Trupanion, Inc. 2019 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2019, filed February 13, 2020. Trupanion provides medical insurance for cats and dogs in the United States, Canada and Puerto Rico through a subscription business and an other business segment that writes policies for third parties. Subscription revenue represented 83.7% of total revenue; other business represented 16.3%.
Total pets enrolled increased to 646,728 at year-end from 521,326 in 2018, while subscription pets increased to 494,026 from 430,770. The company had 738 employees at December 31, 2019.
Financial and operating metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $383.9 million | $304.0 million | +26% |
| Subscription revenue | $321.2 million | $263.7 million | +22% |
| Other business revenue | $62.8 million | $40.2 million | +56% |
| Gross profit | $64.9 million | $51.4 million | +26% |
| Gross margin | 16.9% | 16.9% | Stable |
| Operating loss | $1.9 million | $1.0 million | Loss increased |
| Net loss | $1.8 million | $0.9 million | Loss increased |
| Net loss per share | $0.05 | $0.03 | Loss increased |
| Cash flow from operations | $16.2 million | $12.7 million | +27% |
| Cash, cash equivalents and short-term investments | $98.9 million | Not clearly comparable in the filing summary | |
| Debt outstanding | $26.2 million | $12.9 million | Increased |
Cost of revenue was $319.0 million, or 83.1% of revenue. Veterinary invoice expense was $270.9 million. Technology and development expense was $10.1 million, general and administrative expense was $21.0 million, and sales and marketing expense was $35.5 million. Stock-based compensation expense was $6.8 million.
Average monthly retention was 98.58%, monthly average revenue per subscription pet was $57.52, lifetime value including fixed expenses was $523, and average pet acquisition cost was $212. The company’s $21.2 million reserve for veterinary invoices was a significant estimate and the filing’s critical audit matter.
Year-end working capital was $67.2 million, total assets were $257.2 million, total liabilities were $120.4 million, and stockholders’ equity was $136.8 million. The company generated $16.2 million of operating cash flow, used $28.0 million in investing activities, and received $14.0 million from financing activities.
Material changes versus the prior comparable period
- Revenue increased 26%, driven by 15% growth in subscription pets, a 6% increase in monthly average revenue per pet, and substantial growth in the other business segment.
- Gross margin remained approximately 17%, while subscription gross margin remained approximately 18%.
- Sales and marketing expense rose 42% to $35.5 million, and average pet acquisition cost increased 29% to $212. Management attributed the increase partly to higher headcount and conversion initiatives.
- Operating loss widened to $1.9 million from $1.0 million, and net loss widened to $1.8 million from $0.9 million, despite increased revenue and operating cash flow.
- Debt increased to $26.2 million from $12.9 million. The company had $23.3 million of available borrowing capacity under its $50.0 million revolving credit facility and remained in compliance with its covenants.
- Investing cash outflows declined substantially from 2018 because the prior year included the $55.0 million cash portion of the headquarters acquisition.
- The board authorized a $15.0 million share repurchase program in November 2019; no shares were repurchased during 2019.
Fourth-quarter performance and outlook
Fourth-quarter 2019 revenue was $105.5 million, gross profit was $17.7 million, operating income was $0.6 million, and net income was $0.6 million, or $0.02 per diluted share. This compared with fourth-quarter 2018 revenue of $82.6 million and a net loss of $0.3 million.
The company stated that its cash, cash equivalents, short-term investments and available credit were sufficient to fund operations and capital requirements for the next 12 months. The filing does not provide a clear numerical revenue or profit forecast for 2020. Management planned continued investment in member acquisition, retention, veterinary-hospital relationships, software automation, member experience, international expansion and other revenue opportunities.
Key risks include the company’s history of cumulative losses, rising acquisition costs, dependence on high retention and veterinary referrals, uncertainty in veterinary invoice reserves and pricing assumptions, extensive insurance regulation, risk-based capital requirements, foreign-exchange exposure, technology and cybersecurity risks, competition, reliance on third-party underwriters and general agents, and potential volatility in operating results.
APIC had statutory capital and surplus of $73.8 million at year-end, above the $55.3 million level identified to avoid additional regulatory oversight. The Canadian trust account held CAD $4.3 million. The company has not transferred its insurance risk to third-party reinsurers.
The company reported limited ongoing regulatory matters concerning whether certain employees involved in telephone enrollments were required to hold insurance licenses. It stated that prior matters were resolved in non-material amounts and that it had adequately reserved for the remaining matters. No material litigation was identified in the filing.
Most important facts for investors to verify
- Whether revenue growth can continue while sales and marketing expense and pet acquisition cost remain elevated.
- Whether the company can achieve sustained consolidated profitability rather than relying primarily on operating cash flow.
- The adequacy of the $21.2 million veterinary invoice reserve and sensitivity to claim frequency, severity, medical-cost inflation and reserve development.
- APIC’s statutory surplus, risk-based capital requirements, dividend restrictions and the availability of insurance-subsidiary cash to fund corporate operations.
- Debt maturity, variable interest exposure, credit-facility covenants and the $23.3 million reported borrowing availability.
- Growth and margin contribution from the lower-margin other business segment, including dependence on general agents and third-party relationships.
- Trends in monthly retention, monthly revenue per pet, lifetime value and acquisition cost, particularly because the filing modified the lifetime-value calculation to include fixed expenses in 2019.
- Execution and financial impact of international expansion, the Australian joint venture, the pet food initiative and other strategic investments.