Trupanion Inc (TRUP) 2015 Q4 法說會逐字稿

Good afternoon and welcome to the Trupanion Incorporated fourth quarter 2015 results conference call. All participants will be in listen-only mode. Should you need assistance please signal a conference specialist by pressing the star key followed by zero. After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Laura Bainbridge, Investor Relations. Please go ahead.

Good afternoon and welcome to the Trupanion fourth quarter and full year 2015 financial results conference call. I am joined today by 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 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 and 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 are included in our earnings release which could be found on our Investor Relations website as well as the Company's most recent reports on Form 10-Q and 8-K filed with the Securities and Exchange Commission.

Today's presentation contains reference to non-GAAP financial measures that management uses to evaluate the Company's performance including without limitation variable expenses, fixed expenses, adjusted operating income, acquisition costs, adjusted EBITDA and free cash flow. When we use the term adjusted operating income or margin, it is intended to refer to our non-GAAP operating margin or income before new pet acquisition. Unless otherwise noted margins and expenses will be presented on a non-GAAP basis. Which excludes share-based compensation expense.

These non-GAAP measures are in addition to, and not a substitute for, measures of financial performance prepared in accordance with the US GAAP. Investors are encouraged to review the reconciliations of these non-GAAP financial measures to the most directly comparable GAAP results which can be found in today's press release or on Trupanion's Investor Relations website under the quarterly earnings tab. Lastly, I would like to remind everyone that today's call is also available via webcast on Trupanion's Investor Relations website. 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. Good afternoon everyone. Thank you for your participation as we review our fourth quarter and full year 2015 financial results and discuss our outlook for 2016. In short we had another good quarter to cap off a productive year in which we achieved our financial and operational objectives. As you will hear in our remarks today Trupanion is leading our category by providing a superior value proposition to pet owners and veterinarians.

Our strategy is being rewarded with strong business performance, continued robust growth in enrolled pets and strong member retention. We are expecting continued positive momentum in 2016 which I will share in a moment. First, I want to recap our financial and operating results from 2015. Total revenue was $147 million, 31% growth over our 2014 on a constant currency basis. Revenue from our direct-to-consumer monthly subscription business was up 33% on a constant currency basis.

We delivered this growth while maintaining our average monthly retention rates and increasing average revenue per pet. What I'm most excited about in our 2015 results was the scale that we began to realize in our adjusted operating margin. Previously referred to as our discretionary margin. This metric represents our non-GAAP operating income before a new pet acquisition cost and we have provided a reconciliation to GAAP net loss on our Investor Relations website.

In the fourth quarter our adjusted operating margin was 5.5%, up 470 basis points from the fourth quarter of 2014. This trend positions us well to achieve our stated goal of becoming cash flow breakeven in the second or third quarter of 2016. In the long-term we targeted and adjusted operating income margin of 15% and I'm really excited that our plans for 2016 contemplate continued similar progress toward this objective.

We are redefining the way the industry veterinarians and pet owners think about medical insurance for pets. Pet owners in the United States love their pets, in fact, they spent more than $60 billion on pet products and veterinary care last year. This spending level has been increasing even through recessionary periods. As a cost of veterinary care continues to increase so will the need for our product.

There are more than 160 million cats and dogs in the United States and only about 1% currently have medical insurance plans. At our ARPU every additional point of penetration equates to $1 billion in revenue for our category. Much of our progress in 2015 and our focus in 2016 is on further strengthening our competitive around our business and positioning Trupanion to benefit from the low penetration rates and continued growth of the animal health industry.

We are a vertically integrated provider of medical insurance for cats and dogs which enables us to spend approximately 70% of subscription revenues paying veterinary invoices. Providing pet owners with an exceptional value proposition is core to our success and a key competitive advantage. In addition to this high value proposition, we are focused on improving the member experience by paying veterinarians directly. In 2016 we will accomplish this through the increased availability of Trupanion Express which enables invoices to be submitted and settled in under five minutes.

We ended the year with Trupanion Express installed in over 500 hospitals, well ahead of our original 350 hospital target. With the helpful Trupanion Express we paid over $23 million directly to veterinarians in 2015. Now, it is still early days in the optimization of Trupanion Express but we are pleased with the early results and we remain confident that in time Trupanion Express will be a game-changer for the industry.

We moved the system to the cloud in the second half of the year laying the foundation for accelerated low cost deployments in 2016. We now expect to have Trupanion Express installed in 1500 to 2,000 hospitals by the end of the year. With over 28,000 veterinary hospitals in North America we have a long way to go in the deployment of Trupanion Express, but we are excited to be under way with this accelerated phase.

Another key mode for our business is our national sales force of Territory Partners which is unique within the category. We have been developing it for the past 13 years and it is undeniably one of the most difficult pieces of our business to replicate. Our Territory Partners are responsible for delivering the Trupanion message to veterinarians across the United States and Canada. In 2015 we made significant strides onboarding and training our Territory Partners.

We estimate that our Territory Partners had over 86,000 face to face visits with veterinarians and their staff throughout 2015. A new record for Trupanion. These Territory Partners visited 19,500 of the approximate 28,000 veterinary hospitals throughout North America. We held our Territory Partner conference in the fourth quarter and it was a humbling experience to be surrounded by such knowledgeable and passionate group.

Our goal remains to give them every possible resource and opportunity to help them be successful. In 2016 we will continue to invest in the onboarding and training of our Territory Partners with a particular focus on expanding Trupanion's footprint even further. In our existing markets we will continue to evaluate our growth on a market-by-market basis. In newer territories, where our Territory Partners have been in place for less than five years, our focus remains on growing our active hospital base.

We have made good progress on that in 2015 and will report our number of active hospitals in a couple of months in my annual shareholder letter. In established markets where our Territory Partners have been on the ground for over five years we continue to grow our active hospital base and will also begin to test ways to increase same-store sales. Currently we have about 16 established markets which comprise approximately 5,000 veterinary hospitals. 49% of these were active Trupanion hospitals at the end of the fourth quarter. In summary I am very pleased with our performance in 2015.

We are adding pets, building relationships with more veterinarians and their staff, enhancing the customer experience and expanding our adjusted operating margin. As we look forward to 2016, we expect our positive momentum to continue. We anticipate we will deliver another year of strong revenue growth, drive continued significant leverage in our fixed expenses and achieve cash flow breakeven.

We are excited to keep you abreast of our progress and with that I will hand the call over to Mike.

Thanks, Darryl and good afternoon, everyone. We are very pleased with Trupanion's strong and consistent financial performance throughout 2015. Today I will review our fourth quarter results and provide our outlook for the first quarter and full year 2016. But first I would like to highlight that we delivered on what we said for 2015. First, we forecasted total revenue growth of 25% to 29% year-over-year and in 2015 we grew revenue 27% including foreign currency headwinds.

Second, we forecasted that our subscription business gross margin would return to our normalized range of 18% to 21%, which it did in the last six months. And third, we forecasted that we would show scale in our fixed expense and in the fourth quarter our fixed expenses as a percent of revenues were 13% compared to 17% in the prior-year period. Which resulted in a 470 basis point improvement in our adjusted operating margin.

Turning to our fourth quarter results in more detail, the fourth quarter marked our 33rd quarter of sequential revenue growth since we entered the US market. In all 33 quarters our year-over-year growth exceeded 25%. Total fourth quarter revenue was $40.2 million, a year-over-year increase of 31% on a constant currency basis. After foreign exchange conversion total revenue increased 26% over the prior-year period. Subscription revenues were $36.7 million, 91% of our total revenues and year-over-year growth on a constant currency basis of 33%.

After foreign exchange conversion subscription revenues were up 28% year-over-year. Driven by 27% growth in subscription pets and by continued strength in our average monthly retention rate, which was 98.64% for the fourth quarter. Our focus on providing a superior value proposition and customer experience drives strong customer loyalty which Trupanion pet owners staying with us for an estimated six years on average.

Monthly adjusted revenue per pet increased throughout the year. In the fourth quarter our monthly adjusted revenue per pet increased by 5% for our US members year-over-year and by 6% for our Canadian members each in local currency. Other business revenues, which generally are comprised of our revenues that have a B2B component, totaled $3.5 million in the fourth quarter, up 7% from the prior-year period.

Our subscription business gross margin was 18.9% for the fourth quarter in line with our long-term target of 18% to 21%. The year-over-year and sequential increase in subscription gross margin reflects the gradual and ongoing implementation of pricing adjustments. Total gross profit in the quarter was $7.3 million, a 32% improvement over the prior-year period.

Turning to our cost structure, driving scale and our fixed expenses, which is comprised of our general, administrative and technology expenses and excluding stock based compensation and depreciation continues to be a key financial goal. In the fourth quarter our fixed expenses represented 13% of total revenues, a significant improvement from 17% of total revenues in the prior-year period.

Now let me turn to our acquisition costs. One of the key value creation drivers for any business is the amount of expenses incurred to acquire new customers compared to the lifetime value of those new customers. In the fourth quarter Trupanion spent an average of $132 to acquire a pet with an average lifetime value of $591. For the quarter this was a 4.5 to one ratio. This was cost-effective growth and in line with our short-term Q4 target albeit below our long-term target.

In 2016 we expect to return to our targeted five to one LVP to PAC ratio. As Darryl mentioned, we remain on track to become cash flow break-even in the second or third quarter of 2016. Our free cash flow improved to a loss of $1.7 million in the fourth quarter from a loss of $2.7 million in the fourth quarter of 2014. In the fourth quarter we generated a net loss of $3 million, adjusted EBITDA was a loss of $1.6 million in line with our guidance range.

Turning to our balance sheet, we ended the year with $43.2 million in cash, cash equivalents and short-term investments. In addition, we have $18.4 million available on our outstanding credit facility. Lastly, we ended 2015 with 31.7 million shares outstanding on a fully diluted basis.

Let's now move on to discuss our outlook for Q1 and full year 2016. We are initiating guidance as follows. For the full year 2016 we expect total revenue to be in the range of $182 million to $185 million. In Q1 we expect total revenue to be $41 million to $42 million. As a reminder, our revenue projections are subject to conversion rate movements within the Canadian currency. In 2015 our Canadian business represented 23% of our subscription business revenues.

For the first quarter and full year 2016 guidance we used a 70% conversion rate in our projections which was the approximate rate at the end of January 2016. For full year 2016 we expect adjusted EBITDA to be between a loss of $2 million to $5 million, a substantial improvement from 2015's $11.3 million loss. For the first quarter of 2016 we anticipate an adjusted EBITDA loss of $1 million to $2 million.

Trupanion is well-positioned as a leading provider in a large under penetrated market. We have a proven business model that efficiently creates customers that have a high lifetime value. This is a very attractive, proven, durable business with an increasingly scalable platform that has position to generate strong cash flows over the long-term.

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

Thanks, Mike. Before we open the call up for questions I would like to take a moment to thank our employees and Territory Partners for their tremendous efforts in 2015. We talk a lot about competitive advantages but one aspect that we don't mention often enough is our mission driven culture. Probably because it's difficult to quantify.

Borrowing from a book that often gets quoted back to me, the plain truth is that talented people work the hardest when they are proud of what they do. When their jobs are interesting and meaningful and when they and their team members are recognized for their contributions and share in the benefits. At Trupanion we are seeing that in action.

I would encourage any shareholder, or prospective long-term shareholder, to stop by our Seattle office to get a true sense of what we at Trupanion are so excited and passionate about. We also have plans to be at the Barclays Global Healthcare Conference to be held in Miami and the Roth Growth Conference to be held in Laguna in March and I would love to see any of you there. And with that we'll open up the call for questions.

We will now begin the question-and-answer session. (Operator Instructions). The first question comes from Rohit Kulkani with RBC. Please go ahead.

Thank you. A couple questions, please. First on the Express rollout that you can give more color as to having 500 hospitals with express rolled out already, what have been the learning so far? Good to see that gross margins have been sequentially grinding higher into your comfort zone so clearly there has been improvement in the underlying fundamentals.

So first can you talk about what has been the lesson from Trupanion Express rollout in the first 500 hospitals and how do you see improving as the year progresses? I think you mentioned to almost triple that count, maybe quadruple by the end of 2016. And then I have a couple of questions for Mike.

Great. Well, we have been getting that question a lot about Trupanion Express and as you mentioned we are pretty excited to be ahead of plan and have over 500 installations by the end of the year versus our 350. We think of Trupanion Express really as a [mode] and a way of increasing the customer experience.

What we have learned as the deployment and the demand for the product is high, but we need to continue to work on our implementation and there's going to be probably several years of work towards our conversion rates and making optimizing the entire experience from front to end. So we're not really looking at Trupanion Express right now as a single silver bullet, but we're really excited to get it out there and continue to improve the customer experience. We think the demand is there and we're excited for the year.

Okay. And another question on your marketing spend. I remember you talked about direct-to-consumer marketing on TV as well as online a pilot project that you started back in Q3, I believe. Any updates as to whether -- what we should expect in 2016, Mike.

We're expecting our pet acquisition cost to be in line with where we were for this most recent quarter. So we don't expect to see much change.

Okay. And last kind of housekeeping question is what is your FX headwind that you are on a year-on-year basis for 2016 annual guidance that you have, as in what (inaudible) through trade or the expected growth rate?

So the FX conversion rate that is built into our guidance is at 70% for 2016. That compares to an average of 78% for 2015. So year-over-year is going to be impacted by that. The guidance range that we're giving for revenue growth next year puts us in the 24% to 26% range which we think is pretty good on a converted basis because it's still pretty strong on the local currency basis.

Okay. Great. Thank you. I will jump back in the queue.

Thanks, Rohit.

The next question comes from Michael Graham with Canaccord. Please go ahead.

Thank you. A couple things. First, could you just comment, I think last quarter you said that Trupanion Express accounted for I think 25% of claims activity roughly. I'm just wondering if that's gone up much or the incremental hospitals that you signed up since last quarter are they heavy claims activity hospitals and just an update there and then I have got one more. Thanks.

Sure. What we have -- the number is pretty similar, it's around 26% or 27%. As we continue to roll it to 1500 and 2,000 hospitals it's not going to have the same impact as the early hospitals because in the first year we were really trying to find our really high volume hospitals and now we're spreading it out to kind of a more typical hospitals. So it will have a small impact, but it's not going to be as dramatic as you saw for the first 500.

Okay. Alright. Thanks for that. And then, Mike, I'm just thinking about your EBITDA guidance, which is a modest loss in Q1 and a larger loss for the year. And trying to pair that with the comment about cash flow breakeven in Q2 or Q3. So I'm wondering if you could put any more context around what to expect in terms of the pattern of losses as we move through the year here.

So adjusted EBITDA and free cash flows track very well and so we expect it to be negative in the first half the year and somewhere around the middle breakeven and then improve to positive at the end of the year, but Q1 is a nice we're guiding to negative $1 million to negative $2 million for the EBITDA. So we're at a nice level as we have grown significantly and gotten good scale in our fixed expenses.

Okay. Great. And then just last quick one, please. You mentioned that you expect your PAC to, your lifetime value to pet acquisition cost ratio to improve to five this year and I'm wondering if it's going to come more from one or the other of the numerator or denominator.

This is Darryl. The major impact, the place that we are going to get scale in this business in 2016 is getting scale on our lifetime value of a pet will start to increase over time. We'll see that in 2016 and 2017. Remember we're looking at the lifetime value of a pet and then our target is to divide that by five and that would be our acquisition cost. So we have been at around $600 lifetime value of a pet.

One day we'll get it to $800 and a $1,000 and when we have it at a $1,000, we'll be able it spend $200 to acquire a pet, which will continue to open up some more channels and opportunities for us. I think Rohit asked a question before about the direct-to-consumer testing and we have been testing in areas that are more mature or places where we have higher conversion rates and more active hospitals. The pets came in where we saw an improvement of maybe 10% for a market. They're not yet optimized yet.

But as we see our lifetime values scale over time it will give us the opportunity to get into some of these other channels. The second area of scale for us is really -- it's our gross margin. So it's adjusted operating income which is our revenue minus our COGS minus our variable expense and our fixed expenses. And as we mentioned in our opening remarks where we saw 470 basis points improvement in the back half of the year, as those continue to improve we expect to see scale in that in 2016 as well.

Okay. Thanks, guys.

The next question comes from Jon Block with Stifel. Please go ahead.

Great. Thanks and good afternoon. Maybe just two or three quick ones. The first one, Darryl, the year-over-year we're still working through some numbers but the year-over-year new pets enrolled growth seemed really solid again maybe north of 30% for the second consecutive quarter and was a big step up from where you were in 2014 and 2015. So one is that sort of the right number to be the new pet enrolled growth over 30% and then can you just speak to that momentum? Where are you getting it from, is it going from wire, i.e. new hospitals or is it going from increased utilization sort of same-store sales?

Well, thanks for that question. I think our focus has been by going wider. So we are trying to have more Territory Partners in the field trying to up their training and so as we increase the number of active hospitals that's where we're seeing most of the growth from. I think 2016 you should be looking at something closer to 25%, not 30% or accelerating.

Remember, at a five to one ratio we have some limitations on the ability for us to grow because we have to expense all of that money upfront and we -- if we grew in the 40% to 50% year-over-year, we don't think we would be as efficient or being as there would be dilution required. So if we can grow in the 20% to 30% year-over-year at a five to one ratio and as our operating income, adjusted operating income, improves that's where we think we're going to get most of the benefits.

So I think for the next two years most of our growth is going to be come by adding more stores and in some of our more established markets we'll start testing same-store sales and some more direct-to-consumer.

Got it. Very helpful. And just one more sort of different direction. At a recent vet show there were some new plans that seemed to be rolled out in the industry that were more invoiced based by one of the leading players. And we just would love your thoughts on that. In your view is that just confirmation of where this industry is headed and you already have a big start with modes around the business again anything different from a competitive standpoint as we sit here early in 2016 relative to years past? Thanks, guys.

Well, I think that gets to the heart of the issue is we're in a very large under penetrated market. At any given time when we're adding pets we're not stealing them from a competitor and if we're losing pets they're not going to another competitor. We're trying to build a category and what we have seen is there's really about three types of competitors. Those kind of old traditional that were more price point and had restrictive policies and those guys have not been growing.

We're now starting to see, and we have been seeing it over the last several years, the higher quality products are going faster and we think that we have the highest quality best value proposition. We have unique modes with our sales force as well as Trupanion Express. And the other key issue is when you have broader coverage you need to have the data to price accurately. And our underlying value proposition is to pay $0.70 on the $1 back to each category or group that we have pricing.

And we have over 1.2 million price categories. We're going to stick to our guns and price each of these appropriately and over the long-term that's the best value proportion for the consumers. I think the fact that you have seen products start to look a little closer to us is, as you mentioned, confirmation that we're doing the right thing to build this category.

And just one more quick one if I could throw it in there. Mike, for you, (inaudible) the currency headwind from the Canadian dollar as you mentioned but the underlying ARPU growth in the US and Canada is that still thought to be in sort of that 4% plus range year-over-year.

About 5%, yes.

Okay. 5% and of course what comes back on the report it will be slightly less because of the headwind on the FX side?

Right.

Okay. Great. Thanks, guys.

(Operator Instructions). The next question comes from Kevin Kopelman with Cowen and Company.

Hi, this is Andrew Marok on for Kevin. With the roll out of Trupanion Express, I was just wondering are you seeing any changes in the channel mix for new pet acquisition?

Andrew, it's a good question. Over 80% of all of our leads are coming from veterinarian referrals as well as our existing clients telling their friends. So we haven't seen any dramatic change there. What Trupanion Express is doing is creating a little bit of a mode around the hospital and improving the customer experience. So it's really impacting both of those channels, veterinarian referrals and with better customer experience pet owners adding more pets and telling more of their friends. So the mix is really not changing. I think it's just kind of accentuating our strategy.

Okay. Thank you.

This concludes our question-and-answer session. And the conference is also concluded. Thank you for attending today's presentation. You may now disconnect.