Trupanion Inc (NASDAQ:TRUP) Q2 2020 Earnings Conference Call - Final Transcript

Aug 04, 2020 • 04:30 pm ET


Trupanion Inc (NASDAQ:TRUP) Q2 2020 Earnings Conference Call - Final Transcript


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Darryl Rawlings

phones, to how quickly we were able to pay veterinary invoices. These efforts manifested in record monthly retention in the quarter and a record number of pet owners adding pets or referring to friends.

Improvement in these metrics paved the way for Nirvana, which we define as a state in which existing member referrals equal or exceed the number of members who cancel. I first coined this term in our 2015 annual shareholder letter. And those of you who follow the story closely know the significance of this metric on our ability to deliver self-sustaining growth in the future. At our Annual Shareholder Meeting in June, we highlighted Boston as our first U.S. territory to enter a state of Nirvana. Since then, we've made progress in additional U.S. and Canadian territories, bringing our total count of territories in Nirvana to 6. Churn for the trailing 12-month period averaged 1.34% per month. Our highly efficient Refer A Friend and Add A Pet channel comprised 0.75% of pets during the same period. The difference between the two, the gap to Nirvana, was 0.58%, a 16 basis point improvement over the prior year period. For the stand-alone months of May and June, the gap to Nirvana was only 0.43%.

Maintaining service levels will be critical to continuing to drive Nirvana across the business. At the same time, our field sales team found new and creative ways of interacting with veterinarians and their staff. Relative to the prior period, we believe the total number of touch points actually improved in the quarter. Strategic changes in how we support our field sales team and additional engagement from our account managers strengthened the performance within this core channel. We ended the quarter with over 11,500 active hospitals, a number that has continued to grow in the third quarter. We saw good success outside the veterinarian in Refer A Friend, Add A Pet channels, as the team was able to dynamically adjust our pet acquisition spend in relation to market opportunities. This is not a new skill for Trupanion. The net result was stronger-than-anticipated performance in our subscription business.

While we saw some benefit within our quarterly financial results, the nature of recurring revenue means the impact will be more meaningfully felt in the quarters and years ahead. So with that, I'll review our key financial measures for the quarter. Total revenue grew 28% year-over-year, and we ended the quarter with over 744,000 total enrolled pets. Adjusted operating income grew 44% year-over-year to $14.1 million, $13.4 million of which was from our subscription business. Growth in our adjusted operating income sets us up well to deploy capital at attractive internal rates of return. During the quarter, we were able to deploy $8.4 million of our adjusted operating income in pet acquisition spend related to our subscription business at an estimated internal rate of return of 45%, above our 30% to 40% target. Our internal rate of return benefited from our record-high retention rates in the period, growth