Trupanion, Inc. — 2021 Q1 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 unaudited three months ended March 31, 2021, compared with the three months ended March 31, 2020. The company reports subscription and other business segments.
Financial and Operating Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $154.7 million | $111.3 million | Up 39% |
| Subscription revenue | $113.3 million | $89.5 million | Up 27% |
| Other business revenue | $41.4 million | $21.8 million | Up 90% |
| Gross profit | $21.1 million | $17.9 million | Up 18% |
| Gross margin | 14% | 16% | Down approximately 200 bps |
| Operating loss | $12.7 million | $1.0 million | Loss widened |
| Operating margin | (8%) | (1%) | Down approximately 700 bps |
| Net loss | $12.4 million | $1.1 million | Loss widened |
| Net loss per share | $0.31 | $0.03 | Loss increased |
| Cash used in operating activities | $1.7 million | Cash provided of $2.9 million | Negative swing |
Subscription business operating loss was $12.1 million versus $0.9 million in the prior-year quarter. Other business operating loss was $0.6 million versus $0.01 million. Subscription cost of revenue was 84% of subscription revenue, compared with 82% in the prior-year period; other business cost of revenue remained 92% of segment revenue.
- Total pets enrolled at period-end increased 37% to 943,854.
- Subscription pets enrolled increased 20% to 609,835.
- Monthly average revenue per subscription pet increased 7% to $62.97.
- Average monthly retention improved to 98.73% from 98.59%.
- Average pet acquisition cost increased 13% to $279 from $247.
- Sales and marketing expense increased 89% to $19.7 million, or 13% of revenue, from 9%.
- Stock-based compensation increased to $8.4 million from $1.7 million, including $4.3 million related to a one-time 2020 performance grant.
Balance Sheet, Cash Flow, Debt, and Liquidity
- Cash and cash equivalents were $133.1 million at March 31, 2021, compared with $139.9 million at December 31, 2020.
- Short-term investments were $91.3 million, and total cash, cash equivalents, and short-term investments were approximately $224.5 million.
- Total assets were $513.7 million and total liabilities were $177.6 million.
- Deferred revenue increased to $110.9 million from $92.5 million at year-end 2020.
- Cash, cash equivalents, and restricted cash decreased by $6.8 million during the quarter to $139.4 million.
- Investing cash outflow was $4.6 million, primarily for net investment purchases and property, equipment, and intangible assets.
- Financing cash outflow was $0.6 million, primarily from shares withheld for employee tax obligations.
- The company terminated its line of credit and repaid all outstanding obligations in December 2020; the filing does not report outstanding debt at March 31, 2021.
- Management believes existing liquidity is sufficient to fund operations and capital requirements for the next 12 months, while noting that additional financing may be pursued for growth or regulatory capital needs.
Material Changes Versus the Prior Comparable Period
- Revenue growth was strong, but profitability deteriorated as sales and marketing, stock-based compensation, technology investment, and depreciation and amortization increased faster than revenue.
- Subscription veterinary invoice expense increased 28%, while subscription enrollment increased 20%; veterinary invoice expense per pet increased 6%.
- Sales and marketing investment increased substantially to support a 54% increase in new subscription pet enrollments.
- Depreciation and amortization increased 124% to $3.1 million, including incremental amortization from the Aquarium Software acquisition.
- The October 2020 acquisition of Aquarium Software was funded with approximately $48.3 million of net cash. Its operating results remained immaterial to consolidated results, but acquired intangible assets increased amortization.
- Accounts receivable increased to $117.9 million from $99.1 million, while deferred revenue increased to $110.9 million from $92.5 million, affecting operating cash flow timing.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide a clear numerical revenue or earnings outlook for 2021. Management expects to continue investing in member acquisition, member experience, technology, and growth initiatives. Management stated that COVID-19 had not caused a material adverse impact through the filing date, but its effects on enrollments, cancellations, veterinary invoice expense, productivity, partners, and operating conditions remain uncertain.
- Veterinary invoice reserves totaled $30.1 million at March 31, 2021. Reserve estimates depend on actuarial assumptions and may materially affect future results.
- Insurance entities must maintain regulatory capital and surplus. APIC’s risk-based capital requirement was $79.1 million as of December 31, 2020, compared with $93.2 million maintained.
- Most insurance-entity assets may be unavailable for general corporate purposes without regulatory approval. Capital needs are expected to rise as enrollment grows.
- The company faces competition, member-acquisition cost volatility, retention risk, pricing and rate-approval constraints, foreign-exchange exposure, cybersecurity risk, and dependence on veterinarians, Territory Partners, strategic partners, and third-party underwriters.
- State regulators continue to review a legacy issue concerning whether certain enrollment personnel required insurance licenses. The company believes it has adequately reserved for the matter and considers related potential liabilities non-material.
- The company has a $7.0 million preferred-stock investment in a variable-interest entity, carried at $7.9 million fair value, and a $2.5 million revolving line of credit to that entity.
- On April 29, 2021, after quarter-end, the board approved a share repurchase program covering May 2021 through May 2026. Repurchases are limited to 25% of estimated adjusted operating income for a given year, and no repurchases were assured.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2021, with no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether membership growth and retention remain strong enough to offset rising pet acquisition costs and veterinary invoice expense.
- Whether the company can return to positive operating cash flow and achieve sustainable profitability while continuing growth investments.
- The adequacy of veterinary invoice reserves, particularly as veterinary care costs, utilization, and use of direct-payment software increase.
- The amount of insurance-company capital restricted by regulatory requirements and the resulting availability of cash for corporate uses.
- The financial contribution, integration progress, and amortization impact of the Aquarium Software acquisition.
- Future effects of COVID-19, regulatory inquiries, licensing requirements, rate approvals, and other insurance-law developments.
- Execution and economic impact of the Aflac strategic alliance and the post-quarter-end share repurchase authorization.