Trupanion, Inc. 2017 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 subscription business and an other business segment that writes policies for third parties. The filing covers the fiscal year ended December 31, 2017; fourth-quarter results are included but the filing is an annual report rather than a standalone quarterly filing.
Revenue is primarily recurring subscription revenue, with subscriptions automatically renewing monthly. Total pets enrolled reached 423,194 at year-end, including 371,683 subscription pets. The company had 523 employees at December 31, 2017.
Financial and operating metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $242.7 million | $188.2 million | +29% |
| Subscription revenue | $218.4 million | $173.4 million | +26% |
| Other business revenue | $24.3 million | $14.9 million | +63% |
| Gross profit | $43.1 million | $33.3 million | +29% |
| Gross margin | 17.7% | 17.7% | Stable |
| Operating loss | $2.6 million | $6.7 million | Improved |
| Net loss | $1.5 million | $6.9 million | Improved |
| Net loss per diluted share | $0.05 | $0.24 | Improved |
| Cash flow from operations | $9.7 million | $5.0 million | Improved |
Subscription gross profit was $41.5 million, or approximately 19% of subscription revenue. Consolidated cost of revenue was $199.6 million, including $170.1 million of veterinary invoice expense. Stock-based compensation totaled $3.4 million.
Year-end cash and cash equivalents were $25.7 million, short-term investments were $37.6 million, and working capital was $40.7 million. Including long-term investments, cash and investments totaled approximately $66.5 million on the consolidated balance sheet; management reported $63.3 million of cash, cash equivalents and short-term investments for liquidity purposes. Total debt was $9.3 million net of financing fees, with $9.5 million of borrowings under the revolving facility and $18.7 million of available borrowing capacity, excluding $1.8 million reserved for letters of credit and ancillary services.
At December 31, 2017, total liabilities were $57.4 million, stockholders’ equity was $48.4 million, and accumulated deficit was $82.8 million. The reserve for veterinary invoices was $12.8 million, including $11.1 million for the subscription business.
Key operating metrics included monthly average revenue per pet of $52.07, lifetime value of a pet of $727, average pet acquisition cost of $152, and average monthly retention of 98.63%. The company generated approximately 90% of revenue from subscriptions, 20% of total revenue from Canada, and 76% of leads from veterinary and member referrals.
Material changes versus the prior comparable period
- Revenue growth was driven by a 15% increase in subscription pets enrolled and a 9% increase in average revenue per pet. Pricing reflected higher veterinary-care costs and more precise pricing by risk category.
- Gross margin remained approximately flat overall, while subscription gross margin increased to approximately 19% from 18% as average revenue per pet grew faster than certain veterinary-care costs.
- Operating expenses increased 14% to $45.7 million, but declined to 19% of revenue from 21%. Technology and development expense increased 2%, general and administrative expense increased 11%, and sales and marketing expense increased 25%.
- Average pet acquisition cost increased 24% to $152, partly because of $1.8 million spent testing new marketing initiatives. The company expects to continue investing in member acquisition.
- Operating cash flow increased by $4.7 million to $9.7 million. Investing cash outflows increased to $13.1 million, primarily from purchases of investments and capital expenditures.
- The company recorded a $1.0 million gain from the sale of an equity-method investment and a $0.6 million provisional tax benefit related to the Tax Cuts and Jobs Act. These items reduced the reported net loss.
- Fourth-quarter revenue was $66.5 million, gross profit was $11.7 million, and net loss was $0.8 million, compared with fourth-quarter 2016 revenue of $51.3 million, gross profit of $9.2 million, and net loss of $1.7 million.
Guidance, outlook, commentary and risks
Management expects continued investment in member acquisition, technology, member experience, Territory Partners and operating infrastructure. The filing does not provide a clear quantitative revenue or earnings guidance range for 2018. Management stated that existing cash, investments and borrowing capacity were expected to fund operations and capital requirements for the next 12 months, while noting that additional financing may be pursued as the business grows.
- Profitability is not assured. The company has incurred significant cumulative losses and may continue to report losses while investing for growth.
- Subscription pricing depends on actuarial assumptions, veterinary-cost trends, retention, product mix and regulatory approvals. Actual veterinary invoice costs may exceed reserves.
- Member acquisition costs increased materially, and projected lifetime value may not be realized. Retention may decline as newer acquisition channels scale.
- Insurance regulation may restrict pricing, require additional capital, limit dividends or affect licensing. APIC maintained $37.2 million of statutory capital and surplus against a $22.2 million no-action-level requirement at year-end.
- The company retains the financial risk of its Canadian business through its fronting and reinsurance structure and has not transferred risk to third-party reinsurers. A Canadian trust account held approximately CAD $2.8 million at year-end.
- The revolving credit facility contains financial and operating covenants, including capital, liquidity, revenue, claims-ratio and EBITDA-related requirements. The company reported compliance at December 31, 2017.
- Important additional risks include competition, foreign-exchange exposure, regulatory or litigation matters, data-security and technology failures, dependence on veterinary referrals and Territory Partners, and the loss or termination of third-party insurance relationships.
Important facts for investors to verify
- Reconcile the reported liquidity figures, including cash restricted for veterinary invoices and assets held within regulated insurance subsidiaries.
- Monitor veterinary invoice reserve development, claims frequency, claims severity and the effect of medical-cost inflation on subscription gross margin.
- Assess whether lifetime value continues to grow faster than pet acquisition cost as marketing spending expands.
- Review APIC statutory capital, risk-based capital requirements, dividend restrictions and the availability of insurance-subsidiary cash to the parent company.
- Evaluate the sustainability of near-term operating cash generation despite the continuing GAAP net loss and $82.8 million accumulated deficit.
- Consider the effect of Canadian currency movements; management estimated that a 10% exchange-rate change could affect 2017 revenue by approximately $4.7 million and expenses by approximately $3.4 million.
- Review the $30.8 million of contractual obligations, including $9.5 million of debt, $19.2 million of operating leases and $1.6 million of other commitments.