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Trupanion, Inc. (TRUP)

Q2 2015 Earnings Call· Tue, Aug 4, 2015

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Transcript

Operator

Operator

Good day and welcome to the Trupanion Incorporated Second Quarter 2015 Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. At this time, I would now like to turn the conference over to Ms. Laura Bainbridge of Investor Relations. Ma'am, please go ahead.

Laura Bainbridge

Analyst

Thank you. Good afternoon and welcome to the Trupanion second 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’d 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 uncertainty that could cause actual results to differ materially from those to be discussed. A detailed discussion of these and other risks and uncertainty that could cause actual results 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 not a substitute for measures of financial performance prepared in accordance with U.S. 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 webcast on Trupanion’s investor website. A replay will also be available on the site. And with that I now like to turn the call over to Darryl, Trupanion’s Chief Executive Officer. Darryl?

Darryl Rawlings

Analyst

Thank you, Laura and good afternoon everyone. On the hills of our one year anniversary of our initial public offering, I am pleased to report the both operationally and strategically our businesses right in line today with where we had anticipated we would be over a year ago. On today's call, I will briefly highlight our financial results, summarize our progress since our July 2014 IPO and review some of our key strategic initiatives, Mike will then walk through by second quarter financial results in greater detail before we conclude our prepared remarks and open the call up for your questions. Turning to our second quarter results, our fifth quarter as a public company, performance was in line with our expectations and places are on track to deliver against our full year guidance. Total revenue was $36 million, a 30% increase year-over-year on a constant currency basis. Within our core direct-to-consumer subscription business, revenue grew 33% year-over-year on the same basis. In addition to our steady revenue growth, we saw continued improvement in our key operating metrics. During the second quarter, we had several significant milestones including surpassing a quarter million total enrolled pets to end the quarter at approximately 260,000, up 25% over the prior year period. Growth in total enrolled pets continues to be driven by our direct-to-consumer monthly subscription business which comprised over 90% of our total enrolled pets at quarter-end. Member retention during the quarter was 98.7%. This was a new company record. Clearly, our members are recognizing the value we provide to them. We believe that bodes well for us in the long term, as member referrals are one of the largest and most cost-effective sales channels. Our voluntary cancellations those members that have actively decided to cancel for reasons other than the pet dying…

Michael Banks

Analyst

Thanks Darryl and good afternoon everyone. As Darryl discussed, our second quarter performance was again in line with our expectations. Second quarter marks our 30th quarter of sequential revenue growth since we entered the U.S. market, demonstrating the power of our monthly recurring revenue business model. Total revenue for the quarter increased 27% year-over-year to $35.6 million. As expected year-over-year revenue growth was negatively impacted by Canadian foreign exchange rates. Our Canadian business represented 22% of our total revenue in the second quarter and during the second quarter; the Canadian currency exchange rate was at an average of 81% compared to an average of 92% in the second quarter of 2014. To illustrate the significance of these fluctuations, if FX rates had remained constant at the Q2, 2014 average rate, our second quarter 2015 total revenue would have been approximately $1 million higher and would have grown 30% year-over-year. Subscription revenues which were 91% of our total revenues in the second quarter were up 29% from the second quarter 2014 and totaling $32.2 million. The increase in subscription business revenue was driven by a 26% increase in enrolled subscription pets during the quarter, supported by increased average monthly adjusted revenue per pet and a very strong average monthly retention rate of 98.67%. Our average monthly adjusted revenue per pet grew at 6.2% for our U.S. customers year-over-year and at 8% for our Canadian customers in local currency year-over-year. In U.S. dollars after FX, our blended average monthly adjusted revenue per pet increased 3% from a year ago to $45.10. Other business revenues which generally comprised of revenues that have a B2B component totaled $3.4 million, up 6% from the prior year. Total gross profit for the second quarter was $5.8 million. Subscription gross profit represented $5.6 million of that amount,…

Operator

Operator

Ladies and gentlemen we will now begin the question-and-answer session. [Operator Instructions] And our first question today comes from Jon Block from Stifel. Please go ahead with your question.

Jon Block

Analyst

Great thanks and good afternoon guys. Maybe two or three questions and then I'll just jump back in the queue. But the first one I know you mentioned or you kept the revenue guidance for the year, Mike, at $145 million to $150 million, but if I sort of take a 1H of $69 million, even assume sort of upper end of your 3Q, just say $38 million, you get about $107 million for the first nine months, it would imply, I guess where I'm going with this, it would imply a very big fourth quarter to get to the upper end of the range. I know you guys have been battling currency moving against you throughout the year, just looking at the $145 million to $150 million, what implies about 4Q, are we better off maybe towards a low end of that, versus a high end of that? And if not, can you talk to why 4Q would be very big.

Michael Banks

Analyst

So, Jon the revenue growth is just so consistent and so predictable that Q4 isn't anything out of line. It's just on track with our normal monthly growth, albeit as you mentioned, we've now been impacted somewhat by foreign currency dropping yet again and let me talk to that a little bit. Our Canadian business as we mentioned represents 22% of our total revenues. 1% change in the foreign exchange rate means about $100,000 per quarter. And so we're coming up -- second half of the year is going to be impacted by that a little bit. But our good strong growth combined with this change in foreign currency and we're getting good ARPU price, rate changes coming through in the second half of the year. We're going to see that help our gross margin, but it also helps the topline.

Jon Block

Analyst

Perfect. That was helpful. Thank you. And then Darryl, you're hitting, if not your pass in the subscriber, at least, our subscriber estimate, but we get very little public data or information from other players out there. So, can you just maybe take a step back and let us know what you're seeing or experiencing in terms of market growth or market share or Trupanion versus the other players?

Darryl Rawlings

Analyst

There's roughly about 20 brands, nothing that's really significantly changed over the last 12 months. We think we're pretty close to 40% of the revenue growth across the category. We think that's been pretty consistent. I think there's a group of about five of us that are outgrowing the rest of the marketplace. But no real big changes over the last 12 months.

Jon Block

Analyst

Okay. And last one from me and I'll jump back in the queue. You mentioned that right to consumer, anything more that you can share with us just sort of level of spend in a given market, what you'll be targeting, I don't know TV, print? And then will express be a part of the DTC, in other words, will that be front and center or will you look to accelerate express in the markets that you're pursuing DTC just to sort of increase the overall level of user experience. Thanks guys.

Darryl Rawlings

Analyst

We're going to be testing a little bit TV in the DTC -- direct to consumer. We're going to be testing in places where we've got higher penetration with Trupanion express and testing that messaging as well. We'll also test that against other markets where we don't have as much Trupanion express and pull their bags, so we can kind of AB test that. The amount of dollars that we're doing is not material enough that we expect it to really shop in our pack in Q3 and Q4. We always have a percentage of our pack that is kind of allocated for testing. So, it should fall within there.

Jon Block

Analyst

Perfect. Thank you, guys.

Operator

Operator

Our next question comes from Rohit Kulkarni from RBC Capital Markets. Please go ahead with your question.

Andrew

Analyst · your question.

Thank you. This is Andrew on for Rohit. Two questions. The first one if you can talk about your capital needs going forward as you continue to grow. If you're going to need to go back to the capital markets with this 27% -- high 20% growth. And the second one is if you can give us kind of order of magnitude difference between Trupanion express hospital and a non-Trupanion express hospital in terms of revenue per store. Thank you.

Michael Banks

Analyst · your question.

Hello, Andrew this is Mike Banks, I'll take the first one. The -- our capital needs, as I mentioned, we've got about $48 million of cash and cash equivalents on hand. We believe that that is enough to support our operating needs and our revenue initiatives for as f account receivables as we can look out and we think we got all the cash plus credit facility that we need to support our operations.

Darryl Rawlings

Analyst · your question.

Andrew I'll just add, I mentioned this in the previous call, we capitalized a 100% -- sorry, we do not capitalize; we expand 100% of the pet acquisition cost upfront. So, as long as we're growing in around the 30% range or a little bit less than that, then we believe that we've got all the capital we need moving forward. To your second question order of magnitude between express hospitals and non-express on a per pet or revenue per pet. We've actually put Trupanion express in a big range of hospital so far. We've put them in a predominantly our busier hospitals are AND hospitals that know us better. We've also started testing a few of them in kind of our CD hospitals, people that don't know us as well. So, because we're in about 350 hospitals and the tests are in different types of hospitals at different maturity levels. It's hard for us to draw any specific conclusion. So, we're not making any big ones now, except for that we know the customer experience has dramatically improved, we net promoters scores where we have Trupanion express, we do --we know that the customers like it and that gives us the confidence to continue to drive ahead.

Andrew

Analyst · your question.

Thank you. That's helpful.

Operator

Operator

Our next question comes from Michael Graham from Canaccord Genuity. Please go ahead with your question.

Ryan Wallace

Analyst · your question.

Hey, good afternoon. This is Ryan filling on -- filling in for Mike. I was wondering on the active hospital front, the 28,000 hospitals across the U.S., just understanding how important they are to driving new subscriptions going forward. Can you just talk for a moment and give us a sense of what the competitive landscape is like at a lot of these hospitals where Trupanion doesn’t already have a relationship? I mean is there sort of one preferred provider there or the hospitals working with a number of different providers. Like when the territory partners in new hospital, sort of, what are they up against from a competitive standpoint?

Darryl Rawlings

Analyst · your question.

Well, let me kind of level-set for everybody. There's about 28,000 veterinary hospitals across North America. Approximately 26,000 are independently owned. Of the total 28,000, we're currently visiting about 16,000. So, in those hospitals, we might have our brochures and information in say 12,000 or 13,000 of those hospitals. We don't consider them active. Having our brochure is -- in a hospital, is not what we consider active. In the shareholder letter, we described that we got about 6,000 active hospitals. Those are hospitals that more engaged with us and ultimately, have the confidence to initiative conversations about Trupanion. Our experience tells us that there are very few hospitals and I would suggest that there's probably less than -- far less than a 1,000 hospitals in total that are actively recommending any of our competitors. You could find brochures in many of the hospitals, but as I said, putting brochures on a wall mount, doesn’t make them active.

Ryan Wallace

Analyst · your question.

Thank you.

Operator

Operator

[Operator Instructions] Our next question comes from Kevin Kopelman from Cowen & Company. Please go ahead with your question.

Andrew Marok

Analyst

Hi, this is Andrew Marok on for Kevin. Just wanted to get a sense of how to think about technology expense as Trupanion express rolls out, if there will be any additional development expense on the back end our anything related to additional support or anything like that? Thank you.

Michael Banks

Analyst

Hello, Andrew this is Mike Banks. Our technology expense is going to increase modestly over time from here. So, the developmental -- the future development for Trupanion express is going to be incorporated in that amount of expense. I think we're going to see on a cash flow basis, some improvement as we gap capitalizes some of this effort and depreciates it over the future. But I think we're going to see on a cash flow basis some benefit from the development spend decreasing over time.

Andrew Marok

Analyst

Okay. Thank you.

Operator

Operator

And our next question comes from J.D. Delafield from DHI. Please go ahead with your question.

J.D. Delafield

Analyst · your question.

Hey, Darryl, hey Mike.

Darryl Rawlings

Analyst · your question.

Hello.

J.D. Delafield

Analyst · your question.

So, on TP -- on Trupanion express, are you going to provide numbers in terms of install and the rate at which it sounds like you're installing now, it's substantially higher than before. So, how should we think about the growth in install over the next three, six, nine months?

Darryl Rawlings

Analyst · your question.

So, we said earlier in the year that we expected to end the year in about 350-ish hospitals were on track to do that. What we've been testing is can we do it faster, can we do more in a single day, what are the costs of doing that. And when you look out into 2016, we expect that we will -- 3 to 4x the number of installations by the end of 2016. So, that's probably the best guidance we can give you at this point.

J.D. Delafield

Analyst · your question.

And $350 an install, you must be doing some sort of digital delivery as opposed to right thing, involves any teams at site to give training. Have you changed the deliver method?

Darryl Rawlings

Analyst · your question.

Yeah, we have, and in the last year we worked very hard to take our early learnings which proved up to concept and the technology to us to figure it out how we could scale and deploy faster. So we are not as -- we are trying to get to more of an open table method when we have a veterinarian hospital raise their hand that we are able to do it remotely, with remote training and we've gotten the technology there now. We still need to work on some more messaging within training, but that's why we've been able to drive the deployment cost down and speed it up.

J.D. Delafield

Analyst · your question.

And just on, case maybe you mentioned you did 10 in one day. What you activity with Trupanion express now imply that you are doing an install everybody or some number of installs every day. This is a continuous stream of installs or is it more of a patch.

Darryl Rawlings

Analyst · your question.

No it’s continuous. We have targeted a couple of regions, so we will finish with one, we may take a three or four weeks to ramp up, to go into another region and then take kind of a batch after that. We are also not just looking -- we are looking kind of shotgun approach as well. So we are still really kind of in the testing phase and we will continue to test deployments and communications and trainings for the balance of the year.

J.D. Delafield

Analyst · your question.

Okay. And just one more follow-up on this, because -- and I'm travelling, I don’t have this with me, but the ratio of your revenue coming from TP installed hospitals -- to not Trupanion express installed hospitals was super high, I think 20% of your revenue was coming from something like 5% of the hospitals that were active.

Darryl Rawlings

Analyst · your question.

I think the number you are looking at is 20% of our claims dollars are being paid directly to veterinarian hospitals and that's off a relatively small number of hospital counts. But the reason for that is, we have targeted high dollar, high volume hospitals early on and we also in large dollar claims and some other areas people are -- know what we are doing and they are requesting it, so we are sending the money directly.

J.D. Delafield

Analyst · your question.

Okay, so that ratio should shift down as you expand into other less high volume hospitals

Darryl Rawlings

Analyst · your question.

Yes, on a per hospital basis, absolutely. But we -- I mean, our goal is to have 90%, 95%, 98% of all invoices paid directly to hospitals long-term.

J.D. Delafield

Analyst · your question.

Okay. And then on the territory partners, you mentioned that you we were going to, I guess, increase the gross number of territory partners form -- I think it was a previous target of 90. Is that right and if so how many deals we will see having in future.

Darryl Rawlings

Analyst · your question.

So we started the period around 70, our target is to try to get to 85. We are on pretty good track. But I'm not going to substitute quantity over quality or training. So target is 85, we will see how we hit it up by the end of the year. Long-term we expect it to be around 100 or so. We are now doing a little bit in bigger markets adding more territory partners so we can increase the frequency of visits and implementation and long-term, hopefully, improved same store sales. So we've been doing that for last about nine months and seeing some good response from that.

J.D. Delafield

Analyst · your question.

Okay. And if you have new territory partners going into existing territories, which I think is what I heard you say. How do you manage that with the existing territory partners who may feel their opportunity is diluted?

Darryl Rawlings

Analyst · your question.

So if you think about our territory partner as being like a Coco-Cola distributor in the early days. Now, Coco-Cola it’s all regional. They may be the first truck and the second or third truck might be managed by the first person.

J.D. Delafield

Analyst · your question.

Okay. Fine. Okay, I guess, the last question I had was is there was any more updates on the white label product. Anything to discuss on plans to underwrite for other carriers.

Darryl Rawlings

Analyst · your question.

No, nothing specific. We were always in conversations. But if something happens that will be going into other revenue and if it’s significant we will announce it to the markets.

J.D. Delafield

Analyst · your question.

Okay. Thank you.

Operator

Operator

And our next question comes from Josh Tarasoff from Greenlea Lane Capital. Please go ahead with your question.

Josh Tarasoff

Analyst · your question.

Hi, can you hear me.

Darryl Rawlings

Analyst · your question.

Yeah, we can.

Josh Tarasoff

Analyst · your question.

Thanks for taking my call. I was wondering if we could talk about denial rates and I guess I have three questions about that. First, could you talk about how you think about the importance of driving down denial rates? And underlying my question is the idea that there seems to be key issue that will affect trust strength and brand strength over the long-term. And then second could you talk about how some of the initiatives in the business like Trupanion express are helping with this. And I'm curious if you have any ideas for something new or big that might possibly lead to a breakthrough for this. Anything you've been thinking about or thought about. And then third, any numbers you can give around denial rates would be interesting. And do you think it’s possible that in the long-term making denied claims a truly infrequent occurrence for a low single digit percentage of total claims might be possible. Thanks.

Darryl Rawlings

Analyst · your question.

Denial rate is something, an internal metric that we monitor and measure on regular basis. What I can tell you is that when we enter a new city or a new region, we typically have higher denial rates and those denial rates might be 15% to 20%, that's largely because of veterinarian hospital who often is submitting the claim on behalf of the pet owner is not yet accustomed to Trupanion. So they may be sending something in for a dog vet or for a vaccination. When we have a more mature market that number drops in about half. So once a city or region has more exposure with our territory partner, our denial rates drop in about half. And then as we've been rolling out Trupanion express there is much more insight. So not only we are receiving the claims every time an invoice is created. We have a lot more visibility. So denial rates go down further because those veterinarian hospitals clearly understand what Trupanion covers and they do not. I think ultimately you could be looking at a number -- on a good veterinarian hospital might have a denial rate of about 3% to 5%. And if we could get our entire business to be at that level, that would exceptional. And as I mentioned before, our hit through would tell us, we start higher in the new market and then improves over time.

Josh Tarasoff

Analyst · your question.

Thanks. Yeah that would be great. One more small question if I could. Did you give the direct pay spend in technology for the quarter?

Michael Banks

Analyst · your question.

It will be disclosed at our 10-Q and that direct pay number is about $1.3 million.

Josh Tarasoff

Analyst · your question.

Okay. Thanks.

Operator

Operator

Ladies and gentlemen, this does conclude our question-and-answer session. At this time, I'd like to turn the conference call back over to Darryl Rawlings for any closing remarks.

Darryl Rawlings

Analyst

In summary, we're encouraged by our performance to-date in 2015, operationally, strategically, and financially, we're right on tract. Our monthly subscription revenue model is translating into high growth recurring revenues and strong pet enrollment. We continue to invest in our market leadership, member experience, and the technology to grow and scale our business for the long-term and look forward to achieving cash flow positive next year. Special thanks to all of our stakeholders for making that possible. We great appreciate your trust and support. Mike looks forward to seeing many of you next week at the Canaccord Conference in Boston. Thanks everyone.

Operator

Operator

Ladies and gentlemen that does conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your telephone lines.