Trupanion, Inc.
Q1 2015 Earnings Call Transcript

Published: 6 May 2015

[Operator:]

Good day and welcome to the Trupanion Inc. First Quarter 2015 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 Kimberly Esterkin of Investor Relations. Please go ahead.

[Kimberly Esterkin:]

Thank you, good afternoon and welcome to the Trupanion first quarter 2015 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 May 5, 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 everyone. Thank you for your participation on today's call. We are encouraged by the growing interest in Trupanion. On today's call I will cover our financial highlights as well as review our operational developments for the first quarter. Mike will then review our first quarter performance in greater detail and discuss our outlook for the second quarter and for the full year 2015. We will then open up the call for questions. So let’s jump into our financial highlights. In short the year is off to a good start with Trupanion delivering results in line with our expectations for the quarter. Trupanion continues to be recognized by an increasing number of pet owners and veterinarians for our outstanding product, service and value. Said in another way we feel confident that Trupanion is well positioned to lead our category in both the near and long term. For the quarter total revenue was $33.3 million representing 30% growth rate over the prior year period. Average monthly revenue per pet our version of ARPU increased in local currencies 6% year-over-year in the US and 8% in Canada. On a constant currency basis, our revenue growth would have been 34%. Trupanion had 246,100 enrolled pets at the end of the first quarter. Approximately 228,400 of these came from our subscription business segment. Our direct-to-consumer monthly subscription pets, which is up 27% from the prior year period. The health of our primary subscription business remains strong as evidence by our 98.66% average monthly retention rate. Our ratio of LVP to PAC for the quarter was 4.2

[Michael Banks:]

Thanks Darryl and good afternoon everyone. As Darryl discussed our first quarter performance was in line with our expectations. Total revenue for the quarter increased 30% year-over-year to $33 million. As a reminder our Canadian business represented 22% of our total revenue in the first quarter so we have exposure to fluctuations in Canadian foreign exchange rates during the first quarter the Canadian currency exchange rate dropped to an average of 81% compared to an average of 91% in the first quarter 2014. To illustrate the significance of these fluctuations if FX rates had remained constant at the Q1, 2014 average rate, our first quarter 2015 revenue would have been approximately 900,000 higher and would have grown 34% year-over-year. Subscription revenues which were 90% of our total revenues in the first quarter were up 31% from the first quarter 2014 and totaled $30.1 million. The increase in subscription business revenue was led by 27% increase in enrolled subscription pets during the quarter supported by a continued strong ARPU and an average monthly customer retention rate of 98.66%. Our average monthly adjusted revenue per pet grew at 6% for US customers year-over-year and that 8% for our Canadian customers in Canadian dollars year-over-year. Due to the decrease in the Canadian foreign exchange rates the combined ARPU and U.S. dollars was $44.34 3% from year ago but down 1% from the fourth quarter of 2014. Other business revenues which generally comprised of revenues that have a business to business component totaled $3.3 million up 17% from the prior year. Total gross profit for the first quarter was $5.6 million subscription gross profit was $5.3 million our non-GAAP subscription business gross margin which we measured excluding stock based compensation expense was 17.8% for Q1 in line with our expectations for the quarter. We expect pricing increases to roll through subscription rates throughout the remainder of 2015 and our non-GAAP subscription business gross margin is expected to gradually return to our long term target of 18% to 21% by year end. Our general and administrative and technology expenses totaled 6.5 million in Q1, a 30% increase over the prior year excluding stock based compensation these expenses were 18% of revenues. In recent quarter the growth of these expenses has outpaced out of revenue as we have been investing in our technology member experience and adding resources to be a public company. We believe that we are now in a position to realize leverage on these expenses. Combined these first quarter expenses were flat with the fourth quarter. Going forward we expect to realize more scale in this area. First the direct pay development initiates which was 3.5% of revenues in Q1 we will continue into Q2 and possibly Q3 but the development stays and related expenses will then be finished. There after the initiative of will no longer be developmental and the ongoing expenses will be included in our core technology resources. Second the core technology and G&A resources which were 14.5% of revenues in Q1 excluding stock compensation are expected to grow much more modestly declining as a percent of revenues going forward. In the first quarter Trupanion spent an average of $134 to acquire a pet that has an estimated life time value $567, a 4.2x return on that acquisition cost. We expect our life time value of pet to increase as a gross margin returns to historical norms later this year which should trend LVP to pack ratio back towards our [five to one] goal. Since these unique economics result in such a large financial return overtime, we will continue to make investment in pet acquisition as long as we can do so within a reasonable margin of our long term targeted 5

[Operator:]

We will now begin the question and answer session. [Operator Instructions] The first question comes from Rohit Kulkarni of RBC. Please go ahead.

[Rohit Kulkarni:]

Thank you. Two questions please. Can you provide any updates on the express rollout traction say in terms of how many hospitals or any percentage of new pets that come through as a result of the express rollout and secondly on the pet acquisition costs they can be declined sequentially, is there, is there anything that you are seeing that is leading you to believe that there is more leverage in how you acquire and retain pets going forward? Thank you.

[Darryl Rawlings:]

Thanks Rohit. I will answer the first question about Trupanion express we have added a few more hospitals in Q1, we now have it up to about 25% or 26% of our claims dollars are being paid through Trupanion express, we have a long term outlook to be looking and having about 300 maybe 350 total hospitals by the end of the year and we’re really focusing and trying to lower the deployment cost and we’re kind of - our training were happy with the progress we are making and as you mentioned in your remarks really trying to get it right, get the deployment cost down and then trying to accelerate in 2016.

[Michael Banks:]

Hi Rohit with respect to the PAC my recall in the fourth quarter, our new pet enrollments are seasonally down a little bit in the fourth quarter this fewer business for the vets and that leading few enrolments by us and so conversely in the first quarter there is increase in enrollments and therefore PAC is down slightly so that accounts for the sequential movement in PAC.

[Rohit Kulkarni:]

Okay. Thanks Darryl, thanks Mike. I’ll get back in the queue and nice quarter.

[Darryl Rawlings:]

Thank you.

[Operator:]

Your next question is from Jon Baugh of Stifel. Please go ahead.

[Unidentified Analyst:]

Hello. This is actually [Ethan Ross] on for Jon Baugh, a few questions here, first maybe this one for Mike, for 1Q 2015 you came at the high end of the range for both subscription and total revenue but kept by full year guidance unchanged can we look at the potentially some level of conservative and it’s been built into the guidance or something changed in your outlook remaining of the year is it relates to either enrolled pets or FX and ARPU?

[Michael Banks:]

No, we still maintain our view for enrolled revenues for the long term, we will see how pricing rolls through etcetera. So we’re confident in that range of revenues.

[Unidentified Analyst:]

Okay. And then I believe you mentioned 2014 was 70 territory partners and that's expected to ramp to 85 existing 2015, is that expansion suppose to take place gradually throughout the year or it will be front end and back end weighted and then can you also remind us what level of territory partners you are targeting for full market coverage?

[Darryl Rawlings:]

Yes. It’s gradual throughout the year. So we look at ending the year with about 85 people calling a veterinary hospital. The total long term is about 100 and that has 1% for about 250 hospitals which would increase our call pattern to about 25,000 of the 28,000 hospitals there is a 2,000 or 3,000 hospitals that are really kind of not in our driving range. So we think 100 is our long term outcome.

[Unidentified Analyst:]

Okay. Thanks a lot. I will get back in queue.

[Darryl Rawlings:]

Thank you.

[Operator:]

The next question is from Michael Graham of Canaccord Genuity. Please go ahead.

[Michael Graham:]

Thank you, congrats on the results guys. I just wanted to ask on Trupanion Express. I think that a few quarters ago that was one of the factors that was driving claims activity up that was also pressuring margins in the short term, I think that's correct but please correct me if I am wrong, I am just wondering as you step on the gas you are in 2015 to roll that out more fully and I know you just gave us good margin but is there any risk that you compress gross margins beyond what you plan for or you modulate the rollout of express to make sure that doesn't happen? I have another one too, thank you.

[Darryl Rawlings:]

Well you answered the question. It’s our job to modulate it. We understand what the cause and effect is and as we roll out by regions are on the shock and approach by hospitals we are going to modulate it into the market the best way we can.

[Michael Graham:]

Okay. Is there any way to characterize increased claims activity from a hospital that is implementing to Trupanion express is it like a lot bigger activity on a per pet basis or is there any way that?

[Darryl Rawlings:]

What happens is in the old fashion reimbursement model which is in my mind one of the reasons that the penetration rate has been as low as it has been in North America. Some pet owners just don’t get around sending in their invoices with Trupanion Express we see a 100% of the invoices, 100% of the time, it’s our goal to electronically transfer the money into the veterinary and to bank account within five minutes from the time of the invoice being created. So the biggest change is not so much change in behavior from the consumer although there is a slight change in behavior, the biggest change is that we’ll just see all the invoices, it’s kind of the inverse effect of what you’ll see with a lot of companies that have store cards, a $50 card to be used at our certain retailer. Some of those people just never get around to using it, what was happening before in the reimbursement model is some people just don’t get around sending in the invoice that’s the biggest impact. We’ve realized these things in third quarter; the data still supports exactly what our findings were so we have very high degree of confidence that we’ve got good data.

[Michael Graham:]

Okay that’s helpful thank you and then. I really want to have just Darryl could you characterize the penetration level of pets at hospitals where you had a relationship for a long term rather I’m trying to figure out if there is a cohort framework we could apply to you - hospitals that have been really aggressive at pushing your products versus something that maybe coming up the curve and are the ones you are really highly penetrated, are they still increasing your penetration or is there some level at which they’ve seen level off?

[Darryl Rawlings:]

So great question. In markets where we are more mature and for me the more mature market means we have a higher percentage of active hospitals so we have regions that we have been in the market say for 10 years, we might have four to five hospitals actively recommending us and the growth curve in those territories are still greater than 20%-25% year-over-year. Individual hospitals could have 15%-20% penetration rate in those regions we could see maybe 20%, 25% of the total available new pets coming into the market receiving quotes from us. So even in a much more mature markets for us there is long road runway ahead.

[Michael Graham:]

Okay. Thanks very much guys.

[Operator:]

The next question is from Kevin Kopelman of Cowen & Company. Please go ahead.

[Kevin Kopelman:]

Thanks just wanted to ask about the pets growth like you guys said pretty solid growth there this quarter of 27% as you get bigger what kind of number are you targeting is it possible to keep the growth rates up? Thanks.

[Darryl Rawlings:]

Well, the most difficult area for us is growth it’s not the available market. Our [TAM] is huge. The biggest constraint that we have is we are expensing a 100% of the acquisition cost upfront and how much available cash do we have to grow. So kind of a magic number for us is probably about 30% growth rate. You can do 25% in pets another 5% or 6% in ARPU getting you to a 31% revenue growth and with that level we can use our discretionary margin grow the business without further deletion. If we were to grow in the 40% to 50% range then it would be kind of a cash constraint on the business. So that's kind of the target that we are looking for the next few years.

[Kevin Kopelman:]

Okay. Thanks Darryl.

[Operator:]

[Operator Instructions] The next question comes from Chris Marvin of Barclays. Please go ahead.

[Chris Marvin:]

Okay. Thank you. Darryl if you wouldn't mind updating us on your long term plans for direct to consumer market I think you talked about the opportunity for when your fixed cost base scales and you’ve reached 650,000 to 700,000 pets, I think maybe that's the time when you thought about investing in direct to consumer marketing. But, is there a scenario where there could be an opportunity to do so before hand? And then, secondly you continue to pass through some pretty nice pricing increases. The renewal rates very strong in your conversations with customers are you still seeing sort of lot of runway to keep increasing price I know you have done it for years and years but is there any feeling that you foresee or just based on the discretionary income or do you see a long runway there still? Thanks.

[Darryl Rawlings:]

Well, first I will answer your second question first about price elasticity. I don't think pet owners consider their pets disposable or discretionary although people could put our product into that category. If we are providing great value we haven't seen a push back on price historically. We haven't seen anything in the last couple of quarters that would tell us any differently than we have seen in the previous years, but you need to exceed the consumer expectations on both the product delivery and have a high value proposition of which both we do, so I haven't seen any concerns. We certainly have with 1.2 million price categories we have many cohorts that we will add $100, $120, $140 ARPU we’ve got other ones that are 70 and 80 and we really seeing overall relatively consistent conversion rates and retention rates across all price bands. So as long as we are good at articulating the value proposition I’m not concerned with any pricing issues. As far as direct to consumer you are right in that once we get our fixed expenses to 5% and we have more available free cash that we could put our peddle down a little harder for direct to consumer. I think what you’ll see us do in the next couple of years is text direct to consumer in smaller regions maybe places where we have a higher penetration of active hospitals therefore giving us bigger brand awareness and then you can use the higher conversion rates maybe higher lifetime values to offset the cost. But, our target on all these is to try to find long term places where we can spend a dollar and get $5 back in the lifetime value and if we can test direct to consumer in certain areas or pockets of different distribution, I will be doing that in next couple of years, we’ll just be doing it in smaller ways.

[Chris Marvin:]

All right. Thanks Darryl.

[Darryl Rawlings:]

Thank you everybody for your questions. In closing I just like to thank you for your continued interest in Trupanion, we are pleased with our performance in Q1 and we look forward to our next call in a few months. We hope to see many of you at the upcoming B. Riley Conference which will be held May 12, in Los Angeles and we will be at the Stifel and Cowen conferences that will be held May 27 and 28 in New York.

[Operator:]

The conference is now colluded. Thank you for attending today’s presentation. You may now disconnect.