Trupanion, Inc.

Good afternoon, and welcome to True Panion's third quarter 2022 financial results conference call. Participating on today's call are Marky Tooth, President, Drew Wolf, Chief Financial Officer, and joining us remotely from Europe, Darrell Rawlings, Chief Executive Officer. Similar to prior earnings calls, Tricia Pluss, Chief Operating Officer, will be available 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, 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, margins and expenses will be presented on a non-GAAP basis, which excludes stock-based compensation expense and appreciation 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 the 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 TruePanion'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 TruePanion'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, and good afternoon. Total revenue in the quarter grew 29% to approximately $234 million. Adjusted operating income was $22 million, up 6% year over year. We invested $20 million of this acquiring pets at a 37% estimated internal rate of return. We continue to invest in areas where we believe we can achieve high internal rates of return. In today's environment, I'm especially pleased with the discipline the team has shown in managing to our internal rate of return guardrails. In the quarter, this translated to strong growth within our core subscription business. We added over 70,000 new subscription pets, driven primarily from the veterinary channel. We achieved this record growth while also sustaining our high levels of retention. As you've heard me say before, in times of uncertainty, the need for Trupanion grows. Our monthly recurring business model drives consistency in results. In fact, our total revenue growth has exceeded 20% every year for the last 10 plus years. I'm proud of this growth, but I am most focused on growing adjusted operating income. Adjusted operating income represents the funds we have to grow our business, and I believe it is a proxy for our value creation. The more adjusted operating income we have, the more we're able to reinvest at our high internal rates of return and increase the intrinsic value of our company. In Q3, subscription adjusted operating margin was 12.8% below my expectations and driven by price. This is the one key metric I was disappointed in for the quarter. If the team is focused and continues taking action on price, not only for the accelerated rate of inflation we're seeing today, but also for that which we expect will come, I am confident that we'll get back to our target adjusted operating margin of 15% by the end of 2023. Margie, as the leader of our 60-month plan, is monitoring these efforts, making sure we have clear ownership, focus, and resources to quickly and effectively get ahead of the changes we are seeing in veterinary medicine. Now let's get back to the fundamentals. We are in a large, underpenetrated market. Today, 97% of pet owners do not have pet medical insurance and are therefore choosing to self-insure. With the rising cost of care and the growing human-pet bond, the need for Trupanion is greater than ever. In our monthly subscription business, growth in pet count and ARPU drives higher lifetime value. Higher lifetime value drives higher allowable pet acquisition costs and greater sums of capital we can deploy efficiently. The team has a strong track record of doing so, In the last five years, we've grown our adjusted operating income over 300% and deployed this capital consistently within our target internal rate of return of 30 to 40%. With that, I'll turn it over to Margie.

Thank you, Daryl. I'll start by reviewing our quarterly growth metrics and how today's environment presents a unique opportunity for Trupanion. I'll then discuss the actions we're taking to ensure we're well positioned for where the industry is headed. It was a particularly strong growth quarter, we added over 70,000 new pets in our subscription business, a new quarterly record. Growth was primarily driven by the veterinary channel, reflecting ongoing demand for veterinary care. In the quarter, veterinary leads were at an all-time high. Our pet acquisition spend continues to reflect all efforts to generate leads, convert pet owners to members, and welcome members during their first year with us. I'll echo Daryl's sentiment that we were very encouraged by the efficiency of all elements of the spend during the quarter. This effective capital deployment ultimately helped drive our estimated internal rate of return to well within our 30% to 40% target range. Year-to-date, we have deployed approximately $60 million to add over 190,000 new subscription pets. At our current ARPU of around $64 and assuming an average life of 78 months, This new cohort of pets will generate almost $1 billion in forward revenue. And this is before inflation. Encouragingly, we continue to see the veterinary industry adjust their pricing models. They absolutely cannot afford not to. And yet, at the same time, people's disposable income is stagnating. The cost of self-insure is getting more expensive. It is an increasingly poor solution. As more enrolled pets enter the community, this higher percentage of insured clients can give veterinarians the confidence to continue to raise prices. This, in turn, helps solve the challenges they face, such as staffing. This is positive news for the industry in general, and for us specifically, to see these prices come through. It makes the conversation around budgeting for unexpected veterinary expenses more relevant than ever. However, it also requires meticulous execution, exceptional analysis, and constant review from within Trupanion to stay true to our value proposition and the pricing promise we commit to our members. In the third quarter, we fell short of our 71% value proposition by 2.5%. Absent the impact of mixed changes, cost of invoices was up approximately 10% over the prior year period, outpacing our average rate increase of 7% for the same period. As Darrell alluded, we are taking actions to get ahead of the changes we're seeing in veterinary medicine. Absent the impact of changes in MIX, we now have pricing increases of 11% flowing through into early 2023, with another 7% planned going into next year. We will continue to closely monitor the rate of inflation and are poised to roll forward additional pricing adjustments as needed in the coming months. As a reminder, Rate changes are immediate for new enrolments, but are applied for existing pets once every 12 months, so the impact of these changes will flow through in 2023, with the full benefits showing up in late 2023, when we anticipate being back on track to hit our margin target. At the same time, our member experience teams have been focused on ensuring that our commitment to members regarding our value proposition is well understood and maintained. Our pricing promise is our pledge to pet owners that we price for the life of the pet. never punish unlucky pets, and price accurately to our value proposition across our millions of categories. If in aggregate we overshoot our 15% subscription margin target, we will make it right. This is our pricing promise. In the coming years, the need for Trupanion and to budget and care for the unexpected will only grow. This need is universal, and so too are our aspirations. International expansion is an important building block of our 60-month plan And I'm very proud of the progress the team has made on this front year to date. We've started to see some acceleration in Australia, have team members in place in Japan, and just recently announced two strategic acquisitions to officially mark our entrance into continental Europe to take our new geographies to the cusp of revenue generation. There are over 40,000 veterinary hospitals spanning continental Europe. and our acquisition of SmartPaws and our pending acquisition of PetExpert gives us immediate access to over 12,000 of these, increasing our addressable market. PetExpert provides high-value pet insurance to approximately 25,000 pet owners in the Czech Republic and Slovakia, and works closely with veterinarians to provide high-quality partner support to hospitals. This same synergy is also evident in SmartPaws, our recently completed acquisition. While smaller in scale and pet expert, SmartPaws brings with it a team and infrastructure to further enable rapid expansion and parallel to our North American foundation, deep relationships across the European veterinary community. We're excited that these acquisitions and their pet passionate teams provide a platform for us to bring Trupanion and our world leading member experience to these new and under-penetrated markets. Together we have taken several steps forward in achieving our global mission to help the pets we all love receive the best veterinary care. The opportunity is significant, and we're well poised to build on it. With that, I'll hand over to Drew to walk through our financial results in more detail. Drew?