Trupanion, Inc. 2026 Q2 Earnings Call

Please go ahead. Good afternoon and welcome to Trupanion's second quarter 2026 financial results conference call.

Participating on today's call are Margi Tooth, Chief Executive Officer and President, and Fawwad Qureshi, Chief Financial Officer. Before we begin, please be advised that remarks today will contain forward-looking statements. All statements are then 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 another 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.

Good afternoon, everyone, and thank you for joining us. We delivered another strong quarter. Subscription adjusted operating income grew 24% year-over-year. We remain on track to generate $180 million of total adjusted operating income this year. One of the advantages of our compounding AOI is that it creates additional capacity to invest in our business. This provides the flexibility to thoughtfully deploy capital across the opportunities we believe will create the greatest long-term value, whether that's adding new pets, enhancing our products and member experience, investing in new capabilities and technology, or strengthening the underlying systems that support our business. In the quarter, returns on our pet acquisition investment contributed to an acceleration in gross pet adds, up 9% year-over-year. Together with stable retention, we added approximately 18,800 net subscription pets in the quarter, growth of 39% over the prior year period.

This progress reflects a number of initiatives being rolled out across the business to improve the Trupanion experience, from the moment someone first learns about the company through to enrollment and retention. As pet parents progress through the enrollment experience, we continue to refine and optimize that journey, making it easier to understand our value proposition to enroll with confidence. Those investments contributed to improved web conversion in the quarter, while phone conversion remained consistently strong, operating near record levels. We're pleased with the early results from the enhancements we've made to our core Trupanion product. Expanded deductible and co-insurance options are improving accessibility by providing more affordable monthly choices. We're well on track to expand this rollout across North America as planned. More importantly, through disciplined execution, we're improving the long-term economics of new enrollments with pricing that's better aligned to the value of our coverage.

The results of this discipline show up in a 25% increase in the lifetime value of an enrolled pet during the quarter, meaning every dollar we invest in pet acquisition today has the potential to create significantly more long-term value than it did just a year ago. These stronger unit economics reinforce our confidence to invest across core acquisition channels. In our large and under-penetrated market, a substantial opportunity exists to reach more pet parents, in spite of a downturn in new visits to veterinarians reported across the industry. Even with the recent pullback, there are still millions of uninsured puppies and kittens entering hospitals each year. The addressable market remains vast. We believe our differentiated model, built on decades of veterinary relationships, proprietary data, and deep insurance expertise, position us very well to continue strengthening our core offering while thoughtfully expanding our portfolio to serve more pet parents.

Consistent with that strategy, we remain on track to launch our new digital offering in the first half of our current strategic plan. We believe this will further extend access to medical insurance for cats and dogs, reach new customer segments, help grow the overall market. As we scale, technology will remain a key enabler of growth, helping us to better serve our member base, making every interaction simpler, faster, and more personal. Our investments in AI and automation are designed to increase operating leverage through the removal of friction, improve operational efficiencies, free up our teams to focus on the moments that matter, the human touch. Today, the benefits of this approach are evidenced with our increasing operational scale and solid retention. Over time, we expect these capabilities to support long-term growth while preserving the experience our members and partners have come to expect from Trupanion.

Overall, we're encouraged by the progress we made during the quarter and remain confident in the opportunity ahead. We will continue investing with a disciplined focus on growing adjusted operating income and creating durable shareholder value. Our confidence in our long-term outlook remains high, which is reflected in today's announcement of a share repurchase program. I will hand the call over to Fawwad to provide additional details related to this and to add more color to our quarterly results.

Thanks, Margi, 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 2026. Total revenue for the quarter was $392.9 million, up 11% year-over-year. Within our subscription business, revenue was $276.7 million, up 14% year-over-year. Total monthly average revenue per pet for the quarter was $87.44, up 9% over the prior year period. Total subscription pets increased 5% year-over-year to 1,125,000 pets as of June 30th. This includes approximately 66,000 pets in Europe. Average monthly retention for the trailing 12 months was 98.37%, up versus the second quarter last year, which was 98.29%. The subscription business cost of paying veterinarian invoices was $194.3 million, resulting in a value proposition of 70.2% versus 71.1% in the prior year period.

The quarter included favorable prior period development of $1.2 million or approximately 40 basis points of subscription revenue. As a percentage of subscription revenue, variable expenses were 9%, down from 9.1% in the second quarter of last year. Fixed expenses as a percentage of revenue were 5.8%, down from 6% in the prior year period. Combined, we saw fixed and variable spending at 14.8% of subscription revenue in Q2, an improvement from 15.1% in the prior year period. Our subscription business delivered adjusted operating income of $41.4 million, an increase of 24% from last year, and contributed 96% of our total AOI for the quarter. Subscription adjusted operating margin was 15%, up from 13.8% in the prior year. I'll turn to our other business segment. Other business revenue was $116.2 million for the quarter, an increase of 4% year-over-year.

Adjusted operating income for this segment was $1.9 million or 1.6% of revenue. We also wanted to share that we have agreed with Pets Best to conclude our relationship following the third quarter of 2028. In total, adjusted operating income was $43.3 million in Q2, up 24% from Q2 last year, and ahead of our expectations. We deployed $21.6 million of this AOI to acquire approximately 68,100 new subscription pets. Excluding the pets that are underwritten through an MGA structure, this translated into an average pet acquisition cost of $299 per pet in the quarter, up from $276 in the prior year period. We invested $1.8 million in the quarter in development costs. Stock-based compensation expense was $9.9 million.

As a result, net income for the quarter was $6.8 million or $0.16 per basic and diluted share, compared to net income of $9.4 million or $0.22 per basic and diluted share in the prior year period. As a reminder, last year's net income included a one-time gain of $7.8 million on the exchange of preferred stock related to our pet food initiative. The results of this quarter mark our fifth consecutive quarter of positive net income. In terms of cash flow, operating cash flow was $21 million in the quarter compared to $15 million in the prior year period. Capital expenditures totaled $1.8 million, down from $3 million in Q2 of last year. As a result, free cash flow was $19.2 million, up from $12 million last year. Over the last four quarters, free cash flow reached $82.2 million. Turning to the balance sheet.