Trupanion, Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Trupanion provides medical insurance for cats and dogs in the United States, Canada, Puerto Rico, and Australia. It operates through a subscription business, primarily branded Trupanion products, and an other business segment consisting mainly of policies written for third parties and related products and software solutions. This unaudited filing covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $181.7 million | $130.1 million | $504.6 million | $359.3 million |
| Gross profit | $28.2 million | $20.6 million | $73.8 million | $58.3 million |
| Gross margin | 15.5% | 15.8% | 14.6% | 16.2% |
| Operating loss | $(7.2) million | $(2.3) million | $(29.4) million | $(1.8) million |
| Net loss | $(6.8) million | $(2.6) million | $(28.5) million | $(2.3) million |
| Net loss per share | $(0.17) | $(0.07) | $(0.71) | $(0.07) |
| Operating cash flow | Not separately provided | Not separately provided | $2.3 million | $17.6 million |
- Q3 revenue increased 40%; subscription revenue rose 28% to $127.1 million and other business revenue rose 78% to $54.6 million.
- Nine-month revenue increased 40%; subscription revenue increased 28% to $360.7 million and other business revenue increased 84% to $143.9 million.
- Total cost of revenue was $153.5 million in Q3 and $430.8 million for nine months. Cost of revenue represented 84% and 85% of revenue, respectively.
- Sales and marketing expense increased 48% in Q3 and 78% for the nine-month period. It represented 11% and 12% of revenue, respectively.
- Total stock-based compensation expense was $6.4 million in Q3 and $21.4 million for nine months, compared with $2.4 million and $6.3 million in the prior-year periods. Nine-month expense included $4.3 million related to a one-time 2020 performance grant.
- Total pets enrolled at September 30, 2021 were 1,104,376, up 37% year over year; subscription pets were 676,463, up 22%.
- Monthly average revenue per subscription pet was $63.60 in Q3 and $63.43 for nine months, compared with $60.87 and $59.77, respectively, in 2020.
- Average monthly retention was 98.72%, compared with 98.69% in the prior-year period. Average pet acquisition cost increased to $280 in Q3 and $281 for nine months, from $261 and $237, respectively.
Liquidity, investments, debt, and capital resources
- At September 30, 2021, cash and cash equivalents were $109.6 million, short-term investments were $111.9 million, and long-term investments were $6.6 million. Management reported $221.5 million of cash, cash equivalents, and short-term investments.
- Cash, cash equivalents, and restricted cash totaled $116.0 million at September 30, 2021, down $30.2 million from December 31, 2020.
- Nine-month investing cash outflow was $31.8 million, primarily reflecting net investment purchases and $8.5 million of property, equipment, and intangible asset purchases.
- The company terminated its line of credit in December 2020 and had no borrowings under it during the 2021 nine-month period. The filing does not identify outstanding debt at September 30, 2021.
- Current liabilities increased to $211.2 million from $150.4 million at December 31, 2020, driven substantially by deferred revenue of $140.1 million and a $38.8 million reserve for veterinary invoices.
- Management believes existing liquidity and operating cash flows are sufficient to fund operations and capital requirements for the next 12 months, while noting that additional financing may be considered for growth or regulatory capital needs.
Material changes versus the prior comparable period
- Growth accelerated across both segments, but profitability deteriorated: nine-month operating loss increased from $1.8 million to $29.4 million and net loss increased from $2.3 million to $28.5 million.
- Gross margin declined to 14.6% for nine months from 16.2%, reflecting higher veterinary invoice expense and other cost of revenue.
- Veterinary invoice expense increased 29% in the subscription segment and 84% in the other business segment for nine months. Management attributed subscription cost increases primarily to higher veterinary care costs and utilization.
- Operating expenses increased materially, including technology and development by 78%, general and administrative by 49%, sales and marketing by 78%, and depreciation and amortization by 93% for nine months.
- Operating cash flow declined to $2.3 million from $17.6 million, primarily due to higher pet acquisition spending, faster veterinary invoice payments, and timing differences in collections and vendor payments.
- The proportion of revenue from the subscription business declined to 71% from 78%, while the other business segment increased to 29% from 22%.
- Stockholders’ equity declined to $332.0 million from $339.9 million at December 31, 2020, primarily reflecting the nine-month net loss and other comprehensive loss.
Outlook, management commentary, risks, and unusual items
- No specific quantitative revenue, earnings, or cash-flow guidance is provided in the filing. Management emphasizes continued investment in member acquisition, member experience, technology, new products, and international or adjacent opportunities.
- Management stated that COVID-19 had not materially adversely affected the business through the filing date, but cautioned that future effects on enrollment, cancellations, veterinary expenses, staffing, referral channels, and operations remain uncertain.
- The reserve for veterinary invoices is actuarially estimated and subject to potentially significant changes from claim frequency, veterinary care costs, utilization, payment trends, and other assumptions. The consolidated reserve was $38.8 million at September 30, 2021.
- Insurance subsidiaries are subject to risk-based capital, dividend, and other regulatory restrictions. Capital requirements are expected to grow with enrollment, and funds held in insurance entities may not be freely available for general corporate purposes.
- Legacy state regulatory matters concerning whether certain enrollment personnel required insurance licenses remain unresolved in a limited number of states. The company believes it is compliant and adequately reserved; it does not consider the matters material at present.
- The company invested $7.0 million in preferred stock of Baystride, Inc. and had a $2.5 million revolving line of credit outstanding to that entity. The preferred stock was valued at $7.9 million at September 30, 2021.
- The company has a commitment to contribute up to AUD $2.2 million to an Australian joint venture upon specified milestones; AUD $0.6 million had been contributed as of September 30, 2021.
- Key risks include sustained losses, rising pet acquisition costs, lower margins in the other business segment, inaccurate pricing or veterinary invoice reserves, regulatory constraints, competition, foreign exchange exposure, cybersecurity and systems risks, and dependence on strategic and referral partners.
- The board approved a share repurchase program in April 2021, but no shares had been repurchased as of September 30, 2021. The company does not expect to pay cash dividends in the foreseeable future.
- Disclosure controls and procedures were assessed as effective, and management reported no material changes to internal control over financial reporting during the period.
Important facts for investors to verify
- Whether revenue growth, particularly in the other business segment, translates into improved margins and sustainable operating cash flow.
- Whether veterinary invoice inflation, utilization, and claim reserves remain consistent with pricing assumptions and actuarial estimates.
- Whether average pet acquisition cost continues to rise faster than lifetime value or retention-adjusted economics support.
- The amount of insurance-company capital that is restricted by regulatory requirements and the company’s future need for equity or debt financing.
- The status and potential cost of state licensing matters, other regulatory inquiries, and any future changes to insurance rate approvals.
- The effect of increased stock-based compensation, unvested awards with $73.8 million of remaining expense, and potential dilution from equity compensation.
- Execution and economic returns from the Aquarium acquisition, Aflac strategic alliance, Baystride investment, Australian joint venture, and other adjacent initiatives.