Trupanion, Inc. — Q3 2015 Form 10-Q Summary
Business context and reporting period
Trupanion provides monthly subscription medical plans for cats and dogs in the United States, Canada and Puerto Rico. The filing covers the three and nine months ended September 30, 2015, with comparisons to the same periods in 2014. The company operates subscription and other business segments; prior-period segment data was recast to reflect a reporting reclassification effective January 1, 2015.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $37.9 million | $30.3 million | $106.8 million | $84.0 million |
| Gross profit | $6.6 million | $4.4 million | $18.0 million | $14.4 million |
| Gross margin | 17% | 15% | 17% | 17% |
| Operating loss | $(4.6) million | $(5.4) million | $(13.8) million | $(11.8) million |
| Net loss | $(4.6) million | $(8.5) million | $(14.2) million | $(16.9) million |
| Adjusted EBITDA | $(3.2) million | $(2.9) million | $(9.7) million | $(7.4) million |
| Net loss per share | $(0.17) | $(0.41) | $(0.52) | $(2.09) |
- Subscription revenue increased 27% to $34.4 million in Q3 and 29% to $96.7 million for the nine-month period. Other business revenue increased 8% in Q3 and 10% year to date.
- Subscription pets enrolled increased 26% year over year to 258,546; total pets enrolled increased 25% to 276,988.
- Monthly adjusted revenue per pet was $45.15 in Q3 and $44.88 for the nine-month period. Average monthly retention was 98.66%, compared with 98.67% in the prior-year period.
- Lifetime value per pet was $591 versus $580 for the nine months ended September 30, 2014. Average pet acquisition cost increased to $132 from $114, reducing the efficiency of member acquisition.
- Sales and marketing expense increased 41% in Q3 and 35% year to date, reflecting expanded online marketing, public relations, territory partner costs and personnel. Technology and development expense increased 19% in both periods.
- Claims expenses increased with enrollment growth, while subscription cost of revenue declined to 82% of subscription revenue in Q3 from 85% in the prior-year quarter. The other business segment produced lower gross margins, at 9% in Q3 and 8% year to date.
Cash flow, liquidity and capital structure
- Cash and cash equivalents were $21.7 million at September 30, 2015, compared with $53.1 million at December 31, 2014. Short-term and long-term investments totaled $25.6 million, producing reported cash, cash equivalents and short-term investments of $44.9 million.
- Operating cash flow was $(9.8) million for the first nine months, broadly consistent with $(9.7) million in the prior-year period. Investing cash flow was $(6.6) million, including $3.8 million of property and equipment purchases and a $0.3 million equity investment.
- Financing cash flow was $(14.6) million, primarily due to repayment of $14.9 million of debt. The company had no outstanding borrowings under its revolving facility and $18.4 million of available capacity at quarter-end.
- The revolving facility matures in July 2017, bears a variable rate subject to a 5% floor, includes financial and non-financial covenants, and had a $1.1 million standby letter of credit reducing availability. The company reported compliance with all covenants.
- Total liabilities were $25.1 million and stockholders’ equity was $47.4 million. The accumulated deficit was $71.4 million.
- Management stated that existing cash, investments and available credit were sufficient to fund operations and statutory capital requirements for at least the next 12 months, although additional financing may be pursued.
Material changes, outlook and unusual items
- Revenue growth remained strong, but adjusted EBITDA worsened year over year because the company continued investing in member acquisition and operating infrastructure.
- Net loss improved substantially versus Q3 2014 and the nine-month 2014 period primarily because the prior year included significant debt prepayment and debt-discount amortization expense, partly offset by warrant revaluation income.
- Management expects continued investment in sales and marketing, technology, member experience and personnel. It expects operating cash flow to remain negative until enrollment reaches levels sufficient to support cash-flow breakeven.
- The company targets a lifetime-value-to-acquisition-cost ratio of approximately 5-to-1, but acquisition cost increased materially year over year. Management expects new marketing channels and expansion of the territory partner network may further increase acquisition costs.
- A 10-year Seattle lease is expected to commence in April 2016 and requires approximately $21.0 million of rent over the initial term. Total operating lease obligations reported at September 30, 2015 were $21.8 million.
- The Washington State Office of the Insurance Commissioner issued a report concerning licensing of a subsidiary and certain employees. The company was preparing a response, had accrued $0.4 million, and stated that additional losses were reasonably possible but could not be estimated.
- Insurance subsidiaries are subject to risk-based capital, dividend and statutory-asset restrictions. Capital held for regulatory purposes may not be available for general operations or growth.
- The filing provides no specific quantitative revenue or profitability guidance. It includes customary caution that future results may differ materially from forward-looking statements.
Important investor verification items
- Whether enrollment growth and high retention persist while average pet acquisition cost remains elevated.
- Whether claims frequency, claims severity and the $6.2 million claims reserve are adequate as the member base expands.
- The pace at which operating losses and negative cash flow improve, including the effect of continued marketing and technology spending.
- The amount of cash and investments legally available for corporate use after insurance subsidiary capital, trust and dividend restrictions.
- The outcome and potential financial impact of the Washington insurance regulator matter, including any licensing or compliance remediation.
- Compliance with revolving-credit covenants and the availability of the $18.4 million credit line through maturity.
- The economics and execution of the new Seattle lease, the Trupanion Express direct-pay initiative and other technology investments.
- Exposure to Canadian foreign-exchange movements, regulatory approvals for pricing changes, competition and the company’s reliance on Omega for Canadian underwriting.