Q4 2020 Trupanion Inc Earnings Call
Greetings and welcome to true Pan in fourth quarter 'twenty 'twenty results call. At this time, all participants are in a listen only mode.
<unk> and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I would now like to turn the conference over to your host Laura Bainbridge Vice President of corporate Communications. Thank you you may now begin good afternoon, and welcome to your opinions on fourth quarter.
<unk> and 'twenty 'twenty year end financial results conference call participating on today's call are Darryl Rawlings, Chief Executive Officer, and Tricia plus end market you, who was recently promoted to co president similar to prior earnings calls Mark He will be joining Darryl Tricia for the Q&A portion of today's call.
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 opportunities and financial performance of your opinion 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 as the company's most recent reports on forms 10-K, and 8-K filed with the Securities 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 costs internal rate of return adjusted EBITDA and free cash flow when we use the term adjusted operating income or margin it.
It is intended to refer to our non-GAAP operating income or margin before new pet acquisition, unless otherwise noted margins and 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 these reconciliations of these non-GAAP financial measures to the most directly comparable GAAP results, which can be found in today's press release or entre opinions Investor Relations website under the quarterly earnings tab.
Lastly, I would like to remind everyone that today's call is also available via webcast on drew opinions Investor Relations website.
A replay will also be available on the site with that I will hand, the call over to Darryl.
Thanks, Laura good afternoon, the fourth quarter capped off a strong year for true opinion total revenue grew 31% over the prior year.
Operating income totaled 57 million on 29% over 2019, we invested.
Approximately 44 million of these funds within our subscription business at an estimated internal rate of return of 41%.
Our performance in 2020 is a testament to the consistency of our business model the strength of our positioning in a large underpenetrated market and the power of the pet in 2020 against a backdrop of shock and uncertainty petzel reminded us of the importance of unconditional love for my zoom screens to yours.
Pets were everywhere this past year and not just new pets to the household well much has been written about the rapid rise in pet ownership. Our data suggests a modest single digit increase to put this in context in a typical year with 180 million pets in North America, We would expect 12 million pets to pass away and about 12 million new.
Pets to be borne this year, we've seen the new pet population grow to approximately $13 million about a $1 million increase although this small increase has been helpful. The bigger opportunity remains increasing the overall penetration rate of the category. What Covid did do is accelerate the pet humanization trend that we've been.
Witnessing over the past several decades, we'd expect this will help grow the penetration rate of the category for years to come.
Our data suggests veterinary revenue and visits were up in 2020, and we saw strong growth from this important lead source outside of the veterinary channel leads were up across the board providing additional evidence that we're growing our brand. We're also keeping pets longer than ever before about 78 months in 2020 compared to 70 months and.
2019, the combination of increasing adjusted operating income and improve retention resulted in an impressive 25% year over year increase in lifetime value of a pet expansion in lifetime value increases our allowable pet acquisition spend giving us the opportunity to be more aggressive in the dipped.
<unk> of our capital while maintaining our targeted internal rates of return more broadly we believe the category of pet medical insurance is growing in acceptance and we're seeing additional opportunities as a result, I expect to share more details in my upcoming shareholder letter, which should be available in April are positioning coupled.
With the expansion on our key metrics sets us up well to continue to grow. This is evident in our fourth quarter results total subscription revenue grew 23% in the fourth quarter led by a 17% increase in subscription enrolled pets underlying this acceleration is net new pet growth, which is a leading indicator for a monthly.
Bring revenue business net pets increased 72% in the quarter benefiting from increased lead conversion and strong retention, maintaining and improving upon our first year retention remains an ongoing area of investment and focus as a reminder, we see lower retention among pets within the first year with true Pinyon.
Please see my pass shareholder letters for more details adjusted operating income grew 35% year over year to 16.6 million in the quarter. The team was able to deploy approximately 14 million of these funds within our subscription business and an estimated 35% internal rate of return, which is the midpoint of our 30 to 40 per.
Sent target the team continues to impress as they demonstrate an ability to invest increasing amounts of capital against our opportunities in this large and underpenetrated market.
This sets us up well into 'twenty 'twenty, one and ahead.
With that I'll hand, the call over to Tricia.
Thanks, Darryl and good afternoon, everyone as Darryl covered some of our 'twenty 'twenty financial highlights I'll focus the majority of my commentary on our fourth quarter performance.
I will also provide our outlook for the first quarter and full year of 'twenty 'twenty one I.
I Echo Darryl sentiment that it was a strong quarter for Japan yen on our outperformance was driven by an acceleration in net pet growth within our subscription business and continued strong performance within our other business.
Revenue for the quarter was 142.7 million up 35% year over year.
Within our subscription business revenue was $106.4 million in the quarter up 23% year over year.
Total enrolled subscription pets increased 17% year over year to approximately 578000 pets as of December 31st.
Average monthly retention, which is calculated on a trailing 12 month basis was 98.71% compared to 98.58% in the prior year period.
The improvement in retention and extended the average pet's life with trip Canyon by approximately eight months and is impactful to our calculation of lifetime value and internal rate of return when we look at the unit economics of a single average pet.
The increase over the prior year can be attributed to our improved service levels.
Focus we spoke about on our last call and has continued through the year.
Monthly average revenue per pet for the quarter with $62.03, an increase of 6% year over year in local currency U S. <unk> increased 6% and Canadian <unk> increased 4% over the prior year period we.
We are pleased to deliver continued acceleration in <unk> growth in the quarter, which reflects progress on our pricing initiatives, particularly in the second half of the year.
Our subscription cost of revenue includes the cost of paying veterinary invoices and variable expenses.
The cost of paying veterinary invoices for our subscription business was 71% of revenue during the quarter variable expenses remained consistent with the prior year at 9% of revenue as we continue to focus on the member experience.
Subscription gross margin was 20% of revenue in the quarter compared to 19% in the prior year period and within our annual target of 18% to 21%.
Our other business segment is comprised of revenue from other products and services that generally have a b to b component and different margin profile than our subscription business.
This now includes revenue from the sale of software solutions.
In the fourth quarter, we completed a strategic acquisition other software company that was predominantly focused on improving our back end processes and adding talent, but also had a small P&L impact.
In total other business revenue was $36 3 million for the quarter, an increase of 92% year over year.
Growth in the number of pets enrolled in products within this segment increased revenue, 87% year over year. Additionally, the sale of software solutions contributed 6% to the growth of other revenue.
Cost of revenue for our other business segment was $33 3 million compared to 17 million in the prior year quarter. The year over year increase is consistent with the increase in segment revenue over the same period.
Total fixed expenses, which are shared services that support both our subscription and other lines of business were 5% of revenue in the quarter consistent with the prior year period.
Adjusted operating income was $16 6 million in the quarter, an increase of 35% over the prior year period, and our net loss was 3.5 million. The vast majority of our adjusted operating income was generated from our subscription business during the corner at $15.6 million and what.
15% on subscription revenue.
During the quarter, we deployed 13.8 million of our adjusted operating income to acquire over 47000, new subscription pets.
This resulted in a pack of $272 in the quarter, an estimated 35% internal rate of return for a single average pet.
For more detail on how we calculate internal rate of return on adjusted operating income. Please refer to our supplemental financial materials on the Investor relations portion of our website.
As we enter the next phase of our growth, we expect to invest in initiatives that are pre revenue, including adding new products and international expansion. These development expenses or costs related to product exploration and development that are pre revenue and historically have been insignificant.
We view these activities as he uses of our adjusted operating income separate from pet acquisition spend.
In the quarter, we deployed point 3 million of our adjusted operating income on these activities additional detail can be found within our supplemental financial materials.
Adjusted EBITDA was $2 2 million for the quarter as compared to $3 7 million in the prior year period net loss was $3 5 million or a loss of nine cents per basic and diluted share compared to net income of <unk> 6 million or two cents per basic and diluted share in the prior year.
Period.
As a reminder, profitability is impacted during periods of accelerated pet growth as was the case in 2020.
Free cash flow in the quarter was $1 million compared to 2.7 million in the prior year period operating cash flow in the quarter was $4 million compared to $4 5 million in the prior year period on.
Now turn to our balance sheet, which we meaningfully strengthened during the quarter, most notably we received a $200 million strategic investment with a three year lockup from Aflac in the fourth quarter. The net proceeds of which were used to fund the strategic software company acquisition I mentioned earlier.
As well as to repay all outstanding obligations under our long term credit facility.
As a result, we ended the quarter with cash and investments of over $230 million and no debt our balance sheet at year end also reflects goodwill and intangible assets related to our software acquisitions.
The amortization of the intangible assets increased depreciation and amortization expense by point 6 million in the quarter.
Beginning in Q4, we have separated depreciation and amortization from our other operating expenses on our financial statements to make it easier to identify variances compared to the prior year and better align with management's view of operating results.
Note that the recent acquisitions are expected to increase depreciation and amortization expense by approximately 1 million per quarter in 'twenty and 'twenty one.
In summary, 'twenty 'twenty was a strong year financially we were able to drive expansion in key metrics, including retention and lifetime value of a pet and adjusted operating margin, while deploying increasing amounts of our adjusted operating income at strong internal rates of return. The net result was a 30.
3% increase in net pet growth within our subscription business and 57 million of adjusted operating income or 29% year over year growth. Our strong growth was also disciplined at an estimated full year internal rate of return of 41%.
Finally, our strengthened balance sheet sets us up well to execute on the opportunities ahead of us as we move into 'twenty 'twenty. One we entered the year with strong momentum, which is reflected in our outlook for the full year and first quarter of 'twenty 'twenty one for the full year of 'twenty 'twenty. One total revenue is expected to be in the range.
On $659 million to $669 million.
Subscription revenue for the full year is expected to be in the range of 481 million to 487 million, representing 25% year over year growth at the midpoint.
At the midpoint, we expect total adjusted operating income for the year of around 73 million, an increase of 28% over the prior year with over 90% being generated from our subscription business.
Of the 73 million, we'd expect to invest approximately $60 million in acquiring pets within our subscription business and expect to spend an additional $2 million to $5 million and the development of initiatives discussed earlier as well as on our other business.
Should we have the opportunity to deploy more adjusted operating income while operating within our IRR guardrails of 30% to 40%, we will likely choose to do so and for the first quarter total revenue is expected to be in the range of 151 253 million subscription revenue is it.
Expect it to be in the range of $111 million to $112 million, representing 25% year over year growth at the midpoint.
Also please keep in mind that our revenue projections are subject to conversion rate fluctuations, most notably between the U S on Canadian currencies for our first quarter and full year guidance, we used a 78% conversion rate in our projections, which was the approximate rate at the end of January.
Thank you for your time today, and I will now turn the call back over to Darryl.
Thanks Trish.
'twenty 'twenty was a year. Unlike any other the team navigated through a period of unprecedented change and came together in support of every veterinarian and pet owner, who place their trust and drew pinion for this I want to say thank you to the team look forward to seeing what we can accomplish together in 'twenty 'twenty one with that.
At Marquis Krish and I are available for questions.
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Our first question is from Mark Argento with Lake Street Capital markets. Please proceed.
Hi, everyone. This is John on for Mark I. Appreciate you taking my question.
First of all I'll, just kind of looking back at the past year.
Maybe could you break out some of the areas, where you've seen the highest returns on capital investments and is any of that has changed.
Pandemic started.
Hi, John we don't break.
Breakdown kind of the categories of.
Our internal rates of return either by channel or by Pat or geography.
But what I can say is.
That we saw increased leads and conversion rates across the board.
And particularly in the back half of the year.
Fair enough and then second question I know you guys have had a pretty big focus on the customer experience over the past couple of quarters and really ramping that up as I know, it's early but has that translated.
Into any kind of data points or takeaways as far as your goals for Nevada certain markets.
Yeah.
Yeah, we you know.
We first started talking about this in Q2 and Q3 were.
The output of the metric that we're looking at is improve retention rates and then you talk about Nirvana, which is.
Existing pads are existing members add pats her tell their friends and if that can offset the amount of pets that are canceling.
During the year, we had more markets than ever.
Hit that benchmark and we will talk more details about that at the upcoming shareholder meeting.
But we are definitely.
Besting more dollars in our customer experience. So it really breaks down into kind of two areas one is.
Either educating the clients at the time or before they enroll or shortly after and some of those funds show up on our pet acquisition cost and the other area is about really trying to improve our customer experience from the speed of answering the phone to our 24, seven 365 service and we're on.
Investing in areas such as technology.
Getting our software more places more automation are the recent software acquisitions that Tricia mentioned are all areas that we're investing and we're also adding the bodies and people around to make sure that we can continue to try to increase the service level. The only challenge that you can expect us with accelerated growth.
I'm trying to keep up those operational excellence is a big task, but we are kind of investing to try to make that happen. Yeah. I'll just add a couple of things John.
You know I think as Joe said the main thing with the member experience that were you know really trying to keep the momentum going with other protection and how that can impact our results.
And so that's a big focus for us and we want to invest more dollars in the member experience whether its the claims experience are on.
Awesome.
The general experience that our team provides and so now in the guidance it contemplates a for our subscription.
Subscription business, where adjusted operating income closer to 14% for the year, rather than our target of 15 and that's the reason why is that focus on the member experience and that's really what we've learned in 2020 is that if we focus on it we can see results like retention and so we really want to double down on.
Not going into 'twenty, 'twenty, one and not and that's driving some of those numbers as debt.
We'll be a big focus for us and and to keep this momentum going and then the other thing you know Darryl mentioned lightly and it's also a key take away of Q4 mm and some other investments that we made in technology scalability. The main way we have a great member experience long.
Term through technology through more automation, and we're investing in that area as well.
Great. That's helpful. Thank you guys and congrats on a nice quarter on here.
Thanks Chuck.
Our next question is from Maria <unk> with Canaccord. Please proceed.
Good afternoon, and thanks for taking my questions and Treesh Margate Congrats on your expanded trials.
Our first Ah can.
Can you. Please expand on this new product initiatives that you mentioned and what are those investments and how should we think about sort of any revenue related to that.
Yes.
Yeah. We first started talking about this for you at our shareholder meeting last year and you can expect more details on the upcoming shareholder letter.
Following shareholder meeting.
As the category expands.
We really spent the first 20 years of the company trying to get to operating scale. We built a lot of Foundation foundation around our data foundation around our National sales force that we called territory partners investing in our customer experience to be the only company able to pay hospitals directly at the time of service and when we look out.
Next 510 15 years.
Additional growth channel that we're going to be exploring or expanding into other international markets.
It's going to be adding on.
New products that are designed specifically for new distribution channels.
The the acquisition on the software company will help us take advantage of those areas.
In 2021, the guidance that Tricia provided really doesn't anticipate any of those having any material impact on our P&L.
You know in 2021, and 2022 and 'twenty three we will start to see it but it's really these are long term investments.
Got it that's very helpful. And then secondly, if we look at your full year outlook for subscription, which is which implies 25% I think can you maybe give us some color in terms of what you expect for pet growth wishes ARPA expansion and I believe last quarter. You mentioned that you may need to grow our pool of Bob's just sort of normal five ish.
Percent range.
Can you maybe share with US where you are in that sort of price initiative process and where they have all the necessary regulatory concentrations in place for price increases.
Sure. Thanks for the question Maria Yeah, I mean price they have something that we are constantly monitoring and making sure is as accurate as possible you know as we've talked about previously we really try to price as granularly as possible down to the neighborhood level.
That pricing, particularly on a neighborhood level is something that is continue where we have you know a large team that focuses on that when we we don't expect that to change I would highlight that I think we did a good job in 2020 and pricing and particularly in the second half of the year.
We're moving pricing up closer to 6% versus 5% and we expect that to continue going into 'twenty 'twenty, one and will remain focused on it as we've mentioned before in general you know our historical RVO increases over the past 10 years.
Ours have been 5% to 6% with with some other things corporate consolidation and other pricing trends that we see in the space. We think you know really we should be you know in the foreseeable future targeting closer to 6% to 7% and our initiatives.
And kind of analysis of the data is focused on that so that we can be as accurate as possible I'm, the Guy who inc.
Part of Jacks us being call. It started off sex for fat getting closer to 6% in 'twenty 'twenty, one and then the remainder obviously comes from pet growth as well as you know.
Some semblance of we're not projecting dramatic improvements in retention, but we're obviously have a lot of initiatives to do that but we havent free baked those into our guidance. So it's really mean maintaining that retention momentum that we currently have.
Got it thank you both.
Our next question is from David West timber with Guggenheim Securities. Please proceed.
Hi, Thank you for taking my question and congrats on on a great year here.
Can you help us reconcile new patient growth.
Mary Clinic, I know you mentioned, new patch was around $13 million versus last patch at around 12.
Im curious because it kind of industry data says new patient growth is accelerating.
Or has it been quite robust at the practice.
And I'm just wondering if that maybe helps you.
On the year.
And how maybe you think about that reconciled with of course pet adoption does that makes sense.
It does makes sense hi, Dave.
So in terms of a day, so that we say well the the traffic is definitely up in the veterinary industry in general there is since we mentioned this on my sense or not most of that is coming through on people visiting as the pace of new pets coming in the bulk of the change that you see there if people are at home with their pets during COVID-19 the thing issues with their pets and I've taken a pet for that as well.
Frequently so theres an increased visit pass on that.
For us the way that reconciles with the day said with thing is I'm, not saying, it's all going into that and we're having those conversations have taken capped by the care of your pet and the veterinary channel for US is that kind of got cool night that really we've developed relationships with banks that every year through a territory partner network. That's allowed them to appreciate the value of high quality pet insurance and so when we.
Think about that coupled with the increased conversation happening at the vet level people paying more attention to that Pat on.
The power of the pet in the house all the times of crisis that they're taking better care of them as well as that's by increase that we see a new pets coming into play puppies and kittens overall penetration rates in general you all going out finding in markets and we can see that but if somebody gets on to people taking better care of their pets in times of crisis.
Got it.
Yeah, Yeah, no no I got it so it did help you in the quarter, but help us because you target the veterinary channel on the veterinary channel itself was was robust as is more than they.
Aggregate new.
Forget patch.
No.
I would add on.
When do you think about the industry in general having moved to cut five am to say that that means growth as strong as it was is particularly promising and I think just reinforces that volume with the relationship that we have that.
Because cup side is as many of us and I was particularly challenging for the veterinary industry to appreciate the volume day use of reinsurance was already pretty good price.
Got it and second question is for attrition and sorry, I missed it I got a new phone and it's kind of cutting in and out.
When you were giving guidance.
<unk> said on previous calls you do expect to increase our two seven.
7% versus 6% historically and I think you said on the commentary, though again it was cutting out a little bit on you are expecting retention rates.
The increase and new pets to grow up.
New pet growth. So can you help me.
Is it indeed still that seven still an increase in our <unk> to kind of catch up to that 71% ratio still.
Something you are expecting and should we expect any kind of or why should we not be.
Why should we not.
Why should there not be a headwind to new pet growth.
With our peer going up thank you.
Yeah, Let me I'll try to cover everything let me know if I'm, if I Miss anything, but yeah, I mean and in general based on on what we see in trends in costs and and what's going on in the industry on data.
And ideally, we're executing very well and we're getting closer to our pool increases.
7% year over year now keep in mind missing increases, where we need them and we're targeting that 71% value proposition as you mentioned historically, our increases have been between five and six.
And so you know we're targeting seven mm over to be closer to where we need to be in and say kind of stay on that that's spot that we're targeting the guidance include fixed firsthand because we won't get to a full year on that then immediately so we're going from really.
Oh, you're at 5% in 'twenty and 'twenty, and then moving the needle to get closer to 6%.
And in 'twenty and 'twenty, one with the target with the data we have right now being seven.
And.
I think Martin do you want to talk about the growth side of it yeah, no happy to so I think when we think about that the headwinds in new pet growth. When we look at our performance in the business over the past 12 months of lease up on conversion rates are up on our retention rate is up all of that would suggest that the value proposition the retention rate thing as strong as they are taking it to 17 on the sales significantly.
Increased through the year. It means that there is value on their product on the productivity doing what it needs day, and saying it would be the increase in all cases does not present any any headwind to us.
Great. Thank you so much.
Our next question is from Jon Block with Stifel. Please proceed.
Great. Thanks, and good afternoon, everyone.
Maybe the first one just as we think the 'twenty 'twenty, one and this might build on Maria's question earlier, but the gross adds were really strong in the quarter. You know, we're talking over 30% year over year on the quarter they were less than 10% in the first half.
A 2020 net probably somewhere in between for Threet, usually just when we think about 'twenty 'twenty one.
How do we think about the gross adds year over year is 20% plus a fair number and then how about the cadence of that as the Cubs were dramatically different throughout 2020.
Hi, John I cant get yourself in terms of the debt.
On the flow that you saw back in 2020 with a difference in the quarter as a lot of what was happening in that year. If you look back is we were doubling down on focusing on other things that we can control them in the middle of the year. The pet growth wasn't what we are focused on it with member experience, making sure we could be there for our members when they needed it.
In fact, the thing on the veterinary experienced the partnerships and so we deliberately decided to focus on on the member at the price to a growing we started gradually as COVID-19.
What became more of a normality in that space.
Started to focus on okay, let's see how we can get that growth how do we how do we start to definitely play back into that water as well as maintaining the focus on member, which we did and we did it very effectively the team team was very skilled and I think are increasingly skills on the digital front I'm, helping us to improve that conversion rate as we look forward in 2021.
On the cadence of growth, we expect to be somewhat consistent continuing to drive lead volume, while we count on conversion rate help where we can and I'll hand over to Tricia to speak specifically to that the fact growth for the year on the 20 percentage that you asked about.
Yeah, Yeah, I'm, just echoing you know building on what Marty said, we we expect you know good momentum going into the year and then and then consistency moving through to your direct question the year over year comps in Q1, and Q2 of last year and are are lower than the back half a day or so.
Well, we'll probably you'll you'll see that in the and the growth rates you know as they model out and then when we get further into the year. We can we can update if trends, let's be a little differently on the visibility we have now but to answer your question, yes, but definitely you know low our comps and then and then higher.
Subtle impact that calculation.
Okay.
Thank you for that helpful and interest the contribution I might have missed you a little bit the contribution from the acquisition in the quarter. If you can revisit that what that was on what will the SaaS contribution be in 'twenty and 'twenty. One I mean, the guide was ahead on revenues, but right in line with us on subscription revs and I'm just curious the contribution from the acquisition full year in <unk>.
'twenty 'twenty, one as well.
Yeah, Yeah. Thanks, one other question and I'll, just I'll just take a minute to really highlight this acquisition because we're excited about it where we're excited to acquire you know aquarium software is the name of the company.
And on the backend really system that they they can provide to us as well as you know solutions that can be sold externally.
And they're a great company and excellent team and we've been very happy so far to the the contribution and you know that the two months of this past quarter was small about a million of of topline revenue and about 300000.
And additional operating margin and this is within the other business segment is the segment that it's classified in.
In terms of strategy you know our primary strategy is this is really to improve tripping onions backend systems are built them out. So we can better accident, our chances of being able to execute on much better with this team are working with us and the solutions that they have.
So a lot of the things that Darryl mentioned in terms of products and initiatives, where we're excited about the software to support it. So 2021, it's primarily focused on on getting all of this integrated them. So that we can execute more fully and and also <unk>.
King with that team on the longer term strategy.
But we do you now have us on some revenue on other contributions there so in the other business segment.
It's about 4% to 5% of them the growth of that segment's revenue is projected.
Projected to come from from this business.
With with all the with all of that in mind and then obviously you know modest adjusted operating income profitability up from there with it with the free primary focus in 'twenty 'twenty, one being on on our system.
Great and last one for me.
Increasing our apparel with the.
The allowable spend to increase for pet acquisition. If you will and retention is also improved a good amount. So really you've had to lever is on the L. B P. J.
Darryl can retention improve further from here you've got into very.
Kind of a high bar view Waddington improved further, especially in light of the accelerating gross adds were to your point you've talked about.
Higher year, one churn in the past, we'd love to get your thoughts there. Thanks guys.
Yeah, I mean, our lifetime value improved 25% year over year, which is a staggeringly high number for the average Pat.
You know in a normal situation, where retention stays the same the lifetime value of a pet would be going up about the same as <unk>. So you know around six or 7%.
Unless we were able to do.
Increase the retention rates and our retention rates moving from 70 to 78 months in the last year.
It's created a new a new high water level for our ourselves. The question is going to be can we sustain those with higher growth rates.
We're making a lot of investments to try to do that.
But to your ultimate question is where can we go on.
I alternately believed that we could get to 99% retention.
If we could execute perfectly I think we have roadmaps on how to get there.
I would not speculate in a model that we're going to get there anytime soon but internally I think that's where we think perfection would be.
We were we're going to put our money and resources behind the teams to try to achieve that.
But don't expect it over the next couple of years with the accelerated growth.
If we can maintain the 90 871 or the 78 months in.
In 2021 that would be a really impressive result.
Okay I'll take the rest offline thanks guys.
Okay.
Our next question is from Andrew Cooper with Raymond James. Please proceed.
Thanks for the question guys.
Maybe just to go a little bit different way of thinking about 2021, you know one of the things we've heard from a lot of peers in the animal health space not necessarily insurance.
Was was about limited access to clinics and so just as we think about.
The growth in 2020, and then looking at 2021 is there anything to consider in terms of true opinion expressed installations.
Essentially having been a little bit tougher to do this year, because you did have a little bit more limited access to those new clinics, whereas where you already had.
The software installed on a stronger existing relationships.
You know it.
The assumption that maybe that's what drove more of the growth appropriate and just how do we think about that going forward.
Yeah, Hi, Andre.
Good question. So I would say if we look back on 2020, we just we always had a very strong year and Anthony points out one of the areas that we we did buy down on them with our in store rate for our software. We are as we look forward to 2021, what we've seen is an increase in usage of it. So that is the habit or any thoughts to you said on the adoption rate business with naval isn't there.
There are a couple of ways in which that happens one of them is actually within the community veterinarians, having conversations around how do you deal with curbside, how do you how do you deal with it the phenomenon that we're going free today, but it will stay for members having that experience because it removes the burden on them and they can take care of their pets. So we are seeing.
Slide the natural hazards that you'd have with not being able to get into the clinic hospitals also on installing them, but it's still a focus of the business and it's something that we are driving hard to ensure that I remember experiences that because we noted a benefit against the favorable let's.
So you know we've we've learnt a lot from 2020 and that we put a lot of tactics in the pipeline to be exploring how do you get that install rate higher in 2021 on one of them is pretty wide mouth recommendation, which we're starting to see come through nicely.
And I think to us.
Great. That's helpful and then well that's already been asked so maybe just.
Just a quick update on the Florida trial has been out in the market for a little while now do you feel like Youre at the point given that a lot of the churn typically happens in that first year do you feel like you're at the point, where you've seen some results that give you confidence one way or the other.
Anything to add about that program or potential other tweaks to a broader rollout of a little bit different plan or anything like that.
Yeah, that's a great question, so I'm on a broad level.
We're always looking to improve and simplify them. What we have out there is that the product and you know on products all built on Houston, the veterinary hospitals to make sure. It's as strong as simple as possible on can get the highest and broadest coverage.
I'll go with the new products.
But if we can have a price that's going to increase distributions to increase the volume by the conversion.
Increase in Auckland, and therefore, a longer retention on higher lifetime value and we're seeing some positive signs in our business. It's complicated. So it's not just a case of putting the product out there on letting it fits them, we need to keep marching on data you know, we don't have anything stable on long term metric wise that would want to share at this point, but it has been.
Just shut in just shy of a year there'll be a year in March and we're encouraged by what we see on.
And you know it takes time to get it right, but as soon as we're in a position where we can share more about that we'll do that we'll just keep watching and launching it in the meantime.
Great I'll stop there I appreciate the questions.
Our final question is from Great give us with Northland Securities. Please proceed.
Hey, Darryl Tricia argued thanks for taking the questions I'm, sorry, if I missed this but with respect to your guidance.
What are your kind of thoughts on our assumptions around that lead volumes, where they go from maybe Q4 levels.
Are you expecting regarding lead volume growth from that channel.
Well again, when you're talking about Q4, I mean, the big standout.
Well, it's not just the.
A number of new pets that we enrolled but the net pet growth at 71% year over year net pet growth.
Hum.
Super High number we saw increases in leads and conversions across the board. We also saw increases in retention.
As we go into the guidance of 2020.
We expect continued growth.
In our leads and conversions from from the vet channel to existing members telling their friends.
And we're going to be investing more dollars to try to maintain these higher retention rates and we'll have to see how they play out during the year.
Okay. It sounds good.
You know I don't think we touch too much on this but regarding the partnership with Aflac Hows that progressing you mentioned previously that deal kind of taking a while to ramp to reach its full potential. So just wondering I guess for an updated timeline on when we'd see a noticeable impact from that partnership.
Yeah, well. It is a reminder, aflac is now one of our largest shareholders with just under 10% ownership of the company.
And we really look at it and you know there's two markets Aflac has a long long history in Japan, and we're gonna be exploring.
Bringing true Pan India, Japan, and that's going to take US several years to do it I can tell you overall theres nothing in our guidance that.
That implies any impact from Aflac in 2021, but in the North American side ill, let Marty talk to that she's closer to it that I have yeah I.
Thanks, Darryl so really kind of on we think about the north American side are explicitly in the U S market. We've got three different stages, and we talk about timeline. If I got the first one that will be faster market would be direct to consumer we wouldn't expect that to see have any impacts on the theory, particularly so that would be just going straight on on the <unk>.
I'll talk on website beyond that we don't have to other markets one of them would be leveraging the expertise on the power of Aflac has a poll on that from the relationships. They have with the large and medium size businesses through that technology and that broker infrastructure, they're working at launching something in 2022 and it will be understand started on just overall.
All out to see kind of how does that how does that work what do we see from that and maybe if we're successful and we execute well, we'll see some more benefit from that in 'twenty. Two and then in 2023. The first part of that that core is looking at how do we go after the small business and they're working with the 20000 is strong as I call me of agents.
He works, specifically with a small business with the cross across the American market, which we wouldn't be doing until 2023. So we have a a very kids ready program. We're working really closely with the team there a great team a really good partnership on things and some really good signs in terms of the roadmap on the skills and I'm really kind of building on that for public safety.
We believe we have which is developing the right products for the right channel with a partner that understands the worksite benefits that well I'm, sorry, what I'm really encouraged by what we see early stages, yet, but some sort of timeline built out and developed.
Got it that's helpful Marty.
Last one for me just relating to those pre revenue initiatives.
Tricia I think you said it was a $23 million in the quarter. So it's pretty small at this point, but how much do we expect those initiatives to increase going forward and you know could you maybe talk about some of the bigger initiatives that fall in there.
Yeah, I'll start high level, and then I'll I'll, let Darryl Darryl or Mark can you talk to the specific initiatives if they want to highlight any and.
In general this this will ebb and flow every areas as opportunities arise and timing of when things launch.
You know with the partnership with Aflac and other things.
Things ramping up as we look to the next next five years and what we want to execute on them. We're really starting to focus here and you know one thing is we spend a lot of time, particularly the last five years scaling the business focusing on hitting margin target.
And now we have the opportunity to think more strategically and more broadly and we have the funds available to invest in and these initiatives I'm. So that's that's really at the core of what were doing them in the in the next year, you know that combined with the kind of the day.
Net sales and marketing expense related to the other business, just typically not not more than a million or so we expect to be on the $2 million to $5 million range part of it just depends on how quickly some of these timelines and products.
Product development like Mark mentioned, how quickly they go from a big picture perspective, though these new initiatives we want.
I want to make sure they have the opportunity to generate when they launched 30% to 40% internal rates of return as well as targeting a 15% adjusted operating margin similar to our current subscription business. So.
We're looking at it through all those lenses.
Highlight though yeah.
You know for the impact on the business.
We don't need to be doing this for the next couple of years to hit our growth.
Gulf, but we're making these investments to think about.
Making meaningful impacts to our P&L and the 510 15 year range and they include international.
National expansion.
Working with distribution partners, where they can be powered by true opinion, meaning they get.
Access to us paying hospitals directly our data the same value proposition, but as designing specific products that meet the need for those distribution channels.
And we just see a lot of opportunity ahead of us and we're gonna be.
Planting those seeds over the next couple of years, because we've now broken it out into the P&L over the next year or two we'll be able to start to talk about what those are short term investments look like and why we're making those investments look forward to my shareholder letter in April to provide more but long term, we would expect that theyre going on.
Act more like a subscription business with 15% margin targets on 30% to 40% internal rate of return.
Great. That's helpful. Thank you.
And that does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Yeah.
Okay.
Okay.
Yes.
Sure.
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