Q1 2021 Trupanion Inc Earnings Call
[music].
Greetings and welcome to the true paying of Inc. First quarter 2021 earnings call.
This time, all participants are in a listen only mode.
A question 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.
As a reminder, this conference is being recorded.
Now my pleasure to introduce Laura Bainbridge of Investor Relations.
You may begin good afternoon, and welcome to true opinion first quarter 2021 financial results Conference call.
Participating on today's call are Darryl Rawlings, Chief Executive Officer, and Tricia plus in Marquis two co presidents.
Similar to prior earnings calls Mark will be joining Caroline 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 true opinion within the meaning of the safe Harbor provision of the private Securities Litigation Reform Act of.
1995.
These statements involve the 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 Companys. 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 cost internal rate of return adjusted EBITDA and free cash flow.
When we use the term adjusted operating income of margin. 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 investor.
Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP results, which can be found in today's press release or Entre Pena's Investor Relations website under the quarterly earnings Tab Lastly.
Lastly, I would like to remind everyone that today's call is also available via webcast on true opinions of Investor Relations website. A replay will also be available on the site with that I will hand, the call over to Darryl.
Thanks, Laura and good afternoon, everyone.
2021 is off to a flying start this is apparent in our Q1 results, which I will share of momentarily.
But first I want to point of view or attention to my annual shareholder letter, which was published earlier. This week as usual. It includes the key annual metrics that we believe drive true paring its intrinsic value.
Some of the annual metrics shared in the letter include the number of territory partners active hospitals same store sales as well as financial highlights, including our year over year increases in revenue and adjusted operating income the show strong internal rates of return and the strengthening of our balance sheet. What is different about this year's letter of compared to.
Most is that it also includes a copy of our five year strategic growth plan, whereas we at true Banyan call. It our 60 month plan in the plan, we shared the vision of where we are headed and lay out the roadmap for us to deliver meaningful growth in revenue and intrinsic value I would encourage you all to read it and doing so I hope you'll share in our.
<unk> for the future of.
Ultimately our ability to deliver against our plan comes down to execution and execution comes down to people Tricia and Mark <unk>. Our co president are leaving the teams responsible for the execution of the plan our upcoming shareholder meeting on June 16th we will be your opportunity to meet and have direct Q&A.
With the individuals and teams that are directly responsible for the initiatives outlined in the strategic plan. Our annual shareholder meetings are thoughtfully constructed to be the most valuable source of information for shareholders each year, and we hope you'll be able to attend in person or via zoom as I noted earlier, but it's worth repeating the first three months of.
Of our 60 month plan are off to a very strong start so let me jump into our first quarter results.
<unk> revenue increased 39% in the quarter. This was driven by a 121% increase in subscription net pet growth, which was exceptionally strong adjusted operating.
Operating income increased 40% to $16 $8 million, we were able to deploy 100% of these funds within our subscription business and an estimated internal rate of return of 35% in total we added approximately 56000, new subscription pets in Q1, an increase of.
Of 54% year over year growth benefited from both increased leads and conversions across all channels. We also saw a continued strong retention, which is impressive given our accelerated growth one additional marker of our accelerated growth can be seen in our expanded brand presence over the last six months of the number of <unk>.
Searching for true pinion has grown by 57% in the United States and 78% in Canada, while the search term pet insurance has been flat to slightly down in 2020, we estimate that we increase intrinsic value by $1 4 billion.
And we shared of approximately $55 million of this increase and stock grants with the team, including a 4 million one time bonus to all team members additional details can be found in our annual shareholder letter our financial position is strong with cash and assets of over $513 million and we are well capitalized.
Afford these accelerated growth rates with our strong cash position, we have been making longer term investments in areas like our member experience with the goal of improving retention as well as in technology that will help strengthen our position as the low cost provider. While early on we've already seen some intended benefits manifest in our key metrics.
<unk>, what we used to refer to as Nirvana, which as a reminder measures the difference between existing pet owners, adding pets or referring friends and those the churn reached a new record in the quarter at a GAAP of just 0.3%.
Rodley, we're seeing more and more opportunities opportunities that have come from over 20 years of industry experience, achieving operating scale defensible moats and our brand position in a large and underpenetrated market.
With that I'll hand, the call over to Tricia to talk about our Q1 results.
Thanks, Darryl and good afternoon, everyone.
I will discuss our first quarter performance and also provide our outlook for the second quarter and full year of 2021.
Echo Darryl sentiment that it was an exceptionally strong quarter for Japan yen, our outperformance was driven by an acceleration in pet growth within our subscription business and continued strong performance within our other business.
Total revenue for the quarter was the $154 7 million up 39% year over year.
Within our subscription business revenue was $113 3 million in the quarter up 27% year over year.
<unk> enrolled subscription pets increased 20% year over year to approximately 610000 pets as of March 31.
Average monthly retention, which is calculated on a trailing 12 month basis was $98 seven 3% compared to $98 five 9% in the prior year period the.
The improvement in retention extended the average pet fly with Japan yen to 79 months up from 71 months in the prior 12 month period as we have discussed in the current and prior shareholder letters, we look at retention in three different buckets with one being retention in the first year.
While we have seen improvement in first year retention, it's still acts as a headwind to overall retention during periods of accelerated growth.
On our current growth rate, while we do project retention improvements within the various buckets, we don't expect to see the blended trailing 12 months of attention rate continued to increase during the remainder of the year.
The monthly average revenue per pet for the quarter was $62 97.
An increase of six 8% year over year or five 5% on a constant currency basis, we continue to focus on pricing initiatives to deliver our two increases of between 6% to 7% to position ourselves to hit our target payout ratio of 71%.
Subscription cost of revenue includes the cost of paying veterinary invoices and variable expenses as a percentage of subscription revenue the cost of paying veterinary invoices for our subscription business was 72% and variable expenses increased slightly to 10% both reflecting.
The investment in people systems, and claims automation capabilities to reduce future frictional costs and deliver a more differentiated member experience we have.
We'll continue to invest in these areas in the short to mid term so long as we continue to see future benefit.
Our other business segment is comprised of revenue from other products and services that generally have a beat of the component and different margin profile than that of our subscription business in total our other business revenue of $41 4 million for the quarter, an increase of 90% year over year due primarily.
The two an increase in pets enrolled within the segment cause.
Cost of revenue for our other business segment was $38 million compared to $20 million in the prior year period.
Of the year over year increase is consistent with the increase in the segment revenue over the same period.
Total fixed expenses sort of shared services that support both our subscription and other line of business were 5% of revenue in the quarter an improvement from 6% in the prior year period.
Adjusted operating income was $16 8 million in the quarter, an increase of 40% over the prior year period, and our net loss was $12 4 million, which I will discuss in more detail momentarily.
Of the vast majority of our adjusted operating income was generated from our subscription business during the quarter.
At $15 5 million and was 14% of subscription revenue.
During the quarter, we were able to deploy 100% of our adjusted operating income of $16 8 million to acquire approximately 56000 net subscription pets. This resulted in a pack of $279 in the quarter, an estimate of 35% internal rate of return for us.
Single average pet given our large market opportunity, adding pets at strong internal rates of return as core to our strategy and we are well capitalized to do so.
Development expenses or costs that are related to product exploration and development that are pre revenue were <unk> 8 million in the quarter.
For more detail on how we calculate internal rate of return and adjusted operating income. Please refer to our supplemental financial materials on the Investor relations portion of our website.
As discussed in the first quarter, we were able to deploy all of our adjusted operating income to acquire new pets at our targeted internal rate of return when combined with our development initiatives. This resulted in an adjusted EBITDA loss of $1 1 million for the quarter as compared to adjusted EBITDA of 2 million.
In the prior year period.
Depreciation and amortization was $3 1 million during the quarter, an increase of $1 7 million from the prior year period. This increase was primarily due to the amortization of software and intangible assets from our software acquisition in the fourth quarter.
Total stock based compensation expense was $8 4 million during the quarter up from $1 7 million in the prior year period. This increase reflects our Q1 grants in February which related to our 2020 and transact value growth that Darryl mentioned earlier.
The calculation of the overall company performance pool is consistent with our performance compensation plan, which is detailed in our 2016 annual shareholder letter and was approximately 2% of our total diluted share count at year end.
As Darryl mentioned included in our 2020 performance grants with the onetime grant to our entire team and the amount of $4 3 million, which was fully recognized in our stock compensation expense and net loss for the quarter.
We have very strong performance in 2020, and we're happy to share a portion of this value creation with the team.
Absent this onetime impact we expect stock based compensation to be around $6 million to $7 million per quarter for the remainder of this year.
Net loss was $12 4 million or a loss of 31 per basic and diluted share compared to a net loss of $1 1 million or <unk> <unk> per basic and diluted share in the prior year period.
Net loss per basic and diluted share was impacted 17 compared to the prior year period due to increased stock based compensation expense and <unk> <unk> compared to the prior year period due to increased depreciation and amortization of debt.
Additionally, our accelerated growth rate and associated acquisition spend impacted EPS by <unk> <unk> compared to the prior year period. As a reminder, we view our revenue growth and profitability and cash flow measures are strategically linked.
Historically operating at or above cash flow breakeven was the guardrail to which we manage the business as.
As we noted in our prior calls our financial position is very strong and were capitalized in a way, which we can afford our accelerated growth and execute on the opportunities in front of us.
In addition, we are spending more on capitalized items, mainly in the software to support our member experience and new product initiatives.
As a result free cash flow in the quarter was negative $4 6 million compared to free cash flow of $1 4 million in the prior year period operating cash flow in the quarter was negative $1 7 million compared to $2 9 million in the prior year period.
At quarter end, we held cash and investments of over 224 million and no debt.
I'll now turn to the outlook for the full year of 2021, which we are updating to account for our over performance in Q1.
We now expect total revenue in the range of 674 to 682 million subscription revenue for the full year is expected to be in the range of 491 million to $496 million, representing 27% growth at the midpoint.
At these revenue levels, we would expect total adjusted operating income of around $75 million, an increase of 31% over the prior year with over 90% being generated from our subscription business.
Of the $75 million, we would expect to invest approximately $66 million in acquiring pets within our subscription business, which at our targeted internal rate of return results in a pack of around $280 per pet.
We believe the most value is created through the compounding effects of cost effect of pet acquisition, while operating within our internal rate of return guardrails of 30% to 40%.
For the full year 2021, we also expect to spend $3 million to $5 million on development initiatives discussed earlier as well as our other business for the second quarter total revenue is expected to be in the range of $164 million to $166 million.
Subscription revenue is expected to be in the range of 119% of $120 million, representing 29% 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 and Canadian currencies.
For our second quarter and full year guidance, we use the 79% conversion rate in our projections, which was the approximate rate at the end of March. Thank you for your time today and I will now turn the call back over to Darryl.
Thanks, Trish before we open it up for questions I want to remind you of a few upcoming investor relation of events.
This weekend Mardi Trish and myself will be hosting our annual Q&A to immediately proceed the Berkshire Hathaway annual shareholder meeting. This event was designed for us to connect with long term like minded shareholders and we will once again be hosting the event via zoom those interested in participating can register for the event.
On our Investor Relations web site, and as I mentioned earlier, but worth repeating our annual shareholder meeting will be held on June 16th with vaccination rates, increasing we're excited to offer limited in person attendance at our Seattle headquarters.
Carriage you to visit in person. If you are so Abel and to register as soon as possible on our Investor Relations Web site to ensure we have enough space.
For those who are unable to join us in person, we will offer of live broadcast via Zoom Webinar, We hope to see you at both of these upcoming events with that we'll open it up for questions.
Thank you we will now be conducting a question and answer session.
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One moment, please while we poll for your questions.
Our first question comes from the lie that Maria risks with Canaccord Genuity. Please proceed with your questions.
Great Congrats of strong results on the thank you for the shareholder letter, it's always it's very informative.
I just have a couple of questions around your two new subscription product can you maybe talk about the level of coverage the queue anticipate providing for the key products and maybe broadly speaking what are some of the conditions that are currently covered under your core plan that will not be covered on the display I guess, how you're positioning the new of plants for consumer.
And maybe related to that.
Just in terms of pricing when do you anticipate the discount range to be for the two plants compared to your core to opinion offer for the same pad.
Thanks Maria.
So.
We talk about.
Offering kind of a low and a medium RP products.
In my annual shareholder letter that was recently published and.
No.
Those products are going to be set up and if that's the way that they are clearly identified as of the consumer the diff.
And that's something that has the low coverage median coverage and our traditional higher coverage product.
So I just want to make sure the clear swim lanes, so that the consumer can understand how and why they should choose all of the products will have a high level of transparency and have the same value proposition.
We are planning on launching those products.
Later this year.
We believe.
Good time to do it now because of the company is now set up where we can leverage.
The operating scale as well as our technology and data to do that and we're excited to see other perform in the market.
Got it that's very helpful and maybe a quick follow up can you talk about sort of your marketing strategy, primarily around direct subscriber acquisition efforts of Easter plans and are you planning to invest in brand behind the two new products.
I'll hand that one over to Marty.
Thanks Darryl.
So in terms of the auction as trustee of the difference of today's phase III price will be and Tony ill direct you can see USAA of playing in the online space predominantly.
When we think about the investments in the brand we're going to be continuing to enhance the guardrails of the internal rates of the time between cash of 40% so that won't change of might shift and low.
Continue to do what we can do with the 90% premises the stable growth, we can get with those products from the end of the market.
Got it that's very helpful. Thank you very much.
Thank you. Our next question is coming from the line of sweater category with Evercore ISI. Please proceed with your question.
Okay. Thank you two questions. Please first.
One of our growth ambitions could you please talk to what really worked.
The.
Driving the acceleration that you saw in the quarter.
Subscription back.
And then the second question is in your letter.
Do you have the table that talks to the active hospitals and the visits so I wonder if the <unk>.
Clinic visits every 60 to 90 days that between last year, primarily because of the.
Curbside care.
Think of that it can get back to 2019 levels sometime the fuel or maybe exceed that sometime this year.
And also.
You shared the five year goal for software penetration levels I wonder.
If you could give us.
Some sort of the.
The range for maybe where you think you'll be exiting this year or maybe next year in terms of software penetration too. Thank you.
I thought the soggy.
So I will take as much of that kind of those questions and charity. So in terms of gross additions will watch while overall, we saw a really sort of uptick in both ways.
Finding insurance for the first time conversion rights of very strong and retention rate of favorable as we've talked about historically, we've really been looking at the member experiences, which does help to drive of referral channel. So when we think about referrals that we know if we give people great member experience something that we can update you of alright the.
The control that help the VAT.
The foundation, we have is seeing good growth and the more of that people think about pets as part of our family of <unk> continuing to do the best they can for them, we're saying that continuing and the.
The cautious all of which I think all kind of rounding out the two having a much stronger brand presence as we start to put all of our channels together given the stocking of <unk> to perform very strongly for us.
In terms of active hospitals and visit you are right.
We did see a decrease in hospital visit software excuse of caveats, we are seeing still around 20% 25% per day.
Currently the way.
Welcome to get back a little bit more now say where possible of failed going back in and meeting with the hospital of continuing with those relationships, but I will say is the benefit of having built relationships over the last 10 to 15 years as we have in many of those markets, we're very being able to have been picking up the sales still communicating with us still adding value in ways that we.
Can build on while we can't get in the hospital and of course upon us to go back to face to face business as soon as we can as long as we can do it safely by far a field team in the hospitals themselves.
So we're pleased with picking up if they can have a slightly and we'll keep working on that through the rest of the year.
In terms of our five year Gulf of software on penetration it depends a lot on COVID-19.
Teams are continuing to pick out of some of our penetration nicely and we'll be talking more about that at the shareholder meeting.
And can kind of give you more of the insights into the tactics and what our expectations of the rest of the year.
Okay. Thank you can I can I can start one more as a fall of if you were to include virtual visits the phone calls and <unk>.
While the video calls would you say that the 60 to 90 day would be comparable to 2019 levels, if you add of physical and virtual.
Yes, absolutely.
We've gotten out of any territory products or you still have the account management team. So the price of support we give to the hospital I was saying is probably increase that.
Over the last 12 months between the kept making sure. We can do whatever is possible took the form of acne.
It's not as good as we can pass on banks.
Definitely definitely its good to build that relationship and scoping that for them.
Okay. Thanks, a lot.
Thank you.
Thank you. Our next question comes from the line of David Westenburg with Guggenheim Securities. Please proceed with your question.
Hi, Thank you for taking the questions and congrats on the really strong growth.
So, let's actually start with the growth in <unk> I know you are targeting above 6% or above historical trend.
You did seem to get there with the six 8% growth in that but you also combine that with strong new pad adds.
Can you tell us about the sustainability of those two metrics combined I know that you say is the the cost of veterinary care goes up it drives the demand for insurance, but I wouldn't necessarily think that would be the case all the all of the short term.
So if you can maybe run us through kind of the assumptions in the year with those two metrics kind of in the combined thinking about them combined thank you.
Hi, David Tricia I'll start end of sort of talk about the thought process that went into our outlook.
And then let mark hair, Darryl add add more more color from their perspective.
Yes, as you saw we did have strong <unk> and it was benefited by a rollover of person and our FX rate for the quarter.
But we still feel our progress overall is strong.
As you know our appeal and our pricing is a factor of what of that and why expenses are that we see come in and adding that 30 points on top to hit our pricing and our target margin for that invoice expense of 71, we did make solid progress and year over year, a year ago. It was <unk>.
$72 six and this quarter at 71 nine so overall, we're very happy with how our of who is trending.
<unk>.
I would expect.
And the guidance and what we put in is at similar level.
What you saw in Q1.
And we feel like that is reasonable.
Similarly in our outlook for net comes to our pet growth.
And what we're experiencing.
No.
As you mentioned, we're very happy with our results in Q1 the <unk>.
Results in Q1 definitely exceeded our expectations, particularly around pet growth and the acceleration and.
Margaret and her team did an amazing job of deploying capital.
At that 35% internal rate of return.
And so the extent we can continue to do that going forward, we'll do so we have good confidence.
And sustaining Florida back to tier one level as we go through the year.
Or not.
Getting ahead of ourselves are being overly aggressive in the guidance.
And beyond that of one other thing I will mention on <unk> overall, as we work to introduce new products and we do have accelerated growth.
Who can be impacted by the mix of business overall.
And what we're and so there can be some variability.
And we are most focused on hitting that 71%.
Proposition overall.
Got it that makes thing is actually a good reminder, as you maybe go into that.
Current product categories I guess.
Alright, one other question on the on the search term of 67% can you talk about the correlation from buying and kind of what im getting at right. Now is is that your new subscription pets actually increase I believe I believe it was more than 100%.
And I would tend to think the way that your purchases.
One of the veterinarian the veterinarian recommends Japan yen you come home at beside you I never church surgeon.
Japan, the Dot Com I would always just go Japan yen.
What day.
And here it is.
Maybe you already said this but did conversions actually go up in the quarter.
And how meaningful was that conversion.
And there and then I'll take the rest of the questions offline.
Well, we mentioned in the opening remarks.
And all of our accelerated growth occurred from increase of lead as well as the increase conversions and no growth.
Net across all of our kind of distribution channel.
And.
Our year over year.
Growth you have total.
Total pass Youre also looking at net pets, which is reflected in the improvements in retention.
Sure.
The FDA, which I mentioned was the historically the smallest GAAP at 0.3. So the aggregate of that is what drove the 122% year over year net subscription growth.
You are right. When we are driving lead from veterinarians of referrals when people say well I'll take a look at true banyan people typing sure Danielle.
And that's what we're referencing of our brand awareness has been increasing.
And increasing at a much higher rate.
And then.
People searching the term pet insurance.
Got it yes, yes very much.
Sorry, Dave highest logging just out of just add to that as well just the kind of reinforce the point that the thought.
Thank you when we think about distribution channels, and we think about the way that the.
Traffic is works in the digital channels as well, we're just reinforcing that Brian it's okay go from of that to Google.
That's the way it's going to that's the brand play that we have there and we're always trying to drive that efficiency. When you think about other distribution channels that we've mentioned, we're already starting to get the strength that we're opening opportunity of <unk>. When they think guys of the VAT diverse thought to play a role of the conversion piece of the pace suggests the lead generator, which again is really why we're saying that brand presence.
Maximized because of you're touching a plethora of different places waste, we were unable to pay before.
Yeah.
Got it thank you.
Thank you. Our next question comes from the line of Jon Block with Stifel. Please proceed with your question.
Hey, guys good afternoon.
Maybe the first one I'll actually start with the shareholder letter.
Specific to the pet food initiative, which I believe is Lance path and I think you mentioned in the letter Darryl is going to be sold through the veterinary channel.
Early but any color on that with call of pricing and margins and the fact that you mentioned is going to be sold through the veterinary channel.
How do we think of that in other words can still be bundled with a companion policyholder and if so would it be bundled in terms of offering a discount because you have greater.
<unk> conviction on the Pet's health longer term and then I'll pivot more to questions on the quarter.
Sure well the hypothesis, we have around food the system.
The thing we held for.
Well over 10 years is that if a pet Inc.
High quality food and the right quantity it is going to have a better health outcome.
Well at this point that's the hypothesis.
We've been investing in this area for a while to figure out how we component of our cash.
Hypothesis.
Let me do low and there is a significant data, saying that of a pad equal it's the right amount of calories.
A better health outcome. So we will be able to come out of the gate early on by saying if you're eating the right amount of calories recommended by the veterinarian.
Should expect some organic veterinary invoice expense and we would pass it on to a consumer.
But it is going to take of the years.
Actuarial data to be able to determine if there is big health improvements, but the.
Total is if there was.
27%, including from health improvement.
Based on the pending eating a certain diet, but we would offer that discount on the insurance the two reinforce each other the.
The bulk of the monthly subscription.
I would now have to be limited to just any brand of food.
This could be.
Anyway, we were able to measure of our goal with Landfast was really just to kind of.
The hypothesis and get moving.
Got it perfect and just to kind of more in the quarter.
Some quick math, which is always dangerous, but I think you mentioned, you deploy $66 million and spend the acuity pack and price.
As of about 235000 gross adds for 2020 and wallet or call. It 50 8-K per quarter.
56 from the first quarter you got a lot of momentum you've got increased brand identity search terms are up so can you talk about.
Why can be clear of <unk> was impressive, but why call. It a leveling off of gross adds the expectations, which seems to be implied in the guidance guidance of the balance of the year.
Yes, John.
Hmm.
I mean, the overall ad.
I mentioned three cleared.
We're really excited about the growth in the quarter and we have a lot of good confidence about.
How that level of sustaining that capital deployment and hitting the internal rates of return at that level can flow through the year.
We also don't want to get overly aggressive or too far ahead of ourselves at this point.
Particularly in our outlook. So so this is an area where we're comfortable with at this time.
Okay, and then last one from me again specific to the quarter.
A lot of it the light on some accelerated considerably around the gross adds but pricing fell below our expectations on the subscription business.
You mentioned sort of to compare year over year, but it would be fair or at least the portion versus the last three quarters.
In 2020, neither of the shareholder letter of it would also seem to imply that the express deployment might of been curtailed under of COVID-19 environment. Sometimes express is responsible for accelerated claims and some of that same sort of people who will be counterintuitive why why weren't you able to price better with six 8% of <unk>.
Deployment of unexpressed, not accelerated and just seem to matter when at the end of the day every 100 bps on the mass of topline is obviously, a big swing factor of why don't you think about trying to ramp EBITDA. Thanks for your interest.
Yeah, I can start and Darryl can add as well the one.
One thing that I didn't mention to your prior question that I'll just throw in here quickly is.
To the extent that we can deploy more capital and add more impacts than with the <unk>.
And our current guidance that obviously.
Our goal and something that we're working towards.
When it comes to our of who and the $71 nine net you mention which the tick up slightly.
When we talk about investing in our member experience and that that can lead to strong referrals of can move to strong retention one of those investments was within the 71 nine and investing more in our claims experience.
And the processing of inefficiencies there.
That was.
A lot of <unk>, 5% increase from the prior year prior quarter.
Absent that we would have continued to see strong strong progress we haven't seen anything unusual within the vet.
Does that end of life expense related to our software specifically.
What we are doing it but deploying a little of that more capital into the claims processing side the elevate that.
Member experience.
Alright.
Add anything.
So go ahead, Jeff sorry, Im trying to slip one more in the I just want make sure I understand the development cost that you guys alluded to I think it was 300 K last quarter might of been hitting around 1 million I think I missed the exact number this quarter. Just wondering I have this correct. That's excluded from the pack is that is that kind of excluded from the pack out.
Yes, the protocol of our Beaver area when you read of the shareholder letter it talks about.
The international expansion and from new product initiatives that are pre revenue.
Part of that those development costs are associated with going back to your operating question and I think we've made good improvement kind of hitting a price target.
Year over year of auto is affected by blend of business there'll be more effective in the accelerated growth rate and offering new products from different distribution channels. So I'd be a little less sensitive to looking at the year over year changes and more laser focused and looking at the veterinary invoices.
If we're close to the 71% target one of the.
The operating in a highly efficient business looks good day.
The outlook.
Okay.
And then I will drop in fall of Buffalo, but I guess I don't understand excluding the the.
The development expense in other words, you want to acquire Patrick do you have an initiative today that you are spending on that results in the coming in the subsequent of quarter why is the expense excluded from the numerator and the pet comes in in the subsequent quarter of sort of our free right and the denominator and that's what I'm just trying to reconcile all of my mode.
Yeah, I mean, when we're spending in a period of time and measuring our internal rates of return, we're saying we do it on a monthly basis.
Also reported under the quarterly basis.
But if I'm doing an initiative to enter Japan with the partner in two years from now.
Im not going to put my $400000 of legal expenses and divided by number of pads set of of.
Acquiring this month.
It would distort the internal rates of return for the pads that we are doing so we wanted to separate it some of it.
Very clear because we are wrapping that spend up a little bit where we're doing it separately. So that our shareholders can have a clear viewpoint and what we're investing into the long term without of being.
Distorted in the year over year comparisons.
I would expand on that a little bit because I think this is this is a good question. The next for makes sense development costs are far more than sales.
Sales and marketing initiatives frankly, they're they're not.
These other than you know.
Training of the team a lot of it is for example.
Our low and medium of <unk> product initiatives.
Of the product owner getting all of that up and running the teams getting net price and files and ready for launch. So it encompasses many parts of our P&L and as soon as the product launches all of those expenses will go to the respective lines on the P&L and the measured based on the <unk>.
35% internal rate of return once we have the pets and revenue associated with that's helpful kind of.
Thanks, guys I appreciate it.
Thank you. Our next question comes from the line of Ryan Tunis with Autonomous Research. Please proceed with your question.
Hey, Thanks, good evening.
Okay.
Good day to day at the low.
Sure.
Got it.
The group.
Good day.
Please go ahead.
Okay.
The subscription product.
In the.
Okay.
Net product sales.
Net.
I missed part of it is.
Here's the know your interest.
Great.
Sure.
Free.
And we'll be speaking out.
Continued.
Yes.
Net product sales on top of the risks.
I would say the educating folks on the short answer's kind of noise from four day.
I'll, let you take all of that cheaper products could potentially the candidates.
Yes.
What's kind of the interest behind where you're from.
And the philosophy of consumers.
Ryan your cell phone connection with choppy, but I think I got the.
Just a quick question I think of your question was related to.
Launching of low out the product.
Thank you.
<unk> had a staff of three years that having the high quality of product and educating people and how to build the category.
And all of that remains true.
But we're not scared of anything.
Very confident with the strategy, we have had and what we have in our five year plan moving forward I would say there's two things.
Focus on one of <unk>.
If you have a lower coverage.
And you educate the consumer that has lower coverage and corresponding lower our approach that is better off than what is currently happening in the market price place.
Currently compete against the about 20 brands.
And people learn about your opinion and then we don't convert of 100% of the lead some of those people convert with lower medium <unk> products, which present themselves as being equivalent of teacher, Danielle we want to level, the playing field and we can do so by offering a higher underlying value proposition.
By targeting 71 cents of dollar and the low and medium products, but being very transparent to the consumer.
How it is differentiated these will be unique brands that will need to stand on their own. Another part that I think everyone needs to understand the as these products will not likely have nearly as high lifetime value.
And our allowable Pac spend while maintaining our 30% to 40% internal rate of return. The guardrails will mean that we are only able to deploy much smaller capital to acquire these paths.
Ultimately this is the path.
Cash for US we think of the category has been accelerating over the last two or three years. It makes sense and as we've talked about kind of our brand presence we grew.
Our revenues growing about grew about 30% our brand value is growing up by 50, 570%.
That.
That implies that there is some slippage where driving lead we're not converting all of them. This strategy may allow us to convert some of that we are not the consumer that would be buying these would be learning about the product of the transparent way, which is better for the category and it would be of a better underlying value proposition.
A long as we maintain the guardrails of our internal rates of return.
That's great if it's not successful and that means that nobody else is able to do it in the market.
Okay.
First of all of this time in the afternoon.
Again the growth momentum.
You said the apps.
Defense sales are similar trends.
Yes.
Yes.
The the guidance higher.
The 2%.
Right.
The.
Additionally, the 30.
The C diff.
From a.
Total.
Our.
Can you just kind of understand like extra.
Good day.
Our.
Our day.
Is there really that much to us.
Mark.
That type of things.
Good day really improved materially.
Right.
The cell phone is really choppy so.
Im going to try to read Braille and do my best but I think youre right.
Okay. Okay.
So you can kind of consumer.
Easily identify the difference between the $72, 71% target now.
But over long periods of time and doing it consistently.
We believe every one basis point of we can give back of the consumer.
Ultimately get felt and our job as a company it's the law.
Low operational costs as much as possible, while having the best customer experience and to be offer the broadest coverage to be recommended to the veterinarian channel and for some of these other channel if we might have lower price or lower coverage products that are kind of design.
Designed for those channel.
But all of them will have the highest value proposition think of it like going into Costco.
They have three bottles of wine one for $10 $130 of one for $100.
The each case, the consumer knows that they're getting the best value proposition and.
That's the that's our point of view as well I hope.
And so a good question reasonably well, but it was difficult.
Difficult to hear you.
You might cut off of just one last follow up.
Why not invest that extra one percentage of sales and marketing.
Is the retention of growth tool.
How do you balance that.
That would be an option to I would think growth.
We're not holding back right now with the strength of our balance sheet and the rates of return of 35% mortgage team is not being held back on how much can be deployed we inc.
We are located around the cash flow negative.
And deploy greater sums of capital as long as we're getting those strong rates of return because we do of the strength today.
And the extra 1%.
Our philosophy is we want the best value proposition for the consumer period.
Every year, if we can make it stronger we will and.
Yeah.
If the philosophy like Costco.
All of the people go into Costco and say.
While the selling the peanut butter for $3 you could sell up from 350.
And it's still the cheapest on the market.
It's not a philosophy we work on.
The brand to be associated with the best value proposition and we want veterinarian from consumers to understand the pan.
Kind of one of our point of view of it.
Understood. Thanks from the assets sort of as mentioned.
Yeah.
Thank you. Our next question comes from the line of Elliot Wilbur with Raymond James. Please proceed with your question.
Thanks, Good afternoon second time listener first time of course I appreciate you taking the questions.
The question is for Darryl I was just going to the.
Shareholder letter.
How can we think about growth and margin expansion of the other segments within the context of the overall corporate long term topline growth target of.
25%.
Second question I wanted to ask about the.
Current cancellation policy I know during the course of the pandemic. It was extended to 60 days I don't know if its reverted to historical levels.
Levels or not but just wanted to see if that in fact, the 60 day period is still in place and then I guess last question for Tricia with respect to free cash flow sounds like.
<unk>.
We will continue to see negative free cash flow over the balance of the year, but anything you can say about trends relative to what we saw in the first quarter.
Well I will go over the first question and our other revenue which of.
Lower margin business.
Do we expect that to change over the next five years and the answer is no not really.
But I will tell you that most of the initiatives, we're driving in our 16 months plan.
We will all be running with me.
And we reported on our subscription business.
All going to be targeting of long term, 15% margin and we're always targeting and a 35% of internal rate of return. The other business segment is really where we're doing the <unk>, it's not a beat of fee business and.
We don't really expect any margin improvements over the next four of five years from that in that business.
The second part of the question had to do with the calculation period.
We historically had a 60 day just prior to COVID-19, we move at the 13th we then moved it back to the fixed fee.
And we plan on keeping at that 16 of the future.
Yeah, and with regard to free cash flow.
We as we trend through the air Big picture, we would always be striving to deploy as much of our adjusted operating income as possible to add Pat.
With the guidance that we do have currently.
You would see.
The improvements.
Free cash flow I think of through the year, but to the extent that we can.
And redeploy that and accelerate growth.
That is what we would desire to do that.
Finally, I will just get more contacts because free cash flow does include capital expenditures and.
We have increased our investment there, particularly around.
Technology that was the fundamental in our acquisition of volume.
Claire.
Net technology as of course as part of building the foundation of our 60 month plan and sharing.
We can go to market with product launches as well as improve our member experience and claims automation services as the.
We expand within our 60 month plan.
That's important to us as well and that run rate on Capex, where you would expect.
Continued through the quarter.
This year.
Okay.
Thank you.
No further questions at this time and with that.
This call will come through and that we do appreciate your participation.
You may disconnect your lines at this time of.
Have a great day.