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Trupanion Reports Third Quarter 2019 Results

SEATTLE, Nov. 05, 2019 (GLOBE NEWSWIRE) -- Trupanion, Inc. (TRUP), a leading provider of medical insurance for cats and dogs, today announced financial results for the third quarter ended September 30, 2019.

“Performance in the third quarter was strong. Our subscription business benefitted from a double digit increase in lead volume and strong ARPU and retention,” said Darryl Rawlings, Founder and CEO of Trupanion. “Our solid financial position continues to provide us the opportunity to invest in areas we believe could be meaningful contributors to our long-term growth.”

Third Quarter 2019 Financial and Business Highlights

  • Total revenue was $99.3 million, an increase of 27% compared to the third quarter of 2018.
  • Total enrolled pets (including pets from our other business segment) was 613,694 at September 30, 2019, an increase of 23% over September 30, 2018.
  • Subscription business revenue was $82.6 million, an increase of 23% compared to the third quarter of 2018.
  • Subscription enrolled pets was 479,427 at September 30, 2019, an increase of 15% over September 30, 2018.
  • Net income was $0.8 million, or $0.02 per basic and diluted share, compared to net income of $1.2 million, or $0.04 per basic and $0.03 per diluted share, in the third quarter of 2018.
  • Adjusted EBITDA was $3.9 million, compared to adjusted EBITDA of $3.7 million in the third quarter of 2018.
  • Operating cash flow was $4.7 million and free cash flow was $2.9 million for the third quarter of 2019. This compared to operating cash flow of $4.2 million and free cash flow of $3.2 million, which excludes the cash outflow of $49.3 million related to the third quarter 2018 purchase of our headquarters building. 

Year-to-date 2019 Financial and Business Highlights

  • Total revenue was $278.5 million, an increase of 26% compared to the first nine months of 2018.
  • Subscription business revenue was $234.6 million, an increase of 22% compared to the first nine months of 2018.
  • Net loss was $(2.4) million, or $(0.07) per basic and diluted share, compared to a net loss of $(0.7) million, or $(0.02) per basic and diluted share, in the first nine months of 2018.
  • Adjusted EBITDA was $6.9 million, compared to adjusted EBITDA of $6.1 million in the first nine months of 2018.
  • Operating cash flow was $11.6 million and free cash flow was $8.0 million for the first nine months of 2019. This compared to operating cash flow of $9.0 million and free cash flow of $5.7 million, which excludes the cash outflow of $52.5 million related to the third quarter 2018 purchase of our headquarters building. 

Share Repurchase Program

Trupanion’s Board of Directors has adopted a share repurchase program that will allow the repurchase of up to $15 million of the Company’s common stock over the next 12 months. 

Rawlings commented, “Our capital allocation strategy is predominately focused on acquiring new pets within our targeted internal rate of return.  Our share repurchase program is representative of our philosophy to take advantage of points in time in which our share price is trading well below our estimate of intrinsic value and when we have a high degree of confidence that the rate of return on that investment will be greater than our existing pet acquisition spend.”

Any repurchase will be subject to quarterly assessments based on set parameters that include the uses of capital in a given quarter and the market price of the Company’s common stock relative to its estimate of intrinsic value.

Revenue by Quarter
A chart accompanying this announcement is available at
https://www.globenewswire.com/NewsRoom/AttachmentNg/90589b98-645b-4a60-941d-dfd3cb16fa2e

Conference Call
Trupanion’s management will host a conference call today to review its third quarter 2019 results. The call is scheduled to begin shortly after 1:30 p.m. PT/ 4:30 p.m. ET. A live webcast will be accessible through the Investor Relations section of Trupanion’s website at http://investors.trupanion.com and will be archived online for 3 months upon completion of the conference call. Participants can access the conference call by dialing 1-877-407-0784 (United States) or 1-201-689-8560 (International). A telephonic replay of the call will also be available after the completion of the call, by dialing 1-844-512-2921 (United States) or 1-412-317-6671 (International) and entering the replay pin number: 13695548.

About Trupanion
Trupanion is a leader in medical insurance for cats and dogs throughout the United States and Canada. For almost two decades, Trupanion has given pet owners peace of mind so they can focus on their pet's recovery, not financial stress. Trupanion is committed to providing pet owners with the highest value in pet medical insurance with unlimited payouts for the life of their pets. Trupanion is listed on NASDAQ under the symbol "TRUP". The company was founded in 2000 and is headquartered in Seattle, WA. Trupanion policies are issued, in the United States, by its wholly-owned insurance entity American Pet Insurance Company and, in Canada, by Omega General Insurance Company. For more information, please visit trupanion.com.

Forward-Looking Statements
This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 relating to, among other things, expectations, plans, prospects and financial results for Trupanion, including, but not limited to, its expectations regarding its ability to execute its business plans. These forward-looking statements are based upon the current expectations and beliefs of Trupanion’s management as of the date of this press release, and are subject to certain risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. All forward-looking statements made in this press release are based on information available to Trupanion as of the date hereof, and Trupanion has no obligation to update these forward-looking statements.

In particular, the following factors, among others, could cause results to differ materially from those expressed or implied by such forward-looking statements: the ability to achieve or maintain profitability and/or appropriate levels of cash flow in future periods; the ability to keep growing our membership base and revenue; the accuracy of assumptions used in determining appropriate member acquisition expenditures; the severity and frequency of claims; the ability to maintain high retention rates; the accuracy of assumptions used in pricing medical plan subscriptions and the ability to accurately estimate the impact of new products or offerings on claims frequency; actual claims expense exceeding estimates; regulatory and other constraints on the ability to institute, or the decision to otherwise delay, pricing modifications in response to changes in actual or estimated claims expense; the effectiveness and statutory or regulatory compliance of our Territory Partner model and of our Territory Partners, veterinarians and other third parties in recommending medical plan subscriptions to potential members; the ability to retain existing Territory Partners and increase the number of Territory Partners and active hospitals; compliance by us and those referring us members with laws and regulations that apply to our business, including the sale of a pet medical plan; the ability to maintain the security of our data; fluctuations in the Canadian currency exchange rate; the ability to protect our proprietary and member information; the ability to maintain our culture and team; the ability to maintain the requisite amount of risk-based capital; our ability to implement and maintain effective controls, including over financial reporting; the ability to protect and enforce Trupanion’s intellectual property rights; the ability to continue key contractual relationships with third parties; third-party claims including litigation and regulatory actions; the ability to recognize benefits from investments in new solutions and enhancements to Trupanion’s technology platform and website; and our ability to retain key personnel.

For a detailed discussion of these and other cautionary statements, please refer to the risk factors discussed in filings with the Securities and Exchange Commission (SEC), including but not limited to, Trupanion’s Annual Report on Form 10-K for the year ended December 31, 2018 and any subsequently filed reports on Forms 10-Q and 8-K. All documents are available through the SEC’s Electronic Data Gathering Analysis and Retrieval system at www.sec.gov or the Investor Relations section of Trupanion’s website at http://investors.trupanion.com.

Non-GAAP Financial Measures
Trupanion’s stated results may include certain non-GAAP financial measures. These non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies in its industry as other companies in its industry may calculate or use non-GAAP financial measures differently. In addition, there are limitations in using non-GAAP financial measures because the non-GAAP financial measures are not prepared in accordance with GAAP, may be different from non-GAAP financial measures used by other companies and exclude expenses that may have a material impact on Trupanion’s reported financial results. The presentation and utilization of non-GAAP financial measures is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with GAAP. Trupanion urges its investors to review the reconciliation of its non-GAAP financial measures to the most directly comparable GAAP financial measures in its consolidated financial statements, and not to rely on any single financial or operating measure to evaluate its business. These reconciliations are included below and on Trupanion’s Investor Relations website.

Because of varying available valuation methodologies, subjective assumptions and the variety of equity instruments that can impact a company’s non-cash expenses, Trupanion believes that providing various non-GAAP financial measures that exclude stock-based compensation expense and depreciation and amortization expense allows for more meaningful comparisons between its operating results from period to period. Trupanion offsets sales and marketing expense with sign-up fee revenue in the calculation of net acquisition cost because it collects sign-up fee revenue from new members at the time of enrollment and considers it to be an offset to a portion of Trupanion’s sales and marketing expenses. Trupanion believes this allows it to calculate and present financial measures in a consistent manner across periods. Trupanion’s management believes that the non-GAAP financial measures and the related financial measures derived from them are important tools for financial and operational decision-making and for evaluating operating results over different periods of time.

 
Trupanion, Inc.
Consolidated Statements of Operations
(in thousands, except share data)
 
  Three Months Ended September 30,   Nine Months Ended September 30,
  2019   2018   2019   2018
   
  (unaudited)
Revenue:              
Subscription business $ 82,613     $ 67,421     $ 234,571     $ 192,805  
Other business   16,663       10,743       43,882       28,511  
Total revenue 99,276     78,164     278,453     221,316  
Cost of revenue:              
Subscription business(1) 66,770     54,753     191,421     158,100  
Other business 15,061     9,667     39,842     26,055  
  Total cost of revenue(2) 81,831     64,420     231,263     184,155  
Gross profit:              
Subscription business 15,843     12,668     43,150     34,705  
Other business 1,602     1,076     4,040     2,456  
Total gross profit 17,445     13,744     47,190     37,161  
Operating expenses:              
Technology and development(1) 2,271     2,299     7,518     6,761  
General and administrative(1) 5,017     4,174     15,655     13,242  
Sales and marketing(1) 9,255     6,365     26,239     18,005  
Total operating expenses 16,543     12,838     49,412     38,008  
Gain (loss) from investment in joint venture (59 )       (331 )    
Operating income (loss) 843     906     (2,553 )   (847 )
Interest expense 340     336     974     887  
Other income, net (297 )   (628 )   (1,094 )   (1,071 )
Income (loss) before income taxes 800     1,198     (2,433 )   (663 )
Income tax expense (benefit) 18     (7 )   12     (11 )
Net income (loss) $ 782     $ 1,205     $ (2,445 )   $ (652 )
               
Net income (loss) per share:              
Basic $ 0.02     $ 0.04     $ (0.07 )   $ (0.02 )
Diluted $ 0.02     $ 0.03     $ (0.07 )   $ (0.02 )
Weighted average shares of common stock outstanding:              
Basic 34,876,782     33,129,416     34,593,345     31,376,239  
Diluted 36,399,136     36,385,360     34,593,345     31,376,239  
               
(1)Includes stock-based compensation expense as follows: Three Months Ended September 30,
  Nine Months Ended September 30,
  2019   2018   2019   2018
Cost of revenue $ 258     $ 249     $ 783     $ 698  
Technology and development 94     58     267     167  
General and administrative 916     634     2,452     1,708  
Sales and marketing 577     358     1,573     980  
Total stock-based compensation expense $ 1,845     $ 1,299     $ 5,075     $ 3,553  
               
(2)The breakout of cost of revenue between veterinary invoice expense and other cost of revenue is as follows:
 
  Three Months Ended September 30,   Nine Months Ended September 30,
  2019   2018   2019   2018
Veterinary invoice expense $ 69,086     $ 54,303     $ 196,301     $ 156,196  
Other cost of revenue 12,745     10,117     34,962     27,959  
  Total cost of revenue $ 81,831     $ 64,420     $ 231,263     $ 184,155  


 
Trupanion, Inc.
Consolidated Balance Sheets
(in thousands, except share data)
 
  September 30, 2019   December 31, 2018
  (unaudited)    
Assets      
Current assets:      
Cash and cash equivalents $ 25,027     $ 26,552  
Short-term investments 71,424     54,559  
Accounts and other receivables 50,144     31,565  
Prepaid expenses and other assets 4,861     5,300  
Total current assets 151,456     117,976  
Restricted cash 1,400     1,400  
Long-term investments, at fair value 4,102     3,554  
Property and equipment, net 69,568     69,803  
Intangible assets, net 7,692     8,071  
Other long-term assets 8,769     6,706  
Total assets $ 242,987     $ 207,510  
Liabilities and stockholders’ equity      
Current liabilities:      
Accounts payable $ 2,815     $ 2,767  
Accrued liabilities and other current liabilities 13,555     11,347  
Reserve for veterinary invoices 19,299     16,062  
Deferred revenue 49,900     33,027  
Total current liabilities 85,569     63,203  
Long-term debt 22,071     12,862  
Deferred tax liabilities 1,002     1,002  
Other liabilities 1,499     1,270  
Total liabilities 110,141     78,337  
Stockholders’ equity:      
Common stock: $0.00001 par value per share, 100,000,000 shares authorized; 35,865,687
and 34,935,822 shares issued and outstanding at September 30, 2019; 34,781,121 and
34,025,136 shares issued and outstanding at December 31, 2018
     
Preferred stock: $0.00001 par value per share, 10,000,000 shares authorized; no shares
issued and outstanding
     
Additional paid-in capital 230,209     219,838  
Accumulated other comprehensive loss (506 )   (753 )
Accumulated deficit (86,156 )   (83,711 )
Treasury stock, at cost: 929,865 shares at September 30, 2019 and 755,985 shares at
December 31, 2018
(10,701 )   (6,201 )
Total stockholders’ equity 132,846     129,173  
Total liabilities and stockholders’ equity $ 242,987     $ 207,510  


 
Trupanion, Inc.
Consolidated Statements of Cash Flows
(in thousands)
 
  Three Months Ended September 30,   Nine Months Ended September 30,
  2019   2018   2019   2018
   
  (unaudited)
Operating activities              
Net income (loss) $ 782     $ 1,205     $ (2,445 )   $ (652 )
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
             
Depreciation and amortization 1,181     1,136     4,358     3,027  
Stock-based compensation expense 1,845     1,299     5,075     3,553  
Other, net 46     (275 )   143     (237 )
Changes in operating assets and liabilities:              
Accounts and other receivables (6,642 )   (3,424 )   (18,582 )   (11,592 )
Prepaid expenses and other assets (714 )   269     275     (549 )
Accounts payable, accrued liabilities, and other liabilities 1,363     1,282     2,806     3,849  
Reserve for veterinary invoices 1,042     191     3,187     1,484  
Deferred revenue 5,841     2,472     16,808     10,133  
Net cash provided by operating activities 4,744     4,155     11,625     9,016  
Investing activities              
Purchases of investment securities (13,270 )   (9,181 )   (45,492 )   (29,567 )
Maturities of investment securities 6,329     12,390     28,224     27,405  
Purchases of other investments     (3,000 )       (3,000 )
Acquisition of lease intangibles, related to corporate real estate
acquisition
    (2,959 )       (2,959 )
Purchases of property, equipment and intangible assets (1,806 )   (50,236 )   (3,586 )   (55,856 )
Other (463 )   (965 )   (1,937 )   (852 )
Net cash used in investing activities (9,210 )   (53,951 )   (22,791 )   (64,829 )
Financing activities              
Proceeds from public offering of common stock, net of offering
costs
    (196 )       65,690  
Proceeds from exercise of stock options 629     1,216     2,255     2,872  
Shares withheld to satisfy tax withholding (1,363 )   (1,839 )   (1,610 )   (1,839 )
Proceeds from debt financing, net of financing fees 3,000     (61 )   9,167     9,189  
Repayment of debt financing     (10,000 )       (10,000 )
Other financing (23 )   (179 )   (438 )   (535 )
Net cash provided by (used in) financing activities 2,243     (11,059 )   9,374     65,677  
Effect of foreign exchange rate changes on cash, cash equivalents,
and restricted cash, net
(129 )   108     267     (93 )
Net change in cash, cash equivalents, and restricted cash (2,352 )   (60,747 )   (1,525 )   9,771  
Cash, cash equivalents, and restricted cash at beginning of period 28,779     96,824     27,952     26,306  
Cash, cash equivalents, and restricted cash at end of period $ 26,427     $ 36,077     $ 26,427     $ 36,077  


 
The following tables set forth our key operating metrics:
                               
  Nine Months Ended
September 30,

                       
  2019   2018                        
Total pets enrolled (at period end) 613,694     497,942                          
Total subscription pets enrolled (at period end) 479,427     416,527                          
Monthly average revenue per pet $ 57.14     $ 54.06                          
Lifetime value of a pet (LVP) $ 749     $ 714                          
Average pet acquisition cost (PAC) $ 209     $ 157                          
Average monthly retention 98.59 %   98.61 %                        
                               
                               
  Three Months Ended
  Sept. 30,
2019
  Jun. 30,
2019
  Mar. 31,
2019
  Dec. 31,
2018
  Sept. 30,
2018
  Jun. 30,
2018
  Mar. 31,
2018
  Dec. 31,
2017
Total pets enrolled (at period end) 613,694     577,686     548,002     521,326     497,942     472,480     446,533     423,194  
Total subscription pets enrolled (at period end) 479,427     461,314     445,148     430,770     416,527     401,033     385,640     371,683  
Monthly average revenue per pet $ 58.12     $ 57.11     $ 56.13     $ 55.15     $ 54.55     $ 53.96     $ 53.62     $ 53.17  
Lifetime value of a pet (LVP) $ 749     $ 722     $ 724     $ 710     $ 714     $ 732     $ 727     $ 727  
Average pet acquisition cost (PAC) $ 208     $ 213     $ 205     $ 186     $ 155     $ 150     $ 165     $ 184  
Average monthly retention 98.59 %   98.57 %   98.58 %   98.6 %   98.61 %   98.64 %   98.63 %   98.63 %
                               


The following table reflects the reconciliation of cash provided by operating activities to free cash flow (in thousands):
               
  Three Months Ended
September 30,
  Nine Months Ended
September 30,
  2019   2018   2019   2018
Net cash provided by operating activities $ 4,744     $ 4,155     $ 11,625     $ 9,016  
Purchases of property and equipment (1,806 )   (50,236 )   (3,586 )   (55,856 )
Free cash flow $ 2,938     $ (46,081 )   $ 8,039     $ (46,840 )
Exclude earnest money deposit for building purchase     49,284         52,534  
Free cash flow, excluding earnest money deposit for building purchase $ 2,938     $ 3,203     $ 8,039     $ 5,694  


 
The following table reflects the reconciliation of GAAP measures to non-GAAP measures (in thousands, except percentages):
               
  Three Months Ended
September 30,
  Nine Months Ended
September 30,
  2019   2018   2019   2018
Veterinary invoice expense $ 69,086     $ 54,303     $ 196,301     $ 156,196  
Stock-based compensation expense (169 )   (153 )   (515 )   (421 )
Cost of goods $ 68,917     $ 54,150     $ 195,786     $ 155,775  
% of revenue 69.4 %   69.3 %   70.3 %   70.4 %
               
Other cost of revenue $ 12,745     $ 10,117     $ 34,962     $ 27,959  
Stock-based compensation expense (89 )   (96 )   (268 )   (277 )
Variable expenses $ 12,656     $ 10,021     $ 34,694     $ 27,682  
% of revenue 12.7 %   12.8 %   12.5 %   12.5 %
               
Subscription gross profit $ 15,843     $ 12,668     $ 43,150     $ 34,705  
Stock-based compensation expense 258     249     783     698  
Non-GAAP subscription gross profit $ 16,101     $ 12,917     $ 43,933     $ 35,403  
% of subscription revenue 19.5 %   19.2 %   18.7 %   18.4 %
               
Gross profit $ 17,445     $ 13,744     $ 47,190     $ 37,161  
Stock-based compensation expense 258     249     783     698  
Non-GAAP gross profit $ 17,703     $ 13,993     $ 47,973     $ 37,859  
% of revenue 17.8 %   17.9 %   17.2 %   17.1 %
               
Technology and development expense $ 2,271     $ 2,299     $ 7,518     $ 6,761  
General and administrative expense 5,017     4,174     15,655     13,242  
Depreciation and amortization expense (1,181 )   (1,136 )   (4,358 )   (3,027 )
Stock-based compensation expense (1,010 )   (692 )   (2,719 )   (1,875 )
Fixed expenses $ 5,097     $ 4,645     $ 16,096     $ 15,101  
% of revenue 5.1 %   5.9 %   5.8 %   6.8 %
               
Sales and marketing expense $ 9,255     $ 6,365     $ 26,239     $ 18,005  
Stock-based compensation expense (577 )   (358 )   (1,573 )   (980 )
Acquisition cost $ 8,678     $ 6,007     $ 24,666     $ 17,025  
% of revenue 8.7 %   7.7 %   8.9 %   7.7 %


The following tables reflect the reconciliation of acquisition cost and net acquisition cost to sales and marketing expense (in thousands):
                               
  Nine Months Ended
September 30,

                       
  2019   2018                        
Sales and marketing expenses $ 26,239     $ 18,005                          
Excluding:                              
Stock-based compensation expense (1,573 )   (980 )                        
Acquisition cost 24,666     17,025                          
Net of:                              
Sign-up fee revenue (2,227 )   (1,933 )                        
Other business segment sales and marketing expense (262 )   (275 )                        
Net acquisition cost $ 22,177     $ 14,817                          
                               
  Three Months Ended
  Sept. 30,
2019
  Jun. 30,
2019
  Mar. 31,
2019
  Dec. 31,
2018
  Sept. 30,
2018
  Jun. 30,
2018
  Mar. 31,
2018
  Dec. 31,
2017
Sales and marketing expenses $ 9,255     $ 8,757     $ 8,227     $ 6,994     $ 6,365     $ 5,702     $ 5,938     $ 5,781  
Excluding:                              
Stock-based compensation expense (577 )   (567 )   (429 )   (355 )   (358 )   (349 )   (273 )   (172 )
Acquisition cost 8,678     8,190     7,798     6,639     6,007     5,353     5,665     5,609  
Net of:                              
Sign-up fee revenue (790 )   (734 )   (703 )   (655 )   (693 )   (624 )   (616 )   (550 )
Other business segment sales and marketing expense (94 )   (38 )   (130 )   (102 )   (99 )   (88 )   (87 )   (56 )
Net acquisition cost $ 7,794     $ 7,418     $ 6,965     $ 5,882     $ 5,215     $ 4,641     $ 4,962     $ 5,003  
                               


The following tables reflect the reconciliation of adjusted EBITDA to net income (loss) (in thousands):
                               
  Nine Months Ended
September 30,

                       
  2019   2018                        
Net loss $ (2,445 )   $ (652 )                        
Excluding:                              
Stock-based compensation expense 5,075     3,553                          
Depreciation and amortization expense 4,358     3,027                          
Interest income (1,165 )   (628 )                        
Interest expense 974     887                          
Other non-operating expenses 223                              
Income tax expense (benefit) 12     (11 )                        
Gain from equity method investment (125 )   (107 )                        
Adjusted EBITDA $ 6,907     $ 6,069                          
                               
  Three Months Ended
  Sept. 30,
2019
  Jun. 30,
2019
  Mar. 31,
2019
  Dec. 31,
2018
  Sept. 30,
2018
  Jun. 30,
2018
  Mar. 31,
2018
  Dec. 31,
2017
Net income (loss) $ 782     $ (1,931 )   $ (1,296 )   $ (275 )   $ 1,205     $ (377 )   $ (1,480 )   $ (838 )
Excluding:                              
Stock-based compensation expense 1,845     1,873     1,357     1,222     1,299     1,286     968     855  
Depreciation and amortization expense 1,181     1,564     1,613     1,485     1,136     964     927     1,024  
Interest income (411 )   (412 )   (342 )   (234 )   (317 )   (179 )   (132 )   (3 )
Interest expense 340     317     317     311     336     332     219     163  
Other non-operating expenses 122     101                          
Income tax expense (benefit) expense 18     (46 )   40     4     (7 )   91     (95 )   (482 )
Gain from equity method investment     (125 )               (107 )        
Adjusted EBITDA $ 3,877     $ 1,341     $ 1,689     $ 2,513     $ 3,652     $ 2,010     $ 407     $ 719  
                               

Contacts:

Investors:
Laura Bainbridge, Head of Investor Relations
206.607.1929
InvestorRelations@trupanion.com