Trupanion, Inc.
Q4 2014 Earnings Call Transcript

Published: 13 Feb 2015

[Operator:]

Good day and welcome to the Trupanion Fourth Quarter and 2014 Earnings Conference Call and webcast. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Miss Kimberly Esterkin, Investor Relations. Miss Esterkin, the floor is yours Ma’am.

[Kimberly Esterkin:]

Thank you, good afternoon and welcome to the Trupanion fourth quarter and fiscal year 2014 financial results conference call. Joining me today to discuss Trupanion’s results are Darryl Rawlings, Chief Executive Officer and Mike Banks, Chief Financial Officer. Each will be available for question and answer following today’s prepared remarks. Before we begin, I’d like to take this opportunity to remind everyone that during today’s conference call we will make certain forward-looking statements regarding the future operations, opportunities and financial performance of Trupanion within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These statements involve a high degree of known and unknown risks and uncertainty that could cause actual results to differ materially from those to be discussed. A detailed discussion of these and other risks and uncertainty that could cause actual results and events to differ materially from such forward-looking statements is included in our earnings release which can be found on our investor relations website as well as the company’s most recent reports on Forms 10-Q and 8-K filed with the Securities and Exchange Commission. The forward-looking statements made in today’s conference call are based on information available as of today February 12, 2015 and Trupanion assumes no obligation to update such statements to reflect events or circumstances as of today’s date. Also, I’d like to remind everyone that during the course of this conference call we will be discussing non-GAAP measures and talking about the Company’s performance. These non-GAAP measures are in addition to not a substitute for measures of financial performance prepared in accordance with U.S. GAAP. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP results which can be found in today’s press release or on Trupanion’s investor website under the financial information tab. Lastly, I would like to remind everyone that today’s call is also available via webcast on Trupanion’s investor website. A replay will also be available on the site. And with that I now like to turn the call over to Darryl, Trupanion’s Chief Executive Officer.

[Darryl Rawlings:]

Thank you, Kim. Good afternoon and thank you for your continued interest in Trupanion. I look forward to providing you with the 2014 results and our 2015 outlook. Starting with our growth, we had a strong year as we continue to build the new category of medical insurance for cats and dogs in North America. Total revenue for the year increased 38% to $116 million. Our direct-to-consumer monthly subscription revenues comprised over 90% of our total revenue in 2014. This means we have a highly visible recurring revenue business model. We continue to experience exceptional renewal rates with average monthly retention of 98.68% for the full year. Trupanion and its affiliates had 232,000 enrolled pets at the end of 2014. 218,500 of these came from our subscription business segment. Our direct-to-consumer monthly subscription pets, this is up 29% from the end of 2013. Average monthly revenue per pet our version of ARPU increased slightly over 4% for the year to $44.27. This was affected by the Canadian foreign exchange rate. Our ratio of LVP to PAC for the year was 5

[Michael Banks:]

Thanks, Darryl and good afternoon everyone. 2014 was a busy year for Trupanion. We entered the public markets and delivered strong performance in revenues, enrolled pets and average monthly retention. I will focus my commentary today on our fourth quarter results as well as provide our outlook for the first quarter and full year 2015. Unless I state otherwise I’ll be talking about non-GAAP expenses that excludes stock-based compensation both in terms of dollars as well as percentages of revenues and margins. We delivered yet another quarter of robust sequential and year-over-year revenue growth with fourth quarter total revenues up 33% year-over-year to $31.9 million. Total subscription revenues which comprised 91% of total revenues in the fourth quarter, were $29.1 million, up 36% year-over-year. Total subscription pets at the end of the fourth quarter were approximately 218,500, a 29% increase over the prior year period, and representing 94% of our total enrolled pets. The remaining 13,000 pets fall within our B2B business. Next quarter there’ll be a small re-class of our subscription pets as we move some employee benefit pets from our direct-to-consumer monthly subscription business to our other business which we determine will be appropriate for future periods. In local currencies, our average monthly adjusted revenue per pet grew at 6.6% in the United States year-over-year and at 7.8% in Canada. Adjusted revenue per pet was $44.88, up 4.2% from $43.07 in Q4, 2013, but down slightly from the third quarter of 2014 due to the decrease in Canadian foreign exchange rates. In the fourth quarter the Canadian FX rate drop to an average of 88% compared to an average FX rate of 92% in the recent third quarter. If the average Q3 foreign exchange rate held constant into our fourth quarter, our fourth quarter ARPU would have been $45.40 or $0.52 higher, and Q4 revenues would have been approximately $300,000 higher. And while the average revenue per pet increased in local currencies in Q4, our monthly member retention rate remain strong at an average of 98.68% for the quarter. Subscription business gross margin was in line with our expectations at 18.2% compared to 15.2% in the 2014 third quarter. Subscription gross profit was $5.3 million, a 36% increase over the prior year period. Our other business segment had revenues of $2.8 million, an increase of 8% over the prior year period. This segment gross margin was 11% for the quarter consistent with the prior year period. Our total gross profit was $5.6 million, an increase of 35% over the prior year period. Our fixed expenses which are comprised of general and administrative and core technology expenses, excluding expenses related to our Trupanion Express initiative were $4.6 million, 15% of total revenues. This was consistent with our expectations and down slightly as a percentage of revenue from 16% in the fourth quarter of 2013. We expect to see our fixed expenses begin to scale in 2015. One measure of profitability we consider is the gross margin, minus these fixed expenses but before sales and marketing. Internally we refer to this as our discretionary margin or profit. We think of this margin as the profit generated by our existing portfolio of pets. Under this view our discretionary margin for the quarter was 2% of subscription business revenues. Our long term goals to achieve a discretionary margin of 15% of subscription business revenues. Today we are choosing to spend our discretionary profit on occurring new pets and developing Trupanion Express. During the fourth quarter Trupanion spent an average of $141 to acquire a pet that has an estimated life time value of $590, a 4.2 times return on that acquisition cost. As expected pet acquisition cost increased over the prior year period fulfilling [ph] line with our expectations. As Darryl mentioned, our overall 2014 lifetime value of a pet to pet acquisition cost ratio remained in line with our target of 5 to 1. As we discussed last quarter, the increase in PAC is primarily due to our ongoing investment in our territory partners and our go to market strategy. Cost associated with our national sales conference for our territory partners, which was held in the fourth quarter. And lower pet enrollments during the fourth quarter due to seasonally fewer veterinary visits. This affect naturally inflates our acquisition costs per new pet given the majority of our sales and marketing spend is not seasonal in nature. We expect pet acquisition cost to decline slightly from Q4 level in 2015. They’ll be up over the prior periods. In the fourth quarter we incurred $1.1 million net of capitalization on the developing of Trupanion Express. In the fourth quarter we generated a net loss of $4.3 million compared to a net loss of $3.2 million in the fourth quarter of 2013. This Q4 net loss included non cash charges totaling $1.3 million comprised of depreciation and stock-based compensation, adjusted EBITDA with a loss of $2.9 million for the quarter, consistent with our expectations, but a decrease of 63% year-over-year. Turning to our balance sheet, we ended the fourth quarter with $53.1 million in cash and cash equivalent and $14.9 million in debt. We’re pleased with our overall financial position. I believe we are appropriately capitalized to fund our operations until we reach cash flow breakeven on a quarterly basis and important milestone we expect to achieve within 18 months. Let’s move on to discuss our outlook for Q1 and full year 2015. For the full year 2015, we expect total revenue to be in the range of $145 million to $150 million. For the first quarter we expect total revenue to be $31 million to $33 million. To provide more details, I’ll address our subscription business than I’ll turn to our other business segment. For the full year 2015, we expect subscription revenues to be in the range of $135 million to $139 million, which equates the year-over-year growth of 28% and 32%. For the first quarter of 2015, we expect subscriptions revenues of $28 million to $30 million. These revenue projections are impacted by the recent decline in the Canadian currency conversion rate. Our Canadian business represented 28% of our 2014 subscription business revenues. The average currency conversion rate for 2014 was 91% and we used 80% conversion rate in our 2015 projections which was the approximate conversion rate at the end of January. Our subscription business revenue growth rate in local currency is expected to be between 31% and 36% for 2015. These revenues converted at our assumed 80% Canadian currency exchange rate for 2015 results in a revenue growth rate in U.S. dollars between 29% and 34%. To put these 2015 revenue projections in the context of the recent currency exchange rates. If the average conversion rate for the recent third quarter of 2014 was apply to our revenue projections for 2015. The revenues in our 2015 guidance would be approximately $4 million to $5 million higher. We are expecting our pricing increases will wash through our subscription base throughout 2015 benefiting the second half of 2015 more than the first. In the first quarter we expect our subscription gross margin to be between 16% and 19%. We expect this to improve to 18% to 21% in the fourth quarter of 2015. We expect that our fixed expenses will began to scale going forward and our long term goal is for them to reach 5% of total revenues. Technology expenses will be higher in the first half of 2015 as we continue our investment and the development of Trupanion Express. We are forecasting to incur expenses net of capitalization of $4 million to $5 million on the development of this platform. Over the next quarters at which time the development will be substantially complete and the associated expenses for Trupanion Express will become part of our core technology. During 2015 we plan to continue to invest in expanding and improving our network of territory partners. We will also be incurring expenses to support our new partnership with VCA. In 2015 we expect our LVP to PAC ratio will range between 4

[Operator:]

Thank you, sir. We will now begin the question and answer session. [Operator Instructions] The first question we have, comes from Jon Baugh of Stifel. Please go ahead.

[Jon Baugh:]

Great. Thanks. And good afternoon guys. Maybe two or three and then I can follow the rest off line. But the first one, you gave a lot of metrics and colors on 2015, anything from just a total pets enrolled or new pets enrolled that you guys are targeting that you want to share?

[Michael Banks:]

Jonathan, we were not planning on giving specific numbers on the total enrolled pets, but if you look at the revenue projections in our average ARPU, you should be able to do the kind of reverse math.

[Jon Baugh:]

Got it. Okay. And then just – I think about the $4 million to $5 million hit in revenue that you called out from the strengthening dollar, I’m just trying to think about how that would flow through to hit on adjusted EBITDA, it’s on a dollar for dollar for dollar because you are sort of paying our claims in the local currencies, so is it rough math $5 million hit in revs [ph] would be about a $1 million in change hit to EBITDA, I think about 20% flowing through. Can you talk to that Mike or Darryl?

[Darryl Rawlings:]

Yes, Jonathan. Our expenses in Canada are about – we have a gross margin of let’s say 30%, so the hit to EBITDA is going to be about 30% of that revenue number.

[Jon Baugh:]

Okay. So about arguably $1.5 million down to EBITDA?

[Darryl Rawlings:]

That’s right.

[Jon Baugh:]

Okay. Got it. And then, Darryl, you actually got the claims expense a little bit more in line quickly then at least we were anticipating, but Mike you talked about 16% to 19% in 1Q which arguably would be a – if it were at the lower end that a modest step back, why would we take a modest step back before continuing to move forward. Is that just some variability in the business or is that contingent on the rollout of Trupanion Express and some of the fluctuations that might occur with that.

[Darryl Rawlings:]

It’s mainly to do with fluctuations in Trupanion Express, the roll on of our new rate and Q4 was little light on the claim side.

[Jon Baugh:]

Okay. Got it. And very last one, is it a high level or can you tell us where you want to be with Trupanion Express, whether that’s existing 2015 entering 2016, just when do you really expect to feel comfortable with the claims expense that accompanies express and when you really expect to hit on the gas? Thanks guys.

[Darryl Rawlings:]

Well, with the last question I would say that we’re pretty comfortable of understanding the impacts of today, but we’re going to roll through and plan on doubling the number of hospitals with the technology installed during 2015, so that we’re prepared in 2016 to start to hit the gas. So rough numbers going from about 150 or 200 hospitals to about 300 to 350 hospitals, and then in 2016 we look at been able to roll on 250 to 500 hospitals per quarter if our plans go well.

[Jon Baugh:]

Thanks very much guys.

[Operator:]

Our next question comes from Chris Marvin of Barclays.

[David Lee:]

Hi. This is David Lee calling in for Chris. I just had a quick question on, as you expand your Territory Partners program and established new partnerships like the one you established with VCA. Have you been seeing some same level of engagement and referral volume from the hospitals relative to the hospitals you had relationships for a longer time and then I have a follow-up question?

[Michael Banks:]

Yes. So we’ve been heavily focused on CIPO about trying to build out our national sales force which we called Territory Partners. We’re finding similar up trends in the time it takes to onboard the hospital and get them comfortable to be able to initiate conversation about Trupanion. And we’re existed about our partnership with VCA, but expect the similar type of roll on pattern that we have seen over the last four or five years.

[David Lee:]

Got it. That makes sense. And then just quickly on also how many of the active hospitals today have an exclusive one to one referral relationship with you guys versus having multiple insurance partners that they recommend?

[Darryl Rawlings:]

Well, we don’t lock anybody in with exclusives, but from a practical standpoint many of the hospitals only recommend Trupanion. So it’s not a number that we calculate or we say we have a contract. Veterinarians can choose to recommend whichever company that they feel is best serving their clients’ needs. I would say that our – of our active hospitals you might see somewhere between 20% and 40% of those hospitals would only be have Trupanion in their hospital, other ones may have a few others but might be recommending us first.

[David Lee:]

That’s very helpful. Thank you.

[Operator:]

The next question we have comes from Michael Graham of Canaccord.

[Michael Graham:]

Hey, guys. I have two questions, the first is one just the dynamic around the express, the connect product, and my understanding is that increases claim activity which therefore, because your cost plus model pushes ARPU. And it seems like as you mix in more pets that are doing that you’re going to continue to drive up ARPU? And I’m wondering if that’s true and what kind of churn activity or I know your retention rate was really good this quarter but are you seeing anything in terms of sign-ups or pet owners blocking were effectively higher prices. I just wonder if you could talk about that and then have one more?

[Darryl Rawlings:]

Sure. David, good question. The inflationary cost of veterinary medicine is something that we’ve been dealing with for the last 12 to 15 years since the company started. It’s actually one of the reasons that Trupanion is more relevant today than it was in the past. As the cost of Veterinary care goes higher with more diagnostics, more testings, more availability, there is a greater demand and need for our product and the ability for pet owners to be able to budget for the healthcare risks if the pet become sick or injured. As Mike described on a foreign currency exchange in the U.S. we had about 6% to 7% ARPU increased last year and in Canada it was about 7% ARPU increase. And as you saw from our retention rates we’ve had very, very sticky customers. In fact, I’m a little uncomfortable of how high retention rates are, but they’ve been occurring as we’ve been increasing the rate 6% or 7% last year.

[Michael Graham:]

Okay. And then I just want to ask on the VCA partnership, it seems like they are making a decision that they would like to see more of their pets that they’re caring for have insurance. And I’m just wondering how they think about the unit economics of switching a pet from uninsured to insured. How does that impact VCA’s economic model?

[Darryl Rawlings:]

Well, I think over the VCA is saying that if you provide medical insurance for cats and dogs which is the product that we’re offering that those clients are going to be able to come in more frequently and choose the higher path of treatment instead of the doctor having to say, you can choose plan A or plan B, they’re going to able to choose the plan recommendation by the veterinary and with cost not being a big driver. VCA as well as other hospitals have different wellness components in their system, so this is really about medical insurance and having – the pet owners be able to come in earlier more frequently and get the proper level of care.

[Michael Graham:]

Okay. Thanks very much. And just last quick one is if it’s possible for you guys to make that your prepared remarks available. There were lots of numbers in there. It would be really helpful to be able to get those on your website or if you could email them out to something that would be great? And thanks very much.

[Michael Graham:]

Yes. Absolutely, we’ll make them available.

[Operator:]

[Operator Instructions] Next we have Rohit Kulkarni of RBC. Please go ahead.

[Unidentified Analyst:]

Hello. This is Andrew [indiscernible] on for Rohit. I have two questions, if I could. The first one on your VCA partnership, wondering how many pets were already at VCA hospitals that you have subscribed, and if you can give a sense for?

[Darryl Rawlings:]

Yes. It was a very small number. VCA has 5 to 600 hospitals across the U.S. which is a small incremental to the whole 28,000 so it was a small segment before our relationship.

[Unidentified Analyst:]

Okay and do those hospitals tend to be larger in nature or about the same average?

[Darryl Rawlings:]

It’s probably about a question for VCA but in general they have a higher number of doctors so that they are larger than the average hospital.

[Unidentified Analyst:]

Okay. And then a final question is whether you have kind of a louder microphone as the public company. Have you seen any changes in competitor responses as you are going out there and telling your story?

[Darryl Rawlings:]

I don’t think so. We’ve completed over about 15 years. Today there’s about 20 brands and I haven’t’ seen any dramatic changes in response since going public. I think because we’re kind of leading the growth in the category many competitors are saying that having a higher value of proposition to the consumer is a better thing for the entire category and I expect more people will kind of follow in our footsteps.

[Unidentified Analyst:]

Great. Thank you.

[Operator:]

Next we have a follow up from Jon Baug of Stifel.

[Jon Baugh:]

Hey Darryl its funny you sort of just took it, but I guess I’ll ask it anyway and then I might have one other. I was just going to say, in terms of that competitive landscape, I mean we did hear some chirping from VPI which is sort of fee based moving as a percent of invoice. Are you hearing some of that, and can you specify still sort of how you keep the motor on your business if you saw arguably that number one player start to move towards a percent [ph] of invoice?

[Darryl Rawlings:]

I’ve been hearing that actually for a number of years, so if it becomes true it will overally [ph] surprise me, but with 99% of the pets in North America currently not having medical insurance we are less focused on our competitors and more focused on trying to build the category. I think over a period of time the higher caliber of our competitors means that more pet owners are going to tell their neighbors that this makes sense. So we also make sure that we have a focus on our customer experience, make sure that our value proposition we are repaying $0.70 out on the dollar in the way of veterinary invoices, providing the highest value proposition, making sure that we are paying claims quickly, answering the phone hello will help separate Trupanion from the pack.

[Jon Baugh:]

Okay, great and then maybe the last one. I mean, I think someone mentioned earlier the retention was very, very good, and you called it out. If you were trying to sort of break it apart a little bit and the markets where you push through a price increase over the past three to six months, can you maybe comment on the retention in those specific markets I think some markets may incur it as much of a – an 8% or 10% increase on the ARPU. What are you seeing specific to those markets? Thanks guys.

[Darryl Rawlings:]

So let me try to be clear that, putting rate increases is something we are doing every single month, non-stop. It’s a regular part of our business and regular part of our business for the last ten plus years. When we see a higher rate increases go into a certain market or a certain category we haven’t see a large drop on retention rates historically and so we don’t expect to in the future. I will tell you this that if you look over the last five or six years our retention rates have been about 98.5% and in the last year and a half well we’ve been increasing our rates they have climbed to 98.68%. I’m a little uneasy in that. I wish my five year average was that high, maybe I would feel more comfortable if people backed to [Indiscernible] just a little bit but I’m not concerned about backing it down because of any rate changes moving forward, because that’s been the normal course of business for a long time.

[Jon Baugh:]

Perfect. Thanks guys.

[Operator:]

Well showing no further questions, we will conclude today’s conference call. We would like to thank the management team for their time today and thank you all for attending today’s presentation. At this time you may disconnect your lines. Thank you and have a great day everyone.