Q1 2022 Trupanion Inc Earnings Call
Greetings and welcome to Japan in Inc. First quarter 2021 earnings conference call.
At this time.
All participants are in listen only mode. A question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I'd now like to turn the conference over to your host Laura Bainbridge Investor Relations, Japan, Inc.
Please go ahead, good afternoon, and welcome to true opinions first quarter 2022 financial results conference call participating on today's call are Darryl Rawlings, Chief Executive Officer, Andrew Wolf, Chief Financial Officer, similar to prior earnings calls Mark you choose President and Tricia plus Chief operating officer will be available.
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 two 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 Companys. Most recent reports on forms 10-K, and 8-K filed with the six.
<unk> and Exchange Commission.
Today's presentation contains references to non-GAAP financial measures that management uses to evaluate the company's performance, including without limitation fixed expenses variable expenses adjusted operating income acquisition cost internal rate of return adjusted EBITDA and free cash flow.
When we use the term adjusted operating income or margin. It is intended to refer to our non-GAAP operating income or margin before 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 the reconciliations of these non-GAAP financial measures to the most directly comparable GAAP results, which can be found in today's press release or on true 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 true Pinions 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.
Earlier. This week, we published my annual shareholder letter outside of our annual meeting My letters are intended to be the best source of information to educate yourself on Japan you. It explains the way, we think about and run our business I'll touch on a few of the highlights today, but I would encourage you to read it in its entirety.
Turning to Q1.
The year is off to a strong start as shown in our financial results. Adjusted operating income are the funds generated from our existing portfolio of pets increased 29% to approximately 22 million.
You've heard me say this before but it's worth repeating the vast majority of Japan's intrinsic value is derived from our core subscription business in the quarter, approximately 90% or $20 million of our adjusted operating income was generated from our subscription business. This represents growth of 26% year over year.
<unk> as a percent of our subscription revenue adjusted operating income expanded 40 basis points year over year to 14%.
And our large underpenetrated market pet acquisition remains the primary use of our adjusted operating income in the quarter, we were able to deploy approximately 14% more funds year over year or 19 million within our subscription business at a 34% estimated internal rate of return.
In the quarter, we added nearly 60000, new subscription pets in line with our expectations and another all time high.
Members with our trepanning branded products are staying with us longer than ever before on average 80 months. This highlights our exceptional member experience and continues to be especially impressive in light of our accelerated growth.
Improvement in our trailing 12 month retention coupled with expansion in our subscription adjusted operating margin drove a 7% increase in lifetime value of a pet which topped $730 in the quarter in short performance was strong and we are optimistic about the road ahead with many of the Covid disruptions of the.
The past two years hopefully behind US we are excited to get back in front of veterinarians and their staff.
In my shareholder letter I shared key metrics around the veterinary channel active hospitals totaled 14700 at the end of 2021. Since then that number has continued to grow to over 15600 at the end of the first quarter.
Though face to face visits have been lower over the past two years growth in active hospitals continues to benefit from the strength of our brand as a penetration rate of trepanning members continues to increase within individual veterinary clinic in some markets. We are beginning to witness a flywheel effect, where our value proposition and customer.
Experience increases the confidence and trust of our product to both new pet owners veterinarians and their staff with veterinarian doors opening again and territory partners back in the field. We are excited to continue to build on the momentum of this key metric.
On a trailing 12 month basis, our two Copia GAAP was 30 basis points to Tropea provides the pathway to self sustaining growth with minimal acquisition spend for additional details on Utopia. Please refer to our shareholder letters.
Achieving a stated Utopia is a key component of our 60 month plan as is new products international markets and distribution channels, including through our partnerships with Aflac and chewy well. It's early days, we are excited to see how both of these key strategic partnerships will play out.
Long term initiatives such as these increase the odds of us growing at sustainably higher rates for longer periods of time for companies that are constantly reinvesting in growth tracking value creation can be difficult at true Permian, we want to maximize value creation, while at the same time, making it easy for them.
All of our constituents to track our progress in a very transparent way.
My recent shareholder letter I provide more thoughts around value creation, including laying out the ways, we intend to fund our growth.
At our annual shareholder meeting, we provide a high degree of transparency into our business through an extensive Q&A with the team members directly responsible for the execution of our 60 month plan. This year, our annual shareholder meeting will be held on June eight at our Seattle headquarters. This event is optimized for an in person attendance.
And I would highly encourage those that are looking to better understand our business our strategy and our culture to attend.
With that I'll hand, it over to drew.
Thanks, Darryl and good afternoon, everyone.
Total revenue for the quarter was $206 million up 33% over year over year, driven by strong pet additions and continued high levels of retention in our subscription business along with continued growth within our other business.
Within our subscription business segment revenue was $139 8 million up 23% over last year total enrolled subscription pets increased 21% year over year to over 736500 pets average monthly retention, which is calculated on a trailing 12 month basis was 98 point.
Seven 5% compared to 98.73% in the prior year period, given our accelerated growth, we're especially pleased to see first year retention continued to improve on a year over year basis.
Continued expansion of our average monthly retention rate means we're able to invest more in our growth and target the highest sustainable lifetime value in the industry as the size of our pet portfolio grows so too does the value created from our high retention rates.
The average revenue per pet was $64.21, an increase of 2% year over year and growing ahead of our cost of veterinary invoices, which increased 0.8% over the same time period. This is probably not intuitive given the headlines around inflation. Let me explain why as a reminder, ARP who is an output of pricing accurately.
So our value proposition and in the quarter, we delivered on our value proposition of 71%, while we hit our target in aggregate, we continue to refine our approach across over 1 million subcategories, including increasing or decreasing prices as necessary.
Over the past year, we've worked hard to optimize pricing leading to more growth in some areas, where our loss ratio was previously too low and less growth in some areas where it was too high. This is positively impacting the overall mix of our business. For example, we're seeing higher rates of growth within the category of younger pets year over year growth in our pool reflects.
This dynamic as well as our broad geographic distribution.
As a percentage of subscription revenue variable expenses were 10%, reflecting investments in our member experience. We believe the benefit of this investment as well as pricing accurately to our value proposition is reflected in our increased retention fixed.
Fixed expenses were consistent with last year at 4.9% of revenue after the cost of veterinary invoices variable expenses and fixed expenses, we calculate our adjusted operating income are subscription adjusted operating margin was 14% for the quarter up from 13.6% in the prior year period, and within 100 basis points of our target.
<unk>.
We expect to continue to see scale in our variable and fixed expenses over the next 12 months, resulting in our adjusted operating margin being closer to our 15% target on an annual basis.
In dollars our subscription business delivered adjusted operating income of 19.5 million, an increase of 26% over the prior year period in the quarter, our subscription business accounted for 90% of our total adjusted operating income.
Now I'll turn briefly to our other business segment, which is comprised of revenue from other products and services that generally have a BTB component and different margin profile center or a subscription business total revenue was $66 2 million compared to the prior year quarter. This is an increase of 60% year over year, reflecting an increase in pets enrolled within this segment.
Adjusted operating income for the segment was approximately 2.1 million, while lower margin. Our other business provides scale and data and fixed expenses and we incur virtually no acquisition spend within the segment as a result, our total adjusted operating income was up 29% over the prior year period took $21.6 million during.
The quarter, we were able to invest 14% more year over year or $19 2 million to acquire nearly 60000, new subscription pets. This resulted in a pet acquisition cost of $301, an estimated 34% internal rate of return for a single average pet.
As a reminder, our pet acquisition cost is fully loaded meaning it includes marketing sales call Center and I T personnel that work on pet acquisition as well as marginal advertising and promotion spend we provide the details of how we calculate our IRR in the financial supplemental tables that can be found on our IR website.
Reinforce that unlike some other consumer financial products, where customer acquisition costs are amortized over the life of that customer based on the nature of our monthly recurring policy, we recognize our acquisition spend upfront we recoup these costs over the duration of a pet's life with through Penguin.
We also invested $1.3 million in the quarter on development costs. These are primarily related to new products channels and international expansion, which we expect to deepen our competitive moats. We continue to expect development expense of approximately 0.5% of revenue for the year.
This resulted in an adjusted EBITDA of 1.2 million compared to an adjusted EBITDA loss of 1.1 million in the prior year quarter.
While we have ample growth opportunities ahead, we're often asked about steady state and what this business looks like if we were keeping pet count flat I'll provide an illustrative example, but first it is important to highlight our treat opiate dynamic or the growing portion of Trapan units booked that comes from cost effective referrals pet owners, adding pets or friend referrals.
Of the 1.25% of pets, we lose a month approximately 95 basis points or 76% of that is being replaced by these lead sources. We refer to this frequently as our GAAP to true Tropea as our book grows our brand and its reputation also grows and with it the number of pets enrolling through word of mouth when.
We are ensure Topeka these sources of pet enrollments entirely offset those that churn delivering steady state or a neutral pet count in the first quarter. If we were to enroll just enough pets to offset churn excluding our other business segment, we would estimate standstill EBITDA would've been around 10% of subscription revenue. This also assumes our current variable and fixed.
Fixed expense ratios and reflects the powerful referral dynamic in our portfolio. However, today with our large and underpenetrated market of just 2% we are making the strategic decision to invest for growth and increase the embedded cash flow generation of our business deploying greater sums of capital at a rate of return well in excess.
Of our cost of capital over a long periods of time is what drives value creation in this business, we provide additional thoughts around value creation, including the effect of growing adjusted operating income and deploying compounding amounts at high internal rates of return and Darryl <unk>. Most recent annual shareholder letter.
Total stock based compensation expense was $7.4 million in line with our expectations. This expense includes the initial amortization of our 2021 annual performance grants in February which relate to the year over year growth in our estimated intrinsic value for 2020 . One we estimate that we increased intrinsic value by 41% and after adjusting.
For cash usage, we shared approximately 1.5% of this increase with the team. We believe this level of dilution is appropriate given the value creation.
I'll reiterate that the majority of our share based compensation is performance driven if the company doesn't grow intrinsic value by over 10% there would not be any expected annual performance grants, we expect stock based compensation to be around 9 million per quarter for the remainder of this year. As a result, net loss was $8 9 million or a loss of 22 cents.
Per basic and diluted share compared to a net loss of $12 4 million or a loss of 31 cents per basic and diluted share in the prior year period, turning to our balance sheet. We ended the quarter with over $259 million in cash cash equivalents and short term investments prior to quarter end, we entered into a five year $150 million debt facility.
With an initial draw of 60 million further to my previous comments on capital allocation. The facility provides us a lower cost alternative to fund our growth, including offsetting amounts held for regulatory capital requirements with initiatives like Aflac and chewy coming to market. We're thrilled to have additional flexibility and allow for the allocation of our discretionary <unk>.
Come to areas, where we can earn our targeted 30% to 40% estimated rates of return we approximate the cost of services stat at less than 1% of revenue in terms of cash flow operating cash flow was negative $3.6 million in the quarter compared to negative 1.7 million in the prior year period capital expenditures totaled 3.6.
Million in the quarter and as a result free cash flow was a negative $7.1 million.
Following the first quarter of 2022, I'll reiterate that we continue to target growing subscription adjusted operating income by 25% for the year. We plan to continue deploying as much capital as we were able to within our IRR guardrails of 30% to 40%. We continue to be on track to ramp up several of the initiatives and our 60 month plan that if successful will.
Begin to manifest in our results in the second half of 'twenty, two but more meaningfully so in 2020 three.
We look forward to keeping you apprised of our progress with that I'll hand, it back over to Darryl. Thanks.
Thanks drew before we open it up for questions I want to remind you of a few upcoming investor relations events. This weekend marquee Tricia drew and myself will be hosting our annual Q&A in Omaha. This is a great venue to connect with Likeminded investors, we hope to see you there and as I mentioned earlier, but worth repeating our annual.
Her meeting will be held on June 8th we are excited to once again host shareholders and guests at our headquarters in Seattle.
I encourage you to visit in person. If you are so Abel and to register as soon as possible on our Investor Relations website with that we'll open it up for questions.
Thank you very much.
At this time, we will be conducting a question and answer session.
I would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue.
All participants using speaker equipment, it may be necessary to pick up your handset before pressing disc jockeys.
One moment, please while we poll for questions.
We have our first question from the line of Shred It Judy.
Yeah.
Evercore ISI. Please go ahead.
Okay. Thank you let me try it.
Sure Joe are you there.
Oh sure. So could you. Please repeat your question again.
Oh can you hear me.
Yes, we can.
Oh, okay. Okay. Thanks, Thanks for the question Hi, everyone I have two.
So on page 15 of your shareholder letter you have the stable would be active.
Active hospitals.
Dr <unk> talked about it a little bit in your prepared remarks, but I guess the question really is where do you think that right now it seems like you're an active hospital penetration is about 52%.
8000 in three countries, you're X 14.7, K, where do you think that can go.
Same question for you 1.26 in terms of new Bachelor active hospital, how should we think about where that can go. So that's the first question and then the second question is how do you think you're dead in the quarter.
In your subscription revenue, our subscription pets versus your internal expectations for the quarter. Thank you.
Okay.
Oh, well the active hospitals.
A really important question I mean, if you go back to how we build out our DCF model to value up from an intrinsic value standpoint, the biggest drivers we have as the number of active hospitals and then secondly same store sale.
We ended the year at about <unk>.
14700, I believe but I mentioned in my opening remarks, we were.
15600.
When I look at certain markets market that we've been in longer.
I can see that we could get to the point, where 80% to 90% of hospitals and in area are actively recommending us and that's what we'll be focused for in the years to come as far as same store sales.
I don't think we've seen the upper limit on that number yet.
Certainly have many of our a rated hospitals that have same store sales of over 10 per month, but how how many what percentage of actual hospital. If we can get to that level I think it's a little early I would expect that year over year that we see improvements.
But.
I'm not really here to speculate on the growth of that over the next five or 10 years.
And as far as our revenue expectations, I think I'll hand that over to Margaret.
Yeah.
Enrolled pets.
Q1, I think and we talked a lot about momentum.
Cool off course, and that momentum continued right the way through the end of the course and continue into April .
Expectations. It was bang on I think we were performing well the team is very aligned we think some really strong.
Communication and.
Plywood.
Turning quite nicely.
And already in line with expectations and encouraged by what we think they continue.
Okay. Thanks, Joe Thanks, Marty.
Thank you.
Thank you we have next question from the lineup.
Ribs with Canaccord Genuity. Please go ahead.
Alright, great. Thanks, so much for taking my questions and I appreciate all the color in the shareholder letter.
First on your annual scorecard to hear you reach your member experience as be while you know sort of monthly retention rate continues to improve year. After year I guess, what are some areas, where you think you can still improve and if you remember experiences at optimal level, where would you like to see your retention level, which is 98 point, 75% that you just reported.
Yeah.
Well look here in my shareholder letter Mardi interest drove the scorecards I'll, let them answer the question.
Hi, Matt.
And just as a reminder, when we when we the scoring that that's the way. It has just started looking at let's say the language. We have I think three months right.
For the 12 months and where our expectations in the past 12 months 16 months.
And there are expectations that would be why you know, it's performing pretty well I'm pretty happy with that.
The retention rates were very happy with the way that's been moving.
In terms of areas of opportunity. We believe we can definitely increase the penetration rate of ourselves and make sure that we've come out of hospitals, So I think not.
We're even more routine basis.
The thing is moving in a positive direction, and we know and we see that being used more frequently than April retention rate improve our member experience.
We have less need for people to contact test because that kind of a thing that the thing that was happening in the past.
So I think all in all that that's probably the biggest opportunity we have that the teams are doing a really good job of making sure that that clarity with that coverage.
They used to but I am more positive member experience and higher refer a friend in terms of whack him attention get to I'll call. It 18 months. One is 99% we think that that is good it is actually perfect.
I will tell you know there are areas, we have about 19, 9%.
Beyond the nine plus and we're happy with that but I think all in all we're shooting for ninety-nine. Unfortunately, we cant say the past will ultimately end up passing away, but we believe that that 1% is an area that we can then we can get to I think Christian and thank you for that.
Yeah.
Great. Thanks Margaret.
Maybe maybe my second question is can you maybe update us on your progress with the Chilean Affleck partnerships and then any color you can share on how close you are to lunching with chewy and without any states that were already launched.
Sure Yes.
If I take to be fast actually I'm really wireline corner.
And I think very well aligned on it but clearly we are commencing imminently off base launch.
We're very excited and we remain excited about the potential that went with that partnership.
You know our core business is continuing to perform extremely well behind the scenes. We've had both teams with chewy, Aflac and Japan and all of them working hard.
We thank everybody for these product launches, so really excited to see that coming to fruition very thin.
In terms of Aflac. So phase one launch was in March.
Mindset of what fight cycle, the sales cycle. It takes a long time or anything that we would expect to come from the launch wouldn't hit until 2023 ran ethically and just talking about what the launch means really meaningful way starting to what where the break it with the Aflac team here have been partnering with us to introduce it to the breakers to have the conversations that start.
Pipeline opening up which has been encouraging to begin with.
Great. Thank you so much for the color.
Youre welcome.
Thank you Evan.
Next question from the line up Elliot Wilbur with Raymond James. Please go ahead.
Thanks. Good afternoon first question is just.
With respect to sort of the trends in overall.
<unk> clinic visit volume as we've seen year to date I guess, just given some of the services they're reporting.
Deceleration or actually decline in overall that visits wondering if that has impacted here.
Your deployment of discretionary capital at all between lead generation and.
Conversion strategies.
Well, let me get Chris to answer the first part of it was kind of the data that we're seeing on the claim side and visit patterns and then Marty can follow up.
Sure I'm happy to kick it off.
General, where we've seen some of those industry details as well and we.
We are not seeing that same trend and our data and we are seeing.
Overall increase in frequency so that's.
Frequency of invoices that come in with a little bit over the quarter, and where accident and illness coverage. So we're happy that win where care for our members when they need to use the product they're using it or her for then we're paying the claims are actually paying claims now faster than we ever have before.
Or which is helping with that member experience and so our overall data trends.
Our membership base.
Are not following that another data point that I'll get that looks at longer periods of time, because things have kind of moved around in the past two years with COVID-19 impacts in particular at the vet Hospital.
We look back at 2019 Q1 pre COVID-19 .
Our average frequency and the number of that in places that we get as well as the average dollar amounts are in life are actually up compared to 2019, So where we're seeing the trends we're seeing in usage and we're and we're encouraged.
We're encouraged by that and obviously continue to then price to our value proposition and I'll, let Marty you speak to kind of a.
The lean side of that.
Yes in terms of search in terms of at least April and the impacts on discretionary spend say one of the things you mentioned in the last quarter call is the fact that our territory partners can get back out in the field and basically saying hospitals and rebuilding those relationships and we saw that in Q1, we've seen a tremendous uplift in on the channel that's coming.
And with that channel specifically.
When we talk about that traffic that certainly hasn't been reflected on that shrinks and the vet channel for US is the heartland of everything that we do so as we think about the benefit to the business that means that we have a more efficiently through the conversion then is they sort of stay more efficient because we know that we can convert at a higher rate.
And that ultimately that allows us to think about other areas that we'd be investing our discretionary capital.
It's all in all looking very healthy from that perspective, I'm really really pleased to see the impact of having territory, calling us back in the field and having conversations with hospitals.
Thanks, and I guess your comments sort of lead into my next question, but just thinking about them.
Thank you.
What are the table 19 in there yeah.
It was later with.
That deals with the vet hospital metrics. So if you think about just short of the number of.
You know high frequency high.
Hospitals or hospitals Entravision within every 60 to 90 days I mean that metric is still down roughly 20% versus 2019, but the number of.
Also as Youre, calling on has expanded and show that in aggregate the number of face to face visits as increase but how do we think about the recovery.
In our call patterns in terms of hospitals that you're visiting every 60 to 90 days in terms of impacting your overall book of our book of business trying to get a sense of just how important it is sort of recapturing.
The higher frequency of visits here versus just expanding the overall number of hospitals that you were calling on.
Yeah, I mean, I think you said it very well yourself in terms of the impacts of investments it is incredibly in hartsville.
So when we're thinking about 2019 and 22021 and now while we are in 2022 with their first quarter behind us our visit pattern, that's got back up to 2019 level.
Which is what we were aiming for and it got there a little quicker than I think any of US right, but things that people are really excited to have the tower in Chicago back in hospitals, the terrorists and calling out the very excited to have been going back and.
The impact favorable exit businesses and it's throughout the performance of the vapor helped from a lead generation perspective. It helps with conversion because the introduction is that much stronger people understand the benefits of high quality medical insurance and ultimately from a retention perspective member experience for Ferro right. When you say all of that coming together to improve that.
Experience back to the hospital real estate from Atlanta to point to me.
And I think today for us it's critical that we were getting back in the field as quickly as we could without putting hospital within Terex japonica array. We now feel confident about that and I think I'm, just saying day the momentum that we've had over the last three months and that carried on into April will tell you just how critical that is priced with a night and I think that my taste because of continuing to help us grow that lease.
William.
You know I think in terms of the number of hospitals that we addressed we're always looking at making sure that we can go we can tell me what they are facing going wide as many hospitals as we plus up in Canada thinking deep.
We're looking at as Farrell mentioned and I mentioned, how do we get that same store sales number up how do we build the habit. How do we help people to understand that that repeat conversation about insurance is really critical and it helps get greater and greater frequency of cat Grace at numbers going into the hospital within pet tapping the changes that they need which reinforces the value.
Companion.
Does that answer your question.
Yes, Thanks, and then just last question.
I believe for for drew I, just want to ask maybe get a little bit more insight into what is driving the relative increase in terms of a subscription.
Subscription variable expenses I think that number has gone up as the percentage of subscription revenue by about 100 basis points since year in 2020, just maybe wanted to get a little bit more granularity in terms of some of the incremental investments that are being made.
Whether that's been member experience or if it's just kind of this is just kind of a natural evolution of sort of.
The higher retention costs kind of embedded in that in a larger book of business just trying to get a sense as to when that number may moderate what investments are being made that you know maybe by considered transitory or temporary and just.
Just trying to get a sense of when that are basically wasn't that expense ratio basically caps out. Thanks.
Yeah.
Our target 15% margin is is an annual target and it does fluctuate quarter to quarter Q1 tends to be a heavier quarter for us.
This is a seasonality to some of our expenses, but specifically we invested in retention this quarter.
Getting into the specifics of what those initiatives were but I would say that Q.
Q1's, always a harder quarter for retention and we put up our best Q1 retention number ever specifically in first year retention. So.
You know, we saw the value of making that investment in and dialing it up.
There's interplay between fixed and variable and between the two we expect those to scale down in March down on throughout the year as a percentage of revenue. So we expect to land the year between.
Between 2014, and 15% margin, but we do expect to get scale. This is probably the high point.
Thank you operator or other callers.
Yes. Thank you.
We take next question from the line of Josh Shanker from Bank of America. Please go ahead.
Yes. Thank you for taking my call I guess drew for the first question and I joined a few minutes late you might have mentioned.
It looks like there were a lot of prepaid expenses that bills accounts payable.
And prepaid expenses broadly in the quarter that hit cash flow in one queue wondering what's going on is theres some seasonal.
Information there does that have a true up later in the year.
Yeah, Q1 tends to be a heavier quarter for us we do have some prepaid licenses that come through in Q1.
So in general it's been seasonally heavy and we do expect to get scale for it to scale down as a percent of revenue throughout the year.
And and and so the drag we're seeing in free cash flow in the first quarter.
That should be recurring Q1 and reverse as the year goes on.
Yes, the first half.
Put it into two halves. The first half of the year is a more negative cash flow part of the year and then we.
No more positive flows in the back half.
And in general.
Alright.
Obviously refer a friend and and recurring customers are becoming a bigger and bigger portion of the business. It suggests that the the acquisition cost per game.
Getting through other channels is even higher than what you publish when you're thinking about spending on acquiring new pets to what extent do you think acquisition dollars are being spent.
Spent at this point versus our experimentation and trying to find a new ways that may or may not be successful in acquiring pets, but worth it as long as you keep the IRR profile attacked.
Okay.
Yes.
If you could restate your question I wanted to make sure I get it right.
So the $303 to acquire new pets, but.
Really costs very little to acquire a pet bird versus our refer a friend and it costs almost nothing for recurring customer and Theyre coming in the new patents, there's actually a higher spend per pet through the other channels to.
Across all those pets, but you're experimenting right now some of it is.
It's hard to figure out how to acquire new pets, I'm wondering the extent to which when you look at the money you're spending how much of AD spend and marketing spend do you think as well.
Giving you a knowable return on it versus experiments and trying to figure out the right way to to cut them out and have I guess, Josh I'll, let Marty answer that.
And part of that question I just wanted to on the first part on your free cash flow.
The rate of growth.
The single biggest factor of our of our cash flow and the IRR of the guardrails that we run with but let Marty answer the specifics around the air Yeah, Let's say Dallas.
I'll hit the nail on the had a costco when we're thinking about different channels.
A nice cost sufficient ours he points out with our friends and recurring customer word of mouth.
Which is fantastic for a brand that allows us to really see the difference in member experience makes that when we're thinking about our spend and which channels, we're investing and we're looking across the gamut of difference.
So the specific environment say for example, we know that if we have a high lifetime value, we have more opportunity to spend more in that space that you're looking at a pure dollar amount you're going to see that go up but the IRR is gonna be consistent so we don't just take a hit.
Oh, the cat eye or IRR, it's coming in at 35.
Faithful, we're looking at what does it means that they take care of Kayo and so the teams are most like a pricing team that the king in a very granular level of detail that looking at geography that they can't breathe. They can't species that they can't every type of element. We can to get really specific went away with long thing that allows us to have some areas that to your point our experiment.
So.
No we're not looking at a set percentage every month, but if we find that there are areas. We can test them that we havent otherwise tried before well guy there and not maybe a lead test it might be a conversion of a test.
And at the V C. If it is that we we know what we're testing when my testing and we track the results that we can get better all the time and you can see consistently and of course you have of course, our goal is to be between 30% to 40% IRR and the teams are very good and very disciplined way to do that and so you know when we're thinking about that number that felt like it's not about focusing on a dollar amount.
It's about focusing on the IRA and that's what we're doing specifically for every pad that were annoying.
One quick one in another quarter with better persistency, how far away are you from reasonable perfection in persistency.
Yes, if you I think you can go in a little bit late but Martin you answered the question before that and our 60 month plan are 99% monthly retention or persistency is our long term goal and she mentioned that in some areas and regions. We've already achieved that getting any higher or is it really difficult with pet death.
I appreciate it thank you.
Yeah.
Thank you we have next question from the line of Jon Block with Stifel. Please go ahead.
Thanks, Hey, guys good afternoon.
Drew maybe the first one the modest 2% or who.
Oh I thought you explained it pretty well talking about repricing, some plans, but but why the invoice growth of less than 1% year over year. I mean, we just hear about the inflationary environment that you're increasing prices I think Trish said earlier.
But the number of invoices were going up so again, you shouldn't gave a good explanation on why the or a pool is somewhat muted, but we'll just stick with the invoice growth why are you guys seemingly.
One of the only parts, where we're just seeing such a modest call it less than 1%. This quarter I think it was actually less than 2% last quarter. If you could expand upon that that'd be very helpful.
Sure.
I mean, we're seeing.
The cost of veterinary services in line with what the rest of the market has seen whereas it's just masked by this powerful mixed dynamic and and we're pricing to our value proposition.
So aligning that ARPA with that overall cost with clients. So.
And pricing is just foundational in this business, so as we optimize and I'm talking across a million sub categories. So.
Breed neighborhood.
H so as we're doing that we're aligning our ARPA with our cost of care that we're seeing so in any specific one we are seeing pretty typical but we're just.
Growing now where we're getting the value proposition of a lot more aligned and you can see it in the quarter, we had 71% in aggregate, which is what we're shooting for.
If I can handle this allowed to them when we think about the way that they can sell pricing I mentioned, a second ago, when where everyone is communication and if you think of pricing as the brain at the company what that what the pricing team is saying is giving the rest of the team information as to why we shouldn't be targeting say, whereas before if we were to take a broad brush of price maybe in that broad brush approach.
Targeting people that one has a value proposition that would be.
We changing that also makes it a little bit more but now we're going after pets. We now are being priced at 71 and when we go off today, specifically when you're going to see that makes them. So it's directly by that.
Okay.
I guess I can follow up offline.
I don't fully get it I mean, you're saying the petro going after your installed base is so big.
So it's just hard to offset it that much because again the base is so big I can't see.
That completely be offset by the 50 or 60000 pets that youre, bringing on every quarter, but what I can follow up offline on that and maybe it's just sort of a segue into my next question.
Last quarter, you talked about conversion rates and you said you had some challenges in the fourth quarter of 'twenty one.
I don't know if you want to touch on what those challenges or maybe more importantly, where there's challenges resolved.
Slightly beat our gross add number but if you go ahead and you normalize for the 4000 pets that didnt occur in the fourth quarter because of Covid. Your sequential step up in gross adds from four two to one he was actually below trend line. Historically, usually you see a little bit of a high single digit bump, but it was more maybe low to mid <unk>. So maybe if you can just talk on again conversion rate for the challenge.
Where where the company hasn't tried to resolve some of those past issues. Thanks guys.
Yeah, No definitely say one from a conversion perspective, they know where we're making progress and when we think about our growth. We think about it from two angles, we think about lead generation. So how do we actually make sure passengers are aware of it and when we think about the conversion space a lead on lead generation is outpacing in terms of progress and I'll talk about both of them are leaving.
So we have full as I mentioned in both areas, which is what we want to see them five conversions trending really well the area that we mentioned last time with web conversion, we are making improvements we are adjusting and we have with all the issues that we have within our web site.
That said, there's a tremendous opportunity there and when we think about the fact that we can grow at the pace that we're growing if we can get a conversion right to me the same direction at the same pace, we're gonna be significantly growing even faster than we are today.
Really about thinking how do we take on new distribution channels that we've already started to open up over the last two years make sure that we're catering onto earnings appropriately to those specific pass on it. So we're thinking about the Chinese that's a different way.
I think I always hate to say the right thing at the right time to help more people through the funnel.
I will say in terms of the progress we're making we are as I said, we're making we are positively are improving but what's particularly exciting. We've just hired a chief science that will be joining the team at the backend of it of course guarantee in late June that will be driving specifically effect on conversion.
With a ton of experiencing sites to have them in place then we can really start to make the most of that opportunity to stay in front of it.
Perfect. Thanks for your time guys.
Yeah.
Thank you.
Question from the line of John Barnidge with Piper Sandler. Please go ahead.
Thank you very much you were talking about international growth aspirations and I believe it was 0.5% of revenue, but development spend can you maybe expound upon that.
<unk> more developed overseas, so I assume you'd be go into market with a unique offerings.
Yeah, I'll touch on that in a 16 month plan.
We're trying to look at them.
Over a long period of time, doubling our addressable market. So if.
If you look in the shareholder letter you can see that we're now in three countries and were having about 28000 hospitals that we think is the addressable market.
Over a long period of time, we'd like to get that number closer to 50000.
That allows us to not only.
Have a growth lever with same store sales, but to continue to add to the number of active hospitals and those two drivers.
Uh huh.
Being the growth engine of the company, we have other areas, where we're adding distribution channels the different products, there's additional growth levers, but international is really about increasing the size of our addressable market.
And we are in early stages of trying to determine when and where we're going to be going we hired Simon Wheeler.
<unk>, who joined the company in the last 12 months.
And we're making some pretty decent progress and looking forward to being more of a global player.
Great and then my follow up question, if I could.
When we had this call in February you gave us the.
Kind of the rate of growth in the early weeks of the quarter had reverted similar to the third quarter.
I know youre holding the call a little bit early so you can have the Omaha. So could you maybe refresh us on what is the growth rates. So far in the early weeks of April and in the second quarter and how does that maybe compare to the first quarter's rate of growth on subscription pets. Thank you.
Yeah sure.
Are we talking about momentum if we look at the quarter. One January started off ahead to year over year and February picked up even more in March with a pretty big step out for us and that was the way we used to be the territory partners. The hospitals that lead generation from the vet channel really coming back strong and say that was that and I think that that April is ahead of that.
So we're talking well into double digit growth year after year from Elisa tests that we're excited about what we say and we felt like we you know we mentioned it was getting a lot of momentum we're seeing that traction come through I think just in general that the team is executing really strongly and are.
We're excited to see what we can do with out for the rest of the quarter February encouraging signs that's all.
Okay.
Yeah.
Thank you.
Yeah.
Thank you.
We have a next question from the line of Greg gave us with Northland Securities. Please go ahead.
Hey, good afternoon.
And thanks for taking the questions.
First you know now that the newer low and mid level offerings have been out for a while are you seeing any movements between those offerings either.
That's moving up or down.
Yeah, Hi, right.
I think you're referring to if I can and I'll direct them, so they're already in med Tech.
Air products, yes, they we are testing and in Canada. We the last time. We discussed then we were talking about how we're able to continue to generate need volume, which is loving and then we need to look at the other side of that which is the conversion rate, we're making improvement on conversion rate I'd say, we're happy with the way that that is progressing we're probably about halfway to where we want to be and which is.
It's nice to see so every month, we're getting better we're increasing the the team size and focus and dedication there and and we think that it's performing before it nicely.
Yeah.
Okay got it and.
Regarding your comments on having the chance to rebuild relationships with the vets.
Now that your territory partners can you can kind of revisit a lot more frequently than in person could you kind of discuss the improvements that youre seeing.
Maybe it's you know in terms of that kind of leads or conversion as a result of that.
Yeah, So, let's say our lead traffic all Orange County office it significantly upside when we think about all the channels, we're looking at them.
In terms of why does it why does the conversation originate from them and well that has continued to be strong for us for.
Several courses at ways. It was strongest channel we've seen that really pick up in the last the last three to four months say, having the territory.
Back in the hospital. It just allows them to have the conversation helped her online the team why it's important to talk about high quality medical insurance introduced the concept of insurance and just really get people thinking about it. The other difference is why we're saying, it's because it's kind of a scientist is starting to pull back and people are getting back into that typical what plan is there.
A lot more normal for the team to start thinking about those conversations again say.
Does that helps it from every single element of that journey and then the benefit of having high quality insurance. So that means that they can treat their pets far more efficiently and effectively and emptied the jokes that they've been training set on today. So I think for US. It is critical from a lean perspective, the conversion rate is much much more efficient as a much sticker price that people understand that when you have.
The authority at the veterinarian he's been Chinese buying of persona.
Saying that this is an important thing you need to be thinking about it just helps the conversion of all of them all and then subsequently the retention rate.
Or is it just because I felt facilities have also flagged that we're paying them directly at that time to check out and when we do that we see that the referral rate high the retention rate as high as they expand faster and for us. It's a far more efficient way to manage that that experience from her tenure as well because they wouldn't know what it really is the foundation of what we're trying to do with the business and just.
It helps everything they say more effective.
Okay helpful and.
I guess I know you guys have really good visibility in terms of your vet partners.
Veterinary costs.
Are you at all surprised that maybe.
The cost side of that is in increasing at a faster rate.
Especially when we think about inflation and you know if we do think about maybe your premiums catching up with that.
I know you're kind of protecting the value proposition.
71%, but do you kind of see premiums increasing at a faster rate than historically going forward.
Hi, Greg This is tricia and I can't speak to that's a little bit and it's obviously something that we keep our eye on we're looking at pricing from our over a million different categories and make sure we're pricing as accurately as possible based on the data that we're seeing now I will say.
Andrew mentioned it earlier when what.
What we're reporting.
As you know our consolidated numbers when we just aggregate them, we are seeing costs going up in many of the areas in line with inflation like you would expect and as we priced the neighborhood three it's categories, we're reflecting that in.
And the pricing that we're pushing through and maintaining our that pricing accuracy. The one thing we've been doing and it hasn't just been single quarter, we've been doing it for.
For the last couple of years, and you're kind of really seeing it in our numbers more.
Is.
Really a conscious effort at that very disaggregated level to be priced as accurately as possible and we've seen a lot of movement. There even if sometimes that means we're decreasing the price when we talked about that more on the last couple of calls we've decreased prices in some areas, where we weren't heading of 71 there.
Heading.
65, instead of a 71, we were not returning as much value to the lender as we said haven't updated that and as Martin said before we've given that information to a hurricane and they have been.
And deploying more capital.
And those areas to drive growth as well because we're more accurately price and you're seeing kind of all of that starting to come through because we've been doing that for much more than that and I think all quarter.
I'll get back to your initial question.
Hum.
Monitoring it we do see it in a disaggregated level, but you know you've got the mix going on and if we do see the claims data start to live we continue to then and update our pricing mix, which could cost premiums go up it's a cost plus model. So it's a it's a continuous process.
Okay got it thank you.
Thank you we have next question from the line of Ryan Tunis with Autonomous Research. Please go ahead.
Hey, Thanks, Good afternoon, I might've missed it if I did I apologize, but just on the truly launch you mentioned that that's launching imminently.
Could you maybe give us a little more color on what is going to be the geographic reach of that when we need it when we meet again in three months is it five stage 10 stages is slower than that.
Hi line at the moment, we are it's a soft launch so when we talk about the launches it's something that we're rolling out signing as we typically will do with anything we want to make sure that everything is performing as we expect them. We're not going to go into specific details of where we were the only thing in the geography, but I can tell you that they the launch of a role.
Slightly for the year, and we're well on a state by state and what would cause me to make sure that we're all aligned on what I read my books like honest, leaving at the pace. It basically like the happy with and and just move forward based on on controlling that launch at the right way.
Got it thanks and.
A follow up I guess, just semiannual letter I always.
Loved the report card.
I was hoping you could maybe go into a little more you gave yourself.
Two or three CS.
Which sounded pretty harsh, but I was hoping maybe you could.
Expand on that.
Think it might've been the new product.
Piece in particular, you gave yourself with <unk> four.
What was the thinking that went into that.
Yeah, I can know I can speak to that so I'm not sure. If you had said earlier.
I'll, let Patricia and I sat down and it's good that when we think about new products.
More specific about what that entails making specific thing at all food initiative and GPS initiative.
New products that are outside of the typical insurance base that we wait this thing out.
And just to recap again as I mentioned earlier, when we think about getting ourselves a school within a 16 month plan, but for the first 12 months. We're looking at why would we expect to have been from.
From January to December of 2021, 12 months, well, what do we feel good about them getting a C is horrible it it's fine.
And finally, the fact that it's setting you know.
First when we think about it the reason we didn't go in Iowa, because honestly you would've liked to have made more progress and basically he was at.
That's product.
But I think in general we've learned a ton and these are as I said different to ensure that they were going into spaces that we have to do another deep dive a little pretty fast to make sure that that's in keeping with everything that we said it would do in the states you might find that difficult to say Oh, we liked difficultly like hot it means that when we get that it'll be worth and it's hard to replicate.
Oh, no we're happy with the progress and we didn't expect to kind of come out the gate getting a license for everything.
Frankly, it would've been something that I can say I think in general we feel good about let's see we've got a lot of what today, we've still got 44.
All 14 three months to go about fixing a lot of fun and we're set up well to make progress to get that a little bit higher next year.
Got you. So it didn't include the lower RPM products.
The city when you guys when you sat around what grade would you given you've given yourself.
So for those folks working.
As a parent science back and are included in our additional insurance products that we gave them a b minus.
Above all new products, but not as good as that is a member experience in our intrinsic value and revenue.
I ruled out doing well I mean, we talk about the lead and convert them. The areas that we're looking to improve the conversion we wanted to be able to operate that within the same guardrails as we operate uncle bet that we're learning all the time and making improvements all the time and let's say that since we put the scorecard together we've taken another step forward, which is what we want.
And we're probably about halfway to where we would like to do before we feel good about bringing that into the U S market, but they are in Canada, a lots of good stuff happening and then again another school that I suspect if if we continue with the momentum we're seeing today with those two products will be getting them up to high school and a b minus.
23.
Awesome, Thanks for the answers.
Thank you.
Thank you, ladies and gentlemen, the adverse to last question.
And that concludes today's conference.
You may disconnect your lines at this time, thank you for your participation.
[music].