Trupanion, Inc. 2016 Q3 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 and nine months ended September 30, 2016, compared with the corresponding 2015 periods.
Financial and operating highlights
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $48.4 million | $37.9 million | $136.9 million | $106.8 million |
| Gross profit | $8.5 million | $6.6 million | $24.1 million | $18.0 million |
| Gross margin | 18% | 17% | 18% | 17% |
| Operating loss | $(1.5) million | $(4.6) million | $(5.0) million | $(13.8) million |
| Net loss | $(1.6) million | $(4.6) million | $(5.2) million | $(14.2) million |
| Adjusted EBITDA | $0.3 million | $(3.2) million | $(0.2) million | $(9.7) million |
- Subscription revenue represented approximately 92% of total revenue and increased 30% year over year in both Q3 and the first nine months.
- Total pets enrolled reached 334,070, up 21% from 276,988 at September 30, 2015. Subscription pets enrolled reached 312,282, also up 21%.
- Monthly average revenue per pet increased 7% in Q3 to $48.37 and 5% for the nine-month period to $47.33.
- Average monthly retention was 98.61%, compared with 98.66% in the comparable 2015 period.
- Lifetime value of a pet increased 6% to $624, while average pet acquisition cost declined 7% in Q3 and 9% for the nine-month period to $120.
- Cash provided by operating activities was $1.6 million for the nine months, compared with $9.8 million used in 2015. Net cash increased $2.7 million to $20.6 million.
- At September 30, 2016, cash and cash equivalents were $20.6 million, short-term investments were $28.7 million and long-term investments were $2.5 million.
- Long-term debt was $4.0 million, with $14.4 million available under the revolving credit facility. The company was in compliance with all debt covenants.
- Total assets were $78.5 million and stockholders’ equity was $44.8 million. The accumulated deficit was $79.6 million.
Material changes versus the prior comparable period
- Revenue grew 28% in both Q3 and the first nine months, driven primarily by 21% enrollment growth and higher pricing in the subscription business. Canadian foreign-exchange movements reduced revenue by approximately $0.4 million in Q3 and $1.2 million for the nine months.
- Gross profit increased 29% in Q3 and 34% for the nine months, while gross margin improved to 18% from 17%.
- Operating expenses declined 10% in Q3 and 8% for the nine months. Technology and development expense decreased 22%, and general and administrative expense decreased 6% for the nine-month period. Sales and marketing expense was broadly flat for the nine months.
- The operating loss narrowed substantially, and quarterly Adjusted EBITDA became positive. The nine-month Adjusted EBITDA loss declined to $0.2 million from $9.7 million.
- Claims reserve increased to $8.4 million from $6.3 million at December 31, 2015, reflecting business growth and claims-related accruals.
- Debt increased by approximately $4.0 million during the first nine months, while stock-option exercises generated $2.7 million of cash.
- The company entered into additional strategic marketing, service-provider and capital-lease commitments during 2016.
Guidance, outlook, commentary, risks and unusual items
- Management stated that existing cash, investments and available credit were expected to fund operations and statutory capital requirements for at least the next 12 months. The filing does not provide specific revenue or earnings guidance.
- Management expects continued investment in member acquisition, Territory Partners, technology and member experience. Sales and marketing expense is expected to increase in absolute dollars over time, while technology and general and administrative expenses are expected to decline as percentages of revenue.
- Management targets an approximately 5-to-1 lifetime-value-to-acquisition-cost ratio; the ratio was 5.2-to-1 for both Q3 and the first nine months of 2016.
- Key risks include continued net losses, the ability to achieve profitability, claims severity and frequency, adequacy of the $8.4 million claims reserve, pricing and regulatory approval constraints, member retention, acquisition-cost volatility, competition and foreign-exchange exposure.
- Insurance subsidiaries must maintain regulatory capital and segregated assets, limiting the availability of some cash and investments for general corporate purposes. Risk-based capital requirements may increase as enrollment grows.
- In July 2016, the company settled an inquiry by the Washington State Office of the Insurance Commissioner concerning licensing; the settlement amount was less than the amount accrued as of March 31, 2016, and the company stated the matter was otherwise closed subject to ongoing compliance.
- Operating lease obligations totaled $21.0 million, and total contractual obligations included $4.0 million of long-term debt, $0.6 million of capital leases, $1.3 million of strategic marketing and service agreements, and $2.6 million of other obligations.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2016, with no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether enrollment growth and higher pricing can continue without materially increasing claims costs or reducing retention.
- Whether the claims reserve remains adequate as the membership base expands and veterinary costs rise.
- Whether the company can sustain positive quarterly Adjusted EBITDA and convert improving operating cash flow into GAAP profitability.
- How much of the reported $49.3 million of cash and short-term investments is restricted or held by insurance subsidiaries for statutory capital and claims obligations.
- Compliance with the revolving credit facility’s financial covenants and the availability of the remaining $14.4 million borrowing capacity.
- The effect of regulatory approvals, licensing requirements and future risk-based capital requirements on pricing, growth and liquidity.
- The potential impact of Canadian foreign-exchange movements and the termination or non-renewal of third-party underwriting or other-business relationships.