Trupanion's Q3 2025: Contradictions Emerge on Gross Add Growth, Pricing & Inflation, Retention Strategy, and Pac Investment

Date of Call: None provided

Financials Results

• Revenue: $366.9M, up 12% YOY
• EPS: $0.13 per diluted share (net income $5.9M), up from $0.03 per diluted share (net income $1.4M) prior year
• Gross Margin: Value proposition 70.1%, compared to 71.0% in the prior year
• Operating Margin: Subscription adjusted operating margin 15.5%, up from 14.0% prior year (approx +150 bps)

Guidance:

• Full-year 2025 revenue expected $1.433B–$1.439B.
• Subscription revenue expected $986M–$989M (~15% YOY at midpoint).
• Total adjusted operating income expected $148M–$151M (midpoint ~31% YOY).
• Q4 2025 revenue expected $371M–$377M; subscription revenue $258M–$261M (~14% YOY at midpoint).
• Q4 AOI expected $41M–$44M. (Guidance uses a 72% USD/CAD conversion rate.)

Business Commentary:

• Subscription Segment Growth:
• Trupanion's subscription segment achieved record subscription-adjusted operating income of $39 million, an increase of 27% year-over-year, with a subscription-adjusted operating margin of 15.5%.

• The growth was driven by consistent investment in retention performance and increasing contributions from gross pet additions.

• Pet Acquisition Costs and Investment:

• The company acquired approximately 68,100 new subscription pets, with an average pet acquisition cost of $290 per pet, up from $243 the previous year.

• This investment was attributed to increased aggression in pet acquisition to capitalize on strong financial position and record margins.

• Financial Performance and Cash Flow:

• Trupanion's operating cash flow reached $29.2 million in Q3, compared to $15.3 million the previous year, and free cash flow was $23.9 million.

• The company's liquidity was strengthened by strong free cash flow generation and a $15 million early principal payment towards its debt.

• Debt Refinancing and Interest Savings:

• After quarter-end, Trupanion refinanced its outstanding term loan through a new $120 million credit facility with PNC Bank.

• This resulted in a 240 basis point benefit in terms of interest savings, contributing approximately $8-$9 million in annual interest savings.

• Brand Expansion and Partnerships:

• Trupanion expanded its brand presence through new partnerships such as a collaboration with Seattle Reign FC and a partnership with BMO Insurance.
• These strategic partnerships are aimed at broadening the company's reach, enhancing brand visibility, and engaging with pet parents earlier in their journey.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management described Q3 as "strong" with "record subscription-adjusted operating income of $39M" (up 27% YOY), "subscription AOM 15.5% (record)", "record free cash flow", and emphasized being well positioned to increase investment and growth.

Q&A:

• Question from Brandon Vazquez (William Blair): Hey, everyone. It feels like after a couple of years of stabilizing margins, this might be the first quarter with an inflection — gross ads returning to YOY growth. As you go into next year, what does the commercial strategy look like moving from defense to offense and what should we expect to accelerate growth?
  Response: Company is moving to offense—margin stabilization and improved retention enabled record AOI and free cash flow, allowing aggressive, disciplined investment to re-accelerate pet acquisition and broaden brand reach.

• Question from Brandon Vazquez (William Blair): For modeling 2026, what are the key puts and takes—how much of growth should come from price versus volume (RPU vs gross ads)?
  Response: Near term growth has been more pricing-driven; objective over time is for pet count (volume) to contribute more while pricing contributes less, with continued investment in acquisition and retention.

• Question from Katie Six (Autonomous Research): Can you break down the growth dynamics between the European subscription pet cohort versus US/North America, and are the growth rates this quarter sustainable into next year?
  Response: Core investment focused on North American subscription business; Europe currently has limited investment and is being stabilized before scaling, with expectation to invest more in Europe over the coming years.

• Question from Katie Six (Autonomous Research): Regarding the new BMO Insurance partnership in Canada, which Trupanion products will be offered and how much could it contribute to the pet base next year?
  Response: The core Trupanion product will be offered; partnership is strategic for Canadian brand reach but not expected to contribute meaningfully in the short-to-mid term as it takes time to scale.

• Question from Wilma Burdis (Raymond James): How are you thinking about pricing going into 2026? Are you still on track for the ~15% inflation assumption given recent trends?
  Response: Q3 inflation was stable versus Q2 (slight U.S. reduction, slight Canada increase); it's too early to predict 2026, but management will monitor veterinary cost inflation closely and price to maintain value proposition.

• Question from Wilma Burdis (Raymond James): What are you seeing with customers given pockets of consumer pressure — does the current environment help or hurt sales going forward?
  Response: Despite consumer pressures, demand remains strong; improved retention and increased acquisition investment are driving lead volume and enrollments, and management believes protection remains compelling as costs rise.

• Question from John Barnidge (Piper): Can you quantify interest rate savings and one-time items from ending the old credit facility — should we expect to see savings in 1Q 2026?
  Response: Refinancing to a $120M PNC facility moves debt from SOFR+5.15 to SOFR+2.75 (~240 bps), with expected outstanding debt ~ $115M and interest savings of roughly $8–$9M (savings will materialize going forward).

• Question from John Barnidge (Piper): Any potential additions for the important Q4 open enrollment for the group channel (Aflac) — should we expect meaningful contribution this quarter?
  Response: Aflac remains nascent; no meaningful contribution expected in the upcoming quarter or Q1 as the product/channel is being refined and requires more time to scale.

Contradiction Point 1

Gross Add Growth Expectations

It involves differing expectations regarding the acceleration of gross adds, a critical factor for company growth and investor expectations.

How is Trupanion's strategic shift from defense to offense expected to drive growth acceleration? - Brandon Vazquez (William Blair)

2025Q3: We expect investments to increase, with a focus on pet count contributing more to revenue. - Fawwad Qureshi(CFO)

Can gross new adds in the core business increase in the back half of this year? - Brandon Vazquez (William Blair)

2025Q2: We expect gross adds to be positive in the back half of the year. The timing aligns with the increase in PAC spend. - Fawwad Qureshi(CFO)

Contradiction Point 2

Pricing Strategy and Inflation Expectations

It involves a shift in the company's approach to pricing and inflation expectations, which are crucial for financial forecasting and investor confidence.

How are you approaching 2026 pricing, and will you still achieve 15% inflation? How is the current consumer environment affecting sales? - Wilma Burdis (Raymond James)

2025Q3: Inflation remains stable, in line with previous quarters. It is too early to predict inflation for the next year. Pricing will closely monitor inflation and maintain the value proposition. - Fawwad Qureshi(CFO)

Do you expect 15% inflation to persist next year, and how are you thinking about rate considerations given the strong margin and high inflation levels? - Wilma Carter Jackson Burdis (Raymond James)

2025Q2: We're seeing a deceleration in inflation, which we're incorporating into our operating assumptions. We anticipate moderation for next year, reflecting in our guidance. - Margaret Rosemary Maria Tooth(CEO)

Contradiction Point 3

Retention Improvement and Strategy

It involves the company's strategy for improving customer retention, which affects customer lifecycle and revenue consistency.

Are retention rates for loyal pet parents still at 90%? What initiatives are you taking to improve retention? How does scaling impact cost per acquisition? Could it decrease? - Jonathan Block (Stifel)

2025Q3: Retention improvements are due to focused efforts on customer experience and education. We're seeing tailwinds as members normalize rate adjustments, expecting continued recovery towards historical levels. - Margi Tooth(CEO)

Why did retention of first-year customers without rate changes drop significantly? - Josh Shanker (Bank of America)

2025Q1: The cohort has been decreasing since Q4. We expect to return to under 20% increases by the end of the year as pricing normalizes. - Margi Tooth(CEO)

Contradiction Point 4

Focus on Pet Acquisition Cost (PAC) Investment

It reveals a shift in the company's strategy regarding PAC investment, which directly impacts revenue growth expectations and financial forecasting.

Can you outline Trupanion's strategic direction as it shifts from defense to offense and the expected growth acceleration? - Brandon Vazquez (William Blair)

2025Q3: We expect investments to increase, with a focus on pet count contributing more to revenue. - Fawwad Qureshi(CFO)

How will subscriber growth progress this year, considering PAC spend pickup and associated delays? - Brandon Vazquez (William Blair)

2024Q4: Our goal is to gradually increase PAC investment as the year progresses. We plan to approach the level of investment seen in 2022, which was about $80 million. - Fawwad Qureshi(CFO)