Trupanion, Inc. — Q2 2017 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. The filing covers the three and six months ended June 30, 2017; financial statements are unaudited and prepared under U.S. GAAP. The company operates subscription and other business segments.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $58.3 million | $45.8 million | $113.0 million | $88.5 million |
| Gross profit | $10.4 million | $8.3 million | $19.5 million | $15.6 million |
| Gross margin | 18% | 18% | 17% | 18% |
| Operating loss | $0.6 million | $1.0 million | $1.9 million | $3.5 million |
| Net income (loss) | $0.4 million | $(1.0) million | $(1.1) million | $(3.5) million |
| Basic and diluted EPS | $0.01 | $(0.03) | $(0.04) | $(0.13) |
| Operating cash flow | Not separately provided | Not separately provided | $3.7 million | $0.3 million |
- Subscription revenue was $52.6 million in Q2 and $102.9 million for the first six months, representing approximately 90% and 91% of consolidated revenue, respectively.
- At June 30, total pets enrolled were 383,293, including 346,409 subscription pets. Monthly average revenue per pet was $51.47 in Q2 and $50.99 for the six-month period.
- Average monthly retention was 98.57%; lifetime value of a pet was $654 and average pet acquisition cost was $143 in Q2, producing an LVP-to-PAC ratio of 4.6:1.
- Cash, cash equivalents and short-term investments totaled $57.2 million. Cash, cash equivalents and restricted cash totaled $25.2 million at June 30.
- Long-term debt was $6.3 million net of financing fees; gross borrowings under the revolving facility were $6.5 million, with $22.0 million available. The facility matures in December 2019.
- Claims reserve was $10.8 million, compared with $9.5 million at December 31, 2016. Accumulated deficit was $82.4 million.
Material changes versus the prior comparable period
- Revenue increased 27% year over year in Q2 and 28% for the first six months. Subscription revenue grew 25% and 27%, respectively, driven by enrollment growth and a 9% increase in average revenue per pet, primarily from pricing increases intended to cover higher veterinary costs.
- Other business revenue increased 54% in Q2 and 40% for the first six months, but its gross margin declined to 5% from 7% in Q2 and to 5% from 9% for the six-month period.
- Consolidated operating losses narrowed as operating expenses declined to 19% of revenue from 20% in Q2 and to 19% from 22% for the first six months.
- Q2 net income and the reduced six-month net loss were materially affected by a $1.0 million gain on the sale of an equity-method investment. The gain is non-recurring based on the filing description.
- Sales and marketing expense rose 23% in Q2 and 14% for the first six months. Acquisition costs increased, while LVP increased 5% year over year.
- Operating cash flow improved to $3.7 million from $0.3 million, partly due to increased deferred revenue and claims reserves. Investing cash use increased to $5.8 million, including investment purchases, a $2.6 million note receivable and capital expenditures.
Guidance, outlook, commentary and risks
- The filing does not provide a clear numerical revenue or earnings outlook. Management expects to continue investing substantially in member acquisition, technology, member experience and operations.
- Management states that existing cash, investments and available credit are expected to fund operations and statutory capital requirements for at least the next 12 months, although additional financing may be pursued.
- Insurance subsidiaries must maintain regulatory capital and restricted assets. Growth in enrollment may increase required risk-based capital and limit funds available for general corporate purposes.
- Claims reserves depend on actuarial estimates of reported and incurred-but-not-reported claims. Actual claim frequency, severity and veterinary-care costs could materially differ from estimates.
- Key risks include continued net losses, higher pet acquisition costs, declining retention, inaccurate pricing assumptions, regulatory approval of rate changes, competition, foreign-exchange exposure in Canada, reliance on veterinarians and referral partners, technology or data-security failures, and compliance with extensive insurance regulations.
- The company was in compliance with all credit-facility covenants at June 30, 2017. Legal matters arising in the ordinary course were not considered material individually or in the aggregate.
- Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the period.
Important facts for investors to verify
- Whether enrollment growth and the 98.57% retention rate persist as the member base expands.
- Whether average pet acquisition cost continues rising faster than lifetime value and reduces acquisition returns.
- The adequacy of the $10.8 million claims reserve and the effect of veterinary-cost inflation on future margins.
- The sustainability of positive operating cash flow excluding working-capital movements and the one-time investment-sale gain.
- Available liquidity after considering regulatory capital, claims-payment obligations, restricted cash and insurance-subsidiary restrictions.
- Compliance with revolving-credit covenants, including revenue, claims-ratio, EBITDA-loss and statutory-capital requirements.
- The potential impact of regulatory rate approvals, Canadian currency movements, referral-partner relationships and competition on future growth.