TRUPANION, INC. Q3 FY2024 earnings call

• Subscription adjusted operating income grew 66% over the prior year period, with the subscription adjusted operating margin reaching 14% in the quarter, the highest since Q1 2022, driven by a 71% value proposition achieved against veterinary inflation. - The technology platform saw improvements with claims migration nearly complete, better service levels, increased invoices paid directly to hospitals, record claims automation, and lower invoice processing costs as a percentage of subscription revenue. - In the third quarter, $16.8 million was spent to enroll approximately 65,800 new subscription pets, with an average pet acquisition cost of $243 and an estimated internal rate of return of 36%. - New initiatives, including partnerships and products in Europe, comprised 15% of gross new pet adds and 10% of pet acquisition spend. Launched the first Trupanion branded product in Europe in September. - The company aims to deploy increasing adjusted operating income to acquire pets in upcoming quarters, expecting per pet spend to increase as investment ramps up.

The subscription segment had revenue of $219 million, up 20% year-over-year. Subscription adjusted operating income was $30.8 million, an increase of 66% from the prior year, with a subscription adjusted operating margin of 14% of subscription revenue. The other business segment, which has a lower margin profile, had revenue of $108.5 million, up 5% year-over-year, but adjusted operating income was $1.8 million, a decrease of 65% from the prior year. The subscription segment's revenue contribution was significant, making up approximately 94% of adjusted operating income in Q3.

• Full-year revenue guidance is now $1.281 billion to $1.286 billion, representing 16% growth at the midpoint. - Subscription revenue range is $856 million to $858 million, with the midpoint increasing and representing 20% year-over-year growth. - Total adjusted operating income guidance for the full year is $114 million to $117 million, with the midpoint representing 38% year-over-year growth. - Q4 2024 total revenues expected to be $333 million to $338 million (13% year-over-year growth), subscription revenue $227 million to $229 million (19% year-over-year growth at midpoint), and total adjusted operating income $35 million to $38 million, targeting a 15% subscription adjusted operating margin for Q4.

• Veterinary inflation remains a risk, though the company is assuming 15% inflation. - Execution risks in pet acquisition, as ramping up investment will take time to accelerate growth. - Currency fluctuations could impact revenue projections. - Material weaknesses in controls addressed through investments in technology and controls infrastructure, with fixed expenses elevated as a result.

Q: What are key considerations for adjusted income margin in 2025 given better-than-expected trends, and could subscription adjusted margin exceed 15% if inflation stabilizes/decelerates?

A: Factors include macro factors like pricing and retention, expense management discipline, and inflation. If inflation stabilizes/decelerates, there's potential for subscription adjusted margin to exceed 15% depending on these factors.

Q: When ramping pet acquisition spend, what portion should be allocated to onboarding territory partners vs digital, and which channels/geographies are being leaned into more?

A: Focus on conversion element. Will deploy more from digital perspective to drive education, not significantly expanding territory partners, and will incrementally push from lead and conversion perspectives across channels.

Q: Can you walk through capital relief from NAIC changes in pet insurance, expectation of impact, and if growth penalty has been removed?

A: NAIC factor changes have significantly reduced capital requirements. The most impactful changes are in risk lines 4 and 8. The growth penalty has been removed, with excess capital increasing due to NAIC changes, retained earnings, and slowing growth in other business.

Q: Talk about sequential cadence of spending to impact P&L, when to see pet count build, and timeline for 2025 growth.

A: It will take time for incremental PAC investment to drive market impact. Expect higher pet count in 2025 as investment increases, with a measured approach due to past spend reduction and need for brand re-engagement.

Q: Retention by cohort, percentage of customers receiving 20%+ increase, and when retention should bottom and improve.

A: Percentage of customers with 20%+ increase has gone up. Around 50% of customers have received 20%+ increases. Retention should bottom and begin to improve as the rate increase flow stabilizes and shifts to under 20% increases.

Q: Timing on growth and inflection point for total pets enrolled, shift in view since September investor day.

A: It takes time to redeploy pet spend due to past defensive mode in spending. Q3 was first quarter with more aggressive spending, and compounding effect of increased investment should pay off in 2025.

Q: ARPU continuation into 2025 and contributors.

A: ARPU is expected to continue increasing, with contributions from pricing and potential reacceleration of investment, provided retention is disciplined.

Q: One-time benefits in loss ratio in subscription quarter, and pieces of core subscription vs other business loss ratio.

A: There was a one-time benefit of about $500,000 in Q3 loss ratio. Core subscription loss ratio improved due to pricing actions, efficiency in invoice processing, and trends in veterinary inflation. Other business loss ratio increased due to factors like Pets Best's pricing and reserve developments, with margin on the business being loss-sensitive.