TRUPANION, INC. (TRUP) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Please read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included under Part II, Item 8 of this Annual Report on Form 10-K.
This section of this Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Overview
We provide medical insurance for cats and dogs throughout the United States, Canada, Europe, Puerto Rico, and Australia. Through our data-driven, vertically-integrated approach, we develop and offer high value medical insurance products, 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 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. 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 generate revenue in our other business segment primarily by underwriting policies on behalf of third parties that do not carry reference to the Trupanion brand. 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. Our Seattle 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 years ended December 31, 2022, 2021 and 2020, and for each of the last eight fiscal quarters.
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | |||||||||
| Total Business: | |||||||||||
| Total pets enrolled (at period end) | 1,537,573 | 1,176,778 | 862,928 | ||||||||
| Subscription Business: | |||||||||||
| Total subscription pets enrolled (at period end) | 869,862 | 704,333 | 577,957 | ||||||||
| Monthly average revenue per pet | $ | 63.82 | $ | 63.56 | $ | 60.37 | |||||
| Lifetime value of a pet, including fixed expenses | $ | 641 | $ | 717 | $ | 653 | |||||
| Average pet acquisition cost (PAC) | $ | 289 | $ | 287 | $ | 247 | |||||
| Average monthly retention | 98.69 | % | 98.74 | % | 98.71 | % |
| Three Months Ended | ||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2022 | Sept. 30, 2022 | Jun. 30, 2022 | Mar. 31, 2022 | Dec. 31, 2021 | Sept. 30, 2021 | Jun. 30, 2021 | Mar. 31, 2021 | |||||||||||||||||||||||
| Total Business: | ||||||||||||||||||||||||||||||
| Total pets enrolled (at period end) | 1,537,573 | 1,439,605 | 1,348,145 | 1,267,253 | 1,176,778 | 1,104,376 | 1,024,226 | 943,854 | ||||||||||||||||||||||
| Subscription Business: | ||||||||||||||||||||||||||||||
| Total subscription pets enrolled (at period end) | 869,862 | 808,077 | 770,318 | 736,691 | 704,333 | 676,463 | 643,395 | 609,835 | ||||||||||||||||||||||
| Monthly average revenue per pet | $ | 63.11 | $ | 63.80 | $ | 64.26 | $ | 64.21 | $ | 63.89 | $ | 63.60 | $ | 63.69 | $ | 62.97 | ||||||||||||||
| Lifetime value of a pet, including fixed expenses | $ | 641 | $ | 673 | $ | 713 | $ | 730 | $ | 717 | $ | 697 | $ | 681 | $ | 684 | ||||||||||||||
| Average pet acquisition cost (PAC) | $ | 283 | $ | 268 | $ | 309 | $ | 301 | $ | 306 | $ | 280 | $ | 284 | $ | 279 | ||||||||||||||
| Average monthly retention | 98.69 | % | 98.71 | % | 98.74 | % | 98.75 | % | 98.74 | % | 98.72 | % | 98.72 | % | 98.73 | % |
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 exclude revenue from our managing general agent product lines because their ARPU is representative of commission earnings versus underwriting premiums. We monitor monthly average revenue per pet because it is an indicator of the per pet unit economics of our subscription business.
*Total pets enrolled and total subscription pets enrolled metrics include managing general agent pets acquired.
† Excluding activity relating to managing general agent policies.
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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, other business segment expense and managing general agent 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 exclude managing general agent pet acquisition expense because the ARPU of these products is representative of commission earnings versus underwriting premiums. 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 December 31, 2022 is an average of each month’s retention from January 1, 2022 through December 31, 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.
† Excluding activity relating to managing general agent policies.
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Non-GAAP Financial Measures
In addition to our results determined in accordance with U.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.
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The following tables present the reconciliation of our non-GAAP financial measures from corresponding GAAP measures for the periods presented (in thousands):
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | |||||||||
| Veterinary invoice expense | $ | 649,737 | $ | 486,062 | $ | 351,124 | |||||
| Less: | |||||||||||
| Stock-based compensation expense(1) | (4,054) | (4,538) | (1,118) | ||||||||
| Other business cost of paying veterinary invoices | (212,857) | (129,614) | (72,119) | ||||||||
| Subscription cost of paying veterinary invoices (non-GAAP) | $ | 432,826 | $ | 351,910 | $ | 277,887 | |||||
| % of subscription revenue | 72.5 | % | 71.1 | % | 71.7 | % | |||||
| Other cost of revenue | $ | 133,257 | $ | 108,583 | $ | 69,003 | |||||
| Less: | |||||||||||
| Stock-based compensation expense(1) | (2,232) | (2,610) | (468) | ||||||||
| Other business variable expenses | (72,453) | (57,367) | (33,133) | ||||||||
| Subscription variable expenses (non-GAAP) | $ | 58,572 | $ | 48,606 | $ | 35,402 | |||||
| % of subscription revenue | 9.8 | % | 9.8 | % | 9.1 | % | |||||
| Technology and development expense | $ | 25,133 | $ | 16,866 | $ | 9,947 | |||||
| General and administrative expense | 39,379 | 31,893 | 21,847 | ||||||||
| Less: | |||||||||||
| Stock-based compensation expense(1) | (17,135) | (11,918) | (4,553) | ||||||||
| Business combination transaction costs | (372) | (82) | (522) | ||||||||
| Development expenses | (7,789) | (3,719) | (339) | ||||||||
| Fixed expenses (non-GAAP) | $ | 39,216 | $ | 33,040 | $ | 26,380 | |||||
| % of total revenue | 4.3 | % | 4.7 | % | 5.3 | % | |||||
| New pet acquisition expense | $ | 89,500 | $ | 78,647 | $ | 47,837 | |||||
| Less: | |||||||||||
| Stock-based compensation expense(1) | (9,116) | (9,160) | (2,773) | ||||||||
| Other business pet acquisition expense | (541) | (499) | (820) | ||||||||
| Subscription acquisition cost (non-GAAP) | $ | 79,843 | $ | 68,988 | $ | 44,244 | |||||
| % of subscription revenue | 13.3 | % | 13.9 | % | 11.4 | % | |||||
| (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 $0.9 million for the year ended December 31, 2022. |
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| Three Months Ended | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2022 | Sept. 30, 2022 | Jun. 30, 2022 | Mar. 31, 2022 | Dec. 31, 2021 | Sept. 30, 2021 | Jun. 30, 2021 | Mar. 31, 2021 | ||||||||||||||||||||||||
| Veterinary invoice expense | $ | 176,083 | $ | 171,112 | $ | 157,616 | $ | 144,926 | $ | 132,852 | $ | 125,058 | $ | 118,282 | $109,870 | ||||||||||||||||
| Less: | |||||||||||||||||||||||||||||||
| Stock-based compensation expense(1) | (899) | (960) | (1,022) | (1,173) | (798) | (769) | (672) | (2,299) | |||||||||||||||||||||||
| Other business cost of paying veterinary invoices | (59,946) | (58,197) | (50,378) | (44,336) | (38,009) | (34,432) | (31,029) | (26,144) | |||||||||||||||||||||||
| Subscription cost of paying veterinary invoices (non-GAAP) | $ | 115,238 | $ | 111,955 | $ | 106,216 | $ | 99,417 | $ | 94,045 | $ | 89,857 | $ | 86,581 | $ | 81,427 | |||||||||||||||
| % of subscription revenue | 72.7 | % | 73.5 | % | 72.8 | % | 71.1 | % | 70.1 | % | 70.7 | % | 71.9 | % | 71.9 | % | |||||||||||||||
| Other cost of revenue | $ | 36,277 | $ | 32,589 | $ | 33,212 | $ | 31,179 | $ | 30,992 | $ | 28,443 | $ | 25,433 | $ | 23,715 | |||||||||||||||
| Less: | |||||||||||||||||||||||||||||||
| Stock-based compensation expense(1) | (414) | (433) | (754) | (631) | (581) | (542) | (552) | (935) | |||||||||||||||||||||||
| Other business variable expenses | (20,591) | (17,346) | (18,010) | (16,506) | (17,208) | (15,315) | (12,940) | (11,904) | |||||||||||||||||||||||
| Subscription variable expenses (non-GAAP) | $ | 15,272 | $ | 14,810 | $ | 14,448 | $ | 14,042 | $ | 13,203 | $ | 12,586 | $ | 11,941 | $ | 10,876 | |||||||||||||||
| % of subscription revenue | 9.6 | % | 9.7 | % | 9.9 | % | 10.0 | % | 9.8 | % | 9.9 | % | 9.9 | % | 9.6 | % | |||||||||||||||
| Technology and development expense | $ | 6,955 | $ | 6,553 | $ | 6,396 | $ | 5,229 | $ | 4,665 | $ | 4,391 | $ | 4,079 | $ | 3,731 | |||||||||||||||
| General and administrative expense | 10,472 | 10,314 | 9,227 | 9,366 | 8,996 | 8,246 | 7,435 | 7,216 | |||||||||||||||||||||||
| Less: | |||||||||||||||||||||||||||||||
| Stock-based compensation expense(1) | (5,019) | (4,805) | (4,085) | (3,226) | (3,293) | (3,020) | (3,122) | (2,483) | |||||||||||||||||||||||
| Business combination transaction costs | (193) | (179) | — | — | — | — | — | (82) | |||||||||||||||||||||||
| Development expenses | (2,084) | (2,435) | (2,012) | (1,258) | (858) | (919) | (1,121) | (821) | |||||||||||||||||||||||
| Fixed expenses (non-GAAP) | $ | 10,131 | $ | 9,448 | $ | 9,526 | $ | 10,111 | $ | 9,510 | $ | 8,698 | $ | 7,271 | $ | 7,561 | |||||||||||||||
| % of total revenue | 4.1 | % | 4.0 | % | 4.3 | % | 4.9 | % | 4.9 | % | 4.8 | % | 4.3 | % | 4.9 | % | |||||||||||||||
| New pet acquisition expense | $ | 22,457 | $ | 22,434 | $ | 22,982 | $ | 21,627 | $ | 19,845 | $ | 19,708 | $ | 19,390 | $ | 19,704 | |||||||||||||||
| Less: | |||||||||||||||||||||||||||||||
| Stock-based compensation expense(1) | (2,079) | (2,108) | (2,601) | (2,328) | (2,136) | (2,112) | (2,181) | (2,731) | |||||||||||||||||||||||
| Other business pet acquisition expense | (65) | (181) | (186) | (109) | (76) | (134) | (118) | (171) | |||||||||||||||||||||||
| Subscription acquisition cost (non-GAAP) | $ | 20,313 | $ | 20,145 | $ | 20,195 | $ | 19,190 | $ | 17,633 | $ | 17,462 | $ | 17,091 | $ | 16,802 | |||||||||||||||
| % of subscription revenue | 12.5 | % | 13.2 | % | 13.9 | % | 13.7 | % | 13.1 | % | 13.7 | % | 14.2 | % | 14.8 | % | |||||||||||||||
| (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 $0.2 million for the three months ended December 31, 2022. |
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, other business segment expense, and managing general agent 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 exclude other business segment pet acquisition expense because it does not relate to subscription enrollments. We exclude managing general agent pet acquisition expense because the ARPU of these products is representative of commission earnings versus underwriting premiums. 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.
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The following tables reconcile GAAP new pet acquisition expense to non-GAAP net acquisition cost (in thousands) for the years ended December 31, 2022, 2021, and 2020, and for each of the last eight fiscal quarters:
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | |||||||||
| New pet acquisition expense | $ | 89,500 | $ | 78,647 | $ | 47,837 | |||||
| Net of sign-up fee revenue | (4,984) | (4,954) | (3,292) | ||||||||
| Excluding: | |||||||||||
| Stock-based compensation expense | (9,116) | (9,160) | (2,773) | ||||||||
| Other business pet acquisition expense | (541) | (499) | (820) | ||||||||
| Pet acquisition expense for managing general agent policies | (443) | — | — | ||||||||
| Net acquisition cost | $ | 74,416 | $ | 64,034 | $ | 40,952 |
| Three Months Ended | ||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2022 | Sept. 30, 2022 | Jun. 30, 2022 | Mar. 31, 2022 | Dec. 31, 2021 | Sept. 30, 2021 | Jun. 30, 2021 | Mar. 31, 2021 | |||||||||||||||||||||||
| New pet acquisition expense | $ | 22,457 | $ | 22,434 | $ | 22,982 | $ | 21,627 | $ | 19,845 | $ | 19,708 | $ | 19,390 | $ | 19,704 | ||||||||||||||
| Net of sign-up fee revenue | (1,191) | (1,339) | (1,252) | (1,202) | (1,162) | (1,268) | (1,260) | (1,264) | ||||||||||||||||||||||
| Excluding: | ||||||||||||||||||||||||||||||
| Stock-based compensation expense | (2,079) | (2,108) | (2,601) | (2,328) | (2,136) | (2,112) | (2,181) | (2,731) | ||||||||||||||||||||||
| Other business pet acquisition expense | (65) | (181) | (186) | (109) | (76) | (134) | (118) | (171) | ||||||||||||||||||||||
| Pet acquisition expense for managing general agent policies | (443) | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Net acquisition cost | $ | 18,679 | $ | 18,806 | $ | 18,943 | $ | 17,988 | $ | 16,471 | $ | 16,194 | $ | 15,831 | $ | 15,538 |
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. 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 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.
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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.
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, except 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 of Trupanion, 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 price adjustments. Our subscription business’s cost-plus model depends on our ability to estimate our operating costs and expenses, including veterinary invoice expenses, and to adjust our pricing to achieve our target returns. We regularly reevaluate and adjust the price of our subscriptions, with a goal of achieving our targeted payout ratio, subject to the review and approval of applicable state regulators. This makes it important for us to accurately estimate our costs and to promptly pursue regulatory approval of pricing adjustments. We may, though, have timing mismatches during which our pricing does not reflect our current expense profile.
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 between the United States, Canada, and other jurisdictions, and between areas within those geographies, impacts the monthly average revenue per pet we receive. For example, prices from our plans could vary depending on the relative cost of veterinary care in different countries or areas. As our mix of business between geographies changes, our metrics, such as our monthly average revenue per pet, and our exposure to foreign exchange fluctuations will be impacted. As we expand into international markets and continue to explore other opportunities, we 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.
45
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.
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||
| (in thousands) | ||||||||||
| Revenue: | ||||||||||
| Subscription business | $ | 596,610 | $ | 494,862 | $ | 387,732 | ||||
| Other business | 308,569 | 204,129 | 114,296 | |||||||
| Total revenue | 905,179 | 698,991 | 502,028 | |||||||
| Cost of revenue: | ||||||||||
| Subscription business(1) | 497,684 | 407,664 | 314,875 | |||||||
| Other business | 285,310 | 186,981 | 105,252 | |||||||
| Total cost of revenue | 782,994 | 594,645 | 420,127 | |||||||
| Operating expenses: | ||||||||||
| Technology and development(1) | 25,133 | 16,866 | 9,947 | |||||||
| General and administrative(1) | 39,379 | 31,893 | 21,847 | |||||||
| New pet acquisition expense(1) | 89,500 | 78,647 | 47,837 | |||||||
| Depreciation and amortization | 10,921 | 11,965 | 7,071 | |||||||
| Total operating expenses | 164,933 | 139,371 | 86,702 | |||||||
| Loss from investment in joint venture | (253) | (171) | (126) | |||||||
| Operating loss | (43,001) | (35,196) | (4,927) | |||||||
| Interest expense | 4,267 | 10 | 1,381 | |||||||
| Other expense (income), net | (3,072) | 14 | (581) | |||||||
| Loss before income taxes | (44,196) | (35,220) | (5,727) | |||||||
| Income tax expense | 476 | 310 | 113 | |||||||
| Net loss | $ | (44,672) | $ | (35,530) | $ | (5,840) |
(1) Includes stock-based compensation expense as follows:
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||
| (in thousands) | ||||||||||
| Cost of revenue | $ | 6,484 | $ | 7,148 | $ | 1,586 | ||||
| Technology and development | 4,742 | 3,056 | 758 | |||||||
| General and administrative | 12,831 | 8,862 | 3,795 | |||||||
| New pet acquisition expense | 9,336 | 9,160 | 2,773 | |||||||
| Total stock-based compensation expense | $ | 33,393 | $ | 28,226 | $ | 8,912 |
46
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||
| (as a percentage of revenue) | ||||||||
| Revenue | 100 | % | 100 | % | 100 | % | ||
| Cost of revenue | 87 | 85 | 84 | |||||
| Operating expenses: | ||||||||
| Technology and development | 3 | 2 | 2 | |||||
| General and administrative | 4 | 5 | 4 | |||||
| New pet acquisition expense | 10 | 11 | 10 | |||||
| Depreciation and amortization | 1 | 2 | 1 | |||||
| Total operating expenses | 18 | 20 | 17 | |||||
| Loss from investment in joint venture | — | — | — | |||||
| Operating loss | (5) | (5) | (1) | |||||
| Interest expense | — | — | — | |||||
| Other expense (income), net | — | — | — | |||||
| Loss before income taxes | (5) | (5) | (1) | |||||
| Income tax expense | — | — | — | |||||
| Net loss | (5) | % | (5) | % | (1) | % |
| Stock-based compensation expense: | Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||
| (as a percentage of revenue) | ||||||||
| Cost of revenue | 1 | % | 1 | % | — | % | ||
| Technology and development | 1 | 1 | 1 | |||||
| General and administrative | 1 | — | — | |||||
| New pet acquisition expense | 1 | 1 | 1 | |||||
| Total stock-based compensation expense | 4 | % | 4 | % | 2 | % |
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||
| (as a percentage of subscription revenue) | ||||||||
| Subscription business revenue | 100 | % | 100 | % | 100 | % | ||
| Subscription business cost of revenue | 83 | 82 | 81 |
47
Comparison of the years ended December 31, 2022, 2021, and 2020
Revenue
| Year Ended December 31, | % Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | 2022 vs. 2021 | 2021 vs. 2020 | |||||||||||
| (in thousands, except percentages, pet and per pet data) | |||||||||||||||
| Revenue: | |||||||||||||||
| Subscription business | $ | 596,610 | $ | 494,862 | $ | 387,732 | 21% | 28% | |||||||
| Other business | 308,569 | 204,129 | 114,296 | 51 | 79 | ||||||||||
| Total revenue | $ | 905,179 | $ | 698,991 | $ | 502,028 | 29 | 39 | |||||||
| Percentage of Revenue by Segment: | |||||||||||||||
| Subscription business | 66 | % | 71 | % | 77 | % | |||||||||
| Other business | 34 | 29 | 23 | ||||||||||||
| Total revenue | 100 | % | 100 | % | 100 | % | |||||||||
| Total pets enrolled (at period end) | 1,537,573 | 1,176,778 | 862,928 | 31 | 36 | ||||||||||
| Total subscription pets enrolled (at period end) | 869,862 | 704,333 | 577,957 | 24 | 22 | ||||||||||
| Monthly average revenue per pet | $ | 63.82 | $ | 63.56 | $ | 60.37 | — | 5 | |||||||
| Average monthly retention | 98.69 | % | 98.74 | % | 98.71 | % |
Year ended December 31, 2022 compared to year ended December 31, 2021. Total revenue increased by $206.2 million to $905.2 million for the year ended December 31, 2022, or 29%. Revenue from our subscription business segment increased by $101.7 million to $596.6 million for the year ended December 31, 2022, or 21%. This increase was primarily due to a 19% increase in total subscription pets enrolled as of December 31, 2022 compared to a year ago, excluding pets acquired as part of business combinations in 2022. Average revenue per pet increased by 0.4% year over year, or 1.3% on a constant currency basis. Revenue from our other business segment increased by $104.4 million to $308.6 million, or 51%, for the year ended December 31, 2022, primarily due to a 41% increase in enrolled pets in this segment.
48
Cost of Revenue
| Year Ended December 31, | % Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | 2022 vs. 2021 | 2021 vs. 2020 | |||||||||||
| (in thousands, except percentages, pet and per pet data) | |||||||||||||||
| Cost of Revenue: | |||||||||||||||
| Subscription business: | |||||||||||||||
| Veterinary invoice expense | $ | 436,880 | $ | 356,448 | $ | 279,005 | 23% | 28% | |||||||
| Other cost of revenue | 60,804 | 51,216 | 35,870 | 19 | 43 | ||||||||||
| Total cost of revenue | 497,684 | 407,664 | 314,875 | 22 | 29 | ||||||||||
| Other business: | |||||||||||||||
| Veterinary invoice expense | 212,857 | 129,614 | 72,119 | 64 | 80 | ||||||||||
| Other cost of revenue | 72,453 | 57,367 | 33,133 | 26 | 73 | ||||||||||
| Total cost of revenue | 285,310 | 186,981 | 105,252 | 53 | 78 | ||||||||||
| Percentage of Revenue by Segment: | |||||||||||||||
| Subscription business: | |||||||||||||||
| Veterinary invoice expense | 73 | % | 72 | % | 72 | % | |||||||||
| Other cost of revenue | 10 | 10 | 9 | ||||||||||||
| Total cost of revenue | 83 | 82 | 81 | ||||||||||||
| Other business: | |||||||||||||||
| Veterinary invoice expense | 69 | 63 | 63 | ||||||||||||
| Other cost of revenue | 23 | 28 | 29 | ||||||||||||
| Total cost of revenue | 92 | 92 | 92 | ||||||||||||
| Total pets enrolled (at period end) | 1,537,573 | 1,176,778 | 862,928 | 31 | 36 | ||||||||||
| Total subscription pets enrolled (at period end) | 869,862 | 704,333 | 577,957 | 24 | 22 | ||||||||||
| Monthly average revenue per pet | $ | 63.82 | $ | 63.56 | $ | 60.37 | — | 5 |
Year ended December 31, 2022 compared to year ended December 31, 2021. Cost of revenue for our subscription business segment was $497.7 million, or 83% of revenue, for the year ended December 31, 2022, compared to $407.7 million, or 82%, of revenue, for the year ended December 31, 2021. This increase of 22% in subscription cost of revenue was primarily the result of a 19% increase in subscription pets enrolled, excluding pets acquired as part of business combinations, and a 2.5% increase in veterinary invoice expense per pet, or 2.9% 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 $98.3 million, or 53%, to $285.3 million for the year ended December 31, 2022, primarily due to the increase in enrolled pets in this segment.
49
Technology and Development Expenses
| Year Ended December 31, | % Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | 2022 vs. 2021 | 2021 vs. 2020 | |||||||||||
| (in thousands, except percentages) | |||||||||||||||
| Technology and development | $ | 25,133 | $ | 16,866 | $ | 9,947 | 49% | 70% | |||||||
| Percentage of total revenue | 3 | % | 2 | % | 2 | % |
Year ended December 31, 2022 compared to year ended December 31, 2021. Technology and development expenses increased by $8.3 million, or 49%, to $25.1 million for the year ended December 31, 2022. The increase was primarily due to increased headcount and $1.7 million increase in associated stock-based compensation. Additionally, development expense, which totaled $7.8 million or 1% of total revenue, increased $4.1 million year over year as a result of investments in several pre-revenue initiatives. Technology and development expenses increased from 2% to 3% of total revenue year over year.
General and Administrative Expenses
| Year Ended December 31, | % Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | 2022 vs. 2021 | 2021 vs. 2020 | |||||||||||
| (in thousands, except percentages) | |||||||||||||||
| General and administrative | $ | 39,379 | $ | 31,893 | $ | 21,847 | 23% | 46% | |||||||
| Percentage of total revenue | 4 | % | 5 | % | 4 | % |
Year ended December 31, 2022 compared to year ended December 31, 2021. General and administrative expenses increased by $7.5 million, or 23%, to $39.4 million for the year ended December 31, 2022. The increase was primarily due to a $4.0 million increase in stock-based compensation and a $3.1 million increase in compensation expense. General and administrative expenses decreased from 5% to 4% of total revenue year over year.
New Pet Acquisition Expense
| Year Ended December 31, | % Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | 2022 vs. 2021 | 2021 vs. 2020 | |||||||||||
| (in thousands, except pet and per pet data) | |||||||||||||||
| New pet acquisition expense | $ | 89,500 | $ | 78,647 | $ | 47,837 | 14% | 64% | |||||||
| Percentage of total revenue | 10 | % | 11 | % | 10 | % | |||||||||
| Subscription Business: | |||||||||||||||
| Total subscription pets enrolled (at period end) | 869,862 | 704,333 | 577,957 | 24 | 22 | ||||||||||
| Average pet acquisition cost (PAC) | $ | 289 | $ | 287 | $ | 247 | 1 | 16 |
Year ended December 31, 2022 compared to year ended December 31, 2021. New pet acquisition expense increased by $10.9 million, or 14%, to $89.5 million, for the year ended December 31, 2022. This $10.9 million increase was attributable to expenses to generate leads and increase conversion rates. Specifically, total subscription pets enrolled increased 19%, excluding pets acquired through business combinations, between compared periods. New pet acquisition expenses as a percentage of revenue was 10% for the year ended December 31, 2022, compared to 11% in the same period last year.
50
Depreciation and Amortization
| Year Ended December 31, | % Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | 2022 vs. 2021 | 2021 vs. 2020 | |||||||||||
| (in thousands, except percentages) | |||||||||||||||
| Depreciation and amortization | $ | 10,921 | $ | 11,965 | $ | 7,071 | (9)% | 69% | |||||||
| Percentage of total revenue | 1 | % | 1 | % | 1 | % |
Year ended December 31, 2022 compared to year ended December 31, 2021. Depreciation and amortization expense decreased by $1.0 million, or 9%, to $10.9 million for the year ended December 31, 2022.
Stock-Based Compensation
Year ended December 31, 2022 compared to year ended December 31, 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 $33.4 million for the year ended December 31, 2022, up from $28.2 million in the prior year period. The amount of stock-based compensation recognized largely reflects the timing and vesting of our annual performance grants, calculated according to our equity incentive plan.
51
Quarterly Results of Operations
The following tables contain selected quarterly financial information for the years ended December 31, 2022 and 2021. The unaudited quarterly information has been prepared on a basis consistent with the audited consolidated financial statements and includes all adjustments that we consider necessary for a fair presentation of the information shown. These quarterly operating results for any fiscal quarter are not necessarily indicative of the operating results for any full fiscal year or future period.
| Consolidated Statements of Operations Data: | Three Months Ended | |||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2022 | Sept. 30, 2022 | Jun. 30, 2022 | Mar. 31, 2022 | Dec. 31, 2021 | Sept. 30, 2021 | Jun. 30, 2021 | Mar. 31, 2021 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||||||
| Subscription business | $ | 158,562 | $ | 152,401 | $ | 145,808 | $ | 139,839 | $ | 134,120 | $ | 127,077 | $ | 120,373 | $ | 113,292 | ||||||||||||||
| Other business | 87,447 | 81,359 | 73,603 | 66,160 | 60,259 | 54,590 | 47,887 | 41,393 | ||||||||||||||||||||||
| Total revenue | 246,009 | 233,760 | 219,411 | 205,999 | 194,379 | 181,667 | 168,260 | 154,685 | ||||||||||||||||||||||
| Cost of revenue: | ||||||||||||||||||||||||||||||
| Subscription business(1) | 131,823 | 128,158 | 122,440 | 115,263 | 108,627 | 103,754 | 99,746 | 95,537 | ||||||||||||||||||||||
| Other business | 80,537 | 75,543 | 68,388 | 60,842 | 55,217 | 49,747 | 43,969 | 38,048 | ||||||||||||||||||||||
| Total cost of revenue | 212,360 | 203,701 | 190,828 | 176,105 | 163,844 | 153,501 | 143,715 | 133,585 | ||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||
| Technology and development(1) | 6,955 | 6,553 | 6,396 | 5,229 | 4,665 | 4,391 | 4,079 | 3,731 | ||||||||||||||||||||||
| General and administrative(1) | 10,472 | 10,314 | 9,227 | 9,366 | 8,996 | 8,246 | 7,435 | 7,216 | ||||||||||||||||||||||
| New pet acquisition expense(1) | 22,457 | 22,434 | 22,982 | 21,627 | 19,845 | 19,708 | 19,390 | 19,704 | ||||||||||||||||||||||
| Depreciation and amortization | 2,897 | 2,600 | 2,707 | 2,717 | 2,770 | 2,944 | 3,158 | 3,093 | ||||||||||||||||||||||
| Total operating expenses | 42,781 | 41,901 | 41,312 | 38,939 | 36,276 | 35,289 | 34,062 | 33,744 | ||||||||||||||||||||||
| Gain (loss) from investment in joint venture | (85) | (57) | (42) | (69) | (22) | (69) | 5 | (85) | ||||||||||||||||||||||
| Operating income (loss) | (9,217) | (11,899) | (12,771) | (9,114) | (5,763) | (7,192) | (9,512) | (12,729) | ||||||||||||||||||||||
| Interest expense | 1,587 | 1,408 | 1,193 | 79 | 9 | — | 3 | (2) | ||||||||||||||||||||||
| Other expense (income), net | (1,504) | (889) | (365) | (314) | 236 | (61) | (99) | (62) | ||||||||||||||||||||||
| Income (loss) before income taxes | (9,300) | (12,418) | (13,599) | (8,879) | (6,008) | (7,131) | (9,416) | (12,665) | ||||||||||||||||||||||
| Income tax expense (benefit) | (15) | 496 | 19 | (24) | 1,034 | (312) | (195) | (217) | ||||||||||||||||||||||
| Net income (loss) | $ | (9,285) | $ | (12,914) | $ | (13,618) | $ | (8,855) | $ | (7,042) | $ | (6,819) | $ | (9,221) | $ | (12,448) |
(1) Includes stock-based compensation expense as follows (in thousands):
| Three Months Ended | ||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2022 | Sept. 30, 2022 | Jun. 30, 2022 | Mar. 31, 2022 | Dec. 31, 2021 | Sept. 30, 2021 | Jun. 30, 2021 | Mar. 31, 2021 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||
| Cost of revenue | $ | 1,346 | $ | 1,472 | $ | 1,830 | $ | 1,836 | $ | 1,379 | $ | 1,311 | $ | 1,224 | $ | 3,234 | ||||||||||||||
| Technology and development | 1,549 | 1,184 | 1,101 | 908 | 843 | 749 | 800 | 664 | ||||||||||||||||||||||
| General and administrative | 3,550 | 3,792 | 3,066 | 2,423 | 2,450 | 2,271 | 2,322 | 1,819 | ||||||||||||||||||||||
| New pet acquisition expense | 2,122 | 2,195 | 2,637 | 2,382 | 2,136 | 2,112 | 2,181 | 2,731 | ||||||||||||||||||||||
| Total stock-based compensation expense | $ | 8,567 | $ | 8,643 | $ | 8,634 | $ | 7,549 | $ | 6,808 | $ | 6,443 | $ | 6,527 | $ | 8,448 |
52
| Three Months Ended | ||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2022 | Sept. 30, 2022 | Jun. 30, 2022 | Mar. 31, 2022 | Dec. 31, 2021 | Sept. 30, 2021 | Jun. 30, 2021 | Mar. 31, 2021 | |||||||||||||||||||||||
| Other Financial and Operational Data: | ||||||||||||||||||||||||||||||
| Total Business: | ||||||||||||||||||||||||||||||
| Total pets enrolled (at period end) | 1,537,573 | 1,439,605 | 1,348,145 | 1,267,253 | 1,176,778 | 1,104,376 | 1,024,226 | 943,854 | ||||||||||||||||||||||
| Subscription Business: | ||||||||||||||||||||||||||||||
| Total subscription pets enrolled (at period end) | 869,862 | 808,077 | 770,318 | 736,691 | 704,333 | 676,463 | 643,395 | 609,835 | ||||||||||||||||||||||
| Monthly average revenue per pet | $ | 63.11 | $ | 63.80 | $ | 64.26 | $ | 64.21 | $ | 63.89 | $ | 63.60 | $ | 63.69 | $ | 62.97 | ||||||||||||||
| Lifetime value of a pet, including fixed expenses | $ | 641 | $ | 673 | $ | 713 | $ | 730 | $ | 717 | $ | 697 | $ | 681 | $ | 684 | ||||||||||||||
| Average pet acquisition cost (PAC) | $ | 283 | $ | 268 | $ | 309 | $ | 301 | $ | 306 | $ | 280 | $ | 284 | $ | 279 | ||||||||||||||
| Average monthly retention | 98.69 | % | 98.71 | % | 98.74 | % | 98.75 | % | 98.74 | % | 98.72 | % | 98.72 | % | 98.73 | % |
| Three Months Ended | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2022 | Sept. 30, 2022 | Jun. 30, 2022 | Mar. 31, 2022 | Dec. 31, 2021 | Sept. 30, 2021 | Jun. 30, 2021 | Mar. 31, 2021 | ||||||||||||||||
| (as a percentage of revenue) | |||||||||||||||||||||||
| Revenue | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||||
| Cost of revenue | 86 | 87 | 87 | 85 | 84 | 84 | 85 | 86 | |||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Technology and development | 3 | 3 | 3 | 3 | 2 | 2 | 2 | 2 | |||||||||||||||
| General and administrative | 4 | 4 | 4 | 7 | 5 | 5 | 4 | 7 | |||||||||||||||
| New pet acquisition expense | 9 | 10 | 10 | 10 | 10 | 11 | 12 | 13 | |||||||||||||||
| Depreciation and amortization | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | |||||||||||||||
| Total operating expenses | 17 | 18 | 19 | 19 | 19 | 19 | 20 | 22 | |||||||||||||||
| Gain (loss) from investment in joint venture | — | — | — | — | — | — | — | — | |||||||||||||||
| Operating income (loss) | (4) | (5) | (6) | (4) | (3) | (4) | (6) | (8) | |||||||||||||||
| Interest expense | 1 | 1 | 1 | — | — | — | — | — | |||||||||||||||
| Other expense (income), net | (1) | — | — | — | — | — | — | — | |||||||||||||||
| Income (loss) before income taxes | (4) | (5) | (6) | (4) | (3) | (4) | (6) | (8) | |||||||||||||||
| Income tax expense (benefit) | — | — | — | — | 1 | — | — | — | |||||||||||||||
| Net income (loss) | (4) | % | (6) | % | (6) | % | (4) | % | (4) | % | (4) | % | (5) | % | (8) | % |
| Three Months Ended | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2022 | Sept. 30, 2022 | Jun. 30, 2022 | Mar. 31, 2022 | Dec. 31, 2021 | Sept. 30, 2021 | Jun. 30, 2021 | Mar. 31, 2021 | ||||||||||||||||
| (as a percentage of subscription revenue) | |||||||||||||||||||||||
| Subscription business revenue | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||||
| Subscription business cost of revenue | 83 | 84 | 84 | 82 | 81 | 82 | 83 | 84 |
53
Liquidity and Capital Resources
The following table summarizes our cash flows for the periods indicated (in thousands):
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||
| Net cash (used in) provided by operating activities | $ | (8,000) | $ | 7,458 | $ | 21,544 | ||||
| Net cash used in investing activities | (67,516) | (51,913) | (76,747) | |||||||
| Net cash (used in) provided by financing activities | 60,743 | (1,125) | 170,848 | |||||||
| Effect of foreign exchange rates on cash, cash equivalents, and restricted cash, net | (1,459) | 252 | (16) | |||||||
| Net change in cash, cash equivalents, and restricted cash | $ | (16,232) | $ | (45,328) | $ | 115,629 |
Our primary requirements for liquidity are paying veterinary invoices, funding operations and 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 10, Reserve for Veterinary Invoices, included in Item 8 of Part II of this 10-K, for further details on anticipated cash outflows.
Our primary sources of liquidity are cash provided by operations and available borrowings from our Credit Facility, under which we have $75.0 million remaining credit as of December 31, 2022. We believe these sources are sufficient to fund our operations and 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 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 of December 31, 2022, we had $222.4 million in cash, cash equivalents and short-term investments and $75.0 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 of December 31, 2022, total assets and liabilities held outside of our insurance entities were $211.0 million and $103.9 million, respectively, including $7.2 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".
In April 2021, our board of directors approved a share repurchase program, pursuant to which we may, between May 2021 and May 2026, repurchase outstanding shares of our common stock. While our board of directors has approved the program, any repurchase activity is subject to quarterly assessment and board approval, based on various factors including available cash, stock price relative to our estimated intrinsic value, forecasted operating results, and available opportunities to otherwise deploy capital for business expansion. We repurchased 95,021 shares under this program during the year ended December 31, 2022.
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 to fund projects that improve our members' experience. Net cash used by operating activities was $8.0 million for the year ended December 31, 2022, compared to $7.5 million net cash provided by operating activities for the year ended December 31, 2021. The change was primarily driven by increased pet acquisition spend during the current period to drive new pet enrollments and future growth and faster payment of veterinary invoices. 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 $67.5 million for the year ended December 31, 2022, compared to $51.9 million for the year ended December 31, 2021. The change was primarily related to cash paid for business acquisitions as well as purchases of property, equipment and intangible assets, primarily related to development of internal use software focused on new product initiatives and member experience improvements.
Financing Cash Flows
Net cash provided by financing activities was $60.7 million for the year ended December 31, 2022, compared to $1.1 million net cash used by financing activities during the same period in the prior year, primarily due to net proceeds from the term loans under the new Credit Facility which closed in March 2022, partially offset by $5.8 million used for the repurchase of shares of our common stock during the period.
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Long-Term Debt
Our Credit Facility provides us with up to $150.0 million of credit. As of December 31, 2022, we issued term loans totaling $75.0 million under the Credit Facility. Refer to Note 11, Debt, included in Item 8 of this report, for further details.
Critical Accounting Policies and Significant 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 policies and 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.
Reserve for Veterinary Invoices
We use the paid loss development method (chain-ladder method) to estimate reserves for veterinary invoices for our subscription and for the majority of our other business segment. Paid loss development factors are estimated based on historical paid loss triangles. The reserve represents our estimate of the future amount we will pay for veterinary invoices that are dated as of, or prior to, our balance sheet date. The reserve also includes our estimate of related internal processing costs. To determine the accrual, we make assumptions based on our historical experience, including the number of veterinary invoices we expect to receive, the average cost of those veterinary invoices, the length of time between the date of the veterinary invoice and the date we receive it, and our expected cost to process and administer the payments. As of each balance sheet date, we reevaluate our reserve and may adjust the estimate for new information.
As of December 31, 2022, our reserve for veterinary invoices was $43.7 million, consisting of $42.4 million for the amount we expect to pay in the future for veterinary invoices dated between January 1, 2022 and December 31, 2022, inclusive of related processing costs, and a reserve of $1.3 million for invoices dated prior to January 1, 2022. We believe the reserve amount as of December 31, 2022 is adequate, and we do not believe that there are any reasonably likely changes in the facts or circumstances underlying key assumptions that would result in the reserve balance being insufficient in an amount that would have a material impact on our reported results, financial position or liquidity. The ultimate liability, however, may be in excess of or less than the amount we have reserved.
For the year ended December 31, 2022, we paid $36.6 million for veterinary invoices dated on or before December 31, 2021, including related processing costs. Our reserve estimate for these expenses was $39.7 million as of December 31, 2021. As of December 31, 2022, we reevaluated the remaining reserve for those periods prior to December 31, 2021 and recorded an adjustment to our income statement to decrease it by $1.7 million.
Income Taxes
We determine our deferred tax assets and liabilities based on the differences between the financial reporting and tax basis of assets and liabilities. The deferred tax assets and liabilities are measured using the enacted tax rates that will be in effect when the differences are expected to reverse. A valuation allowance is recorded when it is more likely than not that the deferred tax asset will not be recovered. We apply judgment in the determination of the consolidated financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Although we believe our assumptions, judgments and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of any tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements.
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