Yahoo Finance Trupanion, Inc. (NASDAQ:TRUP) Q1 2024 Earnings Call Transcript
Trupanion, Inc. (NASDAQ:TRUP) Q1 2024 Earnings Call Transcript May 2, 2024
Trupanion, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, everyone, and welcome to the Trupanion First Quarter 2024 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note that today's event is being recorded. I would now like to turn the conference over to Laura Bainbridge, SVP of Corporate Communications. Please go ahead.
Laura Bainbridge: Good afternoon, and welcome to Trupanion's first quarter 2024 financial results conference call. Participating on today's call are Darryl Rawlings, Chief Executive Officer; Margi Tooth, President; and Fawwad Qureshi, Chief Financial Officer. For ease of reference, we've included a slide presentation to accompany today's discussion, which will also be made available on our Investor Relations website, under our quarterly earnings tab. Before we begin, please be advised that remarks today contain forward looking statements. All statements, other than statements of historical facts are forward looking statements. These include, but are not limited to, statements regarding our future operations, opportunities and financial performance, our ability to remediate our material weaknesses, and the Company's CEO succession efforts.
These statements involve a high degree of known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed. A detailed discussion of these and other risks and uncertainties are included in today's earnings release, as well as the Company's most recent reports on forms 10-K and 8-K filed with the securities and Exchange Commission. Today's presentation contains references to non-GAAP financial measures that management uses to evaluate the Company's performance, including, without limitation, variable expenses, fixed expenses, adjusted operating income, acquisition costs, internal rate of return, adjusted EBITDA, and free cash flow. When we use the term adjusted operating income or margin, it is intended to refer to our non-GAAP operating income or margin before new pet acquisition and development expenses.
Unless otherwise noted, margins and expenses will be presented on a non-GAAP basis, which excludes stock-based compensation expense and depreciation expense. These non-GAAP measures are in addition to, and not a substitute for, measures of financial performance prepared in accordance with the US. GAAP. Investors are encouraged to review the reconciliations 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 Relations website under the Quarterly Earnings tab. Lastly, I would like to remind everyone that today's conference call is also available via webcast on Trupanion's Investor Relations website. A replay will also be available on the site.
With that, I'll hand it over to Darryl.
Darryl Rawlings: Thanks Laura, and good afternoon. I'm honored to speak to you in my final earnings call as CEO. Today we announced Margi's appointment as CEO effective August 1. Speaking on behalf of myself and the board, we could not be more excited about this outcome. Today's announcement is a culmination of an involved multi year process to identify my successor as CEO. Achieving this milestone ahead of the schedule reflects the board's unanimous support and confidence in Margi's ability to lead Trupanion forward. In the ten years we've worked together, Margi has shown herself to be a proven leader with an adept ability to manage Trepanion's growth mandate. With her at the helm, I am confident in our continued success in our large, underpenetrated market.
Margi's track record extends beyond her time at Trupanion. She spent over seven years with UK's largest pet insurance provider, during which time the category saw tremendous growth, reaching approximately 25% penetration. She's leveraged that experience here at Trupanion, starting with specific areas of growth and expanding over time. Over the last 18 months, Margi has assumed oversight of every department at Trupanion, including overhauling key operational areas to drive improved efficiency and performance and drive a culture of accountability, collaboration and action. Since joining Trupanion, the category has grown threefold, with Trupanion the largest contributor to the category's growth for three consecutive years. At over $1 billion in revenue today, Trupanion is the largest player in North America.
The veterinary community is the heart of our growth model and our territory partners are an important link to that community. Margi, having wanted to be a veterinarian herself, holds great admiration for this community and her understanding of our approach to market has strengthened our ties. Through our strong growth, Margi has led the team in deploying increasing amounts of capital at consistently strong internal rates of return. When Margi joined Trupanion, the funds we had to invest in new pet acquisition, what we now call our adjusted operating income was just about $4 million. Since then, we've grown our adjusted operating income to over $80 million last year. Beyond the numbers, however, and most important to me is Margi's character.
At Trupanion, we are nimble and courageous, curious and caring. We do what we say, we care for one another, and we simply work harder than most. Margi is all of these things. In short, she personifies the culture of Trupanion. Over the past several years, Margi has come to lead our over 1500 global team members. She has done so with compassion, humility, leads with trust, and is willing to make tough decisions when they need to be made. There is no one I trust more to lead Trupanion into our next phase of growth. It has been my privilege to serve as a resource to her over the past decade. As we've previously communicated. I am committed to continuing to serve as chair on the board for the next ten years, if agreeable to shareholders. Margi co-authored this year's shareholder letter, which was published just a few weeks ago.
For those that have not done so, we encourage you to read it as it provides more insights into how we think and act at Trupanion. This letter can be found on our investor relations website. With that, I'll hand it over to Margi to walk through the performance of the business.
Margi Tooth: Thank you, Daryl. Good afternoon, everyone. Let me begin by saying what an honor it is to be appointed CEO of Trupanion. Trupanion's mission to help pet parents budget and care for their pets is one that resonates with me deeply. Since joining Trupanion over ten years ago, I've seen our mission brought to life through the dedication of our team. It is truly inspiring to work alongside such pet passionate people in support of our members every hour of the day and every day of the year. Together in lockstep with the veterinary industry, we're making a meaningful impact by supporting over 1.7 million pets, paying out over $2 million in veterinary invoices daily, and helping tens of thousands of veterinarians practice life saving veterinary care.
And we're just getting started. Despite our long history, we really are just scratching the surface. With less than 5% of pets insured in North America and an equally low number across most of Europe, there is so much more we can do to support pet parents and veterinarians globally to help pets receive the care they need. Today, Trupanion is placed at the forefront of an exciting growth story. I'm honoured and humbled to lead Trupanion on this journey. I'm grateful for the continued support from Daryl and the board and look forward to our partnership moving forward. With that, I'll now discuss our performance overview for the first quarter of the year, total revenue grew 19%. In the quarter, our subscription revenue grew even faster at 22% year-over-year and with our core Trupanion brand, the primary driver behind this growth.
Our total adjusted operating income, or the amount of funds we have available to invest in growth increased 37% year-over-year. Once again, adjusted operating income for our subscription business outpaced this total, increasing over 55% compared to the prior year period. Our PAC spend was highly efficient in the quarter. We reduced our investment in pet acquisition by 23%, and yet our gross pet adds declined just 9% year-over-year. In total, we acquired over 67,000 pets at an estimated internal rate of return of 44%. As expected, our revenue growth for the quarter was largely increased by a revenue contribution from pricing actions taken over the past 18 months. This translated into total ARPU growth of 9.8% across our subscription business, the highest level since we became public ten years ago.
Within our core Trupanion brand, the average monthly increase in ARPU was even higher at 11% year-over-year. Against this backdrop of significant pricing increases flowing through to our membership, the team has doubled down on communicating Trupanion's value proposition. To date, our efforts have yielded good outcomes. Over the last twelve months, over 40% of our book has received a pricing increase of 20% or more. Average monthly retention within this group was strong in the quarter and up year-over-year. This is a testament to the value our members place in the service Trupanion provides, along with the team's ability to communicate our value proposition and the why behind our actions. Moving to the second component of our revenue growth, adding new pets our total enrolled subscription pets increased 11% in the quarter.
We expect the balance between ARPU increases and growth in subscription pets to be maintained in the near term as we continue down the path of restoring margins before increasing the pace of growth within our subscription business. The team has been consistently making progress against this mandate, as reflected in our year-over-year results. Compared to our eight year low in Q1 of last year, our subscription adjusted operating margin expanded 210 basis points in the quarter, as expected. This is down from quarter four of last year, mirroring the behavior of vets, typically raising their prices early in the year. In aggregate, our operating assumption of 15% veterinary inflation proved sufficient in the first quarter. For veterinarians, charging sustainable rates is necessary to provide our pets with the care they deserve, and we stand behind them offering a product designed to align the needs of pets, pet parents and veterinarians alike.
As the cost of veterinary care continues to rise, outpacing consumers discretionary income, the need for high quality and dependable pet insurance solutions continues with it. This dynamic underscores the importance of having a lifetime solution that enables pet parents to budget effectively and offers reliable coverage. Trupanion stands out in the industry, offering the only lifetime product providing pet parents with complete peace of mind and coverage for life come what may. With this in mind, it's especially important for us to align our growth strategy with accurate pricing, and although our desire is to assist every pet, we must continue to be highly disciplined in our growth approach. To that end, we will not put our foot on the accelerator more aggressively to add more pets until we see greater strength in our margin.
We know this creates the best, most consistent and positive member experience and avoids rates being abruptly increased. We're committed to maintaining this approach and are encouraged by ARPU trends and conversion improvements at this early point in the year and look forward to expanding our pace of growth when margins allow in terms of pet as our Trupanion brand represented the bulk of the new pet growth in the quarter as we continue to focus on growth in areas that are most closely aligned to our targeted value proposition. Our newer initiatives, including our powered by suite of products with chewy and Aflac, our medium and low ARPu products Firkin and Phi Direct, and our products in continental Europe, comprised approximately 22% of our gross new pet adds in the quarter, up from quarter four and over 20% for the first time since we launched these products.
We will continue to deploy a conservative amount of capital against these opportunities, given these products are early in the lifecycle and subscale. However, it should be noted that we've made some encouraging progress in Ferkin and Phi direct, with evidence of scale beginning to manifest. As our margins expand meaningfully into the second half of this year, we will look to adopt a more assertive approach in deploying our capital in our large, underpenetrated market. This remains our overarching mandate. We will do so prudently, however, gradually scaling up our acquisition spend as margins expand. In summary, I'm pleased with our quarter one results, which aligned with our expectations and were delivered through solid execution. This is a testament to the ongoing discipline and focus of the team.
We're committed to maintaining this discipline while fulfilling our mission of supporting more pets and veterinarians. I'm excited about the future and the tremendous opportunities that lie ahead. With that, I'll hand it over to Fawad to provide a detailed overview of our Q1 results.
Fawwad Qureshi: Thanks Margi. Today, I will share additional details around our first quarter performance as well as provide our outlook for the second quarter and full year 2024 at a high level. I'll echo Margi's comments that it was a solid start to the year. Total revenue for the quarter was $306.1million, up 19% year-over-year. Within our subscription business, revenue was $201.1 million, up 22% year-over-year. Total subscription pets increased 11% year-over-year to over 1,006,000 pets as of March 31. This includes approximately 43,000 pets in Europe, which are currently underwritten by third party underwriters. Total monthly average revenue per pet for the quarter was $69.79, up 9.8% over the prior year period. The subscription business cost of paying veterinary invoices was $151.5million, resulting in a value proposition of 75.3% and reflects a 225 basis point improvement over the prior year period.
This improvement provides a clear representation of the actions we have taken to repair our margins and we are pleased with this progress due to the seasonality of that pricing we highlighted earlier and last quarter. The cost of veterinary invoices as a percent of revenue increased 260 basis points. From Q4, our target value proposition for our subscription business remains 71%, and we expect to close the gap to our target by year end. As a percentage of subscription revenue, variable expenses were 9.6%, down from 10.1% a year ago. Fixed expenses as a percentage of revenue were 5.3%,up from 4.7% in the prior year period due to increases in our technology and G&A expenses, including additional expenses incurred related to the remediation of our material weaknesses.
After the cost of paying veterinary invoices, variable expenses, and fixed expenses, we calculate our adjusted operating income. Our subscription business delivered adjusted operating income of $19.6 million, an increase of 55% from last year. Subscription Adjusted operating margin was 9.7% of subscription revenue. This is up from 7.6% in the prior year quarter and represents approximately 210 basis points of year-over-year margin expansion. Now I'll turn to our other business segment, which is comprised of revenue from our other products and services that generally have a B2B component and a different margin profile than our subscription business. Our other business revenue was $105 million for the quarter, an increase of 15% year-over-year.
Adjusted operating income for this segment was $1.7million, a decrease of 41% from last year. The decrease was driven by the previously mentioned increase in fixed expenses and a lower gross margin in total. Adjusted operating income was $21.3 million in Q1. In-line with our expectations, this was up 37% from Q1 last year, but down 22% from Q4. In Q1, our higher value subscription business comprised approximately 92% of our adjusted operating income in the quarter. This is up from 84% for the full year in 2023. We expect this trend to continue as one of our partners in our other business. Pets best continues to enroll pets with their new underwriter. During the quarter, we deployed $15 million to acquire approximately 67,200 new subscription pets, excluding the approximate 3900 new European pets that are underwritten by a third party.
This translated into an average pet acquisition cost of $207 per pet in the quarter, down from $247 in the prior year period and $217 in Q4. We also invested $1.2 million in the quarter in development costs. Stock based compensation expense was $7.4 million during the quarter. As a result, net loss was $6.9 million, or a loss of basic and diluted share, compared to a loss of $24.8 million, or a loss of basic and diluted share in the prior year period. In terms of cash flow, operating cash flow was $2.4 million in the quarter compared to a negative $6.9 million in the prior year period. Capital expenditures totaled $3.1 million. As a result, free cash flow was a negative $0.6 million and $11.4 million improvement from the prior year's first quarter.
Similar to our AOI, our free cash flow is impacted by the seasonal fluctuations we have discussed. It is for this reason we have set an annual free cash flow target at 2.5% of revenue. We believe this is a prudent amount given the strength of our capital position and our desire to grow in such a large, underpenetrated global market. Turning to the balance sheet, we ended the quarter with $275.2 million in cash and short term investments. Outside of our insurance entities, we held $38.1million in cash and short term investments with an additional $15 million available under our credit facility. At the end of the quarter, we maintained $256.7 million of capital surplus at our insurance subsidiaries, which was $103.4million more than the estimated risk based capital requirement of $153.3 million.
This is down from our year-end requirements as growth in our other business slows and the capital intensity of our business is lowered. Last quarter, we reported two material weaknesses as a result of the 2023 audit. In response to this, we have made investments in internal controls, technology and Sox compliance. We have also hired PwC to assist us in the remediation of these material weaknesses and we're making progress in addressing these deficiencies. We will look to regain more efficiency in our fixed expenses throughout the year while balancing our continued remediation efforts in earnest. I'll now turn to our outlook. We are updating our full year revenue guidance, which is now expected to be in the range of $1,244,000,000 to $1,276,000,000 or 14% growth at the midpoint.
This takes into account our slight over performance in Q1. We continue to expect to grow subscription revenue in the range of $842 million to $862 million, representing 20% year-over-year growth at the midpoint. We also continue to expect total adjusted operating income to be in the range of $100 million to $120 million, or 32% year-over-year growth at the midpoint. As we think about the shape of the year, we expect that the first half of the year will start from a lower margin standpoint within our subscription business and build back to a 15% adjusted operating margin by Q4 of this year. Second, for the second quarter of 2024, total revenues are expected to be in the range of $306 million to $311 million, representing 14% year-over-year growth at the midpoint.
Subscription revenue is expected to be in the range of $206 million to $208 million, or 20% year-over-year growth at the midpoint. Total adjusted operating income is expected to be in the range of $21 million to $23 million. As a reminder, our revenue projections are subject to conversion rate movements, predominantly between the US and Canadian currencies. For the second quarter and full year of 2024, we used a 74% conversion rate in our projections, which was the approximate rate at the end of March. With that, I'll hand it back to Margi.
Margi Tooth: Thank you, Fawad. This weekend, Daryl and I will be joined by Fawad in Omaha for our annual Q and A to follow Berkshire Hathaway's annual shareholder meeting. This is an event I personally look forward to every year and one that presents a unique opportunity to meet with long term minded investors. We hope to see many of you there. Now, before we open for questions, I'd like to take a moment to pay tribute to Daryl. Since the development of the Trupanion idea nearly 40 years ago, Daryl has been an exceptional visionary, entrepreneur and leader. He has also been a brilliant coach to many, not least to me. I am deeply humbled to be appointed as his successor and to follow in his footsteps. I'm proud to lead a company and a team that has such a profound significance for so many.
Looking ahead as we continue to grow and expand our reach and products in support of pet parents globally, Daryl has agreed to further develop the early work around our food initiative on behalf of the Trupanion community everywhere. Thank you, Daryl for your mentorship, support, and the impact you've made across the world of animal health. With that, we'll open it up to questions.
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