Trupanion, Inc. Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2017; filed November 2, 2017. Trupanion provides medical insurance plans for cats and dogs in the United States, Canada and Puerto Rico through subscription and other business segments. Financial statements are unaudited and prepared under U.S. GAAP.
Financial performance
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $63.1 million | $48.4 million | $176.1 million | $136.9 million |
| Gross profit | $11.8 million | $8.5 million | $31.3 million | $24.1 million |
| Gross margin | 19% | 18% | 18% | 18% |
| Operating income (loss) | $0.5 million | $(1.5) million | $(1.5) million | $(5.0) million |
| Net income (loss) | $0.4 million | $(1.6) million | $(0.7) million | $(5.2) million |
| Basic and diluted EPS | $0.01 | $(0.06) | $(0.02) | $(0.18) |
- Subscription revenue increased 27% year over year for both Q3 and the nine-month period, reaching $56.5 million and $159.4 million, respectively.
- Other business revenue increased 78% in Q3 and 53% for the nine-month period, but generated substantially lower margins than the subscription business.
- Q3 operating profitability improved to $0.5 million from a $1.5 million loss; nine-month operating loss narrowed to $1.5 million from $5.0 million.
- Other income for the nine-month period included a $1.0 million gain on the sale of an equity-method investment.
Operating metrics and margins
- Total pets enrolled increased 21% to 404,069 at September 30, 2017; subscription pets increased 15% to 359,102.
- Monthly average revenue per pet increased 9% year over year to $52.95 in Q3 and $51.67 for the nine-month period.
- Average monthly retention was 98.61%, unchanged from the comparable nine-month period.
- Lifetime value of a pet increased 12% to $701, while average pet acquisition cost increased 26% in Q3 to $151 and 18% for the nine-month period to $141.
- Subscription gross margin improved to 20% in Q3 and 19% for the nine-month period, compared with 18% in both prior-year periods. Subscription claims expense declined to 70% and 71% of subscription revenue, respectively, from 72%.
- Sales and marketing expense increased 25% in Q3 and 18% for the nine-month period, reflecting higher compensation, expanded marketing efforts and testing of new acquisition initiatives.
Cash flow, liquidity and debt
- Net cash provided by operating activities was $6.7 million for the nine months ended September 30, 2017, compared with $1.6 million in the prior-year period.
- Investing activities used $8.4 million, primarily for investment purchases, a $2.6 million note receivable, capital expenditures and other investments.
- Financing activities provided $2.9 million, including net debt proceeds and stock-option exercises. Cash, cash equivalents and restricted cash increased $1.6 million to $25.8 million.
- Cash, cash equivalents and short-term investments totaled $59.3 million at September 30, 2017. Total assets were $101.9 million and stockholders’ equity was $48.0 million.
- Long-term debt was $7.3 million on the balance sheet; borrowings under the revolving facility were $7.5 million, net of financing fees. The facility has capacity of up to $30.0 million, with $21.0 million of available borrowing capacity, and matures in December 2019.
- Management stated that existing cash, investments and available credit are expected to fund operations and statutory capital requirements for at least the next 12 months.
Material changes and unusual items
- Revenue growth was driven by enrollment growth and higher average revenue per pet, including pricing changes intended to reflect veterinary-cost inflation and the company’s cost-plus margin structure.
- Operating expense leverage improved: total operating expenses declined to 18% of revenue in Q3 and 19% for the nine-month period, compared with 21% in both prior-year periods.
- Claims reserves increased to $11.3 million at September 30, 2017 from $9.5 million at year-end 2016. Reserve estimates depend on actuarial projections and may change materially as claims develop.
- Deferred revenue increased to $22.7 million from $13.5 million at December 31, 2016, while accounts and other receivables increased to $20.3 million from $10.1 million.
- The company adopted accounting updates related to deferred tax classification and employee share-based payments during 2017.
Outlook, risks and contingencies
- Management expects to continue investing in member acquisition, technology, member experience and operations. No specific revenue or profitability guidance is provided in the filing text.
- Profitability remains uncertain: the company has an accumulated deficit of $81.9 million and cautions that growth, retention, acquisition costs and claims trends may not be sustainable.
- Key risks include increases in veterinary-cost inflation, claims frequency or severity, inaccurate claims reserves or pricing assumptions, lower retention, rising acquisition costs and intensified competition.
- Insurance subsidiaries are subject to risk-based capital, dividend and other regulatory restrictions. APIC’s required risk-based capital was $25.8 million as of December 31, 2016, compared with $30.5 million maintained; requirements may increase as enrollment grows.
- The credit facility contains financial and non-financial covenants, including revenue, claims-ratio, cash-flow and EBITDA requirements. The company reported compliance with all covenants at September 30, 2017.
- Other risks include Canadian foreign-exchange exposure, regulatory approval of pricing and licensing, reliance on veterinarians and Territory Partners, technology and data-security failures, litigation and the potential termination of third-party insurance arrangements.
- Ordinary-course litigation and claims exist, but management does not currently believe they are material individually or in the aggregate.
Facts investors should verify
- Whether enrollment growth and higher revenue per pet continue to offset rising pet acquisition costs and claims expenses.
- Whether the company can sustain positive quarterly operating results and achieve profitability despite its accumulated deficit and continued investment plans.
- The adequacy of claims reserves and the effect of veterinary-cost inflation, claim severity and claim frequency on future margins.
- Availability of cash and investments for corporate operations after considering statutory capital and other insurance-company restrictions.
- Compliance with revolving-credit covenants and the impact of the December 2019 maturity date.
- Whether pricing approvals, retention rates, referral relationships and regulatory developments support the company’s stated growth strategy.