Other Reviews to Read From This Season:
Table of Contents
1. Celsius (CELH) — Brief Earnings Snapshot
a. Headline Results
Missed revenue estimates by 5.6%.
You can only blame Pepsi inventory resets for so long!
The core Celsius business again lost Q/Q market share. It now has 10.9% market share vs. 11% Q/Q and 12.3% Y/Y.
Missed $0.20 EPS estimates by $0.02.
Missed EBITDA estimates by 21%.
Alani Nu M&A closed after Q1 ended. There was no financial impact this quarter. Alani Nu’s market share rose from 3.1% to 5.3% Y/Y.
Alani Nu will begin greatly propping up inorganic growth rates starting next quarter. But? That can’t last longer than 4 quarters if the core Celsius brand keeps endlessly ceding market share. And you can’t blame market share losses on poor macro, as everyone in the sector is dealing with the same challenges. This looks like a brand that has peaked.
b. Valuation
No formal guidance.
Celsius trades for 36x forward EPS as of right now. EPS is expected to grow by 22% this year and by 38% next year. Estimates will fall following this report.
c. Balance Sheet
$977M in cash & equivalents.
$141M in inventory vs. $131M Q/Q.
$824M in convertible preferred shares (from the Pepsi partnership); no traditional debt.
Stock compensation is very low at a little over 1% of revenue.
2. Lemonade (LMND) — Detailed Earnings Review
Lemonade offers renters, home, auto, pet & life insurance in the USA, with a small business in Europe too. The company’s tech-and-AI-native foundation cuts out hefty fixed expenses associated with legacy models to lower cost of service. It builds on this edge by obsessively iterating on its underwriting algorithms to ensure accurate risk pricing. This has enabled brisk top-line scaling with stable fixed costs and coinciding margin improvement for a couple of years now. Much more progress needed… But it’s on a great path.
a. Key Points
Rock-solid quarter and guidance.
Resilient underwriting health amid the LA Wildfires.
Reiterated path to profitability and top-line acceleration plans.
b. Demand
Beat in-force premium (IFP) estimates by 0.7% & beat guidance by 0.9%.
This was its fastest rate of Q/Q expansion in over two years as it leans back into growth spend.
Beat gross earned premium (GEP) estimates by 0.7% & beat guidance by 1.6%.
Beat revenue estimates by 4.3% & beat guidance by 5%.
26% 2-yr revenue CAGR vs. 29.7% Q/Q & 35.9% 2 quarters ago.
Investment income rose 26% Y/Y.
Beat customer estimates by 11,000.
Annual dollar retention (ADR) fell due to aforementioned and ongoing plans to cut unattractive home policies in states like California. This lowered ADR by 4 points Y/Y. They expect ADR to resume its upward trajectory in the coming quarters.
c. Profits, Ratios & Margins
Beat 26% GPM estimates by 440 basis points (bps; 1 basis point = 0.01%).
Beat 84% net loss ratio (NLR) estimates by 500 bps; beat gross loss ratio (GLR) estimates by 600 bps. Lower is better and these are two large beats for these metrics.
GLR is similar to NLR but excludes the impact of reinsurance.
Beat -$0.97 GAAP EPS estimates by $0.11. This is despite a $7M GAAP assessment from the wildfires and the California FAIR plan (more later). Without this hit, the beat would have been about $0.21. This charge is already excluded from EBITDA.
Beat EBITDA estimates by 3.5% & beat guidance by 1.1%.
Total operating expenses rose about 30% Y/Y, mainly due to $38M in growth spending vs. about $20M Y/Y and a $7M California FAIR plan charge (more later).
Headcount rose 2% Y/Y.
G&A growth was 20% Y/Y due to more interest expense from the synthetic agent financing agreement. What’s that? For review:
Synthetic Agents Explained & Contextualized:
Lemonade finances the majority of its growth via something called a “synthetic agent.” This effectively finances the cost item and means growth spending is not a cash drain like it typically is for other companies.
Lemonade did this to enable faster, more aggressive pursuit of top-line expansion. It was a creative way to separate cash needs to scale the business from draining its finite liquidity.
It likely will become a less important piece of the business as it matures.
This is why the cash flow statement is inflecting positively before the income statement. Under this structure, the debt is also finite (paid off within 3 years), which means there are no perpetual costs associated with new plans (like a traditional agent receives).
Plans naturally become more profitable as they season, so a younger book with a higher proportion of business that is new will incur what it calls a “new business penalty.” It’s fully willing to accept this business penalty if lifetime loss ratios keep giving it such great confidence in plans being profitable.
The impact on profitability from the LA Wildfires (aside from the $7M assessment charge) was as expected, which is a good sign. It points to this team having a great feel for their industry and evolving risks. It recovered about $8M from a sale of rights to claims from the Eaton fire. It could collect a few more million here in the coming quarter, but the $8M will be the bulk of its recoveries.
d. Annual Guidance & Valuation
Slightly raised annual GEP guidance.
Raised annual revenue guidance by 1%, which slightly beat estimates.
Reiterated annual EBITDA guidance, which met estimates.
Raised annual growth spend guidance from $165M to $170. This, paired with language hinting at some conservatism stemming from the fluid backdrop, is why EBITDA was not raised. They’re getting more aggressive and did say better tariff resolutions would provide upside.
Reiterated positive FCF for 2025; reiterated an EBITDA inflection coming in 2026. They’ve been reiterating this same schedule for years now.
For Q2 guidance specifically, revenue was in line and EBITDA was an 11% miss. Not super concerning to me given the annual profit reiteration.
With no positive EBITDA yet, we need to use sales and gross profit multiples. Lemonade trades for 3x forward sales and about 8.5x forward gross profit. Sales are expected to grow by 25% this year and by 32% next year. Gross profit is expected to compound at a 29% clip during that period.
e. Balance Sheet
Nearly $1B in cash & equivalents.
$259M reg surplus
No traditional debt. It does have $100M drawn from its synthetic agent agreement, which is very similar to debt.
3.7% Y/Y dilution.
f. Call & Release
Car Insurance & AI:
As discussed last quarter, 2025 will be the year of getting underwriting algorithms ready for primetime, expanding to more states and embarking on a durable acceleration in car growth. This quarter marked the first time when Q/Q car premium growth outpaced the book. That should be a consistent trend going forward.
Why is Lemonade so confident in its ability to effectively compete in a tough industry and for car to morph into such a meaningful driver of its headline results? Telematics helps a lot. Many, many insurance companies claim to use some degree of telematics to more precisely gauge driver activity and risk. Nobody matches the depth, frequency and length of data collecting that Lemonade does. And? Nobody has the AI-native foundation to cohesively collect, aggregate and use all of this data. Its underwriting models aren’t made up of disparate, cobbled-together software programs from 20 years ago and an inability to extract value from customer data profiles. Instead, they’re the byproduct of being an AI-native organization with a singular, tech-based foundation powering everything it does. That’s why its underwriting trends look so good; that’s why it can settle claims in real-time; that’s why it can add customers in minutes rather than weeks. And? That’s why its car product is expected to greatly undercut the competition on pricing as it expands nationally.
“It’s not that legacy competitors don't have more data than we do. They certainly do. But when you have the digital infrastructure that we have, you're able to connect dots in a way that is far more meaningful. When you are selling insurance with real-time AI using all of the signals that we have… right down to do I want this customer? How much am I projecting them to be worth over their lifetime? How much would I invest [to get] them? To the best of my knowledge, there isn't another carrier in the nation, perhaps in the world, that has that kind of capability.”
Co-Founder/CEO Daniel Schreiber
As Schreiber pointed out, competitors like Geico are explicitly telling investors they’re taking a “wait and see approach” to AI. Leadership is confident that the longer they wait, the better off Lemonade will be.
Going forward, it plans to build on its perceived telematics lead with something it calls “day zero telematics.” This is what it sounds like. The program aims to start collecting data right at the point-of-sale, which others don’t currently do. In early testing, this is boosting conversion rates by about 60%.
The other main reason for Lemonade’s confidence comes from its 700,000-person waiting list and 2.5 million customers that it can easily cross-sell to. It’s currently optimizing cross-sell messaging and interaction, which netted a 100% Y/Y increase in car cross-sell rates. Much more work to do here. It sees a 5-year path of car cross-sell rates rising from a low single-digit percentage to 30%-40% – which is in-line with incumbents. Leadership was quick to add that its multi-year financial targets don’t rely on this happening… but still they do expect it.
Simply put, we’re nearing full speed ahead here, with Lemonade growing more confident in its car business by the day. Loss ratios are still elevated, but that’s mainly due to the “new business penalty” cited above and the work it has had to do on fixing underwriting models since it acquired Metromile.
Loss ratios from renewed customers are delivering a needed 10+ point reduction and lifetime loss ratios are giving the team more conviction about this business being ready.
In states where it offers every product, including car, its cross-sell rate is around 10% vs. 5% for the rest of its book. ~50% of all new car customers are existing Lemonade customers.
The Colorado car state launch brings them to covering 40% of the USA with this product. They will prioritize the state rollouts this year that allow them to boost that percentage the quickest.
The Quarterly Puppet Master Praise:
The puppet master keeps puppet mastering. Want them to slow growth and accelerate the path to profitability as rates soared and inflation spiked higher? They did. Want them to lean back into growth with the P&L in better shape and, vitally, regulatory approvals for premium increases secured? They now are. This company is in firm control of its financial profile, which is so wonderfully rare for a public enterprise of this age and size.
Why the immense control? Two reasons. First, they’re really good at marketing and have a great feel for where they can spend to secure customers at a compelling 3x lifetime value to customer acquisition cost (LTV/CAC). Secondly, the aforementioned tech-native DNA means their fixed costs just aren’t growing much. Again, they have been able to roughly double premiums over the last couple of years while fixed costs remained flat. No cluttered real estate footprint all over the nation with giant teams of agents to compensate. All of their cost growth is variable in nature, as it’s tied to how much they’re willing to spend on highly reliable growth. The trend of stable fixed costs and exploding gross profit generation is expected to be an enduring one.
“We grow at a pace of our own choosing.”
CFO Tim Bixby
More on Loss Ratios:
Catastrophic events are always part of insurance losses, but this quarter, it had an outsized impact. California loss ratios added 16 full points to GLR, with CAT adding 19 points overall. Amplifying the Y/Y comp difficulties was an 8-point favorable prior period development during Q1 2024. That created another 2 points of net headwinds in the Y/Y comp. Underlying loss ratio trends remain strong (as you can see in the data below), but this quarter yielded considerably intense noise.
Tariffs:
Tariffs could potentially add a few points to its loss ratios. It will work as quickly as it can to secure approvals to hike prices if these persist. It’s worth noting that LMND is in a much better spot (if inflation rises again) than it was 2 years ago. It will not have to rush to put systems in place to expedite filings and will not have to play nearly as much catch-up.
Chewy:
Lemonade terminated a warrant agreement with Chewy during the quarter. As a reminder, Chewy sells Lemonade pet policies through its site. The termination is because Lemonade no longer feels as pressing of a need to preserve cash. It will now compensate Chewy in dollars instead of equity. The partnership continues to go very well.
h. Take
Another rock-solid quarter for Lemonade. More top-line acceleration; steady progress towards breakeven; effective underwriting through a wildly difficult quarter for the industry. Again… It's not normal for a company this young and this far from profits to be able to reiterate the same path to breakeven that they did more than two years ago. They are surgical managers of their financials and that is something I find so impressive. The writing on the wall that this will be a profitable compounder for a long time is growing more obvious. I continue to be a confident shareholder and am pleased with these results.
