Trupanion, Inc. — FY2018 Form 10-K Summary
Business context and reporting period
Trupanion provides medical insurance for cats and dogs in the United States, Canada and Puerto Rico through a vertically integrated, subscription-based model. The filing covers the fiscal year ended December 31, 2018; fourth-quarter information is included but the filing is an annual report.
- Total pets enrolled increased to 521,326 at year-end from 423,194 in 2017.
- Subscription pets enrolled increased to 430,770 from 371,683.
- Subscription revenue is primarily recurring monthly revenue; 87% of total 2018 revenue came from the subscription business.
- Average monthly retention was 98.60%, broadly consistent with 98.63% in 2017.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $304.0 million | $242.7 million | +25% |
| Subscription revenue | $263.7 million | $218.4 million | +21% |
| Other business revenue | $40.2 million | $24.3 million | +65% |
| Gross profit | $51.4 million | $43.1 million | +19% |
| Gross margin | 16.9% | 17.7% | Down approximately 0.8 points |
| Operating loss | $1.0 million | $2.6 million | Improved |
| Net loss | $0.9 million | $1.5 million | Improved |
| Net loss per share | $0.03 | $0.05 | Improved |
| Cash flow from operations | $12.7 million | $9.7 million | +31% |
| Cash, cash equivalents and short-term investments | $81.1 million | $63.3 million | Increased |
| Debt outstanding | $13.0 million | $9.3 million | Increased |
- Overall gross margin declined because cost of revenue increased to 83% of revenue from 82%, primarily as veterinary invoice expense grew faster than revenue.
- Subscription gross margin was approximately 18%, compared with 19% in 2017.
- Sales and marketing expense increased 31% to $25.0 million. Average pet acquisition cost increased 8% to $164, while subscription pets enrolled increased 16%.
- Lifetime value of a pet was $710, down from $727, while monthly average revenue per pet increased to $54.34 from $52.07.
- Stock-based compensation increased to $4.8 million from $3.4 million.
Liquidity, capital resources and unusual items
- Net cash used in investing activities was $81.5 million, primarily reflecting the $65.2 million acquisition of the Seattle headquarters and related property investments.
- The company raised approximately $65.7 million net in a June 2018 follow-on equity offering and issued 303,030 shares valued at approximately $9.6 million as part of the real estate purchase price.
- The revolving credit facility was increased from $30 million to $50 million and extended to June 2021. Available borrowing capacity was $36.6 million at year-end, subject to facility limitations and ancillary obligations.
- The facility bears interest at the greater of 4.5% or 1.25% plus the prime rate; the applicable rate was 6.75% at December 31, 2018. The company was in compliance with its covenants.
- APIC held $56.2 million of statutory capital and surplus versus a $53.4 million requirement to remain at the No Action Level.
- The company believes cash, investments and available credit are sufficient to fund operations and capital requirements for the next 12 months, but states that additional financing may be needed as enrollment grows.
Material changes versus the prior comparable period
- Revenue growth remained strong, but subscription revenue growth slowed to 21% from 26% in 2017.
- Membership growth accelerated modestly to 16% for subscription pets, compared with 15% in 2017.
- Veterinary invoice expense in the subscription business increased 23%, exceeding subscription revenue growth and reducing subscription margin.
- Operating loss narrowed from $2.6 million to $1.0 million, and operating expenses declined to 17% of revenue from 19%.
- Operating cash flow improved by $3.0 million to $12.7 million.
- Debt increased, while equity rose substantially due to the public offering and real estate-related share issuance.
- The other business segment grew rapidly but generated a substantially lower gross margin than the subscription business.
Guidance, outlook, management commentary and risks
The filing does not provide a clear numerical revenue or earnings outlook. Management expects to continue investing in member acquisition, veterinary relationships, technology, member service, international expansion and other growth initiatives. The company was entering the Australian market and may pursue additional international opportunities.
- Key operating risks include continued net losses, the possibility that growth and retention may not be sustainable, and uncertainty in lifetime-value and acquisition-cost estimates.
- Veterinary costs, utilization, pricing assumptions and reserve estimates could differ materially from expectations. The subscription veterinary invoice reserve was $13.9 million at year-end, including a $0.4 million increase related to prior periods.
- Insurance regulation may restrict pricing, require additional capital, limit dividends from subsidiaries or result in licensing, compliance, examination or enforcement costs.
- APIC’s capital surplus was only modestly above its stated risk-based capital requirement, and growing enrollment may require additional capital.
- The business depends heavily on veterinary and member referrals, independent Territory Partners, high retention and effective marketing channels.
- Competition, foreign exchange movements, technology or cybersecurity incidents, privacy requirements, payment-processing issues and litigation could adversely affect results.
- Approximately 19% of revenue was generated in Canada. Management estimated that a 10% change in the Canadian currency could have a $1.7 million net impact on 2018 income or loss.
- The company has no history of paying dividends and does not expect to pay them in the foreseeable future.
- The filing discloses ongoing discussions with a limited number of state regulators regarding legacy insurance-licensing matters involving telephone enrollment personnel; management believes reserves are adequate and prior matters were resolved in non-material amounts.
Most important facts for investors to verify
- Whether enrollment growth and 98%+ retention can continue as the member base expands.
- Whether veterinary invoice inflation and utilization stabilize sufficiently to protect subscription gross margin.
- Whether lifetime value remains well above pet acquisition cost as marketing spending and acquisition costs rise.
- APIC’s statutory capital, risk-based capital ratio and ability to fund growth without restricting operations or requiring new financing.
- Compliance with credit-facility covenants and the terms, interest cost and maturity of the revolving debt.
- The financial performance, renewal risk and margin contribution of the lower-margin other business segment.
- Execution and capital requirements associated with Australia and any other international expansion.
- Potential developments in regulatory inquiries, veterinary invoice reserves, litigation, privacy and cybersecurity matters.