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Trupanion Reports Third Quarter 2017 Results

SEATTLE, Nov. 02, 2017 (GLOBE NEWSWIRE) -- Trupanion, Inc. (Nasdaq:TRUP), a leading provider of medical insurance for cats and dogs, today announced financial results for the third quarter ended September 30, 2017.

“The third quarter was a particularly strong quarter driven by solid operational execution across most of our key strategic initiatives. As a result, we delivered another quarter of consistent revenue growth and positive cash flow,” said Darryl Rawlings, CEO of Trupanion. “During the quarter, we deployed additional capital to test pet acquisition initiatives, with encouraging early results. We also learned that we need to invest more into longer-term, foundational initiatives.”

Third Quarter 2017 Financial and Business Highlights

  • Total revenue was $63.1 million, an increase of 31% compared to the third quarter of 2016 (29% on a constant currency basis).
  • Total enrolled pets (including pets from our other business segment) was 404,069 at September 30, 2017, an increase of 21% over the prior year period.
  • Subscription business revenue was $56.5 million, an increase of 27% compared to the third quarter of 2016 (25% on a constant currency basis).
  • Subscription enrolled pets was 359,102 at September 30, 2017, an increase of 15% over the prior year period.
  • Net income was $0.4 million, or $0.01 per basic and diluted share, compared to a net loss of $(1.6) million, or $(0.06) per basic and diluted share, in the third quarter of 2016.
  • Adjusted EBITDA was $2.4 million, compared to adjusted EBITDA of $0.3 million in the third quarter of 2016.
  • Operating cash flow was $3.0 million and free cash flow was $2.0 million, compared to operating cash flow of $1.3 million and free cash flow of $0.9 million in the third quarter of 2016.

Year-to-date 2017 Financial and Business Highlights

  • Total revenue was $176.1 million, an increase of 29% compared to the first nine months of 2016.
  • Subscription business revenue was $159.4 million, an increase of 27% compared to the first nine months of 2016.
  • Net loss was $(0.7) million, or $(0.02) per basic and diluted share, compared to a net loss of $(5.2) million or $(0.18) per basic and diluted share, in the first nine months of 2016.
  • Adjusted EBITDA was $4.3 million, compared to adjusted EBITDA of $(0.2) million in the first nine months of 2016.
  • Operating cash flow was $6.7 million and free cash flow was $4.4 million, compared to operating cash flow of $1.6 million and free cash flow of less than $0.1 million in the first nine months of 2016.

Revenue by Quarter
A chart accompanying this release is available at http://www.globenewswire.com/NewsRoom/AttachmentNg/e2c5227f-fa22-4928-aa79-3005583b9ec2

Conference Call
Trupanion’s management will host a conference call today to review its third quarter 2017 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, one hour 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: 13671520.

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 helped provide peace of mind to pet owners 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. 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 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 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; fluctuations in the Canadian currency exchange rate; the ability to protect our proprietary and member information; the ability to maintain contractual relations with third parties; the ability to realize benefits from strategic initiatives; the ability to maintain our culture and team; the ability to maintain the requisite amount of risk-based capital; the ability to protect and enforce Trupanion’s intellectual property rights; third-party claims including litigation and regulatory actions; and the ability to recognize benefits from investments in new solutions and enhancements to Trupanion’s technology platform and website.

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, 2016 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, including, without limitation, free cash flow, acquisition cost, net acquisition cost, cost of goods, variable expenses, fixed expenses, non-GAAP subscription gross profit, non-GAAP gross profit, adjusted EBITDA, and basic earnings per share, excluding gain on sale of equity method investment. Adjusted EBITDA is a non-GAAP financial measure that we define as net loss excluding stock-based compensation expense, depreciation and amortization expense, interest income, interest expense, income tax expense (benefit), and loss (gain) from equity method investment.

Trupanion’s 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. Further, stock-based compensation expense and other items used in the calculation of various metrics have been and will continue to be for the foreseeable future significant recurring expenses in Trupanion’s business. 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 allows for more meaningful comparisons between its operating results from period to period. Trupanion calculates non-GAAP gross profit by subtracting cost of goods and variable expenses from revenue. Cost of goods and variable expenses used in this calculation are non-GAAP measures which exclude stock-based compensation expense. Fixed expenses is a non-GAAP measure which excludes stock-based compensation expense and depreciation and amortization expense. Trupanion excludes sign-up fee revenue from 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 acquisition cost, net acquisition cost and the related financial measures it derives from them, as well as adjusted EBITDA, in a consistent manner across periods. Trupanion presents earnings-per-share excluding the impact of one-time transactions and events for increased comparability 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 per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
(unaudited)
Revenue:
Subscription business$56,493 $44,629 $159,363 $125,934
Other business 6,625 3,730 16,759 10,956
Total revenue 63,118 48,359 176,122 136,890
Cost of revenue:
Subscription business (1) 45,215 36,432 129,052 102,793
Other business 6,096 3,427 15,757 10,027
Total cost of revenue (2) 51,311 39,859 144,809 112,820
Gross profit:
Subscription business 11,278 8,197 30,311 23,141
Other business 529 303 1,002 929
Total gross profit 11,807 8,500 31,313 24,070
Operating expenses:
Sales and marketing (1) 4,862 3,892 13,323 11,296
Technology and development (1) 2,471 2,339 7,196 6,790
General and administrative (1) 4,017 3,811 12,274 11,028
Total operating expenses 11,350 10,042 32,793 29,114
Operating income (loss) 457 (1,542) (1,480) (5,044)
Interest expense 124 66 370 137
Other (income) expense, net (99) 16 (1,239) (39)
Income (loss) before income taxes 432 (1,624) (611) (5,142)
Income tax expense 26 13 54 31
Net income (loss)$406 $(1,637) $(665) $(5,173)
Net income (loss) per share:
Basic and diluted$0.01 $(0.06) $(0.02) $(0.18)
Weighted-average common shares outstanding:
Basic 30,037,282 28,732,417 29,500,958 28,362,084
Diluted 33,113,981 28,732,417 29,500,958 28,362,084
(1) Includes stock-based compensation expense as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2017
2016
2017
2016
Cost of revenue$170 $83 $432 $215
Sales and marketing 165 172 550 419
Technology and development 57 67 166 158
General and administrative 503 454 1,416 1,423
Total stock-based compensation expense$895 $776 $2,564 $2,215
(2)The breakout of cost of revenue between claims and other cost of revenue is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2017
2016
2017
2016
Claims expense$43,453 $34,253 $123,649 $97,323
Other cost of revenue 7,858 5,606 21,160 15,497
Total cost of revenue$51,311 $39,859 $144,809 $112,820

Trupanion, Inc.
Consolidated Balance Sheets
(in thousands, except per share data)
September 30, 2017 December 31, 2016
(unaudited)
Assets
Current assets:
Cash and cash equivalents$25,249 $23,637
Short-term investments 34,031 29,570
Accounts and other receivables 20,315 10,118
Prepaid expenses and other assets 2,987 2,062
Total current assets 82,582 65,387
Restricted cash 600 600
Long-term investments, at fair value 3,084 2,579
Equity method investment - 271
Property and equipment, net 7,958 8,464
Intangible assets, net 4,965 4,910
Other long-term assets 2,739 134
Total assets$101,928 $82,345
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$2,327 $2,006
Accrued liabilities and other current liabilities 7,813 5,416
Claims reserve 11,255 9,521
Deferred revenue 22,656 13,463
Total current liabilities 44,051 30,406
Long-term debt 7,299 4,767
Deferred tax liabilities 1,623 1,623
Other liabilities 1,003 834
Total liabilities 53,976 37,630
Stockholders’ equity:
Common stock: $0.00001 par value per share, 100,000,000 shares authorized at September 30, 2017 and December 31, 2016, 30,690,129 and 30,032,829 shares issued and outstanding at September 30, 2017; 30,156,247 and 29,498,947 shares issued and outstanding at December 31, 2016 - -
Preferred stock: $0.00001 par value per share, 10,000,000 shares authorized at September 30, 2017 and December 31, 2016, and 0 shares issued and outstanding at September 30, 2017 and December 31, 2016 - -
Additional paid-in capital 133,150 129,574
Accumulated other comprehensive loss (51) (377)
Accumulated deficit (81,946) (81,281)
Treasury stock, at cost: 657,300 shares at September 30, 2017 and December 31, 2016 (3,201) (3,201)
Total stockholders’ equity 47,952 44,715
Total liabilities and stockholders’ equity$101,928 $82,345

Trupanion, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
(unaudited)
Operating activities
Net income (loss)$406 $(1,637) $(665) $(5,173)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization 1,095 1,093 3,208 2,617
Stock-based compensation expense 895 776 2,564 2,215
Gain on sale of equity method investment - - (1,036) -
Other, net 187 179 243 218
Changes in operating assets and liabilities:
Accounts and other receivables (3,196) (1,029) (10,164) (2,023)
Prepaid expenses and other assets (114) (246) (297) 217
Accounts payable, accrued liabilities and other liabilities 1,209 578 2,122 (625)
Claims reserve 380 799 1,639 2,043
Deferred revenue 2,146 795 9,075 2,079
Net cash provided by operating activities 3,008 1,308 6,689 1,568
Investing activities
Purchases of investment securities (5,809) (4,769) (20,704) (15,992)
Maturities of investment securities 4,166 3,239 15,878 12,577
Proceeds from sale of equity method investment - - 1,402 -
Purchases of property and equipment (983) (456) (2,247) (1,546)
Other investments (9) (61) (2,762) (130)
Net cash used in investing activities (2,635) (2,047) (8,433) (5,091)
Financing activities
Proceeds from exercise of stock options 435 951 2,082 2,736
Shares withheld to satisfy tax withholding (1,170) (662) (1,170) (662)
Proceeds from debt financing, net financing fees 961 3,002 2,420 3,988
Payments on financing obligations (209) (37) (412) (110)
Net cash provided by financing activities 17 3,254 2,920 5,952
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash, net 255 (96) 436 241
Net increase in cash, cash equivalents, and restricted cash 645 2,419 1,612 2,670
Cash, cash equivalents, and restricted cash at beginning of period 25,204 18,207 24,237 17,956
Cash, cash equivalents, and restricted cash at end of period$25,849 $20,626 $25,849 $20,626

The following tables set forth our key operating metrics:
Nine Months Ended
September 30,
2017 2016
Total pets enrolled (at period end) 404,069 334,070
Total subscription pets enrolled (at period end) 359,102 312,282
Monthly average revenue per pet$51.67 $47.33
Lifetime value of a pet (LVP)$701 $624
Average pet acquisition cost (PAC)$141 $120
Average monthly retention 98.61% 98.61%
Three Months Ended
Sep. 30,
2017
Jun. 30,
2017
Mar. 31,
2017
Dec. 31,
2016
Sep. 30,
2016
Jun. 30,
2016
Mar. 31,
2016
Dec. 31,
2015
Total pets enrolled (at period end) 404,069 383,293 364,259 343,649 334,070 320,896 307,298 291,818
Total subscription pets enrolled (at period end) 359,102 346,409 334,909 323,233 312,282 299,856 287,123 272,636
Monthly average revenue per pet$52.95 $51.47 $50.50 $49.17 $48.37 $47.39 $46.12 $45.48
Lifetime value of a pet (LVP)$701 $654 $637 $631 $624 $622 $603 $591
Average pet acquisition cost (PAC)$151 $143 $128 $133 $120 $118 $123 $132
Average monthly retention 98.61% 98.57% 98.58% 98.60% 98.61% 98.64% 98.65% 98.64%

The following table reflects the reconciliation of cash provided by operating activities to free cash flow (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
Net cash provided by operating activities$3,008 $1,308 $6,689 $1,568
Purchases of property and equipment (983) (456) (2,247) (1,546)
Free cash flow$2,025 $852 $4,442 $22

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,
2017 2016 2017 2016
Claims expense $43,453 $34,253 $123,649 $97,323
Stock-based compensation expense (101) (74) (260) (189)
Cost of goods $43,352 $34,179 $123,389 $97,134
% of revenue 68.7% 70.7% 70.1% 71.0%
Other cost of revenue $7,858 $5,606 $21,160 $15,497
Stock-based compensation expense (69) (9) (172) (26)
Variable expenses $7,789 $5,597 $20,988 $15,471
% of revenue 12.3% 11.6% 11.9% 11.3%
Subscription gross profit $11,278 $8,197 $30,311 $23,141
Stock-based compensation expense 170 83 432 215
Non-GAAP subscription gross profit $11,448 $8,280 $30,743 $23,356
% of subscription revenue 20.3% 18.6% 19.3% 18.5%
Gross profit $11,807 $8,500 $31,313 $24,070
Stock-based compensation expense 170 83 432 215
Non-GAAP gross profit $11,977 $8,583 $31,745 $24,285
% of revenue 19.0% 17.7% 18.0% 17.7%
General and administrative expense $4,017 $3,811 $12,274 $11,028
Technology and development expense 2,471 2,339 7,196 6,790
Depreciation and amortization expense (1,095) (1,093) (3,208) (2,617)
Stock-based compensation expense (560) (521) (1,582) (1,581)
Fixed expenses $4,833 $4,536 $14,680 $13,620
% of revenue 7.7% 9.4% 8.3% 9.9%
Sales and marketing expense $4,862 $3,892 $13,323 $11,296
Stock-based compensation expense (165) (172) (550) (419)
Acquisition cost $4,697 $3,720 $12,773 $10,877
% of revenue 7.4% 7.7% 7.3% 7.9%

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,
2017 2016
Sales and marketing expenses $13,323 $11,296
Excluding:
Stock-based compensation expense (550) (419)
Acquisition cost 12,773 10,877
Net of:
Sign-up fee revenue (1,619) (1,547)
Other business segment sales and marketing expense (162) (156)
Net acquisition cost $10,992 $9,174
Three Months Ended
Sep. 30,
2017
Jun. 30,
2017
Mar. 31,
2017
Dec. 31,
2016
Sep. 30,
2016
Jun. 30,
2016
Mar. 31,
2016
Dec. 31,
2015
Sales and marketing expenses $4,862 $4,372 $4,089 $3,951 $3,892 $3,564 $3,840 $3,919
Excluding:
Stock-based compensation expense (165) (198) (187) (113) (172) (165) (82) (104)
Acquisition cost 4,697 4,174 3,902 3,838 3,720 3,399 3,758 3,815
Net of:
Sign-up fee revenue (558) (517) (544) (526) (525) (495) (527) (506)
Other business segment sales and marketing expense (51) (63) (48) (62) (63) (55) (38) (8)
Net acquisition cost $4,088 $3,594 $3,310 $3,250 $3,132 $2,849 $3,193 $3,301

The following tables reflect the reconciliation of adjusted EBITDA to net income (loss) (in thousands):
Nine Months Ended
September 30,
2017 2016
Net loss $(665) $(5,173)
Excluding:
Stock-based compensation expense 2,564 2,215
Depreciation and amortization expense 3,208 2,617
Interest income (224) (78)
Interest expense 370 137
Income tax expense 54 31
(Gain) loss from equity method investment (1,029) 11
Adjusted EBITDA $4,278 $(240)
Three Months Ended
Sep. 30,
2017
Jun. 30,
2017
Mar. 31,
2017
Dec. 31,
2016
Sep. 30,
2016
Jun. 30,
2016
Mar. 31,
2016
Dec. 31,
2015
Net income (loss) $406 $411 $(1,482) $(1,723) $(1,637) $(964) $(2,572) $(3,001)
Excluding:
Stock-based compensation expense 895 888 781 731 776 743 696 653
Depreciation and amortization expense 1,095 1,077 1,036 1,229 1093 739 785 741
Interest income (97) (76) (51) (41) (29) (26) (23) (19)
Interest expense 124 109 137 81 66 41 30 26
Income tax expense 26 4 24 7 13 4 14 12
(Gain) loss from equity method investment - (1,036) 7 18 22 (15) 4 -
Adjusted EBITDA $2,449 $1,377 $452 $302 $304 $522 $(1,066) $(1,588)

The following tables reflect the reconciliation of net income (loss), excluding gain on sale of equity method investment, to net income (loss) (in thousands) and basic earnings per share, excluding gain on sale of equity method investment, to basic earnings per share:
Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
Net income (loss)$406 $(1,637) $(665) $(5,173)
Excluding:
Gain on sale of equity method investment$- $- $(1,036) $-
Net income (loss), excluding gain on sale of equity method investment$406 $(1,637) $(1,701) $(5,173)
Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
Basic earnings per share$0.01 $(0.06) $(0.02) $(0.18)
Excluding:
Gain on sale of equity method investment - - (0.03) -
Basic earnings per share, excluding gain on sale of equity method investment$0.01 $(0.06) $(0.05) $(0.18)
Basic weighted-average common shares outstanding 30,037,282 28,732,417 29,500,958 28,362,084

Contacts:

Investors:
Laura Bainbridge, Addo Investor Relations
310.829.5400
InvestorRelations@trupanion.com

Media:
Scott Janzen, Trupanion Director of Communications
888.612.1138 ext 3450
scott.janzen@trupanion.com

Source:Trupanion, Inc.