Trupanion, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Trupanion provides medical insurance for cats and dogs in the United States, Canada and Puerto Rico through subscription and other business segments. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods.
Financial and Operating Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $78.2 million | $63.1 million | $221.3 million | $176.1 million |
| Gross profit | $13.7 million | $11.8 million | $37.2 million | $31.3 million |
| Gross margin | 17.6% | 18.7% | 16.8% | 17.8% |
| Operating income (loss) | $0.9 million | $0.5 million | $(0.8) million | $(1.5) million |
| Net income (loss) | $1.2 million | $0.4 million | $(0.7) million | $(0.7) million |
| Diluted EPS | $0.03 | $0.01 | $(0.02) | $(0.02) |
| Operating cash flow | Not separately provided | Not separately provided | $9.0 million | $6.7 million |
- Q3 revenue increased 24%; nine-month revenue increased 26%. Subscription revenue increased 19% in Q3 and 21% year to date, while other business revenue increased 62% and 70%, respectively.
- Q3 operating margin was approximately 1.2% and net margin approximately 1.5%. Nine-month operating margin was approximately negative 0.4% and net margin approximately negative 0.3%.
- At September 30, 2018, total pets enrolled were 497,942, including 416,527 subscription pets, up 23% and 16%, respectively, from the prior-year period.
- Monthly average revenue per subscription pet was $54.55 in Q3 and $54.06 for the nine-month period. Average monthly retention was 98.61%.
- Lifetime value of a pet was $714 and average pet acquisition cost was $155 in Q3; nine-month figures were $714 and $157, respectively.
- Cash and cash equivalents were $34.7 million, short-term investments were $39.4 million, and restricted cash was $1.4 million at September 30, 2018. Management reported $74.1 million of cash, cash equivalents and short-term investments.
- Total assets were $199.9 million and stockholders’ equity was $127.9 million, compared with $105.9 million and $48.4 million, respectively, at December 31, 2017.
- Long-term debt was $8.6 million on the balance sheet. The amended revolving facility had $8.8 million of borrowings, $28.9 million of available borrowing capacity and a $50.0 million maximum capacity, subject to borrowing-base limits.
Material Changes Versus the Prior Comparable Period
- Revenue growth was supported by higher enrollment, pricing increases reflecting veterinary-care costs and utilization, and substantial growth in the other business segment.
- Consolidated gross margin declined to 17.6% in Q3 from 18.7% and to 16.8% for nine months from 17.8%, primarily because veterinary invoice expense increased faster than subscription revenue.
- Sales and marketing expense increased 31% in Q3 and 35% for nine months. Nine-month average pet acquisition cost increased 11% to $157, partly reflecting higher headcount, new marketing initiatives and the timing of the Territory Partner conference.
- Technology and development expense declined 7% in Q3 and 6% for nine months as more resources were allocated to capital projects and previously capitalized software became fully amortized.
- The Company completed a $65.7 million net follow-on equity offering and issued 303,030 shares valued at $9.6 million as partial consideration for its corporate headquarters.
- In August 2018, Trupanion purchased its Seattle headquarters for $55.0 million in cash plus the shares issued to the seller. Property and equipment increased to $70.0 million from $7.9 million at year-end 2017.
- Net cash used in investing activities increased to $64.8 million, primarily because of $55.9 million of property and equipment purchases, including the headquarters acquisition.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing does not provide a clear numerical revenue or earnings forecast. Management stated that available liquidity is expected to fund operations and capital requirements for the next 12 months, while noting that additional financing may be pursued as the business grows.
- Management expects continued investment in member acquisition, member experience, technology, hiring and Territory Partner relationships. These investments may increase acquisition costs and delay or prevent sustained profitability.
- The veterinary invoice reserve was $14.2 million at September 30, 2018. Reserve adequacy depends on actuarial estimates, claim frequency, veterinary costs and payment patterns; actual costs may materially exceed the reserve.
- Insurance subsidiaries are subject to risk-based capital, dividend and other regulatory restrictions. A significant portion of cash and investments is held within regulated insurance entities and may not be freely available for general corporate purposes.
- The credit facility contains financial and non-financial covenants, including requirements relating to capital, cash, revenue, claims ratios, operating cash flow and EBITDA losses. The Company reported compliance at September 30, 2018.
- Trupanion committed to purchase up to an additional $4.0 million of preferred stock in a private company if that company exercises its option through January 2020, and extended a $2.5 million revolving line of credit to that company.
- The Company committed to contribute up to $2.2 million Australian dollars to a joint venture upon achievement of specified milestones over at least four years.
- Key risks include competition, retention deterioration, higher veterinary costs, inaccurate pricing assumptions, regulatory approval of rate changes, insurance-capital requirements, dependence on veterinary referrals, technology or cybersecurity failures, litigation and foreign-exchange exposure.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2018 and reported no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether enrollment growth and retention remain sufficient to offset rising veterinary invoice expense and pet acquisition costs.
- The adequacy and future development of the veterinary invoice reserve, including the impact of claim severity and veterinary inflation.
- The availability of cash held by regulated insurance subsidiaries and the Company’s compliance with risk-based capital requirements.
- Actual utilization of the revolving credit facility, borrowing-base restrictions and ongoing compliance with debt covenants.
- The financial returns, tenant occupancy and maintenance costs associated with the newly acquired headquarters.
- The potential cash requirements from the additional preferred-stock commitment, private-company credit line and joint-venture contribution obligation.
- Whether the other business segment’s rapid growth is sustainable and whether its lower historical margins or contract termination provisions could affect future results.