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TRUPANION, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
We provide medical insurance for cats and dogs throughoutthe United States ,Canada ,Europe ,Puerto Rico , andAustralia . Our data-driven, vertically-integrated approach enables us to provide pet owners with products that offer what we believe is the highest value medical insurance, priced specifically for each pet's unique characteristics and coverage level. Our growing and loyal membership base provides us with highly predictable and recurring revenue. We operate our subscription business segment similar to other subscription-based businesses, with a focus on achieving a target margin prior to our new pet acquisition expense and acquiring as many pets as possible at our targeted average estimated internal rate of return. We operate in two business segments: subscription business and other business. We generate revenue in our subscription business segment primarily by subscription fees from our direct-to-consumer products. Fees are paid at the beginning of each subscription period, which automatically renews on a monthly basis. We generate revenue in our other business segment primarily by writing policies on behalf of third parties. We do not undertake the marketing efforts for these policies and have a business-to-business relationship with these third parties. Our other business segment also includes revenue from other products and software solutions that have a different margin profile from our subscription business. We generate leads for our subscription business segment from a diverse set of member acquisition channels, which we then convert into members through our contact center, website and other direct-to-consumer activities. These channels include leads from third-parties such as veterinarians and referrals from existing members. Veterinary hospitals represent our largest referral source. We engage our "Territory Partners " to have face-to-face visits with veterinarians and their staff.Territory Partners are dedicated to cultivating direct veterinary relationships and building awareness of the benefits of high quality medical insurance to veterinarians and their clients. Veterinarians then educate pet owners, who visit our website or call our contact center to learn more about, and potentially enroll in,Trupanion . We also receive a significant number of new leads from existing members adding pets and referring their friends and family members. Our direct-to-consumer acquisition channels serve as important resources for pet owner education and drive new member leads and conversion. We monitor average pet acquisition cost to evaluate the efficiency in acquiring new members and measure effectiveness based on our targeted return on investment.
Our Response to the COVID-19 Pandemic
We have not experienced a material adverse impact on our business due to COVID-19, but we continue to monitor conditions closely and adapt our operations to meet federal, state and local guidance. Our focus remains on promoting employee health and safety, serving our members and ensuring business continuity. OurSeattle headquarters is now open for those who want to work in that office, in compliance with applicable regulations and guidance.
The impacts of COVID-19 and related economic conditions on our results are
highly uncertain and in many ways outside of our control. The scope, duration
and magnitude of the direct and indirect effects of COVID-19 are evolving
rapidly and in ways that are difficult, if possible, to anticipate. For
additional details, see the section titled "Risk Factors."
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Key Operating Metrics
The following tables set forth total pets enrolled and key operating metrics for our subscription business for the nine months endedSeptember 30, 2022 and 2021 and for each of the last eight fiscal quarters. Nine Months Ended September 30, 2022 2021 Total Business: Total pets enrolled (at period end) 1,439,605 1,104,376 Subscription Business: Total subscription pets enrolled (at period end) 808,077 676,463 Monthly average revenue per pet$ 64.09 $ 63.43 Lifetime value of a pet, including fixed expenses $ 673$ 697 Average pet acquisition cost (PAC) $ 291$ 281 Average monthly retention 98.71 % 98.72 % Three Months EndedSep. 30, 2022 Jun. 30, 2022 Mar. 31, 2022 Dec. 31, 2021 Sept. 30, 2021 Jun. 30, 2021 Mar. 31, 2021 Dec. 31, 2020 Total Business: Total pets enrolled (at period end) 1,439,605 1,348,145 1,267,253 1,176,778 1,104,376 1,024,226 943,854 862,928 Subscription Business: Total subscription pets enrolled (at period end) 808,077 770,318 736,691 704,333 676,463 643,395 609,835 577,957 Monthly average revenue per pet$ 63.80 $ 64.26 $ 64.21 $ 63.89 $ 63.60 $ 63.69 $ 62.97 $ 62.03 Lifetime value of a pet, including fixed expenses$ 673 $ 713 $ 730 $ 717 $ 697$ 681 $ 684 $ 653 Average pet acquisition cost (PAC)$ 268 $ 309 $ 301 $ 306 $ 280$ 284 $ 279 $ 272 Average monthly retention 98.71 % 98.74 % 98.75 % 98.74 % 98.72 %
98.72 % 98.73 % 98.71 %
Total pets enrolled. Total pets enrolled reflects the number of subscription
pets or pets enrolled in one of the insurance products offered in our other
business segment at the end of each period presented. We monitor total pets
enrolled because it provides an indication of the growth of our consolidated
business.
Total subscription pets enrolled. Total subscription pets enrolled reflects the
number of pets in active memberships at the end of each period presented. We
monitor total subscription pets enrolled because it provides an indication of
the growth of our subscription business.
Monthly average revenue per pet. Monthly average revenue per pet is calculated
as amounts billed in a given period for subscriptions divided by the total
number of subscription pet months in the period. Total subscription pet months
in a period represents the sum of all subscription pets enrolled for each month
during the period. We monitor monthly average revenue per pet because it is an
indicator of the per pet unit economics of our subscription business.
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Lifetime value of a pet, including fixed expenses. Lifetime value of a pet,
including fixed expenses, is calculated based on subscription revenue less cost
of revenue from our subscription business segment for the 12 months prior to the
period end date excluding stock-based compensation expense related to cost of
revenue from our subscription business segment, sign-up fee revenue and the
change in deferred revenue between periods. This amount is also reduced by the
fixed expenses related to our subscription business, which are the pro-rata
portion of general and administrative and technology and development expenses,
less stock-based compensation, based on revenues. This amount, on a per pet
basis, is multiplied by the implied average subscriber life in months. Implied
average subscriber life in months is calculated as the quotient obtained by
dividing one by one minus the average monthly retention rate. We monitor
lifetime value of a pet, including fixed expenses, to estimate the value we
might expect from new pets over their implied average subscriber life in months,
if they behave like the average pet in that respective period. When evaluating
the amount of pet acquisition expenses we may want to incur to attract new pet
enrollments, we refer to the lifetime value of a pet, including fixed expenses,
as well as our estimated internal rate of return calculation for an average pet,
which also includes an estimated surplus capital charge, to inform the amount of
acquisition spend in relation to the estimated payback period.
Average pet acquisition cost. Average pet acquisition cost (PAC) is calculated
as net acquisition cost divided by the total number of new subscription pets
enrolled in that period. Net acquisition cost, a non-GAAP financial measure, is
calculated in a reporting period as new pet acquisition expense, excluding
stock-based compensation expense and other business segment expense, offset by
sign-up fee revenue. We exclude stock-based compensation expense because the
amount varies from period to period based on number of awards issued and
market-based valuation inputs. We offset sign-up fee revenue because it is a
one-time charge to new members collected at the time of enrollment used to
partially offset initial setup costs, which are included in new pet acquisition
expenses. We exclude other business segment pet acquisition expense because that
does not relate to subscription enrollments. We monitor average pet acquisition
cost to evaluate the efficiency in acquiring new members and measure
effectiveness based on our targeted return on investment.
Average monthly retention. Average monthly retention is measured as the monthly
retention rate of enrolled subscription pets for each applicable period averaged
over the 12 months prior to the period end date. As such, our average monthly
retention rate as of September 30, 2022 is an average of each month's retention
from October 1, 2021 through September 30, 2022 . We calculate monthly retention
as the number of pets that remain after subtracting all pets that cancel during
a month, including pets that enroll and cancel within that month, divided by the
total pets enrolled at the beginning of that month. We monitor average monthly
retention because it provides a measure of member satisfaction and allows us to
calculate the implied average subscriber life in months.
Non-GAAP Financial Measures
In addition to our results determined in accordance withU.S. GAAP, we believe the following non-GAAP financial measures are useful in evaluating our operating performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that these non-GAAP financial measures, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for, the directly comparable financial measures prepared in accordance with GAAP. We calculate these non-GAAP financial measures by excluding certain non-cash or non-recurring expenses. We exclude business combination transaction cost as it is non-recurring and not indicative of our operating performance. We exclude stock-based compensation as it is non-cash in nature. Although stock-based compensation expenses are expected to remain recurring expenses for the foreseeable future, we believe excluding them allows investors to make meaningful comparisons between our recurring core business operating results and those of other companies. We define non-GAAP development expenses as operating expenses incurred to develop new products and offerings that are pre-revenue. We define non-GAAP fixed expenses as the total of technology and development expense and general and administrative expense, less stock-based compensation expense, business combination transaction cost, and development expenses related to exploring and developing new products and offerings that are in the pre-revenue stage. 20 -------------------------------------------------------------------------------- The following tables present the reconciliation of our non-GAAP financial measures from corresponding GAAP measures for the periods presented (in thousands): Nine Months Ended September 30, 2022 2021 Veterinary invoice expense$ 473,654 $ 353,210 Less: Stock-based compensation expense(1) (3,155) (3,740) Other business cost of paying veterinary invoices (152,911) (91,605)
Subscription cost of paying veterinary invoices (non-GAAP)
$ 257,865 % of subscription revenue 72.5 % 71.5 % Other cost of revenue$ 96,980 $ 77,591
Less:
Stock-based compensation expense(1) (1,818) (2,029) Other business variable expenses (51,862) (40,159) Subscription variable expenses (non-GAAP)$ 43,300 $ 35,403 % of subscription revenue 9.9 % 9.8 % Technology and development expense$ 18,178 $ 12,201 General and administrative expense 28,907 22,897
Less:
Stock-based compensation expense(1) (12,116) (8,625) Business combination transaction costs (179) (82) Development expenses (5,705) (2,861) Fixed expenses (non-GAAP)$ 29,085 $ 23,530 % of total revenue 4.4 % 4.7 % New pet acquisition expense$ 67,043 $ 58,802
Less:
Stock-based compensation expense(1) (7,037) (7,024) Other business pet acquisition expense (476) (423) Subscription acquisition cost (non-GAAP)$ 59,530 $ 51,355 % of subscription revenue 13.6 % 14.2 % (1)Trupanion employees may elect to take restricted stock units in lieu of cash payment for their bonuses. We account for such expense as stock-based compensation in accordance with GAAP, but we do not include it in any non-GAAP adjustments. Stock-based compensation associated with bonuses was approximately$0.7 million for the nine months endedSeptember 30, 2022 . 21 --------------------------------------------------------------------------------
Three Months Ended
Sep. 30, 2022 Jun. 30, 2022 Mar. 31, 2022 Dec. 31, 2021 Sept. 30, 2021 Jun. 30, 2021 Mar. 31, 2021 Dec. 31, 2020
Veterinary invoice expense $ 171,112 $ 157,616 $ 144,926 $ 132,852 $ 125,058 $ 118,282 $ 109,870 $ 98,169
Less:
Stock-based compensation
expense(1) (960) (1,022) (1,173) (798) (769) (672) (2,299) (358)
Other business cost of paying
veterinary invoices (58,197) (50,378) (44,336) (38,009) (34,432) (31,029) (26,144)
(22,254)
Subscription cost of paying veterinary invoices (non-GAAP)$ 111,955 $ 106,216 $ 99,417 $ 94,045 $ 89,857 $ 86,581 $ 81,427 $ 75,557 % of subscription revenue 73.5 % 72.8 % 71.1 % 70.1 % 70.7 % 71.9 % 71.9 % 71.0 % Other cost of revenue$ 32,589 $ 33,212 $ 31,179 $ 30,992 $ 28,443 $ 25,433 $ 23,715 $ 20,925 Less: Stock-based compensation expense(1) (433) (754) (631) (581) (542) (552) (935) (168) Other business variable expenses (17,346) (18,010) (16,506) (17,208) (15,315) (12,940) (11,904)
(11,079)
Subscription variable expenses (non-GAAP)$ 14,810 $ 14,448 $ 14,042 $ 13,203 $ 12,586 $ 11,941 $ 10,876 $ 9,678 % of subscription revenue 9.7 % 9.9 % 10.0 % 9.8 % 9.9 % 9.9 % 9.6 % 9.1 % Technology and development expense$ 6,553 $ 6,396 $ 5,229 $ 4,665 $ 4,391 $ 4,079 $ 3,731 $ 3,108 General and administrative expense 10,314 9,227 9,366 8,996 8,246 7,435 7,216 6,502 Less: Stock-based compensation expense(1) (4,805) (4,085) (3,226) (3,293) (3,020) (3,122) (2,483)
(1,275)
Business combination transaction costs (179) - - - - - (82) (522) Development expenses (2,435) (2,012) (1,258) (858) (919) (1,121) (821) (339) Fixed expenses (non-GAAP)$ 9,448 $ 9,526 $ 10,111 $ 9,510 $ 8,698 $ 7,271 $ 7,561 $ 7,474 % of total revenue 4.0 % 4.3 % 4.9 % 4.9 % 4.8 % 4.3 % 4.9 % 5.2 % New pet acquisition expense$ 22,434 $ 22,982 $ 21,627 $ 19,845 $ 19,708 $ 19,390 $ 19,704 $ 14,809 Less: Stock-based compensation expense(1) (2,108) (2,601) (2,328) (2,136) (2,112) (2,181) (2,731)
(801)
Other business pet acquisition expense (181) (186) (109) (76) (134) (118) (171) (201) Subscription acquisition cost (non-GAAP)$ 20,145 $ 20,195 $ 19,190 $ 17,633 $ 17,462 $ 17,091 $ 16,802 $ 13,807 % of subscription revenue 13.2 % 13.9 % 13.7 % 13.1 % 13.7 % 14.2 % 14.8 % 13.0 %
(1)
any non-GAAP adjustments. Stock-based compensation associated with bonuses was approximately
When determining our PAC, we calculate net acquisition cost for a more
comparable metric across periods. Net acquisition cost, a non-GAAP financial
measure, is calculated in a reporting period as GAAP new pet acquisition
expense, excluding stock-based compensation expense and other business segment
expense, offset by sign-up fee revenue. We exclude stock-based compensation
expense because the amount varies from period to period based on the number of
awards issued and market-based valuation inputs. We offset sign-up fee revenue
because it is a one-time charge to new members collected at the time of
enrollment used to partially offset initial setup costs, which are included in
new pet acquisition expenses. We exclude other business segment pet acquisition
expense because it does not relate to subscription enrollments.
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The following tables reconcile GAAP new pet acquisition expense to non-GAAP net
acquisition cost (in thousands) for the nine months ended September 30, 2022 and
2021 and for each of the last eight fiscal quarters:
Nine Months Ended September 30,
2022 2021
New pet acquisition expense $ 67,043 $ 58,802
Net of sign-up fee revenue (3,793) (3,792)
Excluding:
Stock-based compensation expense (7,037)
(7,024)
Other business pet acquisition expense (476) (423) Net acquisition cost $ 55,737$ 47,563 Three Months Ended Sept. 30,Sep. 30, 2022 Jun. 30, 2022 Mar. 31, 2022 Dec. 31, 2021 2021Jun. 30, 2021 Mar. 31, 2021 Dec. 31, 2020 New pet acquisition expense$ 22,434 $ 22,982 $ 21,627 $ 19,845 $ 19,708 $ 19,390 $ 19,704 $ 14,809 Net of sign-up fee revenue (1,339) (1,252) (1,202) (1,162) (1,268) (1,260) (1,264) (919) Excluding: Stock-based compensation expense (2,108) (2,601) (2,328) (2,136) (2,112) (2,181) (2,731) (801) Other business pet acquisition expense (181) (186) (109) (76) (134) (118) (171) (201) Net acquisition cost$ 18,806 $ 18,943 $ 17,988 $ 16,471 $ 16,194 $ 15,831 $ 15,538 $ 12,888
Components of Operating Results
General
We operate in two business segments: subscription business and other business. Our subscription business segment primarily relates to subscription fees from our direct to consumer products. Our other business segment includes revenue from other product offerings that generally have a business-to-business relationship and different margin profiles than our subscription business segment, including revenue from writing policies on behalf of third parties and revenue from other products and software solutions.
Revenue
We generate revenue in our subscription business segment primarily from subscription fees for our pet medical insurance. Fees are paid at the beginning of each subscription period, which automatically renews on a monthly basis. In most cases, our members authorize us to directly charge their credit card, debit card or bank account through automatic funds transfer. Subscription revenue is recognized on a pro rata basis over the monthly enrollment term. Membership may be canceled at any time without penalty, and we issue a refund for the unused portion of the canceled membership. We generate revenue in our other business segment primarily from writing policies on behalf of third parties where we do not undertake the direct consumer marketing. This segment also includes revenue from other products and software solutions that have a different margin profile from our subscription business. Cost of Revenue
Cost of revenue in each of our segments is comprised of the following:
Veterinary invoice expense
Veterinary invoice expense includes our costs to review veterinary invoices,
administer the payments, and provide member services, and other operating
expenses directly or indirectly related to this process. We also accrue for
veterinary invoices that have been incurred but not yet received. This also
includes amounts paid by unaffiliated general agents, and an estimate of amounts
incurred and not yet paid for our other business segment.
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Other cost of revenue
Other cost of revenue for the subscription business segment includes direct and indirect member service expenses, Territory Partner renewal fees, credit card transaction fees and premium tax expenses. Other cost of revenue for the other business segment includes the commissions we pay to unaffiliated general agents, costs to administer the programs in the other business segment and premium taxes on the sales in this segment. Operating Expenses Our operating expenses are classified into four categories: technology and development, general and administrative, new pet acquisition expense, and depreciation and amortization. For each category, excluding depreciation and amortization, the largest component is personnel costs, which include salaries, employee benefit costs, bonuses and stock-based compensation expense.
Technology and development
Technology and development expenses primarily consist of personnel costs and related expenses for our technology staff, which includes information technology development and infrastructure support, including third-party services. It also includes expenses associated with development of new products and offerings.
General and administrative
General and administrative expenses consist primarily of personnel costs and related expenses for our finance, actuarial, human resources, regulatory, legal and general management functions, as well as facilities and professional services.
New pet acquisition expense
New pet acquisition expenses primarily consist of costs, including employee compensation, to educate veterinarians and consumers about the benefits ofTrupanion , to generate leads and to convert leads into enrolled pets, as well as print, online and promotional advertising costs. New pet acquisition expense was previously termed "sales and marketing" on the consolidated statement of operations. This update represents a change in name only. It does not denote a change in method of accounting.
Depreciation and amortization
Depreciation and amortization expenses consist of depreciation of property,
equipment, and software developed for internal use, as well as amortization of
finite-lived intangible assets.
Gain (loss) from investment in joint venture
Gain (loss) from investment in joint venture consists of the share of income and losses from our equity method investment in a joint venture, as well as income and expenses associated with administrative services provided to the joint venture.
Stock-based compensation
Stock-based compensation is included in the cost and expense line items above.
Stock-based compensation will vary depending on corporate performance and terms
of the awards under our equity incentive plan. For example, when we have
delivered strong performance, stock-based compensation may increase as a result
of incentive-based awards under our equity incentive plan.
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Factors Affecting Our Performance
Average monthly retention. Our performance depends on our ability to continue to retain our existing and newly enrolled pets and is impacted by our ability to provide a best-in-class value and member experience. Our ability to retain enrolled pets depends on a number of factors, including the actual and perceived value of our services and the quality of our member experience, the ease and transparency of the process for reviewing and paying veterinary invoices for our members, and the competitive environment. In addition, other initiatives across our business may temporarily impact retention and make it difficult for us to improve or maintain this metric. For example, if the number of new pets enrolled increases at a faster rate than our historical experience, our average monthly retention rate could be adversely impacted, as our retention rate is generally lower during the first year of member enrollment. Investment in pet acquisition. We have made and plan to continue to make significant investments to grow our member base. Our net acquisition cost and the number of new members we enroll depends on a number of factors, including the amount we elect to invest in pet acquisition activities in any particular period in the aggregate and by channel, the frequency of existing members adding a pet or referring their friends or family, the effectiveness of our sales execution and marketing initiatives, changes in costs of media, the mix of our pet acquisition expenditures and the competitive environment. Our average pet acquisition cost has in the past significantly varied, and in the future may significantly vary, from period to period based upon specific marketing initiatives and estimated rates of return on pet acquisition spend. We also regularly test new member acquisition channels and marketing initiatives, which may be more expensive than our traditional marketing channels and may increase our average acquisition costs. We continually assess our pet acquisition activities by monitoring the estimated return on PAC spend both on a detailed level by acquisition channel and in the aggregate. Timing of initiatives. Over time we plan to implement new initiatives to improve our member experience, make modifications to our subscription plan, introduce new coverage plans, pursue pet food or other adjacent opportunities, improve our technology, increase the number of veterinary hospitals using our direct pay software, and find other ways to maintain a strong value proposition for our members. These initiatives will sometimes be accompanied by price adjustments, in order to compensate for an increase in benefits received by our members. The implementation of such initiatives may not always coincide with the timing of price adjustments, resulting in fluctuations in revenue and profitability in our subscription business segment. Geographic mix of sales. The relative mix of our business betweenthe United States ,Canada , and other jurisdictions impacts the monthly average revenue per pet we receive. For example, prices for our plan inCanada are generally higher than inthe United States (in local currencies), which is consistent with the relative cost of veterinary care in each country. As our mix of business betweenthe United States ,Canada and other jurisdictions changes, our metrics, such as our monthly average revenue per pet, and our exposure to foreign exchange fluctuations will be impacted. We are expanding into international markets and expect to continue to explore other opportunities, and accordingly expect these effects to increase. Other business segment. Our other business segment primarily includes other product offerings that generally have a business-to-business relationship. These products have been, and we expect will be in the future, materially different from our subscription business segment. Our relationships in our other business segment are generally subject to termination provisions and are non-exclusive. Accordingly, we cannot control the volume of business, even if a contract is not terminated. Loss of an entire program via contract termination could result in the associated policies and revenue being lost over a period of 12 to 18 months, which could have a material impact on our results of operations. We may enter into additional relationships in the future to the extent we believe they will be profitable to us, which could also impact our operating results. 25 --------------------------------------------------------------------------------
Results of Operations
The following tables set forth our results of operations for the periods
presented both in absolute dollars and as a percentage of total revenue for
those periods. The period-to-period comparison of financial results is not
necessarily indicative of future results.
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(in thousands)
Revenue:
Subscription business $ 152,401 $ 127,077 $ 438,048 $ 360,742
Other business 81,359 54,590 221,122 143,870
Total revenue 233,760 181,667 659,170 504,612
Cost of revenue:
Subscription business(1) 128,158 103,754 365,861 299,037
Other business 75,543 49,747 204,773 131,764
Total cost of revenue 203,701 153,501 570,634 430,801
Operating expenses:
Technology and development(1) 6,553 4,391 18,178 12,201
General and administrative(1) 10,314 8,246 28,907 22,897
New pet acquisition expense(1) 22,434 19,708 67,043 58,802
Depreciation and amortization 2,600 2,944 8,024 9,195
Total operating expenses 41,901 35,289 122,152 103,095
Gain (loss) from investment in joint venture (57) (69) (168) (149)
Operating loss (11,899) (7,192) (33,784) (29,433)
Interest expense 1,408 - 2,680 1
Other income, net (889) (61) (1,568) (222)
Loss before income taxes (12,418) (7,131) (34,896) (29,212)
Income tax expense (benefit) 496 (312) 491 (724)
Net loss $ (12,914) $ (6,819) $ (35,387) $ (28,488)
(1) Includes stock-based compensation expense as follows:
Three Months Ended September Nine Months Ended September
30, 30,
2022 2021 2022 2021
(in thousands)
Cost of revenue $ 1,472 $ 1,311 $ 5,138 $ 5,769
Technology and development 1,184 749 3,193 2,213
General and administrative 3,792 2,271 9,281 6,412
New pet acquisition expense 2,195 2,112 7,214 7,024
Total stock-based compensation expense
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Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(as a percentage of revenue)
Revenue 100 % 100 % 100 % 100 %
Cost of revenue 87 84 87 85
Operating expenses:
Technology and development 3 2 3 2
General and administrative 4 5 4 5
New pet acquisition expense 10 11 10 12
Depreciation and amortization 1 2 1 2
Total operating expenses 18 19 19 20
Gain (loss) from investment in joint venture - - - -
Operating loss (5) (4) (5) (6)
Interest expense 1 - - -
Other income, net - - - -
Loss before income taxes (5) (4) (5) (6)
Income tax expense (benefit) - - - -
Net loss (6) % (4) % (5) % (6) %
Stock-based compensation expense: Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(as a percentage of revenue)
Cost of revenue 1 % 1 % 1 % 1 %
Technology and development 1 - - -
General and administrative 2 1 1 1
New pet acquisition expense 1 1 1 1
Total stock-based compensation expense 4 % 4 % 4 % 4 %
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(as a percentage of subscription revenue)
Subscription business revenue 100 % 100 % 100 % 100 %
Subscription business cost of revenue 84 82 84 83
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Comparison of the Three and Nine Months Ended
Revenue
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 % Change 2022 2021 % Change
(in thousands, except percentages, pet and per pet data)
Revenue:
Subscription business $ 152,401 $ 127,077 20 % $ 438,048 $ 360,742 21 %
Other business 81,359 54,590 49 221,122 143,870 54
Total revenue $ 233,760 $ 181,667 29 $ 659,170 $ 504,612 31
Percentage of Revenue by Segment:
Subscription business 65 % 70 % 66 % 71 %
Other business 35 30 34 29
Total revenue 100 % 100 % 100 % 100 %
Total pets enrolled (at period end) 1,439,605 1,104,376 30 1,439,605 1,104,376 30
Total subscription pets enrolled (at
period end) 808,077 676,463 19 808,077 676,463 19
Monthly average revenue per pet $ 63.80 $ 63.60 - $ 64.09 $ 63.43 1
Average monthly retention 98.71 % 98.72 % 98.71 % 98.72 %
Three months ended September 30, 2022 compared to three months ended September
30, 2021 . Total revenue increased by $52.1 million , or 29%, to $233.8 million
for the three months ended September 30, 2022 . Revenue from our subscription
business segment increased by $25.3 million , or 20%, to $152.4 million for the
three months ended September 30, 2022 . This increase in subscription business
revenue was primarily due to a 19% increase in total subscription pets enrolled
as of September 30, 2022 compared to a year ago. Average revenue per pet
increased by 0.3% year over year, or 1.1% on a constant currency basis. Revenue
from our other business segment increased by $26.8 million , or 49%, to $81.4
million for the three months ended September 30, 2022 , primarily due to a 48%
increase in enrolled pets in this segment.
Nine months ended September 30, 2022 compared to nine months ended September 30,
2021 . Total revenue increased by $154.6 million , or 31%, to $659.2 million for
the nine months ended September 30, 2022 . Revenue from our subscription business
segment increased by $77.3 million , or 21%, to $438.0 million . This increase was
primarily due to a 19% increase in total subscription pets enrolled as of
September 30, 2022 compared to a year ago. Average revenue per pet increased by
1.0% year over year, or 1.6% on a constant currency basis. Revenue from our
other business segment increased by $77.3 million , or 54%, to $221.1 million for
the nine months ended September 30, 2022 , primarily due to a 48% increase in
enrolled pets in this segment.
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Cost of Revenue
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 % Change 2022 2021 % Change
(in thousands, except percentages, pet and per pet data)
Cost of Revenue:
Subscription business:
Veterinary invoice expense $ 112,915 $ 90,626 25 % $ 320,743 $ 261,605 23 %
Other cost of revenue 15,243 13,128 16 45,118 37,432 21
Total cost of revenue 128,158 103,754 24 365,861 299,037 22
Other business:
Veterinary invoice expense 58,197 34,432 69 152,911 91,605 67
Other cost of revenue 17,346 15,315 13 51,862 40,159 29
Total cost of revenue $ 75,543 $ 49,747 52 $ 204,773 $ 131,764 55
Percentage of Revenue by Segment:
Subscription business:
Veterinary invoice expense 74 % 71 % 73 % 73 %
Other cost of revenue 10 10 10 10
Total cost of revenue 84 82 84 83
Other business:
Veterinary invoice expense 72 63 69 64
Other cost of revenue 21 28 23 28
Total cost of revenue 93 % 91 % 93 % 92 %
Total pets enrolled (at period end) 1,439,605 1,104,376 30 1,439,605 1,104,376
30
Total subscription pets enrolled (at period end) 808,077 676,463 19 808,077 676,463
19
Monthly average revenue per pet$ 63.80 $ 63.60 - $ 64.09$ 63.43 1 Three months endedSeptember 30, 2022 compared to three months endedSeptember 30, 2021 . Cost of revenue for our subscription business segment was$128.2 million for the three months endedSeptember 30, 2022 , compared to$103.8 million for the same period in the prior year. The increase of 24% in subscription cost of revenue was primarily the result of a 19% increase in subscription pets enrolled and a 4.3% increase in veterinary invoice expense per pet, or 5.0% on a constant currency basis. This was attributable to both increased cost and utilization of veterinary care. Cost of revenue for our other business segment increased by$25.8 million , or 52%, to$75.5 million for the three months endedSeptember 30, 2022 , primarily due to the increase in enrolled pets in this segment. Nine months endedSeptember 30, 2022 compared to nine months endedSeptember 30, 2021 . Cost of revenue for our subscription business segment was$365.9 million for the nine months endedSeptember 30, 2022 , compared to$299.0 million for the same period in the prior year. The increase of 22% in subscription cost of revenue was primarily the result of a 19% increase in subscription pets enrolled, and a 2.5% increase in veterinary invoice expense per pet, or 3.0% on a constant currency basis. This was attributable to both increased cost and utilization of veterinary care. Cost of revenue for our other business segment increased by$73.0 million , or 55%, to$204.8 million for the nine months endedSeptember 30, 2022 , primarily due to the increase in enrolled pets in this segment. 29 --------------------------------------------------------------------------------
Technology and Development Expenses
Three Months Ended September
30, Nine Months Ended September 30,
2022 2021 % Change 2022 2021 % Change
(in thousands, except percentages)
Technology and development $ 6,553 $ 4,391 49 % $ 18,178 $ 12,201 49 %
Percentage of total revenue 3 % 2 % 3 % 2 %
Three months ended September 30, 2022 compared to three months ended September
30, 2021 . Technology and development expenses increased by $2.2 million , or 49%,
to $6.6 million for the three months ended September 30, 2022 . The increase was
primarily due to increased headcount and related compensation expense.
Additionally, development expenses, which totaled $2.4 million or 1% of our
total revenue, increased $1.5 million year over year as a result of investment
in several pre-revenue initiatives including new product offerings and
international expansion. Technology and development expenses increased from 2%
to 3% of total revenue year over year.
Nine months ended September 30, 2022 compared to nine months ended September 30,
2021 . Technology and development expenses increased by $6.0 million , or 49%, to
$18.2 million for the nine months ended September 30, 2022 . The increase was
primarily due to increased headcount and related compensation expense.
Additionally, development expense, which totaled $5.7 million or 1% of our total
revenue, increased $2.8 million year over year as a result of investment in
several pre-revenue initiatives including new product offerings and
international expansion. Technology and development expenses increased from 2%
to 3% of total revenue year over year.
General and Administrative Expenses
Three Months Ended September
30, Nine Months Ended September 30,
2022 2021 % Change 2022 2021 % Change
(in thousands, except percentages)
General and administrative $ 10,314 $ 8,246 25 % $ 28,907 $ 22,897 26 %
Percentage of total revenue 4 % 5 % 4 % 5 %
Three months ended September 30, 2022 compared to three months ended September
30, 2021 . General and administrative expenses increased by $2.1 million , or 25%,
to $10.3 million for the three months ended September 30, 2022 . The increase was
mainly due to a $1.4 million increase in stock-based compensation and a $0.8
million increase in compensation expense. General and administrative expenses
decreased from 5% to 4% of total revenue year over year.
Nine months ended September 30, 2022 compared to nine months ended September 30,
2021 . General and administrative expenses increased by $6.0 million , or 26%, to
$28.9 million for the nine months ended September 30, 2022 . The increase was
mainly due to a $2.7 million increase in stock-based compensation, a $2.6
million increase in compensation expense, and a $0.8 million increase in
professional services fees. General and administrative expenses decreased from
5% to 4% of total revenue year over year.
30
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New Pet Acquisition Expense
Three Months Ended September
30, Nine Months Ended September 30,
2022 2021 % Change 2022 2021 % Change
(in thousands, except percentages, pet and per pet data)
New pet acquisition expense $ 22,434 $ 19,708 14 % $ 67,043 $ 58,802 14 %
Percentage of total revenue 10 % 11 % 10 % 12 %
Subscription Business:
Total subscription pets enrolled
(at period end) 808,077 676,463 19 808,077 676,463 19
Average pet acquisition cost (PAC) $ 268 $ 280 (4) $ 291 $ 281 4
Three months ended September 30, 2022 compared to three months ended September
30, 2021 . New pet acquisition expense increased by $2.7 million , or 14%, to
$22.4 million for the three months ended September 30, 2022 , contributing to a
19% increase in total subscription pets enrolled year over year. The $2.7
million increase was attributable to expenses to generate leads and increase
conversion rates. Specifically, total subscription pets enrolled increased 19%
between compared periods.
Nine months ended September 30, 2022 compared to nine months ended September 30,
2021 . New pet acquisition expense increased by $8.2 million , or 14%, to $67.0
million for the nine months ended September 30, 2022 , contributing to a 19%
increase in total subscription pets enrolled year over year. The $8.2 million
increase was attributable to expenses to generate leads and increase conversion
rates. Specifically, total subscription pets enrolled increased 19% between
compared periods.
Depreciation and Amortization
Three Months Ended September Nine Months Ended September
30, 30,
2022 2021 % Change 2022 2021 % Change
(in thousands, except percentages)
Depreciation and amortization $ 2,600 $ 2,944 (12)% $ 8,024 $ 9,195 (13)%
Percentage of total revenue 1 % 2 % 1 % 2 %
Three months ended September 30, 2022 compared to three months ended September
30, 2021 . Depreciation and amortization expense decreased by $0.3 million , or
12%, to $2.6 million for the three months ended September 30, 2022 . Depreciation
and amortization expense as a percentage of total revenue decreased from 2% to
1% year over year, primarily due to certain internal use software becoming fully
amortized in 2022.
Nine months ended September 30, 2022 compared to nine months ended September 30,
2021 . Depreciation and amortization expense decreased by $1.2 million , or 13%,
to $8.0 million for the nine months ended September 30, 2022 . Depreciation and
amortization expense as a percentage of total revenue decreased from 2% to 1%
year over year, primarily due to certain internal use software becoming fully
amortized in 2022.
Stock-Based Compensation
Three months ended September 30, 2022 compared to three months ended September
30, 2021 . Stock-based compensation is
included in the cost and expense line items in the consolidated statements of
operations, discussed above. Stock-based compensation expense in total was $8.6
million during the three months ended September 30, 2022 , up from $6.4 million
in the prior year period. The amount of stock-based compensation recognized
largely reflects the timing and vesting of our annual performance grants.
Nine months ended September 30, 2022 compared to nine months ended September 30,
2021 . Stock-based compensation expense in total was $24.8 million during the
nine months ended September 30, 2022 , an increase from $21.4 million in the
prior year period. The amount of stock-based compensation recognized largely
reflects the timing and vesting of performance grants.
31
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Liquidity and Capital Resources
The following table summarizes our cash flows for the periods indicated (in
thousands):
Nine Months Ended September 30,
2022 2021
Net cash (used in) provided by operating activities $ (9,019) $ 2,302
Net cash used in investing activities (36,964) (31,807)
Net cash provided by (used in) financing activities 46,061 (674)
Effect of foreign exchange rates on cash, cash equivalents, and
restricted cash, net
(1,964) (53)
Net change in cash, cash equivalents and restricted cash
Our primary requirements for liquidity are paying veterinary invoices, funding operations and regulatory capital requirements, investing in new member acquisition, investing in enhancements to our member experience, and servicing debt. We have certain contractual obligations in the normal course of business, including obligations and commitments relating to our credit facility, non-cancellable vendor purchase agreements, as well as future payments of veterinary invoice claims. Refer to Note 9, Reserve for Veterinary Invoices, and Note 10, Debt, included in Item 1 of Part I of this report, for further details on anticipated cash outflows. Our primary sources of liquidity are cash provided by operations and available borrowings from our credit facility. InMarch 2022 , we entered into a credit agreement that provides us with up to$150.0 million of credit, including a$60.0 million initial term loan that was funded at closing. We believe these sources are sufficient to fund our operations and regulatory capital requirements for the next 12 months. As we continue to grow and consider strategic opportunities, however, we may explore additional financing to fund our operations and growth or to meet regulatory capital requirements. Financing could include equity, equity-linked, or debt financing. Additional financing may not be available to us on acceptable terms, or at all. As ofSeptember 30, 2022 , we had$182.9 million in cash, cash equivalents and short-term investments and$90.0 million available under our credit facility. The credit facility is secured by substantially all of our assets and those of our subsidiaries. In addition, most of the assets in our insurance subsidiaries are subject to certain capital and dividend rules and regulations prescribed by jurisdictions in which they are authorized to operate. As ofSeptember 30, 2022 , total assets and liabilities held outside of our insurance entities were$211.5 million and$88.3 million , respectively, including$7.0 million of cash and cash equivalents that were segregated from other operating funds and held in trust for the payment of veterinary invoices on behalf of our insurance subsidiaries. For further information, refer to "-Regulation". InApril 2021 , our board of directors approved a share repurchase program, pursuant to which we may, betweenMay 2021 andMay 2026 , repurchase outstanding shares of our common stock. While our board of directors has approved the program, any repurchase will be subject to quarterly assessments based on parameters we set. These include uses of capital in a given quarter, available cash, stock price relative to our estimated intrinsic value, estimated operating results, and general market conditions. Our board of directors may also authorize management to execute repurchase notwithstanding these parameters, such as the$20.0 million authorization it approved for repurchases fromAugust 2022 throughOctober 2022 , although we did not utilize this authority in the third quarter of 2022. We cannot predict the timing or extent of any repurchases of shares of common stock, as such repurchases will depend on a number of factors, some of which are beyond our control. We repurchased 62 and 95,021 shares under this program during the three and nine months endedSeptember 30, 2022 , respectively.
Operating Cash Flows
We derive operating cash flows primarily from the sale of our subscription plans, which is used to pay veterinary invoices and other cost of revenue. Additionally, cash is used to support the growth of our business by reinvesting to acquire new pet enrollments, develop new product offerings and fund projects that improve our members' experience. Net cash used in operating activities was$9.0 million for the nine months endedSeptember 30, 2022 , compared to$2.3 million net cash provided by operating activities for the nine months endedSeptember 30, 2021 . The change was primarily driven by increased pet acquisition spend during the current period to drive new pet enrollments and future growth, faster payment of veterinary invoices as a result of increased software utilization and claims automation. Changes in accounts receivable and deferred revenue were primarily related to annual policies with monthly payment terms within our other business segment.
Investing Cash Flows
Net cash used in investing activities was$37.0 million for the nine months endedSeptember 30, 2022 , compared to$31.8 million for the nine months endedSeptember 30, 2021 . The change was primarily related to a$3.1 million increase in purchases of property, equipment and intangible assets, primarily attributable to development of internal use software focused on new product initiatives and member experience improvements,$2.8 million net cash paid in a business acquisition, partially offset by a$2.0 million decrease in the net purchases of investment securities. 32 --------------------------------------------------------------------------------
Financing Cash Flows
Net cash provided by financing activities was$46.1 million for the nine months endedSeptember 30, 2022 , compared to$0.7 million net cash used in financing activities during the same period in the prior year, primarily due to net proceeds from the initial term loan under the new Credit Facility which closed inMarch 2022 , partially offset by$5.8 million in repurchase of shares of our common shares during the period.
Long-Term Debt
InMarch 2022 , we entered into a credit agreement that provides us with up to$150 million of credit, including a$60 million initial term loan that was funded at closing. Refer to Note 10, Debt, included in Item 1 of Part I of this report, for further details.
Regulation
As ofSeptember 30, 2022 , our insurance entities collectively held$97.4 million in short-term investments and$247.6 million in other current assets, including$21.8 million held in cash and cash equivalents to be used for operating expenses of our insurance subsidiaries. Most of the assets in our insurance entities are subject to certain capital and dividend rules and regulations prescribed by jurisdictions in which they are authorized to operate. We expect our required capital held within our insurance entities to grow as our business grows.
The majority of our investments are held by our insurance entities to satisfy risk-based capital requirements of theNational Association of Insurance Commissioners (NAIC). The NAIC requirements provide a method for analyzing the minimum amount of risk-based capital (statutory capital and surplus plus other adjustments) appropriate for an insurance company to support its overall business operations, taking into account the risk characteristics of the company's assets, liabilities and certain other items. An insurance company found to have insufficient statutory capital based on its risk-based capital ratio may be subject to varying levels of additional regulatory oversight depending on the level of capital inadequacy. APIC must hold certain capital amounts in order to comply with the statutory regulations and, therefore, we cannot use these amounts for general operating purposes without regulatory approval. As our business grows, the amount of capital we are required to maintain to satisfy our risk-based capital requirements may increase significantly. As ofDecember 31, 2021 , APIC was required to maintain at least$116.0 million of risk-based capital to avoid this additional regulatory oversight. As of that date, APIC maintained$124.2 million of risk-based capital.
In 2021, we established two new wholly-owned insurance subsidiaries, ZPIC and QPIC, domiciled inMissouri andNebraska , respectively. We have funded required statutory capital to these new subsidiaries. As ofSeptember 30, 2022 , neither ZPIC nor QPIC has begun underwriting any insurance policies.
WICL Segregated Account AX was established by WICL, withTrupanion, Inc. as the shareholder, to enter into a reinsurance agreement withOmega General Insurance Company . All of the assets and liabilities of WICL Segregated Account AX are legally segregated from other assets and liabilities within WICL, and all shares of the segregated account are owned byTrupanion, Inc. InMarch 2022 , our parent entity received a dividend of$6.9 million from WICL Segregated Account AX as allowed under our agreements with WICL. As required by the Office of the Superintendentof Financial Institutions regulations related to our reinsurance agreement withOmega General Insurance Company , we are required to maintain aCanadian Trust account with the greater of CAD$2.0 million or 120% of unearned Canadian premium plus 20% of outstanding Canadian claims, including all incurred but not reported claims. As ofDecember 31, 2021 , the account held CAD$7.7 million . Though we are not directly regulated by theBermuda Monetary Authority (BMA), WICL's regulation and compliance impacts us as it could have an adverse impact on the ability of WICL Segregated Account AX to pay dividends. WICL is regulated by the BMA under the Insurance Act of 1978 (Insurance Act) and the Segregated Accounts Company Act of 2000. The Insurance Act imposes onBermuda insurance companies, solvency and liquidity standards, certain restrictions on the declaration and payment of dividends and distributions, certain restrictions on the reduction of statutory capital, and auditing and reporting requirements, and grants the BMA powers to supervise and, in certain circumstances, to investigate and intervene in the affairs of insurance companies. Under the Insurance Act, WICL, as a class 3 insurer, is required to maintain available statutory capital and surplus at a level equal to or in excess of a prescribed minimum established by reference to net written premiums and loss reserves. 33 -------------------------------------------------------------------------------- Under the Bermuda Companies Act 1981, as amended, aBermuda company may not declare or pay a dividend or make a distribution out of contributed surplus if there are reasonable grounds for believing that: (a) the company is, or would after the payment be, unable to pay its liabilities as they become due; or (b) the realizable value of the company's assets would thereby be less than its liabilities. The Segregated Accounts Company Act of 2000 further requires that dividends out of a segregated account can only be paid to the extent that the cell remains solvent and the value of its assets remain greater than the aggregate of its liabilities and its issued share capital and share premium accounts. Contractual Obligations We enter into long-term contractual obligations and commitments in the normal course of business, primarily debt obligations and non-cancellable vendor service agreements. InMarch 2022 , we entered into a credit agreement that provides us with up to$150 million of credit, including a$60 million initial term loan that was funded at closing. Refer to Note 10, Debt, included in Item 1 of Part I of this report, for further details, including interest and future principal payments.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, as well as the reported revenue and expenses during the reporting periods. Critical accounting estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Generally, we base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.
There have been no material changes to our critical accounting estimates as
compared to those described in our Annual Report on Form 10-K for the fiscal
year ended
34
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Citizens Reports Third Quarter 2022 Financial Results
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST FILES (8-K) Disclosing Entry into a Material Definitive Agreement
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