Trupanion may easily surpass 1 million pets insured by next quarter

Trupanion hosted its Q2’23 earnings call on Aug 3, 2023. Select highlights:

• Key priorities:
  • Expansion of adjusted operating margin
  • Efficient deployment of capital
  • Return to free cash flow positive by Q4 2023
• Q2 Highlights:
  • Adjusted operating income: $16.8 million
  • Margin expansion observed after period of compression
  • Expect further margin expansion in H2 2023
  • Deployed $19 million to acquire over 75,000 gross new pets
  • Added 23% more pets YoY with 6% less in acquisition spend
  • Cost to acquire a pet 24% lower than prior year period
  • Achieved a $3.9 million sequential improvement in free cash flow
  • Further actions taken to reduce spend towards free cash flow positive in Q4
• Encouraging progress made over the past 4 months.
• Results more closely aligned with expectations.
• Focus on executing diligently in a dynamic environment.
• Long-term goal: Grow adjusted operating income and deploy capital at high internal rates of return.
• Throttling back spend and allocating capital to accurately priced markets and geographies.
• Understanding and managing spend based on lifetime value of pets is crucial.
• Pets’ lifetime value can vary significantly based on individual characteristics and factors like coverage, products, and markets.
• The company aims to report on the internal rate of return for new mix of pets in a granular way.
• Previous assumptions of all pets behaving similarly are becoming less relevant due to the introduction of new products and markets.
• New products and geographies may have different ARPU and retention rates, affecting the estimated returns on spend.
• The company plans to provide more granularity into the returns of various products, channels, and geographies.
• Recent changes have resulted in signs of margin expansion and progress towards achieving free cash flow positive in Q4.
• The decentralized management approach is delivering stronger and more predictable results.
• Good growth and scale seen in new initiatives and international efforts, expanding the addressable market.
• Added over 75,000 gross pets in the quarter.
• Achieved strong growth despite intentional 6% reduction in pet acquisition investment compared to the previous year.
• Started adjusting and reducing acquisition spend to focus on areas with the strongest lifetime value.
• Focused on geographies where the company can provide value to members consistent with brand and pricing promise.
• Estimated internal rate of return for the quarter was 25%.
• Continued pricing refinement and rate adjustments across North America.
• Average rate flowing through the book in Q2: 16.3%, expected to reach 20.8% by the end of the month.
• Pricing increases will be applied to new members and roll through the book as policies renew.
• Expected rate to increase to 22.9% by the end of September and 23.9% by the end of October.
• Focus on returning to the target value proposition of 71%.
• Saw 60 basis points of sequential improvement in value proposition target and subscription adjusted operating margin in the quarter.
• Cost of care growth consistent with assumptions.
• On track to achieve 15% adjusted operating margin target toward the end of next year.
• Solid contribution from newer products and channels, particularly in Japan and Europe.
• Launching in Poland to add 8,000 hospitals to the addressable market.
• New initiatives ramping in market and contributing meaningfully to growth.
• Maintaining discipline in approach and balancing growth with living within financial guardrails.
• Took deliberate actions to reduce costs and improve efficiency.
• Progress in developing next-generation policy administration and clean adjudication platform.
• Positioning to deliver solid second-half performance and achieve positive free cash flow in Q4.
• Handing over to WEI for Q2 results and outlook for the remainder of the year.
• As of June 30, 2023, the company had over 943,000 pets.
• Average monthly retention for North American subscription products: 98.61% with an average life of 72 months.
• Monthly average revenue per pet: $64.41. New pet ARPU for North America subscription: $61.49.
• Year-over-year subscription revenue growth: 19%.
• Loss ratio for veterinary invoices: 77%, a sequential improvement of 60 basis points.
• Variable expenses as a percentage of revenue: 9.7%. Fixed expenses: 5.1%.
• Subscription business delivered adjusted operating income of $14.1 million or 8.2% of subscription revenue.
• Other business segment revenue: $97.3 million, up 32% YoY. Adjusted operating income: $2.6 million.
• Total adjusted operating income: $16.8 million in Q2, up 8% sequentially.
• Deployed $19 million to acquire over 75,000 new subscription pets in the quarter.
• Adjusted EBITDA loss: $3.2 million. Depreciation and amortization: $3.3 million. Stock-based compensation: $6.5 million.
• Net loss: $13.7 million or a loss of $0.33 per basic and diluted share, same as the prior year period.
• Operating cash flow: negative $3.4 million. Capital expenditures: $4.7 million. Free cash flow: negative $8.1 million.
• Ended the quarter with $236.1 million in cash and short-term investments.
• Full-year 2023 guidance: Revenue in the range of $1.73 billion to $1.89 billion, adjusted operating income in the range of $70 million to $80 million.
• Third quarter 2023 guidance: Total revenue expected to be in the range of $270 million to $275 million, adjusted operating income in the range of $18 million to $21 million.
• Revenue projections subject to conversion rate fluctuations between U.S. and Canadian currencies, using a 75% conversion rate in projections.
• Team successfully lowered average pet acquisition cost from $309 to $230 in a single year, showing progress in directing spend effectively.