Q2 2020 Trupanion Inc Earnings Call
Right.
Welcome to the Trupanion Inc. second quarter 2020 results call.
Hi, all participants Arnie listen only mode.
Question answer session will follow the formal presentation, if anyone should require operator during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Laura Bainbridge head of excuse me head of corporate communications. Thank you you may begin good afternoon, and welcome to Trupanions second quarter 2020 financial results conference call participating on today's call or Darryl Rawlings, Chief Executive Officer.
Okay, and Tricia plus Chief Financial Officer, Marquee tooth Trupanions Chief revenue Officer will also be available for the Q and a portion of today's call before we begin I would like to remind everyone that during today's conference call will make certain forward looking statements regarding the future operations opportunities and 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 a 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 the company's most recent reports on forms 10-K, an 8-K filed with the securities and exchange.
Range 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 costs internal rate of return adjusted EBITDA and free cash flow when we use the term address.
Adding incremental margin. It is intended to refer to our non-GAAP operating income or margin before new pet acquisition.
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 result, which can be found in today's press release or on Trupanions Investor Relations website under the quarterly earnings top lastly, I wouldn't.
Back 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 It was a strong quarter for Trupanion normally I start with a review of our key financial metrics. This quarter the metric speak for themselves. So I'll start with some context around her business performance.
Just a few months ago, we moved to our entire workforce remote against the backdrop I have a steep an unprecedented economic downturn throughout this period of change the team stepped up in support of our members and delivered on her promise to be there 20 473 65.
In times of uncertainty the need to help pet owners budget for the unexpected is even greater.
Across the business, we delivered record breaking service levels from the speed, we answered the phone to how quickly we were able to pay veterinary invoices. These efforts manifested in record monthly retention in the quarter and a record number of pet owners, adding pets are referring to friends improvement in these metrics paved the way for Nirvana.
No, which we define as a state in which existing member referrals equal or exceed the number of members who cancel I first coined the term enter 2015 annual shareholder letter and those of you who follow the story closely no. The significance of this metric on our ability to deliver self sustaining growth in the future.
At our annual shareholder meeting in June we highlighted Boston as our first U.S. territory to enter a state of Nirvana. Since then we've made progress in additional U.S. and Canadian territories, bringing our total counter territories in Nirvana to six.
Churn for the trailing 12 month period averaged 1.34% per month are highly efficient refer a friend and add a pad channel comprise 0.75% a pet during the same period the difference between the two the gap to Nirvana was 0.58% he 16.
He basis point improvement over the prior year period for the Standalone months of May and June the gap to Nirvana was only 0.43% maintaining service levels will be critical to continuing to drive nirvana across the business at the same time, our field sales team found new and creative ways of interactive.
And with veterinarians and their staff relative to the prior period. We believe the total number of touch point actually improved in the quarter strategic changes in how we support our field sales team and additional engagement from our account managers strengthened the performance within this core channel we ended the quarter with over 11005.
Hundred active hospitals, a number that has continued to grow in the third quarter. We saw good success outside the veterinarian number for a friend out of pet channels as a team was able to dynamically adjust our pet acquisition spend in relation to market opportunities. This is not a new skill for Trupanion then.
That result was stronger than anticipated performance in our subscription business, what we saw some benefit within our quarterly financial results. The nature of recurring revenue means the impact will be more meaningfully felt in the quarters in years ahead.
So with that I'll review, our key financial measures for the quarter.
Total revenue grew 28% year over year, and we ended the quarter with over 744000 total enrolled pets.
Adjusted operating income grew 44% year over year to 14.1 million 13.4 million of which was from our subscription business growth in our adjusted operating income sets us up well to deploy capital at attractive internal rates of return during the quarter, we were able to deploy.
Boy 8.4 million of our adjusted operating income in pet acquisition spend related to our subscription business at an estimated internal rate of return a 45% above our 30% to 40% target our internal rate of return benefited from our record high retention rates in the period growth in.
There are highly efficient refer a friend out about channel and expansion in our adjusted operating margin. The combination of margin expansion and improved monthly retention increases the lifetime value of a pet and our allowable acquisition spend as a result, and we intend to be more aggressive in the second half of 2020.
In the quarter, we saw expansion across key metrics that pet growth.
Retention lifetime value of a pet growth inactive hospitals and adjusted operating margin all while being disciplined with our internal rates of return on invested capital. These results will positively impact the intrinsic value of our company for a more detailed discussion of intrinsic value and Howard.
Business metrics influence that please look to my 2019 annual shareholder letter, which we published in April.
In summary, it was a very good quarter for trupanion across nearly every metric the team headed out of the park all while navigating through a period of unprecedented change to the team you came together in support of our members and their pet while raising the bar on or service levels well done.
And on behalf of all shareholders. We thank you.
With that I'll hand, it over to Trish.
Thanks, Darryl and good afternoon, everyone.
We're pleased with our strong financial results for the second quarter, which exceeded our expectations are overperformance was led by record monthly retention and solid gross additions in our subscription business and continued growth in our other business before getting into the results I'll provide high level contact.
For how our performance compared to our expectations.
In late April when we last provided guidance our lead volume from button Marian's was down as much as 20% compared to the prior year, we've since seen wellness visits at the veterinarian rebound.
Also in April retention was consistent with historical levels. After a slight decline at the end of Q1. We also had seen a slight reduction and the number of veterinary invoices, though it remains unclear how quickly volumes would begin to increase in light of market uncertainties, we had pulled back our pet.
The acquisition spending early in the second quarter, particularly our test spend.
With that as a backdrop I'll review, our second quarter performance in more detail.
Total revenue for the quarter was 117.9 million up 28% year over year subscription revenue was 92.5 million in the quarter up 19% year over year or 20% on a constant currency basis total enrolled subscription pets increased 15.
Year over year to over 529000 pets as of June Thirtyth.
Average monthly retention, which is calculated on a trailing 12 month basis was 98.66% compared to 98.57% in the prior year period, we know that approximately 1600 failed payment cancellations were deferred from Q2 into Q3 as it.
Result of a change in process due to co bed adjusting for these cancellations our retention rate would still be excellent at 98.64% for.
For additional context retention for Q2 on a standalone basis and adjusted for those failed payments was 98.78% our highest quarter on record as a reminder, nearly 96% of our subscription revenue for a given quarter is from our existing book of business. So.
Rating the impact of strong retention rates on our business model.
Monthly average revenue per pet for the quarter was $59.40, an increase of 4% year over year or 5% on a constant currency basis.
In local currency U.S., ARPU increased 5% and Canadian ARPU increased 3% over the prior year period.
Our other business revenue, which is comprised of revenue from our other product offerings that generally have a b to b component totaled 25.5 million for the quarter, an increase of 76% year over year.
Year over year growth and our other business segment reflects an increase in the number of pets enrolled.
Subscription gross margin was 20% of revenue in the quarter compared to 18% in the prior year period and within our annual target of 18% to 21%. Our subscription gross margin was comprised of 71.2% paying veterinary invoices and 9.2% variable.
Fences as a percentage of subscription revenue during the quarter, we saw a reduction in veterinary invoice volume that increased our subscription gross margin by about 1% of revenue.
Early in Q3, we have seen veterinary invoices volumes trending back in line with pre coded levels.
Total gross margin was 17%, which includes our lower margin other business segment total fixed expenses in the quarter scaled to 5.2% of total revenue down from 5.6% in the prior year period.
I also want to know that during the quarter, we were able to resolve the majority of our known regulatory matters, including a recent matter with New York and the amount of $90000.
We generated 14.1 million of total adjusted operating income during the quarter, an increase of 44% over the prior year period net income in the quarter was 1.4 million adjusted operating income from our subscription business segment during the quarter was 13.4 mill.
Ian or 14.5% of subscription revenue this margin expanded 250 basis points over the prior year period benefiting from a reduction in veterinary invoice expense and scale in fixed expenses.
As a reminder, our target margin profile for our subscription business is to generate 15% adjusted operating margin before new pet acquisition spend we continue to close the gap on fixed expenses nearing our target at scale of 5% of revenue. We also continued to make progress.
Initiative aimed at pricing has accurately as possible to our 71% value proposition, but we do expect to be closer to 72% for the full year up 2020.
During the quarter, we deployed 8.4 million of our adjusted operating income to acquire over a 38000, new subscription pets, resulting in a pack of $199 in the quarter, an estimated 45% internal rate of return on a single average Pat this compared to 8.2 million.
In the prior year to acquire approximately 35000, new subscription pets, resulting in APAC of $213, an estimated 42% internal rate of return on a single average Pat.
I'll take a moment to reiterate that we're continuously evaluating our Pakistan, ensuring we operate within our internal rate of return guardrails answer reflect current market opportunities at 45% estimated internal rates of return we left some opportunity to be more aggressive.
Free cash flow was 3.1 million during the quarter, an operating cash flow in the quarter was 4.9 million compared to 2.9 million in the prior year period. Adjusted EBITDA was 5.5 million in the quarter up from 1.3 million in the prior year period net income was one.
Quite fourmillion or four cents per basic and diluted share compared to a net loss of 1.9 million or six cents loss per basic and diluted share in the prior year period.
These results demonstrate that we have the levers to control, our bottomline profitability and cash flow, while continuing to grow during uncertain times.
Trupanions balance sheet remains strong with over 105 million of cash and investments and ample availability on our existing line of credit at June Thirtyth, We had approximately 27.3 million of long term debt.
I'll now turn to our outlook for the third quarter and an update for the full year of 2020, Oh once again highlight that while we're not immune to economic challenges. The recurring nature of our business model provides us with a higher degree of visibility into our future performance than most quarter to date, we've seen.
And the continued improvement in lead volume and strong conversion and retention rates that said, we're monitoring the pace of the market recovery and what impact the virus may continue to have any on activity at North American veterinary hospitals.
With that as a backdrop, we are updating our full year guidance to reflect our over performance in the quarter, while maintaining a slightly wider range to account for some market uncertainty.
We now expect revenue for the full year to be in the range of 487 to 491 million or 27% year over year growth at the midpoint for.
For the third quarter, we're expecting total revenue in the range of 126 to 127 million, representing 27% growth at the midpoint.
Our full year subscription revenue is now expected to be in the range of 382 to 386 million, 20% growth at the midpoint for the third quarter. We are expecting subscription revenue in the range of 98 to 99 million representing 19% growth.
The midpoint, our other business segment, which continues to perform well, but have less visibility is now expected to be around 105 million for the year.
These updated revenue levels, we expect total adjusted operating income for the year to be around 56 million with approximately 53 million coming from our subscription business.
Our total pet acquisition spend well flex up or down as needed in response to market opportunities with this in mind, we estimate our allowable acquisition spend per pet within our 30% to 40% internal rate of return guardrails will be between 240 and $270 for the full.
Full year at the midpoint this would equate to total pet acquisition spend for the year of around 43 million also please keep in mind that our revenue projections are subject to conversion rate fluctuations between the U.S. and Canadian currencies for our guidance, we used a 73% conversion rate in our approach.
Actions, which was the approximate rate at the end of June.
In summary, we're very pleased with our Q2 financial performance and our ability to navigate through the current market landscape. Our financial position is strong and we will continue to be disciplined and the allocation of our capital. Thank you for your time today and I will now turn the call back over to zero.
Thanks, Trish well open it up for Q in a momentarily joining us for today is Q and a session is marching to our chief revenue officer, who can help provide some additional context underperformance in the quarter I also want to point your attention to a few upcoming investor events, both Tricia and I will be participating in the upcoming.
Virtual Canaccord Conference next week, we'll also be hosting a series of virtual non deal Roadshows over the course of August and September we hope to speak to many of you then.
With that Tricia marquee and myself are now available for your question.
Thank you will now be conducting a question and answer session. If he would like that's the question, but star one on your telephone.
Confirmation, telling one indicate your line is in a question can you might start to you, but some of your question from the Q.
Thank you didn't see for Clinton, maybe necessary to pick up your hands that before passing the darkie, one lets say the legal for your question.
Our first question comes from the line that Ajaria with RBC capital markets. Please proceed with your question.
Okay. Thank you two questions. Please first on retention rate what gives you confidence I mean, it the shareholder event.
You had pointed out the globe in retention in May and it'd be great too.
Your your thoughts on what gives you most confident in the sustainability of this retention rate and the second question is what any.
Any trends in particular that you can call out from July Thank you.
Thanks for that.
Well, you're right that we first started to see an increase in our retention rates and spoke about it at our shareholder meeting in June.
Main areas. It gives us confidence at least we have a road map will still have to execute.
In the beginning of Q2, knowing that there was a lot of uncertainty with code Red and looking at the end of March we went back to the team and said this is a time to really focus on our existing members. We don't know what the opportunities that's going to be like outside of our control, but let's really focus on taking care of the customer and we did that by paying or in.
It's a faster than ever answering the phone quicker and the team really rallied and I can't say enough about what the team did what we saw in the back side of that was record leveling level NPS scores record level retention and pretty much across the board on every way that we measure it we saw improvements in our retention rate.
In April and May and June.
And we have seen also improvements in July to date. So we think we have the formula it's not overly complicated when you partner with veterinarian hospitals. When you have the ability to pay hospitals directly in seconds or minutes, when you're able to answer the phones and service the client even faster and better than we've done how.
Historically, we think not only as our retention rates going to be able to be sustained at higher levels than historical averages, but we'll see higher referral and add a pet because happy clients mean, they're telling their friends and adding Pat so.
Softness so we have the roadmap and a tough the team to execute I'm sure you know over the next three years to come there will be bumps along the way but.
We're feeling pretty positive.
And then.
But any trends in July and.
As I mentioned just previously we've had seemed a retention trends continue we're seeing really strong results everywhere July and the veterinarians.
I really running off their feet right now, we're seeing a lot of wellness visit.
There are some challenges for us at curbside check in to learn how to.
That's access that so I think there's some other opportunities to learn but july's trended similar to Q2.
Okay. Thank you though.
Thank you. Our next question comes from the line of Murray I read with Canaccord Genuity. Please proceed with your question.
Thanks for taking my questions on that congrats on strong results.
Anymore color, maybe you could share with us on higher gross additions in the quarter in light of low APAC and any particular channels, maybe that were very productive for you. This quarter I know you highlighted high referrals, but is there anything else that you highlight and there or what thank you mentioned being a little bit more aggressive and the second half.
With what spending can you maybe give us a little bit more color on that.
Sure I think I'll hand, the silver to market you can give us a lot more.
And for the question better than I can.
Hi, Maria.
I would say that in terms of gross additions the the VAT tunnel continuing to outperform on the child that we that we operate within and in doing so allowed us to happy really efficient low cost that.
As always very productive for us that's always something that we we work hard to maintain efficiencies. We made some adjustments partway through the course of having spent a number of a number of Cortez and he is looking at what's the right thing to do in terms of continuing to get growth efficiency.
And they change is suddenly led to a more effective lead generation and conversion across the border. She is very positive first moving forward.
And so we not only do we have neutral with me messaging adoptions that we will say lets out there were a fire Brendan out of pet channels, a doubt that air point. When you look at the improvements we made across the business. They fell significantly help not only with all the new pads coming into the market. So.
Great experience he wants to thing quickly invoices get paid very quickly the software massively helps.
We've also thing the breeder shuttle continued to perform strongly for us if the channel it's not as large as about channel, but it's a great total a team of what very hard and pitching pushing forward and it's really across the board. If you look across all of the child, we operate within.
Positively that's been performing well.
In terms of getting more aggressive with POC in the second half of the year, we always look at trying to call ballpark spend into three different areas. The core channels, which is the that channel potentially for us.
And then looking at where are the area, where less competent and what they can deliver that we'll be doing more in the lines that maybe a little bit more direct because they weren't focused on the conversion sort of thing it could be anything from outdoor to more online activity I'm, just being more aggressive testing and the higher the we can take a learning through Q2 key transport to.
Put into more of a core spend ultimately, which is which is how we continue to grow by from a cost effective.
So from a pack at point of view.
One thing I'd like to kind of add is.
The a record retention rates that we've seen in Q2, even based on a 12 month average so not getting full credit of what we accomplished in Q2 it increases the lifetime value of a pad and increases from an address averaged 71 month to 75 month I mean, the stream of cash.
Although we're gonna have is larger which means to have the same internal rates of return we can spend more money, we can be more aggressive in the marketplace. So it is the fact of our expanding adjusted operating margin and the big improvements we've made on retention, which will allow us to have the capital to be more aggressive and marketing or team will figure out how to best.
Utilize that money.
Thank you that's a that's very helpful and maybe another question if I could can you maybe talk about how you territory partners and inside Ecom manages roles and responsibilities may have changed since the start of the pandemic and what are the right any changes to how you view youre sort of sales structure post call that.
Good potential they result in up in cost savings going forward.
Yes, I'll hand, it to Marty I will say that.
You know what we've done in the field pre Cove added we even started to make some changes.
If you looked over the last couple of years as a few areas that we weren't growing as quickly as we wanted or getting the results. We wanted so we made some changes with the team the as I mentioned in my opening remarks, and led to a more touch points to the bad Hospital now, we're having to learn how to do that differently on curbside versus regular checkinn.
But we've got new teams of people working on the tools and the tactics.
And we're super encouraged by the results we've seen no if I still your Thunder there Mark if you have anything else to and I know, but I think.
The 0.1 of the things that we've really a it's helped us to get a lot better relationship between the touch upon its an account managers, which already or pricing really really well together and the touch points. They then very different skills to the hospital, but I think them still having not that outreach. They had the relationship. So if you imagine that through in the process of going through kind of it is.
Challenging for them wellness business pick up in your school. They can get so the t. Rowe changes more of a supporting function and probably would otherwise the being a which is getting the facts here, but one of the biggest thing that we took out so the backend of Q2 Q1, sorry going into Q2 was we wanted to make sure that we're at position to leverage the data that we haven't yet.
But she is that we have any industry onto what would the partnerships we have across the board and the animal health industry not just in North America, but globally to do what we could to do a participant precedent and crisis cobot mode.
So our chief Actuary also said, though to see why no that's not the Cobot Council and if they had another initiative, which led to a massive social media outreach, they're not only hit a new petronas and help to respond to what the trupanion, but it also reinforced through a hospitals were working with how we can help them. A we can help them understand how do you message KBS, how do you message they fight to visit.
Pat.
Looking at let's cut five pick up which is a very different way about pricing for them. The industry is really reaching out looking for people that can help them practically in moments of money, but that's really what we've seen a big efficiency by someone touched upon on the count lounge amazed and that we have to Dallas point, we continue to look at ways that we can best and beverage Cup side.
Using all coaching messaging to chicken temporary filled up.
Got it thank you very much.
[laughter].
Thank you. Our next question comes from the line of Mark Argento with Lake Street Capital markets. Please proceed with your question.
Hi, good afternoon.
I wanted to get your impression on you know obviously make that turned damage it seems like.
No no new patch are all overall people are deemed more puppies and kittens and all that stuff what.
What do you think you guys are able to kind of quantify that at all.
From that as a is that what you're benefiting from right now or do you think there's law.
A multiple quarter all positive effect from that.
Just one quick follow up on.
At any direct to consumer channels that you guys. So.
Our continued to try here.
Thanks.
Well, Mark we heard a lot about the increase in new pet ownership.
And I'm going to do a little science for people here.
There's no doubt the demand for pets has been increasing we saying this and other recession when people have a lot of uncertainty when people are at home more people lose their jobs often people are saying. This is a good time to bring up had to train them you layer that on top of whats covert with quarantining and people are saying this is.
Great time to get a new Pat now there's no doubt that in March and April the shelters got cleared out it was great humanity came to the rescue of our four legged friends and made sure that they were taking care of.
But there is a supply issue.
And everybody is talking about this wave of new pet ownership and I think people are following stories in social media more than map.
No doubt that demand is up but in March and April.
A breeder was not able to produce more path.
It takes a on average.
About four to five month to increase the supply of past from the time.
I pad is conceived until it goes home. So we've really started to see just in the month of July and hearing reports from veterinarians that they're seeing a lot of new Pat.
In the month of July we didn't feel lot of it in Q2.
No doubt there is a lot of demand I would expect that we're going to see more of it in the back half of this year and we'll see how we fair in those areas.
And I'll hand over the DTC channels Mark is there anything that you're seeing that was exciting in Q2 or in Q3.
The interesting core supports the DC. So as a reminder, we think of anything that's the right because they were the conversion hotdog strategy say the VAT channel is core to the regeneration and really helps us a great a bit looking at them into kind of what we're saying and continues to be but from a direct to consumer.
The thing we were very quiet in April.
Again, as a result of coming out of the early signs of kind of it as we start to get more aggressive with off and we didn't do a little bit more testing, we were able to take advantage of some of the media, which was a little bit cheaper than it might otherwise have been.
And you know drive some good results our pockets.
Representative about I think we continue to learn and test then.
Continue to try all sorts of different direct to consumer Chiles nothing right now is kind of flowing inside of the war separate it helps to just tried I conversion little bit quicker.
It's important that channel.
Thank you.
Thanks, Mark. Thank you. Our next question comes from the line of Jon Block with Stifel. Please proceed with your question.
Thanks, guys and good afternoon.
Pretty quick question because the first one for you just because of the balance sheet. The our biggest maybe 85.
Year over year, Canada might be a culture of other division I think it's somewhat tied to what it even seems to be outstripping the impressive growth from the other divisions or can you just talk about the a are being.
90% year over year, and I think that's sort of a trademark that may have accelerated over the past couple of quarters.
Yeah, John and you're right, but that the majority of our accounts receivable balance is related to our other business segment.
Very small amount or they are which kind of grows in line with subscription revenue growth is related to subscription business just related to kind of month month and deposit in transit the haven't settled yet I'm a good portion of our other business segment I'm like.
The Trupanion product, which is monthly a and renewed monthly the majority of the other business segment is an annual product.
On the accounting for an annual product is to record a diversey bubble up front. If you allow collection on a monthly basis.
So what trends relatively in line with that with growth with overall revenue growth in that segment.
If you look down in the liability that nearly an equal in offsetting deferred revenue when I'm out.
Well, it's effectively kind of that balance sheet grossed up that occurs related to accounting for an annual product with quarterly payment or sorry monthly payment.
Because your recording a revenue and then deferring nearly all of it until it's recognized over the course of the year I never recording our receivable and then that receivable comes down as as the payments are made monthly by the customer. So it's just a function of the type of product.
Monthly and quarterly and being a I was really a balance sheet accounting growth up.
Okay got it very helpful. Maybe I can follow up offline there on the other one Daryl I think is for you. If you sort of a big picture question I mean, a lot clearly we're right in the quarter, but you don't.
Same instead, the something seems somewhat temporary and that's where I'd love some color or me from you in other words, possibly 199.
Got it still being to 40 to 70 for the year, which implies a big pickup.
It's a quite English subscription gross gross margin was really good in the quarter, but I think Chris you even talked about it moving maybe even outside the guardrail Daryl just sort of an old publishing question can you talk about you know what was really good in the quarter that you view as the noble going forward in coming quarters for years versus what might have been.
Advantageous for the three month period, it might somewhat unwind over that six to 12 months. Thanks guys.
Well, John what you're talking about is the levers that we have in this business.
You know, we don't have to spend our tax dollars to grow.
Year over year, or and if you read the shareholders or I know a lot of our shareholders read the letters and talk about the impact of Nirvana talks about what type of money can hit our bottom line well, having kind of normalized growth rate the levers that we have for our pet acquisition spend are.
Driven by the amount of cash flows generated and how much we want to be able to spend during the time now in that spend.
We have a combination of the things that we're doing regularly which are efficient and repeatable and we often have a group of test spending what we demonstrated in this quarter is we don't have to spend that money, we actually pulled a lot of it back and that lowered the pack spend for a period of time it should show in.
Masters the ability of the levers that we have to control our business it entered destiny.
Now as I mentioned before.
How do we get.
When we look at invested capital we're talking about the internal rate of return on invested capital and one of the things that really came out which should be sustainable quarter. After quarter. If we can continue to execute is taking our retention rate from 78 months, historically and starting to push it up closer to 75 and.
Maybe potentially even higher in the years to come up with the team can really rally.
When that happens.
Because the stream of cash flow over the past life will go up and our allowable pack spend the amount that we can span to acquire or Pat will still maintaining very very high internal rates of return will go up. So we mentioned earlier Trish mentioned to be getting on average a 35 bridge.
Thanks internal rate of return, we can be spending I think between.
Our guard rails were 240 and $270 to acquire a bet that gives us the ability in the flexibility to kind of leave the category and to learn and grow invest in areas that will take US you know five and 10 years.
I think that's the biggest kind of stand out.
When I look at your question is what was really you know one time, you know March and April which straddled Q1 in Q2, we're kind of the biggest change where we saw that traffic down and I'm just a lot of a lot of impact in the marketplace, but from.
Going from May June and July we've seen consistency.
Until really a comfortable moving forward.
Thanks for the color guys.
Thank you.
Thank you once again it seems like that so question.
Sorry.
Okay.
Participants do you think speaker appointment, maybe necessary to pick up your hands that before passing the Starkey. Our next question comes from the line of David Westenberg with Guggenheim Securities. Please proceed with your question.
Hi, Thank you for taking the questions so I'm going to continue.
Little bit with Mark's question in terms of teasing out I I get that the biology argument, but I am trying to kind of figure out what covert might have done in the quarter that might be different. So can you talk about if you know whether or not like through industry data, whether or not you're gaining or losing market share or how youre doing.
Relative to competitors, maybe in the quarter, a and then as a continuation of that are you seeing any differences in the marketing strategy marketing strategy of these competitors and I'm just trying to figure out how much of a covert bump there as to what kind of normalized the long term.
What the business looks like.
Well, it's the best information that we have if you look at 2018 and 19, even going back to 2017, we've been leading the categories revenue growth year over year based on the information that we have a we would expect that that is continued.
I will continue for 2020, and we expect that similar things will happen in Q2.
Versus other areas. The one the one place that we're seeing the benefit is because of our relationships with veterinarians because we're paying a pet owners directly because we're paying so quickly.
Those are things that are not easy for competitors to to replicate and that's where we're seeing our net growth accelerate because with lower churn.
Gives us ability to accelerate the medpac growth and you have to have the net past time, some monthly revenue to get our monthly cost to gave your revenue.
I would expect that may be we're accelerating in that were compared to the overall market because I think we lead and retention I'm confident we lead in retention and as we.
Outside of that I think the demand for Pat the demand to help people budget and care for their pets goes up and recessions in downturns and I think you will help the overall categories while trupanion.
I appreciate that and I realize that the need for insurance during recession.
Is higher and Youve historically shown very strong growth in a recession, but I.
I am curious if maybe just kind of.
Situation is different because we're having maybe unemployment be a precursor to recession as opposed to a normal recession and I.
With that with setting it up like that I'm. Just curious if you anticipate any impacts from from this high unemployment rate, maybe you need to extend terms, maybe should we see any any impacts on on I'm getting to extend terms seek consumer customers.
And maybe future impacts on receivables.
From that again I agree I appreciate that your business is fairly recession resistant I'm just kind of curious just you know this time, it's different the proverbial. This time is different.
Yeah.
Well, we're not going to be extending terms to our members like car insurance companies. The reason that they were able to in a different situation us as people start driving which means the likelihood of getting into car accident or lower well guess what.
The likelihood of a pack getting sick or injured or not lowered in a world of cobot than in the world that without covet and in fact, many could say that with more pat's at home and more people at home to notice issues, we could actually see an uptake and the level of frequency.
Marian's are certainly saying in the month of July they're running off of their feet. So.
I don't think Theres anything, particularly unique so far.
March and April was the shock and awe and low volume and then after that time Weve. It's acted like other recession I will tell you through other recessions our retention rates have always held we have not seen historically retentions were raised the way that they have I mean.
We're at 20 year highs in this company quarterly in monthly on retention rates and we put that directly to the efforts that the team has put together to servicing our clients and certainly our software.
And paying them with automation of all helped.
Thank you.
Thank you. Our next question something a line of great Yeah that with Northland Securities. Please proceed with your question.
Yes, the nutrition Darryl thanks for taking the questions and congrats on a quarter.
First of all just a quick we revisit those that leads.
You provide just a little bit more color on how those I guess lead volumes on that channel trended throughout the quarter.
No. It was back in April you mentioned them being down about 20%, but maybe how do those improve in Q2 on a monthly basis and then how is that maybe turned into July just relative to that down 20% level at the beginning of Q2.
Yes leaves in Q2 from the we're about April up about 8% year over year.
It's kind of that leads the way that we track it.
So we typically would expect leads to be up 10% to 20% by channel year over year to hit our growth rate. So they were a little bit down at 8%, but definitely trending up as we saw the quarter go on.
Got it that's super helpful. Darryl and then the second one for me which is.
Regarding that.
Newly implemented or I guess recently implemented retention team you kind of directed at.
Improving the so called save rates.
How much of that improvement I guess have you seen informing that team and.
Where I guess are you seeing most favorite level out are they continuing to improve since implementing that dean.
Well I'll hand, it over to Margate I'm not sure how much secret sauce forgive me, but the teams performed really well.
Line, Greg I'm, not going to giving too much secret thought, but I will say that and time to say races definitely help us. We've we've taken a team of a into the very dedicated to the skilled having conversations one other things are they not just about the team I'm gonna people, taking the coal and having that conversation. That's also around how quickly you respond to that passes so whether or not.
With claim because I understand why the invoice wasn't page they want to check up on something you haven't got you haven't got the volume of people are going to level, what they need to.
The antagonize enough to coalesce because were.
Communicating with them quickly that's helpful help with the do not costs, which will help us to do that third part all the its definitely part of the puzzle, but there are a number of different elements here that make us confident that it's not just about the kind of it impacts their austin operational changes as some shifting and messaging that's added value proposition and coaching and based on the fields, but also from Arren total team.
And having having that confidence at the hospital level that we're able to deal with that client quicker than they could do with and without paying with bad credit, calling the retention team with Pos of at and across the board. If you look at all the retention buckets, we've seen increases which is positive and tells us to this isn't just a capex related.
Hi, good onto your question.
That does okay, that's very helpful.
Last quick one for me was just if you can share anything regarding that partnership with rain, maybe when we would see those products at the market and if anything has really been discussed regarding that the strategy with marketing that product line. Thanks.
Yes. The question, you're asking is about a pet food initiative that we've made some investments and.
Our hypothesis is that.
Pasadena high quality food over their life will have better health outcomes, and we made some investments to figure out how to test that.
We're looking at in the next several months in quarters doing some more testing to figure out how we can learn about that hypothesis, but it is going to be a very long term project.
Okay. Thank you.
Thank you we had reached the end of our question and answer session and fusion of todays call. Thank you.
Can you may now disconnect your lines and had a wonderful day.
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