Trupanion, Inc. — 2018 Q2 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. The filing covers the three and six months ended June 30, 2018, compared with the same periods in 2017. The business consists of subscription medical insurance marketed directly to consumers and an other-business segment consisting primarily of policies written for third parties.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $73.4 million | $58.3 million | $143.2 million | $113.0 million |
| Gross profit | $12.4 million | $10.4 million | $23.4 million | $19.5 million |
| Gross margin | 16.8% | 17.8% | 16.4% | 17.3% |
| Operating loss | $0.3 million | $0.6 million | $1.8 million | $1.9 million |
| Net loss | $0.4 million | Net income of $0.4 million | $1.9 million | $1.1 million |
| Net loss per share | $0.01 | Net income per share of $0.01 | $0.06 | $0.04 |
| Cash flow from operations | Not separately provided | Not separately provided | $1.6 million | $3.7 million |
Revenue increased 26% in Q2 and 27% for the six-month period. Subscription revenue rose 21% in Q2 and 22% year to date, while other-business revenue increased 69% and 75%, respectively. Veterinary invoice expense was $51.8 million in Q2 and $101.9 million year to date, representing the largest cost component.
At June 30, 2018, cash and cash equivalents were $95.4 million, short-term investments were $42.8 million, and long-term investments were $3.3 million. Total current assets were $173.7 million and total assets were $194.3 million. Current liabilities were $57.1 million, including $30.3 million of deferred revenue and a $14.0 million reserve for veterinary invoices.
Long-term debt was $18.6 million, compared with $9.3 million at December 31, 2017. Stockholders’ equity was $116.3 million, compared with $48.4 million at year-end 2017. The company reported $138.2 million of cash, cash equivalents and short-term investments and $20.2 million of available borrowing capacity at quarter-end.
Material changes versus the prior comparable period
- Total subscription pets enrolled increased 16% to 401,033, while total pets enrolled increased 23% to 472,480.
- Monthly average revenue per pet increased 5% to $53.96 in Q2 and $53.79 for the six-month period.
- Average monthly retention improved modestly to 98.64% from 98.57%.
- Lifetime value of a pet increased to $732 from $654, while average pet acquisition cost increased to $158 from $135 for the six-month period.
- Sales and marketing expense increased 30% in Q2 and 38% year to date, reflecting higher compensation, increased headcount and testing of new marketing initiatives.
- Gross margin declined from 17.8% to 16.8% in Q2 and from 17.3% to 16.4% year to date, primarily as subscription veterinary invoice expense increased faster than revenue.
- Operating loss narrowed year to date, but the company moved from Q2 2017 net income to a Q2 2018 net loss. The prior-year period benefited from a $1.0 million gain on the sale of an equity-method investment.
- Financing activities generated $76.7 million year to date, primarily from $65.9 million of net proceeds from a June follow-on public offering and $9.3 million of additional debt financing.
Guidance, outlook, commentary, risks and unusual items
Management stated that existing cash, investments and borrowing capacity were sufficient to fund operations and capital requirements for the next 12 months. No specific revenue or earnings guidance was provided in the filing text.
In June 2018, Trupanion amended its credit facility, increasing capacity from $30.0 million to $50.0 million and extending maturity to June 2021. Borrowings were $18.8 million, and the company was in compliance with its financial and non-financial covenants. Interest accrues at the greater of 4.5% or 1.25% plus the prime rate.
The company entered into an agreement to purchase its Seattle headquarters for $55.0 million in cash and 303,030 common shares. It paid a $3.3 million earnest-money deposit, which is generally non-refundable but creditable toward the purchase price. Closing was expected no later than January 1, 2019, subject to customary contingencies.
On July 18, 2018, after quarter-end, the company invested approximately $3.0 million in a privately held corporation, committed to potentially purchase an additional $4.0 million of equity during the following 18 months, and extended a revolving credit line with maximum capacity of $2.5 million.
- Key operating risks include continued net losses, inability to achieve profitability, rising pet acquisition costs, and dependence on assumptions underlying lifetime value and retention metrics.
- Veterinary invoice reserves are based on actuarial and management estimates and may prove inadequate, particularly if claim frequency, treatment costs or invoice-processing costs increase.
- Insurance regulation and risk-based capital requirements may restrict the use of subsidiary assets and limit the ability to transfer capital to the parent company.
- The company relies on veterinarians, Territory Partners and other referral sources for customer acquisition; loss or deterioration of these relationships could impair growth.
- Competition, pricing approvals, foreign-exchange movements, technology failures, cybersecurity incidents, litigation and regulatory inquiries could adversely affect results.
- The other-business segment has lower margins and depends on contracts that may be terminated or may not generate consistent enrollment volumes.
Most important facts for investors to verify
- Whether enrollment growth and the 98.64% retention rate continue without materially increasing pet acquisition costs.
- Whether veterinary invoice expense and reserve development stabilize sufficiently to restore or improve gross margins.
- Progress, final terms and funding of the planned $55.0 million headquarters acquisition, including the equity consideration.
- Compliance with the amended credit facility’s financial covenants and the effect of variable interest rates on debt service.
- Availability of cash held in insurance subsidiaries given statutory capital, dividend and risk-based capital restrictions.
- Whether the company can transition from recurring operating losses to sustained profitability without further equity or debt financing.
- The outcome of the post-quarter-end investment and its potential additional $4.0 million commitment.