Trupanion, Inc. — Q2 2023 Form 10-Q Summary
Business context and reporting period
Trupanion provides medical insurance for cats and dogs in the United States, Canada, Europe, Puerto Rico, and Australia. It reports two segments: subscription business, primarily direct-to-consumer subscription fees, and other business, primarily policies underwritten for third parties. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the same periods in 2022.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $270.6 million | $219.4 million | $526.9 million | $425.4 million |
| Revenue growth | 23% | — | 24% | — |
| Gross profit | $29.4 million | $28.6 million | $55.7 million | $58.5 million |
| Gross margin | 10.9% | 13.0% | 10.6% | 13.7% |
| Operating loss | $13.1 million | $12.8 million | $37.6 million | $21.9 million |
| Operating margin | (4.8%) | (5.8%) | (7.1%) | (5.1%) |
| Net loss | $13.7 million | $13.6 million | $38.5 million | $22.5 million |
| Net loss per share | $0.33 | $0.33 | $0.93 | $0.55 |
| Cash used in operating activities | Not separately provided | Not separately provided | $10.3 million | $6.7 million |
Q2 revenue was $173.3 million from the subscription business and $97.3 million from the other business. Six-month revenue was $338.5 million and $188.4 million, respectively. Total enrolled pets increased 25% year over year to 1.68 million, while subscription pets increased 23% to 943,958. Monthly average revenue per subscription pet was $64.41 in Q2 and $64.00 for the six-month period. Average monthly retention was 98.61%, compared with 98.74% in the prior-year period.
Liquidity, cash flow, debt, and capital
- At June 30, 2023, cash and cash equivalents were $118.4 million, short-term investments were $117.6 million, and long-term investments were $9.8 million.
- Cash, cash equivalents, and short-term investments totaled $236.1 million. Management stated that these resources, operating cash flows, and available borrowings were expected to fund operations and capital requirements for the next 12 months.
- Operating cash flow was negative $10.3 million for the first six months, compared with negative $6.7 million in 2022. Investing activities provided $28.4 million, and financing activities provided $33.7 million, including $35.1 million of net debt financing.
- Term loans outstanding totaled $110.0 million under a $150.0 million secured credit facility. The stated interest rate was approximately 10.39% at June 30, 2023. Carrying-value debt totaled approximately $104.0 million, including current and long-term portions; scheduled future principal payments totaled $109.0 million.
- The company reported compliance with all credit facility covenants. Outside insurance entities, it held $25.4 million of cash, cash equivalents, and short-term investments, with an additional $40.0 million available under the credit facility.
- Insurance subsidiaries held $213.1 million of capital surplus, stated to be $57.3 million above the estimated risk-based capital requirement. Regulatory restrictions may limit the company’s ability to distribute this surplus.
Material changes versus the prior comparable period
- Revenue increased 23% in Q2 and 24% for the first six months, driven by enrollment growth. Subscription revenue increased 19% in Q2 and 18% year to date; other-business revenue increased 32% and 35%, respectively.
- Margins deteriorated. Subscription cost of revenue rose to 87% of subscription revenue in Q2 from 84% and to 88% from 83% for the six-month period. Management cited inflation in veterinary costs, higher claims utilization, and increased claims submitted through its direct-pay software.
- Veterinary invoice expense increased 25% in Q2 and 27% year to date for the subscription business. The subscription veterinary invoice reserve increased to $26.2 million, while the other-business reserve increased to $30.0 million.
- General and administrative expense increased 42% in Q2 and 84% year to date. Year-to-date increases included $4.8 million of stock-based compensation related to executive departures and a $3.8 million non-recurring settlement of uncollected premiums associated with transitioning third-party underwriting to other insurers.
- New pet acquisition expense declined 10% in Q2 and 5% year to date, while average pet acquisition cost declined to $236 in Q2 and $241 for the six-month period, compared with $309 and $305, respectively.
- Technology and development expense declined 18% in Q2 and 13% year to date as certain pre-revenue initiatives moved out of development. No shares were repurchased during the six months, compared with 94,959 shares repurchased in the prior-year period.
Guidance, outlook, commentary, and risks
The filing does not provide a clear numerical revenue or earnings guidance update. Management emphasized continued investment in member acquisition, member experience, technology, direct veterinary payment capabilities, product initiatives, and international operations. It also stated that it may seek additional equity, equity-linked, or debt financing to fund growth or capital needs, although financing may not be available on acceptable terms.
- Management expects pricing actions to help achieve targeted returns, but regulatory approval may delay or limit rate increases. Veterinary-cost inflation and claims trends could continue to pressure margins.
- The company remains unprofitable, with an accumulated deficit of $210.1 million at June 30, 2023. Management cautioned that revenue growth may not continue and that profitability may not be achieved or maintained.
- Reserve estimates for veterinary invoices involve actuarial assumptions and could require material adjustments. Increased use of the company’s direct-pay software may increase claims volume and cost of revenue.
- The other business segment depends on third-party relationships that may be terminated or rolled off, potentially causing revenue volatility. Management expects a portion of this business to roll off beginning in 2023 but does not control the timing or extent.
- Key risks include insurance and capital regulation, debt service and floating interest rates, competition, member retention, acquisition-cost assumptions, cybersecurity and technology failures, foreign-exchange exposure, litigation, and the need for additional capital.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2023, and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether veterinary invoice inflation and claims utilization continue to reduce subscription margins.
- Whether enrollment growth and retention remain strong while lifetime value declined to $470 from $713 in the prior-year six-month period.
- Whether the company can reduce operating losses and achieve positive operating cash flow without additional financing.
- The timing, terms, and restrictions associated with future debt, equity, or equity-linked financing.
- The adequacy of veterinary invoice reserves and the impact of any prior-period reserve adjustments.
- The timing and financial effect of the expected roll-off of third-party other-business programs.
- The availability of insurance-subsidiary capital for corporate purposes given regulatory and dividend restrictions.
- Potential effects of executive departures, related stock-based compensation charges, regulatory matters, litigation, and the $3.8 million premium settlement.