stimulus rebates that require a 2007 tax return to be filed and that has received significant publicity in recent weeks. The IRS estimates that 10 to 20 million incremental tax returns will be filed this season by individuals filing only to receive the economic stimulus plan rebate and who otherwise would not be required to file a tax return.

The revenue impact for Jackson Hewitt will be limited given that our fees for serving these customers will be lower than normal tax returns but it does broaden our exposure to potential customers.

With expectations for improved tax return performance in the late season we have set full year projections at this time. Those projections recognize that Jackson Hewitt historically has completed a substantial portion of its tax returns in the January period and so will be unable to fully make up the ground lost. As such, we are projecting a full year tax return decline by 5% to 6%. We recognize this is not an acceptable outcome and I will outline the initiatives we’re implementing to seek aggressive growth in the future.

For the remainder of the fiscal year we are managing the expenses of the company conservatively. To be clear though, while these cost saving actions are necessary given the softer tax return outlook we believe it will be important long term to invest in order to realize the strategic growth objectives of the corporation.

As we seek to grow the business I am reminded that what attracted me to Jackson Hewitt is that we only have a 4% market share in a growing and fragmented market. That continues to be the opportunity for the corporation and this year’s early season results did not change my view of that opportunity. In fact the results from the early season demonstrated even greater importance and urgency to the initiatives we are undertaking.

Let me take a few minutes to outline the changes that I made during my five months since I was promoted to CEO. These changes will serve as a basis to execute against my aggressive growth strategies. Among the first changes that I have made was to our senior management team. The people hired in recent months have significant drive, talent and experience in building successful operations. They will provide a sound foundation for the company adding to the bench strength of our next line of management and providing leadership to aggressively build the business. Mark Heimbouch our former Chief Financial Officer was promoted to Chief Operating Officer. Daniel O’Brien joined us as Chief Financial Officer, Doug Foster joined us as Chief Marketing Officer, Danamichele Brennen joined us as Chief Technology Officer and just this past week, Randy Neilson has joined us as Chief Network Development Officer.

We are in the process of recruiting additional resources in several areas including product development but with my background experience, I will be personally involved in this area. In prior assignments I have designed, built and launched many new successful products and will do so here. As part of building this foundation we’ve also reviewed our infrastructure to ensure that it is scalable for growth. We tested our systems, improved call center responsiveness and enhanced our learning, training and compliance capabilities to better serve our franchisees and customers. Those improvements were in place for the current tax season and will be reviewed for further enhancements in the future.

I believe our relationship with the Internal Revenue Service has improved. We have regular meetings with top level officials within the service so that they can better understand our commitment to quality tax preparation. Similarly I believe our relationship with our financial product partners has improved. We regularly meet and communicate with our partners at the most senior levels to ensure that our customers are provided choice among responsible products that are disclosed in a clear and transparent manner. We also work closely with our financial partners, delivering quality tax preparation throughout the Jackson Hewitt system.

In the franchise area I have devoted considerable time to strengthening our relationship with the company’s franchisees. They are our partners and we profit when they profit. We now have more frequent and a more organized dialogue with the franchise system and their representatives that involves them in early stages of product development and upcoming initiatives. We have even relocated some of our marketing dollars for spending at the discretion of the individual franchisees who live and work in their local markets. And we have created meaningful incentives for franchisees in order to drive increased growth this late season and further align the interest of franchisees with those of our shareholders.

We are looking for ways over time to make the franchisee experience even more compelling and more profitable for them by providing the ability to leverage their expense base and reach their clients more effectively with products and services on a year round basis. Improving franchisee relationships and the franchisee value proposition will be an ongoing process and there is more work to be done. But I can tell you that even just the change in the level of communication over the past few months has been recognized and more positively received by the franchisee community.

Let me now turn to the strategies for the future. With the organization and infrastructure largely in place, we are ready to pursue aggressive growth. Let me be very clear, the changes that I am implementing are intended to drive significant not incremental growth in the coming years. For example, we’ve been telling investors that we only penetrate 40% of the addressable market for far too long. While I won’t publically disclose our growth objectives at this time, I will tell you that we plan to aggressively increase that 40% metric, rather than merely target a couple of percentage points of growth during the next two years. If successful this significantly greater penetration should provide an equally significant increase and economic value for our shareholders.

In the distribution area, we want to expand our footprint aggressively but smartly. Over the past several years we have opened many new offices but still penetrate the same 40% of the addressable market that we have talked about in the past. As an indication of the opportunity available, if we were to be successful in expanding our reach from 40% of the addressable market to just 45% that could generate approximately $36 million per year of annual incremental revenue. If we could grow our market share from 4% to just 5%, that could generate approximately $70 million of annual and recurring revenue. We are building the organization and infrastructure to support that type of aggressive growth in the future.

We have prioritized those markets in the country which are most attractive to us and in which we are under represented. We are also creating multiple sales channels to develop those prioritized territories seeking multiple unit owner operators who can develop a market or a cluster of territories as opposed to a franchisee who is limited in his or her ability to open multiple offices in a year. These efforts should not only accelerate territory sales in high potential markets, but are intended to drive productivity in existing offices because there will be less risk of a new, nearby office cannibalizing existing same store sales. We absolutely will encourage our best managed and capitalized existing franchisees to reinvest but this strategy will be focused on the opportunity to capture market share in non adjacent but potentially higher growth and more attractive markets that we may have missed in the past.

We also continue to seek to convert an independent to a franchisee or seek to have that independent acquired by a franchisee. Similarly we will consider and investment by our company owned operators in new, high growth markets if there is no franchisee available to reinvest. We are primarily a franchisor and that’s not changing. But we cannot afford to delay an economically attractive expansion in high growth opportunities. We successfully completed transactions this tax season to develop company owned presence in Seattle, Honolulu and Minneapolis. These are new markets for the company owned business and there was no existing franchisee in those markets in a position to fully realize the growth opportunity that we believed existed in the near term. At some point in the future those markets or others could be sold as a franchise business opportunity.

Let me now turn for a minute to product development. As we build our distribution network we need to be able to continually introduce products and services that are competitive differentiators for franchisees to offer to our consumers. Our new products will be customized to meet the needs of our customers and offered in a responsible fashion consistent with Jackson Hewitt principles. The new products and services will be based on customer research and some designed to meet the specific needs of the early season’s speed of refund customer while other products will be designed to increase share of wallet among both our early and late season customers. The services will include building a relationship with our customers year round and not just during the tax season.

As we mentioned previously we will seek to introduce products primarily to partnerships with other consumer and financial service firms in order to gain their expertise and also gain access to their clientele to market our services. However we plan to build the infrastructure so that some products can be developed or customized in house our through acquiring needed capabilities. Any investment would be required to meet appropriate return hurdles and provide an attractive economic return versus other use for that capital.

To assist us in developing this strategic plan we have engaged in outside consulting firm that has been on sight full time for the last several months to review and help us prioritize the opportunities for expanded distribution and greater same store sales. We have also engaged a branding firm that has worked with us in recent months to rethink the positioning of the Jackson Hewitt brand both in the early and late seasons. This branding effort is even more important to address the five markets that were affected by last year’s Department of Justice complaint against a former franchisee.

Let me summarize by saying that I am not a patient person. Nor will I accept the growth that Jackson Hewitt has experienced over the past couple of years. We were in the process of completing the changes to the organization and infrastructure that will serve as the basis to drive aggressive growth in the business and we now need to execute, execute, execute. With that let me welcome Daniel O’Brien our new CFO to his first Jackson Hewitt earnings call. Dan joins us with over 25 years of financial management experience including serving as CFO of several large public companies. He will work to continuously improve on the great foundation that Mark Heimbouch has built over the past four years and to help drive the aggressive growth that we seek.

Daniel O’Brien

Thanks Mike. I’m pleased to be part of Jackson Hewitt and I as with Mike and the other new members of the senior management team have joined in order to help the company realize the growth opportunity in front of us.

Let me start today by reviewing the financial performance for the quarter, provide an update on our capital structure and share repurchase program and then we’ll move on to full year financial guidance.

As we discuss the financial performance I believe you will see the potential benefits from the strategic objectives that Mike has outlined. As a primarily franchised company our cost base is largely fixed to serve our franchisees and has been definitively set before we enter the tax season. As such, each incremental customer served becomes highly profitable to both us and our franchisees. This has certainly impacted us to the negative thus far with a slower tax return growth in January on this largely fixed expense base, but provides an opportunity for us in the future. By being able to aggressively grow the number of customers that we serve and the products we offer through the distribution system in the future, we would anticipate that there would be an opportunity for significant earnings growth. Even in a year with slower tax return growth than anticipated the business in the current year will generate considerable free cash flow. Especially for a company of our revenue base.

With that let’s now move on to talk about the quarter. As mentioned in our press release total revenues for the three month period declined by 15% to $97.6 million primarily as a result of a 14% decline in tax return volumes during the quarter. Approximately one percentage point of this decline can be attributed to the weaker performance in the markets involved in last year’s Department of Justice complaint against a franchisee. Revenue for tax returns declined by 1% for the period as pricing increases in the quarter were largely offset by the absence of certain non recurring pricing opportunities from 2007. For example, year end tax planning fees earned with the offer of help loans last year and the telecom excise tax form.

Royalty and marketing and advertising revenues each declined by 15% in the quarter, approximately in line with the decline in tax returns. Financial product fees declined by 19% principally due to lower product counts. The fixed fee component of the financial product agreements are accounted for on a percentage of completion basis over the tax season. Overall product attachment rates were consistent with the prior year period with somewhat of a shift from refund anticipation loans to assisted refunds. Recall that we are economically indifferent as to which financial product the customer chooses. We do believe that our bank approval rate for refund anticipation loans was higher than those of independent tax preparers and others in the industry who publicized their approval rates. We think this is in large part, due to the increased compliance initiatives undertaken by Jackson Hewitt and will be a driver of retention in the future.

Other revenues declined by approximately $700,000 in part reflecting lower electronic filing fees earned due to the lower tax return volumes. Territory sales for the quarter were approximately flat with 30 sales completed as compared to 32 for the prior year period. Service revenues from company owned operations declined by 11% in the quarter. Lower tax return volumes were largely offset by the acquisition of approximately 150 franchise locations earlier in the year from the former franchisee who had been named in the Department of Justice matter. Excluding those acquisitions tax return volumes in the company owned operations would have been down approximately 13% in line with franchisee performance.

Service revenues were also impacted by lower revenues per tax return in the period which has in a sense nearly reversed itself and is now closer to franchisee performance. Insularly revenues from a discontinued November and December tax planning product also negatively impacted revenues, but the company offset that decline with lower occupancy and personnel costs since most stores did not need to open as early as in prior years.

Moving to expenses, total operating expenses decreased by 4% or $2.3 million during the quarter. Marketing and advertising expenses declined by 10% or $2.4 million as the company reallocated a portion of its marketing spend to later in the season. Cost of company owned operations increased by 8% or $1.5 million to reflect the larger store base operated for this tax season. The acquisition of the 150 stores mentioned earlier from the former franchisee was a significant factor in this store base increase and contributed $3.1 million of operating costs since being purchased in early October. SG&A expenses declined by 15% or $1.5 million, higher personnel costs which included recruitment expenses for several new members of the senior management team and higher consulting costs related to the outside consulting firm that Mike mentioned were more than offset by the absence of the prior year period litigation charge of $1.9 million.

Interest expense increased by $1 million during the quarter and reflected higher average debt balances resulting from the cumulative share repurchases over the past several years. Net income declined by $9.3 million to $18.2 million. Diluted earnings per share were $0.61 as compared to $0.83 in the prior period. In this prior year period the company incurred $1.9 million or $0.03 per share non recurring litigation related charge which I mentioned just a moment ago. For the nine months, net loss was $25 million as compared to $600,000 in the prior year period. Loss per share for the nine month period included $12.7 million of non recurring expenses, primarily related to the internal review and severance costs for the former Chief Executive Officer. I will remind you that basic not diluted share count is used to calculate earnings per share in periods of loss.

In light of the slow January start, Mike and I have instructed the company to sharply curtail non revenue generating discretionary spending in the fourth quarter. I will reiterate Mike’s comments regarding the importance of investing for growth which we consider essential going forward to recognize the economic potential for the business. But we are conservatively managing non essential spending in the interim.

Moving on to capital structure, the company continued to aggressively repurchase shares during the quarter especially as the share price declined in January. During the quarter we repurchased 1.5 million spending $39.8 million. Through the first nine months of the year we repurchased 3.3 million for $94.8 million. As of the end of January we had approximately $38 million remaining available under the existing authorization. We have reduced the weighted average share count by approximately 10% during the past 12 months and have repurchased approximately 27% of the shares issued at the IPO in 2004.

Debt balances increased during the quarter to accommodate the increased pace of share repurchases and seasonal borrowing needs. At quarter end, debt was $351 million with nearly $100 million of undrawn capacity under our credit facility. As mentioned cash flow in the business remains seasonally strong, the January 31 debt balance already reflects the retainment of approximately $30 million of peak outstanding debt from earlier in the month and we have since made additional repayments that we anticipate will continue through the tax season.

We continue to believe strongly that excess cash flow should be returned to shareholders in the form of share repurchases and dividends. That being said, as we proceed with the development of our strategic plan we would anticipate that there would be more opportunities for value creating projects than may have been in the past. Those will receive priority funding once we are confident in the strong economic returns expected to be generated. Beyond that we will seek the return of excess free cash flow to investors while maintaining strategic flexibility in our capital structure and within the confines of our credit agreement.

Let me now turn to the outlook for the year. As Mike indicated we are forecasting total tax return volumes for the current year to a decline by 5% to 6%. This decline excludes any positive benefit from incremental economic stimulus program tax returns. In addition we are now forecasting revenue per tax return to grow by 1% to 2% also excluding the impact of the lower priced economic stimulus program tax returns. The company and its franchisees have continued to experience pricing increases despite competitive pressures. However these gains largely offset 5% to 6% of prior year product offers that were non recurring in nature and that I had mentioned earlier.

The company forecasts that total financial product fees for the current fiscal year will be $72 million to $75 million, a decrease over the fees earned last year as a result of lower than anticipated tax return volumes. Of this total we would anticipate that approximately $61 million to $64 million will be generated from our relationships with our principal banks, Santa Barbara Bank and Trust, Republic Bank and Trust and HSBC, with the remainder largely due to the Gold Guarantee product. Based on the tax return forecast that Mike provided, we would anticipate that at least 90% of this $61 million to $64 million is already contractually fixed for this season.

Again, it is important to note that even in the variable fee compensation to be earned; we are economically indifferent in our current agreements as to whether a customer chooses a loan or a non loan product. Based on these assumptions we are projecting total revenues to be $282 million to $292 million for the current fiscal year. We are also projecting diluted earnings per share for the current fiscal year to be $1.48 to $1.60.

As I turn the call back to Mike, let me reiterate that notwithstanding a pretty difficult quarter and tax season I am excited about the opportunities in front of us and the potential for value creation in the coming years.

Michael Yerington

Thanks Dan. As we mentioned on our last earnings call we knew that 2008 would be a year of transition for Jackson Hewitt. However our early season operating results were disappointing. We have seen growth in February and are optimistic for the prospect for the rest of the tax season. More importantly the initiatives undertaken in the past year have already made us a stronger company and the strategic objectives that I have outlined today and will update on future calls are expected to be the basis for aggressive growth in the coming years. We are committed to driving shareholder value and assure you that the interest of employees, franchisees, management and The Board of Directors are all aligned with shareholders to do so. With that, we’ll open the call to questions.

Question-and-Answer Session

Operator

Your first question comes from John Healy - FTN Midwest Securities

John Healy – FTN Midwest Securities

Bigger picture question on the industry, this is the second tax season in a row where it seems the industry is shifting more towards the later season and we’re a bit surprised that this continues to take place especially in light of what some people believe is economic pressures and things tightening out there. I was hoping to just get some more color from you guys, what you’re hearing from your franchisees and how you look at the industry on why this shift is occurring and if you were surprised that the shift continued even this year with the economic situation as it is.

Michael Yerington

John, we’ve seen this happening over the last three to four years and I think we kind of expected as you might of, that with people being a little more tight from a cash flow standpoint they might have filed earlier in the season but that continues to happen. We don’t see that changing anytime in the foreseeable future and don’t know all the reasons behind it but I think that people are maybe at this early stage of potentially an economic downturn they’re still feeling okay about being able to file a little bit later.

John Healy – FTN Midwest Securities

And when you guys talked about the factors you cited as having an impact on the early season, is there any way to kind of put the numbers behind those, maybe how much was just a shift, how much you think was impacted by the media and how much was lost due to financial products.

Michael Yerington

Yes, let me just reiterate what those reasons were again. I don’t know if I can put a percentage behind each one of them. You know we mentioned before more returns are being filed later that’s certainly for our customers which tend to be early filers; January to February 15 we have a significant portion of our business in at that point. That’s certainly one factor. Lack of a preseason product, even though the preseason product was not there this year it is as we’ve said in the past a very good retention tool for us and when we had pre file as a standalone by ourselves in 2006 it was a significant attracter of new customers as well. We think the independence filing with paystubs, when we did pre file a couple of years back it was because we knew there was a need for our customers who are usually in a tight financial situation to get money quickly. And we saw it in the marketplace that there were people out there filing tax returns based on paystubs instead of W-2s, so we created a legal alternative which was called Pre File. And when Pre File went away I think the need for those products still existed and I think we’ve fallen back into the old pattern that we had before Pre File was introduced where people are now going to less focused, I guess less focused but people who are not as focused on quality tax returns and I think they’re filing with a paystub. And I think that’s been evident this season.

The other thing that I think that we talked about is the impact of the DOJ actions and let me just give you a little clarity on that. Mark and I spent some time in the field with three areas that were impacted by the DOJ complaint. We were in Chicago, Atlanta and Detroit. We talked with our franchisees there. We talked with customers. We had done some surveys at the end of the season to try to find out what the impact of that would be but even with all the things that we did, which were heavying up on our media campaign and doing some charitable things in those markets, it had a more significant impact than we wanted it to have or that we expected it to have. If you look and just to put it into perspective, if you look at the total country, we’re down about 14% as of January 31. In the five affected cities we were down about 26% as of January 31 and the company owned businesses, those businesses that we acquired from the franchisee who was impacted by DOJ we were down 45% in the three cities that were impacted. So those are the main reasons that we suffered the declines that we did.

John Healy – FTN Midwest Securities

That’s very helpful. And just lastly, it was great to hear your longer term strategy for growing the distribution and growing the brand, I was just hoping to find out, how do you plan on updating us as we approach tax season 2008. Is there something we should expect to hear from you guys over the next nine months or so on how you’re rolling this out and what to expect. Will this be updated on a quarterly basis and then just with that, do you continue to believe that the long term targets of revenue of 10% to 15% and EPS of 15% to 20% are still doable and if so, maybe a time frame on when those might be attained.

Michael Yerington

Let me talk first about the update of the strategy. We will certainly update you on strategies every quarter. We’ll talk about our progress against the milestones which will be very specific. Everybody in the company will have specific milestones they’ll be working against to achieve the strategies I talked about and we’ll be certainly glad to update you during the quarter as well as we’ll update everybody on the quarterly call. So everybody will get a chance to be updated on those and if you need progress reports in the interim, I’m glad to be able to give you what we can. Obviously as a public company I have to be careful about that but some of the milestones will be very visible to the outside world.

As far as the 10% to 15% growth rate….

Daniel O’Brien

Let me chime in just a little bit, I think the revenue at 10% to 15% and diluted EPS at 15% to 20% are the right kind of targets for this company. And should be achievable by the company over time. That’s a long term view, clearly this was not a year in which we achieved those kinds of returns but is an appropriate view for us to have long term. And certainly as we get through the strategic planning process that Mike has described, that’s something that we can give more information on with respect to the impact of those activities with respect to that long term guidance.

John Healy – FTN Midwest Securities

Thanks a lot guys.

Operator

Your next question comes from Scott Schneeberger – Oppenheimer

Scott Schneeberger – Oppenheimer

I guess could we start out, I think that you mentioned territory sales were I think 30 in the quarter, where does that take us for the full year?

Daniel O’Brien

It’s 123 and again about 77% of those were sold to existing franchisees and a greater proportion, just under 70% were to our targeted locations as well. So again 123 in total.

Michael Yerington

Let me just do a quick follow-up on that Scott, I think it’s important. As you look at the aggressive growth plans we have in place for distribution we’re going to be looking at targeted locations and those will consist of two things. One is there are significant locations where we don’t have a presence at all today and we will be focused on those as well as there are significant territories where we don’t have enough presence. So if I have a territory with one office in it and I know that there’s potential for three, I’ll be working with the franchisees to make sure that they have the right incentives to make sure those offices get opened. And in areas where I don’t have strong presence today I’ll certainly try to go with a franchisee first but I don’t want to be sitting here a year from now saying, “Hey we have a 40% addressable footprint.” That doesn’t work for me. And I know it doesn’t work for our investors and I think the way we show that we’re doing what we need to be doing as a management team is to make sure that we get our addressable footprint up to a significantly higher place than it is right now. And we’ll be doing all the things necessary to accomplish that.

Scott Schneeberger – Oppenheimer

Okay thanks. It looks like new offices for total system is up about 280 something and surprised growth and franchise offices up 0.1%, I guess if we could talk about that, but what I’m looking to get at is there trouble now? Maybe it’s related to the fraud issue. Is there trouble selling to new franchisees, is it more of the strategy of, “oh we’re making you not open adjacent but far away.” Or is it the fraud issue because you’re now speaking of “oh we’ll do company owned to get the thing moving quickly.” Should we be very concerned that you’re just unable to attract that franchise growth? Thanks.

Daniel O’Brien

First just on the numbers just so we’re clear, you’re right the increase in total was in that are of 280 offices. You’d mentioned the growth in franchise offices, you have to understand that that reflects the movement of offices purchased from our, that franchisee we had the DOJ issues with and that was 150 offices that affectively went from franchise operations to company owned. So you should think about the 280 as an affective net gain.

Michael Yerington

Let me just talk Scott to the other point you talked about which is, is it hard to sell franchised territories. If you look at what we have done in the past, traditionally we have sold existing or sold new territories for the most part 80% or more, to existing franchisees. It’s sort of like the self fulfilling prophecy, if you sell to your existing franchisees and you’re existing footprint, guess where your new offices will be? In your existing footprint. And we’re not going to do that anymore. You know the definition of insanity is doing the same thing and expecting a different result. But we are doing and will expect the franchisees to help us with this, but we can’t rely just on them because they want to focus where they have been with, and they have a presence. And there are lots of territories. We have identified through the outsource that we mentioned, this consulting group, there are significant, 1,000s of territories where we need to be in or locations I should say, where we need to be in and we’re not sure that we can get the franchisees to agree to move to those locations because its not close to where they are now. We don’t need necessarily more offices opened where we are now. That’s, some territories there are some that we’ve got room for improvement. We need maybe a few more offices but our clear opportunity is outside of where our footprint is today. As people move to the second season, as our opportunity looks to be moving out to the second season, our footprint is in the first season and we need to be moving more to the second season. So you’ll be seeing more and more focus on making sure that our footprint is out, not only in urban markets but in mid to sub urban markets as well.

And as I said before, I’m not going to be patient about that. I’m going to ask my franchisees to move ahead with us on that. I’m going to try to incent them but we can’t move as fast as we need to move unless we do that ourselves in some cases.

Scott Schneeberger – Oppenheimer

Okay, I guess I’ll transition to a question I was going to ask later. Dan mentioned when discussing capital structure and repurchases, he mentioned that yeah we still continue to do dividends and share repurchase but we are looking to get into some value creating initiatives. Could you talk a, I guess you’re not going to expose fully what those are, but what type of CapEx is associated with that and maybe that is growing some company on stores just so we can get an idea of where capital will be going forward, thanks.

Daniel O’Brien

Scott, it’s too early to give you any quantitative dimensions around that. I think your observation and conclusion is the correct one. We believe that moving forward in a much more aggressive way some of which would involve expanded use of our TSA operations will require some more capital. But it’s too early to determine the impact of that and to quantify that until we finish off some of our planning. That’s in process and as we move forward with it and crystallize it a bit; certainly we will give you more specifics around that.

Michael Yerington

Just to follow-up on what Dan has said Scott, I think smart investors will want us to grow the business and I think if we’re able to articulate a story which says the capital is better used to grow the business than just to buy back shares you would understand that. And clearly we’ll be able to articulate that story and tell you why we think that the use of capital may be used a little bit differently going forward. We don’t have to get crazy but used a little differently going forward will help us grow the business. That is clearly the mode that we’re in is to grow the business and we cannot grow the business without additional distribution.

Daniel O’Brien

I just reiterate what we said in kind of the earlier comments, we’re not going to grow just to grow, we’re going to grow because it provides economic value to us. We’re going to be smart about the use of that cash. We’re going to ensure that it gives and delivers the proper kinds of economic returns based on our costs of capital and the risk factors we’re taking on in those expansions. So we’re going to make sure that we’re doing this right, but we believe that there are a number of opportunities where deploying capital in that smart way will realize significant value accretion to shareholders.

Scott Schneeberger – Oppenheimer

Is these projects that you guys are alluding to now, are they, are you doing some pilots now so you can see that, yeah we do have the potential to get to the returns that we are forecasting or should we think that fiscal year ’09 that tax season is when we’re actually going to see, oh yeah they are going to be delivering upon those or oh, maybe they are falling short of the ROIC. I guess I’m asking, are you getting a head start on those during this tax season to make this year more the beta year as opposed to next.

Michael Yerington

Scott it’s a good question and I think we mentioned during the call that we have focused on Hawaii. We purchased an independent there. We are building out that marketplace. We focused on Minneapolis. We have purchased a franchise there and we’re building out that market. And we have focused on Seattle. And so we have this season begun to see the kind of strategy we’ll begin to use going forward. And it includes going in buying independence. Going in and maybe where there’s a small franchisee moving, getting them to either grow with us or move out. Or putting in a company operations. And so where it makes economic sense to do so, we will be going into those markets and growing. And even though I’ve said we’re still primarily a franchisor and we will still operate through franchisees we will have some situations where it makes more sense and better economic sense as I said before, that we should go in as a company owned office. I don’t see that being a wholesale change in our strategy but I do see that happening more often in the future where we can’t get franchisees to move ahead as quickly as we would like.

Scott Schneeberger – Oppenheimer

Okay thanks. One more on a different topic, could you take us a little bit through the progression, week by week or however granular as you’d like, from January into February so we can get a feel of the progression of the tax season, thanks.

Daniel O’Brien

It’s tough to give that progression other than to say that we certainly have given you a view in terms of how January progressed. And that the month and the early part of the tax season was substantially lower than prior year and where we expected to be running. We have seen improvement as we look on kind of a day by day basis and we are now giving the kinds of projected total view at minus five to minus six percent relative to a minus 13.5% as of the end of January. So we’re starting to see the improvement, starting to roll through and the only, there was no significant blip to call out. We had a little higher volume improvement right around the time, February 11 when some people had assumed they couldn’t file for AMT purposes. It wasn’t major but it was a pickup at that point. There’s not really much granularity I think would be helpful in this other than we are seeing some improvement as measured versus prior year as we move through the season and would expect somewhat better results in March and April to lead to the minus five to six that we’ve outlined.

Scott Schneeberger – Oppenheimer

Okay thanks.

Operator

Your next question comes from Michael Millman - Soleil Millman Research

Michael Millman - Soleil Millman Research

I’m just following up on that last question, to what extent do you expect some pickup from having the [inaudible] stores for the week or two at the end of the year that he had closed them down or you had closed them down last year.

Daniel O’Brien

Yes that’s a good question Michael, we indeed within the forecast that provided have assumed a little bit larger uplift in the back end of the season but that is built unto the minus five to six guidance that we’ve offered.

Michael Millman - Soleil Millman Research

In terms and maybe just on the volume, obviously you got an extra day with the 29th and you got an extra calendar day, what’s the current volume look like on a day over day?

Daniel O’Brien

It’s about, at this point in the year it actually has recovered of that, we’re about, I think it’s about a percent difference viewed on a day over day basis now relative to prior year again adjusted on that basis. At this point in the season it’s about a percent difference.

Michael Millman - Soleil Millman Research

Even including the 29th?

Daniel O’Brien

That’s right, both days.

Michael Millman - Soleil Millman Research

You cite to move on, you cite some of your problems in not having some products early in the year, and then when you talk about what you’re going to do next year, there’s no mention of them. So could you talk about what your plans are to get back into a pre W2 product? You didn’t talk at all about military RALs. Could you talk about how they affected you and what you might want to do about them? Could you also talk about what impact there was if any impact you saw from the express RAL, the 36% RAL?

Michael Yerington

Okay, there’s a lot of questions to answer Mike, let me take the easy one first. Military, we had about 38,000 total customers out of our total population that were impacted by military RALs and you know that we are, you may know that we had partnered with a company that does installment loans to the military. We don’t know that that’s a significant impact was only 36,000 customers that are impacted. That’s last year and so even with that said, we need to have a military product. I don’t want any of my customers whether its 36,000 or one to have to go to another place to get a product or service that I should be rendering so I guess the short answer to your question is even though it has minimal impact we will have a product next year that will service that client.

Secondly on the preseason product, as I said before there is a need in the preseason for people that need cash. A lot of the folks in our franchisee network are people that need cash quickly and I think if you’re going to win in that marketplace you have to have a product, a legal product, that provides cash quickly and we will have a product that will provide cash quickly. I’m not going to get into all the details on that except to say that that will be a product that we will have.

As far as the 36% RAL we do have a product that competes with that up to about $1,000. It’s called an ARBL; our franchisees have access to that today. Thirty-six percent RAL business has been out there for awhile. We’ve been able to affectively compete against it. So I think that we’ll probably refine that product going forward and work to maybe bring the value or the amount of money a little higher but right now it’s a $1,000 limit and it is at 36%. So I guess let me just close out the focus on preseason products or on products in general.

I think that there’s an opportunity for Jackson Hewitt to win in the early season which is where a lot of our footprint is today but I think there’s also an opportunity for us to win in the second season which are folks that are not as focused on cash now products. And so I think we have the opportunity as a company to create products and services for both first season and second season and as I mentioned I think there’s an opportunity with almost 7,000 distribution points to create other products and services that can be sold to our current customers and to new customers as well.

Daniel O’Brien

I might just add a point around this because certainly Scott’s earlier question and Michael your question as well, as to kind of the early season performances, as Mike had said we think its probably less due to anything around the military RAL where our prior year customers were only about 1% as opposed to belief on certain parts that it was higher. It’s in that area of about 1%. We do think that this issue which we mentioned in our earlier comments around returns being done using paystubs versus W2s was probably a pretty significant factor. Its tough to fully and precisely parse that through but when you look at that period where that could have been a more significant factor in the mid part of January into the latter part of January when W2s were just coming out, there were a lot of returns done in that period and we were about 200,000 returns down by that point. So again it would imply certainly evidenced by a lot of anecdotal and other discussions with franchisees that this issue of paystub return preparation was a more significant factor as it affected us early season and is difficult to recover at this point.

Michael Millman - Soleil Millman Research

Just looking at that 200,000, if you were 200,000 down very early on paystub, it almost suggests that the seasonal shift had no influence because that’s about the number.

Daniel O’Brien

No, it’s a little bit light of the actual number. I think when we look at it, that that is captured off of call it the prior year as well as our view in terms of the shift that was occurring. So it’s a rough number. It’s again, as I said, tough to parse that through precisely but it’s kind of in that area.

Michael Millman - Soleil Millman Research

Where do you expect your long term debt to be by the end of April? How much do you expect to pay down?

Daniel O’Brien

I think we’ll probably be in the area of $240 million to $250 million closing off the year. So again when you think about having a $450 million facility obviously that gives us more than $200 million of head room as of the close of the tax season recognizing that the peak was somewhat higher.

Michael Millman - Soleil Millman Research

And what leverage would that imply?

Daniel O’Brien

Rather than talk about the forward side of it what I would say is for the past quarter, we’re probably in that area of around 2.2x.

Michael Millman - Soleil Millman Research

Okay, thank you very much.

Operator

As there are no further questions, I would now like to turn the call back over to Mr. Michael Yerington, President and CEO for closing remarks.

Michael Yerington

Well first of all thanks for being on the call. I will reiterate as I said during the call, that I’m disappointed with the earnings and I know that folks are and we are working on changing that. I guess the thing that I would leave you with is I am not a patient person. I do not like being in this situation. I know how we got here and I know the way out and I know that with the products and services that we are talking about, I know with the distribution that we are looking to build and with the brand that we have, we have lots of opportunities for growth. I stated before the reason I came here was to grow this business, that’s what I intend to do and I think now that I have the infrastructure of organization in place to do that, you will begin to see the kind of execution that this organization is capable of with the right team in place. And that’s what I expect to do. So thanks again for being on the call.

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Source: Jackson Hewitt Tax Service Inc., F3Q08 (Qtr End 1/31/08) Earnings Call Transcript
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