Good day, and welcome to the Trupanion Second 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 a touch-tone phone. To withdraw your question, please press star then 2. Please note 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 Dupenian's second quarter 2025 financial results conference call. Participating on today's call are Margie Tooth, Chief Executive Officer and President, and Farad 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 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 forms 10K, 10Q, and 8K 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 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 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 Troopanion's investor relations website. A replay will also be available on the site. I will now hand over the call to Margie.

Thank you, Gil, and good afternoon, everyone. I'll briefly touch on our financial highlights and will provide more context after Forward completes this detailed review of our Q2 results. I'm delighted to share that Q2 was one of the strongest financial quarters in the history of Troopanion, underscored by consistent top-line growth, robust margin expansion, and strengthening retention. Within our subscription segment, revenue rose 16% year-over-year and adjusted operating income increased 45%, over $33 million for the quarter. This translates to a 13.8% subscription adjusted operating margin, up 280 basis points versus the prior year period, performance well ahead of plan. We were able to deploy 16% more into pet acquisition in the quarter as we continue on the pathway to return to prior investment levels, setting up pet growth for the years to come. These results reflect the team's operational rigour and continued discipline related to execution, honouring our value proposition, member experience, and commitment to the veterinary It's highly encouraging to see the results of that work reflected in our performance. Let me now turn it over to Fawad to walk us through the numbers in more detail.

Thanks, Margie, and 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 2025. Total revenue for the quarter was $353.6 million, up 12% year-over-year. Within our subscription business, revenue was $242.2 million, up 16% year-over-year. Total subscription pets increased four percent year-over-year to over 1,066,000 pets as of June 30th. This includes over 56,000 pets in Europe, a majority of which are currently underwritten through an MGA structure. Average monthly retention for the trailing 12 months was 98.29 percent down versus the second quarter last year, which was 98.34 percent. On a trailing three-month basis, retention was 98.4 percent up from the second quarter last year and up sequentially from the first quarter this year. The subscription business cost of paying veterinary invoices was 172.1 million, resulting in a value proposition of 71.1%, a healthy improvement from 74.1% in the prior year period. The quarter benefited from prior period development of 1.4 million or approximately 60 basis points of revenue. As a percentage of subscription revenue, variable expenses were 9.1%, down from 9.5% a year ago. Fixed expenses as a percentage of revenue were 6%, up from 5.3% in the prior year period, and down sequentially from 6.2% in Q1. This is in line with our expectations, and we continue to expect expense leverage as we transition to our wholly-owned insurance entity for Canadian business. Our subscription business delivered adjusted operating income of $33.4 million, an increase of 45% from last year, and contributed 96% of our total AOI for the quarter. Subscription adjusted operating margin was 13.8%, up from 11% in the prior year, and represents approximately 280 basis points of margin expansion. Now I'll turn to our other business segment, which is comprised of revenue from other products and services that have a lower margin profile than our subscription business. Our other business revenue was $111.4 million for the quarter, an increase of 5% year-over-year. We expect growth for this segment to continue to decelerate as we are no longer enrolling new pets in the majority of U.S. states for our largest partner in this segment. Adjusted operating income for this segment was $1.4 million, or 1.3% of revenue. In total, adjusted operating income was $34.8 million in Q2, up 40% from Q2 last year. We deployed $18.3 million of this AOI to acquire approximately 62,700 new subscription pets. Excluding the pets that are underwritten through an MGA structure, This translated into an average pet acquisition cost of $276 per pet in the quarter, up from $231 in the prior year period. The estimated internal rate of return on this spend was 30% in the quarter. We invested $0.9 million in the quarter in development costs. Stock-based compensation expense was $9.3 million. During the quarter, we also recorded a one-time gain of $7.8 million on our preferred stock in Baystride as part of an exchange of our preferred interest for intellectual property related to our food initiative. As a result, net income for the quarter improved to $9.4 million or $0.22 per basic and diluted share as compared to a net loss of $5.9 million or $0.14 per basic and share in the prior year period. In terms of cash flow, operating cash flow was $15 million in the quarter compared to $6.9 million in the prior year period. Capital expenditures totaled $3 million, largely consistent with Q2 last year. As a result, free cash flow was $12 million, up from $4 million last year. Over the last four quarters, free cash flow reached $61.3 million. Turning to the balance sheet, we ended the quarter with $319.6 million in cash and short-term investments. Our largest insurance entity, APEC, continues to be strongly capitalized, which in the quarter enabled us to pay an extraordinary dividend to our operating company of $26 million. We used approximately $15 million of the proceeds to pay down debt, ending the quarter with a reduced debt balance of $116.4 million and plan to use the remaining $11 million for growth investments and strategic initiatives. Now I'll turn to our outlook. For the full year of 2025, we are raising our guidance to account for Q2 overperformance, updated assumptions for the second half, as well as favorable conversion rate movements. We now expect total revenue in the range of $1.417 billion to $1.434 billion. Subscription revenue is now expected to be in the range of $983 million to $992 million, representing approximately 15% year-over-year growth at the midpoint. We now expect total adjusted operating income to be in the range of $141 million to $151 million. We are raising both ends of the range, and the new midpoint represents 28% year-over-year growth. For the third quarter of 2025, total revenue is expected to be in the range of $359 million to $365 million. Subscription revenue is expected to be in the range of $251 million to $254 million, representing approximately 15% year-over-year growth at the midpoint. Total adjusted operating income is expected to be in the range of $37 million to $40 million. This represents approximately 18% growth year-over-year at the midpoint. As a reminder, our revenue projections are subject to conversion rate movements predominantly between the U.S. and Canadian currencies. For our third quarter and four-year guidance, we used a 73% conversion rate in our projections. Let me now pass it back to Margie.

Thank you, Fawad. Our financial results and guidance for the year demonstrate that Trupanion is positioned exceptionally well for the future. I am so proud of the team and thank them for their focus and discipline over the last 12 months and for their unwavering support of the veterinary industry. We understand the current pressures within the veterinary field and the ongoing challenge to strike a careful balance to support the practice of best medicine while enabling access to care. Most recently, we've observed a modest but clear deceleration trend in our cost of goods, giving us confidence to marginally decrease our operating assumptions related to veterinary invoice trends for the second half of this year. Our results today show that we have now caught up with the cost of veterinary care with our value proposition restored to target. This allows us to deliver a strong and sustainable offering to our members while generating the adjusted operating income needed for Drupanion to reinvest, ensuring more pets get the care they need. Results of this caliber do not come through pricing alone. Our longer-term investments in technology are beginning to pay dividends by improving our cost-to-process invoices, increasing the penetration of our direct payment software at veterinary hospitals, and creating efficiencies across the organization, all while enhancing our overall member experience. The combination of this improved experience and industry-leading coverage is driving our impressive retention of 98.4% for the quarter, especially for those with pricing changes of over 20%, which far exceeded expectations. This rebounding level of retention demonstrates the exceptional and measurable durability of our product and the value realized by our members. Furthermore, we've been disciplined with our acquisition efforts and have been very focused on ensuring the right pets at the appropriate level of investment, which long-term will be a foundational driver of healthy margins and a more resilient member experience. This quarter's results serve as tangible proof of this discipline and will serve as a catalyst for compounding growth as we continue to lean more aggressively into the opportunity in front of us. In closing, we enter the second half of 2025 from a position of financial strength and an exciting point in our growth journey. We're buoyed by continued efficiency and motivated by a highly resilient member base whose retention rate and thus lifetime value continues to increase. Most crucially, the team is ready to deploy our AOI to enable high-quality, sustainable growth for the years to come. With a vast global addressable market ahead of us and a business model compounding at high and proven internal rates of return, we are uniquely positioned to grow and to scale with confidence. With that, we'll open it up for questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, Please press star, then two. And please, we ask that you limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question is from John Barnage with Piper Sandler. Please go ahead.

Thank you for the opportunity. You're talking about a clear deceleration trend in the elevated input costs. and then it seems like growth is returning. Isn't the loss ratio typically more elevated seasonally in the first half of the year due to the calendar? That wasn't really the case here this year. And given that seasonal makeup, should we be expecting the loss ratio to further improve from here beyond the targeted 71% margin?

Yeah. Hi, John. Thanks for the question. So I'll start off and then pass over to Ford as well. From our perspective, typically we do see a seasonal lift in q1 q2 and as we take more rate through the year we'll see that that rate start to realize and therefore brings down that cost of goods that hasn't been the case this quarter as we noted we've seen a mild deceleration which is encouraging um and you know at the moment that's kind of what we're assuming and within our operating assumptions so that being equal we would expect to see that reflected in our guidance which is what forward said earlier what anything to add yeah yeah just from an inflation perspective um in the quarter we saw a little bit of an the bacon of inflation down about 1%.

So baked into our guidance for the second half is an assumption that that 1% continues. And in the prepared remarks, I mentioned it, we had about 60 base points of favorable development in Q2.

Great, thank you. And my follow-up question, can you maybe talk a little bit more about the food initiative benefit that you talked about in your prepared remarks? Are we closer to that business launching?

Yeah, I think we took a step in a positive direction. Business is still nascent, we're just beginning. But this was an opportunity for us to acquire IP, the company made an investment in a partner called Baytroyd some years ago. And so being able to get access to that IP, that's a foundational element for this business. And the business is still in the very early stages, but this IP is a critical foundation. It's a building block that will be important for the business. We're very optimistic about this business. We think it is a good thing.

Thank you.

The next question is from John Block with Stiefel. Please go ahead.

Thanks, guys. Good afternoon. You know, Margie, the slides sort of come out late, so I'm trying to run some math. You know, I have pack up about 20 percent year over year, but the gross ads down low single digits year over year and just a real sort of stagnant gross ads over the past five quarters or so. So can you explain the inability to accelerate gross ads despite spending more and more on each pet in an industry that's arguably a growth industry where we hear some 20, 30, 40 percent growth numbers from some of your competitors? Thank you.

Yeah. Hi, John. Thanks for the question. So I would say overall when we think about growth, our gross ads are right in line with expectations as our guidance shows. So the last year we've been really focusing on how do we refine our approach to ensure that we're priced appropriately for each pet. So a year ago, we talked about as pricing flows through, we'll target those pets that have the right pricing and the higher lifetime value, which means we haven't been growing for quantity, but we've been growing for quality, if you will. So when you think about what that means, essentially, it's looking at pets that will deliver the highest lifetime value. And that's from the vet channel, from Adapet, which we're seeing performing really well. The LVP of our core book of business is higher today than it was a year ago and i think that's reflected in the bottom line and you can see that we've been working on the pets we've been adding for the last year have been consistently at a higher lbp level which ultimately makes them more sustainable when we think about focusing on those um just to put that in perspective what it means in reality is we're turning off some of the less profitable channels so things like wellness versus insurance things where we know we're not priced appropriately sustainably we're not going to grow there to add a pet we're going to grow there to put the right pet on the book. And then we've been spending more on retention, which has really been our main focus for last year. So that's working really well, considering the rate increases that have come through. I think that shows up in our net pet growth. So it's up for two consecutive quarters now. Quarterly planning is performing ahead in the blended mix, which is incredibly encouraging, and we'll continue to build on the investment. I think that the key thing for us now is we have the money to grow. We've got that nice free cash flow, and we're starting to deploy more. We saw that the pack was up 16% year over year, which is encouraging. And we expect that to continue into the back half of this year.

Okay. That was helpful. Thank you. But maybe I'll just follow up and continue on that same theme. I mean, if I remember, I think it was September of last year. So about a year ago, we were out at the analyst day. I might have my months a little bit off, but it was roughly 12 months ago. And at that time, you were conveying that we were going to start to see a pickup in overall gross ads. You know, you were getting the MLR back in place. It's been in place now for some time or back around where you wanted after the hyperinflationary time. So, like, what's changed, right? I mean, that's what you were conveying 12 months ago that, in my view, clearly hasn't played out. I know you're still beating the drum on, you know, the profitability, the lifetime value for Pat. I mean, that's just going up because you're taking more price and price. So, like, can you talk to us about what you saw 10 or 11 months ago that I don't think has really played out? And then when should we expect real growth and gross ads, which, you know, I think is the ultimate driver of arguably the long-term value of the company in a growth market?

Yeah, I mean, growth comes through a number of different areas for us. Nothing has changed in terms of our expectations and nothing has changed in terms of that mentality around growth and growth pet ads ultimately. When we think about what we were trying to do beginning of – it was September last year, you're right. So in terms of the timing, 12 months ago was the first quarter and a number of quarters we actually started to increase our pack spend. We did it again in Q4, Q1, and now Q2 is our biggest step up, which is encouraging. It gives us more room to move. We expect to see that a modest pickup in the second half of this year, which is right in line with expectations that we set at the beginning of this year. And as we move into the following quarters and years, you expect to see more and more of that turnaround. So we're still, from a PAC perspective, 25% down on those big quarters where we were spending close to $20 million a year, and that was back in 2022. So as we build that back up to that level, we expect to see more from a brand halo effect, which will help us make a more rapid growth build. But the plan this year is always to see modest pickup in the back half of the year, and that remains the case today.

Perfect. Thank you, guys.

Thank you. The next question is from Brandon Vazquez with William Blair. Please go ahead.

Thanks for the question and congrats on the quarter. Maybe I'll ask somewhat of a similar question, but I'll attack it a little bit different maybe for Margie and follow-up for both of you. As we look at the kind of the sequentrals from here and we go into the back half of the year. Help us think about the mix of subscription business. Let's just focus on that subscription business growth that's coming from price versus coming from pet subscription growth or the number of pets. And then really what that base means for our models as we go into 2026.

Yeah, I can help with the mixed part. So in the quarter, it breaks the 16% year-over-year revenue growth for subscription. About 11% came from ARPU, and about 5% came from us. That's roughly consistent with what we saw in Q1. What we've said at the beginning of the year, and it remains what we're on track for, is for pets to contribute at a higher level than they are today as a percent of revenue growth, and ARPU to contribute less. So ARPU peaked in Q4 of 23. That was our assumption at the time, and that has largely played out in Q1 and Q2. So if I'm looking at the second half of the year, I would expect to see more contributions Pricing will still lead the way, but FedCount will come up.

And just a quick follow-up on that, Talwad, if, like, sequentially, can gross new ads, I think this is part of what John was trying to ask earlier, PACspend has been ramping up for a couple quarters now, do you think sequentially we can start to expect that gross new ads uh in the core business can can increase in the back half of this year yeah our expectations back half of the year gross heads will be positive um in terms of the specific timing on quarterization i i would think about the timing of the pax by the point that margie made so we had talked last year about very gradually increasing the pack spend we increased it modestly in q3 of last year about four percent about eight percent

in q4 we only just uh in q1 began to increase the double digits um total dollars spent it's still less than what we were spending a couple of years ago in the first half so we're happy to be able to redeploy those dollars but from a second half perspective yes our assumption and our model is that first half will turn pop okay and margie maybe just a quick update on uh phi and firkin any progress that you can update with us there and potential timing of a broader launch for either one of those products, especially in the U.S.?

Thanks.

Yeah, thank you. We've got a lot of learnings from these products. They've been in market now in Canada for around four years, so a fair amount of time. We've actually invested small amounts of money into these products, so they're not consuming a huge amount of capital, but they're giving us a lot of learning. So we're taking those learnings and building on them. As we've mentioned before, we've been focusing on the highest LVP product, which in turn means we've turned down some focus on these smaller products because we're looking at the quality pannion um but as we you know we recognize the market grows it's evolving we think there's absolutely a place from the learnings that we found that we can redeploy those into the u.s market more broadly so as our pack investment steps up longer term we have the optionality to deploy that against different marketing segments and market segments so we're fine-tuning our learnings um we'll build on them in time and we won't share more for competitive reasons but we're well positioned for growth across the ecosystem and these products have definitely helped bolster all our education there.

Again, if you have a question, please press star then one. The next question is from Katie Sackies with Autonomous Research. Please go ahead.

Hi, thank you. I want to circle back to some comments you've made, Margie, on retention previously. I think we discussed, you know, expecting to see a little bit of the headwind abate in in 2q and 3q and i can appreciate that on a sequential basis there's there's been a modest improvement there um but thinking about that cadence of improvement i mean should we expect to see more significant improvement in 3q and and where are you guys really trying to end the year at in terms of retention yeah thanks for the question katie retention for the quarter was strong i mean i think kind of sequential movement based on when you think about how much of a compounding increase most of our members have received you know we're really pleased to see that move in a positive direction uh i'd expect us to continue in this direction for the foreseeable future as we work on our learnings we keep building on hopefully having

that tailwind of consistently lower pricing increases we've now caught up so when we think about our value proposition we're at that value proposition today so the times where we were playing catch up initially and then having to kind of really put that rate above 20 are behind us So seeing that from a member perspective and their experiences are going to be a lot softer. So in terms of budgetability, which is what we aim to be, we see a nice tailwind in front of us there. So I expect it to continue moving in a positive direction. We've got a long way to go. We've got a lot of opportunity in front of us, given that this was, you know, a high was a 98.8. You know, that's something that we're always going to strive to do again, but it's going to take a long time together. We'll just keep moving forward. And I would say the strength of the over and the under 20% buckets give us a lot of encouragement.

Okay, maybe going at this from a different direction, you've previously discussed, you know, having almost half of the book kind of priced ahead of where it needs to be. What's the strategy with those customers looking into the back half of the year? I mean, can they expect to see price decreases? And if so, I mean, how much of a tailwind can we expect that to be to retention overall and subsequently how much of a headwind might that be to ARPU in the back half of the year?

Yeah I mean our pricing is set for the back half of the year so we're not going to be adjusting any rates that our members are going to be seeing right now because we set them around a year to 18 months in advance. This is really talking about 2026 and beyond as we look at those overall trends. In terms of pricing ahead when we price ahead we always price ahead. We're always thinking about what is the projected cost of that pet that risk of that pet every for the next 12 months. So we feel like we're now in good shape, which means we're going to see a lot softer increases for members on a regular basis moving forward because we've hit that value proposition overall. And what that means is there may be some areas that have a price decrease. There will be a lot of areas that have a significantly reduced increase for 2026 and beyond as we've caught up with that price. Our value proposition goal is still to maintain that 71. We're not going to change that and deviate it. So what it means is we will be going through in a far more granular level to refine our value proposition, not just from a geography perspective, but breed and age, which is what we used to do historically prior to those big inflationary periods. In our business, retention is a primary growth lever, and we're really excited about momentum on this front. And considering those compounding increases experience, we're now in a position to move forward. And there is a tailwind in front of us, and we're operating from a very healthy margin position.

Understood. Thank you.

Thank you. The next question is from Wilma Burtis with Raymond James. Please go ahead.

Hey, what was the other income, which was $12 million, which contributed at least partly to the large net EPS seat? Thanks.

Yeah, so that, well, thanks for the question. Yeah, that was related to the one-time gain that we got from the exchange of our preferred stock in base drive. So that's what I was describing earlier with we returned our preferred stock to base drive in exchange for IP. IP is going to be used for lens map.

And then I understand that margin appears to be near the targets and obviously very solid, but do you expect 15% inflation will continue to recur next year? And how are you guys thinking about rate even with the margin being in a good position? Because just levels of inflation have been high. So you think about it going forward? Thanks.

Yeah, so what we're seeing right now, as Ford mentioned, is definitely a deceleration in inflation. So we've seen that trend over the last few months, and we said we would share more as that came through, and we have done and will continue to do so. So we're obviously monitoring this very closely. I expect given the challenges in the veterinary industry that we may see further moderation. We're not seeing that yet, but we will tell you and we'll take them into account. As we think about 2026, we're using that assumption, that operating assumption with that slight deceleration in our rates for next year and beyond. So that will mean that there will still be increases coming through because the cost of goods will continue to go up, and therefore that will be justified in our numbers. But if it needs to evade further, then we will take the necessary steps to ensure that happens for our members, so we honor that value prop.

Okay, thank you. This concludes the question and answer session. I would like to turn the conference back over to Margie Tooth for any closing remarks.

Thank you, Debbie, and thank you, everyone, for joining the call today and for the questions. As hopefully you heard, we're very pleased with the strong results we shared today, and we look forward to building on this momentum in the coming months and the quarters ahead. With this in mind, we invite you to our upcoming Investor Day, which will be held here in Seattle, Washington on September 17th, which is just six weeks away. The event annually provides a unique opportunity for our investors to connect with our team and hear from all of the leaders across the business. so registration and additional details can be found on the investor relations website so please do go there and check that out so in closing we're now in the third quarter of the year we've just five months left to run in our 16-month plan the team is executing really well we've improved the financial health of the business immeasurably over the last year and based on the guidance you heard today our adjusted operating income will have compounded 21 percent over the last five years thank you for your time and for your questions today The conference is now concluded.

Thank you for attending today's presentation. You may now disconnect.