H & R Block Inc (HRB) 2005 Q3 法說會逐字稿

Good afternoon.

My name is Ramona and I will be your conference facilitator today.

At this time I would like to welcome everyone to the H&R Block third quarter earnings release conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer period. [OPERATOR INSTRUCTIONS]

Thank you.

I will now turn the call over to Mr. Mark Ernst.

Sir, you may begin your conference.

Thank you.

Good afternoon and thanks for joining us to discuss our fiscal 2005 third quarter results.

With me today are Jeff Yabuki, our Chief Operating Officer.

Bill Trubeck, our Chief Financial Officer, and Bob Dubrish, who runs our mortgage businesses.

Before I begin my formal remarks, I need to remind you that various comments that we make include certain estimates and projections and other forward-looking statements, the words will, plan, estimate, approximate, project, intend, remain, expect, believe and variations thereof, and similar expressions are intended to identify forward-looking statements.

These statements speak only as of the date in which they are made and are not guarantees of future performance.

Actual results may differ materially from those expressed, implied, or forecast in the forward-looking statements.

Some factors that could cause actual results to differ include the uncertainty that the Company will achieve its revenue and earnings per share expectations for fiscal 2005 or any quarter there of, and that actual financial results for fiscal year 2005, or any quarter there of, will fall within the guidance provided by the Company.

Changes in economic, political regulatory or competitive environment and the effects of such changes, the inability of H&R Block subsidiaries to successfully expand their business, litigation involving H&R Block and its subsidiaries, and other risks described from time to time in H&R Block's press releases and forms 10-K, 10-Q, 8-K and other filings with the Security and Exchange Commission.

H&R Block undertakes no obligation to publicly release any revisions to forward-looking statements to reflect events or expectations after the date of these remarks.

H&R Block provides a detailed discussion of risk factors in periodic SEC filings and you are encouraged to review these filings.

Got that out of the way.

Okay.

In conjunction with today's call supplemental financial information has been posted to the Investor Relations section of our website at hrblock.com to facilitate your analysis.

A copy of our prepared remarks will be posted to our website shortly after the conclusion of this call.

I would also note that some of the the supplemental information that we have posted to our website for this call will be referenced we go through the call, so you may want to pull that up if you have access to it.

Before we dive into a discussion of our results, I want to first thank the associates throughout our organization, whose service to our clients is responsible for our strong results.

Whether you're serving our tax clients, mortgage and accounting clients, investment services clients, or you support our colleagues who serve our clients, your outstanding efforts have helped H&R Block obtain a strong quarter financially.

Let me turn to the discussion of our third quarter results then we'll follow with our outlook for remainder of the fiscal year.

I am pleased with the Company's financial and operating performance for the quarter.

Financially we saw double-digit year-over-year revenue growth in both the tax and business services segment.

Our mortgage businesses delivered nearly 30 percent loan origination growth over the second quarter in a very difficult market environment.

Our reported net income for the third quarter was $92 million or $0.55 per diluted share, compared to net income of $107 million or $0.59 per diluted share last year.

Shares outstanding are down 6 percent from last year's third quarter.

Total revenues in the third quarter increased year-over-year by 7 percent to $1 billion.

For me, the key highlights of the quarter that are indicators of our current successes and shape our outlook for growth, are the growth in tax clients served, and the significant increase in mortgage originations.

Both suggest that our strategies designed to strengthen our market positions in those two businesses are working.

Retail tax clients served increased 3.7 percent over the previous year through January 31st, and further improved through February 15th.

For the year thus far we have seen growth in retail tax clients of 4 percent.

Average fees per client are up 6.3 percent through February 15th, consistent with our expectations.

Inside the client growth numbers is great news on a number of fronts.

We're seeing good results in our efforts to attract new clients.

We're also encouraged by the early indications for client retention.

Perhaps most importantly, we have seen a significant increase in client satisfaction thus far this year, something that we attribute to the quality of service our associates deliver, our efforts to reduce early season wait times, and our strategy to incorporate financial advice into our client service.

We expect that these actions will continue to enhance our results for the remainder of the year and position us for success in future years.

The other highlight for the quarter, our performance in mortgage, is equally encouraging to me.

During the third quarter we did what we said we were going to do strategically.

Our total origination volume increased nearly 30 percent over the previous quarter's levels, and we reduced our cost of origination by 37 basis points.

We also extended our reach and delivered high quality service to our broker community, while competitive pressures kept our weighted average coupon rates below the levels that we think will ultimately prevail.

Business services is performing well and its core tax, accounting, and consulting businesses are well positioned to respond to its heavy revenue season that we are now in.

Finally, our results this quarter included $12 million or $0.05 per share in stock-based compensation expense, compared to $7 million last year.

This increased expense reflects the second year of our early prospective adoption for expensing stock-based compensation.

In the corporate segment, we also recorded a $17 million legal recovery that we received from litigation with AOL.

The impact this had on earnings was $0.06 per share, though we also took approximately $3 million of legal reserves in several of our lines of business which offset about $0.01 of this impact.

Let me now turn the call over to Jeff, who is going to review in more depth tax and investment service operations.

Our tax services segment which includes U.S., international, and digital tax services, along with refund settlement products had a strong quarter, and a very strong start to the filing season.

Revenues increased $57 million, or 12 percent over the same quarter last year.

Pretax earnings increased 4 percent to $64 million.

Our increased revenue for the quarter, offset the significant and expected start-up cost for our office expansion, increases in labor costs, higher estimated bad debt costs associated with refund anticipation loans, and a series of timing adjustments within our expenses.

We are pleased with our results through the end of the third quarter.

Through January 31, clients served by company-owned and franchise offices increased 3.7 percent, compared with the same period last year.

Average tax preparation and related fees per client rose 6 percent to $142.97, compared to $134.92 last year in company-owned and franchise operations for the period January 1 through January 31.

Refund anticipation loans processed in H&R Block offices in January were up 1 percent over the previous year to 1.9 million loans.

Revenues associated with RAL participations increased $6 million in the quarter, due to higher average loan size, which also carries a commensurate increase in bad debt expense.

Although refund anticipation loans did not mirror client growth for the period, we are experiencing solid growth in lower cost settlement products.

We are committed to providing a full range of options so clients can make the best decision for their personal situation, which then translates to increased satisfaction and long-term loyalty to the Company.

Rather than speak about results through January 31, and separately through February 15th, I will just talk about results through mid-February.

While we're happy to discuss results as of the January 31 cutoff, the results through mid February are probably the best indication of how the year is progressing.

As most of you know, there has been a fair amount of dialog on the start of this year's tax season.

First of all, you should realize that historically there has been little or no correlation between the early performance of the tax season, and annual growth in tax return filing.

That said, in order to monitor the performance of each tax season, we have developed pacing models that help us both interpret internal and external data, as well as manage client capacity and staffing levels, which are dependent upon tax return flow throughout the season.

We are sharing our perspective to enable investors to better interpret the multiple data points that are being discussed in the marketplace.

The start of this season and performance through February 15th is generally consistent with our pacing models, with January 31st falling on a Monday, the season started in a manner consistent with our experience in such years.

In fact, 1994 was the last time we had a comparable year on the calendar.

Also, despite talk about the late delivery of W-2s.

We did not observe nor did our channel checks confirm with payroll providers suggest a later than usual delivery of these forms.

In fact, there was some evidence that W-2's were actually slightly earlier this year.

We believe that the difference in timing is largely attributable to how the days of the week aligned with calendar dates.

This is important to understand as I will talk more about the impact of the calendar on our interim period results later in the discussion.

Through February 15th, our retail tax business is performing in line with our expectations.

As we discussed at our investor conference in January, there were several near-term focus areas that we believed would drive results this year.

Our key priorities are expanding the capacity and size of retail network, increasing our level of marketing effectiveness, and continuing to enhance our service levels to increase retention and overall client growth.

We are very pleased with our regular office expansion this year.

We opened 609 new company-owned locations, and 152 locations have been opened in franchise territories for this tax season.

This expands our overall regular office reach by 8 percent this year.

While it is still relatively early in the season, our new offices are performing in line with expectations.

In fact, the average tax returns prepared in a new office are up 13 percent over the comparable period for first year offices versus last year.

We have also seen improved client growth rates in our offices that we have opened over the last several years on a comparable same-office performance basis.

For example, offices that were opened last year have achieved a 32 percent growth rate through February 15th this year, versus a 29 percent growth rate for the comparable period and tenure band last year.

We are seeing an increase in relative growth rates in each of the tenure groups for the 4 years that we can track comparable data.

We also added 394 net new kiosks within the Wal-Mart channel for a total of 947 locations.

Results in both first and second-year locations are performing within our range of expectations.

Our goal is to continue to cost effectively add to the size and convenience of our overall network.

Wal-Mart, along with Sears and other kiosks opportunities, is an important supplement to our overall distribution strategy.

As we move into planning for next year we are examining the interaction between the regular and seasonal distribution channels, to identify the combination of locations that will allow us to best serve clients, and deliver shareholder value.

In addition to adding new locations, we had a significant focus on increasing our internal capacity to serve clients through enhancements in our staff management, and the deployment of new technology, we are serving more clients in our existing locations.

Peak wait times have been reduced and that results in increased satisfaction.

Through the first peak of the tax season, target offices had increases across all key metrics.

Clients served, new clients, return starts and revenues.

We are very encouraged by the results today.

We also believe that there are additional benefits to realizing the peak period leading up to April 15th.

Perhaps most impressive of all is that we have seen a significant increase in client satisfaction.

Through February 15th, overall satisfaction, along with every other key measure, including price-value satisfaction, is up significantly.

The increases in this year's satisfaction are on top of meaningful increases in client satisfaction measures last year.

We believe these results to be reflective of our efforts to increase convenience, lessen wait time for clients, and our focus on delivering an enhanced client experience differentiated on the basis of actionable advice.

The last major focus for this tax season has been our effort to deliver improved marketing results.

We are evolving to a combination of national and local marketing that is based on the competitive dynamics within individual geographies.

To date, we are very pleased with this year's overall campaign, and it's positive impact on client growth.

Tracking studies suggest that our advertising this year is breaking through, and our double your refund campaign has delivered solid results.

We will continue to refine our approach through the season to maximize results.

From a pricing perspective, average revenue per client is meeting our expectations, increasing 6.3 percent through mid-February.

Our early look into tax complexity shows a slight increase to date, but it is too early in the season to draw any conclusions for the entire year.

As I mentioned earlier, we are also seeing solid increases in price-value satisfaction, which is a sign that our pricing strategy is working well.

If this trend continues, it sets us up for improved loyalty from these clients next year.

Overall, we've had a solid start to the season, and the results are in line with our full-year expectations.

However, as I mentioned, there can be significant confusion over interim reporting of date-to-date results.

Day to day reporting, while different, has other anomalies that make it even less useful, in our opinion.

Because consumers have a very predictable pattern of filing throughout the season and throughout most weeks, the inclusion of particular days of the week in a reporting period can skew comparisons.

Also, given that last year was a leap year, second half of February comparisons will be particularly confusing.

To help with your analysis, we've included a slide titled calendar impact of day to day reporting on page 5 in the supplemental materials.

This slide provides an illustration of the reported growth in clients served in each of the remaining tax season interim reporting periods.

If the remainder of the tax season was to end up with 0 growth over last year.

Which is not meant to be a forecast of our remaining expected results.

Said another way, if the growth in absolute numbers of clients served through February 15th were equal to the absolute client growth for the year, reported results would vary by interim period, as illustrated on page 5.

As you can see, there will be large inter-period fluctuations with a significant uptick in results in the April 15th reporting period, given the way the days of the week fall this year.

You may best judge how we are performing on a period by period basis, by comparing actual results to these adjusted numbers.

Let me briefly mention our results in our digital businesses.

Revenues were up 5 percent over the prior year's third quarter and expenses were generally in line with expectations.

As we indicated previously, wae had expected to see a slowing in the growth of the digital market, as the category matures over time.

However, actions taken by a number of players in this market have altered the competitive landscape, and also may have reduced the direct profitability outlook of the overall industry.

These competitive changes are coming at a time when our internal analysis suggests that the years of rapid growth, were likely coming to an end.

The all free offers on FFA and deep discounting in the paid on-line channel are affecting our business, and the industry as a whole.

While we don't see cannibalization of our prior year digital clients, we do believe that free for all offers on FFA are disproportionately capturing new category entrants, who would have otherwise paid for a return in the on-line channel.

Although the digital business is a relatively small part of the tax segment today, we continue to view the digital and multichannel capabilities as strategically important, and accordingly have chosen to match offers in this market to sustain our ability to attract new prospects for our retail channel through initial digital relationships.

To this point, we are seeing strong growth in client movement from our prior year digital channels to our current year retail business.

Prior year digital clients moving to retail grew 46 percent over the comparable period last year.

We expect that number to continue to grow throughout the season.

Through February 15th, our paid digital clients were down 9.1 percent which is a combination of modest growth on line, and a decrease in federal software units sold.

We expect the software results to improve slightly, but to be below our targets for the year.

Competitor advertising that we did not match has shifted share within the category, though overall we don't think that action will expand the category.

For the long term, this likely means that this category will see reduced profitability.

On line clients have a balanced filing season, so first half results are directional but too early to read for a complete season assessment.

However, we would not expect to achieve the level of paid client growth that we had planned, given the developments in the on-line industry this year.

Though speculated by some analysts, we see no evidence that digital offers generally, or FFA specifically, is having a negative effect on the broad trend towards paid preparation, a trend that we believe is continuing again this year.

Our international tax operations which include Canada, Australia, and the United Kingdom, generated revenues in the quarter of $11 million, a 14 percent increase over last year, and a pretax loss of $8 million compared to a loss of $6 million last year.

The Canadian tax season launched last week, so it is too early to provide much insight into that business's tax season results.

In summary, based on tax season results we have seen so far, we have confidence in our previously discussed range of 0 to 3 percent for retail clients, and pricing growth in the mid to high end of our 6 to 7 percent range.

Overall, we're on track for a solid tax season.

Investment services continued to struggle financially in the quarter, although good progress was made in driving future revenue growth through partnering with our tax professionals.

Investment services revenues were $62 million for the quarter, up 8 percent over the same period last year, and up 16 percent sequentially.

The business had a pretax loss of $18 million in the third quarter which is a $6 million increase over the pretax loss in the third quarter of last year, and a $6 million improvement over the preceding quarter.

Each of these quarterly loss figures includes $7 million of intangible amortization.

Within our gross revenues total production revenue increased 3 percent compared to last year and 16 percent from the preceding quarter.

Consistent with our strategy, we continue to shift our mix of business with 43 percent coming from annuitized revenues, compared to 37 percent in the third quarter of the previous year.

Net interest income increased 34 percent to $11 million, primarily from increased rates compared to the third quarter last year.

Average margin balances increased 5 percent compared to third quarter last year and were essentially flat quarter over quarter.

This year, we have expanded our opportunities to deliver financial services to our qualified tax clients by teaming tax professionals and financial advisors.

To date, we have over 9,400 tax professionals enrolled in our team program, and over 5,000 tax professionals have made at least one direct referral.

In fact, as of February 22nd, tax professionals throughout the retail network have referred just over 64,000 tax clients to a financial advisor, which is over 2 times the number of referrals through the same date last year.

We are pleased by the early season results to deliver our integrated value proposition to qualified clients.

Let me now turn the call back to Mark, for a review of our mortgage and business services operations.

Thanks, Jeff.

Our mortgage operations which primarily include Option One and H&R Block Mortgage, performed extremely well against competitive pressures in the quarter.

Note that we've expanded the supplemental information that we're providing to further enhance the transparency of these operations.

I would refer to you pages 7 through 9 of our supplemental materials.

Third quarter loan production totaled $8.4 billion, an increase of 57 percent over third quarter last year, and an increase of 29 percent from the previous quarter.

Revenues for the third quarter were $305 million, down 4 percent over last year and up 8 percent over the previous quarter.

As pricing pressures continued, we sought to maintain our competitive position but continue our policy of not seeking to be the price leader in the market.

The weighted average coupon on new originations declined 17 basis points from the prior year to 7.30 percent in the prior year this decline in WAC, was in response to competitive pressure despite the fact that market interest rates increased steadily.

This compares to 7.46 percent in the previous quarter and 7.47 percent a year ago.

For the month of January, our WAC was 7.37 percent.

We continue to focus on maintaining preferred provider status with the brokers we serve, and aggressively controlling origination costs.

The third quarter origination costs were improved over the previous quarter by 37 basis points to 213 basis points excluding acquisition costs.

The improvement resulted from prudent spending and greater leveraging of capacity.

It's notable that the improvement would have been even greater except for the fact that we incurred costs associated with significant retail expansion during the quarter in preparation for the upcoming tax season.

Credit quality remains strong on our non prime originations.

Our average FICO scores for non prime originations average 615 per current quarter compared to 609 last quarter.

The loan-to-value also increased slightly to 79.3 percent.

These increases are a result of interest only fundings that generally require higher credit quality and larger loan balances.

In the third quarter, IO fundings represented 15 percent of our overall loan production.

Overall third quarter net margin decreased 16 basis points but was offset by significantly greater production.

At quarter end, Option One servicing portfolio was $59 billion, an increase of $17 billion over last year, and $5 billion over the previous quarter.

As we said last quarter, we do not expect to see pricing pressures dissipate through the remainder of our fiscal year.

We've seen no actions by our competitors to indicate a change in the current landscape in the near term.

In this competitive environment we remain focused on doing those things that will allow us the greatest performance in the near term, while solidifying our competitive position for the long term.

Our reputation as a service leader gives us a distinct market advantage, an advantage that we are pressing.

We've expanded our sales capacity to serve brokers better, and the productivity of these account executives is rising as expected.

We expect to see further growth in production in our fourth quarter.

To further enhance our market position we've begun introducing web-based pre qualification technology, to more efficiently serve our brokers.

Early feedback is very encouraging, though the introduction of the technology was too late in the quarter to have impacted production yet.

The other technology enhancement that we've been working on to streamline and accelerate the underwriting process, is in pilot and depending upon results will be rolled out later in the next fiscal year.

We remain focused on reducing origination costs and have begun to see this with the current quarter 37-basis-point reduction against the 50 to 75-basis-point improvement we mentioned in the last call.

We continue to have cost -- a cost structure that can absorb or support greater volumes throughout our businesses including substantial increases this quarter in our retail business operation.

As we indicated, our third quarter results were very similar to our first quarter's performance.

For the fourth quarter, we continue to anticipate growth in production levels, and lowered origination costs, but still with operating margins below what we believe this business should ultimately achieve.

Specifically, related to H&R Block Mortgage, our retail business, third quarter retail non prime origination volume increased 67 percent over last year, and decreased 3 percent over the previous quarter.

Retail prime origination volume increased 52 percent over last year's comparable quarter, and 30 percent on a sequential basis.

Results from the tax season should impact our retail businesses profitability as we turn our attention to serving tax clients mortgage needs.

Our direct relationship with our tax client tends to give us a slight pricing premium over our broker relationships, which are facing greater competitive pressure.

In the quarter, 2 percent of our nonprime loan sales settled through the whole loan market versus 18 percent securitizations.

While the differential on the price between the two has narrowed recently, we continue to see comparatively superior execution in the whole loan market.

The mix between whole loan sales and securitizations is dependent upon a number of factors, but is highly dependent upon efficient use of capital, and how to best optimize the level of cash received for production any in given quarter, balanced against the overall value that we receive.

The percentage of cash proceeds we receive from our non prime capital market transactions with 82 percent for the current quarter compared to 85 percent in the second quarter.

Our residual assets, delinquency and prepayment trends remain positive. 12 month season and beyond delinquency rates since the high in January 2002 of 14.8 percent, have been holding in the 11 to 12 percent range over the past year.

At the end of January 2005, 31-day plus delinquency rates were 11.5 percent.

As both our whole loan sales and securitizations are non-recourse transactions, it's important to noted that our risk as it relates to loan performance, is primarily limited to the tax-affected value of residual assets and mortgage servicing rights on our balance sheet.

As the value of these residual assets is based on future performance, we continually monitor the reasonableness of our valuation assumptions, relative to actual loan performance and performance in the market.

Our residual assets continue to perform better than expected, due primarily to lower than modeled losses, and offset by the effect of increased interest rates.

Accordingly, during the quarter we realized a net write-up in residual balances of $10 million, which was recorded in other comprehensive income on the balance sheet net of deferred taxes.

Turning to business services, this business continued to perform well in the third quarter from strong tax and accounting, consulting, risk management, and financial process outsourcing results, offset by underperformance in our capital markets and retirement resources business.

As we discussed at our January investor conference, several segments businesses are high potential, early-stage businesses that require initial investments and depressed results in the short term, but are expected to deliver solid earnings and margin over the long term.

This is reflected in our growing revenues from these businesses.

Overall third quarter revenues increased 18 percent to $133 million, and pretax earnings were $6 million compared to $2 million last year.

Moving into the segment's most productive quarter, we're pleased by the strong performance and marked position of our businesses.

Strong strategic execution, improving economic conditions, and continued industry opportunity are helping to accelerate our expansion into this attractive market.

Now let me turn the call over to Bill, who is going to discuss some of our key balance sheet items.

The major changes with respect to the balance sheet this quarter are largely due to the seasonality within the tax related businesses, and the Company's purchase of participation interests and refund anticipation loans.

As such receivables were up considerably to $1.5 billion compared to 368 million last quarter, and 348 million at April 30th, 2004.

Short-term borrowings were 1.5 billion at the end of the third quarter, compared with 316 million at the end of last quarter and 0 at fiscal year end.

Commercial paper issuance for the year has already peaked, and seasonal outstandings are expected to be back down to 0 by early next week.

Although the borrowings were intra-quarter and therefore not visible on the balance sheet, the Company entered into a useable committed line of credit with a bank for $750 million from January 26th through February 25th.

Where advantageous we supplemented our commercial paper borrowings with bank borrowings throughout the month to fund participation interests.

The current portion of long-term debt declined by 252 million this quarter, with the repayment of previously issued debt in November.

If you will recall, the Company issued replacement debt in October, and up-sized the amount of the offering to $400 million due to favorable market conditions.

Mortgage residual interests and securitizations declined 8 million during the quarter to 254 million.

Slide 13 in our supplement slides provides detailed information.

Other balance sheet categories were fairly consistent, however.

PP&E increased to 327 million from 279 million at April 30th, 2004.

This was due to a combination of factors, but primarily due to the real estate expansion in the tax segment and general expansion of our businesses.

The Company did not repurchase additional treasury stock in the third quarter as the majority of the projected excess capital was deployed in the first half of the year.

A total of 1.6 million shares were issued for option exercises, and these principally associated with seasonal tax associate stock options, and smaller amounts of employee stock purchase plan purchases and restricted shares during the current quarter.

And as of January 31st there were 165 million shares outstanding.

And just two other items of note, on our last earnings call we said we expected to launch an on-balance sheet $3 billion commercial program for Option One in the fourth quarter.

We continue to work towards implementation.

However, it is now likely we won't issue paper until early next fiscal year.

As has been regularly reported the Company tests its goodwill for impairment at least annually at the beginning of the fourth quarter.

We are currently in the middle of this process, and of yet we have not reached any conclusions regarding the fair value of any reporting unit and its goodwill.

With that let me turn the call back over to Mark.

As we discussed previously, we continue to work toward filing an application for a bank charter, which we likely will do in our fourth quarter.

This is a long process that is unlikely to be completed in the next few quarters.

If the company is successful and the charter is granted, the assets that can be converted and how quickly they can be moved, remains a subject of negotiation.

We don't want to get ahead of ourselves and we'll keep you posted as we move forward and the effect of this opportunity on the Company becomes more clear.

In terms of outlook we are cautiously optimistic about the tax season outlook though there is obviously a great deal of tax filing yet to be done.

Overall revenues and financial performance are expected to be within the range we previously shared.

Retail results are tracking in line with our previous expectations while digital software and on line, will likely come in below our initial expectations.

We continue to make necessary changes in our mortgage segment to respond to the competitive market.

With our service advantage, technology enhancements, and improved cost structure we expect to be in a very strong position as we head into our fiscal 2006.

However, we expect our fourth quarter the continue to be challenging from an industry pricing perspective, and expect continued pressure on gains on sales resulting in slightly lower earnings for this segment than our previous expectation.

We expect continued strong performance in our business services segment core accounting and tax services, and we'll continue to work toward improved performance in our investment services segment.

Given the continued tight pricing in mortgage, we currently expect fiscal 2005 earnings to be nearer the low end of our $3.50 to $4.00 range.

And with that, I want to thank everyone who has joined us thus far.

As always, our focus remains on prudent management of all of our businesses, as well as efficient capital allocation to create long-term value for our shareholders.

I think that we can clearly see, that we are clearly seeing key strategies working in our most critical business, and we're pleased with our overall performance, with that I think, operator, we're now ready to open the line for questions.

Thank you. [OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the Q-and-A roster.

Your first question is from Mark [Full] of Thomas Weisel Partners.

Thanks.

Just a quick -- couple quick questions.

You had mentioned the existing share count right now about 165 million.

What are your expectations as far as on a year-end basis?

Well, it's probably isn't going to move an awful lot.

Bill maybe knows this more specifically.

Probably isn't going to move very much from that level.

For the most part our share repurchase program is, you know, is not something where we have an opportunity to do much with for the balance of the year, and we've used most of the excess capital that we would expected to apply already.

That and the fact that we don't have significant -- the reason we had a large number of shares in the fourth quarter and the third quarter, is because that's the time when we have our seasonal stock option exercises, so that was an anomaly during the third quarter.

So generally speaking, Bill, we're going to be close to the same level.

Close to the current level and we still operate within the ability to go after 15.1 million additional shares that have been authorized by the Board for repurchase.

Got you.

On the tax side on pricing, you know, when you look at competitors, pricing at rates which seem to be above yours, is there any -- any kind of impetus to raise the pricing points that you guys are at, as we go into Q4?

Yeah, you know, I'll give you my quick answer and let Jeff kind of supplement that as well.

The answer is no.

We go into the season with a pretty clear understanding of both the relative price value satisfaction and the things that we're doing to drive variations in client satisfaction, and our real goal, our model, is to optimize long-term client loyalty, so we think we're targeting our prices to optimize sort of the net present value or the value of the client base that is coming to see us, reflecting both current pricing as well as what that does to loyalty.

So I don't think there's anything that's changed there.

We would not trade off sort of a short-term bump in earnings to sort of lose the long-term position we want with clients.

I think the only thing that I would add, is as we continue through the season and we see kind of the impact of the -- or see the client mix as we see the client mix develop, it's feasible that our pricing could be higher if the client -- if the client mix and the relative complexity gets higher, but for now, we would leave it the way it is set up.

Great.

Just one more question, so I can let other people get in here, but on kind of client retention and what not, have you guys seen that the buildout of your new store -- do you think it's the buildout of your new locations that have helped offset some of the timing issues of people waiting at the stores, or improved marketing focus on some of the lower income early filers that has allowed to you improve retention, and regain some customer growth versus your competitors?

I would say that retention is a -- there are multiple prongs to the things that drive retention.

And as we -- as we tried to lay out, we think one of the things we've been hurt by over the last several years, is a kind of a decline in our level of general convenience, and by having more convenience, i.e. more locations, we do think there is some retention lift from that.

Just as important is, we believe the increases that we're seeing in client satisfaction.

We are delivering a higher quality service, it is more differentiated, we've talked for a couple of years about advice.

We think that's critical.

And lastly, is our pricing strategy.

We have gotten more targeted on our pricing strategy in terms of really trying to be as precise as we can on where increases land, and in fact in some cases where decreases land.

So we're using our pricing strategy to drive loyalty.

So I would really say it's a combination of those factors right now, and we'll talk much more about that after the season is over.

Frankly, it's too soon to see anything other than emerging trends.

Thanks.

Thanks.

Your next question is from Joe LaManna of William Blair.

Hello?

Joe, are you there?

Sir you may proceed with your question.

Mr. Lamanna your line is open.

Can you hear me?

We can now.

Beginning with Jeff's comments he alluded to the fact that the way the calendar fell, January 31st being a Monday, was important.

And I guess I'm wondering, in terms of your results through January 31st, in the tax business, did they benefit, or get hurt by the way the calendar fell this year versus last year?

Well, you know, one of the reasons we try to lay some of this information out is that there's been a lot of bad information kind of floating around about this early start/late start W-2's early late kind of stuff, and this is something we've been tracking very, very carefully for long time.

And have been modeling what the start of the season should look like, and what peak should look like, the first peak, specifically so that we can manage our business within that first peak regardless of how the calendar -- with an eye toward how the calendar works, because there are some anomalies that occur in consumer behavior based upon the days of the week and the point at which January 31st falls every year.

In general, that is also the reason why we share our information through mid-February, because we think that by mid-February, all noise around how the season begins and how peak plays out has already been washed out, and you essentially are seeing results through the first peak, that are essential pretty, you know, pretty much settled by that point.

So, you know, to comment on where we were at on January 31st, you know, I think it's a little -- almost anything I would say would say, you know, is -- has a danger of being misleading because, you know, without understanding all the models of what you should expect based on a Monday January 31st, which the last time we saw one of these was 1994, and even then it wasn't exactly the same, because this one follows a leap year, so you get a completely different effect based on the way in which the days fall and is a little bit hard to read.

I think the best thing I could tell you is, you know, through mid February, you are now seeing the effect of the first peak.

I would say to the more specific, were we benefited or detrimented by the calendar, I would say that the season is going the way we expected the season to go.

I don't think we would say we were benefited or detrimented.

We were at our expectation.

The one thing about this kind of a pattern, which this is why this stuff really matters and we think that our experience or history in this business allows us to staff more appropriately, there is different pattern to this kind of a peak than there would be to other peaks with other patterns, and this peak is not as severe, on a particular day basis, which means that you can staff differently, or you should staff differently because the peak is a little bit more spread out in a season like -- in a year like this.

Right.

Let me just ask something related to that, given your answer to.

What extent are your tax offices open on the weekends, if it's important that January 31st fell on a Monday, are your tax offices throughout the country generally open on the Saturday and the Sunday preceding that?

Should, they are, but this really goes to -- this goes to consumer behavior.

Consumers, this is I think through across virtually the entire retail tax industry, and that is that you see the greatest amount -- other than in the two peaks, and even during the two peaks you get some of this effect, but the first peak and the last peak are going to be a little bit varying depending on how the calendar falls.

But in most times, Monday is the busiest day, it declines from there through Friday.

Saturday is usually lighter than Friday was, and then Sunday is a fraction of what Saturday was, then you see a big jump again on Monday.

That's the pattern, and that really driven by consumer behavior, not by anything that we do operationally.

So we staff for that.

That answers my question.

Great, thanks, Joe.

Your next question is from Andy Shaffer of Farley Capital.

Hi everyone.

Regarding the growth in retail tax clients year-to-date, what of that would you attribute to the change in the, if at all, the unemployment severity index?

Hi, Andy.

We would say that we continue to believe that the industry as a whole will be up more than it was last year, so the industry growth will be up.

At this stage, it would be almost impossible to say X percentage of the growth is attributable to kind of a change in the U.S.I., or X percent is attributable to other specific environmental elements.

We think it's generally positive for the environment, but I think we'll have to wait until we get through the season to really understand the impact.

Okay.

Thanks.

Thanks.

Your next question is from Michael Hodes of Goldman Sachs.

Hi.

Good afternoon, guys, and congrats on a solid start to the season.

Two questions on tax and one on mortgage.

First, I guess, for Jeff, the calendar impact of date to date reporting I thought that slide was particularly helpful.

Am I right in assuming if you were going to see a negative skew from the calendar break in the back half of February, that there was a positive skew in the first half of February?

Maybe you could just give us the early part of the table on page 5. so we could get a fuller comparison.

Second question, on the break to the tax season there were some IRS data that came out yesterday that suggested tax returns through February 11th were running down 4 to 5 percent year-over-year.

Are you saying that's more symptomatic of just the way the calendar fell, and where the peak hit this year, and is not indicative of a slow start?

Those are my two tax questions.

Then on mortgage I was hoping Mark that you could give us a little color around the benefit from derivatives, it looks like it was I think a $31 million benefit, and I didn't catch anything in the commentary on it.

Let me launch into all of those.

Then I'm going to ask Jeff to jump in.

On the early season calendar impact, or would there have been a equivalent one, this is why we -- we always wait until we have February 15 data to share, because the beginning of the season pattern is so volatile, based upon any number of factors, that anything would you try to glean from January 31st or through, you know, through the first week or so of February is a little bit volatile.

And I guess to some degree I 'm going to beg off on that question because we think there is some competitive advantage in how we understand the peaks to playout under different scenarios, that we'd prefer not to share with our competitors.

So we --

Let me ask it a different way, If the calendar impact of date to date reporting is so significant for the back half of the season, what is special about the first half of the season that would suggest it wouldn't also be significant?

Generally nothing.

Although what I would tell you what I can tell you is that the -- by our models, the beginning of the season on a day-to-day basis the way the IRS typically puts out data, should have been down significantly.

And it would have been on a date to date basis, but for January 31st being on a Monday.

And when you put those two factors together, they are pretty close to offsetting.

And that also sets you up that for the first 15 days of February, you don't have a real great deal of volatility in a year, like the one we are in.

And does it relate to the IRS' data question as well.

First thing you have to remember the IRS data is the usage study.

That is different, and that is a -- not a particularly stable set of data.

If a sample that they extrapolate off a variety of different sources, and so to use that data to interpret what's happening by itself, is probably to begin with a little bit dangerous.

Having said that they are working this year off a much bigger lag, because last year was a leap year.

So unlike normal years, where you're looking at a one-day lag in data, in terms of the year having run, this year they're actually reporting off of a two-day lag.

That two-day lag at that point in the year, probably explains 100 percent of that shortfall.

So it wasn't a late start.

They're reporting data that has a two-day lag in it.

As we have looked at that information and looked at other data that we have on how the year is progressing, if you factor two things into consideration, the two-day lag, and the incremental adoption of electronic filing this year which continues apace with a lot of paid preparers, if you factor those two things and make adjustments for those two, the season looks kind of like the IRS I think would have expected it to.

It doesn't look like it's really moving too much differently than that.

What do you want to add to that Jeff?

I think the only thing I would say is if you go back to slide on page 5 just for a moment, obviously you have some odd things going on in the data.

If you just use the illustrations, I think it is unfair to say that at a 0 growth rate February 28th would, showing a 14 percent decline in date to date reporting is at a 0 -- if you were on the 0 percent illustration, is probably extreme, as is the 11 percent on April 15th, you're getting the benefit of an extra day on a comparison in the kind of the peak week.

And so you just -- you have a number of gives and takes.

What we were really wanting to do was to -- is to give some better benchmark than looking at an absolute percentage growth in each period as it compares to what we've done so far for the year.

Now, Mike, you had said, you know, could we give you some other data.

I think maybe ahead of the February 28th period?

No, I guess my comment was it's a little counter-intuitive that the calendar break is so significant, creating skews in different periods for the back half of the tax season, that it's neutral in the first half, but I take it that's what you're saying, the puts and takes.

We would not say it's normally neutral.

We know there's a very specific trend that occurs that based on which pattern of the year you are in on the days.

So I don't want to suggest that there is not a similar kind of skewing that can occur.

This year, that skewing would not have been real severe.

Between the January 31st cut-off versus the February 1 to February 15 cut off.

By 2/15, any skew that would have been there is already long gone.

So in general, while there's probably a slight skewing this year that would have suggested that, you know, the season was a little bit more into February and a little less into January, it's not significant.

Got you.

That's very helpful.

On your mortgage question about the derivatives benefit, yeah, we called that out specifically because historically, this goes to our hedging strategy, one of the things that we do, or we hedge our pipeline and we hedge both the existing pipeline of loans that have been sort of submitted to us and we also hedge the sort of expected pipeline 20 to 25 working days out.

Historically, we have used forward contracts as the primary if not the exclusive way in which we were hedging those sales.

We have just in the last six months or, so I guess, begun to use swaps as part of our hedge strategy.

In doing that those are now traded derivatives, and so our -- the accounting on those is different than the accounting on forwards.

The accounting on those requires us to sort of mark those to market at the end of each quarter, and book the gain or loss.

This quarter we had a significant run-up in rates, which caused to us realize a derivative gain on our swaps.

At the same time, when we finally went to sell the loans into the market using securitizations rather than forward sales, we got less value.

So the two of those really are designed to sort of closely mirror sort of the full value that we're getting for the loans, and the difference is just the form in which the hedge was created.

Anything you could add to that, Bill?

That's fine.

It is broken out on page 6 of the supplemental information as well.

And just in summary, up, so if we were to look to the April quarter, what would be a reasonable expectation for the derivative impact?

In theory, it should be zero.

But it's really when rates move in a dramatic, reasonably dramatic way that you would see that become a meaningful size number.

Thanks a lot.

Your next question is from Michael Millman of Soleil Securities.

I guess semi-repeating some of the things that have gone by, on the derivative, is there any timing difference?

In other words, that 31 million was offset on the gain on sale in the quarter?

And then I wanted to move on to some tax questions.

Let me just hit that one real quick.

There might be a very, very slight amount of that that would be sort of a gain this quarter on production that's still coming through the pipeline, but it would be a very small amount of that.

For the most part, because we are selling into our off-balance sheet warehouse facilities, and that is a true sales treatment when it goes into that, as we are producing loans, the gain or loss on those loans is realized from an accounting perspective and from an economic perspective when we originate the loan and put into it the warehouse, so in that sense, we are pretty current on those to the extent we had swap gains in effect on part of our remaining pipeline that had not yet turned into a loan, there might be a little bit of it that's sort of an acceleration, but it wouldn't be much.

Thank you.

On the tax, I guess, several questions.

One just -- looking at the usage report that you referred to, that came out yesterday, it does seem that the electronic filing should be reasonable.

That was up 1.3 percent, and is there any reason not to take that at face value, that the business that you're in was reasonably up 1.3 percent, at least through that date?

No, I don't think that's reasonable to -- to put those two things together and reach that conclusion.

You have several things going on.

Electronic filing is being reported there is with a two-day lag.

So it is up -- despite the fact there's two extra days in last year's reported period versus this year's reporting period, it would suggest there's a much larger increase of electronic returns filed to date, on a date-to-date comparative basis.

The offset to that frankly which is always hard to see until you get all the way through the year, is how much additional electronic filing adoption is there within the industry.

We know that that continues to be the case.

We can see in our own data, that we are even in closing our levels of electronic filing this year. and we know we've always been high in the industry, so we are quite confident that the things the IRS has done, and the things that have occurred in the industry are causing E-file adoption to increase .

How those two offsetting factors interplay with one another to get to that net number, I don't think you can make a leap of faith and say the two just exactly offset each other.

Okay.

And talking a little bit about the tax, I think you indicate -- at least Jeff indicated that on a tenure basis, you're up in all tenures, or all first full year tenure basis, I think that was through the 15th.

Yes, it was through the 15th.

Well, that should -- if -- given that and assuming that your first year stores are doing kind of normal first year store business, it should suggest that you were up -- should have been up more than the 3 to 4 percent number, depending upon which numbers you're looking like.

So, A, is there something very faulty in this an analysis, or B, did you see some declines in your more mature stores?

I'm not sure we -- on the analysis itself, we have, as you will remember, Mike, we have a -- we have a very different number of offices in each of the tenure bands.

So in the tenure band of last year, we were only working with 81 offices.

In the tenure band this year , we're working with over 600.

I'm talking about the company-opened operations only.

You see a lot of variation there.

So your -- the point that I was trying to make, is we're seeing better growth in the comparable tenure bands year-to-year and that's, I think, coming from better execution, some of the programs that we put in that we talked about that are expanding capacity, we're getting that expansive effect in the new office as well, and on top of that you have we think more effect of marketing, better client satisfaction that all of our offices are benefiting from in the system.

The last thing I would say is that as you will recall as we open up a new office, it's important for us to move tenured tax professionals, people who have clients, from an existing location to a new location, and when you do that, you end up creating capacity in the office where that tax pro moved from.

And by that, you're going to have some shift of the numbers back and forth.

So that's an expected part of the expansion program, and we end up creating more capacity to serve over time by doing that.

To me, the reason we thought it was important that shareholders understand that what we're seeing there is for two reasons.

One, because we opened up a lot of new offices this year there was a concern at least on our part that we may not have our sighting and our ability to get those new offices to perform to the modeled way in which we had seen new offices perform in the past, because of the sheer size of number of offices we were opening.

But we are seeing just the opposite, that we opened up a substantially larger number of offices, and they're performing better than first-year offices have performed for us in the past as a class, so we think that's purely good news.

The other piece of it, the reason we wanted to make sure shareholders knew this point, was the new offices could have kind of performed at the expense of existing offices.

But so far we are not seeing that be the case.

Existing offices continue to perform as we would have expected them to perform if not slightly -- if not better, and as a result we think that, you know, the real estate strategy or the expansion strategy is right on track with what we had hoped it would look like this year.

Maybe a little early, but on that basis, should we assume that next year you'd open at least as many new stores, if not even more?

Well, I don't think we're ready to kind of go on -- as we talked about in January, our view is, to the extent we can make this work, we know that we are under-penetrated relative to the way we think that convenience is now being defined by many consumers.

So in that sense I don't think anything we said in January has changed, and I think the results we're seeing so far would continue to have us do that.

The one thing I would tell you, we are very commit to expand our business and our points of presence and our convenience to blunt competitive in-roads.

To the extent that others have seen weaknesses in our network and our system historically, and have taken advantage of that, we are very committed to not let that continue to be the case.

Great.

Thank you.

Your next question is from Herb Buckbinder of Wachovia Securities.

Three quick questions.

Can you commented on number of free returns you've done this year versus last year?

Looks like it's probably had little impact.

Two, you're starting a business staffing offices with CPAs.

Just wondering if you could comment on the business a little bit, and describe the profile of the CPA that you're looking to go after here?

Three, American Express is spinning off their financial advisor unit.

Can you tell me if they're retaining their accounting and business services unit, if not, is that a business that you would have some interest in looking at?

Herb, on the free return question, is that on on-line, or is that --.

everything.

All the free returns that you could possibly offer in this world.

Well, just to be clear, the data we've announced does not include any of our free returns.

We don't those when we disclose.

To the extent we have been participating in the free file alliance, we have not historically disclosed what our share of that is, but I tell you the share is not dissimilar from where it's been in the past.

Okay.

That's what I was looking for, just to make sure that nothing unusual, because it seems to be promoted more this year, but it's having virtually no effect on your overall results.

No, we have not seen.

One of the things that will not surprised you, is we try to pay a lot of attention to movement across different channels.

In fact, given that retention is up this year over last year, as we follow the demographics we don't have any reason to believe that we've seen cannibalization from the digital FFA channel within our retail network.

On the small business resources question which is really the small CPA acquisition, I would say that this is akin to the small local CPAs that are in virtually every community in the U.S., you know, where you might have 5 to 10 employees, some CPAs, bookkeepers, really dealing with the smaller business, and the kind of the mid-range income, in a way that's very similar to maybe the clients that we had historically targeted in premium.

So you've got kind of the 100,000, 150,000, maybe 200,000 of general personal income, then the smaller business that are probably in the 2.5 to 3 million and less.

So in that -- so it's the stuff that is kind of between the core tax business and the RSM channel.

Was the supply of these types of CPAs easier to find in staffing a tax office?

The CPAs in that category are not any different than hiring CPAs in any other category.

We see as one of our advantages, the ability to actually use our tax professionals today who are in our current network, and move them between the different businesses.

So between the tax channel, as well as a small business channel to get them more engaged in our success.

Using these local CPAs, is this a business that could grow big enough that you're going to comment on or is it going to take awhile?

Take awhile.

Comment on this American Express thing.

Their accounting business is not inside of their financial advisor's business.

No, I know, but have they made any comments about what they're going to do with that business?

Does that fit in?

If not would that be a business you would target?

To my knowledge they have not made any comment.

If it is available, is that something you would like to own?

We would never comment on that, but thanks for trying.

All right, thanks.

Your next question is from Chris Gutek of Morgan Stanley.

Couple questions.

If you look at the tax business and the mortgage business both, it looks as if there might be a bit of a trade-off to focus more on volume and less on profitability.

Wondering if you could comment on that?

Well, you know, let me I'm not sure where to start with that question.

I can't imagine there's a trade-off that's going on in the tax business, either for competitive reasons or for consciously, you know, managed reasons.

If your description is really trying to look at third quarter results, I don't think that's a fair kind of assessment to make of what happened in the third quarter.

We had significant new office openings and staffing and training and sort of early season costs in the -- in the third quarter, that may have held down margins relative to the increase in the revenues for the quarter, but those -- that is certainly not a trade-off that I think we are trying to make in any way.

So I'm not sure that's fair.

What is happening in mortgage is that it's a very competitive pricing environment.

We have chosen to compete, not to be a price leader, but we're certainly not going to price ourselves out of the market and lose the position, the competitive position that we have had in that market.

But I would tell you we track this very, very carefully.

Our growth in originations is not due in any manner that we can see, to pricing more aggressively than competitors to be able to gain share.

That growth in originations is coming due to things that we have done to expand our reach into the broker network to, you know, to really allow us to grow our originations in an organic way.

Bob what would you add?

I think that's right.

While we're doing that, really focus on lowering our costs.

Grow production, keep making our relationships and lowering cost.

Mark's thoughts on tax side of business.

I guess what you're saying with revenue year to date in the tax business up 12 percent, but the profitability year-to-date worsening by 9 percent, that's purely a function of the increased number of offices and the off-season costs, but the fact you haven't fully booked the full year's revenue benefit yet, in other words, you're still on track for relatively flat margins for the full season in the tax business?

Yeah, that's right.

You just cannot use a January 31st cut-off as a measure for the third quarter as a measure for that.

We have a lot of off season costs, ramp-up costs.

Clearly this is an unusual year or relative to previous years because we add significant increase in the scale or size of our network, that has a lot of start-up costs associated with it, all of which we think are good, rational things to do but they don't all pay off in the month of January.

I think Jeff mentioned higher bad debt expense associated with the RAL product, and also presumably your profitability on the digital side of business is below plan so there's offsetting positives to offset those negatives?

Yes.

And finally, the RAL volumes were flat, but RAL revenue up 16 percent.

Are you increasing your participation percentage or what's the cause?

The RAL revenues are up largely because of price increases that HSBC made.

There's that and also the average size of loans this year is up pretty materially, the average refund size is up, so a combination of those things is really what's driving it.

Great.

Thanks.

Our last question is from Bill Roy of Jacob Asset Management.

Hi.

Do you have if net execution on the loan originations this quarter?

Do you mean on the sales, or that we would have booked based upon our sale into our off balance sheet facility?

Sale into the off balance sheet facility, I'm assuming that's what gets booked.

That's the real value, yes.

You can see that on page 7 of our supplemental information.

It was 2.86 percent.

2.86.

Now, that is -- that's based on a question you heard earlier about derivative benefits, that number would have been higher but for movement in rates, and there was a swap gain that was offsetting that, so that, you know, I think the fair comparison of that would be it's, you know, 3, whatever that is 25 would have been sort of the apples and apples comparative number.

Right.

So I'm trying to figure out, just before I ask my next question this off-balance sheet facility, is this a securitization facility, or is this a facility that allows you to book the gain in the current quarter, irrespective of what [hold-on] premiums are doing in the market?

It's not based on -- it doesn't allow you to book something without respect or without regard to what premiums are in the market.

When the loans are sold into that facility, we book them at the expected disposition value, and that expected disposition value is virtually always known, because we've erd forward sold, or we have a swap hedge against it, so in all cases I think we know pretty tightly what the real value is when it goes in, and that's what it's booked at.

Okay.

So in the current quarter, your WACs dropped by 16 basis points, and the two-year swap during this period increased by 71 basis points, resulting in compression of 87 basis points.

Now, this 87 basis points, should result in some adverse execution.

Right.

And, you know, buy-down rates are 2 points, 1.5 points.

If you use the average of that, 1.75, theoretically the adverse execution should be around 1.5 points.

I'm trying to figure out, in the current quarter did you experience all of the adverse execution on your gain on sale, resulting from the spread compression, or should we expect to see some flow into next quarter?

No, you should not expect to see any flow into next quarter.

You saw it all come through this quarter.

And the -- I think the offset, I'd have to do some of that math you just did kind of real quickly, but for the most part the one thing that you didn't take into consideration is the narrowing of spreads in the secondary market when you're selling loans.

We have seen tightening of spreads over the course of the last six months for this kind of paper, which is part of the reason why I think you've seen the rates -- rate environment, the WAC environment, remain as competitive as it has is that some of the profitability of this kind of loan has held up a little bit because of narrowing of spreads.

I've heard that the positive spread execution you're getting on -- on the ABS market, or securitization market is 10 to 15 basis points, so it would mitigate some of that spread compression, but not most of it.

So --.

Well, and I think, you know, between our -- the gain on sale this quarter over last quarter, went down 76 basis points.

And we offset 37 basis points of that through our swap so that we were sort of hedged against that movement in rates, but we clearly saw a compression and gain on sale even after our -- after our hedges.

So what you're describing certainly did happen to us this quarter, and I would tell you again, you know, there's not a flow-through yet coming, because of the way in which we account for loan originations, we effectively book all the real value of that loan in the quarter in which it's originated.

What would happen if the value that you book, you say that you know most of the time, but what if it didn't reflect the real value you could get in the -- in a whole loan sale or that you actually get in a whole loan sale when you sell it in the next quarter?

We know in -- I don't remember this quarter exactly, but for the most part we always know what our disposition is going to be when we book it at the end of the quarter.

We already -- while we sometimes don't have our forwards committed in place as the loans are being originated, or as they're coming through the pipeline, and therefore we hedge with swaps, by the time we actually originate the loan we have the disposition planned in almost every case, Bob, right?

I think that's right.

It's such a short period of time, if there's any risk at all, we say we're going to deliver a coupon on a forward lone sale of 7.3 and it ends up being 7.28 that would be -- or 7.32, we would either be a little above or a little bit below that.

It's only really looking 30 days out so we pretty much have a handle on the coupons, and I think it's almost always entirely sold.

Thank you.

Our last question is from Kartik Mehta of Midwest Research.

Good afternoon, a question on the mortgage business.

You said originations declined by 37 basis points.

How much was that technology, or how much was that reduction in commission or other expenses?

The cost origination declined by 37 basis points.

Yeah.

You know, I would tell you this quarter technology had no impact on this at all.

I mean, maybe a little bit, but it would be a very, very little bit.

For the most part the two sort of key new technologies that we have coming on line, are broker pre-qual, is just being rolled out.

Was being rolled out in January, and, you know, it's kind of still filtering out into the system now, so we would expect that we'll start to see some of the pickup from that to the extent we will see it, during our fourth quarter and more of it into next fiscal year.

The other one that we have in development and now in test, is our automated underwriting system.

That will not have an effect this fiscal year.

Clearly didn't have any effect during this quarter.

To the extent that works as we think it's working and will work, we would expect that will start to have more of an impact for us in our fiscal 2006.

So I wouldn't attribute any of this quarter's result to those new technologies.

If you look at from a pricing standpoint, do you believe we're at the bottom in terms of pricing for subprime, or based on some recent data that you've seen, or recent sales that have happened, is there even more pressure on the subprime pricing ?

Intuitively, yeah, I would think we're near that point.

I think I've thought that before.

I think at the investor conference I said that, you know, we pretty much tracking -- track pricing of our competitors every day.

I think I said at the investor conference we had seen the light at the end of the tunnel, we thought.

Since then we've seen a decrease in overall rates amongst the competitors, but it seems pretty -- it's flat right now.

What we do, we are tracking very carefully what our competitors cost origination are.

Part of the reason we have become, giving you the transparency on cost origination that we are and we try to track equivalent although sometimes it's hard to get, equivalent levels for our competitors is that, you know, at some point rational is -- rational price willing always to have take into consideration your cost structure and those people who have the lowest cost structure, can sort of do things that others won't, or can't.

We think that our cost structure at these levels is getting very much in line, if not improving from what some of our competitors are at, and we think we have meaningful room to improve from here, puts us in a very strong position to weather whatever is going to happen, and I think we are probably seeing, if we haven't seen the sort of bottom in terms of where people will take pricing in this industry, we have to be pretty close, because we don't think many people can sustain their businesses with the -- with the cost structures that we think they have in place, relative to these WACs.

But we've felt we were there before.

To some degree it depends on what margin people are willing to work for, this quarter we reported a 98 basis point margin.

That's probably a little bit lower than what is real, because of investments we made this quarter into our retail business, maybe it's, you know, that might have hurt us by 15 to 18 basis points, something like that.

But net/net I think that we continue to believe if we focus on ensuring that we deliver high quality service but at the same time get our cost structure clearly in line, we will be in a great position for the long term, and other people can't, you know, sort of weather this storm with much lower rates.

One final question on the tax side of the business.

I know there's been a lot of numbers out there, IRS text usage data, the day versus date comparison, the calendars and everything, but if you look at your data as of February 15th, up 4 percent, how much of that, in your opinion is the market , and how much of that is market share gains for you?

I think to the extent we have done analysis that would kind of give us sort of what was the equivalent date to date real market, after you adjust for the day differences, and the E-file adoption difference and what have you we would have guessed that sort of the equivalent for the industry, is that it might be up 50 basis points at that point, Jeff?

Is that about -- so we think that on an apples and apples basis, you know, the market probably is up less than 1 percent at that point, and -- compared to our numbers.

We feel pretty good that between the things that we've done to build capacity in our existing office network, the expansion, as well as the improvements that we've made to serve more clients in our existing locations, are having a pretty significant impact, and we would say those are share drivers.

In real estate alone, in the real estate expansion alone through last several years, we have been below 35 percent in terms of kind of amongst the larger competitors in terms of office expansion, this year it looks like we gained about 60 percent of the total office openings across the larger retail branded competitors.

So we feel pretty good about our share gains to date.

Great.

Thank you very much, gentlemen.

Thank you.

And with that, let me say thanks for joining us, and as always, if you have other follow-up questions, please feel free to give us a call.

Thanks.

This concludes today's H&R Block third quarter earnings release conference call.

You may now disconnect.