Trupanion, Inc. 2019 Q3 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 through subscription and other business segments. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Financial Performance and Key Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $99.3 million | $78.2 million | $278.5 million | $221.3 million |
| Gross profit | $17.4 million | $13.7 million | $47.2 million | $37.2 million |
| Gross margin | 18% | 18% | 17% | 17% |
| Operating income (loss) | $0.8 million | $0.9 million | $(2.6) million | $(0.8) million |
| Net income (loss) | $0.8 million | $1.2 million | $(2.4) million | $(0.7) million |
| Operating cash flow | Not separately provided | Not separately provided | $11.6 million | $9.0 million |
- Subscription revenue increased 23% in Q3 and 22% for the nine-month period. Other business revenue increased 55% in Q3 and 54% for the nine-month period.
- Total pets enrolled reached 613,694, up 23% year over year; subscription pets reached 479,427, up 15%.
- Monthly average revenue per pet increased 7% in Q3 to $58.12 and 6% for the nine-month period to $57.14.
- Average monthly retention was 98.59%, compared with 98.61% in the prior-year period.
- Average pet acquisition cost increased to $208 in Q3 and $209 for the nine-month period, versus $155 and $157, respectively, in 2018. Net acquisition cost for the nine-month period was $22.2 million, compared with $14.8 million.
- Sales and marketing expense increased 45% in Q3 and 46% for the nine-month period, reflecting higher enrollment-related spending, increased headcount, and conversion initiatives.
- Veterinary invoice expense rose 22% in Q3 and 21% for the nine-month period in the subscription business, driven by enrollment growth and higher veterinary expense per pet.
- Stock-based compensation was $1.8 million in Q3 and $5.1 million for the nine-month period, compared with $1.3 million and $3.6 million, respectively, in 2018.
Balance Sheet, Cash Flow, Debt, and Liquidity
- At September 30, 2019, cash and cash equivalents were $25.0 million, short-term investments were $71.4 million, and total current assets were $151.5 million.
- Total assets were $243.0 million and stockholders’ equity was $132.8 million.
- Current liabilities were $85.6 million, including $49.9 million of deferred revenue and a $19.3 million reserve for veterinary invoices. Total liabilities were $110.1 million.
- Cash, cash equivalents, and restricted cash decreased by $1.5 million during the first nine months of 2019. Operating cash flow of $11.6 million was offset primarily by $22.8 million of investing cash uses and $9.4 million of financing cash inflows.
- Debt consisted principally of $22.2 million of borrowings under a $50.0 million revolving credit facility, recorded as $22.1 million of long-term debt net of financing fees. The facility matures in June 2022 and bears interest at the greater of 4.5% or 0.75% plus the prime rate.
- Available borrowing capacity was $27.4 million, excluding $0.4 million reserved for ancillary services and letters of credit. The company was in compliance with all financial and non-financial covenants.
- Management reported $96.5 million of cash, cash equivalents, and short-term investments and stated that available liquidity was sufficient for operations and capital requirements for the next 12 months. Some insurance subsidiary assets are restricted by regulatory capital and dividend requirements.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated to 27% in Q3 and 26% for the nine-month period, while total gross margin remained broadly stable.
- Quarterly profitability declined modestly, with net income falling from $1.2 million to $0.8 million; the nine-month net loss widened from $0.7 million to $2.4 million.
- Sales and marketing investment increased substantially faster than revenue, contributing to the nine-month operating loss.
- Operating cash flow improved by $2.6 million year over year, while investing cash use declined substantially because the prior-year period included the cash portion of the office-building acquisition.
- Debt increased from $12.9 million at December 31, 2018 to $22.1 million at September 30, 2019.
- The company adopted the new lease standard effective January 1, 2019 and recorded approximately $0.1 million of right-of-use assets and lease liabilities, with no material income statement or cash flow impact.
Guidance, Outlook, Risks, and Unusual Items
- The filing does not provide a clear formal revenue or earnings forecast. Management stated that it expects to continue investing in member acquisition, member experience, technology, and growth.
- Management highlighted the importance of sustaining high retention, accurately pricing subscriptions, controlling veterinary invoice costs, and achieving adequate returns on acquisition spending.
- The reserve for veterinary invoices is actuarially estimated and totaled $19.3 million at September 30, 2019. Changes in payment trends, veterinary costs, utilization, or other assumptions could materially affect results.
- Insurance subsidiaries are subject to risk-based capital, dividend, and other regulatory requirements. Capital held by these entities may not be available for general corporate purposes without approval.
- The company is addressing legacy inquiries from certain state insurance regulators regarding whether employees involved in prior telephone enrollments required insurance licenses. Management believes it has adequately reserved for these matters and that prior resolutions were immaterial.
- Other key risks include competition, rising pet acquisition costs, pricing and rate-approval constraints, loss of veterinary or strategic referral relationships, contract termination in the other business segment, technology or cybersecurity failures, regulatory changes, litigation, foreign exchange exposure, and potential shortfalls in veterinary invoice reserves.
- In October 2019, after the reporting date, the company purchased an additional $4.0 million of preferred stock of a variable interest entity. In November 2019, the board approved a potential share repurchase program of up to $15.0 million over 12 months; the filing states that repurchases were not assured.
Important Facts for Investors to Verify
- Whether enrollment growth and higher monthly revenue per pet can offset rising pet acquisition costs and veterinary invoice expense.
- The sustainability of high retention rates and the resulting lifetime-value assumptions used to justify acquisition spending.
- The adequacy of the $19.3 million veterinary invoice reserve and sensitivity to higher treatment costs or utilization.
- Availability of corporate liquidity after considering insurance subsidiary capital restrictions and the $22.2 million credit-facility borrowing.
- Compliance with revolving-credit covenants and future risk-based capital requirements as enrollment grows.
- The status and potential cost of state regulatory inquiries concerning licensing, as well as other insurance regulatory matters and litigation.
- The effect of the additional $4.0 million variable-interest-entity investment and any subsequent share repurchases on liquidity and capital allocation.