Trupanion, Inc.

Greetings and welcome to Trupanion fourth quarter 2020 results call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I would now like to turn the conference over to your host, Laura Bainbridge, Vice President of Corporate Communications. Thank you. You may now begin.

Good afternoon, and welcome to Trupanion's fourth quarter and 2020 year-end financial results conference call. Participating on today's call are Daryl Rawlings, Chief Executive Officer, and Tricia Plus and Margie Tooth, who were recently promoted to co-presidents. Similar to prior earnings calls, Margie will be joining Daryl and Tricia for the Q&A portion of today's call. Before we begin, I would like to remind everyone that during today's conference call, we will make certain forward-looking statements regarding the future operations, opportunities, and financial performance of Trupanion within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. 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 our earnings release, which can be found on our investor relations website, as well as the company's most recent reports on Forms 10-K 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, fixed expenses, variable 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 NUPAT acquisition. Unless otherwise noted, margins and expenses will be presented on a non-GAAP basis, which excludes stock-based compensation expense and depreciation expense. These non-GAAP measures are an addition to, and not a substitute for, measures of financial performance prepared in accordance with the U.S. GAAP. Investors are encouraged to review these reconciliations of these non-GAAP financial measures to the most directly comparable GAAP results, which can be found in today's press release or on Trupanion's Investor Relations website under the quarterly earnings tab. Lastly, I would like to remind everyone that today's call is also available via webcast on Trupanion's Investor Relations website. A replay will also be available on the site. With that, I will hand the call over to Daryl.

Thanks, Laura. Good afternoon. The fourth quarter capped off a strong year for Trupanion. Total revenue grew 31% over the prior year. Adjusted operating income totaled $57 million, up 29% over 2019. We invested approximately $44 million of these funds within our subscription business at an estimated internal rate of return of 41%. Our performance in 2020 is a testament to the consistency of our business model, the strength of our positioning in a large, under-penetrated market, and the power of the pet. In 2020, against a backdrop of shock and uncertainty, pets reminded us of the importance of unconditional love. From my Zoom screens to yours, pets were everywhere this past year, and not just new pets to the household. While much has been written about the rapid rise in pet ownership, our data suggests a modest single-digit increase. To put this in context, in a typical year with 180 million pets in North America, we'd expect 12 million pets to pass away and about 12 million new pets to be born. This year, we've seen the new pet population grow to approximately 13 million, about a 1 million increase. Although this small increase has been helpful, the bigger opportunity remains increasing the overall penetration rate of the category. What COVID did do is accelerate the pet humanization trend that we've been witnessing over the past several decades. We'd expect this will help grow the penetration rate of the category for years to come. Our data suggests veterinary revenue and visits were up in 2020, and we saw strong growth from this important lead source. Outside of the veterinary channel, leads were up across the board, providing additional evidence that we're growing our brand. We're also keeping pets longer than ever before, about 78 months in 2020 compared to 70 months in 2019. The combination of increasing adjusted operating income and improved retention resulted in an impressive 25% year-over-year increase in lifetime value of a pet. Expansion in lifetime value increases our allowable pet acquisition spend, giving us the opportunity to be more aggressive in the deployment of our capital while maintaining our targeted internal rates of return. More broadly, we believe the category of pet medical insurance is growing in acceptance, and we're seeing additional opportunities as a result. I expect to share more details in my upcoming shareholder letter, which should be available in April. Our positioning, coupled with the expansion in our key metrics, sets us up well to continue to grow. This is evident in our fourth quarter results. Total subscription revenue grew 23% in the fourth quarter, led by a 17% increase in subscription-enrolled pets. Underlying this acceleration is net new pet growth, which is a leading indicator for a monthly recurring revenue business. Net pets increased 72% in the quarter, benefiting from increased leads, conversion, and strong retention. Maintaining and improving upon our first-year retention remains an ongoing area of investment and focus. As a reminder, we see lower retention among pets within the first year with Trupanion. Please see my past shareholder letters for more details. Adjusted operating income grew 35% year-over-year to $16.6 million in the quarter. The team was able to deploy approximately $14 million of these funds within our subscription business at an estimated 35% internal rate of return, which is the midpoint of our 30% to 40% target. The team continues to impress as they demonstrate an inability to invest increasing amounts of capital against our opportunities in this large and under-penetrated market. This sets us up well into 2021 and ahead. With that, I'll hand the call over to Trish.