Q3 2019 Earnings Call
Time, all participants are no listen only mode.
Next question answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone Keypad. As reminder, this conference is being recorded.
Hi, my pleasure to introduce your host Ms., Laura Bainbridge head of Investor Relations. Thank you you need to get good afternoon, and welcome to the Trupanion third quarter 2019 financial results Conference call.
Participating on today's call, our Darryl Rawlings, Chief Executive Officer, and Tricia, plus Chief Financial Officer.
Before we begin I would like to remind everyone that during today's conference call. We will make certain forward looking statements regarding the future operations.
For todays financial performance of Trupanion within the meaning of the Safe Harbor provision of the private Securities Litigation Reform Act of 1995.
These statements involve a high degree of known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed you detailed discussion of these and other risks and uncertainties are included in our earnings release, which can be found on our investor relations website as well as the companies. Most recent reports on forms 10-K, an 8-K filed with the SEC.
Charities 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 fixed expenses variable expenses adjusted operating income acquisition cost 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 our non-GAAP operating income or margin before you put acquisition.
Unless otherwise noted margins in expenses will be presented on a non-GAAP basis, which excludes stock based compensation expense and depreciation expense.
These non-GAAP measures are in addition to and not a 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 or on Trupanions Investor Relations website under the quarterly earnings Todd.
Lastly, I would like to remind everyone that today's call is also available via webcast on Trupanions Investor Relations website, a replay will also be available on the site.
And with that I will hand, the call over to Darryl.
Thanks, Laura Good afternoon, we delivered strong results in the third quarter revenue grew 27% year over year, the highest rate of growth since Q1 of 2018 subscription revenue grew 23% over the prior year led by double digit increase in lead volume.
In addition to solid growth in or leads from our core veterinary channel. We saw an increase in referrals from existing members, adding pets or referring friend.
Our conversion rate also continued to improve for the quarter in the third quarter. We saw a marked progress towards Nirvana led by improved 90 day retention and strong refer a friend and add a pet growth as a reminder, nirvana is our ambitious long term goal of offsetting monthly cancellations with the addition of.
New pets by existing members or friends they preferred.
Adjusted operating income increased 35% to 12.6 million in the quarter and we're on track to deliver around 45 million in adjusted operating income for the year.
Over the next decade, we expect our adjusted operating income to continue to expand and we want to reinvest as much of it as we were able to in order to grow revenue within the range of 20% to 30% to operate at these revenue growth levels. We target an estimated internal rate of return on pet acquisition spend of 30.
The 40% for a single average pet strategically we view these ranges as late.
Expansion of our adjusted operating income provides us the ability to invest in areas previously unavailable to us within our targeted an internal rate of return we estimate acquisition spend in 2019 to be around 34 million.
Approximately 10 million of this spend is being allocated to newer or unproven initiatives that may or may not be helpful. Contributors to our growth long term, but will allow us to learn and iterate.
As I stated in my 2016 annual shareholder letter, we're working together to build a new category and that means we must be able to test and learn areas in which we're investing in learning include the continued growth of our inside sales force accelerated deployment of our patented software building out or a conversion in content team.
Piloting our state farm partnership and continuing to integrate on our direct to consumer spend.
Additionally, a portion of our acquisition spend is being used for efforts focused on reducing our 90 day churn.
In the third quarter, we were able to deploy 8.7 million up our adjusted operating income, which is up from 6 million in the prior year period.
Our estimated internal rate of return for our single average Pat inclusive of these investments was 33% I.
I'm encouraged by the team's ability to deploy approximately 40% more cash well still operating within our internal rates of return Guardrails has this category continues to grow in both size and acceptance. We believe the company offering the broadest coverage coupled with the highest targeted value proposition and the best customer experience.
We'll produce the strongest retention rates.
The combination of these factors allow trupanion to target and otherwise higher allowable pet acquisition spend which we believe best positions our company for sustainable long term growth.
Recent data points suggest a more favorable industry backdrop, then we have seen in the past five to 10 years over the past decade revenue growth for the category has accelerated from the mid teens in 2009 to the low Twentys in 2018 and for the first time ever we've seen accelerated growth in the search term pet insurance.
Organic searches for the term Trupanion continue to increase and then even faster rate and represented over 40% of the volume of queries compared to the term pet insurance to me. These data points speak to the progress of the category as well as the gains we have made building our brand. Additionally in August the American.
Veterinary Medical Association revised its policy around pet medical insurance.
Have you may now encourages veterinarians to educate their clients about the availability of medical insurance options for their pets. The avian may also noted that studies show that pet owners are more likely to accept Pep medical insurance. If it is brought to their attention by their veterinarian.
This category continues to grow we expect additional competitors to enter the space competition, there's nothing new to Trupanion since we enrolled our first pad in 2000. We've competed against over 40 brands in North America over that time, we have delivered consistent 20% plus revenue growth improve conversion Edward.
Tension rates expanded or adjusted operating margin, increasing our allowable pack spend and strengthened our competitive mode.
We believe the categories growth has been driven not by awareness of pet insurance, but by the acceptance of high quality medical insurance by the veterinary community.
Our success has been built around this belief with over 75% of our enrollment coming from organic unpaid referral sources, including existing members and veterinarians.
We recently entered into long term partnerships with two strategic players and animal health coach mattress and IDEXX that together on the vast majority of the veterinary practice management software worldwide across our organizations, we are well aligned clients with high quality insurance visit more frequently.
More often choose the best course of treatment through these partnerships, we expect to incrementally add to our data leadership and over time better identify new pets entering the household our patented software along with our veterinary relationships and our pricing data our competitive moat and cannot be understated.
Easily replicated we look forward to building upon our most in the years ahead.
Our perspective and strategy span decades to the day when one in four loving responsible north American pet owners has high quality medical insurance for their pet the runway for growth between now and then is significant and as we've noted historically at occurred average monthly revenue per pet each one point a market penetration represents.
More than 1 billion in revenue for the industry for illustrative purposes. If trupanion grew revenue 20% annually for the next 10 years market penetration for Trupanion would approximate 1.3% in the year 2030. Following this assumption at our current market share.
Market penetration for the entire North American category would approximate just 5%, leaving decades of runway for continued growth.
As the industry continues on this growth trajectory trupanion is well positioned to maintain its market leadership. Our trupanion brand offers the broadest coverage the highest value proposition and the best customer experience delivered through our proprietary patented software, allowing us to be the only company in the space to pay veterinarians diary.
Lastly, without paperwork and within seconds.
I'll now hand, the call over to Trish who'll discuss our quarterly results in more detail.
Thanks, Darryl and good afternoon, everyone.
We're very pleased with our third quarter results, which reflects strong execution across all areas of the business.
Revenue of 99.3 million was up 27% year over year due to slightly stronger than forecasted enrolled pets in both our subscription and other business segments as well is slightly higher average revenue per pet then forecasted and our subscription business segment total enrolled pets increased 23 per se.
Over the prior year period to approximately 614000.
Subscription revenue was 82.6 million in the quarter up 23% year over year.
Total enrolled subscription pets increased 15% year over year to 479000 pets as of September Thirtyth.
Pet growth within our subscription business continued to benefit from increased leads in our core veterinary channel and strong contribution from our refer a friend and add a pet initiatives as Daryl noted. We also continued to see conversion rates improve in the quarter monthly average revenue per pet for the quarter was $58 into.
I'll cents, an increase of 7% year over year in local currency monthly average revenue per pet increased by 8% from the prior year for U.S. members and by 4% for our Canadian numbers.
Our other business revenue, which is comprised of revenue from other product offerings that generally have a b to b component totaled 16.7 million for the quarter, an increase of 55% year over year year over year growth in our other business segment, primarily reflects an increase in the number of enrolled pets.
Subscription gross margin was 19.5% in the quarter inline with our annual target of 18% to 21% total gross margin was 18% which includes our other business segment fixed expenses were 5.1 million representing 5% of total revenue in the quarter down 80 base.
At this point from the prior year period, adjusted operating income totaled 12.6 million in the third quarter at 35% increase from 9.3 million in the prior year period.
Net income for the quarter, what's point 8 million.
As a reminder, adjusted operating income represents the funds available to us to invest in pet acquisition or other strategic initiatives.
As a percentage of revenue adjusted operating margin expanded approximately 70 basis points year over year to 13% expansion in our adjusted operating income allows us to deploy a greater amounts of capital, which we intend to do so long as we can achieve our targeted internal rates of return and remain free.
Cash flow positive during the quarter, we deployed 8.7 million of our adjusted operating income compared to 6 million in the prior year period, which resulted in the acquisition of approximately 37000, new subscription pets, Oh, the 8.7 million approximately 2.8 million was spent on newer.
Sure and unproven initiatives discussed earlier by Darryl.
Inclusive of this spend we estimate our internal rates of return for a single average Pat at 33% for the quarter inline with our 30% to 40% target additional details behind the calculation of adjusted operating income and internal rate of return can be found in our quarterly earnings supplement on our investor.
Relations website, which we would encourage you to reveal.
Adjusted EBITDA was 3.9 million for the quarter compared to 3.7 million in the prior year period net income was point 8 million or two cents per basic and diluted share compared to net income of 1.2 million or four cents per basic and three cents per diluted share in the prior.
Your period.
Free cash flow was 2.9 million operating cash flow in the quarter was 4.7 million compared to 4.2 million in the prior year period I.
At September Thirtyth, we had 96.5 million in cash cash equivalents and short term investments and 22.1 million of long term debt.
I'll now provide a quick update on our settlement with the California Department of insurance, which as you will recall relates to the years old matter of call center licensing that we corrected years ago as part of the settlement. We have agreed to pay a 500000 dollar fine which is reflective of the size of business, we do in California.
I'm for which we were appropriately reserved in addition, we will work with the department over the next six months to confirm that we continue to use licensed employees to enroll California pet owners over the phone as part of this settlement showed any unlicensed employees process, California enrollments. During this time period, we may become.
Subject to an additional fine of up to $500000, we do not anticipate any issues arising out of this audit process as our agents have been licensed in California for many years.
We're pleased to have reached a settlement with California, which resolves the majority of our known regulatory matters. We take these matters seriously and are committed to maintaining prioritizing and investing in our relationships with state regulators.
Before I turn to our outlook I'll highlight today's announcement of a share repurchase program under which our board of directors has authorized the repurchase of up to $15 million over the next 12 months.
The board has authorized this program any repurchases will be subject to quarterly assessments based on parameters. We set. These include uses of capital in a given corridor and the stock price relative to our estimate of intrinsic value if given the opportunity these potential repurchases are not.
Acted to exceed a small percentage of our adjusted operating income in a given quarter.
Turning now to our outlook for the full year 2019.
For the full year, we're increasing our revenue guidance range to reflect our over performance year to date and visibility into the fourth quarter. We now expect revenue for the full year to be in the range of 383 to 384 million, representing 26% year over year growth at the midpoint. This.
Why is expected fourth quarter revenue growth of 27% at the midpoint, we now estimate our other business revenue to be around 62 million for the year.
At our forecasted revenue levels, we continue to expect adjusted operating income for the year of around 45 million and allowable acquisition spend of around 34 million within our targeted IR our range of 30% to 40% also please keep in mind that are revenue projections are subject to conversion rate flux.
Relations between the U.S. in Canadian currencies for our full year guidance, we used to 76% conversion rate in our projections, which was the approximate rate at the end of June .
Thank you for your time today, and I will now turn the call back over to Darryl.
Thanks, Trish before we open up the call for questions I wanted to take a moment to reference my inaugural 2014 shareholder letter and which I foreshadowed our compounding adjusted operating income we set our job is to invest these discretionary funds had outsized internal rates of return when acquiring new pets. We also stated.
But if and when we have additional capital beyond what we can cost effectively deploy acquiring pets. We may opportunistically invest these dollars repurchasing our stock. If we believe we can earn greater internal rates of return our share repurchase philosophy reflects our long term intent to take advantage of points in time in which our share price.
This is trading well below our estimate of intrinsic value and when we have a high degree of confidence that the rate of return on that investment will be greater than our existing pet acquisition spend also take this moment to highlight our participation has several upcoming investor conferences. This month, including the credit Suisse Health care conference in Scottsdale as well.
The Stifel healthcare and RBC TMT conference has both being held in New York, We hope to see you there.
And with that we'll open the call up for questions operator.
Thank you will now be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad. It confirmation tone on indicate your line is another question Q you May press start to if you'd like to have your question from the Q for participants using speaker equipment, maybe necessary to pick up your hands at the four pressing the star keys, one moment. Please people.
Your question.
Our first question comes from the line of Jon Block with Stifel. Please proceed with your question.
Thanks, and good afternoon nice quarter guys.
Daryl maybe I'll start with you if you're willing to share what were some of the initiatives that helped with the conversion rates in the quarter or that you called out do you think there's more room to run with further improving since it is really you guys that are generating a lot of the leads in the space and that I've got a follow up.
Thanks, John .
You know when I think about some of the initiatives that we talk or were investing this extra $10 million. This year that we didnt have in previous years conversion rate for retention rates acceleration of Exane store sales. Some of the specific tactics I think for competitive reasons, we won't get into any detail.
But I will tell you that we're going to continue to invest in these areas because we think they give us leverage in the system and as a category continues to grow.
The acceptance goes up we feel like we're in a strong position.
Okay got it I don't pivot tricia's, what might be for you, but you know the fixed expenses in the quarter. I think you noted was 5% of revenue, which I believe was a company goal and you've got there quicker than certainly we had anticipated you purchased the building a little while ago. So I guess is there a revised target there or how do we think about.
Fixed expenses as a percent of sales over the next several quarters.
Sure I mean in in general like you said, we've been working very hard to get to our fixed expense target you know a single corridor, while we're really happy with the results of this quarter does that mean and that it won't move around slightly over the next couple of quarters on but we.
Feel like we're well positioned.
Going into 220 20 with with that scale that we have the overall and and then you know by the 5% thick fixed expenses being the right target, although we'll definitely give more detail on that and how we're thinking about 2020.
On our February call.
Okay and last one if I could just one more quick follow up there according to our work.
No.
What we saw from the veterinarians are you guys are being recommended.
Multiples higher than that of your peers and you know it seems like you mentioned the accelerated growth for the industry that you're going I don't know maybe in around the rate of the industry is there anything that you guys can do from a company perspective.
Leverage you know the the the positive recommendations that clearly you have amongst the veterinarians and get that to convert to the pet owners before you lose them through a Google search to a potential competitor hopefully that made some sense.
Yeah, I did make sense I mean, we think we're driving most of the leads and the acceptance of the category, but you know there's always going to be many brands and it's going to.
It's going to take.
Probably decades until there is brand dominants, I mean, I would say from the veterinary aside trupanion as well known but from a direct to consumer side.
Daniel brand is in the very early days. So those are areas that we're now able to invest greater and greater sums of dollars building, our brand, which has conversion and retention rates all of the things and you know I mentioned in my opening remarks, we think we've got the broadest coverage the best value proposition and the best customer experience and it's our job to make sure that consumers can.
I understand that.
Thank you.
Thank you. My next question comes in a line of sweat that catch area with RBC capital markets. Please proceed with your question.
Great. Thank you two questions. Please one can you. Please comment on just generally would the pricing environment, you're seeing maybe in California, or you know compared and what how is there have been great increases then what trupin's is versus others in the market potentially I'm, just you don't have to quantify but Dan.
And just the trends and then a the second is on retention any any additional detail on you know, which kind of goal what you saw better retention ads in the quarter and what really helped grow that retention. Thank you.
Sure.
You know that.
I think for the quarter, our ARPU was up 7% a year over year, you're gonna typically see a the veterinary inflation going up five 6% when we got the headwind of installing or software, where we pay hospitals directly maybe adds another point on that it's important for us to be slightly out scale.
During our ARPU versus what we're spending in veterinary invoices to be hitting our long term margin profile.
We made progress this quarter to made progress year to date.
I think about any particular state.
You know some have higher rates of inflation than others.
You have a longer cycle cycle between rate increases and that's not for one particular company. It tends to happen across the board, California somebody that tends to have a little bit longer cycle. So win rate changes happened they tend to be a little bit steeper and California has a little higher inflation than men. Many when we compare ourselves.
Historically the amounts of rate changes were seeing are getting smaller and smaller and most of the states in California similar.
When we look across the industry, we see people having a wider changes we think the data leads that we have and trying to price down to neighborhood levels or something we'll continue to work on for the years in decades ahead.
The second question on retention.
You know my shareholder letters I talk about how we kind of bucket at one areas to think about first year retention. Another one is retention of clients that are getting less than a 20% year over year change between which is the vast majority and then some people that getting outsize changes the biggest bucket for us of improvements is really.
I've been in that first year that we've been focused on.
It's more important for us to be priced accurately then to be going after that third bucket. So it's really 90 day or first year retention that we've been focused on in the last a year or so.
But we'd look at each of a very carefully.
Thanks Darryl.
Oh.
Thank you. Our next question comes from the line of answer Cooper with Raymond James. Please proceed with your question.
Thanks for the question just a quick one for me I think in terms of.
You know obviously there was expectations in the back half of the year around claims expense and I think we saw the kind of bounce back that we expected.
But any commentary there in terms of kind of tying into the prior question.
ARPU, but how to think about that for Fourq you and.
Kind of over the long term I know, it's it's been asked or maybe just asking a little bit of a different way.
Sure, Andrew and I can give a little bit more color. There you know as Daryl mentioned that it's really important as we're trying to get you know that invoice expense as a percentage of revenue, which has been running closer to 72 and our target is 70 that our ARPU increases.
Our outpacing that and that invoice expense per pet increases.
On a quarterly and annual basis, we're making good progress here year to date, and where ARPU as outpacing claim slightly and so we feel good about the work were doing and not continuing into 2020 that being said as you can see when you look.
Through our results in past quarters, it does move around on a quarterly basis.
Is important to look at these things on an annual basis and look at incremental improvement as opposed to a single quarter, just the way things roll on and days in a quarter and holidays in a quarter and things like that and albeit flight. So.
As I was saying, we're making very good progress moving into that and we think we'll continue to make progress towards our goal is 70, but we do have that one person headwind when we're accelerating more of our software which continues to be one of our strategic initiatives that we're focused on as well.
So well make progress I'm, probably won't get all the way to 70 next year just based on that.
Okay. That's helpful and then.
Just looking kind of down the piano it looked like again sort of adds maybe expected at least to some degree the the Australia.
Results for better quarter over quarter, but just any context in terms of any any early learnings there or any change to sort of the aggressiveness and what you're going after it or any any takeaways on on Australia in international markets in general and sort of how you think about him what would be great.
Yeah.
When we think the next five or 10 years, we think it's important that we're going to have more of a global presence.
Probably a similar to our Canadian market, where we started we say Australia, it's kind of a sister to Canada as I speak the same languages about the same size of market. We thought it's an easier play for us to go test and learn we're in very very early stages, where and you know a handful of clinics, there and were making sure that we've got a great customer.
Variance and we can discuss the value proposition before we roll things out so early days.
All right I'll I'll stop there. Thanks appreciate it.
Thank you once again, if he would like to ask a question. Please press star one on your telephone keypad for participants you think speaker equipment, maybe necessary to pick up your hands that before pressing the star Keys. Our next question comes from the line of David Westenberg Guggenheim. Please proceed with your question.
Hi, Thanks for taking the question congrats on it on a great quarter. So I'm just going to continuation of an earlier question can you talk about and just in terms of that 20% price increases in California can you just talked maybe talk about the the correlation price increases with the availability of specialty markets and if there's any correlation with like a will.
Yes for for hot to spend more on pads in this particular markets and and willingness to maybe pay higher spot price increases I'm, just getting a lot of questions on the increases in pricing in California, and and I just want to get you know all those those ducks in a line between paying what that market looks like.
And if that looks like other geographies in the U.S. on.
Is that Claire.
Yeah. It is I mean so.
California on its own you know we have been.
Historically, we don't break things down by.
Categories, but you know there's a fair amount of visibility here you know were off our target in California by about four points and the inflation rate there is closer to 10% year over year versus six the reality is as you don't add.
10, plus four and have a 14% rate increase because.
It's going to take about a full 18 months until you've got everybody through the midpoint, so you're actually pricing into the future and that's why we put a larger rate increase in California, I would say when everything perfectly executed on our end, which may take years to get too.
And if California considered continued into rate that normally has on inflation. If a state that's going up about 10% a year I don't think California has a much higher percentage of referral and specialty hospitals going in I mean, you don't have to go far from the Bay area to see what's happening and housing costs and everything else.
In the pressure downward pressure that puts on the veterinarians on what they need to pay their staff, California is a little bit unique in that market, but it's not when you get down to a neighborhood levels or other ones or some places go up 10% other places go two or 3%.
California, like I said takes a little bit longer for approvals to go through and incrementally we continue to get better.
Alright. Thank you and then just just cosmetically I'm looking at Q3 at the last three years, they've been kind of a high court in gross margin is that kind of coincidence.
Or is that is theyre actually it's a seasonality component to the gross margins and the Q3.
Thank you.
I would say you know, we do have a little bit of seasonality in our business, albeit very slight involve kinds of enrollment side as well is that the claim side you know we tend to see.
You know more more clay and that invoices, albeit very slight and typically that second quarter. Because you know allergy season ramping up and things like that and then you know it's slightly different in the third quarter. It also we typically have more of just based on our pricing cycle more.
Our of our pricing have enrolled through our book by the third quarter on other given year than earlier in the year, there's a lot of different dynamics.
At play in general I'll be them very slight.
Very helpful. Thank you.
Thank you. Our next question comes from the line of Maria reps with Canaccord. Please proceed with your question.
Great. Thanks for taking my questions.
Can you talk about what's driving momentum in Dod business any specific baldness, you would highlight there and what's the opportunity to perhaps at pardon Sam and then secondly can you just take a step back and maybe it was visit.
Some of the key things that have to happen in the U.S. for the penetration to increase.
I think there were couple of competitive launches in the quarter do you view that as a competitive threat at this point or do you see that kind of helping to market grow more quickly at this stage.
Oh, great questions.
So the for you started off by talking about momentum in our other business, which has broken down into kind of three buckets, but they're all b to b all of them are trending well, they're all on much smaller basis than what our regular subscription businesses are.
But if you think about our overall strategy at Trupanion at a incorporated level. What we know we believe as a category is going to grow by more veterinarians, having higher acceptance of the product. If you take a look at what has happened in the UK market historically.
When it started to get traction a lot more brands came into the marketplace. We think we're very well positioned to be the company behind other distribution channel as well as being the company that can be behind low ARPU or medium ARPU products in the future. That's part of our aggregate strategy. So we will stay focused on building.
The acceptance of high quality medical insurance with the veterinarians and if theres other distribution channels or other opportunities in the years to come we expect to be able to play in that were well set up to do that if you think about.
Changes in the market.
You know in the last a year, there's been a change in ownership of a couple of brands, but as I mentioned in my opening remarks. We've competed against over 40 brands in the last a 20 years at any given time, it's been about 20 brands in the marketplace. There's also been two new brands that have been introduced.
In the last a few months.
Those are not new products, there re dressings of existing products.
We would expect to that when a lower media marketed products, which ones those on they will really affect market share of some of our competitors and some dynamics.
We don't really think more competition is going to accelerate the growth of the industry, but we do believe a that we should expect more as more distribution comes into play.
Thank you. Our next question comes from the line of Kevin Ellis with Craig Hallum. Please proceed with your question.
Good afternoon, thank for taking my questions Daryl I guess.
Thinking about the increase in.
You talked about the double digit increase in lead volume.
Couple of things is this proof that the initiatives that you guys are investing in our working and I guess when you talk about double digits every talking low double digits or high double digits any any detail would be helpful.
Well I mean, I think our quarter shows that a lot of our initiatives are working.
No. This is the strongest growth we've had going back to the beginning of 2000 of 18 and their subscription business as well as our total revenue.
We also have our margin expansion.
The opportunity that we put into play years ago about trying to get scale, it or fixed expenses shortens the payback period, which allows us to invest greater dollars in areas to grow the business and we feel and I mentioned in my opening remarks, a bunch of areas that we're focused on I don't expect all of them.
To work, but we're excited about each of them.
And we're going to continue to invest in these areas and we think it will give us a higher probability of having a higher growth rates for not only the years to come but the decades to come.
Okay that makes sense and then I guess going back to David's question on the seasonality in gross margin Trish explain I guess why they would be seasonality in the business I mean, I understand you know allergies and things like that but those you know can't be a big big driver of claims or is it.
I would say no single thing, it's a big a big driver you know part of it does tested.
Part of it just has to do with the fact that if you think about it now our revenue <unk> revenue is recognized.
Kind of equally over a time period versus you know claims are recognized as the information comes in so the number of holidays can impact to whether there's more week days versus weekends and in a given period can enhance it it's slightly and that's all I'm quite.
So I don't like for example, this coming quarter in Q1 and has an extra day with a leap year, an extra day means we'll get slightly more claims than we would otherwise get enough in a Q1 comparatively. These are all very subtle flight thing and I would say a 1% variability on gross margin and.
General and it's very slight in this business. So you know I get back to what I said earlier, which as these things are interesting on a quarterly basis, but when you're looking at trends and understanding how we're doing it the business.
Looking at things annually and as much more representative, especially in these areas.
Got it but that that that makes sense and then Daryl last one for me you know can you give us little bit of detail or color and thought behind you know some of the new policy changes you guys are thinking about are trying to make it looked like you and tried to ask some of the state regulators for.
Changes you know, allowing you to make mid term changes to the deductibles for existing policies I'm just wanted to see what was going on behind that.
Well, let me step back for a second and kind of paint the industry I think there's roughly three buckets of products. There's low ARPU products that have very restrictive policies that were not cover things like congenital congenital or hereditary issues, which has code for things.
Most likely to happen to agree they tend to have things like fee schedules they tend to have.
Rules like if you have a problem. This year you won't be covered the next year.
And those are ways to drive low monthly costs. Then you have another bucket, which are kind of your mid range products and I think the midrange products are the ones that have as whereas most people are kind of centered on right now and if you look at most of the companies that have had market share gains that kind of in that bucket.
And those ones have things like a longer waiting periods and they have.
They automatically increased rates because pets have birthdays they have.
Limits and caps they have longer exclusions.
They're all reimbursement models, but they kind of fall in the middle bucket and they might be.
What I would call.
Middle medium ARPU products Trupanion product, which is designed for veterinarians have the confidence to recommend is the broadest coverage not only is that the broadest coverage because we target 70 cents on the dollar. We believe it is the highest targeted value proposition I mean, you couple that together with.
Our ability to pay hospitals directly with our patented software and you end up with them. What we believe it's about service when we think about creating new products.
As I mentioned in our other revenue will have strategies for the kind of a low in the medium ARPU in the years to come but we're also try to figure out what would it due to have a product that would have higher conversion rates and higher retentions with higher product coverage and I. We currently do and that's an area that we will probably tests over the next one to three years.
There's we don't know will ever be able to exceed what we currently have but we'll certainly look at testing it and I think we mentioned in her opening remarks, a you know kind of the combination between the patents. We have in these new 15 year agreements with people in animal health. They all give us kind of incrementally better positioned to under.
Dan some things about data, but really about enhancing our customer experience for the long term and we're going to design products and features around the areas that we have our melt.
Great. Thank you.
Thank you. Our next question comes from the line of Mark Argento with Lake Street. Please proceed with your question.
Hey, This is Jason Schmidt on for Mark I, just quick question on the competitive landscape out there with recently scratch pay a private company that's offering payment plans for better services that just raise the money just curious how you view some of these financing plans bidding into the broader competitive landscape.
Well the financing plans have been in a into space for decades.
You know I think.
There's always an opportunity for companies to come in and either provide either a better customer experience or a differentiated product.
I know that in the last 10 years I've seen probably five or six versions of this I think most of it is dominated right now by one player and I think you know its solving a different problem.
This is for people that didn't have the foresight to be able to help budget in advance and it's a safety net for pet owners that don't habit I don't really think at cannibalize as our business one way or the other.
You know when we're looking at less than a 5% market penetration today, and maybe one day getting up to 25%, there's going to need to be solutions for the other 75% of pet owners out there and the financing options I think are interesting and can be helpful.
You know there other areas, which I talk about is the wellness products, which are.
Thing to pay for help to budget or get a return on investment on things that the pet owner knows they're going to need to pay for vaccination fleet control and often what we've seen in the past as people try to package enactment Nelnet plan with a wellness plan.
And we don't think that really provides a good value proposition for the consumer we strongly believe that wellness plans need to be provided by veterinarians and a lot of the veterinarians are offering them and they can do it where they are there is a return on investment you know here's $100. The stuff that you need to do every year and we'll give it to you for $90 break it into monthly.
Payments, if you come back to us So I think there's a place for wellness plans provided by veterinarians I think there's a place for high quality medical insurance and I think there'll be a place for financing for those people that didn't have the forecyte device.
Medical insurance.
Okay. Thanks, a lot guys.
Thank you are vital question comes from the line of Greg Davis with Northland Capital. Please proceed with your question.
Good afternoon, and thanks for taking my questions.
Just when we think about the blended conversion rates I think you said previously that they were above the 30% range roughly how should we think about how that's trended over time.
Would be expected to maybe go up as marketing and your marketing effects kind of our more effective or would those maybe level off as a market becomes a little bit more saturated or any color you can provide on that trend would be beneficial.
Well.
We did talk about that at our annual shareholder meeting in a the teams that are working on a gave a lot more visibility.
Overtime, our conversion rates have been trending up.
I think it is a partly its brand awareness and as the other one as being able to.
Distinguish our share the value proposition to consumer and needing to be able to do that over multiple mediums, including you know a mobile phones online video et cetera.
We are investing significantly in this area for us we expect that we will outspend other people in this category.
For the years to come and our expectations as it will be able to get.
Progress year over year I wouldn't expect every quarter to have progress is going to be a lot of test and learns and it's not always up into the right, but if I think over the next five to 10 years, we'd expect that to increase and it really does help give us leverage.
Yes that makes sense.
On a closer to the beginning of this year you had 10 open territories that were actually included some pretty sizable markets.
I guess I was just wondering if you could provide an update on how those investments in new territory partners have been going.
Uh huh.
You know we've made you know I'll give more details of the my in my shareholder letter, but.
You know, we're focused a last year and this year on not only adding the number of territories or the number of active hospitals, but we've really been bearing down on same store sales and trying to figure out how to get our software and build out our inside sales.
We're trying to do both of the same time doing both is difficult.
But we've made progress both on adding hospitals as well as same store sales this year and we'll provide more details the as the year conclude.
Got it thank you.
Thank you we have reached the end of our question and answer session and the conclusion of our call. Thank you for your participation you may disconnect your lines and have a wonderful day.