Trupanion, Inc. — Q2 2015 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods. Trupanion provides direct-to-consumer monthly medical-plan subscriptions for cats and dogs in the United States, Canada and Puerto Rico. The company reports subscription and other business segments.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $35.6 million, up 27% | $68.9 million, up 28% |
| Gross profit | $5.8 million; 16% margin | $11.4 million; 16% margin |
| Operating loss | $(4.6) million | $(9.2) million |
| Net loss | $(4.6) million | $(9.6) million |
| Net loss per share | $(0.17) | $(0.35) |
| Adjusted EBITDA | $(3.2) million | $(6.5) million |
- Subscription revenue was $32.2 million for the quarter and $62.3 million for the six-month period, representing 91% and 90% of consolidated revenue, respectively.
- Cost of revenue increased to 84% of consolidated revenue from 82% in both comparable periods, reducing gross margin from 18% to 16%.
- Subscription-business gross margin declined to 17% from 19% for both the quarter and six-month period. Claims expenses were elevated because of higher claim frequency and delays in implementing pricing increases in certain states.
- Operating expenses increased 20% to $10.4 million in the quarter and 26% to $20.6 million for the six-month period. Six-month sales and marketing, technology and development, and general and administrative expenses were $7.2 million, $5.7 million and $7.7 million, respectively.
- At June 30, 2015, total pets enrolled were 259,948, including 241,808 subscription pets, up 25% and 26%, respectively, from June 30, 2014. Average monthly retention was 98.67%.
- Monthly adjusted revenue per subscription pet was $44.73 for the six-month period, up from $43.34. Lifetime value per pet declined to $570 from $602, while average pet acquisition cost increased to $133 from $113.
Cash flow, liquidity and capital structure
- Cash used in operating activities was $8.9 million for the six months ended June 30, compared with $6.4 million in 2014.
- Cash used in investing activities was $3.4 million, including $2.6 million of property and equipment purchases.
- Cash used in financing activities was $14.5 million, primarily reflecting repayment of $14.9 million under the revolving credit facility.
- Cash and cash equivalents were $26.2 million at June 30, down from $53.1 million at December 31, 2014. Cash, cash equivalents and short-term investments totaled $47.7 million; including long-term investments, investments totaled $24.1 million.
- The company had no outstanding debt at June 30, 2015 and approximately $19.5 million available under its revolving line of credit, subject to borrowing limitations and covenants. Management stated that available liquidity and the facility should fund operations and statutory capital requirements for at least the next 12 months.
- Current liabilities were $21.4 million, including a $5.8 million claims reserve and $10.1 million of deferred revenue. Accumulated deficit was $66.7 million.
- Insurance subsidiaries held $23.1 million of investments and $8.6 million of other current assets subject to statutory capital, dividend and regulatory restrictions, limiting their availability for general corporate purposes.
Material changes versus the prior comparable period
- Revenue growth remained strong, driven primarily by a 26% increase in subscription pets and higher pricing and coverage levels. Canadian foreign-exchange effects reduced reported revenue by approximately $1.0 million in the quarter and $1.9 million for the six-month period.
- Claims costs grew faster than subscription revenue, increasing subscription cost of revenue to 83% from 81%. Management expected claims ratios and cost of revenue to remain elevated during 2015 while pricing changes take effect on members’ annual renewal dates.
- Adjusted EBITDA deteriorated to a $6.5 million loss from a $4.5 million loss, reflecting continued investment in growth and operating infrastructure.
- Interest expense declined substantially following debt repayment. The company also repaid its remaining $14.9 million facility balance during the first quarter.
- Segment reporting was changed effective January 1, 2015. Certain enterprise-oriented enrollments were moved from subscription business to other business, and prior periods were recast.
- The company paid $0.8 million to the Canada Revenue Agency during the first six months for GST and HST obligations relating to 2007–2013.
Outlook, risks and unusual items
- Management expects to continue investing in member acquisition, technology, claims administration and member experience. It expects operating cash flows to remain negative until enrollment reaches levels sufficient to support cash-flow breakeven.
- Management targets a lifetime-value-to-pet-acquisition-cost ratio of approximately 5-to-1, but reported lifetime value declined while acquisition cost increased in the current period.
- Key risks include continued losses, elevated claims frequency or severity, insufficient or delayed regulatory approval for pricing increases, inadequate claims reserves, retention deterioration as the member base grows, and higher acquisition costs.
- Insurance regulation and risk-based capital requirements may restrict the use of subsidiary capital. APIC’s stated risk-based capital requirement was $22.6 million at December 31, 2014, versus $23.7 million maintained; requirements may increase as enrollment grows.
- The company had accrued $0.3 million for a Washington State Office of the Insurance Commissioner inquiry involving licensing matters. Additional loss was reasonably possible, but the company could not estimate a further loss range.
- Future commitments included approximately $0.8 million in 2015, $1.8 million in 2016 and $0.7 million in 2017 under strategic marketing, service-provider and other agreements.
- On July 24, 2015, the company granted options for 426,549 shares at an exercise price of $7.78 per share, vesting over four years.
- Management reported effective disclosure controls and procedures and no material changes in internal control over financial reporting during the period.
Important facts for investors to verify
- Whether pricing increases are implemented as planned and reduce the elevated claims ratio without materially harming retention.
- Trends in subscription pet growth, monthly retention, lifetime value per pet and acquisition cost, including the sustainability of the target 5-to-1 relationship.
- Whether operating losses and negative operating cash flow improve before available liquidity and statutory capital become constrained.
- The adequacy of the $5.8 million claims reserve and the potential financial or licensing consequences of the Washington regulatory inquiry.
- Availability of insurance-subsidiary capital, compliance with risk-based capital requirements and restrictions on dividends from APIC and the Bermuda segregated account.
- Reliance on veterinary referrals, the unaffiliated general-agent relationship and Canadian underwriting arrangements, including termination rights and margin implications.
- Non-GAAP adjustments underlying adjusted revenue, lifetime value, acquisition cost and adjusted EBITDA, particularly recurring stock-based compensation and exclusions from reported results.