Good afternoon, and welcome to JTH's Holding First Investor Day. I'm Darby Schoenfeld, the
Director of Investor Relations.
First thing, our Safe Harbor statement. I'd like to remind everyone that today's remarks may
include forward-looking statements as defined in the Securities and Exchange Act of 1934.
These statements are based on current information and management expectations as of this
date are not guarantees for 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 on our
annual report on Form 10-K for the fiscal year ended April 30, 2012 and our other SEC filings.
JTH Holding undertakes no obligation to publicly update these risk factors or forward looking
statements.
I'd like to start today with some over-arching ideas that we are going to provide you with. First
because this is our first Investor Day we wanted to give you a good in-depth view of the
Company. This will include an overview of who are and how we compete in the industry, a
description of our operations and some of our marketing techniques.
Second, we wanted to give you a detailed look at our business model. And what our revenue
streams are and how the seasonality of the business impacts our financial statements.
Finally, our 2013 outlook -- our plans for 2013 are interspersed throughout the presentation
today including our 2013 earnings outlook. So with that in mind, let me go over the line-up for
today.
First you will hear from our Founder, Chairman, and CEO, John Hewitt who will give you an
overview of the industry and the Company. Next you will hear from Rufe Vanderpool, our COO
who will talk to you about franchise sales process, training, support and finally technology.
After Rufe, Martha O'Gorman, our Chief Marketing Officer who will walk you through our
marketing. Finally, Mark Baumgartner, our CFO will detail our revenue categories and how the
seasonality of our business impacts our financial statements, and finally give you an update our
financials including our newly introduced guidance. Then we'll have the Q&A session.
So first up I'd like to introduce John Hewitt, our Chairman, Founder and CEO. John began his
tax career working for H&R Block. At the age of 22 he managed 10 tax offices, at the age of 26
he ran 20, and at the age of 30 he managed 250. At that time he was the youngest Regional
Director for H&R Block.
In 1981, John left H&R Block and joined with his father to create the first tax software for Apple
computers. In 1982, John started Jackson Hewitt and within 16 years sold the company for
$483 million. He then took his top 4 people and started Liberty Tax in Canada. After his noncompete was finished, Liberty opened in the US and 12 years later there are over 3,800 offices
in the US.
John Hewitt?
John Hewitt: Thank you, Darby. And first I'd like to ask any of you to raise your hand if you
were at the H&R Block Investor Day? You know, I felt a little bit disparaged that there was some
talk in the hallway that the jackhammers were being run either Jackson Hewitt or Liberty and I
only have one word to say about that, guilty.
First, I want to talk about the tax industry because we love our industry. I fell in love with the
industry 43 years ago when I took a Block tax course when I was attending the University of
Buffalo.
We love it for a lot of reasons, but it's death and taxes. And Benjamin Franklin said that in 1789
and Denis Waitley 30 years ago wrote a book and said, now there's one more certainty in life,
that’s change. And for the last 43 years of tax there has been change every year. So I think for
the next 43 years it's going to be changed every year, and that drives people to prepare.
And it's recession resistant -- I'm not going to say it's recession proof but in the worst recession
of our lifetime since -- I'm almost the oldest here, my Mom is here so I can't be the oldest. I'm
going to say that the last recession -- the great recession was the worst ever.
And during that recession in 2008 and 2009, Liberty opened 800 new locations, more than any
other company in America during the worst recession of our lifetime because during a
recession you don't have to buy a new car, you don't have to buy a new house, you don't have
to buy a new refrigerator, but you do have to do your taxes.
So taxes are recession resistant and it's growing. And you see in the next chart that it's grown
by over 10% in the last 10 years. It grows because people are living longer and filing longer.
The other thing we like about the business is it's seasonal because it's the best part of the
opportunity and the most difficult part of the opportunity. The difficulties help it being a barrier
to entry. You see that we have two kinds of customers and we'll talk about those customers
that come in early and come in later.
But it's the best part of the opportunity because the average H&R Block in this country which is
the 800 pound gorilla in this industry and that's about $70,000 after paying their year-round
expenses. And what's wrong with working hard for three months and making $70,000? And if
you want to make $140,000 you get two locations, you want to make $200,000 you get three
locations. So, it's a great quality of life for our franchisees.
We also love it because of the IRS. In my career thousands and tens of thousands of people
have told me that they are afraid of the IRS. No one has ever told me I'm afraid of the CIA or
the FBI. And, Mike, if you tell me you are afraid of the CIA, then I'm afraid of you. So, it's scary.
And one-third of the people -- one-third of the 80 million people that pay a preparer just
because they are afraid of the IRS. It drives people to prepare.
We do tax returns where people have done their own return and they bring them in, they've
already done them, they are correct and they just pay us to sign the return. So the IRS helps us
build our industry.
The best part of the industry, though, I think it's fragmented. And in this industry Mom and
Pops do over three times as many returns as H&R Block, more than twice as much as the
national competitors combined. And we sort of take a page out of the Burger King book that
McDonald's spends $30,000 to do a demographic study and they find a location. Burger King
doesn't spend anything, they just get next door to McDonald's. And when McDonald's opens
they are successful 99.9% of the time. They take business from Mom and Pops.
We -- when a Burger King opens they get right next door, they don't go to the other side of
town, they get right in their face -- and when Burger King opens the volume of the McDonald's
is not decreased, it continues to rise. So who is Burger King getting business from?
They get business from Mom and Pops, and that's what we do. We are never going to put
Block out of business. Fortunately for those of you that have followed the industry for a while,
Mike and Scott, over 25 years combined, Block is doing a good job of trying to go out of
business but at the end of the day we are not going to put Block out of business. We are going
to take business -- we are going to take our share from Mom and Pops.
As I said, the industry has grown for 10% over the last 10 years and the IRS is forecasting over
the next 4 years that is going to grow another 5%, another 1.5 million or 2 million more people
are going to file a year.
Talking about the makeup of the industry, as I said H&R Block has an 18% share and Jackson
Hewitt has 3%, Liberty has 2%, Mom and Pops have over 60% of the industry. And we are going
to talk about how we consolidate and take business from Mom and Pops in a moment.
But first, let's talk about the Company and the Company overview. We are the fastest growing
national retail tax preparer by tax returns. In the 21st century not only have we gained more
tax returns than Block in raw number of returns. We've gained more tax returns than Block and
Jackson Hewitt combined.
We are the third largest tax preparer in the United States. Actually, in store fronts we are the
second largest tax preparer in the United States. The only reason why Jackson Hewitt is still
than us in total offices is they are going to be in over 2,800 Wal-Mart and we are just going to
be in 300. So other than the retail locations Liberty is larger in number of returns and offices
that are in actual store front locations.
There are consolidation opportunities in this industry. There are things that are conspiring to
put Mom and Pops out of business. There is the aging of the Mom and Pops.
When Thomas Allen was with me at the National Association of Taxpayer Convention and there
wasn't a brown-haired person in the room. It was a gray-haired convention. They are aging.
Their certification is coming that preparers now are required to take testing to -- their minimum
testing that is driving them out of the industry.
And we had experienced that. We have experience in California and Oregon where they have
had certification as long as we can remember and as long as I can remember. And in those
states you have to take a license class. You have to pass the test and that drives out Mom and
Pops and there's less competition therefore there is fees and higher profits. So we embrace
certification, as soon as the IRS was required by Congress to begin offering certification, we
started our own certification program.
So our -- all of our preparers over the last three years have had to be certified. So now, instead
of taking the IRS test at the end of their course, I'm sorry, instead of taking our own internal
test, they'll begin taking an IRS test.
We have -- another thing that sets us apart is we have a clear goal. Most companies don't have
clear goals. I mean, if you went to an employee of H&R Block or Sears or Wal-Mart and said,
what's the goal of a company? It would be nebulous at best. Even if they understood the goal,
it would be nebulous.
Our goal is to be number one, to do one more tax turn than anyone else in the universe by the
year 2020. So that sets us apart from almost any company. That's clear, understandable, and
it's easy to motivate people to that end.
We have a culture in our organization. We believe in culture that -- and I don't think most
companies get it that -- studied why great companies are great, why is Wal-Mart growing by
leaps and bounds and K-Mart.
And I talked to myself why -- what's the difference between the top three guys at K-Mart and
the top three guys at Wal-Mart? Are they smarter? Are they more educated? Are they more
experienced? I say, no. You can hire the most educated, the smartest, the most experienced.
The difference is attitude and culture.
And so, at Liberty, we foster an area of attitude. We disseminate it through our organization
and it starts with servant leadership and listening to customers, listening to franchisees, and
growing and modifying our system because we're fanatic about having the best system. To
have the best system, it has to be improving. And to improve you have to listen to the people
that deal with the customers.
And finally, our experienced team, our -- it's dramatically different from the other two national
players. In fact, when you look at our team, the person that's been in the industry the least has
9 years of experience.
The most experienced comparable executive at one of the other companies has 8 years. The
least experienced in our organization has 9 years. It sets us apart. We have the best system.
We have the momentum in terms of growth.
And we've been gaining market share every year in -- not only has Liberty gained market share
in the 13 years we've been in US, but in my entire career. In 30 years of competing with Block,
I've always gained market share.
Let's talk about how we -- how we compete with each. What's the difference between us and
Block, and us and Jackson Hewitt, and us and the Mom and Pops? First of all, simplistically, the
difference between us and Block is we're a franchise organization. And Block is primarily
company-owned.
I feel like sending H&R Block a "Thank You" card about once a month because for the last 40
years, they've been buying back their offices. And in every franchise organization in this
country, franchisees do a better job than company employees because franchisees act like
owners, and while you can get some employees to act like owners, a few percent.
Most owners act like owners. The vast majority -- 80%, 90% of owners act like owners. So our
strategic advantage at Liberty is we're 98% franchised, Block is about 70% company-owned. So
our franchisees can out work, out hustle, outperform the employed H&R Block. In Jackson
Hewitt, it goes to the season.
The seasonality of the business is really two types of customers -- the customers that file early.
They are younger. They have low income. They have simple returns. And the thing that drives
them is they want their cash and they want it now.
Then you have your later-filing customers who are older. They have complex tax returns. They
have higher income. When I say high income, I don't mean hundreds of thousands of income
because Liberty is after the bottom 85% or 90% of the population. We're not after the people
who make hundreds of thousands of dollars.
They think they need a CPA. And I learned a long time ago that you make money from giving
people what they want, not change -- trying to change their mind. So we're not after the very
wealthy
But there are two types of customers and both us and Block are about 50/50. Early season
customers about 50% -- early season customers, about 50% late season customers. At Jackson
Hewitt, they are over two-thirds early season customers. And that really goes back to when I
was at Jackson Hewitt in the '90s. We had a competitive advantage over Block.
Block was slow to computerize. For example, in 1990 when the IRS started electronic filing in
Chicago, Block didn't even go into Chicago. So Jackson Hewitt had a monopoly in the City of
Chicago.
So Block was slow to computerize. Jackson Hewitt was faster to get refunds. So Jackson Hewitt
has turned into a company that really focuses on the early season. And back when they did
refund anticipation loans, at the height of the refund anticipation loan, for example, Jackson
Hewitt was doing over 35% of their business with loans, whereas Liberty was half of that. It was
about 17% or 18%, the lowest in the industry.
Block was about 27%, Jackson Hewitt was about 35%, and we were only about 18%. So the
difference between us and Jackson Hewitt is we are -- do a better job of going after the March
and April of customers -- the somewhat higher income customers. People call it -- people that
make between $50,000 and $100,000.
There is -- in terms of approach, we have the -- we're the only company now that has a three
prong approach. We have our area developers and our unit franchisees. And so, in each
market, they're in New York and I have a couple of my Long Island developers here, in Long
Island, they are unit operators that operate in their locations. There are area developers that
support. And then there is corporate headquarters in that very entrepreneurial organization, of
course, lead by myself.
So there's really -- H&R Block in Long Island is facing three entrepreneurs. The company
employee and -- or employees that are in Long Island are facing the unit franchise, the area
development, and us. So it's kind of three against one. Rufe will expand on that in a minute.
There is consistency at Liberty. Since we -- I founded Liberty, there's been seven management
changes at both Block and Jackson Hewitt. The average CEO therefore has been there about
two years. There's -- and there is going to be consistency.
My last year at the convention, my younger son, my 12-year-old said, I want to thank -- he
stood up in front of 1,500 franchisees with me and said, I want to thank all you guys for doing a
great job because someday I'm going to take over this company. So this is not a company that's
going to switch CEOs consistently and every 2 or 3 years. We have a consistent fanatical goal to
be number one by 2020 and they got to kill us to stop us. I mean, this is -- this is the kind
company we are.
As a result of this, let's look at what's happened over the last 4 years in franchising. Four years
ago when the housing industry collapsed, franchising took a hit. And this graph really shows
what happened. Not only have Block and Jackson Hewitt hit the wall. And Block has 2,000
offices less today than they had 4 years ago. Jackson Hewitt has less offices.
And -- but the entire franchise of any kind, whether it's McDonalds or Subway, or Holiday Inn, I
mean, all franchise are suffering in United States, there’s less locations today of all types of
franchises than they were in 2008 because there's not many, even though our franchise is
inexpensive compared to most, it's total investment about $60,000 or $70,000, there’s not
many people who can write a $60,000 or $70,000 check.
And back in the height of our growth and the height of Block and Jackson Hewitt's growth, you
could get money. I mean, if someone wanted to get money to start a franchise, they'd go get it
out of their home equity. Well, over the last three or 4 years, even if you still have home
equity, it's hard to get to it.
And so franchising -- the funding of franchising has diminished dramatically and hurt the entire
franchise industry. However, during that time, Liberty has continued to grow. So you can see
from that graph that we're growing substantially each year. In fact, this year, we're going to
grow by somewhere in 11% to 13% of offices.
The entire industry -- franchise industry of all kinds is hurt.
The opportunity for us, you know, I stand up here representing 2,200 independent business
people and 2,200 franchisees and to put that in perspective, when I left Jackson Hewitt in 1997
-- fiscal 1997, the average franchisee had about 1.8 locations a piece.
Today, the average franchisee, they have seven a piece. And our franchisees grow -- they open
one the first year on average, a second one the third year, a third one the fifth year. Every two
year they -- two years, they add locations.
And so most of our chain -- most of our franchisees are in their first 3 or 4 years. More than
half of our franchisees are in their first 3 or 4 years. So we only need 10,500 to 11,000 offices in
United States. Much of that growth is going to come internally as these franchisees expand.
As I said, we can add -- we'll have over 4,000 offices this year -- over 4,300 offices. There is
room in the United States to add 6,000 or 7,000 offices. And I think the best part of the
opportunity is we get to take this year for the Mom and Pops -- our advantage against the Mom
and Pops is stiff. I mean, that's the same advantage that happened in pharmacies and
hardware and department stores, gasoline stations.
We have the same advantage. We take share from Mom and Pops. Again, we're not going to
put Block out of business. We're a brand name. When enter a market, there is a place for us.
There is -- waiting for us another national players compete with H&R Block and that's really
how we're going to grow is to take share for the Mom and Pops.
Block has shown us that you can become a $5 billion company. Once a $10 billion company,
but now a $5 billion from just having an 18% or 19% market share. So, that's where we're
going.
And now I'm going to introduce you to the Rufe Vanderpool, our Chief Operating Officer.
Rufe Vanderpool: Good afternoon. My name is Rufe Vanderpool. I'm the Chief Operating
Officer. I joined Liberty Tax in 2004, coming over from Orrtax which was an affiliate of one of
the largest H&R Block franchisees at that time.
I am going to spend some time taking you through the components of our franchise model.
Then, I am going to review our sales process. I'll walk you through the various trainings. And
then, once we have the franchisee on board, I'll talk a little bit about our technology.
When we're meeting prospects -- and I love to use this famous quote -- be in the business for
yourself but not by yourself. It's so simple but it really makes the point as to the advantages of
a franchise system. It's a great lead in to show all the support via the Liberty Tax system.
As John mentioned, we have a three-tiered franchise model. The franchisee is the first level.
They own the offices and they service the customers. We have area developers who licensed
large geographic regions and they assist the franchisees all aspects of their operations -- of their
locations.
Then, we have the corporate office which is to support the franchisees and the area developers.
So, this three-tiered structure allows us to offer fanatical customer service because as John
said, you have those three layers of entrepreneurs who are all supporting the customer and
whose success depends on the other operating at a very good level.
As I mentioned, the first level is the franchisee. They own the office and perform all direct
customer services. When they decide to become part of Liberty, they buy their territory. The
territory is basically a license to operate in a defined geographic area.
The territories have a population of around 28,000 people. That number came about because
when H&R Block model when they were at the height of their business, they had about 10,000
stores supporting a nation-wide population about 280 million people. So, we just did the math.
When we define a territory, we try to include at least one H&R Block office. We also use
McDonald's as a reference as well. And, again, the franchisees have exclusive marketing rights
within that boundary. No one else can market there. We do have generic materials that can be
used throughout the system. Those have a common 800 number and they use geo-coding to
route the customer to the nearest office.
The franchisee may have multiple offices within a territory. For example, they may have two
large retail areas that they need two locations to adequately cover their territory. Many also
open kiosk locations within other retailers as I've mentioned with Wal-Mart Family Dollar and
check-cashing locations.
The next level is the area developer. The area developers license a large collection of
territories, many, a full or major part of a designated market area, or DMA. As the name
implies, they purchase this in an effort to develop that area. They sell the territories. They
establish the franchisees and then they share in the revenue that is generated. They also
provide first level operational support.
If the franchisee needs help or guidance, they look to their AD first. The Ads facilitate all of the
DMA-based meetings and any kind of communal marketing events. Most ADs are entitled to
one-half of the all the franchise fees generated and one-half of all the royalties within those
territories of their area.
As I mentioned before, this leads to a model where less the franchisees are successful, the AD is
not successful. Such a symbiotic relationship works wonders for our system. We have over 120
area developers.
The next level is corporate. Corporate offers all levels of support to both the franchisees and
the ADs. We have a full operation staff which includes training and technical support, tax
support to assisting in tax issues any franchisee or ADs. We also have bank support, helps with
all the service bank issues -- bank enrollment, customer disbursement, fee deposits and such.
As far as the operation regional directors who cover the upper East Coast the Midwest, the
West and Canada. All operational issues are funneled through these four divisions.
The franchisees join and leave the sales process through a training called effective operations
training -- and I'll go over that in a minute -- with our operating manual and it details everything
they need to do.
This is the group that helps them along that way from office setup, financing, finding employees
and expansions in the new areas that when they want to improve their office. All corporate
ADs report to the regional directors. These corporate ADs support all the franchisees that are
outside of areas that have been licensed to the area developer. Developers are -- these staff
members are the first level of support for the franchisees.
There are also several employees dedicated to supporting the area developers directly. Most of
those area developers live in the area that they purchased. These people are basically the ADs
boots on the ground within corporate.
They assist the ADs with paperwork, with financing issues, anything that comes up within the
walls of the corporate office. We also have a site selection group, includes part-time people all
around the country, that help the franchisees with their office location selection, their lease
and the setup of that office.
We have a full mapping department, maps and verifies all the territories are correctly defined.
We have a guerilla marketing group. They have staff all around the country. They assist
franchisees in their local marketing efforts and the tax school group assist in their tax schools
and their preparer training. That group also assists with any kind of state requirements or
licensing issues.
As I stated earlier, everyone is working for the success of the franchisees. They are not
successful unless the franchisees are successful. And those franchisees should never feel that
corporate is not there to support them at any level for any part of their business.
The other types of support offered by corporate included technical tax and bank support teams.
Technical support assists with all the hardware, software, installation printers, third party apps
and just general troubleshooting. Offers all type of help around filling out complex tax returns,
all preparer training and prepare certification testing. And they also help with audits that our
franchisees need for both themselves or for assistance to their customers.
The bank support team assists all franchisees with getting setup with their service bank to offer
tax settlement products. They also assist with customer checks, debit cards or direct deposits.
I'd like to spend some time talking about our sales model. That's how we get the leads. They're
actually closing them and bringing them on as a new franchisee.
The sales funnel begins with lead generation where they are handed off to the franchise
development department conference calls where they can get their initial questions answered.
They come to a (inaudible) seminar or discovery day. They also handle all the required
paperwork training and closing a sale.
The lead generation function is a part of our marketing department. They may use many
different programs to get the message out to prospects. Some of the most effective are
referrals from other within our system, Internet-based searches by prospects, direct mail pieces
to industry players as well as to other programs like insurance agents or brokers.
They also assist ADs in local events to explain the Liberty opportunity.
Once that lead enters our system, an automatic email goes out and they get their first contact.
And usually within a few hours from our franchise development staff, they introduce
themselves and they get them excited about the Liberty system.
Their goal is to drive them to the conference call. The typical call, it's a standard call with John.
A typical call will have between 75 and 120 prospects on it. It usually lasts about 45 minutes
and the prospects themselves get to ask questions about the industry or the company.
That basically is to drive them to the discovery day seminar. If they are interested in moving
forward, we get them to the discovery day at a corporate-sponsored location. Quite these
seminars are scheduled to coincide with effective operations training which I'll discuss here in a
second.
The night before the seminar, we host all the prospects at a social event and we co-mingle
them with the prospects that have made the decision to move forward and are just now
completing their training.
To me, this move is fantastic. You take the people who have made the decision to move
forward at the peak of their excitement and we get them talking to the people that are about to
make that same decision and co-mingling them works beautifully.
John then hosts this all-day seminar with an in-depth discussion of the industry in our corporate
offices. We also take them around to some local office and we try to get all their questions
answered. Once a prospect graduate from this and when they decide to move on, they sign
their contracts and here comes the effective operations training. It's a one-week training to
close the deal. And I'll go in the details here in a second.
At this time, all the franchise agreements are reviewed, legal and accounting for completeness
and the paperwork unsigned. And that following Monday, they'll be called contacted by their
AD and welcomed to the Liberty Tax family.
On training, I mentioned this, the effective operations training.
The sales process ends with the prospects attending this training. It's a 5-day training. It's
usually in Virginia Beach, Las Vegas, or Toronto for our Canadian operation.
The training goes over the operating manual and everything necessary to set up and run a tax
business. They're introduced to all the corporate systems, program and support functions.
They attend a day in the office and that’s at a local franchisee's location showing exactly what
goes on in a standard office.
They're introduced to our guerilla marketing methods such as the now famous waivers and
then -- and to do business-to-business visits and get familiar with the companies around you.
They also do this training in costume so they get comfortable dressing as Lady Liberty.
Also, as part of the franchise training, I mentioned EOT, this slide shows you the average
number of students in a year that take these trainings. As you saw in the sales process, EOT is
required of all new franchisees and is suggested for their general managers.
After they complete EOT and before the next tax season starts, they will attend hands-on
training. This is hand done in an office close to their own territory that they purchased. It
provides them with the practical application of what they learned in EOT. It's basically an
extension of the day in the office with more detail and time spent on the day-to-day activities
of running an office.
Liberty College is a 4-day training that begins with Tax Academy which is a detailed and very
focused tax training, qualifies for continuing education credits as well. They also go over our
tax prep software, advanced marketing techniques and much, much more. All of those classes
are taught as intermediate or advanced, to cover both franchisees that have been just starting
out with us and veterans who have been with us for many years.
Update training is an intense, single-day, Web-based training year the end of the calendar year
that focuses on all tax law changes, system updates and late breaking news that impacts that
tax season that's about to begin.
In the last few years, we've also hosted focus management and leadership training for
employees at the corporate office. We determined we needed to allow franchisees to
participate in this as well. And now, we make these trainings available to all.
Area developer training -- so much like our franchisees, area developers must also attend
training before they can close their deal. At this multi-day training, they learn all aspects of
being an area developer and what they need to do to support their franchisees.
We also host two AD retreats throughout the years. These retreats are a 2-day event with very
detailed focus on topics that the area developers themselves select. They're sponsored by
corporate employees and we also bring in a lot of outside experts on various topics.
One of the most popular items at that training are panels hosted by the most successful ADs
and how they do their business. New this year, we're also identifying the best of the best ADs
and we're hosting an event just for them.
We also host many training events for the top tier operators within our system. These are held
all around the country. The top producers are broken out into two levels, A and B. The A are
the top tier with the B being the next best performers. The real difference is that we usually
pay all the travel cost for the A to come to the event and then we do the event the second time
and allow the B team to come in if they cover their own travel expenses.
Topics at these events are driven by the participants themselves. The top guns are the best
overall producers in all aspects of our system. The Elite 18 are the largest franchisees by
numbers of customers served. Think of that as the A team.
The Fantastic 50 are the rest of the largest 50 producers within our system. As I mentioned
before, this year, we're starting a new group, the Elite ADs that are the best overall ADs within
our organization.
John kindly mentioned our tax preparer training. Along with all the training we offer to our
franchisees in ADs, we also have many options available for tax preparers within our business
operation.
One of the most effective ways our franchisees find employees for their stores is by building
them. They take customer-focused individuals and train them on preparing taxes. These 10, 8,
and 6-week classes teach all topics for preparing tax returns from the most simple to the most
complex business returns. All of these classify continuing education as required by the IRS.
We also have a rapid class which is an intensive 12-lesson course to educate employees on
returns typically seen during the early part of the tax season. These rapid class students can
then take the intermediate modules after the first peek to learn about completing the more
complex tax returns of the second half of the filing season.
Rapid class usually begins after Christmas as the final push to get enough employees to get the
office through tax season. As was mentioned, for many tax seasons, Liberty, we've had our
own tax certification system.
This industry-leading system prepared both our franchisees and preparers for the upcoming IRS
certification process. Certification within our system was at three levels, with Level 1 being for
the most simple tax returns, up to Level 3 which is actually based on the same level of
knowledge as the IRS enrolled agent courses.
All preparers have been required to pass Level 1 before they could submit any taxes to the IRS.
Now that the IRS has started their own certification system, preparers must starting in
December of this year -- or of next year, I'm sorry, pass a one-time competency test to be able
to submit returns.
Once they pass this test, they can get their PTIN which is their ID number that they use to file
returns with the IRS. They also need, starting this year, to have 15 continuing education credits
each year.
We have, as I mentioned, many times that amount available through our normal training
system at no cost. This is a huge advantage to companies such as Liberty. We can have this
system-wide process in places at little to no cost for our franchisees.
The independent tax offices find it very cost-prohibitive to keep these certifications in place.
This factor alone is driving many of them out of the industry while our own process and our
own certification system has prepared people within Liberty.
As you've seen, we've offered an extensive amount of training. I want to spend a little time on
our technology. Our franchisees buy their computers directly from our suppliers which is very
important because it gives us a standardized platform and for simplified support. We're able to
pre-load those systems with all the prior year software and every tool that they need. So
they're ready to go hit the ground running from the factory.
We have our own tax proprietary tax prep software called Libtax. The system has been built for
over many years and makes preparing returns and refund products and fee tracking very easy
for our franchisees.
We also provide our franchisees with a complete system to offer refund settlement products to
our financial partners. This system allows customers to apply for a loan or refund check or
debit card, or direct deposit with ease.
We complete e-filing to the IRS in the states. These systems not only submit the returns, but
they do -- they process all the return statuses back from the filers to the franchises so that they
can complete the work with the customer.
We have a very good working relationship with the technology side of the IRS. Liberty has been
a leader in many of the new IRS systems and we've actually helped the agency do their early
testing.
Throughout our systems, we also provide many tools to help our franchisees track and support
their filing. They must be able to provide the status to the customer as well as help with any
issue that comes up with, between the customer and the IRS.
We provide complete data warehousing and data analysis systems to our franchisees, ADs and
to the corporate. These systems allow everyone to get up to the minute reports and scorecards
on performance. We also provide many office management tools such as timekeeping,
invoicing, scheduling of employees and such.
The next topic I'd like to cover is our next generation tax prep software. We've been working
on this for the last three years. We ran a small DIY test on this platform last tax season. This
year, we'll be beta testing it in some of our offices as well as continuing to have the DIY
platform available.
Unlike Libtax, NextGen is a Web-based program. This factor alone removes a trove of issues for
our franchisees. There are no installation issues, printer installation issues. Most common
hardware systems work just fine.
We're also going to be using our own private cloud-based storage which is a huge benefit over
the desktop applications in use today. There're no files being copied around. They just exist.
NextGen will allow multi-unit operators access to all of their data from all of their locations
without copying files around. They're just there.
Another advantage is that the system will use the same content to deliver DIY tax directly to the
tax consumers as well as the office model for our stores. This single code base allows us to
build once, but deliver multiple systems. To put this in perspective, most of our competitors
have upwards of three completely different programs to deliver this software.
The final and the one we see as very important advantage this system provides is a single
database storage. What that allows is full access to the data no matter if the return is done by
someone at home from their own computer or they're in an office.
The customer can start their return online, go into a Liberty office and the preparer has a
complete access to all the data that was entered. Conversely, the customer could begin in an
office then have full access to their tax return online. This online-to-office and office-to-online
approach allows us to keep the customer in the Liberty system.
That customer, you know, could be comfortable doing their own return online. And then
typically some kind of life-changing event, getting married, having kids, investments, rental
properties come along. And the added complexity drives them to a professional preparer. All
data supplied online is readily available to that preparer. So if someone gets comfortable and
wants to go online and finish their own return, they're able to access all of the data.
Keeping customers within the circle of Liberty, we should not lose them to any competitor as
they switch back and forth between professional help and wanting to do it themselves online.
I want to take a moment here and introduce you to a new program we're going to pilot in a few
offices this year. It's called Liberty Touch. If you'll look at the tax preparation cycle, when a
customer is actually sitting at the desk, there's times of interaction with the preparer followed
by downtime as the preparer actually works on their return. We wanted to come up with a
system that they could use during this downtime. We also saw this as a great opportunity to
sell ideas to the customer.
Quite often, the preparer needs to show the value of the service that they're offering and we
could use this to do that. We could introduce them to a new program. We -- this interactive
screen gives corporate a platform to directly interact with the customer. We built the system
on Windows 8.
If you've not seen Windows 8, it's a tile-based system somewhat similar to the icons you see on
your Apple and Android phone or tablet. Tiles allow the customer to just touch through the
underlying program. So our system is customer referrals wherein we introduced many ways for
the customers to refer their family and friends and collect the associated fee.
A really amazing way the system allows them to do this is like, for example, they can log into a
social media site, let's say like their Facebook account. And with one click, they can come and
send a message to all of their friends to come to Liberty Tax, and each one that does, they
collect a $50 send-a-friend incentive for having referred that customer.
We also have a program called closing the sale. It's an intense training for tax preparers that
show them how to complete tax returns for a customer and show them the value that they and
Liberty Tax have added to the transaction.
This touch screen is going to continuously display messages to the customer, outlining those
same values as they get their returns completed. We also have many companies that would
like to make offers to our customers. The same system can display coupons or other items for
surrounding businesses that customers like me like to take advantage of. The thing that's nice
is that all of this is free to the customer, the franchisees that sells the advertising picks up a
commission if they deliver the customer at no cost to that taxpayer.
We're also making entertainment options available. We're making interactive games such as
Angry Birds. They can just sit there and play, if they want. Or we've got a finger-painting
application so that their children can play as the parents are getting their taxes filed.
The thing that I really think is kind of amazing about it is it's a complete web-based system
that's controlled from the corporate office. We had built in a very robust analytics system. So
our marketing staff can watch in real-time exactly what customers are doing and can adjust the
system to influence their behavior.
With that, I'd now like to introduce Martha O'Gorman, our Chief Marketing Officer who'll go
into detail on some of our marketing techniques.
Martha O'Gorman: Good afternoon, everybody. As Rufe said, I'm Martha O'Gorman. I'm the
chief marketing officer at Liberty Tax Service. And I'm proud to tell you that I am one of the
original founders of Liberty Tax Service, so I've seen this thing grow from the beginning.
Today, what I want to talk to you about is how we have built a brand one community at a time
from scratch. And this is an interesting concept because I think we've done a pretty good job at
building out a very well-known brand very quickly.
The Liberty brand has been built on the cornerstone of our waivers.
When Liberty first started, we didn't have an infrastructure and we didn't have a lot of
resources. And we certainly didn't have a name yet.
We struggled for several months to find the perfect name that would embody the goal of the
company, as John said, to be number one.
Luckily, the name Liberty Tax Service was not trademarked. The URL libertytax.com was
available. And just as the internet was really starting to take shape, we decided that the iconic
Statue of Liberty was a perfect branding tool. More so than we ever could have imagined.
Quickly, as we started to grow, we became very aware of just how powerful a branding tool or
costume character could be. Soon, we started to manufacture the costume and quantity and
we made them available to our franchisees so they could replicate our waiving program.
The marketing philosophy of Liberty Tax Service is to make sure that everybody knows who we
are, where we are located and what the organization stands for. But doing that is certainly not
an easy task. We found that successful people are willing to do the things that unsuccessful
people will not do. Our marketing strategy is not easy.
If it was, everybody would try to replicate it. And in some cases, they have in fact tried to no
avail.
But our impact is undeniable. The process is a roadmap that we let to see the franchisees, and
obviously, the waivers are our number one way of getting business. To this end, we've
developed training materials including manuals and videos that give step-by-step instructions
on how to effectively implement the waiver program. Believe it or not, it is important to waive
differently to different types of people.
Over the years, we've added scores of new techniques from signed spending waivers to lighted
costumes for nighttime use to a new updated look. There was virtually no one I speak to when
I mentioned Liberty Tax Service who doesn't say, oh, yes, I see your people out on the streets
during tax season.
But there's more to Liberty Tax marketing than just the waver program. We've created a very
robust business-to-business program that consists of our franchisees implementing a structured
campaign that involves a daily routine of sending costumed marketers out into the community
to spread the word about Liberty Tax.
We visit a minimum of 50 businesses daily within each territory and we deliver small gifts along
with discount coupons that could be used at our neighboring locations. The marketers are
trained to impart a consistent message to each business that includes asking if they know
where we're located, asking how many employees they have so we can leave behind enough
coupons and then we ask if they would like to provide us with reciprocal marketing materials
that we can display in our stores.
The icebreaker of wearing the costume and the reciprocity of helping to market their business
makes the experience far more inviting than normal business-to-business solicitation that
occurs for less motivated companies. People for the most part greet us with a smile and a
willingness to listen to the pitch.
Rufe talked a little bit about our referral program. And it's really a substantial part of our
marketing strategy. We've implemented a program that supports giving people who refer new
customers to Liberty stores a $50 reward, preferably in cash, that is paid immediately. And, like
all good franchise organizations, our franchisees have augmented that program by offering
additional rewards like DVD players, television sets, weekend getaways – and that's for multiple
referrals.
I like to talk about how Liberty gives the little unexpected extras, or the G.L.U.E., to our
customers that makes the Liberty experience something that they want to tell everybody
about. The power of referrals and word of mouth trump any type of traditional marketing.
Another valuable marketing solution that have refined over the last several years is what we
internally call "Cash-in-a-Flash." What this is is a program that provides franchisees with a
system of distributing $50 bills to customers who complete a tax return in a Liberty office. The
immediacy of handing the customer a $50 bill in cash and the excitement it creates in the office
and the word of mouth that it generates within the community is really viral marketing at its
best.
We are marketing these ads. Everybody gets the opportunity to receive many more $50 bills
through the referral program. Liberty is putting hundreds of thousands of dollars back into the
community. This helps to boost spending and create more retail activity typically in a sluggish
first quarter. And while our competition is dumping millions of dollars in what I consider to be
ineffective television advertising, Liberty is helping the community.
To that end, we know that people do business with people they like, that they know and that
they trust, and our success of [contingent] on building relationships within the community.
Liberty Tax strongly supports local involvement from our franchisees to participation with
charitable organizations such as Relay for Life and the March of Dimes.
We also provide training and guidance on how to participate in local community events such as
holiday parades, local festivals, local sporting events in any venue where a large number of
people are present. This brand imaging strategy positions Liberty as a community-minded
organization that believes that, in order to move forward, we need to give back.
A very important support mechanism that we provide to our franchisees is the ability for them
to create custom artwork through our state-of-the-art ad builder system. This software tool
provides the franchisees with what I like to refer to as controlled flexibility. We give them the
tools needed to created artwork, newsletters, signage, newspaper ads, flyers, business cards
and other branded materials and they can choose from many options while maintaining brand
consistency that's required to be compliant with our advertising standards.
As part of our national advertising budget, our franchisees have access to an email marketing
program through Constant Contact. And we consider them to be a leader in small business
email marketing.
Through this relationship, our franchisees are able to easily build and maintain email list of
customers, potential customers, media contacts, community leaders. And they can use preapproved templates. And email marketing is considered into a simple task that is monitored for
advertising compliance as well as best practices for email marketing standards and adherence
to CAN-SPAM laws.
Also a part of our national advertising budget is access to a inbound and outbound texting
program. This service provides every office with the ability to send and receive text messages,
outlining various time-sensitive promotions, communication with other employees and other
messaging as it might apply to specific offers.
97% of all text messages are opened within 4 minutes of being received. This provides or will
allow us to monitor the messaging and the mobile phone database usage for compliance with
advertising rules and text messaging regulations.
One of the things we're really proud of is that we've devoted considerable time and resources
to building an impressive Hispanic initiative. Working with Latinos in the tax preparation
environment is challenging at best. We believe that our best strategy is to develop
relationships with the gatekeepers of this rapidly growing population. Consulates, school
districts, community centers are all part of this well thought out strategy for reaching a
somewhat elusive demographic.
We have an online training program for our franchisees them how to effectively communicate
and market to the Hispanic community. Our charitable foundation, Una Familia Sin Fronteras,
has been created to help with the educational needs for young immigrants.
Our Guerilla Marketing Program has yet to be replicated by our competition. This highly
specialized marketing weapon has been integral to our growth and building of the brand. We
provide intense training to our franchisees on how to effectively use Guerilla Marketing tools
and strategies to outsmart the competition through an effective use of advertising specialties,
office visibility guidelines, signage recommendations, wavers and our business-to-business
marketing program.
We provide the franchisees with the daily guide on what they should be doing each day during
the tax season to achieve their goals, from how many people do they have on payroll each hour
of the day to what marketing activities should be completed on that particular day.
But we also use traditional forms of advertising to augment our community-based strategy. We
place yellow pages and Internet yellow pages advertising bundles for all of our offices. We
create and provide radio and television commercials that our franchisees can use locally. We
also do a significant amount of solo direct mail in the early part of the tax season that employs
a scratch off mechanism that helps to increase the redemption of those pieces.
We have a program for contacting non-returning customers from the prior two tax seasons that
is very effective. And we use online job boards such as Careerbuilder and Snag a Job to help us
advertise and recruit for our tax schools, wavers, marketers and experienced tax preparers.
We also use Internet paperclip advertising programs and contextual and behavioral online
programs to promote the brand to keep our messages relevant with our customers and,
especially, with the millennials. Our website is mobile compatible to all handheld devices. And
we have created specific pages for each one of our offices that are accessible through our
online office locator and through our texting program.
So you might surmise that our plate is full when it comes to providing marketing strategies and
programs to fit the needs of our growing franchise base. Our goal is to provide the systems and
the tools to help the offices implement the proven strategies that have been developed over
the last 15 years.
We believe that, in order to win, we need to continue to master the fundamentals and play the
game better than our opponents.
I would just like to leave you with this thought that the secret of success is to do the common
things uncommonly well.
And, now, I'd like to turn it over to our CFO, Mark Baumgartner.
Mark Baumgartner: Thank you, Martha.
Good afternoon, everyone. As Martha said, I'm Mark Baumgartner, the CFO of JTH Holdings.
Before beginning, I would like also welcome everyone here today. It's great to see both so
many familiar faces as well as some new ones. I'd also like to take this opportunity to wish
everyone a safe and happy holiday season.
Now that you have heard about the industry and our company from John and taken an in-depth
look at our operations from Rufe and Martha, I would like to share with you and overview of
our company from a finance standpoint. Today, I will discuss the different pieces of our
revenue and what drives each of them. Then, I will cover the seasonality of our business and
how it impacts our income statement, balance sheet and cash flow statement.
As you saw from John's slides, we do most of our business in the third and fourth quarter of the
fiscal year, and that impacts each of our financial statements. And, finally, I'll go over our fiscal
2012 results, our fiscal year-to-date 2013 results, and review the guidance that we issued this
morning.
So let's get started. We break our revenue down into six categories on our income statement -franchise fees, royalty and advertising fees, financial products, tax preparation fees, interest
income, and other. There are many moving pieces in each of these items, so I'd like to show
what goes into each one and what can impact each one.
Franchise fees. There are two types of franchise fees -- the area developer fees and the unit
territory fees. Area developers buy the right to develop a cluster of territories, whereas a
franchisee buys the single unit territory. When we sell an area to an area developer, the AD is
buying the rights to help develop the unit territories in that area. There are 126 active AD
entities in the country representing approximately 70% of the US population.
Since there is significant revenue associated with the sale of an individual AD, the big impact on
our quarterly revenues. You can see this impact in our fiscal year 2013 results. As we disclose,
we sold more area developer areas in the first quarter of this year versus more in the second
quarter of last year. So while our area developer revenue declined in the second quarter, it was
virtually flat for the first 6 months of the year.
We received unit territory fees when we or one of our area developers sells a single unit
territory. Our AD generally receive 50% of both the franchise fee and the royalties derived from
franchisees located in their AD areas and are required to provide both sales and first line
operational support to those franchisees.
We can facilitate the sale of a unit territory in many different ways. The options that we offer
generally depend on whether the franchisee is new to Liberty or is an existing franchisee
looking to expand.
If the franchise, if the franchisee is looking to buy their initial territory, there are two basic
options available to them. There is the traditional franchise sale where they pay the $40,000
franchise fee to purchase the territory.
The franchisee is then subject to a 14% royalty and a 5% advertising fee. It’s in the first quarter
of 2012 which allows a new franchisee to waive the $40,000 franchise fee and instead, pay a
25% royalty fee and a 5% advertising fee for the first 5 years they own the territory. After the 5
years, the royalty fee reverts to the traditional 14%. This allows the franchisee to lower the
capital investment needed to open the initial office.
The mix of this first group can have a big impact on our yearly revenue. If more new
franchisees choose the zero down option, our franchise fee revenue will decline since they
won’t pay the $40,000 upfront. However, this decline will be somewhat offset by the higher
royalty income from these territories.
During fiscal year 2012, 5% of our territories operated under this zero down option. Now for an
existing franchisee looking to expand and buy additional territories, there's basically four
options available to them. They have the same two options that the initial franchisee has to
pay the $40,000 with the 14% and the 5% advertising fee. They can do to zero down which has
the 25% royalty and the 5% marketing.
Or they can look to corporate to help finance that purchase. In that situation, they put 20%
down on the franchise fee and pay the remainder over the next 4 years. While all of the
revenue gets booked at the time when all conditions are met to book a sale, the remaining 80%
will become a loan receivable on our balance sheet. Under this option, their royalty fee is the
traditional 14% and 5%.
In situations where our franchisees utilize the 20% down and pay the remainder of the next 4
years, we have the ability to collect the payments electronically. Let me explain that here.
When tax preparation fees are paid out of the tax refunds utilizing a financial product, the
funds flow through corporate and can be intercepted to make those note payments. This
ability to utilize the fee intercept mechanism minimizes our credit risk.
Finally, existing franchisees can buy under a rent-to-own or a try-before-you-buy program, both
of which were designed [inaudible] franchisees to open new offices with minimal risk. In these
programs, we allow the existing [inaudible] unsold territory. When the franchisee operates the
office and decides to retain ownership of the territory, they must notify us by February 28th
and close on the purchase by March 30th.
If they decide not to purchase the territory, they must operate it for the rest of the current tax
season. Historically, very few of our existing franchisees choose the zero down option, and so
we either receive the $40,000 upon the execution of the agreement or we recognize the
revenue when we receive the 20% down payment with the balance, a loan receivable on our
balance sheet. So selling to existing franchisee has very little impact on the revenue mix for
franchise fees.
And if all of that wasn't enough, there was one other variable that can affect our franchise
revenue. I told you before that ADs generally receive 50% of both the franchise fee and the
royalties derived from franchises located in their area. So when the franchise sale happens in a
territory under an AD, we split the revenue with the AD who owns that territory. In fiscal 2012,
our ADs earned $3.4 million in franchise fee revenue.
Currently, we have 3,850 unsold territories under an AD. We have begun to strategically
repurchase certain of our AD areas. Our efforts to date have focused mainly on
underperforming ADs; however, as more areas become developed, we anticipate a larger
percentage of our buybacks to be developed areas. In fiscal 2012, we spent $7.7 million to
repurchase 12 AD areas. So moving forward, we expect to recognize more and more of the full
franchise fee.
Royalties and advertising. Royalties can be impacted by all of those scenarios I just described to
you. Under their traditional model, we received the 14% royalty from our franchisees. If the
franchisee exists in an AD area, we split the revenue with the AD.
Under the zero down option, we receive a 25% royalty fee for the first 5 years the office is open
and then it reverts to the 14%. Again, if it exists in an AD area, that revenue is split. In fiscal
2012, our ADs earned $20.1 million in franchise royalties. It’s important to note that only our
portion of the royalty is recorded on our income statement.
During fiscal year 2012, our royalty fees were 9.4% of our system-wide revenue. This
percentage will increase as we sell more zero down franchises, thus increasing the number of
territories where we get that larger percentage. In addition to that, since we are also beginning
to buy back AD territories, we are receiving more and more of the full royalty fee per franchise
instead of splitting the revenue with the area developer.
No matter what type of purchase the franchisee makes, the traditional version, the zero down,
the rent-to-own or the try-before-you-buy, the advertising fees that they pay stay the same.
They are 5% of the revenues, not split with the area developer, and are recorded in full on our
revenue line but are in essence a pass-through. We are required by our franchise agreement to
spend these funds on advertising. In addition to spending nationally, we also allocate a portion
of the fees to allow franchisees to purchase certain of their guerilla marketing materials.
Financial products. We call this the attachment rate. Traditionally, there were two financial
products that we have offered. First is the refund transfer product and second is the refund
based loan product such as a refund anticipation loan, or RAL, or an instant cash advance, or an
ICA. Up until recently, almost all paid tax preparers have been able to offer both products. But
in recent years, there has been a significant shift from refund based loans to refund transfer of
products.
There are a few reasons behind this shift. First, the IRS stopped providing the deed indicator
which gave the bank making the refund based loan an indication of whether the customer's
refund was going to be offset by some other debt to be collected by the IRS.
Second, with the introduction of many new banking regulations, the availability of banks willing
to offer a RAL has declined each other and the last bank agreed to exist the product after the
2012 tax season to show that if a customer is unable to get will instead choose the refund.
So let's start with the refund transfer product. I’ll cover the mechanics of the refund transfer
product quickly and then get into detail on the economics of it.
A customer comes into an office, has their tax return prepared. Last year, on average, our early
season customer received gross refund of approximately $3,300. The fastest way for that
individual to obtain their refund is to provide the IRS with a bank account number, and once
their return is proceed, the refund is electronically transferred or ACH to the bank account.
If the customer does not have a bank account or they simply don’t want this deposit going into
their account, they can obtain a refund transfer product from us. A refund transfer product
creates a temporary bank account in the customer's name for the refund to be deposited into.
Additionally, if the customer elects the refund transfer product, their tax preparation fees and
the product fee can also be paid out of the refund. This allows them to pick up a net refund
check in our office or have it loaded on to a prepaid debit card. If they select the check option,
they also have the added advantage of various check cashing relationships that we have
established.
Liberty owns one of the few proprietary systems that allow us to process fees charged for
financial products and to provide comprehensive customer support of the product. It also gives
us the ability to collect fees for supplying the refund. So here's how the charges work in tax
season 2012.
In order to set up the temporary bank account, there's a set-up fee. We and Jackson Hewitt
would charge $29.95 while H&R Block charged $34.95 last year. When we used the third party
to issue the refund transfer product, we received none of this fee. However, in the 20% of our
refund transfer transactions, those that were processed throughout processing company, JTH
Financial, we received the entire fee.
In addition to the set-up fee, both Liberty and Jackson Hewitt charged a $20 transmitter fee.
We received the full amount of this fee and this, again, also was deducted from -- directly from
the refund.
H&R Block did not collect a transmitter fee, but they did charge a $20 check fee for anyone who
wanted to receive their refund in a paper check format instead of the H&R Block-branded
Emerald Prepaid Card.
So the total customer charge for the standard H&R Block product assuming the customer
received the paper check was $54.95, and for both Liberty and Jackson Hewitt it was $49.95.
From an economic standpoint, we received the entire amount of the $49.95 when we
processed the transaction in-house through JTH Financial which was about 20% at the time.
When our third-party bank processed the product, we received only the $20 transmitter fee.
So what happens in fiscal 2013? I can't tell you much about how our competitors will price, but
I can tell you how we will price and which portion of the fees we will earn. Again, we have two
ways of processing the refund transfer product, either through a third-party bank relationship
or in-house through JTH Financial.
Let's start with processing it through a third-party bank. The set-up fee will stay the same at
$29.95 so to the customer there's no change here. However, this year when we process it
through a third-party bank, we will receive a portion of the set-up fee. This is due to the fact
that in previous years our third-party bank required that where they provided us a refundbased loan product they would get to keep the full set-up fee on the refund transfer product
since we are no longer able to use that third-party bank to provide a refund-based loan, we are
now able to share in a portion of the set-up fee for the refund transfer product.
After the set-up fee just like last year the customer will pay a transmitter fee. However, this
year our transmitter fee will be lowered to $9, an $11 discount to the customer. So when we
use a third party bank the customer will pay less but we will see higher revenue since we will
now share in the set-up fee.
Pricing will remain the same when we process the refund transfer product in-house through
JTH Financial, however the revenue we recognize will be different. We will recognize all of both
the set-up fee and the transmitter fee but again the customer will pay less. While I am not
prepared to disclose the percentage of products that we will process internally I can say that
the transition in-house will continue.
Last season only one bank offered RALs. Both Jackson Hewitt and Liberty had full availability of
loans in addition to a significant number of the larger Mom and Pops. Republic Bank agreed
with its bank regulators to exit the business after the 2012 tax season.
We saw the potential for this years ago and began to develop a replacement product that we
call an ICA or an instant cash advance. Instead of relying on a regulated bank to make the loan
we have partnered with a finance company that is licensed in particular states to offer a
consumer loan in that state. This program was initially piloted in one state in 2011 and
expanded to seven states last year.
Our goal for 2013 is to have a loan based product in 26 states which will cover approximately
64% of our business.
In this arrangement our customers can obtain a loan amount of up to half of their refund
subject to state law limits. To help facilitate the third party lender to obtain funding for the
program as in prior years we have again agreed to purchase any loan made to one of our tax
customers that becomes 60 days past due in exchange for a fee.
We expect the number of these loans made and the balance outstanding to peak early in the
tax season but significantly decrease by the end of February. In addition we may repurchase
loans because of the 60 day requirement and subsequently receive from the IRS a portion or all
of the loan balance.
During the 2012 tax season we incurred $1.1 million in losses related to these repurchased
loans which represented 2.4% of the ICA loans made during 2012 tax season.
Fees and interest vary by state depending on the particular state specific regulation. In the
seven states where we offer the program during Fiscal 2012 the average loan amount was
slightly over $2,000 and the total charges, interest and fees averaged about 4.5 points.
Tax preparation fees consist of fees we collect either through return to done in our companyowned offices or online tax returns prepared through our -- through our eSmart online offering.
During fiscal 2012, we processed approximately 113,000 online returns. At the end of the
second quarter of fiscal 2013, we operated 102 company offices.
Historically, our company offices represent offices in transition. We have managed out an
existing franchisee due to underperformance or complacency and have not yet found a new
owner for that office. One hundred percent of these offices are for sale. We believe in the
franchise model.
New in 2013 though, we will be opening some new offices as company offices due to our
contract with Wal-Mart. Our Wal-Mart agreement calls for us to open tax offices within -- over
300 Wal-Mart stores.
We anticipated taking us a few years to sell all of these territories to franchisees and thus, we
plan to open and operate the unsold locations this year. These company run Wal-Mart
locations will open in January 2013 and thus are not included in the company office counts
previously mentioned.
Another piece of our revenue is interest income. We generate interest income from the loans
that we make to our franchisees and our ADs, whether to help with operating cost in the off
season or financing part of the upfront franchise or area development fee.
The two largest components of other are transfer and commission fees. Both of these fees are
associated with the sale of a territory from one franchisee to another. All transfers incur a
transfer fee and a commission is earned when a sale -- when one of our sales associates
handles the sale.
So now let's talk about seasonality. During the first and second quarter and the first two
months of our third quarter our revenue is primarily driven by selling franchise territories and
ADs. During -- then during the last month of the third quarter and the fourth quarter our
revenue is driven by the preparation of tax returns.
John showed you the slide earlier where our peak return times are in the last week of January
and the first two weeks of February and then again, in the last week preceding when taxes are
due. This in turn has a large impact on our financial statements.
Here you can see both our revenue, the blue bars and our net income, the red line by quarter
over the last two and a half years. Predictably, over 80% of our revenue comes in the third and
fourth quarter of the year. You can also see that we incurred net losses in the first two quarters
of the year and correspondingly, our net income in the last two quarters is not only positive but
makes our net income positive for the year.
This phenomenon produces different challenges than your average -- than your average
company faces. Take for instance our cash flow and our balance sheet.
Here you can see our quarterly operating cash flow over the last two and a half years.
Operating cash flow has traditionally been negative in the first three quarters of the year and
then turned positive in the fourth quarter. Our business has historically generated a strong
operating cash flow from operations on an annual basis. In the last two years, we generated
over $20 million in annual cash flow from operations. We devoted a significant portion of our
cash resources during the off season to help finance the working capital needs of certain of our
franchisees.
Following each tax season from May through early February of the following year we rely
significantly on the excess operating cash flow from the previous season. In addition, we
receive cash payments from franchisees and ADs who purchase new territories and areas and
rely on the use of our credit facility to fund our operating expenses and invest most importantly
in the future growth of our business.
You can see the use of our credit facility by taking a look at our balance sheet.
Back to John's comment about one of the benefits of this business for our franchisees is that
the tax season is so short, allowing them flexibility in the off season.
The flipside of that is what happens to those offices in the off season. In many instances, our
franchisees need some help in the off season in the form of loans to help pay their expenses.
We have found that it is much easier for Liberty corporate to get a bank loan than it is for some
of our new franchisees.
So we have a revolving credit facility. This allows us to draw money and loan it out to our
franchisees during the off season and then they pay us back during the tax season. As I said
before in the franchise fee section, we have the ability to use this fee intercept mechanism to
help us ensure repayment of these amounts, thus reducing our credit risk.
So if you look at our balance sheet, you can see the revolver balance, the blue bar, increase
during the first three quarters when we are covering our off season operating expenses and
loaning money out to our franchisees. And then we pay it down to zero during the fourth
quarter.
On October 31st, 2012, our total balance of loans to franchisees and ADs for working capital
and equipment loans representing cash amounts we had advanced to the franchisees and ADs
was $30 million. In addition at that date our franchisees and ADs together owed us an
additional $84.2 million for unpaid amounts owed to us, largely representing the unpaid
purchase price of new territories in the case of franchisees and areas comprising clusters of
territories in the case of ADs.
I mentioned our credit facility. In April 2012, we successfully extended our credit facility. The
new $130 million facility matures in 2017 and gives us the additional flexibility by way of the
accordion to increase the facility to $200 million. Our relationship with our seven syndicate
banks is strong and we are continuing to work with each of them to enhance their relationship
with us and our franchisees.
Finally, let's talk about our financial performance.
I will cover these next few slides quickly before getting to the guidance we issued in the press
release this morning. During fiscal year 2012, we generated revenues of $109.1 million on
system-wide revenue of $359.1 million. Total operating expenses were $79.4 million. Our net
income was $17.4 million with our diluted earnings per share $1.23.
During the second quarter of fiscal 2013, we generated revenues of $7.3 million. Total
operating expenses were $17.9 million and our net loss was $6.7 million or $0.51 per share.
I’ve put our year-end balance sheet next to our balance sheet from the end of our second
quarter. At the end of fiscal 2012, we had almost $20 million in cash and cash equivalents
compared to $1 million at the end of the second quarter of fiscal 2013. We also had almost $77
million in current receivables compared to $80.6 million at the end of October.
Total debt including our current portion was approximately $29 million versus $68 million at
the end of our second quarter. Our revolving credit facility increased from zero at year-end to
$39.7 million at the end of our second quarter answer as a result of the things that I explained
during the seasonality section.
Finally, stockholders' equity was $100 million at the end of fiscal 2012 and was almost $90
million at the end of the second quarter. As you can see our balance sheet is strong, even
though we draw on our revolving credit facility during the year it is paid in full by the end of the
fiscal year.
We sat with $20 million in cash and cash equivalents, $77 million in current receivables and
only $29 million of debt at the end of our fiscal year.
This morning we issued a press release announcing our initial 2013 guidance. We expect net
income in the range of $20 million to $21.5 million. This includes total office growth of 11% to
13%, revenues in the range of $131 million to $136 million and an effective tax rate of 38.6%.
This year, we will see higher than normal revenue growth due to the financial products and a
significant increase in the number of company-run offices due to the Wal-Mart agreement.
Since we will be increasing the percentage of financial products handled by JTH Financial, we
will see a one-time growth increase in our revenue that will not repeat in this magnitude in the
future.
Our net income projection also reflects not only the increased revenue from bringing financial
products in-house but also the additional expenses associated with that revenue and the
additional expenses associated with running the company-owned Wal-Mart offices.
Finally, as we said in our press release announcing second quarter results, earlier this year we
postponed our initial public offering because of market conditions involving IPOs and because
we did not need the proceeds of an offering for liquidity purposes. In the second quarter, we
filed an amendment to our registration statement which had the effect of restarting the SEC
review process.
We did this for two reasons. First, we wish to update the filing with our most recent financial
statements in order to afford the greatest flexibility to move quickly if and when we determine
that an offering will be appropriate.
Second, because there are several large shareholders whose status as affiliates effectively
prevents them from having any significant liquidity in their shares. We continue to look for the
appropriate market opportunity to conduct a public offering that would allow these long-term
shareholders the opportunity to sell stock.
Here you can see a list of some of these shareholders and their ownership. At this time, we can
advise that we do not anticipate initiating an offer prior to our fiscal fourth quarter.
So, that is an in-depth look at each of our revenue components, how the seasonality of our
business impacts our financial statements and a financial update including the introduction of
our guidance.
I'd now like to invite everyone back up for a Q&A session. Thank you.