TRUPANION, INC. quarterly report, Q2 FY2022

Trupanion, Inc. — Form 10-Q Summary

Reporting period: Three and six months ended June 30, 2022. The filing covers Trupanion’s pet medical insurance operations in the United States, Canada, Puerto Rico, and Australia. Results are unaudited and prepared under U.S. GAAP.

Key Financial Metrics

Metric	Q2 2022	Q2 2021	Change	Six months 2022	Six months 2021
Revenue	$219.4 million	$168.3 million	+30%	$425.4 million	$322.9 million
Operating loss	$(12.8) million	$(9.5) million	Worsened	$(21.9) million	$(22.2) million
Net loss	$(13.6) million	$(9.2) million	Worsened	$(22.5) million	$(21.7) million
Net loss per diluted share	$(0.33)	$(0.23)	Worsened	$(0.55)	$(0.54)
Operating margin	(5.8%)	(5.7%)	Generally stable	(5.1%)	(6.9%)
Net margin	(6.2%)	(5.5%)	Worsened	(5.3%)	(6.7%)

Subscription revenue increased 21% to $145.8 million in Q2 and 22% to $285.6 million for the six-month period. Other business revenue increased 54% to $73.6 million in Q2 and 57% to $139.8 million for the six-month period. The other business segment continued to have a lower margin profile than the subscription business.

Total cost of revenue was $190.8 million in Q2, or 87% of revenue, versus 85% in the prior-year quarter. For the six-month period, cost of revenue was $366.9 million, or 86% of revenue, unchanged from the prior-year percentage. Subscription cost of revenue represented 84% of subscription revenue in Q2 and 83% for the six-month period.

Q2 operating expenses were $41.3 million, up 21% year over year. Technology and development increased 57% to $6.4 million, general and administrative expenses increased 24% to $9.2 million, and new pet acquisition expense increased 19% to $23.0 million. Total stock-based compensation was $8.6 million in Q2 and $16.2 million for the six-month period.

Membership and Operating Metrics

Total pets enrolled reached 1,348,145 at June 30, 2022, up 32% from 1,024,226 a year earlier.
Subscription pets enrolled reached 770,318, up 20% year over year.
Monthly average revenue per subscription pet was $64.26 in Q2 and $64.24 for the six-month period, compared with $63.69 and $63.34, respectively, in the prior-year periods.
Average monthly retention was 98.74%, compared with 98.72% in the comparable prior-year period.
Average pet acquisition cost increased 9% to $309 in Q2 and to $305 for the six-month period, compared with $284 and $281, respectively.
Subscription acquisition cost was 13.9% of subscription revenue in Q2 and 13.8% for the six-month period, compared with 14.2% and 14.5% in the prior-year periods.

Cash Flow, Liquidity, and Debt

Cash used in operating activities was $6.7 million for the six months ended June 30, 2022, compared with $3.9 million used in the prior-year period.
Cash used in investing activities was $25.1 million, including net investment purchases and $7.5 million of property and equipment purchases.
Cash provided by financing activities was $46.8 million, primarily from the new term loan, partially offset by $5.8 million of share repurchases.
Cash, cash equivalents, and restricted cash increased to $115.1 million from $100.9 million at the beginning of the year.
Cash, cash equivalents, and short-term investments totaled $243.0 million at June 30, 2022. Management stated that these resources, together with available borrowings, were sufficient to fund operations and regulatory capital requirements for the next 12 months.
In March 2022, Trupanion entered into a $150.0 million credit facility, including a funded $60.0 million initial term loan, $75.0 million of delayed-draw term loan commitments, and a $15.0 million revolving commitment. Outstanding debt was approximately $59.9 million at June 30, 2022, with an interest rate of approximately 5.76%.
The credit facility is secured by substantially all company and subsidiary assets and includes financial and other covenants. The company reported compliance with all covenants at June 30, 2022.

Material Changes Versus the Prior Comparable Period

Revenue growth accelerated through higher enrollment and modestly higher revenue per pet, with total revenue up 30% in Q2 and 32% for the six-month period.
Other business grew faster than subscription revenue, increasing its share of total revenue to 34% in Q2 and 33% for the six-month period, compared with 28% in both prior-year periods.
Veterinary invoice expense increased faster than subscription revenue in Q2, resulting in subscription veterinary invoice expense rising to 74% of subscription revenue from 72%.
Operating loss improved slightly for the six-month period but worsened in Q2, while net loss worsened in both comparisons, partly reflecting approximately $1.2 million of Q2 interest expense associated with new debt.
Operating cash usage increased, while financing cash flow improved substantially because of the new credit facility.
The company repurchased 94,959 shares for $5.8 million during the quarter and six-month period. The board authorized up to $20.0 million of additional repurchases from August through October 2022, subject to the company’s stated conditions.
Foreign currency translation losses reduced comprehensive income by $3.3 million in Q2 and $4.2 million for the six-month period.

Outlook, Commentary, Risks, and Unusual Items

The filing does not provide a clear current-period revenue, earnings, or cash-flow guidance range. Management expects to continue investing in member acquisition, member experience, technology, product initiatives, and international expansion, but cautions that growth investments may not generate expected returns.

Management stated that COVID-19 had not materially adversely affected the business as of the filing date, but future effects on enrollment, retention, claims, operations, and economic conditions remained uncertain.
Veterinary invoice reserves are based on actuarial estimates and may change materially if claims frequency, treatment costs, invoice timing, or payment patterns differ from assumptions. The total reserve was $36.6 million at June 30, 2022.
Insurance subsidiaries must maintain regulatory capital and surplus. Capital held within insurance entities may not be available for general corporate purposes without regulatory approval, and required capital is expected to grow with enrollment.
The other business segment depends on contracts with third-party general agents. Termination or loss of a program could reduce revenue over a period of 12 to 18 months and materially affect results.
Key risks include continued net losses, rising pet acquisition costs, competition, consumer sensitivity to economic conditions, regulatory approval of pricing, foreign exchange exposure, cybersecurity and technology failures, litigation, debt covenant compliance, and the ability to maintain risk-based capital.
The company reported no material legal proceedings individually or in the aggregate at the balance-sheet date, although ordinary-course litigation, coverage disputes, regulatory inquiries, and other claims remain possible.
Management concluded that disclosure controls and procedures were effective as of June 30, 2022 and reported no material changes in internal control over financial reporting.

Facts Investors Should Verify

Whether subscription veterinary invoice costs continue to rise faster than subscription revenue and pressure margins.
Whether higher pet acquisition costs produce the expected enrollment growth, retention, lifetime value, and return on investment.
The sustainability and margin contribution of the rapidly growing other business segment.
Actual cash burn, debt service requirements, floating-rate exposure, and compliance with credit-facility covenants.
Regulatory capital requirements and the amount of cash and investments legally available outside insurance subsidiaries.
The adequacy of veterinary invoice reserves as claims utilization and treatment costs evolve.
Execution and returns from pre-revenue product initiatives, international expansion, and strategic investments, including the Baystride investment and related credit line.
Any subsequent changes to repurchase activity, management guidance, regulatory matters, litigation, or COVID-19-related operating effects.