Trupanion, Inc.

Good day and welcome to the Trupanion first quarter 2025 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note that this event is being recorded. I would now like to turn the conference over to Gil Melchior, Director of Investor Relations. Please go ahead.

Good afternoon, and welcome to Tupani's first quarter 2025 financial results conference call. Participating on today's call are Margie Tooth, Chief Executive Officer and President, and Fawad Qureshi, Chief Financial Officer. For ease of reference, we've included a slide presentation to accompany today's discussion. which will be made available on our investor relations website under our quarterly earnings tab. Before we begin, please be advised that remarks today will contain forward-looking statements. All statements other than 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 Form 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 pre-cash flow. When we use the term adjusted operating income or margin, it is intended to refer to a 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 Tupani's Investor Relations website. A replay will also be available on the site. I will now hand over the call to Margie.

Good afternoon, everyone. It's a pleasure to be with you today to discuss our first quarter results. The year is off to a strong start, and I'm pleased to report overachievement on both total revenue and total adjusted operating income in the quarter. Most notable was the increase in our subscription adjusted operating income, which increased 53% year over year to over $30 million. Across the business, we executed two or better than plan with a delivery of steady improvements across key financial metrics and continued advancements in operating efficiencies in critical areas of the business. Within our core subscription business, revenue was $233 million, up 16% year over year. The majority of this growth was driven by increases in average revenue per pet, reflecting the pricing actions we've taken over the past two years and a modest additional lift from growth in enrolled pets. Our meaningful step up in subscription adjusted operating income was driven by two key components, an improving loss ratio and efficiencies operationally. We made continued progress toward our annual target value proposition with a substantial year over year increase of 350 basis points, ending the quarter at 71.8%. This, coupled with efficiencies stemming from our transition to our internal technology platform, Vision has enabled some solid operational gains, allowing us to lower invoice processing costs while enhancing the member experience and reducing overall variable expenses. Since its rollout, we've brought claims inventory to near record lows and meaningfully increased both the speed and frequency of invoice payments. As a monthly recurring revenue business, member retention is critical to our long-term sustainable growth. In Q1, reported monthly average retention improved quarter on quarter for the first time in 12 quarters to 98.28%. This sequential uptick was largely driven by improvements within our quarterly planning product, especially among members who received rate increases greater than 20%. These rate changes were not taken lightly. They reflect a focused response to the rising cost of veterinary care and a commitment to maintaining long-term sustainability. Worth noting, while reported cost trends across the broader animal health industry suggest some pricing moderation, the costs we observe within our own book remain largely in line with our expectations. We continue to monitor trends very closely and partner with others across the industry to stay informed and to react as needed. That said, it's important to highlight that the Trupanian experience is fundamentally different. Our members visit the veterinarian more frequently and are more likely to follow the veterinarian's recommended treatment, which naturally results in a high use of our product. Trupanion's cost of care has consistently indexed above the CPI norm for these reasons. Looking ahead, with the majority of pet parents transitioning out of our highest rate cohorts and into more stable pricing tiers, we will be placing even more emphasis on the early stage member experience. With this in mind, we've adjusted our pet acquisition investment to add resources and realigned our marketing structure to better integrate acquisition and retention. We're also expanding the use of our patented vet portal, which supports real-time payments directly to the veterinary hospital, helping members avoid out-of-pocket costs while pursuing optimal treatment solutions for their pets. With the average subscription pet staying with us for 58 months, there is a long way to go to return to our historical average retention rate, Yet I'm encouraged by our work on this front and its potential impact on member experience over time. Retention is a significant growth catalyst. New pet acquisition is another. And here too, we're quite pleased with our results. Pet acquisition investment, which is fueled by the healthy expansion in our adjusted operating income, increased 18% year over year in this first quarter and held between our guardrails at 31% internal rate of return. We saw a sequential increase in growth pet additions for the core Trupanion product, the direct benefit of compounding our investment in pet growth sequentially for the last three quarters. Disciplined acquisition spend, especially within our efficient veterinary channel, remains a priority, ensuring we maximize return on each dollar invested. The average profit per Trupanion pet was up 46% year over year, reflecting improved margins from focused pricing action and cost efficiencies. This growth in profitability, combined with stable retention, gives us even greater flexibility to reinvest in high-quality growth opportunities in our large and underpenetrated addressable market, which is something discussed at length in this year's shareholder letter. When our PAC deployment moves in line with our adjusted operating income growth, we see parallel growth curves, an encouraging demonstration of the flywheel of our business. The combination of stronger retention and improved pet ads contributed to our first meaningful sequential increase in net pet addition in two years. In summary, Q1 was a strong start to the year. Performance is tracking largely ahead of our expectations. We're growing the dollars available for reinvestment and are beginning to see a return to growth in new pets. We'll continue to focus on the levers we can control, doubling down on member experience, operating efficiency, and disciplined growth. As we look to the future, we're mindful of the broader macro environment. It is at times such as these that true planning comes into its own. We are designed to support pet parents during times of uncertainty, and we've proven time and again the resilience of our business model. Q1 was an encouraging indication that our strategy is working, and we look forward to building on our progress in the months and quarters ahead. Before handing it over to Fawad, I'd like to briefly refer you to our recently published shareholder letter, which can be found on our IR website. I've referenced it during this call and for good reason. It includes a comprehensive review of our 2024 performance, key strategic updates, and a deeper dive into some of the more nuanced elements of our business. With that, I'll hand the call over to Fawad.