Trupanion Inc (TRUP) 2015 Q1 法說會逐字稿

Good day and welcome to the Trupanion, Inc. first quarter 2015 conference call and web cast. All participants will be in listen-only mode. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Kim Esterkin, of Investor Relations. Please go ahead.

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 would 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 uncertainties that could cause actual results to differ materially from those to be discussed. A detailed discussion of these and other risks and uncertainties 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 on 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 would like to remind everyone that during the course of this conference call we will be discussing non-GAAP measures when talking about the Company's performance.

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 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 web cast on Trupanion's investor web cast. A replay will also be available on the site. And with that, I would now like to turn the call over to Darryl, Trupanion's Chief Executive Officer.

Thank you, Kim and 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 questioning. 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 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 a 30% growth rate over the prior-year period. Average monthly revenue per pet, our version of ARPU, increased in local currency 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 evidenced by our 98.66% average monthly retention rate. Our ratio of LVP-to-PAC for the quarter was 4.2:1, in line with our expectations. Gross margin for our subscription business was 17.8%, excluding stock-based compensation expense. Also, in line with our expectations for the quarter we expect ARPU to increase, which should further benefit our subscription gross margin in the second half of the year. Adjusted EBITDA was a loss of $3.3 million reflecting our continued investment in building Trupanion and the broader medical insurance for cats and dogs category, but a smaller loss than we had previously expected.

Our territory partners, technology and member experience initiatives remain key areas of investment during the quarter. We manage our business based on cash flow and we are on track to achieve cash flow break-even by the middle of next year. Once we achieve operational scale of 650,000 to 750,000 enrolled pets, our intention is to have our fixed expense scale as a percentage of revenue and our discretionary margin should continue to expand.

Over time continued expansion of our discretionary margin, which we define as our gross margin minus fixed expenses but excluding sales and marketing and expenses related to our direct pay initiative, should allow us to increase our funding for future growth and more specifically pet acquisition costs. With medical insurance for cats and dogs in the US at approximately 1% penetration we expect to make investments to grow this category for the long-term.

Let me switch gears to talk about Trupanion's strategic approach to the market. We fundamentally believe that the support from veterinarian and their staff is critical to driving broader acceptance of medical insurance for pets in North America. We have built our success around this belief. To expand our reach we have been building out our national sales force which we call Territory Partners. At the end of 2014 we had 70 sales representatives in the field. We intend to grow this number by the end of 2015 and will report our progress again in our 2015 Annual Report.

We're extremely committed to improving the way that we onboard and support our Territory Partners. I am more confident than ever that our Territory Partner model provides us with a long-term strategic advantage and moat.

The primary role of a Territory Partner is to build relationships and trust with veterinarians as the local face of Trupanion, and in doing so encourage veterinarians to actively recommend Trupanion in their hospitals. As a reminder, North America had 28,000 veterinary hospitals. Our Territory Partners are visiting an estimated 16,000 of the 28,000 hospitals.

Last year we believe we made over 80,000 face-to-face visits and since entering the US market over 350,000 visits. We have materials in and enroll pets from over 12,000 hospitals but we did not consider all of these hospitals as active. We define an active hospital as one that has had enrollment activity in the last 90 days. We ended 2014 with over 6,000 active hospitals. This is up approximately 18% from 2013.

In addition to our national sales force of Territory Partners, we build relationships through strategic partnerships. In January we announced a strategic partnership with VCA, one of the largest corporate owned veterinary hospitals in the US. We are pleased that our Territory Partners will now have a direct line of communication with veterinarian's from VCA hospitals in the US.

In February we announced that Trupanion was selected by MWI veterinarian supply as the preferred provider of medical insurance for cats and dogs for its distinct advantage program members. MWI is the nation's premiere distributor of animal health products and services and has deep relationships with thousands of leading animal hospitals. Our Territory Partners will now be able to work side-by-side with MWI territory managers to educate member hospitals on the benefits of Trupanion. We plan to continue to build strategic relationships throughout the animal health community and explore additional distribution channels to aid in the overall awareness and growth of Trupanion.

In order to maintain our important veterinary relationships, we are constantly looking for ways to enhance the Trupanion experience. One such way in which we are doing so is through Trupanion Express, our no cost software solution that eliminates the reimbursement model, a major pain point for our consumers and veterinarians. Continued deployment and development of Trupanion Express will remain a top priority in 2015 as we prepare to aggressively expand its reach in 2016. In summary, we are pleased with the start to the year. As Mike will touch upon, we are on track to deliver against our financial objectives of 2015. Our outlook contemplates solid growth in revenue, enrolled pets, continued gross margin improvement and early leverage in our fixed expenses.

As encouraged as we are by our forecasted near-term performance, we must remind you that we are building this Company for the long-term. The opportunity ahead of Trupanion is vast and we are committed to building this category well beyond a 1% penetration level today. In the next five years we plan to achieve operational scale which targets 5% fixed expenses and a 15% discretionary margin with our discretionary income funding our growth. This may be aggressive, but we commit to updating you on our progress towards these goals every year. We recently published our first annual Shareholder Letter where I have outlined our long-term vision on the Company. There is a vast amount of information in the letter and I encourage you to take the time to read it. You can find the letter on our website in the Investor Relations section. And with that, I will hand the call over to our CFO, Mike 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 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 1st quarter, the Canadian currency exchange rate dropped to an average of 81% compared to an average of 91% in the first quarter of 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 a 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 our US customers year-over-year and at 8% for our Canadian customers in Canadian dollars year-over-year. Due to the decrease in the Canadian foreign exchange rates, the combined ARPU in US dollars was $44.34, up 3% from a year-ago, but down 1% from the fourth quarter of 2014. Other business revenues, which generally are 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 measure 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 our subscriber base 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 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 revenue. In recent quarters the growth of these expenses has out-paced that 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 initiative, which was 3.5% of revenues in Q1, will continue into Q2 and possibly Q3, but the development phase and related expenses will then be finished. Thereafter, the initiative 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 lifetime value of $567. A 4.2 times return on that acquisition cost. We expect our lifetime value of pet to increase as the gross margin returns to historical norms later this year which should trend our LVP-to-PAC ratio back towards our 5:1 goal. Since these unit economics result in such a large financial return over time, we will continue to make investments in pet acquisition as long as we can do so within a reasonable margin of our long-term targeted 5:1 ratio.

In the first quarter we generated a net loss of $4.9 million. Adjusted EBITDA was a loss of $3.3 million for the quarter, slightly ahead of our expectations. As Darryl mentioned our Territory Partners market penetration, technology and member experience initiatives remain key areas of investment focus during the quarter. We expect to see further improvement in adjusted EBITDA in the second half of 2015 as our gross margin returns to normal and our G&A and technology expenses scale.

Turning to our balance sheet, we ended the first quarter with $32.5 million in cash and cash equivalent. The sequential decrease in our cash balance resulted from the repayment of $14.9 million in long-term debt as well as cash used in operations. Let's move on to discuss our outlook for the second quarter and full year 2015. For the second quarter we are initiating guidance as follows. Total revenue is expected to be in the range of $34.5 million to $36.5 million. Adjusted EBITDA for the second quarter is expected to be a loss of $3 million to a loss of $5 million.

It is important to keep in mind that these projections are impacted by the recent decline in the Canadian currency conversion rate. The average currency conversion rate we have used in calculating these projections was 79%, the rate in effect at the end of Q1. With respect to the full year 2015 our guidance is unchanged so we are reiterating as follows; Total revenue is expected to be in the range of $145 million to $150 million, adjusted EBITDA for the full year 2015 is expected to be a loss of $15 million to a loss of $10 million.

As we mentioned on our fourth quarter call, we have made a small re-class between our two segments as we have moved some pets that have a business to business component out of our direct-to-consumer monthly subscription business and into our other business segment, which we have determined will be appropriate for future periods. You can find tables regarding this reclassification at the end of our first quarter press release as well as under the financial documents section of our Investor Relations website. A total of $500,000 of revenue in Q1 was reclassified. As a result, we expect $2 million of our forecasted 2015 subscription revenue to be reclassified to the other business segment. So, we expect subscription revenue to be in the range of $133 million to $137 million in 2015.

In closing, I would like to emphasize that by the end of 2015 we expect to accomplish significant growth, return our gross margin to normal levels, begin to realize scale on our fixed expenses and be in a position to become cash flow positive by the middle of 2016. Thank you for your time today. Now, we'll open the call for questions. Operator?

We will now begin the question-and-answer session. (Operator Instructions). At this time we will pause momentarily to assemble our roster. The first question comes from Rohit Kulkarni, of RBC. Please go ahead.

Thank you. Two questions, please. Can you provide any updates on the Express roll out and traction say in terms of how many hospitals or any percentage of new pets that come through as a result of the Express roll out? And secondly, on the pet acquisition costs, they kind of declined sequentially. Is there anything that you are seeing that is leading you to believe that there is more leverage in how you acquire (inaudible) pets going forward? Thank you.

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 claim sellers are being paid through Trupanion Express. We have a long-term outlook to be looking at having about 300, maybe 350 total hospitals by the end of the year and we're really focusing on trying to lower the deployment costs and work on our training. We're happy with the progress we're making and as we mentioned in our earlier remarks, really trying to get it right, get our deployment costs down and try to accelerate in 2016.

Hi Rohit. With respect to the PAC, you might recall that in the fourth quarter our new pet enrollments are seasonally down a little bit in the fourth quarter. There's fewer visits to the vets and leading to fewer enrollments by us. Conversely, in the first quarter there is an increase in enrollment and, therefore, PAC is down slightly. So, that accounts for the sequential movement impact

Okay. Thanks, Darryl. Thanks, Mike. I will get back in the queue and nice quarter.

Thank you.

The next question is from Jon Block, of Stifel. Please, go ahead.

Hi. This is actually Ethan Roth on for Jon Block. A few questions here. First, maybe this one is for Mike. For 1Q 2015 you came in at the high end of the range for both subscription and total revenue but kept full year guidance unchanged. Can we look at this as potentially some level of conservatism that's been built into the guidance or has something changed in your outlook for the remaining of the year as it relates to either enrolled pets or FX and ARPU?

No. We still maintain our view for revenues for the long-term. We'll see how pricing rolls through, et cetera. So, we're still confident in that range of revenues.

Okay. And then I believe you mentioned you ended 2014 with 70 Territory Partners and that's expected to ramp to 85 exiting 2015. Is that expansion supposed to take place gradually throughout the year or will it be front end or back end weighted? And then, can you also remind us what level of Territory Partners you're targeting for full market coverage?

Yes. It's gradual throughout the year. So we look at ending the year about 85 people calling our veterinary hospitals. The total long-term is about 100 and that has one person for about 250 hospitals which would increase our call pattern to about 25,000 of the 28,000 hospitals. There's 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. Output.

Okay. Thanks. I'll get back in queue.

Thank you.

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

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'm wrong. I'm just wondering as you step on the gas here in 2015 to roll that out more fully, and I know you just gave us some good margin guidance, but is there any risk that you can press gross margins beyond what you planned for or will you modulate the roll out of Express to make sure that doesn't happen? I have another one, too. Thank you.

Well, you answered question. It's our job to modulate it. We understand what the cause and effect is and as we roll it out by regions we're in a shotgun approach by hospital we're going to modulate it into the market the best way that we can.

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

Well, 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 to sending in their invoices. With Trupanion Express we see 100% of the invoices 100% of the time and it's our goal to electronically transfer the money into the veterinarian's bank account within five minutes from the time of the invoice being created. So, the biggest change is not so much a change in behavior from the consumer although there's a slight change in behavior. The biggest change is we'll just see all the invoices.

It's kind of the inverse affect of what you will see with a lot of companies that have store bought cards, you know, a $50 card to be used at a certain retailer. Some of these people just never get around to using it. What was happening before in the reimbursement model is some people just don't get around to sending in the invoice. That's the biggest impact. We realized these things in third quarter. The data still supports exactly what our findings were so we have a very high degree of confidence that we've got good data.

Okay. That's helpful. Thank you. And then the other one I had was just, Darryl, could you characterize the penetration level of pets at hospitals where you've had a relationship for a long time? In other words, I'm trying to figure out if there's a cohort frame work we could apply to hospitals that have been really aggressive at pushing your product versus some that may be coming up the curve? And, are the ones who are really highly penetrated are they still increasing their penetration or is there some level at which they seem to level off?

So great question. In markets where we are more mature, and for me a 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 ten 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 market for us there's a long run way ahead.

Okay. Thanks very much, guys.

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

Thanks. Just wanted to ask about the pets growth outlook. You guys had pretty solid growth there this quarter with 27%. As you get bigger, what kind of numbers are you targeting, and is it possible to keep the growth rate up in the high 20's? Thanks.

Well, the most difficult area for us is growth it's not the available market. Our TAM is huge. The biggest constraints that we have is we are expensing 100% of the acquisition costs up front, 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 could do 25% in pets, another 5% or 6% in ARPU, getting you to a 31% revenue growth. And with that level we could use our discretionary margin to grow the business without further dilution. 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're looking for, for the next few years.

Okay. Thanks, Darryl.

(Operator Instructions). The next question comes from Chris Merwin, of Barclays. Please go ahead.

Okay. Thank you. Darryl, if you wouldn't mind just updating us on your long-term plans for direct to consumer marketing? You talked about the opportunity for when your fixed cost based scaled and you 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 price increases, renewal rate is very strong, in your conversations with customers are you still seeing a lot of run way to keep increasing prices? I know you have done it for years and years, but is there any ceiling that you foresee, or just based on discretionary income, or do you see a long run way there still? Thanks.

Well, I will answer your second question first about price elasticity. I don't think pet owners consider their pets disposable or discretionary although, you know, people could put our product into that category. If we're providing great value, we haven't seen any push back on price historically. We haven't seen anything in the last couple quarters that would tell us any differently than we have seen in the previous years, but you need to exceed the consumers expectations on both the products 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 are at $100, $120, $140 ARPU. We've got other ones that are at 70 and 80 and we are really seeing overall relatively consistent conversion rates and retention rates across all price band. So, as long as we're good at articulating the value proposition I am not concerned with any pricing issue. As far as direct-to-consumer, you're right in that once we get our fixed expenses to 5% and we have more available free cash that we could put our pedal down a little harder for direct-to-consumer. I think what you'll see us do in the next couple years is test 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 of this is to try to find long-term places where we can spend $1 and get $5 back on the lifetime value, and if we can test direct-to-consumer in certain areas or pockets or different distributions, we'll be doing that in the next couple years. We will just be doing it in smaller ways.

All right. Thanks, Darryl.

Okay. Well, thank you everybody for your questions. In closing I would 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.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.