Pre-Paid Legal Services CEO Discusses Q4 2010 Results - Earnings Call Transcript

Pre-Paid Legal Services, Inc. ( PPD)

Q4 2010 Earnings Call

February 16, 2011 8:30 am ET

Executives

Randy Harp - President, Co-Chief Executive Officer and Chief Operating Officer

Steve Williamson - Chief Financial Officer

Presentation

Operator

Good day ladies and gentlemen, and welcome to the Pre-Paid Legal fourth-quarter earnings results conference call. At this time, all participants' lines are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Mr. Randy Harp, Chief Operation Officer. Please go ahead.

Randy Harp

Thank you and good morning. This is Randy Harp, Chief Operating Officer of the Company. I want to welcome you to the 2010 fourth-quarter and year-end earnings conference call for Pre-Paid Legal Services Inc. Joining me here in our home office in Ada, Oklahoma is Steve Williamson, our CFO.

Before we begin, I want 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 these 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 releases that announce these earnings as well as disclosures in our other public reports on Forms 10K, 10-Q, 8-K and any amendments filed thereto with the SEC, and are available on the SEC EDGAR website as well as our own website, PrePaidLegal.com, under Investor Relations.

As previously announced, we entered into a definitive merger agreement on January 30, 2011 with newly created entities formed by MidOcean Partners, a New York-based private equity firm. The merger agreement provides that MidOcean will acquire all of our outstanding shares for cash, cash premiums of $66.50 per share, or approximately $650 million in aggregate. The closing of the transaction is subject to certain terms and conditions customary for transactions of this type, including receipt of stockholder and regulatory approvals. Additional information regarding the merger will be included in a proxy statement to be filed with the SEC and provided to all shareholders. We will not be responding to e-mail questions regarding the merger on this call.

At this time, I'd like to ask our Chief Financial Officer, Steve Williamson, to step through the more significant financial highlights for both the 2010 fourth quarter and 2010 fiscal year. Steve?

Steve Williamson

Thanks Randy. First of all, just a big picture of the fourth quarter '10 compared to '09, total revenue was down $7.5 million. Expenses for taxes were down as well, which resulted in a $4.9 million or a 43% increase in net income. There were 7% fewer diluted shares outstanding that brought our diluted earnings per share up 54%. On a sequential basis, membership fees were down $479,000.

Then to kind of step through the fourth-quarter income statement line items by line item, the fourth-quarter 2010 membership fee decreased $3.8 million compared to the fourth quarter of '09, of course as a result of the fewer average fees in force. Associate Services revenue was down $3.6 million, primarily due to lower fee – associate fee revenues, which was a result of fewer new recruits. We had 28,000 new recruits in the fourth quarter of 2010 compared to 62,000 in '09. We also saw a decline of $269,000 in e-Service fees.

Other revenue, which you all know is primarily the amortization of that $10 enrollment fee over a three-year average life, was down $78,000 to $828,000. Membership benefits decreased 5.6% versus a 3.5% decline in membership revenues. That increased decline was due to the new contractual rates that we have with Kroll on our ID theft membership product. For, again, for 2010 versus '09, we had a 33.3% benefit ratio versus a 34% ratio over the 2009 period.

Commissions were down 30% to $26.4 million due to a 22% decline in annual membership fees sold. Commissions per member came in at $225, $29 lower than the prior year and represented 72% of new membership premiums sold.

Associate Services costs was higher than Associate Services revenue at $1.2 million in the fourth quarter 2010 versus $1.3 million for '09, so it came in about the same place on the comparable fourth quarter of '09.

G&A increased $2 million, primarily due to this $2.6 million of additional expenses that we had in conjunction with the special committee activities and their advisors. That was offset by decreases in employee costs, bank service charges, other taxes and postage.

Other expenses decreased $1 million in the fourth quarter '10 compared to '09 due to a $276,000 decrease in interest expense, a $171,000 decrease in depreciation expense and a $492,000 increase in interest income. The net result of the interest income and interest expense was primarily due to the settlement of our Canadian tax issue that we had relative to commissions. We settled that in the fourth quarter, received the payment from CRA. We still have a little left over from Ontario that is to be received more than likely this quarter.

Provision for taxes were approximately 41% for the fourth quarter 2010 and 40% for the fourth quarter of '09. Again, net income was up 33% to $16.3 million. 7% decline in diluted shares outstanding of course due to the buyback program. Fourth-quarter 2010 diluted EPS came in with an increase of 54% to $1.66.

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