Pre-Paid Legal Services, Inc. (NYSE:PPD)
Q4 2008 Earnings Call
February 25, 2009 8:30 am ET
Randy Harp – COO
Steve Williamson - CFO
Welcome to the Pre-Paid Legal Services fourth quarter 2008 earnings results conference call. (Operator Instructions) At this time I'd like to turn the conference over to Mr. Randy Harp, Chief Operating Officer; please go ahead sir.
Good morning. This is Randy Harp, Chief Operating Officer for the company. I want to welcome you to the 2008 fourth quarter and year-end earnings conference call for Pre-Paid Legal Services, Inc. Joining me here at our home office is Steve Williamson, our Chief Financial Officer.
Before we begin I want to remind everybody that the conference call will contain forward-looking statements including our expectations of future results and our future plans. Those actual results might differ materially from those projected in these forward-looking statement.
Additional information concerning risk factors that could cause the results to differ materially from those forward-looking statements are contained in our press release announcing our earnings, as well as from disclosures in our public reports on Forms 10-K, 10-Q, 8-K, etc., filed with the SEC and are available on the SEC Edgar website as well as our own website, www.prepaidlegal.com.
Will tell you also we expect to file possibly as early as Friday of this week, the 2008 10-K. If we miss Friday then we’ll file it the first part of next week, we’re very, very close on wrapping that up.
At this time, I would ask our Chief Financial Officer, Steve Williamson to step through the more significant financial highlights of both the 2008 fourth quarter as well as the full year of 2008.
Thanks Randy, first an overview for the fourth quarter of 2008 versus 2007, we had $1.2 million less total revenue with $4.2 million less expenses, taxes, which equals about $3 million increase in net income. Add 9% fewer shares and you get to a 38% increase in diluted earnings per share.
The details for the fourth quarter of 2008 were fees, membership fees were up $96,000 over the fourth quarter of 2007 at a total of $109 million. Fourth quarter of 2008 associate services revenue was down 18% or $1.1 million and to $5 million total due to approximately 10% fewer new recruits and we also had lower fees from our eservice membership product.
Other revenue was down $160,000, $1 million of the revenue as we’ve talked about before consists of the revenue recognized from the $10 enrollment fee that we get from some of our members. Total revenue was down 1% to $114.9 million for the fourth quarter of 2008. Going to membership benefits, they were 34.5% of membership fees for the fourth quarter of 2008, that’s down from $34.6, of course that’s due to or partially due to that $0.25 per member per month reduction that we had in the IDT memberships when we redid the [Crow] contract.
The estimated benefit ratio that I would suggest on a go forward basis with these 25% declines is about a 50 basis points that we should see beginning in the first quarter of 2009. An additional $0.25 is going to kick in January 1, 2010 so we’ve got another full year.
The benefit ratio when it declines at 50 basis points again in 2010 I would estimate for 2009 the full year benefit to be approximately $2.4 million pre-tax or about $0.13 per share on an annualized basis. Commissions were down 3% or $1.1 million, came in at $31.1 million for the fourth quarter of 2008. We had about 12% fewer new membership sales in the fourth quarter, 133,000 compared to 150,000 and the average premium sold was about the same, it was $301 for this particular quarter, fourth quarter of 2008.
Premiums written which takes those memberships times average premium was down 12%, with a 12% decline in premiums we normally would expect to see a comparable or pretty close to that amount of decline in commissions. But you will recall that we’ve talked about before, we did add the expansion bonus program in the middle of last year so really didn’t have those dollars in the 2007 figures, none in the fourth quarter of 2007, of which those bonuses are designed to be paid for the growth for that particular associate that earns those.
For modeling purposes and trying to project what’s going to happen on a go forward basis, I would use commissions as a percentage of premium written of approximately 71% to 73% which that’s about the ratio we’ve had in the third and fourth quarter of 2008 which are the two quarters that we had the full effect of the expansion bonus in it.
Associate service costs were $5.5 million for 2008, that’s down $1.3 million from 2007 primarily due to the reduction in bonus programs and some of the costs associated with our incentive programs compared to what we had last year now that we have the expansion bonus those are a little bit lower. General and administrative expense was 13% of membership fees for 2008 versus 9.8% for 2007. The 9.8% for 2007 would be 13% if you excluded the sales tax charge that we had when we reclassified sales taxes in the fourth quarter of 2007 so really on a comparable basis about the same at 13%.
We do continue to see lower expenses and bank service charges, post-its, telephone, and these have been of course during this quarter more then offset by the increases in employee costs and consulting fees which are primarily related to our PCI compliance efforts. Year to date our G&A expense was 12.1% for 2008 compared to 11.8% for 2007 so a pretty tight range there when you get to the year to date figures.
We have recently implemented some cost control measures over employee costs, consulting fees, and other areas due to the lower membership revenue growth rates that we’ve seen trying to keep out G&A costs in that 12% range. Other net includes $2.2 million of depreciation for both 2008 and 2007, interest expense of $1.2 million which includes $400,000 of accrued interest expense associated with that Canadian tax issue that we’ve talked about before. That’s the accrued penalty and interest portion of that which is really most of our exposure.
The other portion related to that Canadian tax matter is really just a matter of timing when we actually get to take the deduction so really the additional accrual relates around the potential penalties and interest there and added $400,000 there. So even with that extra $400,000 we were down $211,000 in interest expense for 2008 from the 2007 levels. Premium taxes were slightly lower at about $421,000 and those were all offset by interest income of $496,000 which is about $276,000 lower then 2007 of course due to the lower interest rate environment.
Our tax rate for the fourth quarter of 2008 was 36.5% compared to 54% for last year and again you’ll recall that the 2007 rate includes that charge related to the state income tax error that we reported on last year. Our 2008 full year tax rate was 38.2% and we would expect that our tax rate on the go forward basis would continue to be around that 38% to 39% range.
And one other note on taxes during the fourth quarter that 36.5% is a little lower then normal that’s because we did have a reclass out of the state income tax line of $390,000 [out] to state taxes because there is some portion of our state taxes that really are not based on income and they are required to be presented in G&A.
That gets us to our resulted net income line of $14.7 million for the fourth quarter of 2008 which is a 26% increase over 2007. Average diluted shares were down 9% due to our continual treasury stock buybacks. Fourth quarter 2008 diluted earnings per share was $1.27, that’s up 38% form the $0.92 that we reported in 2007’s fourth quarter.
Cash flow from operations for the fourth quarter was up about $232,000 to $20 million for the fourth quarter of 2008, that compares to about $19.8 million for 2007. CapEx was relatively light, $793,000 for the fourth quarter. For the full year of 2008 we had $5.3 million of CapEx compared to $5.9 million for 2007 and we would expect on a go forward basis to have capital expenditures of near those levels, that $5 to $6 million range.
At 12/31/08 we had cash in unpledged investments that totaled $60 million. We had total notes payable at 12/31/08 of $59.7 million, so more cash then we had cash investments then we had in debt. Our principal payments are $7.1 million per quarter. At least for the first quarter they’ll be that much, and then during the second quarter we will pay off that additional $10 million that we borrowed from the Bank of Oklahoma so our principal payments will reduce in the second quarter and then again in the third quarter.
But the average cost of that debt is 143 basis points over the 30 day LIBOR which puts us at about 1.9% is our interest rate on our existing debt. Our debt reprices right about the end of each month on a 30 days basis every single month and the December 2008 and January 2009 LIBOR rate was about 0.46 which kind of gets you to less then that 1.9% rate and because of that lower LIBOR rate environment we would expect right now if March reprices the same way, we’ll probably have about $400,000 less interest expense on notes payable and also don’t expect the change in that reserve associated with the Canadian interest expense exposure.
So we should see about an $800,000 improvement just on the interest line item. We are in compliance with all of our debt covenants. Under the most restrictive covenants we would have about $17 million available for stock buybacks beginning 01/01/09 and now just a real brief kind of overview of the year 2008 versus 2007, we did have $7.4 million more dollars in total revenue with $1.6 million less expenses, that gives us $9 million more in net income with the 10% fewer shares outstanding, gives us a 30% increase in diluted earnings per share for 2008 of $5.04.
Our 2008 [year-end] cash flow from operations was $64 million, you’ll note that’s $4 million higher then our net income which really highlights our very conservative earnings reporting model that we have. We have used our cash flow as follows, that $64 million we used $5 million for CapEx, $45 million to buyback our shares, $14 million in reduction of our debt. We did obtain an additional one million share approval from The Board since we had virtually completed all of the purchases of our previous 14 million shares that had been authorized and we certainly will be back in the market today.
With that I’ll turn it back to you Randy.
Ok Steve, we want to respond to any email questions that we receive and we’ve just received one but I do think it’s a good question and we have, I want to take time to respond to it. The question is “does Pre-Paid have plans to increase its web presence, for example, when one Googles legal forms, many sites for competitors are shown but not Pre-Paid Legal’s, will Pre-Paid be upgrading its website and offering more forms. What can Pre-Paid do to attract customers who might otherwise use the service like Legal Zoom or someone else”, and then it runs off the page, I can’t read it.
But anyway, “thanks for all the great work.” I think we’re always in the process, web presence is kind of like being on a treadmill, you don’t just develop one, and then you have it. Our web presence changes almost on a daily basis. We do have on our landing, main landing page a link to our form service center that contains lots of forms especially for our members but lots of forms even for non members because forms are something that especially when times are tight, you’re going to see more do-it-yourselfers.
The nice thing about having a pre-paid membership is even if you want to do your own form, you can then send it to the provider attorney to have it reviewed. I think that’s the difference between what we do and what Legal Zoom for example does. I’ll mention Legal Zoom because we do, we respect those guys, we have a relationship with those guys. In our opinion bright guys, and have done a wonderful job creating their environment.
The one thing that they couldn’t do and the reason that they came to see us was as you’ll know on their sites a lot of disclaimers about these forms have not been the forms that you buy or fill out, have not been reviewed by an attorney and so the reason they sought us out was because we had that piece of the puzzle and so we expect that and certainly hope that relationship with them continues to grow as it has again pretty consistently not to the levels that we would like it but that’s kind of like our own internal production and recruiting.
It will never be good enough and I want to update you just broadly on kind of what we’ve seen in January and February and broadly because I don’t have all the comparisons in front of me but and also one month doesn’t make a trend, but January was, we did get off to a slow start. We had implemented an alternative recruiting scenario. We had been recruiting new associates for $49 and on the first of January we put in place an alternative path if you will, that new associates can pay $249 and progress through the compensation structure more quickly if they do certain things and so after a slow January we have seen recruiting especially on that, after we implemented that new thing continue to increase and just looking at last year, 2008’s first quarter, February was the best month out of the first quarter of 2008.
From a production standpoint even though we’re seeing recruiting up nicely compared to last February production is about flat, has been flat the last couple of weeks. Some weeks may have been low single-digit decline but things are continuing to pick up. And I know talking to some of our top producers, the Rob Best of the world, Beth Taylor, Verna Heath, [inaudible] down in Mississippi, those type of folks who had very good years, Rob was our top producer. He produced over 5,200 memberships last year personally wrote 5,200 memberships.
In talking to those folks which we do on a regular basis, they are almost all without exception January was a better month for them then January of 2008 and so even though out total production and total recruiting will never be what we want it to be, its not a systemic problem. The folks that are out hitting the lick and working are having success. In fact I think all of the people that I mentioned will tell you there’s never been a better time for our product. They have companies now especially in Rob’s case, companies calling them wanting them to come in and hold meetings and sign up their employees and so we hope that trend certainly will continue and that other associates throughout the company begin to enjoy that type of market acceptability.
I think if you would ask our 100 top field leaders, 98 or 99 of them would tell you that the receptivity for our product and even the opportunity as people look to replace or supplement their income has never been better in the timeframe that those folks have been with us and some of those have been with us for a long, long time. Some of them predate me and I’ve been here 19 years.
So the important thing I think is our model continues to work and it’s a variable model meaning that, what I mean by that is we don’t have any big fixed costs. Most of the line item detail that Steve explained to you moves automatically up and down with production and those that don’t such as general and administrative we do have a great degree of control over that and as Steve mentioned, we have already put in place some G&A controls in response to the flat production that we’ve seen.
But even with that said, we still have more cash then we do debt. Cash flow exceeds our earnings which I think says a lot as Steve mentioned about the conservative nature of our reporting model. Payments to accrual, those decreased again in January so things are still, we still have a lot of good things, we continue to work. We’ve driven down a lot of areas of G&A for example in 2008 and efforts that we’re proud of so the model still works.
Things are still very, very good here. Our number one use of cash has always been, will always be to pay commissions to our sales force for increasing our membership base, that’s the best return on investment that we can generate for our shareholders. Again second best use that we’ve identified is to buyback our own shares and we’ve been doing that with a vengeance. As Steve said we’re now well under half of what the shares outstanding were when we began the product and so we certainly expect to continue.
We would love nothing more then to not be able to buyback shares because we’re writing so much new business its consuming our cash but until that happens buying back our stock I think is clearly the second best use of our cash and so we’ll continue to do so. Again, Steve and I appreciate your continued confidence. I know some of you have ridden the river with us for many, many years, we never take that for granted.
We talk about that internally a lot, probably I should share that more with our appreciation for you guys and gals more then we do but we strongly believe and it gets demonstrated to us in both increasing and decreasing production scenarios that we have a model that works, a model that produces results, allows us to grow and still produce cash flow, 2008 was the sixteenth consecutive year that we’ve increased the top line. Would be the first to tell you that it was not nearly acceptable but again take some comfort and some pride in the fact that we’ve been able to increase it 16 years in a row. In 2009, it may be the biggest challenge that we’ve faced in a while to continue that trend.
But I feel very good about where we’re positioned and the model that we have that if we do and the field does what they need to do that we’ll continue to extend that streak. Again we appreciate you being on the call today. I know you have a lot to do, other calls you could be on, so we appreciate it. We look forward to talking to you in April about the first quarter of 2009. Appreciate you being on the call today, thanks.
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