Trupanion, Inc. (NASDAQ:TRUP) Q2 2025 Earnings Call Transcript

Trupanion, Inc. (NASDAQ:TRUP) Q2 2025 Earnings Call Transcript August 7, 2025

Trupanion, Inc. beats earnings expectations. Reported EPS is $0.22, expectations were $-0.03.

Operator: Good day, and welcome to the Trupanion Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Gil Melchior, Director of Investor Relations. Please go ahead.

Gil Melchior: Good afternoon, and welcome to Trupanion’s Second Quarter 2025 Financial Results Conference Call. Participating on today’s call are Margi Tooth, Chief Executive Officer and President; and Fawwad Qureshi, Chief Financial Officer. For ease of reference, we’ve included a slide presentation to accompany today’s discussion, which will be made available on our Investor Relations website under the Quarterly Earnings tab. Before we begin, please be advised that remarks today will contain forward-looking statements. All statements other than statements of historical facts are forward-looking statements. These include, but are not limited to, statements regarding our future operations, key operating metrics, opportunities and financial performance, pricing and veterinary industry inflation.

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 today’s earnings release as well as the company’s most recent reports, including Forms 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission. Today’s presentation contains references to non-GAAP financial measures that management uses to evaluate the company’s performance, including, without limitation, cost of paying veterinary invoices, variable expenses, fixed expenses, adjusted operating income, acquisition costs, internal rate of return, 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 income or margin before new pet acquisition and development expenses.

Unless otherwise noted, all margins and expenses will be presented on a non-GAAP basis and excluding stock-based compensation expense and depreciation expense. These non-GAAP measures are in addition to and not a substitute for measures of financial performance prepared in accordance with the U.S. 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. Lastly, I would like to remind everyone that today’s conference call is also available via webcast on Trupanion’s Investor Relations website. A replay will also be available on the site. I will now hand over the call to Margi.

Margaret Rosemary Maria Tooth: Thank you, Gil, and good afternoon, everyone. I’ll briefly touch on our financial highlights, and we’ll provide more context after Fawwad completes his detailed review of our Q2 results. I’m delighted to share that Q2 was one of the strongest financial quarters in the history of Trupanion, underscored by consistent top line growth, robust margin expansion and strengthening retention. Within our subscription segment, revenue rose 16% year-over-year and adjusted operating income increased 45% to over $33 million for the quarter. This translates to a 13.8% subscription adjusted operating margin, up 280 basis points versus the prior year period, performance well ahead of plan. We were able to deploy 16% more into pet acquisition in the quarter as we continue on the pathway to return to prior investment levels, setting up pet growth for the years to come.

These results reflect the team’s operational rigor and continued discipline related to execution, honoring our value proposition, member experience and commitment to the veterinary industry. It’s highly encouraging to see the results of that work reflected in our performance. Let me now turn it over to Fawwad to walk us through the numbers in more detail.

Fawwad Qureshi: Thanks, Margi, and good afternoon, everyone. Today, I will share additional details around our second quarter performance as well as provide our outlook for the third quarter and full year 2025. Total revenue for the quarter was $353.6 million, up 12% year-over- year. Within our subscription business, revenue was $242.2 million, up 16% year-over-year. Total subscription pets increased 4% year-over-year to over 1,066,000 pets as of June 30. This includes over 56,000 pets in Europe, a majority of which are currently underwritten through an MGA structure. Average monthly retention for the trailing 12 months was 98.29%, down versus the second quarter last year, which was 98.34%. On a trailing 3-month basis, retention was 98.4%, up from the second quarter last year and up sequentially from the first quarter this year.

The subscription business cost of paying veterinary invoices was $172.1 million, resulting in a value proposition of 71.1%, a healthy improvement from 74.1% in the prior year period. The quarter benefited from prior period development of $1.4 million or approximately 60 basis points of revenue. As a percentage of subscription revenue, variable expenses were 9.1%, down from 9.5% a year ago. Fixed expenses as a percentage of revenue were 6%, up from 5.3% in the prior year period and down sequentially from 6.2% in Q1. This is in line with our expectations, and we continue to expect expense leverage as we transition to our wholly owned insurance entity for our Canadian business. Our subscription business delivered adjusted operating income of $33.4 million, an increase of 45% from last year and contributed 96% of our total AOI for the quarter.

Subscription adjusted operating margin was 13.8%, up from 11% in the prior year and represents approximately 280 basis points of margin expansion. Now I’ll turn to our other business segment, which is comprised of revenue from other products and services that have a lower margin profile than our subscription business. Our other business revenue was $111.4 million for the quarter, an increase of 5% year-over- year. We expect growth for this segment to continue to decelerate as we are no longer enrolling new pets in the majority of U.S. states for our largest partner in this segment. Adjusted operating income for this segment was $1.4 million or 1.3% of revenue. In total, adjusted operating income was $34.8 million in Q2, up 40% from Q2 last year.

We deployed $18.3 million of this AOI to acquire approximately 62,700 new subscription pets. Excluding the pets that are underwritten through an MGA structure, this translated into an average pet acquisition cost of $276 per pet in the quarter, up from $231 in the prior year period. The estimated internal rate of return on this spend was 30% in the quarter. We invested $0.9 million in the quarter in development costs. Stock-based compensation expense was $9.3 million. During the quarter, we also recorded a one-time gain of $7.8 million on our preferred stock in base drive as part of an exchange of our preferred interest for intellectual property related to our food initiative. As a result, net income for the quarter improved to $9.4 million or $0.22 per basic and diluted share as compared to a net loss of $5.9 million or $0.14 per basic and diluted share in the prior year period.

In terms of cash flow, operating cash flow was $15 million in the quarter compared to $6.9 million in the prior year period. Capital expenditures totaled $3 million, largely consistent with Q2 last year. As a result, free cash flow was $12 million, up from $4 million last year. Over the last 4 quarters, free cash flow reached $61.3 million. Turning to the balance sheet. We ended the quarter with $319.6 million in cash and short-term investments. Our largest insurance entity, APIC, continues to be strongly capitalized, which in the quarter enabled us to pay an extraordinary dividend to our operating company of $26 million. We used approximately $15 million of the proceeds to pay down debt, ending the quarter with a reduced debt balance of $116.4 million and plan to use the remaining $11 million for growth investments and strategic initiatives.

Now I’ll turn to our outlook. For the full year of 2025, we are raising our guidance to account for Q2 overperformance, updated assumptions for the second half as well as favorable conversion rate movements. We now expect total revenue in the range of $1.417 billion to $1.434 billion. Subscription revenue is now expected to be in the range of $983 million to $992 million, representing approximately 15% year-over-year growth at the midpoint. We now expect total adjusted operating income to be in the range of $141 million to $151 million. We are raising both ends of the range and the new midpoint represents 28% year-over-year growth. For the third quarter of 2025, total revenue is expected to be in the range of $359 million to $365 million. Subscription revenue is expected to be in the range of $251 million to $254 million, representing approximately 15% year-over-year growth at the midpoint.

Total adjusted operating income is expected to be in the range of $37 million to $40 million. This represents approximately 18% growth year-over-year at the midpoint. As a reminder, our revenue projections are subject to conversion rate movements predominantly between the U.S. and Canadian currencies. For our third quarter and full year guidance, we used a 73% conversion rate in our projections. Let me now pass it back to Margi.

Margaret Rosemary Maria Tooth: Thank you, Fawwad. Our financial results and guidance for the year demonstrate that Trupanion is positioned exceptionally well for the future. I am so proud of the team and thank them for their focus and discipline over the last 12 months and for their unwavering support of the veterinary industry. We understand the current pressures within the veterinary field and the ongoing challenge to strike a careful balance to support the practice of best medicine while enabling access to care. Most recently, we’ve observed a modest but clear deceleration trend in our cost of goods, giving us confidence to marginally decrease our operating assumptions related to veterinary invoice trends for the second half of this year.

Our results today show that we have now caught up with the cost of veterinary care with our value proposition restored to target. This allows us to deliver a strong and sustainable offering to our members while generating the adjusted operating income needed for Trupanion to reinvest, ensuring more pets get the care they need. Results of this caliber do not come through pricing alone. Our longer-term investments in technology are beginning to pay dividends by improving our cost to process invoices, increasing the penetration of our direct payment software at veterinary hospitals and creating efficiencies across the organization, all while enhancing our overall member experience. The combination of this improved experience and industry-leading coverage is driving our impressive retention of 98.4% for the quarter, especially for those with pricing changes of over 20%, which far exceeded expectations.

This rebounding level of retention demonstrates the exceptional and measurable durability of our product and the value realized by our members. Furthermore, we’ve been disciplined with our acquisition efforts and have been very focused on ensuring the right pets at the appropriate level of investment, which long term will be a foundational driver of healthy margins and a more resilient member experience. This quarter’s results serve as tangible proof of this discipline and will serve as a catalyst for compounding growth as we continue to lean more aggressively into the opportunity in front of us. In closing, we enter the second half of 2025 from a position of financial strength and an exciting point in our growth journey. We’re buoyed by our continued efficiency and motivated by a highly resilient member base whose retention rate and thus lifetime value continues to increase.

Most crucially, the team is ready to deploy our AOI to enable high-quality, sustainable growth for the years to come. With a vast global addressable market ahead of us and a business model compounding at high and proven internal rates of return, we are uniquely positioned to grow and to scale with confidence. With that, we’ll open it up for questions.

Q&A Session

Operator: [Operator Instructions] The first question is from John Barnidge with Piper Sandler.

John Bakewell Barnidge: 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?

Margaret Rosemary Maria Tooth: Yes. John, thanks for the question. So, I’ll start off and then pass over to Fawwad as well. From our perspective, typically, we do see a seasonal lift in Q1, Q2. And as we take more rate through the year, we’ll see that, that rate start to realize and therefore, brings down that cost of goods. That hasn’t been the case this quarter. As we noted, we’ve seen a mild deceleration, which is encouraging. And at the moment, that’s kind of what we’re assuming in within our operating assumptions. So that being equal, we would expect to see that reflected in our guidance, which is what Fawwad shared earlier. Fawwad, anything to add?

Fawwad Qureshi: Yes. The only thing I’d add is just from an inflation perspective. In the quarter, we saw a little bit of an abatement of inflation down about 1%. So baked into our guidance for second half is an assumption that, that 1% continues. And in the prepared remarks, I mentioned that we had about 60 basis points of favorable development in Q2.

John Bakewell Barnidge: Great. And my follow-up question, 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?

Fawwad Qureshi: Yes. I think we took a step in a positive direction. This business is still nascent. We’re just beginning, but this was an opportunity for us to acquire IP. The company had made an investment in a partner called [indiscernible] some years ago. And so being able to get access to an IP, that’s a foundational element for this business. And the business is still in the very early stages, but this IP is a critical foundation. It’s a building block that will be important for the business. We’re very optimistic about this business. We think it has significant potential over time.

Operator: The next question is from Jon Block with Stifel.

Jonathan David Block: Margi, 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?

Margaret Rosemary Maria Tooth: Jon, thanks for the question. So, I would say overall, when we think about growth, our gross adds are right in line with expectations as our guidance shows. For the last year, we’ve been really focusing on how do we refine our approach to ensure that we’re priced appropriately for each pet. So, a year ago, we talked about as pricing flows through, we’ll target those pets that have the right pricing and the higher lifetime value, which means we haven’t been growing for quantity, but we’ve been growing for quality, if you will. So, when you think about what that means, essentially, it’s looking at pets that will deliver the highest lifetime value. And that’s from the vet channel from other net, which we’re seeing performing really well.

The LVP of our core book of business is higher today than it was a year ago. And I think that’s reflected in the bottom line. And you can see that we’ve been working on the pets we’ve been adding for the last year have been consistently at a higher LVP level, which ultimately makes it more sustainable. When we think about focusing on those, just to put that in perspective, what it means in reality is we’re turning off some of the less profitable channels. So, things like wellness versus insurance, things where we know we’re not priced appropriately sustainably, we’re not going to grow there to add a pet. We’re going to grow there to put the right pet on the book. And then we’ve been spending more on retention, which has really been our main focus for the last year.

So that’s working really well considering the rate increases that have come through. I think that shows up in our net pet growth. So, it’s up for 2 consecutive quarters now. Core Trupanion is performing ahead in the blended mix, which is incredibly encouraging. And we’ll continue to build on the investment. I think the key thing for us now is we have the money to grow. We’ve got that nice free cash flow, and we’re starting to deploy more. We saw that pet. The PAC was up 16% year-over-year, which is encouraging, and we expect that to continue into the back half of this year.

Jonathan David Block: Okay. That was helpful. But maybe I’ll just follow up and continue on that same theme. I mean, if I remember, I think it was September of last year, so about a year ago, we were out at the Analyst Day. I might have my months a little bit off, but it was roughly 12 months ago. And at that time, you were conveying that we were going to start to see a pickup in overall gross adds. You were getting the MLR back in place. It’s been in place now for some time or back around where you wanted after the hyperinflationary time. So, like what’s changed, right? I mean, that’s what you were conveying 12 months ago that, in my view, clearly hasn’t played out. I know you’re still beating the drum on the profitability, the lifetime value per pet.

I mean that’s just going up because you’re taking more price and price. So, like can you talk to us about what you saw 10 or 11 months ago that I don’t think has really played out? And then when should we expect real growth in gross adds, which I think is the ultimate driver of arguably the long-term value of the company in a growth market?

Margaret Rosemary Maria Tooth: Yes. I mean growth comes through a number of different areas for us. Nothing has changed in terms of our expectations, and nothing has changed in terms of that mentality around growth and gross net adds ultimately. When we think about what we were trying to do beginning of — it was September last year, you’re right. So, in terms of the timing, 12 months ago, it was the first quarter in a number of quarters, we actually started to increase our PAC spend again in Q4, Q1 and now Q2 is our biggest step-up, which is encouraging and gives us more room to move. We expect to see that a modest pickup in the second half of this year, which is right in line with expectations that we set at the beginning of this year.

And as we move into the following quarters and years, you expect to see more and more of that turnaround. So, we’re still, from a PAC perspective, 25% down on those big quarters where we were spending close to $20 million a year, and that was back in 2022. So, as we build that back up to that level, we expect to see more from a brand halo effect, which will help us from a more rapid growth build. But the plan this year was always to see modest pickup in the back half of the year, and that remains the case today.

Operator: The next question is from Brandon Vazquez with William Blair.

Brandon Vazquez: Congrats on the quarter. Maybe I’ll ask somewhat of a similar question, but I’ll attack it a little bit different. Maybe for Margi and Fawwad, for both of you. 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.

Fawwad Qureshi: Yes, I can help with the mix part. So, in the quarter, if you break the 16% year-over-year revenue growth for subscription, about 11% came from ARPU and about 5% came from pets. That’s roughly consistent with what we saw in Q1. What we said at the beginning of the year, and it remains what we’re on track for, is for pets to contribute at a higher level than they are today as a percent of contribution to revenue growth and ARPU to contribute less. So ARPU peaked in Q4 of ’23. That was our assumption at the time and that has largely played out in Q1 and Q2. So, I’m looking at the second half of the year, I would expect to see more contribution from pets, less contribution from ARPU on a relative basis. Pricing will still be the way, but pet count will come up.

Brandon Vazquez: And just a quick follow-up on that, Fawwad. Like sequentially, can gross new adds, I think this is part of what John was trying to ask earlier, PAC spend has been ramping up for a couple of quarters now. Do you think sequentially, we can start to expect that gross new adds in the core business can increase in the back half of this year?

Fawwad Qureshi: Yes. Our expectation is back half of the year gross adds will be positive. In terms of the specific timing on quarterization, I would think about the timing of the PAC spend, the point that Margi made. So, we had talked last year about very gradually increasing the PAC spend. We increased it modestly in Q3 of last year, about 4%, about 8% in Q4. We only just in Q1 began to increase in double digits. On total dollar spend, it’s still less than what we were spending a couple of years ago in the first half. So, we’re happy to be able to redeploy those dollars. But from a second half perspective, yes, our assumption and our model is that first half will turn positive.

Brandon Vazquez: Okay. And Margi, maybe just a quick update on PHI and Furkin. Any progress that you can update with us there and potential timing of a broader launch for either one of those products, especially in the U.S.

Margaret Rosemary Maria Tooth: Yes. Thank you. We’ve got a lot of learnings from these products. They’ve been in market now in Canada for around 4 years. So, a fair amount of time. We’ve actually invested small amounts of money into these products. So, they’re not consuming a huge amount of capital, but they’re giving us a lot of learnings. So, we’re taking those learnings we’re building on them. As we’ve mentioned before, we’ve been focusing on the highest LVP product, which in turn means we’ve turned down some focus on these smaller products because we’re looking at the core Trupanion. But as we recognize the market grows, it’s evolving. We think there’s absolutely a place from the learnings that we found that we can redeploy those into the U.S. market more broadly.

So, as our PAC investment steps up longer term, we have the optionality to deploy that against different marketing segments and market segments. So, we’re fine-tuning our learnings. We’ll build on them in time, and we won’t share more for competitive reasons, but we’re well positioned for growth across the ecosystem, and these products have definitely helped bolster our education there.

Operator: [Operator Instructions] The next question is from Katie Sakys with Autonomous Research.

Katie Sakys: I’d like to circle back to some comments you’ve made, Margi, on retention previously. I think we discussed expecting to see a little bit of the headwind abate in 2Q and 3Q. And I can appreciate that on a sequential basis, there’s been a modest improvement there. But thinking about that cadence of improvement, I mean, should we expect to see more significant improvement in 3Q? And where are you guys really trying to end the year at in terms of retention?

Margaret Rosemary Maria Tooth: Yes. Thanks for the question, Katie. Retention for the quarter was strong. I mean I think kind of the sequential movement based on — when you think about how much of a compounding increase most of our members have received, we’re really pleased to see that move in a positive direction. I’d expect us to continue in this direction for the foreseeable future as we work on our learnings. We keep building on hopefully having that tailwind of consistently lower pricing increases we’ve now caught up. So, when we think about our value proposition, we’re at that value proposition today. So, the times where we were playing catch-up initially and then having to kind of really put that rate above 20% are behind us.

So, seeing that from a member perspective and their experiences are going to be a lot softer. So, in terms of budgetability, which is what we aim to be, we see a nice tailwind in front of us there. So, I’d expect it to continue moving in a positive direction. We’ve got a long way to go. We’ve got a lot of opportunity in front of us given that this was — a high was 98.8%. That’s something that we’re always going to strive to do again, but it’s going to take a long time to get there. We’ll just keep moving forward. And I would say the strength of the over and the under 20% buckets give us a lot of encouragement.

Katie Sakys: Okay. Maybe going at this from a different direction. You’ve previously discussed having almost half of the book kind of priced ahead of where it needs to be. What’s the strategy with those customers looking into the back half of the year? I mean can they expect to see price decreases? And if so, I mean, how much of a tailwind can we expect that to be to retention overall? And subsequently, how much of a headwind might that be to ARPU in the back half of the year?

Margaret Rosemary Maria Tooth: Yes. I mean our pricing is set for the back half of the year. So, we’re not going to be adjusting any rates that our members are going to be seeing right now because we set them around a year to 18 months in advance. This is really talking about 2026 and beyond as we look at those overall trends. In terms of pricing ahead, when we price ahead — we always price ahead. We’re always thinking about what is the projected cost of that risk of that pet every — for the next 12 months. So, we feel like we’re now in good shape, which means we’re going to see a lot softer increases for members on a regular basis moving forward because we’ve hit that value proposition overall. And what that means is you — there may be some areas that have a price decrease.

There will be a lot of areas that have a significantly reduced increase for 2026 and beyond as we’ve caught up with that price. Our value proposition goal is still to maintain that 71%. We’re not going to change that and deviate it. So, what it means is we will be going through in a far more granular level to refine our value proposition, not just from a geography perspective, but breed and age, which is what we used to do historically prior to those big inflationary periods. In our business, retention is a primary growth lever, and we’re really excited about momentum on this front. And considering those compounding increases experience, we’re now in a position to move forward. And there is a tailwind in front of us, and we’re operating from a very healthy margin position.

Operator: The next question is from Wilma Burdis with Raymond James.

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

Fawwad Qureshi: Yes. So, thanks for the question. Yes, that was related to the one-time gain that we got from the exchange of our preferred stock in base ride. So that’s what I was describing earlier. We returned our preferred stock to base ride in exchange for IP. That IP is going to be used for lands map.

Wilma Carter Jackson Burdis: Got you. And then 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?

Margaret Rosemary Maria Tooth: Yes. So, what we’re seeing right now, as Fawwad mentioned, is definitely a deceleration in inflation. So, we’ve seen that trend over the last few months, and we said we would share more as that came through, and we have done and we’ll continue to do so. So, we’re obviously monitoring this very closely. I expect given the challenges in the veterinary industry that we may see further moderation. We’re not seeing that yet, but we will tell you and we’ll take that into account. As we think about 2026, we’re using that assumption, that operating assumption with that slight deceleration in our rates for next year and beyond. So that will mean that there will still be increases coming through because the cost of goods will continue to go up, and therefore, that will be justified in our numbers. But if it needs to abate further, then we will take the necessary steps to ensure that happens for our members that we honor that value prop.

Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Margi Tooth for any closing remarks.

Margaret Rosemary Maria Tooth: Thank you, Debbie, and thank you, everyone, for joining the call today and for the questions. As hopefully, you heard, we’re very pleased with the strong results we shared today, and we look forward to building on this momentum in the coming months and the quarters ahead. With this in mind, we invite you to our upcoming Investor Day, which will be held here in Seattle, Washington on September 17, which is just 6 weeks away. The event annually provides a unique opportunity for our investors to connect with our team and hear from all of the leaders across the business. So, registration and additional details can be found on the Investor Relations website. So please do go there and check that out.

So, in closing, we’re now in the third quarter of the year. We have just 5 months left to run in our 60-month plan. The team is executing really well. We’ve improved the financial health of the business immeasurably over the last year. And based on the guidance you heard today, our adjusted operating income will have compounded 21% over the last 5 years. Thank you for your time and for your questions today.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.