Trupanion Inc (TRUP) 2015 Q3 法說會逐字稿

Good afternoon, and welcome to the Trupanion third-quarter 2015 results conference call.

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Laura Bainbridge with Investor Relations. Please go ahead.

Thank you.

Good afternoon, and welcome to the Trupanion third-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 answers following today's prepared remarks.

Before we begin, I would like 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 discussed.

A detailed discussion of these and other risks and uncertainties that could cause actual risks and events to differ materially from such forward-looking statements are 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.

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 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 website under the financial information tab.

Lastly, I would like to remind everyone that today's call is also available via webcast on Trupanion's investor webcast. A replay will also be available on the site.

With that, I would like to turn the call over to Darryl, Trupanion's Chief Executive Officer. Darryl?

Thanks, Laura. And thanks, everyone, for your participation today. Joining me is Mike Banks, our CFO.

Today we look forward to reviewing our third-quarter highlights, recapping the progress made against our strategic initiatives, and discussing our outlook for the remainder of the year.

Quite simply, we had a great third quarter, and I could not be prouder of the way our business performed. We achieved our financial targets, exceeded enrollment goals, grew active hospitals at the fastest pace in four years, and made measurable strides to improve the Trupanion experience for our members.

Historically, our recurring revenue business model has resulted in rapid but consistent quarter over quarter growth. Our third quarter was no different. But I believe our performance in the third quarter did more to improve our Company than in any quarter in recent years.

I am thrilled with the execution of our team, and I am excited about our positioning for the future. With that as a backdrop, I will dive into our third-quarter highlights.

Fundamentally, we are a growth company with recurring revenue. Quarterly revenue was $37.9 million, 30% growth on a constant currency basis. Revenue from our direct-to-consumer subscription business was $34.4 million, representing 91% of our total revenue. Total subscription revenue grew 33% year over year on a constant currency basis.

Our revenue growth was, once again, driven by continued improvements across our key operating metrics. We exceeded our enrollment goal for the quarter, growing total enrolled pets by 25% and subscription pets by 26%. As a result, we ended the quarter with over 276,000 total enrolled pets, over 90% of which are from our core subscription business.

Monthly adjusted revenue per pet increased 5% on a constant currency basis. At the same time, we maintained an impressive 98.66% member retention. By all measures, our subscription business remains strong.

We also saw positive trends in the scale of our business during the quarter. Subscription gross margin, excluding stock compensation, was 18.4%, in line with our expectations and our long-term target of 18% to 21%. This represents a 340 basis point improvement over the same period last year.

Scaling our fixed expenses is fundamental to achieving our long-term goal of a 15% discretionary margin for our subscription business, which represents our subscription profit before any investments in sales and marketing or in our direct pay initiative. We focus on discretionary margin because we fully intend to maintain our sales and marketing investments, as we're committed to building this category and increasing North America penetration rate of medical insurance for pets beyond the 1% rate today.

A full reconciliation of our discretionary income is provided on our newly updated Investor Relations website. I talk more about our discretionary margin strategy in my shareholder letter included in our 2014 Annual Report.

In the third quarter, discretionary income was $900,000, a 630% increase from the prior year period, and representing 2.8% of subscription revenues. All in all, this was an extraordinarily good quarter for Trupanion. Our results clearly underscore our positioning of a high growth direct-to-consumer monthly subscription service.

Subscription service companies rely on a high value proposition for their members. The best subscription companies have a high cost of goods and exceptional member experience and the lowest frictional costs. This is how we run the business. We are focused on delivering a high value proposition to our members.

Fundamentally we strive to apply a cost plus approach to each pet. Paying $0.70 on the dollar to the average pet owner over the life of the pet. You can reference this further in my shareholder letter.

At the core, our strategy requires the trust and support of veterinarians and their staff. Our national sales force of territory partners is at the forefront of this effort. They are our primary link to the veterinarian community.

In the third quarter, our territory partners delivered the largest quarterly active hospital growth in four years. Next week, our territory partners will gather here in Seattle for our annual territory partner conference. Trupanion Express will be a particular focus at this year's conference, as we get ready to accelerate the deployment of this game-changing product.

For our members, Trupanion Express eliminates the reimbursement model where they have to self-finance veterinarian procedures, a necessary evil in the traditional pet insurance industry. We also believe that these fantastic experiences will, in time, pay dividends for our business.

We are confident that direct pay will aid retention and, over the long term, be a growth driver for us. While it's still early in our deployment, we are already beginning to see some evidence of this.

In August we communicated our goal of having Trupanion Express in 350 veterinary hospitals by year end. We're pleased to report that we are well ahead of schedule having already crossed that milestone in September.

In the third quarter, we paid over 25% of invoice dollars directly to veterinarians. We now expect to end the year with approximately 450 Trupanion Express installed hospitals.

More importantly, we believe the stage is now set for accelerated deployment of Trupanion Express, and we expect to have between 1500 and 2000 installed hospitals by the end of the year 2016. I am really excited about the progress on this front. Our Trupanion Express team has done an amazing job.

In summary, the second half of 2015 is off to an incredible start. We delivered continued robust growth in revenue and enrolled pets. We accelerated the deployments of Trupanion Express and, at the same time, our subscription growth margins normalized as we expected they would.

We are also are seeing positive trends in the scale of our business. Our performance year to date places us on track to deliver against our 2015 financial targets.

With that, I'll hand the call over to Mike.

Thanks, Darryl, and good afternoon, everyone.

As Darryl said, we had a great quarter. I will be addressing our financial performance in the third quarter, including achievements in the following key areas. We delivered, again, on the top-line with consistent, predictable, and robust revenue growth while maintaining our strong customer retention.

As expected, our gross margins were back in line with our long-term target range. We continue to see expansion in our discretionary margin. We continue to cost-effectively acquire new members. We improved our free cash flow dramatically, keeping us on track to deliver free cash flow break even in the second or third quarter of 2016.

Drilling down on our results, the third quarter marked our 31st quarter of sequential revenue growth since we entered the US market, and in all 31 quarters our year-over-year growth exceeded 25%. Total revenue for the quarter increased 30% on a constant currency basis. Including foreign exchange fluctuations, total revenue increased 25% year over year to $37.9 million.

Subscription revenues, which were 91% of our total revenue from the third quarter, were up 33% from the third quarter 2014 on a constant currency basis. Including foreign exchange fluctuations, total subscription revenues in the third quarter were $34.4 million, up 27% year over year. The increase in subscription business revenue was driven by a 26% increase in subscription pets during the quarter and our strong average monthly retention rate of 98.66%.

Monthly adjusted revenue per pet has been increasing throughout the year. Our monthly adjusted revenue per pet increased year over year by 5% for our US members, and by 7% for our Canadian members, each in local currency. Other business revenues, which generally are comprised of revenues that have a B2B component, totaled $3.4 million, up 8% from the prior year.

Total gross profit for the third quarter was $6.6 million. Subscription gross profit represented $6.3 million of that amount, a 54% increase over the prior year period. Our non-GAAP subscription business gross margin was 18.4%, back in line with our long-term target of 18% to 21%.

I now want to turn to our cost structure. We managed the business on a cash basis and with a focus on gradually increasing our discretionary margin over the long term.

On the expense side, we plan to achieve this by realizing scale in our fixed expenses. In the third quarter, our general, administrative, and technology expenses, excluding stock-based compensation, represented 17.1% of total revenues, up slightly from 16.9% of total revenue in the prior year period, but decreasing sequentially since we became a public company. We also remain focused on maintaining the ratio between our projected lifetime value of a pet and our average pet acquisition cost at around 5 to 1.

Acquiring new members on a cost-effective basis is critical to our long-term success. We measure this by monitoring our LVP-to-PAC ratio. In the third quarter we had $129 PAC and an LVP of $591, a 4.6 times return on acquisition spend.

Our free cash flow was negative $2 million in the third quarter, an improvement from negative $5 million in the third quarter of 2014. We delivered this improvement in free cash flow as we continue to increase our sales and marketing spend, which was $4.1 million, up from $2.9 million in the third quarter of 2014.

As Darryl discussed, our strategy is to continue to invest in sales and marketing while driving scale in the other expense lines of our income statement. We remain on track to achieve cash flow break even in the second or third quarter of 2016.

In the third quarter, we generated a net loss of $4.6 million, adjusted EBITDA was a loss of $3.2 million for the quarter, within our guidance range. Turning to our balance sheet, we ended the third quarter with $44.9 million in cash, cash equivalents, and short-term investments.

Let's now move on to discuss our outlook for the full year 2015. Despite significant foreign exchange headwinds, our revenue forecast for the full year 2015 remain in line with the guidance we provided in February.

With only in the fourth quarter remaining, we are narrowing our prior revenue guidance and keeping our full-year adjusted EBITDA guidance unchanged from the range we provided last quarter. Total revenue is now expected to be in the range of $146.5 million to $148.5 million. Adjusted EBITDA is expected to be in the range of negative $13 million to negative $10 million.

Thank you all for your time today. I will now turn the call back over to Darryl.

Thanks, Mike.

I want to mention a couple more things. First, we recently updated our Investor Relations website. We've added quite a bit of information to the site, including top investor questions. I would encourage you to take a look and provide us with your feedback.

We will also be attending several upcoming investor conferences, including RBC's Technology, Media, and Telecom Conference on November 11; and Stifel's Healthcare Conference on November 18. We hope to see many of you there.

Finally, before we open up the call for questions, I want to take the time to recognize the team for their tremendous efforts in the third quarter and throughout 2015. Our team has been working extremely hard to improve the lives of the pets that we all love so much.

Their efforts are paying off. We're delivering across every front: operationally, financially and strategically.

And with that, we will open up the call for questions. Operator?

Thank you.

(Operator Instructions)

The first question will come from Rohit Kulkarni of RBC Capital.

Great, thank you. A couple of questions actually. The first one on active hospitals, can -- you grew the active hospitals in the fastest pace in four years. Can you talk about why behind that, as in what is leading to this growth? Particularly, one of the fastest that you have seen in such a long timeframe.

A question for Mike, the pet acquisition costs seem to be declining over the last four quarters sequentially. Any particular reason again behind the why as to what is leading to that? And how substantial is that as we look at in 2016? Then I have a couple other follow-ups. Thank you.

Great. Thanks for the question, Rohit. We are thrilled with the focus that we've had on increasing the number of active hospitals. It's primarily driven by better training of territory partners and having more territory partners in the field. A lot of work that we did a year ago has been paying off. It's just a continued focus on building relationships with veterinarians.

Hi, Rohit. With regard to PAC, PAC's been coming down slightly over the last few quarters as our number of new pets have been rising. Going forward, I would expect PAC to remain within the range that we experienced this quarter and the last couple quarters.

Okay. One follow-up for the $0.9 million in discretionary income, 2.8 portion of subscription revenues. What is the correct indication of that and how high could that go as you talked about getting to a free cash flow break even mid of next year, Q3 maybe. What is the reasonable range of expectation for that discretionary income margin? As in, you've repredicted it to be mid-teens is the target over time? How fast the ramp could be?

The long-term target is about 15 points. We will see it linearly improve over the years. It won't take full effect until we have our fixed expenses totally at scale.

Okay. Great. Nice quarter, guys. I will get back into the queue. Thank you.

The next question comes from Jon Block of Stifel.

Great. Thanks, guys, and good afternoon. Maybe two or three and then I will jump back in the queue. Darryl, Express is clearly starting to ramp and you're already at the 350. You're running ahead of plan. Any metrics you can give on churn rates where Express is deployed? Or even maybe your market share within a hospital that adopts Express? In other words, if they were indifferent and had four or five brochures out there maybe where your market share is before and after the direct-pay initiative at a particular hospital?

I'm not going to give direct same-store issues, but I will tell you that we are seeing increased leads, increased conversion rates, and we're seeing lower operating expenses from the hospitals that have Trupanion Express. All the key metrics we're looking at give us a positive view to accelerate the growth.

Okay. Got it. And then I didn't hear in your prepared remarks, any commentary around the direct-to-consumer? Any early thoughts there? Certainly the enrollments were ahead of our estimates, and that has to be somewhat broad-based. What did you see in some of the markets where you were testing DTC where you had a little bit more scale?

We are getting good early results, but we are still midstream in the test. So we haven't come to any conclusions yet. We're learning that it not only helps consumer awareness, but it seems to be helping with our messaging with the vets as well.

Okay, and then maybe last one away from the everyday business. I think you guys have a very good relationship, a preferred vendor with BluePearl, a specialty hospital. They were just acquired, as I'm sure you know, by Banfield, the largest corporate-owned hospital chain with, I don't know, 800 or 900 in the US. Any opportunity there to take that relationship with BluePearl and expand it much more broadly into their new owner, being Banfield?

I think it's a little early to say, but we have a good relationship with BluePearl, as you mentioned, so marginally it might be positive.

Okay, great. I'll follow up with you guys offline. Thank you.

Thank you.

The next question is from Kevin Kopelman of Cowen and Company.

This is Andrew Merrick on for Kevin. Two questions. Pretty solid growth in subscription pets this quarter, 26%. As you get bigger, do you continue to target, and do you think that it is possible to keep the growth rates up in the mid-to-high 20%s?

And then on Trupanion Express, with the rollout coming in ahead of schedule, was wondering if there was any implications for technology expense with that? Thank you.

Just as a reminder, we are in a 1% penetrated market. Every 1% increase is about $1 billion of revenue at our current ARPU. In the UK, it's a 26% penetration rate. We've got a very large TAM, which gives us the opportunity to be growing consistently over a long period of time. If we can target in the 20% to 25% pet growth consistently then we will be achieving our goals.

With regard to the technology spend on Trupanion Express, the development phase is nearing its end in the near future. And we expect to see some reduction in technology over the next few quarters.

Okay. Thank you.

The next question comes from Michael Graham of Canaccord.

Hey guys, thank you very much. And congrats on the quarter. I wanted to ask about Trupanion Express, a couple of questions. Can you give us a quick overview of what the implementation is like? How long it takes? How people-intensive is it?

I also was wondering, you had a hiccup several quarters ago with the gross margins because of extra claims activity, and you got that nicely back to your target range. As you ramp up the rollout of this product, can you talk about how confident you are with the gross margin outlook that you are trying to aim for, given that you're going to have a lot more claims activity coming through here?

Yes, I can answer both of those questions. First of all, in the earlier days with deploying Trupanion Express it was a large team of people going into a hospital. I think our first few it cost us over $10,000 of deployment. We then got to a point that we had it down to about $1,500 a deployment. Today we have it under $250 a deployment.

I believe on the last earnings call, we talked about that we were able to deploy a faster number of hospitals. We are able to do it and streamline it. It's now more web-based, so it can be downloaded more like an OpenTable scenario. Our speed and costs have dramatically come down. That's one of the reasons that we feel confident to move aggressively.

As far as our growth margin a year ago, when we rolled out Trupanion Express it became a new factor for us. We have seen very consistent usage patterns. And today I would just say it's normal operating procedure for us. It's a scale that we've learned over the last year, and we expect it will not have a material impact on us moving forward.

Okay. Thank you, Darryl.

(Operator Instructions)

Our next question comes from JD Delafield of Delafield Hambrecht.

Hey, Darryl. Hey, Mike.

Hello, JD.

Hi, JD.

A couple of questions, some of them just following up on earlier ones. Direct-to-consumer marketing, are you going to expand into any new markets this quarter other than the ones you started with in the third quarter?

We are not planning on expanding into any major new markets for direct-to-consumer in Q4.

Okay. Can you tell us how much of the increase in sales and marketing expense was due to the consumer marketing campaigns?

On any given quarter, about 20% of our PAC costs are for tests. Our direct-to-consumer that we are doing in a particular region was inside of that 20%.

Okay. Thanks. And then on the gross margins that were impacted by the Trupanion Express rollout a year ago, you've now cycled through a full year. I am assuming you were able to get pricing in all of the markets, including -- that you needed to and the regulators are comfortable with your arguments as to why? Or are there any other issues out there where certain states or regulators are not comfortable with giving you pricing for that reason?

Really, it's just an additional factor for us now. Same as breed and geography and age and a whole bunch of other issues. We feel that we have been able to impact ratings by state and by province in a way that we feel comfortable to roll everything out. It's not buttoned up 100% in every single location, but by the time we are rolling out to hit our 2016 objectives, we feel confident.

Okay. The $900,000 of discretionary income, I don't remember you saying a number in past calls. Is that a disclosure item that you're going to continue to give going forward? Or maybe you have in the past and I just missed it.

What we are trying to do for the street is to give people the building blocks about how we think about our business. We've been disclosing and have been very transparent about those building blocks so that people can build their models and think about how we're growing our business. I think over time the amount of disclosures that we will have will probably be going down, not going up, as we started to inform the market about how we think about growing this category.

Okay. So you may or you may not continue to do that one?

Correct.

Okay. How many territory partners are on board at this point?

That is something that I announce once a year in our shareholder letter. It will be updated in the shareholder letter that will go out in Q1.

Okay. The last question I had is, in the past you've talked about what percentage of the category growth you think you represent. Where do you think that is today?

I think it's remaining consistent. There's probably 17 to 20 brands, depending on how you slice and dice it. We think we are 30% to 40% of the category's growth.

Okay. Thank you. It's a great quarter. Congratulations.

Thank you.

Showing no further questions. The conference is now concluded. We thank you for attending today's presentation. You may now disconnect.