Pethealth Inc.
TSX : PTZ

Pethealth Inc.

November 09, 2010 16:28 ET

Pethealth Inc. Announces Quarterly Revenue of $8,193,000 and Net Income of $343,333 and Its Full Results for the Third Quarter and Nine Months Ended September 30, 2010

OAKVILLE, ONTARIO--(Marketwire - Nov. 9, 2010) - Pethealth Inc. (TSX:PTZ) ("Pethealth" or "the Company") today announced its financial results for its quarter and nine months ended September 30, 2010.

Financial Highlights

Third quarter ended September 30, 2010

  • Total revenue for the quarter ended September 30, 2010 was $8.2-million, down 9% from 2009.

  • Net income, before taxes, for the quarter ended September 30, 2010 was $471,000 ($0.01 per share) vs. $1.1-million ($0.04 per share).

  • Net income, after taxes, was $343,000 ($0.01 per share) vs. the prior year's net income of $1.1-million ($0.04 per share).

  • EBITDA (see definition on page 2) for the quarter was $923,000 vs. $1.5-million during the same period last year.

  • Adjusted EBITDA (see definition on page 2) was $887,000 for the quarter vs. $1.1-million during the same period in the prior year.

The 5% and 11% appreciation of the Canadian dollar against the U.S. dollar and the British pound respectively had a significant impact on comparative year over year quarterly results as described below.

Nine months ended September 30, 2010

  • Total revenue for the nine months ended September 30, 2010 was $24.4-million, down 7% from 2009.

  • Net income, before taxes, for the nine months ended September 30, 2010 was $1.3-million ($0.02 per share after giving effect to the $585,000 annual dividend) vs. $3.6 million in the prior year ($0.11 per share after giving effect to the annual $600,000 dividend payment made in the first quarter of 2009) in the prior year.

  • Net income, after taxes, was $1.6-million ($0.03 per share after giving effect to the $585,000 annual dividend payment made in the first quarter to holders of the Company's convertible preference shares) vs. the prior year's net income of $3.6-million ($0.11 per share after giving effect to the $600,000 dividend payment made in the first quarter of 2009). Net income, after tax, includes the recognition of a future tax recovery in the second quarter, related to the Company's Canadian brokerage operation.

  • EBITDA (see definition on page 2) for the nine months was $2.7-million vs. $5.0-million for the same period last year.

  • Adjusted EBITDA (see definition on page 2) was $2.7-million for the nine months vs. $4.3-million during the same period last year.

The 11% and 12% appreciation of the Canadian dollar against the U.S. dollar and the British pound respectively had a significant impact on comparative year over year nine month year to date results as described below.

Results of Operations

Pethealth Inc. reports its financial results in two reportable segments; its insurance operations and its non-insurance operations. Its insurance operations currently consist of the distribution and administration of the PetCare, Pet Protect, petPals, ShelterCare, QuickCare, CherryBlue and other co-branded, white labelled or private labelled pet insurance programs, while its non-insurance operations are made up of its 24PetWatch and Pet Protect manufacturer-neutral pet registry and recovery service, the distribution of RFID microchip technology, the development and distribution of PetPoint, its animal shelter management software program, and Petango.com, its on-line pet portal which includes its on-line adoptable search engine, thePetangoStore.com and social networking.

  For the three months ended   For the nine months ended  
('000) Sep 30 2010   Sep 30 2009     Change   Sep 30 2010   Sep 30 2009     Change  
                                     
Revenue                                    
  Insurance segment $ 5,800   $ 7,017     (17 %) $ 17,840   $ 20,702     (14 %)
  Non-insurance segment   2,393     1,949     23 %   6,599     5,658     17 %
  $ 8,193   $ 8,966     (9 %) $ 24,439   $ 26,360     (7 %)
Net income (loss) before taxes                                    
  Insurance segment $ 1,332   $ 1,835     (27 %) $ 3,843   $ 5,768     (33 %)
  Non-insurance segment   (861 )   (778 )   (11 %)   (2,517 )   (2,135 )   (18 %)
  $ 471   $ 1,057     (55 %) $ 1,326   $ 3,633     (64 %)
                                     
Net income (loss) after taxes                                    
  Insurance segment $ 1,205   $ 1,835     (34 %) $ 4,127   $ 5,768     (28 %)
  Non-insurance segment   (862 )   (778 )   (11 %)   (2,517 )   (2,135 )   (18 %)
  $ 343   $ 1,057     (68 %) $ 1,610   $ 3,633     (56 %)
                                     
EBITDA (1)                                    
  Insurance segment $ 1,580   $ 2,110     (25 %) $ 4,593   $ 6,611     (31 %)
  Non-insurance segment   (657 )   (598 )   (10 %)   (1,899 )   (1,645 )   (15 %)
  $ 923   $ 1,512     (39 %) $ 2,694   $ 4,966     (46 %)
                                     
Adjusted EBITDA (2)                                    
  Insurance segment $ 1,544   $ 1,711     (10 %) $ 4,625   $ 5,963     (22 %)
  Non-insurance segment   (657 )   (598 )   (10 %)   (1,899 )   (1,645 )   (15 %)
  $ 887   $ 1,113     (20 %) $ 2,726   $ 4,318     (37 %)
                                     
(1) EBITDA, a non GAAP accounting measure, is operating income plus amortization plus interest on long-term debt plus income taxes.
(2) Adjusted EBITDA, a non GAAP accounting measure, is EBITDA plus stock option and equity-based compensation expenses and adjusted for non-cash foreign currency accounting translation gains and losses resulting from the Company's U.S. denominated debt.

The 5% and 11% respective appreciation of the Canadian dollar against the U.S. dollar and the British pound for the quarter and the 11% and 12% respective appreciation of the Canadian dollar against the U.S. dollar and the British pound for the nine months ended September 30, 2010 had a significant impact on comparative year over year results as set out below:

  Three month period   Nine month period  
('000s) September 30, 2010   September 30, 2009   September 30, 2010   September 30, 2009  
                         
Revenue as reported $ 8,193   $ 8,966   $ 24,439   $ 26,360  
Year over year foreign exchange impact on revenue   454     -     2,614     -  
Pro forma revenue adjusted for changes in foreign exchange rates for comparative purposes $ 8,647   $ 8,966   $ 27,053   $ 26,360  
                         
Net income as reported $ 343   $ 1,057   $ 1,610   $ 3,633  
Quarterly sequential non-cash translation foreign exchange gain reported   (79 )   (441 )   (47 )   (774 )
Year over year foreign exchange impact on operating income   226     -     971     -  
Pro forma net income adjusted for the impact of changes in foreign exchange rates for comparative purposes $ 490   $ 616   $ 2,534   $ 2,859  
                         

In addition to the appreciation in the Canadian dollar, insurance segment revenues and operating income were impacted by a change the Company implemented on May 1, 2010 to the enrolment process for its ShelterCare insurance program. Prior to May 1, adopters of dogs and cats who provided a valid e-mail address and, where the adoption was taking place in an animal welfare organizations running the Company's PetPoint shelter management software, were provided 30 days of ShelterCare insurance coverage. Subsequent to May 1, adopters were required to actively register their 30-days of ShelterCare coverage through the Company's on-line portal. The change in the program was made to actively engage the adopter in the enrolment process which the Company believes will increase consumer awareness and promote increased conversion into the Company's longer term insurance programs. The change to the program reduced the revenue and marketing expenses by $428,000 and $778,000 respectively, for the quarter and by $689,000 and $1,252,000 respectively, for the nine months ended September 30, 2010.

During the quarter, marketing expense associated with the non-insurance business increased by approximately $210,000 over that spent in the same quarter last year as a result of both increased online and offline marketing activities including the Company hosting two conferences directed at its animal welfare clients.

At September 30, 2010, the Company had total assets of $21.6 million including unrestricted cash balances of $5.2 million compared to assets of $17.9 million including unrestricted cash balances of $2.9 million at September 30, 2009.

"After an excellent start in July and the first half of August, pet owner appetite for discretionary spending started to tail away towards the end of the quarter, returning to levels seen in the spring. This trend was most pronounced in our U.S. operations. Notwithstanding the continued pressure on the consumer, net policy growth improved sequentially and our non-insurance business showed both strong annual and sequential revenue growth," said Mark Warren, President and Chief Executive Officer of Pethealth.

Insurance Operations:

Results

The Company is North America's number two provider of pet insurance operating in Canada, the United States and the United Kingdom. In all three jurisdictions, the Company operates as a Managing General Agent ("MGA") and, as such, is responsible for all aspects of its pet insurance programs other than the underwriting risk which is entirely borne by its third party carriers other than the Company's limited participation in underwriting results.

Pet insurance revenues are earned primarily through commissions and fees generated from the sale of pet insurance policies at a blended base commission rate of approximately 37% in the United States, 35% in Canada and 33% in the United Kingdom.

Over 60% of the Company's new policy sales during Q3 2010 were generated from the North American shelter channel. The Company expects this channel to remain the primary organic growth engine for commission and fee revenue supported by:

(1) The current trend that adoption is growing as a source of new pet acquisition, which the Company believes is set to continue. This trend was supported in a recent study released by PetSmart Charities and based on IPSOS market research, which shows that pet adoption accounted for 25% of all new pet acquisitions in 2009, when compared to a previous 2005/2006 APPMA Survey, which showed adoptions at approximately 15% of new pet acquisitions. Based on the trending of these two studies, 2010 is expected to be the first year when more people acquire new dogs and cats via adoption than through any other single channel.
   
(2) The continued growth of the Company's shelter network, centered around the licensing of its PetPoint animal management system, which will result in more adoptions occurring through the Company's applications and programs.
   
(3) An integrated program focused on increasing the number of adopters who, subsequent to completing an adoption, purchase a pet insurance policy. This program focuses specifically on upgrading adopters from the Company's 30 day ShelterCare gift of insurance offered to adopters by animal welfare organisations running PetPoint.

In addition to organic growth, the Company intends to acquire other pet insurance businesses both in the United Kingdom and North America as they become available.

Administration costs, consisting of claims adjudication, medical underwriting, billing, and customer service but excluding corporate expenses, are measured on a percentage of premium basis. For the nine months ended September 30, 2010, administration costs, inclusive of North American insurance business and the Pet Protect business, represented 12% of gross premiums earned by the Company's carriers as compared to 11.1% for the same period in the prior year. When adjusted for the impact of foreign exchange and the change in the ShelterCare program, administration costs as a percentage of earned premium were consistent with that reported last year. The Company believes that its administrative costs, as a percentage of gross premiums earned, continue to be the best in the industry. All marketing costs are expensed when incurred.

Under the terms of its MGA agreement with Praetorian Financial Group (USA) and QBE (Europe)(UK), both subsidiaries of QBE Insurance Group (collectively "QBE"), the Company participates in a portion of the underwriting results for core pet insurance policies placed with QBE in the U.S. and the U.K. on an aggregated weighted basis. The Company participates positively for policies underwritten by QBE when the aggregate weighted average accident year loss ratio is less than 50% and negatively when the actual accident year loss ratio exceeds 50%. The Company's participation in QBE's underwriting results is capped at 2.5% of earned premium.

As the Company's participation is based on the actual calendar year end loss ratio, estimates for interim reporting purposes are used. In 2009, the estimates used over the first three quarters proved to be too high, leading to an adjustment for the fourth quarter which negatively impacted Q4 earnings. For 2010, based on trending to date, year end loss ratios are unlikely to be below 50% with upward pressure on U.K. loss ratios and a higher weighting of the U.K. book of business (which now accounts for 43% of the eligible U.S./U.K. insurance business) offsetting the continued strong underwriting performance of our U.S. book. As a result, a provision of $130,100 has been recorded in the third quarter reflecting a potential commission reduction to the first nine months' results, compared to profit sharing of $705,755 recorded in the same period last year.

Non-Insurance Operations:

The non-insurance operations focus on generating revenues from North American pet owners who have acquired their pet through adoption and from corporate entities and charitable foundations wishing to have access to the individual adopter or prior to the adoption process itself. The Company's non-insurance operations are centered on the provision of PetPoint, the Company's web based SAAS shelter management system which, by September 30, 2010 had been licensed by 1,502 animal welfare organizations representing approximately 50% of North American pet adoptions occurring through animal welfare organizations. PetPoint is provided free to those animal welfare organisations that are using the Company's 24PetWatch microchip program and who agree to also promote its ShelterCare insurance program to their adopters. 

To date, the Company's non-insurance business has been focused on building out its technology platforms, including PetPoint, 24PetWatch and, most recently, Petango.com. These platforms are used to develop a network through which the Company can establish a relationship with the pet owner from the time they begin to search for their new dog or cat through the lifetime of that pet. The Company's strategic advantage is that it is both able to make this connection with the adopter and influence purchasing decisions prior to that adopter establishing his or her buying habits for their new dog or cat as well as the ability to maintain an on-going relationship based on the provision of various products and services, including pet insurance.

Investment in The Company's technology platforms peaked in Q3 2010 and will decline quarterly to June 2012 when the Company's plan for a fully integrated platform for both insurance and non-insurance operations will have been completed.

Revenue opportunities resulting from the promotion of the PetPoint animal management application to this network of animal welfare organisations falls into five categories:

  1. Advertising;
  2. Sponsorship;
  3. E-commerce;
  4. Content syndication;
  5. Medical/Data Publishing.

1. Advertising

The Company intends to take advantage of two trends in advertising: (i) the growing shift towards Internet advertising generally and highly targeted digital advertising, specifically; (ii) the growing trend amongst retailers and national brands to advertise non-pet products on high traffic pet related sites.

While advertising revenues throughout the industry have recently shown some signs of recovery from a soft 2009, we have continued to build out our platform so as to position it to take advantage of a sustained return in Internet based advertising spend which we anticipate will occur over the next several quarters.

2. Sponsorship

The Company believes that, given its multi-faceted program of products and services to the animal welfare community, it can generate significant sponsorship related revenues outside of those advertising revenues generated through its Petango/PetPoint platform including the Company's ShelterCare insurance and 24PetWatch microchip programs.

3. E-commerce

In December 2009, the Company launched ThePetangoStore.com web site promoting the sale of pet pharmacy and pet specialty retailer products to pet owners in the United States. While there are now several ecommerce related web sites focusing on the sale of pet supply and pharmacy products, ThePetangoStore.com benefits from having lower new customer acquisition costs than most as sales are driven principally via the Company's shelter network and to the over 90,000 new adopters coming to the Company each month. As at September 30, 2010, thePetangoStore.com was offering pet owners approximately 2,200 SKUs with plans to have as many as 2,500 by the end of 2010. 

Sales are also driven by offering commissions to animal welfare organisations as the Company is able to track sales from new pet owners back to the shelters from which they adopted their new dog or cat. This creates an additional recurring revenue stream for animal welfare organisations which, we believe, will lead to increased promotion by the same shelters, humane societies and SPCAs.

4. Content Syndication

The syndication of adoptable search content (the pictures of adoptable dogs and cats with page descriptions) is not a new concept. Many of Pethealth's competitors in adoptable search are currently syndicating their own content to other third parties. Pethealth's advantage is that any adoptable search content syndicated by the Company will be live to those third parties whereas much of the content of Pethealth's competitors is stale, meaning that the animals posted as available for adoption have, in many cases, already been adopted or, in some cases, euthanized.

5. Medical/Data Publishing

Pethealth, via its PetPoint animal management application, is now the largest aggregator of animal welfare organisations' data in North America. In Q3 2010, 583,394 animal "intakes" were completed by shelters running PetPoint and 210,993 adoptions were completed by these same organizations bringing the nine month to date totals to 1,564,928 and 570,787 respectively.

The Company believes that significant revenue can be generated by providing access to this aggregated information to charitable organisations working with the animal welfare community. As evidence, the Company in 2009 completed a 30 month agreement with PetSmart Charities whereby they will pay the Company a minimum of $400,000 over the life of the contract to have access to aggregated data to help further their own initiatives directed towards the animal welfare community. The Company expects to execute other similar deals over the remainder of 2010 and beyond.

Non-insurance results

The sale of RFID microchips to animal welfare organisations and veterinary clinics accounted for revenue of $1,951,713 in Q3 2010 and $5,335,271 for the nine month period ended September 30, 2010 representing 82% and 81% of the total non-insurance revenues for the quarter and nine month periods respectively. This compared to $1,739,888 in Q3 2009 and $5,069,239 for the nine month period ended September 30, 2009, a 12% and 5% respective increase. On May 11, 2010, the Company announced that it had entered into an exclusive supply and purchase agreement with Allflex (USA) effective January 1, 2010. Under the terms of the agreement, Allflex has agreed to handle all shipping logics in the United States and Canada as well as fix the wholesale pricing of its microchip technology over 4 years. The agreement is expected to reduce the Company's cost of sales by approximately $450,000 in 2010 and by a minimum of $500,000 annually thereafter.

In addition, the sale of ancillary products and services to the 24PetWatch database of pet owners, such as pet tags and change of address fees but excluding core insurance products, accounted for an additional $441,613 in revenue for the quarter, 111% higher than the $209,485 sold in the prior year and $1,264,238 for the nine months ended September 30, 2010, 115% higher than the same period in the prior year. The 24PetWatch call center received 55,596 inbound calls from subscribers of the 24PetWatch service during Q3 2010, representing a 26% increase over Q3 2009. Subscribers representing 25% of total inbound calls chose to purchase one or more of the Company's products and services during the quarter vs. 24% in Q3 2009. The Company expects that the growth of both Petango and the Petango Store will provide further opportunities to cross sell products and services to the 24PetWatch database of pet owners.

Since selling its first microchip in January 2003, Pethealth has become one of the largest providers of RFID microchip technology for companion animal purposes in the world. Sales of microchips were 334,000 in Q3 2010 and 947,000 for the nine months ended September 30, 2010, a 15% and 17% respective increase over the same periods in the prior year. The Company now sells microchips in Canada, the United States and the United Kingdom. In Canada and the U.S., microchips are sold under the 24PetWatch brand and in the U.K. under the Pet Protect brand.

By the end of Q3 2010, the 24PetWatch database exceeded 3.7 million pet owner/pet subscriptions.

The Company is hosting an investor conference call later today, Tuesday, November 9th, 2010, at 4:30 PM (EST) which can be accessed at 1-866-225-0198. For those unable to participate, an instant replay of the call will be available for 7 days at 1-800-408-3053 pass code 4187721.

     
CONSOLIDATED FINANCIAL HIGHLIGHTS: For Three Months Ended  
  30-Sep-10 30-Sep-09   Change %  
   
Insurance Commissions and Fees $ 5,784,303 $ 7,007,827   (17 )%
Microchip Technology and Non-insurance Revenue   2,393,326   1,949,373   23 %
Interest and Other Income   14,919   9,169   63 %
Total Revenue   8,192,548   8,966,369   (9 )%
   
Cost of Sales – Microchip Technology & Petango Store   1,336,935   1,246,398   7 %
Marketing Expenses   1,712,290   2,096,630   (18) %
Employment Expenses   2,493,635   2,423,734   3 %
Stock Option Expense   42,000   42,000     -
Administration Expenses   1,656,031   1,954,898   (15 )%
Foreign Exchange Loss/(Gain)   28,409   (309,613 ) (109 )%
Interest Expense on Long Term Debt   28,984   59,490   (51 )%
Amortization of Capital, Intangible and Other Assets   423,410   396,033   7 %
   
Earnings before tax   470,854   1,056,799   (55 )%
  Income tax expense - current   42,521   -     -
  Income tax expense – future   85,000   -     -
Net Income   343,333   1,056,799   (68 )%
               
EPS – Basic 1   0.01   0.04   (75 )%
EPS – Diluted 1   0.01   0.04   (75 )%
               
EBITDA 2   923,248   1,512,322   (39 )%
               
Adjusted EBITDA 3   886,529   1,112,748   (20 )%
   
Gross Premiums Earned by Carriers   15,366,823   16,969,744   (9 )%
(1) Basic and diluted earnings per share are adjusted to reflect the dividend payments made during the first quarter of 2010 and 2009. At September 30, 2010 the Company had weighted average basic common shares of 32,493,401 (2009 – 28,385,535) and fully diluted common shares of 32,860,197 (2009 – 28,385,535).
   
(2) The Company believes the presentation of EBITDA is a useful means of providing investors with additional information in reviewing and analyzing the Company's operating results. EBITDA is considered to be a non-GAAP earnings measure and does not have any standardized meaning prescribed by GAAP. It is, therefore, unlikely to be comparable to similar measures presented by other issuers. EBITDA is net income adjusted for interest, taxes and amortization.
   
(3) The Company believes the presentation of Adjusted EBITDA is a useful means of providing investors with additional information in reviewing and analyzing the Company's operating results. Adjusted EBITDA is considered to be a non-GAAP earnings measure and does not have any standardized meaning prescribed by GAAP. It is, therefore, unlikely to be comparable to similar measures presented by other issuers. Adjusted EBITDA is EBITDA adjusted for stock option and equity-based compensation expense and non-cash translation gains and losses associated with the company's US denominated debt.
   
   
CONSOLIDATED FINANCIAL HIGHLIGHTS: For nine months ended  
  30-Sep-10   30-Sep-09   Change %  
   
Insurance Commissions and Fees $ 17,798,319   $ 20,667,575   (14 )%
Microchip Technology and Non-insurance Revenue   6,599,509     5,658,380   17 %
Interest and Other Income   41,542     33,963   22 %
Total Revenue   24,439,370     26,359,918   (7 )%
   
Cost of Sales – Microchip Technology & Petango Store   3,480,392     3,654,507   (5 )%
Marketing Expenses   5,914,321     5,797,693   2 %
Employment Expenses   7,431,734     7,000,950   6 %
Stock Option Expense   78,843     126,126   (37 )%
Administration Expenses   4,779,446     5,356,522   (11 )%
Foreign Exchange Loss/(Gain)   60,141     (542,281 ) (111 )% 
Interest Expense on Long Term Debt   105,472     211,936   (50 )%
Amortization of Capital, Intangible and Other Assets   1,262,830     1,121,380   13 %
   
Earnings before taxes   1,326,191     3,633,085   (63 )%
  Income tax expense – current   145,769     -     -
  Income tax recovery – future   (430,000 )   -     -
Net Income   1,610,422     3,633,085   (56 )%
                 
EPS – Basic 1   0.03     0.11   (73 )%
EPS – Diluted 1   0.03     0.11   (73 )%
                 
EBITDA2 2   2,694,493     4,966,401   (46 )%
                 
Adjusted EBITDA 3   2,726,221     4,318,264   (37 )%
   
Gross Premiums Earned by Carriers   45,818,664     52,721,472   (13 )%

About Pethealth

Pethealth is the leading provider of companion animal services in North America. In addition, the Company is the leading provider of management software to North American animal welfare organizations through its SaaS-based application and is the leading provider of pet related database management services to the North American companion animal industry. Pethealth offers a unique range of products and services for veterinarians, shelters and pet owner through a number of wholly owned subsidiaries using a range of brand names including PetCare, 24PetWatch, Pet Protect, Petpals DirectShelterCare, PetPoint, Petango.com and ThePetangoStore.com.

Pethealth is based in Oakville, Ontario. To find out more about Pethealth, visit the web site at www.pethealthinc.com.

Forward-Looking Statements

This press release contains information that is forward-looking information within the meaning of applicable securities laws. In some cases, forward-looking information can be identified by the use of terms such as "may", "will", "should", "expect", "plan", "anticipate", "believe", "intend", "estimate", "predict", "potential", "continue" or the negative of these terms or other similar expressions concerning matters that are not historical facts.

Forward-looking information by its nature necessarily involves risks and uncertainties including, without limitation, the difficulty of predicting the current regulatory and supervisory environment, the timing and conditions to obtaining any regulatory approval, reliance on insurance underwriters for pet insurance policies, market acceptance and demand for existing and new products and services, including PetPoint and EVE Software and the 24PetWatch microchip program, the Company's ability to maintain and service new and existing customers, the protection of intellectual property associated with its products and services, the impact of competition generally and new competitive products, currency and foreign exchange fluctuations, risks associated with the Company's customer care solutions facility, and related risks and uncertainties. Additional risks and uncertainties affecting the Company can be found in the Company's Annual Information Form available on SEDAR at www.sedar.com. If any of these risks or uncertainties were to materialize, or if the factors and assumptions underlying the forward-looking information were to prove incorrect, actual results could vary materially from those that are expressed or implied by the forward-looking information contained herein. The Company disclaims any intention or obligation, other than those required by security laws, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Contact Information

  • Investor Relations Contacts:
    Pethealth Inc.
    Mark Warren
    President and Chief Executive Officer
    (905) 842-2615
    or
    Pethealth Inc.
    Glen Tennison
    Chief Financial Officer
    (905) 842-2615
    www.pethealthinc.com