Trupanion, Inc. Q2 FY2025 earnings call

Financial Highlights

• Q2 was a strong quarter with consistent top-line growth, robust margin expansion, and strengthening retention. Subscription revenue rose 16% year-over-year, and adjusted operating income increased 45% to over $33 million.

Operational Focus

• Deployed 16% more into pet acquisition to set up pet growth for future years. Continued operational rigor and discipline in execution, honoring value proposition and member experience.

Cost and Expenses

• Cost of paying veterinary invoices was $172.1 million, with a value proposition of 71.1%. Variable expenses were 9.1% of subscription revenue, down from 9.5% a year ago. Fixed expenses were 6% of revenue, up from 5.3% prior year but down sequentially from Q1.

Other Developments

• Recorded a one-time gain of $7.8 million on preferred stock in base drive. Net income improved to $9.4 million. Operating cash flow was $15 million, free cash flow $12 million, up from $4 million prior year.

Subscription Segment: Revenue was $242.2 million, up 16% year-over-year. Adjusted operating income was $33.4 million, a 45% increase from the prior year, contributing 96% of total adjusted operating income. Subscription adjusted operating margin was 13.8%, up from 11% in the prior year. Other Business Segment: Revenue was $111.4 million, up 5% year-over-year. Adjusted operating income for this segment was $1.4 million, or 1.3% of revenue.

Full Year 2025

• Total revenue expected in the range of $1.417 billion to $1.434 billion. Subscription revenue expected $983 million to $992 million. Adjusted operating income expected $141 million to $151 million.

Third Quarter 2025

• Total revenue expected $359 million to $365 million. Subscription revenue expected $251 million to $254 million. Adjusted operating income expected $37 million to $40 million. Guidance accounts for 73% conversion rate between U.S. and Canadian currencies.

• Inflation and Veterinary Industry: Risks related to inflation affecting cost of goods and veterinary invoice trends. The company observed a mild deceleration in cost of goods, influencing operating assumptions for the second half.
• Market and Execution: Potential challenges in achieving growth targets, including pet acquisition and market competition, though the company is positioned with financial strength to deploy AOI for growth.

Q: You're talking about a clear deceleration trend in the elevated input costs and then it seems like growth is returning. Isn't the loss ratio typically more elevated seasonally in the first half of the year due to the calendar? That wasn't really the case here this year. And given that seasonal makeup, should we be expecting the loss ratio to further improve from here beyond the targeted 71% margin?

A: Yes. Typically, we see a seasonal lift in Q1, Q2, and as rate realizes, cost of goods comes down. Mild deceleration observed, assumed in operating assumptions, reflected in guidance. Inflation abated by about 1% in the quarter, baked into second half guidance.

Q: Can you maybe talk a little bit more about the food initiative benefit that you talked about in your prepared remarks? Are we closer to that business launching?

A: Yes. Took a step with IP acquisition from base ride. Business is nascent, IP critical for foundation, still early stages but optimistic about potential.

Q: The slides sort of come out late, so I'm trying to run some math. But I have PAC up about 20% year-over-year, but the gross adds down low-single digits year-over-year and just a real sort of stagnant gross adds over the past 5 quarters or so. So, can you explain the inability to accelerate gross adds despite spending more and more on each pet in an industry that's arguably a growth industry where we hear some 20%, 30%, 40% growth numbers from some of your competitors?

A: Focus on quality pets, targeting highest lifetime value. Turned off less profitable channels, spent more on retention. PAC up 16% YOY, expecting pickup in back half with ability to deploy more AOI for growth. Net pet growth up for 2 consecutive quarters, core Trupanion performing ahead in blended mix.

Q: As we look at the kind of the sequentials from here and we go into the back half of the year, help us think about the mix of subscription business. Let's just focus on that subscription business growth that's coming from price versus coming from pet subscription growth or the number of pets and then really what that base means for our models as we go into 2026.

A: In Q2, 11% of subscription revenue growth from ARPU, 5% from pets. Expect more contribution from pets and less from ARPU in second half as pet count increases, pricing still a factor but pet growth to contribute more.

Q: How is the other income, which was $12 million, which contributed at least partly to the large net EPS beat?

A: Related to one-time gain from exchange of preferred stock in base ride for IP used in lands map.

Q: How is the other income, which was $12 million, which contributed at least partly to the large net EPS beat?

A: Related to one-time gain from exchange of preferred stock in base ride for IP used in lands map.

Q: Understanding the margin appears to be near the targets and obviously very solid, but do you expect 15% inflation will continue to recur next year? And how are you guys thinking about rate even with the margin being in a good position because just levels of inflation have been high. So how do you think about that going forward?

A: Seen deceleration in inflation, monitoring closely. Expect moderation, assumptions for 2026 include slight deceleration in rates while justifying cost of goods increases to honor value proposition.