Trupanion, Inc. — 2016 Q1 Form 10-Q Summary
Business Context and Reporting Period
Trupanion provides medical insurance plans for cats and dogs in the United States, Canada and Puerto Rico. The filing reports unaudited results for the three months ended March 31, 2016, compared with the three months ended March 31, 2015. The company operates subscription and other business segments.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $42.7 million | $33.3 million | 28% increase |
| Gross profit | $7.3 million | $5.6 million | 31% increase |
| Gross margin | 17.1% | 16.8% | Approximately 30 basis points higher |
| Operating loss | $(2.5) million | $(4.6) million | Improved by $2.0 million |
| Operating margin | (6.0)% | (13.7)% | Improved |
| Net loss | $(2.6) million | $(4.9) million | Improved by $2.4 million |
| Net loss per share | $(0.09) | $(0.18) | Improved |
| Adjusted EBITDA | $(1.1) million | $(3.3) million | Improved by $2.3 million |
| Net cash used in operating activities | $(1.3) million | $(4.9) million | Lower cash use |
Subscription revenue was $39.1 million, up 30%, and other business revenue was $3.6 million, up 9%. Claims expenses increased 31% overall to $30.6 million, while total cost of revenue remained approximately 83% of revenue. Sales and marketing expense increased 5% to $3.8 million, technology and development expense declined 18% to $2.3 million, and general and administrative expense was essentially unchanged at $3.7 million.
At March 31, 2016, cash and cash equivalents were $17.5 million, short-term investments were $25.6 million, and long-term investments were $2.5 million. The company reported approximately $43.1 million of cash, cash equivalents and short-term investments in its liquidity discussion. Total assets were $70.9 million and stockholders’ equity was $44.3 million.
Long-term debt was $1.0 million, with $17.4 million available under the revolving credit facility. The facility matures in July 2017, bears interest at the greater of 4.5% or 1.25% plus prime, and the company was in compliance with its covenants. Current liabilities included a $6.9 million claims reserve and $11.8 million of deferred revenue.
Operating Metrics and Changes Versus Prior Period
- Total pets enrolled increased 25% year over year to 307,298; subscription pets enrolled increased 26% to 287,123.
- Monthly adjusted revenue per pet increased 4% to $46.12, primarily reflecting pricing increases related to veterinary cost inflation. Canadian foreign exchange movements reduced revenue by approximately $0.9 million.
- Average monthly retention was 98.65%, broadly consistent with 98.66% in the prior-year quarter.
- Average pet acquisition cost declined 8% to $123, while lifetime value of a pet increased 6% to $603. The LVP-to-PAC ratio improved to 4.9:1 from 4.2:1.
- Claims expense increased faster than subscription enrollment, rising 33% in the subscription business, although subscription cost of revenue remained 82% of subscription revenue.
- Operating leverage improved as sales and marketing declined to 9% of revenue from 11%, technology and development declined to 5% from 8%, and general and administrative declined to 9% from 11%.
- Operating cash use improved primarily because of higher revenue and noncash expenses, although the company remained loss-making and cash flow negative.
Guidance, Outlook, Commentary and Unusual Items
The filing does not provide a clear quantified revenue or earnings guidance range. Management expects to continue investing in member acquisition, Territory Partners, member experience and technology. It expects sales and marketing expense to increase in absolute dollars, while technology and development and general and administrative expenses may decline as percentages of revenue. Management targets an LVP-to-PAC ratio of approximately 5:1.
Management states that existing cash, investments and the available credit facility should fund operations and statutory capital requirements for at least the next 12 months, but notes that additional financing may be needed and may not be available on acceptable terms.
- Insurance subsidiaries are subject to risk-based capital and dividend restrictions. APIC maintained $26.1 million of risk-based capital as of December 31, 2015 against a stated $24.5 million requirement.
- A Washington State Office of the Insurance Commissioner matter remained unresolved. The company had accrued $0.4 million, but adverse outcomes beyond the recorded amount were reasonably possible and could not be estimated.
- Future commitments under strategic marketing and service agreements totaled approximately $1.3 million for the remainder of 2016, $0.3 million in 2017 and $0.1 million in 2018.
- The company entered into a two-year equipment lease after quarter-end, with total availability of up to $0.8 million.
- Management identified significant risks involving claims severity and reserve adequacy, regulatory compliance and licensing, risk-based capital requirements, competition, member retention, acquisition costs, foreign exchange, technology and data security, and continued operating losses.
Important Facts for Investors to Verify
- Whether enrollment growth and the 98.65% retention rate remain sustainable as the member base expands.
- Whether claims expenses and veterinary cost inflation remain consistent with pricing assumptions and the $6.9 million claims reserve.
- Whether the company can achieve profitability while continuing planned investments in member acquisition, technology and service.
- The availability of corporate liquidity after considering statutory capital, trust restrictions and other insurance-entity requirements.
- Compliance with the revolving credit facility’s financial and non-financial covenants before its July 2017 maturity.
- The ultimate resolution and potential additional cost of the Washington insurance-regulatory matter.
- Whether the reported LVP-to-PAC ratio and adjusted EBITDA trends continue; both are non-GAAP measures and may not be comparable with similarly named measures used by other companies.
- The impact of Canadian currency movements, regulatory pricing approvals and the potential termination of third-party insurance or underwriting relationships.