Pre-Paid Legal Services, Inc. ( PPD)

Q1 2011 Earnings Call Transcript

April 27, 2011 8:30 am ET


Randy Harp – President, Co-CEO and COO

Steve Williamson – CFO



Good day ladies and gentlemen, and welcome to the Pre-Paid Legal first quarter earnings results conference call. At this time, all participants' are in a listen-only mode. (Operator instructions)

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

Randy Harp

Thank you Ally. I want to welcome everyone to the 2011 first-quarter 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 like to remind everyone 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 those 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 announcing our earnings as well as disclosures in our other public reports on Forms 10-K, 10-Q, and 8-K and any amendments filed thereto with the SEC, and those reports are available both on the SEC’s EDGAR website as well as Pre-Paid Legal’s website.

As we have mentioned previously and publicly announced, we entered into a definitive merger agreement on January 30, 2011 with newly created entities formed by MidOcean Partners, a New York private equity firm, and the merger agreement provides that MidOcean will acquire all the outstanding shares of Pre-Paid for a cash payment of $66.50 per share, or approximately $650 million in the 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.

We expect the merger to close as we anticipated sometime in the late June, July timeframe. Additional information regarding the merger is included in a proxy statement we filed with the SEC and upon SEC approval will be provided to shareholders. So we will not be responding to any 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 the first quarter of 2011. Steve?

Steve Williamson

Thanks Randy. Total revenue for the first quarter of ’11 compared to '10 was down about $7 million. Expenses and taxes were down were down about $5 million, resulting in about $2 million or 10% decrease in net income. With 3% fewer shares diluted EPS was down 8%. On a sequential basis, the membership fees were down $2.2 million.

Kind of stepping through on a kind of more detailed basis on a line item by line item, membership fees for the first quarter of 2011 decreased $4.8 million over the first quarter of 2010. It is about a 4.4% decline. Membership fees, as you all know by now are driven by average premium in force, which was down around 5%. That actually is equal to the product of the average number of members times the average annual fee that those members are paying.

Associate Services revenue decreased $2.2 million, primarily due to the associate fee revenues, which was a result of a big drop in the new recruits, 16,000 versus 38,000, and partially offset by higher enrolment fee. We went through the higher Fast Start fees, which averaged $147 for the quarter versus $70 for the prior year’s quarter. We also saw a slight decline in e-Service fees. They were down $269,000 for this quarter compared to the last year’s quarter.

Other revenue, which is primarily that three year amortization of that $10 enrollment fee, they were down $32,000 at $851,000 for the quarter. Membership benefits decreased 4.5%, very consistent with the 4.4% decline in membership revenues. The benefit ratio for both quarters were 33.2%. In that we have all the benefits from the renegotiated Kroll contract, and expect that ratio to be pretty consistent on a go forward basis.

Commissions were down 20% to $23.7 million primarily due to the decline in production, 24% decline in annual membership premium sold for a quarter. Commissions on a per unit basis or per member basis came in at $220, which is $4 higher than the first quarter 2010, represented 71% of new premiums sold. So pretty consistent with what we have had in earlier quarters.

Associate Services costs was $648,000 higher than Associate Services revenue for the first quarter of 2011 versus in 2010 we actually had more revenues and costs to the tune of about $2.5 million.

G&A increased $2.8 million, primarily due to the additional expenses associated with the advisers and special committee, both financial and legal. And those of course all resulted in the merger that Randy was talking about previously. We also saw an increase in legal fees, over $300,000 increase in legal fees, primarily due to the litigation that ensued around the merger.

We did see some offsets, some decreases in employee costs, bank service costs, telco costs and postage, some of the items that can be tracked with the top line.

Other expenses decreased $85,000 in the first quarter of 2011 versus 2010 due to a $218,000 decrease in interest expense, paid off the debt at the end of last year, so had no interest expense to speak of for the quarter. premium tax decreased 54,000, had a $244,000 decrease in depreciation and a $30,000 increase in interest income, and all that was partially offset about $500,000 litigation reserve. We did set up a litigation reserve this quarter.

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