Title: Pre-Paid Legal Services Q2 2010 Earnings Call Transcript
Call Start: 8:30
Call End: 9:00
Pre-Paid Legal Services (NYSE:PPD)
Q2 2010 Earnings Call
July 23, 2010 8:30 a.m. ET
Randy Harp – Co-CEO, President and COO
Steve Williamson – CFO
Good day ladies and gentlemen, and welcome to the Pre-Paid Legal Services second quarter earnings results conference call. (Operator Instructions.)
I would now like to turn the conference over to your host Mr. Randy Harp, co-CEO, president, and chief operating officer. Please go ahead.
Good morning this is Randy Harp. I want to welcome you to the 2010 second quarter earnings conference call for Pre-Paid Legal Services Inc. Joining me here at the home office is our chief financial officer, Steve Williamson.
Before we begin, I need like to remind everybody that the conference call will contain forward-looking statements, including our expectations of future results and future plans. Actual results might differ materially from those projected in any forward-looking statements. Additional information concerning risk factors that could cause the results to differ materially from these forward-looking statements are contained in our press release announcing the second quarter earnings as well as disclosures in our public reports on Forms 10-K, 10-Q and 8-K and any amendments thereto filed with the SEC and as always they’re available on the SEC Edgar website as well as our own website.
My co-CEO, Mark Brown, is travelling today to British Columbia, but had passed on two very recent articles that were of interest to him and would be of interest to folks on this call and certainly pertain to the area that this company is focused on. One is dated July 12. The title is--and I’m just going to hit a few sentences from each of these articles--judges say litigants are increasingly going pro se, meaning that they represent themselves, and at their own peril. “A survey of nearly 1200 state trial judges around the country indicates that the weak economy has increased the number of litigants representing themselves in foreclosures, domestic relations, consumer issues, and non-foreclosure housing matters and the judges say litigants are doing a poor job as well as burdening courts already hurt by cutbacks. More than half the judges saw case filings increase in 2009, and 60% of them say fewer people are represented by counsel . The greatest increase is in foreclosures, followed by domestic relations, consumer cases, and other housing matters. The economic crisis has only exacerbated the problems in the courts says (inaudible). Self-representation is resulting in worse outcomes for litigants according to 62% of the judges. 78% of the judges say the increase in self-representation is hurting the courts, especially by slowing down the docket.”
Another article that was in the New York Times July 12: “Automated Debt-collection Lawsuits Engulf Courts. As millions of Americans have fallen behind on paying their bills, debt-collection law firms have been clogging courtrooms with lawsuits seeking repayment.” The firm that they profile in Woodbury, New York has been filing roughly 80,000 lawsuits a year. They have 14 lawyers on staff, so that averages out to more than 5700 cases per lawyer and the article goes on to explain how automated the process is, the software that they’re using.
How is that possible? “The answer to that is at the heart of a growing debate over the increasing use of the nation’s legal system to collect on bad debts. Already some state legislators and judges have tried to crack down on collection lawsuits and on Monday the Federal Trade Commission weighed in, saying the system for resolving disputes over consumer debts was broken and in need of significant reforms. The agency also urged states to adopt measures to make it more likely that consumers would show up in court to defend themselves because currently most do not, resulting in default judgments. Most consumers fail to show up in court and those who do rarely have a lawyer. A court judgment gives debt buyers the ability to collect on the debt through actions like wage or property garnishment.”
The last comment: “Lawsuits are sometimes filed against the wrong people, critics say. Other times, they say, the amount owed is incorrect or includes questionable fees and interest that has been added to the balance.”
So again, just a couple of articles that Mark had forwarded. We always say pick up any newspaper and it will make a case for our membership benefits and certainly I think those two are right on point, so please consider that information and at this time I’ll ask our chief financial officer Steve Williamson to step through the more significant financial highlights for the 2010 second quarter. Steve?
Thanks Randy. I’ll just start with a little overview for the second quarter of 2010 compared to ‘09. We had total revenue up about $1.7 million. Total expenses and taxes were up about $1 million, which resulted in about a $695,000 increase or a 4% increase in that income. 9% fewer shares gave us a 15% increase in diluted earnings per share.
On a sequential basis, membership fees were down about $581,000. Looking at the quarterly comparison, second quarter 2010 membership fees increased 1% over the second quarter of ‘09 due to the 1% increase in the average premium enforced that we had for the second quarter of 2010.
Associate services revenue increased $588,000, and that was primarily due to higher e-service fees that we had during the quarter compared to the ’09 quarter. The revenue, which as most of you know, is the 3-year amortization of that $10 enrollment fee that we have on some of our memberships. That was down $74,000, bringing that total line to $895,000.
Dropping down to expenses, membership benefits, they decreased less than 1% versus the 1% increase in membership revenue, and that’s due to the reduced cost that we have on the I.D. theft memberships for 2010. Versus ’09 it dropped a quarter, as many of you know who have read our documents. It brought our benefit ratio to 33.6% for 2010’s second quarter versus 34.1% for ’09. I would expect it to be somewhere around that 33.5% on a go-forward basis.
For commissions, they were virtually unchanged. They did around $29.2 million, and that’s basically because if you look at the annual membership fees written, which is the total new members that we wrote during any given period times the average fee per member that gives you the membership revenue written that we refer to. That was up just slightly, I think less than 1%. Commissions on a per-member basis were about $7 higher at $233 for the second quarter of 2010.
Associate service cost was higher than associate services revenue by $1.1 million for the second quarter of 2010 versus being $594,000 in excess cost for the 2009 period. Associate services cost for the second quarter of 2010 was higher primarily because we had more bonuses paid in the 2010 quarter versus ’09.
G&A decreased $478,000. And again, we had an increase in the top line but improved the margins a little bit by reducing the G&A cost in the quarter. So down $478,000 primarily due to a decrease in employee cost, legal cost, our telco and data communications cost, and some consulting fees that were lower. And those were partially offset by some slight increases in bank service charges overall and that’s primarily driven by the fees associated with processing the credit card payments.
Other expenses increased $382,000. The biggest reason for that change, you may recall that last year from the second quarter of ’09 we had a reversal of our litigation accrual of $450,000. We also had $174,000 decrease in interest income in 2010 versus ’09 quarter. Those two items were offset by $117,000 less in interest expense, primarily due to the lower debt levels and slight decrease in interest expense on average over the period and a $114,000 reduction in depreciation expense.
Provision for taxes came in at approximately 39% for both periods, which brings us to net income that was up 4% to $16.5 million and with a 9% reduction in our diluted shares outstanding due to our buyback program. That brought our second quarter diluted earnings per share to $1.65, up 15%. For the full first six months of 2010, diluted EPS was up 19%, to a record $3.52. So a pretty decent run rate.
We used $3.8 million in cash to purchase 84,000 shares during the second quarter at an average cost of $45.15. The shares outstanding at July 16 were around $9.9 million. At June 30 we had cash and unpledged investments of about $70 million versus our total debt of about $28 million, and again that debt, we’re annualizing that out at about $4.5 million, $4.6 million per quarter.
The biggest portion of that of course is the stock note that we had from Wells Fargo. That one will actually mature and that $1.2 million or so that we make on a monthly basis on that particular piece of debt will be gone as of June of next year, so rapidly approaching actual debt-free status. And the rate on that, on average we’re paying LIBOR plus 1.35%, which puts us at about 1.7% for the current LIBOR rates that are in place. And they’re all based upon the 30-day LIBOR rate, which is actually down a couple of ticks from last quarter at about 0.33 versus 0.35.
We are in compliance with all of our debt covenants, under the most restrictive covenant that we have we have about $27 million available on our stock buyback. And then to go over, on a six-month period, want to just do a high-level overview of what we did with the cash flow.
We generated $34.3 million in cash flow from operations for the first six months of 2010. We spent $1.1 million of that on capital expenditures, reduced debt of about $14.1 million, bought back shares with $5.4 million. That left about a $13.7 increase in cash and investments.
And with that I’ll turn it back to you Randy.
Just another rock-solid cash flow quarter for sure and the company continues to move towards debt-free status. Certainly already there easily on the net debt basis, but thanks for all the numbers Steve.
We now want to respond to the email questions that we received that haven’t been addressed this morning that are in our queue that we filed yesterday. We have three questions, and one of them is fairly long and I’m going to save it and answer these other two first.
Any changes in the first half in terms of the percent of the business sold to group marketing or multiple-level marketing compared to the prior year? Have you seen any growth in any of the specialty legal plans that you sell, small business or commercial drivers?
Group business has been down compared to the previous year. That changes sometimes but most weeks it is down. I’ve been travelling a lot and I have heard from some of our longtime, significant group producers that with this economy it is tougher to actually get in front of the employees to do presentations. I think employers are concerned about surviving and not necessarily looking for additional benefits. But as the last person I met with was telling me, that just means they need to call on more businesses. So exposure is still the biggest hurdle in front of us. Maybe this will make us get out and talk to more folks.
Any growth in any of the specialty legal plans? Small business and CDLP for example, both are pretty consistent. They fluctuate again from week to week but pretty consistent with what we’ve seen and still represent a relatively small piece of our overall business.
Any new specific programs or plans to help new associates become more productive in selling the legal plans?
We have retained and are starting down a path, from a training standpoint, primarily on the group side, although a lot of the material and a lot of the training seminars or conference calls and video presentations would certainly be applicable to any of our sales associates, but the primary motivation and focus has been on our group division or group area, so we will be in the third quarter rolling out a very specific to pre-paid training program that hopefully will help better prepare our associates to deal with issues that they may be seeing in the workplace.
Last question that we have is a long one. I may paraphrase and just hit the high points but it starts out: Advertising is one area that the company has allocated very little capital for over the years. Why not test the avenue to find out what returns could be. There’s no question that the current presentation of the product is a fraction of the addressable population. Why not educate people about a great product? With a supportive advertising campaign perhaps associates will have more success selling the product and an even better time recruiting additional associates.
It goes on to say . . . Right now if you go to our website wanting information about becoming a member we treat that information as a lead and spool that lead out to our sales force and the question also is asked why not accept that membership when you’ve got the member there, the potential member knocking on the door. Why not accept that membership?
And then the closing comment in this question is: Priority must be to continue to grow the business. This appears to have become more challenging in the recent year and therefore calls for the company to think about all options. It seems logical to respond by awakening more people to the excellent product and giving the consumer the ability to transact at their convenience.
I think for the most part certainly we would agree. We have not advertised in the past. I guess I personally, not on behalf of the company but personally, have a question . . . I don’t think a significant or substantial advertising or branding campaign is necessarily something that we can test or do halfheartedly. I think if I were going to do it, if I were convinced to move down that path, I think you have to do it in a meaningful way. I think we could easily throw some single digits or even tens of millions of dollars at that effort and not spend enough, not do enough work to really show a return for our shareholders.
So I think the question in my mind is very similar. Other than my idea about a test, it would probably be more significant and if we’re going to do it I think we ought do it right. And the big question there is it would be additional dollars. As you know, we’ve always put all of our advertising dollars up in the form of commissions. We swap paper for paper. We pay a lot of commissions when a membership is written, and we’ve always put all of our available dollars up in the form of commissions, so to go down a branding awareness, advertising campaign, whatever you want to call it, would have to come out of the company’s pockets and again I think if you’re going to do it you ought to do it right.
And so it’s a bigger question or not as easy a question to answer maybe, because it would change our margins, it would change our reporting model, one that we’re certainly very proud of, but we certainly would agree with the writer that our biggest challenge on a go-forward basis is exposure. I certainly agree with his comments about an excellent product and I do agree that exposure is the key to increasing our results and building this company to a multiple of what it is today on behalf of our shareholders.
The second part of his question deals with signing up on the web and I could have submitted this question myself because I feel very strongly about that. But at the same time appreciate, because of my 20+ years here, I have dealt with a lot of our sales associates over the years and understand that if we start taking online signups just as house accounts, not only would that be perceived as competing with our sales force, I believe we would be competing with our sales force and that’s just a bridge that we’ve never crossed in the past. I think it’s a path that you only go down once and we’ve not done that in the first 38 years of the company’s history but it is one that I certainly understand. I do a lot of my own personal transactions online and it’s pretty frustrating for me to go to a site that I want to buy a product or service from only to be told that they will have someone contact me.
So I do agree, again, with the writer that we need to be more consumer-friendly. We just have to figure out the way to do that without competing with our sales force, to find some way, some pool of dollars that we could also reward them for the online activity. We’ve talked and talk almost on a daily basis about that type of effort and I do think we will have to do more of that, not less of that, as we move on down the path.
So good questions, and again I tend to agree with the writer, I just do have enough practical experience, I know what the tradeoffs would be, and great questions and potentially great paths for this company to go down but I think both of those paths are paths that we have to be cautious about because we want to avoid certainly any channel conflict and so far we’ve elected not to change our basic business model, to change our margins to spend what, to me at least, in eight Oklahoma dollars, would be very significant dollars on an advertising or branding campaign.
So let me close the call. Anybody that ever hears me speak is going to hear the same thing over and over again, so I’m consistent if nothing else, but our whole business model, our whole approach to doing what we do, is a win-win-win approach, and I’m very proud of that. It has served us well thus far and I look forward to just escalating that as we go into the future.
But I believe that the only way we really can increase long-term value for our shareholders is by one metric, and that’s growing our membership base. And that’s the nice thing about this business model. We have all components, the win-win-win relationship, our provider law firms, our sales associates, and our shareholders, are all motivated by the exact same metric. We all benefit when that exact same metric increases, which is our membership base.
That approach provides a win for our sales associates in the form of commissions for sales that are actually closed and processed, a paper-for-paper swap if you will, commissions for memberships, based entirely on results. It’s the purest form of pay for performance I can think of.
As that occurs, as our membership base grows, certainly our provider law firms that receive the capitated per-member, per-month fee that’s electronically deposited by us between the eighth and the tenth of each month into their accounts, they certainly win as the amount of the monthly payments we make to them increase in direct proportion to our membership base.
And last but certainly not least, the company and our shareholders. Nothing, nothing determines our long-term success more than growing the membership base, because it determines our revenue, our cash flow, our net income. Virtually every financial metric is impacted or dictated by our active membership base.
The nice thing about that is as we move down the path, trying to increase the results for all three of those constituencies, the fee-paying member in the middle, if you will, this win-win-win triangle, those three elements can all benefit, but the biggest winner in that approach is the fee-paying member. They have to receive more in value each month than they pay us in cash. They have to, they must, receive high-quality legal services in a customer-friendly manner, on a consistent basis, each and every time they interact with our law firms.
And I just think the level of service that we have today from our provider law firms is better than it’s ever been. I think it will be even better this time next year, and as we continue to grow this is a business model that I honestly believe gets better the bigger it gets. It’s very scalable, it allows people to become more efficient at higher levels and so it is a tremendous business model and reporting model that we’re very proud of.
But we have a great company, we have a great opportunity in front of all of us because we have a great product, and a product that is more needed today, just like the articles that I shared with you earlier in the call, there is a greater need for our product in today’s economy than at least any time in my 20+ years with this company. There is a greater need for supplemental or replacement income with the levels of unemployment we have across this great country. It has gone, in my mind, from being an opportunity that we need to share to a responsibility that we need our existing sales associates to go out and share like they’ve never shared before.
We need to talk to more people, we need to talk to them quicker. We need to do it right, but we need to go do it. I think we each have a responsibility to each other. We have the solution to the problems that were mentioned in the two articles that I shared earlier on the call, and if we’ve got the solution, if we can make a difference in the lives of those folks, I think we have a moral obligation and a responsibility to go out and to share the solution with as many people as we possibly can.
So I feel very good that that win-win-win nature of our business model will continue to provide a basis for us to grow this company, take this company to where I think it ought to be, which is certainly a multiple of what it is today. I think it will serve us well.
Steve and I certainly appreciate your continued confidence. We never take it for granted. We strongly believe, and we’re very proud of, the model that has been built and believe that it will continue to produce results that you can all be proud of. I appreciate your time this morning, appreciate your being on the call, and look forward to the next quarter’s earnings call sometime in October. Thank you very much.
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