Trupanion, Inc. — Q2 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. The filing covers the three and six months ended June 30, 2021, compared with the same periods in 2020. The company reports subscription and other business segments.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $168.3 million | $117.9 million | $322.9 million | $229.2 million |
| Gross profit | $24.5 million | $19.9 million | $45.6 million | $37.7 million |
| Approximate gross margin | 14.6% | 16.9% | 14.1% | 16.5% |
| Operating income (loss) | ($9.5 million) | $1.5 million | ($22.2 million) | $0.5 million |
| Approximate operating margin | (5.7%) | 1.3% | (6.9%) | 0.2% |
| Net income (loss) | ($9.2 million) | $1.4 million | ($21.7 million) | $0.2 million |
| Net income (loss) per diluted share | ($0.23) | $0.04 | ($0.54) | $0.01 |
| Cash flow from operating activities | Not separately provided | Not separately provided | ($3.9 million) | $7.8 million |
Subscription revenue increased 30% year over year in Q2 and 28% for the six-month period. Other business revenue increased 88% in Q2 and 89% for the six-month period. Subscription business represented 72% of total revenue, down from 78% in Q2 2020.
At June 30, 2021, total pets enrolled were 1,024,226, up 38% year over year, and subscription pets enrolled were 643,395, up 22%. Monthly average revenue per pet increased 7% to $63.69 in Q2. Average monthly retention was 98.72%, compared with 98.66% in the prior-year period.
Sales and marketing expense increased 110% in Q2 and 99% for the six-month period. Average pet acquisition cost rose to $284 in Q2 from $199 and to $281 for the six-month period from $222. Lifetime value of a pet, including fixed expenses, was $681 for the six-month period, compared with $597 in 2020.
Liquidity, cash flow, debt, and balance sheet
- Cash, cash equivalents, and short-term investments totaled $219.4 million at June 30, 2021, including $117.3 million of cash and cash equivalents and $102.1 million of short-term investments.
- Cash, cash equivalents, and restricted cash decreased by $22.5 million during the first six months to $123.7 million.
- Operating cash flow was negative $3.9 million, compared with positive $7.8 million in the prior-year period, primarily due to increased member acquisition spending, faster veterinary invoice payments, and collection and payment timing.
- Investing cash outflows were $18.6 million, including net investment purchases and $5.8 million of property, equipment, and intangible asset purchases.
- The company terminated its line of credit in December 2020 and had no borrowings or repayments under the facility during the six months ended June 30, 2021.
- Current liabilities increased to $189.9 million from $150.4 million at December 31, 2020, driven in part by deferred revenue increasing to $126.6 million and the veterinary invoice reserve increasing to $35.9 million.
- Management stated that existing liquidity is sufficient to fund operations and capital requirements for the next 12 months, although additional equity, equity-linked, or debt financing may be considered for growth or regulatory capital needs.
Material changes versus the prior comparable period
- Revenue growth accelerated substantially, but profitability deteriorated as cost of revenue, sales and marketing, technology, general and administrative expense, and depreciation and amortization grew faster than revenue.
- Total cost of revenue rose to 85% of revenue in Q2 from 83%, while total operating expenses rose to 20% of revenue from 16%.
- Veterinary invoice expense increased, reflecting higher veterinary care costs and utilization, as well as unusually low prior-year claims activity associated with COVID-19.
- Stock-based compensation increased to $6.5 million in Q2 and $15.0 million for the six-month period, compared with $2.2 million and $3.9 million, respectively. The six-month amount included $4.3 million related to a one-time 2020 performance grant.
- The company established ZPIC, a wholly owned Missouri insurance subsidiary, during Q2; it had not begun underwriting policies as of June 30, 2021.
- The company approved a share repurchase program covering May 2021 through May 2026, but repurchased no shares during Q2.
Guidance, outlook, management commentary, and risks
The filing does not provide a clear quantitative revenue or earnings outlook. Management expects to continue investing in member acquisition, technology, member experience, product initiatives, and insurance subsidiaries. The company stated that COVID-19 had not materially adversely affected the business as of the filing date, but its future effects remain uncertain.
Key risks include continued net losses, the possibility that acquisition costs will not be recovered, rising veterinary invoice expense, reserve estimation uncertainty, regulatory capital requirements, approval of pricing changes, competition, foreign exchange exposure, dependence on third-party distribution and underwriting relationships, cybersecurity and technology failures, and potential regulatory or legal proceedings.
The veterinary invoice reserve is actuarially estimated and may change materially as payment patterns, claim frequency, veterinary costs, and utilization develop. The company also remains engaged with a limited number of state insurance regulators regarding a legacy issue involving licensing of employees who assisted with telephone enrollment; management believes it is adequately reserved and that the matters are not material.
Management reported that disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting identified during the period.
Important facts for investors to verify
- Whether revenue growth can continue while gross margin and operating margin remain under pressure.
- Whether higher pet acquisition costs are justified by realized retention, lifetime value, and eventual cash returns.
- Whether veterinary invoice frequency, utilization, and cost trends require unfavorable reserve increases or additional pricing actions.
- The amount of liquidity that is restricted or required to remain within insurance subsidiaries for risk-based capital and regulatory purposes.
- Whether negative operating cash flow persists as the company expands sales and marketing spending.
- The progress and financial impact of ZPIC, the Aquarium acquisition, the Aflac strategic alliance, and other strategic initiatives.
- Any developments in state licensing inquiries, insurance regulation, legal proceedings, or required capital levels.