Pre-Paid's Pickle Gets Juicier

The long slide continues at Pre-Paid Legal Services (PPD Quote).

For a full year now, the embattled legal services company has failed to attract new customers and sales associates at the rapid clip of its glory days. During the third quarter, Pre-Paid added 15% fewer customers than it did a year ago. And it recruited less than half the number of sales associates -- who are crucial for future sales -- as it did in the same period last year.

Meanwhile, the company's overall customer base barely budged. Even after adding some 168,356 new customers, the company ended the quarter with only 15,000 more customers than it started with.

"The business is growing at a snail's pace at best," said one short-seller. "And the recruiting is just a joke."

Pre-Paid declines to comment for stories in TheStreet.com, saying it believes they are biased. Pre-Paid shares -- heavily shorted by hedge funds -- slipped a penny to $23.90 on Thursday.

Behind the Numbers

To be fair, the quarter wasn't a total disaster.

Although the company lost a huge number of customers -- equal to 11% of its total membership base -- it has lost more than that before. Until now, in fact, Pre-Paid had been shedding more than 160,000 customers quarterly for an entire year.

Still, critics have cast doubts on Pre-Paid's true customer retention rate. Pre-Paid associates themselves claim that the company continues to count customers as "active" long after they've canceled their policies. So short-sellers tend to view Pre-Paid's total customer count -- supposedly up 2.3% from a year ago -- with considerable skepticism.

"That's an area where we think the company is playing serious games," said one.

Pre-Paid has repeatedly pledged to improve the low customer retention rate that chips away at its customer base. (The company loses roughly half of all new members after just one year.) And reports from the field indicate that the company has taken some drastic steps to keep new members on the books. For example, one highly productive sales team reportedly saw their commission checks shrivel as punishment for the poor retention of customers they'd signed up over the Internet.