Pre-Paid Legal Services, Inc. (NYSE:PPD)
Q1 2010 Earnings Call Transcript
April 28, 2010 8:30 am ET
Randy Harp – Co-CEO, President and COO
Mark Brown – Co-CEO, SVP and Chief Marketing Officer
Steve Williamson – CFO
Good day ladies and gentlemen and welcome to the Pre-Paid Legal Services first quarter earnings results conference call. (Operator Instructions)
I would now like to turn the conference over to your host Mr. Randy Harp. Please go ahead.
Thank you, Ellie. Good morning this is Randy Harp, Co-CEO, President and Chief Operating Officer of the company. I want to welcome you to the 2010 first quarter earnings conference call for Pre-Paid Legal Services Inc.
Joining me here at our home office is Mark Brown, our Co-CEO, Senior Vice President
Chief Marketing Officer as well as Steve Williamson, our Chief Financial Officer.
Before we begin, I would 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 our earnings as well as from disclosures in our public reports on Forms 10-K, 10-Q and 8-K and is getting amendments thereto filed with the SEC and all of those are available on the SEC at the website www.sec.gov or our website prepaidlegal.com.
I will now turn the call over to Mark Brown for his comments.
Thank you, Randy very much. And it is a pleasure to be on the call this morning. And I just wanted to talk a little bit about our product, and honestly why I'm able to be here at One Pre-Paid Way. And my 15 years in our pre-paid legal business came about because of the very membership that we offer in North America.
And I had a printing business for 18 years. I was sold the product by a printing customer of mine early on in the early part of 1995. And I had an ongoing situation at the time, and I bought the membership because I was, like most Americans are, I felt locked out of the legal system. I felt like it was an exclusive country club I couldn't join. I did what a lot of people do. I tried to handle the problem myself or ignored it. What I find – what you find when you do things like that though, when you have a problem on your mind it causes you to lose sleep, you become unproductive.
So I bought the membership and used it immediately. And the law firm simply wrote a letter on my behalf, and a week later I had a resolution to my problem. It was a debt situation. I didn't know that they – this other company had me owning that and were gunning me for it. What I found, and what I want to – what I always try to share with people is some things that our membership does that I think is extremely valuable. Number one, I got to – as part of our membership, I got to call the law firm. They called me back with a lawyer in the area that I needed. And I got to unburden myself to that gentleman and tell him the story. I had been kind of compartmentalizing it, kind of keeping it to myself, trying to figure it out, trying to handle it. I was losing sleep. I was unproductive. I unburdened myself to him. He – fortunately, they were able to write a letter for me, sent me a copy of it. A week later I had a resolution to the situation.
Now, I always tell people I am not trying to tell you we have a magic law from there and they wrote a magic letter. The magic was, Randy, I never had to leave my office to get that done.
I didn't throw a dart at the Yellow Pages. I didn't run all over town, take a check out of my checkbook, trying to figure out where to go, how to handle it. I simply made a call from my office. I unburdened myself to this gentleman and once I got a resolution to this, I kind of reflected back over that week and the past three months that I had been dealing with this issue. And number one, what happened to me in my – in having this membership was number one, after I unburdened myself to that lawyer that day, I slept better that night. I think anybody who has probably gone to bed with a problem on their mind, couldn't go to sleep worrying about it. I slept good that night. I became more productive that week. I actually got back to work. I actually didn't think about that problem again, like I had been obsessing over it.
And just sitting there in my office after I got that call talking about the resolution to this situation, I just thought, man, everybody is going to have this. Unbelievable that I have never heard of it and if people would just understand what it did, everybody would have it because the world we live in is more complicated today than it was 15 years ago when I bought the membership.
And so as a non-Pre-Paid Legal associate, as most people do when you have something good happen to your life. I don't care if it is a good movie, you see it, a good restaurant, or you read a good book, whatever it is. You like to transfer that belief and tell other people about it. Not necessary to sell it to them, but just tell them about it. For the next couple of weeks that is what I did.
Every human I came in contact with I told them that there's a company out there that you can have unlimited per subject matter phone consultation and contracted document review and phone calls and letters written and made on your behalf, and a will written and updated, along with a durable power of attorney and a living will, and traffic tickets defended. I always tell people if I get a speeding ticket and I am guilty, then that I don't mind paying the fine. I just don't want to pay the State Farm fine. Help us keep it off our driving record. Help us defend ourselves with litigation protection with actually having hours every year, if you are named a defendant or respondent or you're sued, you or your spouse – IRS protection. Even a preferred member discount offered for existing conditions bankruptcy, drug or alcohol related situations.
And the greatest thing is you can get a hold of your lawyer for certain emergency situations in the middle of the night, Christmas morning, if you need to.
Just telling people about my story and what happened, I became an associate. I became a marketing person at Pre-Paid Legal, because the majority of people I talked to – not trying to sell them, but just the majority of people I talked to wanted more information, wanted to know more about it. I wanted to get out of the printing business anyway, because that business had changed dramatically.
And I became an associate in February of 1995. And I have been telling people about it ever since, because it is just the best value out there for literally $26 a month or less, depending on what market you are in and what product of ours you buy, it covers your entire immediate family. It gives you more value – you could not even put that 26 bucks or less – you could not even put a value on that, how much that does for you. How it helps you sleep better at night. How it helps you to be more productive.
I always say, let the experts do what they do best so you can go back and do what you do best and that is the best way I think to live your life in this country. And that is – that is my goal is – my position now with the company, as it was 15 years ago, is telling people about it, because we got the best deal out there.
Thanks Mark, and thanks again. I believe as obviously Mark does and I know Steve does that our members receive more value every month than they pay us in cash and the thing that we have and a lot of people say is that when you combine our life events legal plans and our identity theft products and our legal field 24/7 access to our provider law firms, there is no other company out there that can deliver that suite of benefits. So we do, we are in a – I think a sweet spot from a market standpoint, we are the only ones that can deliver that kind of trifecta of coverage.
So, with that I would ask Steve Williamson, our Chief Financial Officer to set through some of the most significant financial highlights for the 2010 first quarter. Steve?
Okay, will do. I will kind of start with kind of an overview. The total revenue for the first quarter 2010 compared to first quarter ’09 was up 3.1 million. Expenses and taxes were up 1.4 million that resulted in an increase of 1.7 million or 10% increase in net income. With 10% fewer shares, diluted EPS was up 23% to $1.87.
And stepping through the details, membership fees were up slightly about 400,000 over '09 due to average premium in force being slightly higher. So we are, kind of, tracking sideways, if you will from the previous year comparison.
First-quarter 2010 associate revenue was up 2.7 million, which included an increase in the associate fees, primarily due to the higher levels of new recruits, a 1.5 million increase in eService fees. And I might remind everybody that associate fees, just like member fees, although we are close to cash, we are effectively pushing cash flow back, because we recognize our associate fees over five months. And so said in another way, our actual recognized associate fee revenue was over a $1 million higher that we recognized versus the cash flow.
If you look back to our production report and you take the total associates recruited, multiply that times the average associate fee, you get about 2.6 million, and we recorded about 3.7 million in associate fee revenues. So just a little heads up on how that works and why we are kind of showing a little bit more on the associate services revenue than we are (inaudible). So part of it is just the way we recognize that.
And again, the eService fees were actually up. On a go-forward basis I expect those to come down. We tend to get a higher level from our very high recruiting efforts in the third and fourth quarter. So I guess that don't be expecting the same differential between associate services revenue and associate services cost in the future, because it won't be there.
Other revenue, primarily it is a $10 enrollment fee that we amortize in over a three-year period. That declined about $50,000 for the first quarter of 2010.
Stepping down into the membership benefits; Membership benefits decreased about 1.4%, more than the 0.4% decline in the membership revenue line because of the ID theft member cost savings. Again, we hit that for the last time this quarter, having that savings kind of moving into play over several years there. That was that $0.25 reduction that hit. So our ratio came in at about 33.2% for the first quarter of 2010 versus 33.9 for '09. I would expect that we would be really close to that 33.2, maybe a couple of ticks higher or lower on a go-forward basis, because all of those savings have been baked in now.
Commissions increased 9.3%, mainly due to the 9.5% increase in membership sales. It kind of tracks, again, like we said before commissions are going to follow the number of members and the average membership fee sold, it is going to track that number very closely. Commissions per member were $220 for both quarters. And it came in at around 68% to 69% of membership fees written for both periods. So, very much in line with what we would expect.
Associate services and direct marketing costs, they were 2.5 million less than the first quarter of 2010 versus the 1.5 million excess cost for '09. As I said before, I wouldn't expect that big differential to be in play on a go-forward basis.
The increased revenue, I have already talked about was 1.5 of it was the associate fees. But the bonuses were lower this quarter. Players club expenses and the associate support costs, the two big departments that answer the phones and help the associates, the costs associated with that were lower. And I will go over some of that, kind of, because that ties into some of the G&A.
We have just done a better job of managing over time and some of our health-related cost. A lot of the costs on the associate support costs are just our employees that are helping the associates out in the field, answering phones, answering the questions.
G&A decreased 1.1 million, primarily due to the decrease in the employee costs and that includes both the hourly costs, as well as the health insurance benefits. Again, we basically were able to let attrition kind of take care of matching up the G&A expenses with the top line as we backed up a little bit on the top line side.
And the result is, is we came in at about 11.5% of membership fees compared to what we had in prior years we have – or prior quarters. This is actually the fifth consecutive quarterly decline that we had.
Some of the other areas – and again, the employee cost is by far the largest portion of that reduction, that $1.1 million reduction. But other areas that we had some decreases in were in legal fees, PCI consultant fees. We have had – did have some increases in bank service fees, telco fees, and also computer maintenance costs for all the computer equipment that we have around here.
Other expenses, they were actually down – or $91,000 higher than they were in the prior-year's first quarter. 2 million of that was depreciation expense, which is actually down $118,000. And as you have seen, considerably lower Capex levels that we have had in the last few quarters, so we are seeing the depreciation come down some.
Premium taxes were about the same at $469,000 this quarter. Interest expense was down 130,000. It came in at 232,000 for the quarter. Of course, that is due to lower debt levels and lower interest rate environment. Interest income was down 330,000 to 291,000. A lower interest rate environment is why that was down as well.
Provision for taxes came in at 39% versus 38% for the '09 period. Due to some of the states, as I think I've mentioned on the call before, their budgets are having some issues and they are passing some of that on to us. So we are going to probably have somewhere around 39% to 39.5% tax rate on a go-forward basis.
Net income resulted in an increase, 10%, to a record of 18.8 million for the quarter with a 10% decrease in diluted shares outstanding due to our stock buyback program, that brings us to a diluted earnings per share that is up 23% to a record $1.87.
And to hit some of the other items, the non-income statement items. We did purchase 39,510 shares at an average price of 39.70 for the quarter. Shares outstanding are approximately, as we speak today, 10,009,209 [ph]. So 9,209 and we break the magic 10 million share barrier, where we can get there and it makes my EPS calculation a lot easier.
At 12/31/09, cash and investment totaled 71.6 million versus debt of 32.7 million. And I think we had like 40-something million in just cold, hard cash. So we very easily could be debt free if we care to be. But we have some pretty inexpensive debt and the cash flow requirements were pretty modest. Debt payments are 4.6 million per quarter. For 2010 at March 31, the average cost of our debt is – all of it tied to LIBOR, but the average is LIBOR plus 137, which puts us at about interest cost – pretax interest cost of about 159. Our debt reprices on a monthly basis, and it is tied to the 30-day LIBOR.
We are in compliance with all the debt covenants, the most restrictive of which would give us about $31 million available to date that we could buy back shares, pay dividends or have debt reductions during the second quarter of 2010 [ph].
And just in closing that we will continue to be very focused and disciplined on how we deploy the excess cash that this great model generates. We will evaluate many factors including, but not limited to, just the overall economic environment, the existing share price of our shares, our prospects for growth, the retention rates, cost of new debt, as well as all the debt covenants and restrictions that we have.
And based on all those factors we are going to either acquire shares, pay dividends, retire debt or accumulate cash or do a little or a lot of each. Again, that is just kind of a moving target, it is hard to pin down exactly what we will do, but we will go through that same process every time at the end of the day trying to make the decisions that are best for the long-term shareholders. Randy?
Thanks Steve, and again our cash flow exceeding reported earnings continues the strength of last ten plus years, I think now where our cash flow exceeds our reported earnings, so it continues to be I think a conservative reporting (inaudible).
We now want to respond to any email questions that we received and we haven’t previously addressed this morning or in our 10-Q which we filed yesterday and utilizing our respective strengths, I’ll read the questions and let Steve or Mark answer them.
We have three questions today. I’ll read them in order. You have stated over the years that the best use of your excess cash flow is to add quality members and repurchase stock. In the quarter your cash flow exceeded 26 million and you purchased 1.6 million of stock, why didn’t you purchase, why didn’t you repurchase more stock?
Well, the short answer and it’s probably appropriate for me answering that one is we had debt covenants that limited that. So, if you look back at all disclosures in our 10-K, we had little under $2 million that were available to us under the calculations and if you kind of go with calculations the excess of cash flow calculation and an existing cash on the balance sheet calculation, the lower of those two is what we get to use and we had been so aggressive during the fourth quarter buying back shares that we didn’t have any availability left.
And then in fact, we have always stated that the best use for our cash is to pay commissions for the growth of the new memberships or buy back stock. The only asterisk, and one of the things is we really have not been at the price where that has really been the question that I always want to go out there that – if we are trading today at $120 a share, we are probably not going to buy any shares. If I am just adding that one, little caveat there.
Well, and if I remember right, we bought over 900,000 shares in the fourth quarter. So we kind of spent all the change that we had in our pockets in the fourth quarter and had to build up more during the first quarter of 2010.
Next question. From your recent sales convention, were there any new marketing plans introduced or new training programs introduced to increase production?
For those of you that may not be familiar, we have two events a year for our sales force. We just completed our international convention in Oklahoma City about three weeks ago, and really didn't introduce any new marketing plans. Mark, I might get your comments on some of the new incentives that were rolled out at that – at international convention.
Yeah, Randy, I would love to comment on that. On that convention we really did focus on our product, and just a great value, as you talked about earlier. A member gets, excuse me, far more value than what the monthly premium is and coming out of that convention we always want to help our marketing folks out in the field increase and do more, and so we came up with a bonus program that really hit several levels. It helps newer folks as they move up through our system. It helps existing top producers and our top executives maintain, which is important, maintain their position, but grow their position.
And we tied this into a bonus program that I believe is just great for the company and great for our sales force which is, the main part of this bonus, or the larger part, is tied to a growth in what we want to see in the next few months up – I think it goes through August is a – this bonus is partly tied to a 20% production growth and we need them as a benchmark to exceed what we did in March. In other words, we gave them a bar and they have to exceed that and grow that.
And if we can grow that production by 20%, they get a larger part of the bonus. And we just think it is a very, very positive way to use money to help incent and create a bonus pool for these folks.
One of the things that – and I have talked to a couple of shareholders and explained this. One of the – sometimes we will come up with some ideas inside here, and then when we start talking about it in the field, they will see other pieces that make an awful lot of sense.
And one of the things that, kind of, resonated with me was because in order for the ED, the Executive Director, the highest attainable level, or the level that you have to actually requalify for each month, one of the benefits we have is they have to maintain that level over a five-month period, four out of five times, to meet some of these requirements and have the bonuses and if they maintain that level, you just build a stronger Executive Director. Because when they first get there they may work really, really hard to get to that level. It is a difficult level to attain. And if you don't put a carrot out there to have them keep doing that, they might fall back at the Director level. And then all of a sudden they're getting paid less for membership, and a lot of times you lose them.
So the field really liked it, because they thought that it would extend the life of that associate that made ED for the first time. And also we did maintain some of the existing bonuses that I think I have talked about last time, where if you are a manager – if you make it to manager or Director 25 or Director 50, so we still have this broadly spread set of bonuses that keep people focused as they, kind of, march through there. Again, one of the things we really like about this program is that we hope it will attain, and our goal is to attain, is to give them a carrot out there real close to keep them focused, and basically extend the life of the associates.
So hopefully the average life will go up from the five months that we have currently.
Well, March was the best production month of the first quarter, and so we used it as a metric. And I think – I have received good feedback. One of the things I really like is the longer-term nature of this incentives, instead of a one-month wonder this is based on a five-month push and again, as Steve said, it will help get people to a certain level, more importantly get them to stay at that level.
So the goal is certainly is a longer-term approach to a consistent, good quality business. And really the first time we have ever offered, I think, kind of a field-wide team effort. If the company's production increases 20% over the contest timeframe, then we will double the bonuses that are out there for the field.
And I have heard really good comments about that. And certainly have – I know Mark and I have both been on the road a lot traveling, and a very good feedback from the events that I have been to about, let's do our part. We don't want to be the only state that doesn't do the 20%, etc.
So just, I think, good friendly competition that will benefit us over the long haul.
And good calls from some of our top people, Randy, in stating what their goals are, and how they want to achieve them. And it really is like a great team pulling together to make this happen. It is very exciting.
It seem like we came out of the Oklahoma City event more cohesive than we have ever been.
And hopefully that turns into more memberships and more associates.
The last question that we have is, since cash and cash equivalents exceed total debt by almost 40 million, why don't you refinance your debt to allow greater flexibility in repurchasing stock?
It will and we have considered it. We talked about that on a pretty regular basis –
On regular basis, yes.
Yeah, sometimes more than once a day, we have even talked to the bankers and we've got some indications of pricing. And there is the first answer. They told us that there is no longer – that LIBOR plus 150 is not available anymore. We have kind of got to where we like that low interest rate that we are paying. But that is part of it.
The other is we have got $30 million in the bank and if you look at our average trading volume, it’s around 80 – probably 80,000. The number of trading days that I have available, I have more cash than I can spend in the open market doing an open market purchases right now. So I don't need any right now. Unless we do a tender offer, and when we do a tender offer that – you have got to let it sit for 30 days and it kind of takes you out of the market for a while. And we have grown to where we like doing the majority of our purchases in open market purchases, and just – it has worked pretty well.
So that is the other, and really a big one. I know you can't just call and all of a sudden you have money, but I think I'm set for this quarter.
And the other thing is that debt really just gets you to a certain level of stock purchases little bit earlier. We could be debt free today if we wanted to be with one phone call – actually three phone calls. And all of a sudden we have got $65 million [ph] a year we can do whatever we want to with, and not have to say another may I [ph] to anybody. And that is appealing.
So there is a number. But again, if I wake up tomorrow and we are trading at 30 because of the great job we have done on this call, we would probably have some more debt. A lot of it depends on price, but at the end of the day those are the three things that, kind of, keep us from pulling the trigger on that right now.
Very good. We do appreciate the questions. I want to wrap the call up today by just make sure everyone remembers our value proposition, if you will. The value proposition of our family coverage, the life events legal plan, our identity theft, I mean, we approach everything that we do with a win-win-win approach. We apply that to all the aspects of our business, because I think that is the only way over the long haul to develop long-term value for our shareholders.
So we have to – the way that we increase long-term value for our shareholders is very simple, we grow our membership base. There is not a more important metric than our membership base. In fact, all other metrics, kind of, pale in comparison to the importance of that one. And keep in mind, we provide a win, certainly, I think for our sales associates in the form of commissions, but we only pay commissions for sales that are actually closed and processed. We swap paper for paper. In essence we pay commissions for memberships based entirely on results. It is the purest form of pay per – for performance out there.
As the membership base grows, not only do sales associates benefit, but our provider law firms that – again, average tenure of our law firms now is in excess of 10 years that they have been with us and as you know, they receive a capitated per-member per-month fee electronically deposited in their account by us between the 8th and the 10th of every month. And they certainly win. As the membership base increases, the amount of the monthly payments we make to them increase in direct proportion to our membership base. They certainly win as well.
And certainly, last but not least, our shareholders – again, nothing determines our long-term success more than us growing our membership base and that will determine our revenues, our cash flow, our net income. Again, virtually every financial metric is impacted or dictated by our active membership base.
So the focus at Pre-Paid is, I think, more important than the providers, the sales associates, and our shareholders is that fee-paying member that is in the middle of those three elements, if you will, sales associates, provider firms and shareholders; that fee-paying member that we focus on has to receive more in value each month than they pay us in cash. They have to receive high value, high quality legal services delivered in a customer friendly manner on a consistent basis each and every time they pick up the phone and talk to our law firms.
And we've got a great company and a great opportunity in front of us for one reason; that is because we have a great product. And we can never get that out of order. We've got to always remember that is what – as far as the pre-paid legal world, it is our product that makes the world go round and has. It has allowed us to grow the company to the point we are at now and survive for 38 plus years.
More importantly, that great product and that growing membership base, that will take us all where we think this company ought to be. We all firmly believe we should be a multiple of where we are at today.
I am very proud of what we have done over the 38 years that the company has been in existence, but more excited about what we think we are going to be able to do on a go-forward basis.
So, again, Mark, Steve and I all appreciate your continued confidence. We don't take it for granted. We strongly believe that our business model is one that will continue to produce results that you can be proud of. We appreciate you being on the call today. I look forward to our next quarterly earnings call in late July. Thank you.
Ladies and gentlemen, that does conclude today's conference. You may all disconnect. And have a wonderful day.
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