Q2 2021 Trupanion Inc Earnings Call
Greetings and welcome to the true Canon, Inc. Second quarter 2021earnings conference call. At this time, all participants are in a listen only mode.
On the answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on yourself on keypad. As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Laura Bainbridge Investor Relations.
Good afternoon, and welcome to true Pinions second quarter 2021 financial results conference call participating on today's call are Darryl Rawlings, Chief Executive Officer, and Tricia plus in Marquis 2 co presidents.
Similar to prior earnings calls Mark he will be joining Darryl Tricia for the Q&A portion of today's call before we begin I would like 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 true pennon within the meaning of the safe Harbor provision of the private Securities litigation.
And Reform Act of 1995. 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 our earnings release, which can be found on our investor relations website as well as the Companys. Most recent reports on forms 10-K.
An 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 fixed expenses variable expenses adjusted operating income acquisition costs internal rate of return adjusted EBITDA and free cash flow.
When we use the term adjusted operating income on margin. It is intended to refer to our non-GAAP operating income or margin before new pet acquisition.
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 on in addition to and not a substitute for measures of financial performance prepared in accordance with the U S. 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 true Pinions Investor Relations website under the quarterly earnings tab.
Lastly, I would like to remind everyone that today's call is also available via webcast on true opinions Investor Relations website. A replay will also be available on the site.
With that I will hand, the call over to Darryl.
Thanks, Laura and good afternoon, everyone.
In June we hosted our annual shareholder meeting during which we covered a wide range of topics that pertain to our business and our 60 month plan because of this we will keep today's remarks brief.
In summary, Q2 was another strong quarter as shown by our key financial measures total revenue grew 43% year over year, we added over 33000 net new subscription pets in the quarter and we crossed over 1 billion in total pets enrolled.
These are interesting, but what I'm most focused on is the expansion of our adjusted operating income, which our profits generated from our existing book of business that we then have available for us to grow and invest in our business at attractive internal rates of return in.
In the quarter adjusted operating income grew 32% to $18.5 million, we deployed about 17 million of these funds on our subscription business to acquire nearly 56000 pet at an estimated internal rate of return of 34%, it's worth reiterating that for the purposes of on.
Our internal rate of return calculation pet acquisition cost is inclusive of all sales and marketing spend including the cost of all team members working on acquiring pets.
Growing our adjusted operating income and deploying as much of this is possible at attractive internal rates of returns are the fundamentals of our business model. The team is increasingly skilled at doing so year over year. The team was able to put approximately 100% more capital to work and in a disciplined and highly efficient way.
Historically, we spent the vast majority of our adjusted operating income and acquiring pets in our core subscription business. This quarter. In addition to the 17 million. We spent acquiring new pets, we spent $1 million of our adjusted operating income on pre revenue initiatives that are a part of our 60 month plan. We also invest said roughly an additional.
On a 1 million in capex compared to the prior year, primarily in our next generation product administration platform, which we will launch in the next 12 months. We expect this platform will support new product initiatives improve our member experience and build upon our position as the global low cost provider in our industry.
While this results in us being cash flow negative in the quarter. It's a tradeoff. We are excited to make given our large underpenetrated market and the opportunities we're pursuing as part of our 60 month plan.
As a reminder, our 60 month plan was provided in our most recent shareholder letter, which can be found on the investor relations portion of our website.
Our financial position is strong and we're well capitalized to afford our accelerated growth and execute on the opportunities ahead of us.
Even with our elevated growth I'm happy to report continued exceptional monthly retention of 98.72% the output of our ongoing focus on member experience.
The average pet now stays with Japan yen for 78 months, which is up from 70 months just a few years ago. We believe our retention is industry, leading and small incremental improvements can meaningfully impact the intrinsic value of the company.
Maintaining retention well accelerating growth is exceptionally difficult and the team deserves to be commended on their efforts.
Taking stock of where we stand 6 months into our 60 month plan I am pleased with the progress we've made and I'm proud of the team.
With that I'll hand, the call over to Tricia to discuss our Q2 results in greater detail Trish.
Thanks, Darryl and good afternoon, everyone. We are very pleased with our second quarter results, which exceeded our expectations. Our over performance was led by strong monthly retention and solid gross additions in our subscription business and continued strong growth in our other business.
Total revenue for the quarter was $168.3 million up 43% year over year within our subscription business revenue was 120.4 million in the quarter up 30% year over year or 27% on a constant currency basis.
Total enrolled subscription pets increased 22% year over year to approximately 643000 pets as of June 30th average monthly retention, which is calculated on a trailing 12 month basis was $98.7 2% compared to 98.66% in the.
The prior year period, which we attribute to our ongoing investment in service levels.
As a reminder, our blended retention rate is influenced by our mix of business during periods of accelerated growth first year retention May act as a headwind to overall retention.
Monthly average revenue per pet for the quarter was $63 on 69 cents, an increase of 7.2% year over year or 4.4% on a constant currency basis in the first half of this year, we saw ARPA increased 7% and the cost of paying veterinary invoices.
On a per pet basis also increased approximately 7%, while we continue to make progress on our pricing initiatives. We currently estimate needing an additional 1% in ARPA increase says to ensure that we are pricing more consistently to our 71% value proposition our subscription cost of revenue.
<unk> includes the cost of paying veterinary invoices and variable expenses as a percentage of subscription revenue the cost of paying veterinary invoices for our subscription business was 72% and variable expenses increased slightly to 10%, both reflecting continued investment in people systems.
Claims automation capabilities, we continue to be encouraged by the impact we are seeing 2 retention from these initiatives, which are designed to deliver a more differentiated member experience and over time to reduce frictional costs.
Our other business segment is comprised of revenue from other products and services that generally have a b to b component and different margin profile than that of our subscription business and total other business revenue was $47.9 million for the quarter, an increase of 88% year over year due.
You primarily to an increase in pets enrolled within this segment cost of revenue for our other business segment was 44 million compared to $23.5 million in the prior year period the.
The year over year increase is consistent with the increase in segment revenue over the same period total fixed expenses, which are shared services that support both our subscription and other line of business were 4% of revenue in the quarter an improvement from 5% in the prior year period.
After the cost of paying veterinary invoices variable expenses and fixed expenses, we calculate our adjusted operating income as Darryl mentioned, we view our adjusted operating income as the critical measure of our scale and discipline since it represents the profit we generate before investing in growth and other.
Strategic initiatives for our subscription business, our target adjusted operating margin remains at 15%.
In the quarter. Our total adjusted operating income was $18.5 million, which is up 32% over the prior year period, and our total net loss was $9.2 million, which I will discuss in more detail momentarily.
Approximately 90% of our adjusted operating income was generated from our subscription business during the quarter at $16.6 million or 14% of revenue the variance from our 15% target was primarily due to the investments in our member experience. We discussed earlier, we have made the.
Strategic decision to invest in these initiatives in the near term as they drive retention and referrals, but we do expect them to scale longer term.
During the quarter, we invested $17.1 million of our adjusted operating income to acquire approximately 56000, new subscription pets. This resulted in a pack of $284 in the quarter, an estimated 34% internal rate of return for a single average pet with.
In our internal rate of return guardrails.
Given our strong balance sheet and scale. We are also investing in new product development and international expansion. These initiatives are included in development expenses as they are pre revenue and were $1.1 million in the quarter.
This resulted in an adjusted EBITDA of point $2 million in the quarter compared to $5.5 million in the prior year period.
Depreciation and amortization were $3.2 million during the quarter, an increase of 1.4 million from the prior year period. This increase was primarily due to the amortization of assets from our software acquisition in the fourth quarter.
Total stock based comp expense was $6.5 million during the quarter up from 2.2 million in the prior year period. This is in line with our projection of 6 to 7 million in stock based compensation per quarter for the remainder of this year as a result, net loss was $9.2 million or a loss of 23.
<unk> per basic and diluted share compared to net income of $1.4 million or 4 cents per basic and diluted share in the prior year period as.
As compared to the prior year period, the increase in stock based compensation impacted net loss by 11 cents and the increased depreciation and amortization impacted net loss by 4 cents per share.
I'll now turn to cash flow.
Operating cash flow in the quarter was negative 2.2 million compared to positive operating cash flow of $4.9 million in the prior year period, the year over year decrease in operating cash flow reflects our accelerated pet growth and investment and development initiatives I discussed earlier, we have also increased.
Our investment in capital expenditures compared to the prior year totaling 2.9 million during the quarter. The increased capital expenditures primarily related to software driving our member experience and new product initiatives. This resulted in free cash flow in the quarter of negative 5.1 million.
At quarter end, we held cash and investments of over 219 million and no debt.
I'll now turn to the outlook for the full year of 2021, which we are updating to account for our over performance in the first half of the year, including benefits from FX.
We now expect total revenue in the range of 687 to 692 million subscription revenue for the full year is expected to be in the range of 495 million to 498 million, representing 28% year over year growth at the midpoint at these revenue levels.
We would expect total adjusted operating income of around $76 million, an increase of 34% over the prior year with over 90% being generated from our subscription business.
Of the $76 million in adjusted operating income, we would expect to invest approximately $69 million in acquiring pets within our subscription business, which at our targeted internal rates of return results in a pack of around 280, we believe the most value is created through the compounding effects of cost.
Effects of pet acquisition, while operating within our internal rate of return guardrails of 30% to 40% for the full year of 'twenty 'twenty..1 we continue to expect to spend 3 to 5 million on development initiatives discussed earlier as well as on our other business pet acquisition for the third quarter.
Total revenue is expected to be in the range of 177 to 179 million subscription revenue is expected to be on the range of 127 to 128 million, representing 28% year over year growth at the midpoint also keep in mind that our revenue projection.
These are subject to conversion rate fluctuations between the U S on Canadian currencies for our third quarter and full year guidance, we used an 80% conversion rate in our projections, which was the approximate rate at the end of July.
Thank you for your time today, operator, we will now open up the call for questions.
Yeah.
Thank you.
We will now be conducting a question and answer session. If you would like to ask a question. Please press star 1 on your.
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Our first question is from sweater Schrader.
Cause urea with Evercore ISI. Please proceed.
Okay. Thank you 2 questions from me. Please first is on our food and that increased from last quarter as well.
Could you please update us on the revised full year guide for <unk> for <unk> and then the second question is Darryl you said.
You are pleased with the progress for the 5 year plan in the first 6 months.
Maybe if you could talk about how you're measuring progress across those 5.
Sellers are initiatives.
On that you laid out on the shareholder letter. Thank you.
I just try to other sort of cash out.
Start with the first 1 before I hand, it over to Darryl. So we did see <unk> continuing to increase although you know a little bit lower on a constant currency basis.
As a reminder, we're a cost plus model. So we're constantly looking at that and trying to hit that 71% value proposition will continue to do that for the rest of the year, we're looking at them.
Roughly in the 5% to 6% range for for the full year just based on how we're tracking as we look to that 71% on what we and we expect to be flowing through.
Yeah.
That's right.
So.
We have a number of initiatives that we outlined in the shareholder letter and we talked about recently on the shareholder meeting.
On broad speaking they include adding more products and new distribution channels in North America, and then international expansion.
How are we measuring our investment.
In those areas.
All of them have what we consider to be considerable upside.
And considerable upside that will not only be good for the next several years, but that could draw.
Drive growth for the business for the upcoming following.
On 1 to 2 decades.
All of these initiatives are going to take a very period of time from 12, 24.36 months to get off the ground. So what I'm really monitoring or the milestones in each of those initiatives and how they are projecting.
Moving forward compared to our expectations.
And in all areas, we feel really good.
Covid has made international travel a little bit more challenging so although we're moving ahead with business plans and making a lot of progress we haven't had feet on the ground as much as we would like but overall the teams are doing really well Mark do you have anything to add.
Yeah.
Okay. Thanks, Chris Thanks Darryl.
Okay.
Our next question is from Maria Rips with Canaccord Genuity. Please proceed.
Oh, great. Thanks for taking my questions on that congrats on strong results.
So your Q3 guidance implies continued strong growth with very little deceleration from Q2 have you seen any changes in sort of consumer behavior on that traffic over the past few weeks amidst what seems to be sort of a worsening COVID-19 conditions around the country and then I have a quick follow up.
However, erez long day.
So in terms of the overall changes in consumer behavior, we're really having on LIBOR.
Our conversion rate is up it continues to go into other parts of the direction in a heartbeat.
And then on several courses, which is which is good.
In terms of specific that changes nothing has changed in the vet industry directly with the same thing that we've seen let's say follow this here in the last year with that shortage staff shortages that Russia defeats him. There is obviously always depend on.
On the kind of over the head at the moment, but in terms of the need for a product that continues to be a real it's reinforced during times of day, hence our traffic being positive.
And that hasn't really been a change since last quarter.
Just I'll kind of add to it our core subscription business is growing.
Very strong and it has so for the last 3 quarters as Margaret said leads and conversion rates are up but just a reminder, the overall penetration rate in North America is extremely low.
Every 1 point of penetration is over $1 billion on revenue. So we've got so much runway ahead of us for the next several decades in just North America that.
A little changes in environmental what's what's happening out in the world.
Don't really we don't see them as much as a headwind and I think you know our retention rates, which are at our historical highs or another.
Vacation that.
We've got a big market ahead of us and that the consumers are accepting our product.
Oh, great. Thanks for that and then secondly, I just wanted to ask about sort of the the breeder channel and I believe you talked in the past that it could be an opportunity for Japan.
I guess, how fall on are you in that effort and it seems like it's a very fragmented space. So did you see sort of the opportunity there to leverage data and technology to accelerate this effort sort of similar to what you've been doing with a vet hospitals.
Yeah I'll stay on.
On the British channel is 1 of a number of Tyler they've all been growing them on Brita channel is 1 that we've been definitely investing in now for a good few yes. There is a day. So as you say it is a fragmented channel on the the reason that we like the breeder channel is because youre getting to a puppy or a kitchen at a very early age and for US We believe the best member.
Experience with having that pet enrolled from from Beth I'm, taking them on their way through to end of life and so it really helps in terms of messaging and it ties into our overall value proposition that is the reason that we feel that we have such strength in all product. So it ties in well that we continuously investing in all of our different distribution channels breeder is 1.
We all are we like a lot it has high lifetime value and will continue to invest in that way on those guardrails on to work with any other tunnels that we're performing in.
We remain excited and it's definitely call it out 16 months fun.
Oh, great. Thank you for the color.
[noise].
Our next question is from David Westenburg with Guggenheim Securities. Please proceed.
Hi, and thank you for taking the question.
And congrats on the on the on the good.
So we're hearing a lot about wage inflation on.
Services inflation, and that's really kind of raising prices over and over the next couple of years.
Accommodate that I know over the long run higher prices drives demand for insurance do you anticipate any short term impacts if indeed, we're seeing an increase in prices that we've not historically seen over the past few years.
Well you pointed out and underlying thing that is often misunderstood and that we are aligned with veterinarians.
With them, providing the best level of care that they can you know veterinarians.
And their staff have gone through a lot of pressure over the last year wage inflation is certainly a challenge it's been a challenge for 10 plus years.
Corporate consolidation is another 1 we would expect inflation to be at or above historical level levels for the next several years, what's important for us and we've done a really good job you can notice it in this quarter and on the previous quarters of keeping lock step between our <unk> and the cost.
What we're paying out in veterinary invoices.
As Chris mentioned, we're still trying to bump it up about 1% so.
You know, we're very encouraged by what the veterinarians are doing referral specialty hospitals, the advancements we're making.
And.
It's our job just to make sure that we can continue to stay on top of it.
And we do that in a very granular fashion, we shared on a blended basis, but.
The team is doing a good job.
Got it thank you.
This could be mis modeling because I can do that at certain point, sometimes on I'm not perfect. So anyway. When I was looking at I I I I under modeled kind of what the.
Some of their subs from cost would be and I was trying to go through and I'm like okay.
Everything kind of just Miss me slightly or it was a little bit about me in terms of subscription cards and paying invoices variable expenses interest expenses everything was everything was a nudge above me.
Any moving parts in the quarter or did I, just not do a very good job on modeling or listening to the 72% [laughter] language that you viewed as before because that's possible too and that's my last question.
Yeah, Dave I would say on you know things move around slightly quarter to quarter at the at the items, we were targeting around a 14% going into the quarter and that's you know the guidance. We gave on ally and we did come in right right at that so.
But it's it's it's possible between the various components you know those we we performed a little better on our fixed expenses, but we did invest a little heavier in some of our member experience you know variable expenses, but I mean overall, where we came in with a 14%.
And our adjusted operating income.
Was it was right on.
Got it thank you.
Our next question is from Elliot Wilbur with Raymond James. Please proceed.
Hi, everyone. This is actually Michael car, Larry I'm filling in for Elliot. Thanks for taking my questions. So I believe in June you guys discussed 1 of the initiatives was the introduction of low and medium price point plans I was just wondering if you had any update.
On those plans and timing wise and then also regarding those plans can we still expect you know around a 70% payout ratio for them.
And how should we think of harp, who grows with the presumed greater price sensitivity around the lower and mid price point plants. Thank you.
So I'll kick this off on AR and Darryl on interest can answer those questions as well because there are a few and so to start off with how are we doing we havent seen launch since the June shareholder me, saying, where we announced day that's more of the details around the lower medium I'll pay products on the faster, which is called P. H I direct we just non stop in Canada.
In the last month.
Very early days, let's say just a few weeks ago. So there's nothing really to share other than we're happy that we've built on the muscle as the team 1 of the things that we've been ready I'm really trying to balance on Monday. This year, that's 6 months on it but you know we've got a very strong growth range today without force subscription business and that's what the other thing muscle how do we maintain that strong growth rate.
As well as day to see these new initiatives and I think with on numbers that you just didn't come through in Q2, we've thought we've proven that we can do that wishes which is encouraging.
The dial in terms of day the margin do you want to take that yeah. I mean, the most important margin for US is our 15% adjusted operating margin and all of our new subscription initiatives, which include lower <unk> international expansion, our new distribution channels even.
You know given your total on the monthly.
Monthly food subscription side all of them are designed to have the same margin profile, where we're looking at.
Craig on that 15% and.
But that's our focus.
Yeah, I would just add you know 1 thing overall, yeah, we will as some of these things ramp up are our key metrics, particularly arc, who will reflect more of mix of business, but in general I think the thing I want to highlight particular as we look to this year and enrolling into next year, you know that the guidance and the result strong.
Frequency and the beginning of Covid I described it at the time as being like a snow storm. If you called your veterinarian you said my dog's limping, a lot or a little bit and it's got a lump or a bottle do.
Do I need to come in today and the veterinarians like you know I'd like to see them soon but it's not critical that you hear today that slowed down frequency in the beginning of Q2 of last year.
It also dramatically slowed down wellness visits so people go on in for flea control vaccinations teeth cleaning et cetera.
But the frequency of our business is very stable.
And going really into Q3, and Q4 last year, we were back to normal frequency levels and they've helped steady Simpson.
Got it that makes sense and then he was on the pack on the the pet acquisition constantly trying to split hairs on the last quarter. We were using 280 is the assumption.
Annie crept, a little bit above that and I I think you mentioned 280 earlier in the call is what you're thinking about from the rest of the year I mean is.
Should we interpret that as guidance or is it kind of you think it'll probably more likely continue to pick up.
Well I mean, we do our our we target our pet acquisition costs based on the internal rate of return so our guard rails or any firm anywhere from 30% to 40%.
The guidance that Tricia mentioned on there was assuming we hit at 35% in the mid point of our internal rate of return and then our lifetime value remained steady of where it is today, but on the lifetime value of our pet has gone up about 14% over the last year because of the increased and <unk> and the increase in retention rate.
To kick off our tests, which we have as it is the test we're making sure we have everything lined up.
On that everything is ready to go so we're a little bit were little bit ahead of other might we haven't quite got it out to all casinos detested after that test them on like the hospital testing. So we've still got a fairly long runway.
As with everything in all 60 months on you know, we expect them to come on at different times. So.
This is something that we continue to work on them. We've got on some focus on there is making sure that we can do it right and we'll be able to update as and when that testing. So from we can get more information then.
And I can speak to your first question.
Correct, we did over perform on bulk segments on the other business the revenue being 1 of them and as a reminder, there's a few different things in our other business revenue all of them or an income bind at the lower margin part of our business..1 is we've ensure pets for the veteran affair.
There's a federal government service dogs to some employer benefits are that we'd go that go through there and then 3 would be on underwriting other products in the market that we don't wholly own and all of them performed well during the quarter over performed.
As a reminder, this segment tends to be less predictable tends to be a little bit more lumpy and so we always try to make sure. We don't get ahead of ourselves a win win we're projecting that out, particularly because if it's a lower margin part of our business areas that we are happy to participate.
So peyton, albeit at lower margins, but our main focus is on our core subscription business and really pushing that in the margin profile that come along with that and the strong strong growth rates over 90% of our adjusted operating income is coming from our core subscription business. So while we're happy.
For all segments to over perform on the focus is on the subscription, particularly in our 60 month plan, that's where you'll you'll see those initiatives come into play more.
Great that's helpful and.
With respect to your guidance.
You know I know.
Necessarily break out your.
Underlying assumptions in different channels, but was just wondering maybe at a high level.
Assuming that lead volume trend.
Yeah.
For the second half of the year for instance, some are we expecting to see kind of similar levels of growth.
And that leads relative to the first day.
Yeah. So I mean, we were definitely it's the T. P. A tower she partners can get back out into hospitals was saying on that active hospital visits happening more and more frequently which is always great is where that relationship with the vet. The vet industry is so cool so everything that we do so.
We've seen that lead volume continue to pick up as I mentioned and that is all his on court channel last so I don't anticipate that that continues to be strong you know when we talk about the way that we deploy a capsule not the way that we can invest that money from a 30% to 40% we're going to keep doing that and I think 1 thing that you know to the only other question.
We are watching them from being a position, where we're driving an awful lot more leaves them. We're investing so we're thinking about 30% to 40% with thing and I called it out to be really efficient.
So we noted that the opportunities are for us to go on crank the lever on on lead volume as well as trying to keep that conversion rate high so.
That will no doubt continues to perform very strongly for us and are on the team is doing a great job of keeping that volume up.
I had a comment for people that are new listeners to our true banyan no.
True Banyan has over 150 plus people in the field, calling on veterinary hospitals are typically trying to visit them. Every 60 days, we're the only company in the category that has a dedicated.
Sales force and during Covid like everybody else they were stuck at home and they had to learn how to deal with the telephone communication texting zooming and the field is excited and to be able to get back on their cars and make those connections.
<unk>.
You know, we'll have to all watch what happens with Covid, but we're really eager to you know to be in the field and we expect strong growth from that segment of our business.
Great. Thank you.
Thank you.
Ladies and gentlemen, we have reached the end of the question answer session and this will conclude today's conference you may disconnect. Your lines at this time. Thank you very much for your participation and have a great day.