Q4 2023 Trupanion Inc Earnings Call

Operator: Good day, everyone, and welcome to the Trupanion fourth quarter 2023 earnings call. All participants will be in a listen-only mode.

Good day, everyone and welcome to the Japan in fourth quarter 2023 earnings call.

All participants will be in a listen only mode.

Operator: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press the star key and then one on a touch-tone telephone.

If you need assistance. Please signal conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions you're.

To ask a question you May press Star then one using a touchtone telephone withdraw your question you May press Star two.

Operator: After all your questions, you may press star and two. Please note that today's event is being recorded. At this time, I'd like to turn the floor over to Laura Bainbridge. SVP of Corporate Communications, Ma'am? Go ahead.

Please note that today's event is being recorded.

At this time I'd like to turn the floor over to Laura Bainbridge S.

That's P P O corporate communications ma'am.

Please go ahead.

Laura Bainbridge: Good afternoon, and welcome to Trupanion's fourth quarter and full year 2023 Financial Results Conference Call. Participating on today's call are Darryl Rawlings, Chief Executive Officer, Margie Tooth, President, and Fawad Qureshi, Chief Financial Officer. For ease of reference, we've included a slide presentation to accompany today's discussion, which will be broadcast on today's webcast. A copy of the slides will also be made available on our Investor Relations website under our Quarterly Earnings tab. As reported in today's earnings release, the audit of our financial statements for fiscal year 2023 is in progress, and we have identified two material weaknesses in connection with that audit.

Good afternoon, and welcome to true pinion fourth quarter and full year 2023 financial results conference call participating on today's call are Darryl Rawlings, Chief Executive Officer, Mark Youtube, President and Pawan to correctly, Chief Financial officer for ease of reference we've included a slide presentation.

To accompany todays discussion, which is broadcast on today's webcast a copy of the slides will also be made available on our Investor Relations website under our quarterly earnings tab.

As reported in today's earnings release, the audit of our financial statements for fiscal year 'twenty 'twenty. Three is in progress we have identified two material weaknesses in connection with that audit as a result, the numbers reported today are preliminary.

Laura Bainbridge: As a result, the numbers reported today are preliminary. We continue to work with our auditors to complete the audit, which may affect our ability to timely file our Form 10-K as we finalize our financial statements and disclosures and allow the company's independent registered public accounting firm to complete its procedures related thereto. I would also 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 Trupanion within the meaning of the safe harbor provisions 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.

We continue to work with our auditors to complete the audit, which may affect our ability to timely file our Form 10-K, as we finalize our financial statements and disclosures and allow the company's independent registered public accounting firm to complete its procedures related there too.

I would also 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 at your opinion within the meaning of the Safe Harbor provisions 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 Securities and Exchange Commission.

Laura Bainbridge: A detailed discussion of these and other risks and uncertainties is included in our earnings release, which can be found on our Investor Relations website, as well as in the company's most recent reports on Forms 10-K and 8-K filed with the Securities and Exchange Commission. Today's presentation contains references to non-GAAP financial measures that management uses to evaluate the company's performance, including, without limitation, variable expenses, fixed expenses, adjusted operating income, acquisition costs, internal rate of return, adjusted EBITDA, and free cash flow. When we use the term adjusted operating income or margin, it is intended to refer to our non-GAAP operating income or margin before new PET acquisition and development expenses. 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 U.S. GAAP.

Today's presentation contains references to non-GAAP financial measures that management uses to evaluate the company's performance, including without limitation variable expenses fixed 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 and development expenses, 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 performer.

<unk> 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.

Laura Bainbridge: 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 Trupanion's investor relations website under the quarterly earnings tab. Lastly, I would like to remind everyone that today's conference call is also available via webcast on Trupanion's investor relations website. A replay will also be available on the site. With that, I'll hand it over to Daryl.

Lastly, I would like to remind everyone that todays conference call is also available via webcast untrue opinions Investor Relations website, a replay will also be available on the site.

With that I'll hand, it over to Daryl.

Darryl Rawlings: Thanks, Laura. Good afternoon. Across our key financial metrics, Trupanion made strong sequential progress in the fourth quarter. We delivered significant margin expansion in our subscription business. Since Q1, our adjusted operating margin has expanded approximately 540 basis points. Quarterly capital allocation was highly efficient, and we generated another quarter of positive free cash flow.

Thanks, Laura good afternoon.

Ross our key financial metrics to opinion made strong sequential progress in the fourth quarter, we delivered significant margin expansion in our subscription business. Since Q1, our adjusted operating margin has expanded approximately 540 basis points quarterly capital allocation was highly efficient and we generated another quarter of positive free cash flow.

So I'm pleased with this improving trend in our results, but they don't tell the whole story entering the year, we faced unprecedented levels of veterinary inflation, we experienced margin compression in our subscription business. The first period of sustained compression since going public in 2014, we also made the necessary decision to transition to a more DC.

Darryl Rawlings: I'm pleased with this improving trend in our results, but they don't tell the whole story. Throughout the year, we faced unprecedented levels of veterinary inflation. We experienced margin compression in our subscription business, the first period of sustained compression since going public in 2014. We also made the necessary decision to transition to a more decentralized operating structure, which will better set us up to grow and be nimble in the years ahead. The team navigated well through this period of adversity.

<unk> operating structure, which will better set us up to grow and be nimble in the years ahead. The team navigated well through this period of adversity, we took meaningful and deliberate actions to reduce expenses, we're operating with increased efficiency and discipline across the organization I've also been impressed by the innovation and evolution of our tools. The team is leveraging to dry.

Darryl Rawlings: We took meaningful and deliberate actions to reduce expenses. We're operating with increased efficiency and discipline across the organization. I've also been impressed by the innovation and evolution of our tools the team is leveraging to drive our performance. I expect that we will carry our learnings forward with increasing levels of discipline and rigor. On that note, I also want to acknowledge the two material weaknesses reported today.

<unk> performance I expect that we will carry our learnings forward with increasing levels of discipline and rigor.

On that note I also want to acknowledge the two material weaknesses as reported today, we're committed to Remediated and Theyre doing better in the future in.

Darryl Rawlings: We're committed to remediating and to doing better in the future. In 2024, we will look to grow our adjusted operating income by greater than 30%. As our margins expand, the team will be more aggressive in growing, deploying the majority of these pre-tax funds at our high rates of return in our large, underpenetrated global markets, where only 3% of pets have pet medical insurance. We intend to do so while remaining free cash flow positive on an annual basis. Delivering on this plan will translate into strong value creation for our shareholders. We've done so for shareholders every year but this past one.

In 'twenty 'twenty four we will look to grow our adjusted operating income by greater than 30% as our margins expand the team will be more aggressive in growing deploying the majority of these pre tax funds at our high rates of return and a large underpenetrated global markets, which only 3% of pets have pet medical insurance, we intend to do so while remain.

Free cash flow positive on an annual basis delivering on this plan will translate into strong value creation for our shareholders. We've done so for shareholders every year, but this past one well I'm disappointed with the year over year results of our adjusted operating income per share in 2020 three I'm proud of the team.

Darryl Rawlings: While I'm disappointed with the year-over-year results of our adjusted operating income per share in 2023, I'm proud of the team. The inherent challenges of the post-COVID veterinary inflation environment have made us a stronger and more capable team, setting us up well headed into 2024 and beyond. With that, I'll hand it over to Margi. Thanks, Darryl. Good afternoon, everyone.

The inherent challenges of the post Covid veterinary inflation environment has made us a stronger and more capable team setting us up well heading into 'twenty 'twenty, four and beyond with that I'll hand, it over to Marty.

Thanks, Darryl and good afternoon, everyone I'm pleased to share that our results in the fourth quarter showed continued momentum across multiple areas of the business.

Margie Tooth: I'm pleased to share that our results in the fourth quarter show continued momentum across multiple areas of the business. Our performance speaks to our ongoing focus on disciplined growth, margin expansion, and operating with increased efficiency across the business. In the quarter, total revenue grew 20% to $296 million.

Performance speaks to our ongoing focus on disciplined growth margin expansion and operating with increased efficiency across the business.

In the quarter total revenue grew 20% to $296 million subscription revenue increased 21% year over year benefiting from a 14% pet growth and a 6% increase in average revenue per pet.

Margie Tooth: Subscription revenue increased 21% year over year, benefiting from a 14% pet growth and a 6% increase in average revenue per pet. Growth in ARPU for our core Trupanion product, which makes up 98% of our subscription business, was even higher, increasing 7.5% year over year as our approved rate flow continues to show more meaningfully. Retention for this book of business was 70 months on a trading 12-month basis, in line with our expectations.

And I'll pay you for a coach Japan M product, which makes up 98% of our subscription business was even higher increasing seven 5% year over year as our pre rate play continues to shame on meaningfully retention, but this book of business with 17 months on a trailing 12 month basis in line with our expectations, while we continue to close the Morristown.

Margie Tooth: While we continue to closely monitor our retention rates across our three key retention cohorts of first year, under 20% rate increase, and over 20% rate increase, we are paying particular attention to this latter bucket as a larger than normal portion of our members are seeing a pricing adjustment in excess of 20%. Over the last 12 months, approximately 298,000 members have had this experience, and through year-end, we have retained over 98.28% of them on a monthly basis. We now have an average of 26% pricing rolling through our book, and while still early in the year, inflation remains in line with our expectations at 15%. Against this backdrop, we are continuing to invest in our member retention efforts both operationally and through direct member outreach, increasing member education around our value proposition and the increased need for Trupanion as the cost of care rises. We have also identified opportunities to improve execution around our member experience. This relates predominantly to the use of our new policy administration system, which we expect will take some time for team members to learn.

Our retention rates across all three key retention cohorts are first jam under 20% rates increase and over 20% rate increase we are paying particular attention to the smasher bucket as a larger than normal portion of our members are staying a pricing adjustment in excess of 20%.

Over the last 12 months approximately 298000 members have had this experience and through yearend, we had retained over 98.28% of them on a monthly basis. We now have an average of 26% pricing rolling through our book and while still early in the year inflation remains in line with expectations at 15%.

Against this backdrop, we are continuing to invest in our member retention efforts, both operationally and through direct member outreach, increasing member education around our value proposition and the increased need for couponing as a cost of care arises we.

We have also identified opportunities to improve execution around our member experience. This relates predominantly to the use of our new policy administration system, which we expect will take some time for team members to learn Meanwhile, while we ramp up the system, we're seeing lower than expected service levels.

Margie Tooth: Meanwhile, while we ramp up the system, we're seeing lower than expected service levels. With our migration nearing completion, we look forward to leveraging our latest technology platform to deliver an exceptional member experience and ultimately enhance our claims automation rates, a key differentiator as a low-cost operator. Ultimately, the investments we have made are intended to help scale our business globally with greater levels of control and oversight, both from a member perspective as well as operationally. Adjusted operating margin for our subscription business was 13% in the quarter.

Without migration nearing completion, we look forward to leveraging our latest technology platform to deliver unexceptional member experience and ultimately enhance our claims automation rates a key differentiator as a low cost operator Ulf.

Ultimately the investments we have made are intended to help scale, our business globally with greater levels of control and oversight from a member perspective as well as operationally.

Adjusted operating margin Prost subscription business was 13% in the quarter, while not yet at our target I am pleased with the strong quarter over quarter expansion. This is a reflection of deliberate a meaningful actions to price to value proposition drive efficiencies and reduce any and all cost of member would not thank us for this will be an ongoing focus in <unk>.

Margie Tooth: While not yet at our target, I am pleased with a strong quarter-over-quarter expansion. This is a reflection of deliberate and meaningful actions to price our value proposition, drive efficiencies, and reduce any and all costs a member would not thank us for. This will be an ongoing focus in 2024. In total, we generated over $27 million in adjusted operating income, which marks a new quarterly record. Of this, we deployed approximately $15.5 million to acquire nearly 67,000 pets.

24 in total we generated over $27 million and adjusted operating income, which marked a new quarterly record.

This we deployed approximately $15.5 million to acquire nearly 67000 pass. This represents the same level of pet additions year over year, but with 23% less spend as margins continued to expand year over year, we expect to grow our allowable pet pet acquisition costs in line with all guardrails, well, we're pleased to deliver.

Margie Tooth: This represents the same level of pet additions year-over-year, but with 23% less spend. As margins continue to expand year-over-year, we expect to grow our allowable per-pet acquisition costs in line with our guardrails. While we are pleased to deliver growth efficiently, it is not our plan to throttle down growth so significantly over the long term.

Efficiently it is not our plan to throttle down grow significantly over the long term once again on veterinary channel drove the majority of our gray for a coach you Panam product since early 2020 tea, we have experienced an unprecedented inflationary environment during which time the need for couponing has never been greater as a direct result of this we can.

Margie Tooth: Once again, our veterinary channel drove the majority of our growth for our core Troupanion product. Since early 2022, we have experienced an unprecedented inflationary environment, during which time the need for Troupanion has never been greater. As a direct result of this, we continue to see strong leads, conversion, and retention rates from our heartland, the veterinary channel. In the quarter, we spent just over $13.7 million to add approximately 54,200 new pets, at an average new pet ARPU of $67.61. We estimate the average lifetime value of these pets at $615, and at an average cost to acquire of $233, the estimated internal rate of return of these pets was 42%, above our guardrails of 30-40%.

Turning to see strong leads to conversion and retention rates from our heartland. The veterinary channel in the quarter, we spend just say about $13.7 million to add approximately 54200, new pads at an average new pet all paid of $67.61. We estimate the average lifetime value of these past $615.

And at an average cost to acquire a $233. The estimated internal rates of return of these pads was 42% above our guardrails of 30% to 40%. We also continued to see steady growth from our new products channels and geographies, which collectively represented approximately 19% of our gross adds in the quarter.

Margie Tooth: We also continue to see steady growth from our new products, channels, and geographies, which collectively represented approximately 19% of our gross pet ads in the quarter. For example, within our newer North American products, which include Furkin, PHI Direct, and are powered by offerings for Chewy and Aflac, we added approximately 9,000 new pets at a new pet ARPU of $38.06. As noted, overall, these products have lower coverage, which ultimately leads to lower retention and, therefore, lower lifetime value. Furthermore, given the early stages of development, investment in growth for these products continues to be minimal.

We then on newer North American products, which include fucking P. H I direct and all powered by offerings for chewy and Aflac. We added approximately 9000, new paths at a new pet RPT of $38 in six cents as noted overall east products have lower coverage, which ultimately leads to lower retention and therefore lower lifetime value.

Given the early stages of development investment and Grace. These products continues to be minimal in the quarter. We spent just $1.1 million. So quantities pass, which is just 7% of our total acquisition spend and equating to an average pet acquisition costs of $119. Because these products are not yet operating scale the estimated lifetime value.

Margie Tooth: In the quarter, we spent just $1.1 million to acquire these pets, which is just 7% of our total acquisition spend and equating to an average pet acquisition cost of $119. Because these products are not yet at operating scale, the estimated lifetime value and internal rate of return for these pets were negative. Achieving 15% adjusted operating margins for these new offerings will be a primary focus for us before we look to increase our level of acquisition investment here. Moving away from our North American coverage, in Europe, we invested just $800,000 to add approximately 3,400 new pets in the quarter. Keep in mind that today these products are not yet fully underwritten by Trupanion, and thus, revenue is not yet fully realized. International expansion is a key part of our 16-month plan, and over the last three years, we've more than doubled our addressable market to over 50,000 veterinary hospitals. Our margin expansion, coupled with lower acquisition spend, helped generate over $13 million in free cash flow in the quarter.

An internal rate of return of these past was negative achieving 15% adjusted operating margins. These new offerings will be a primary focus for us before we look to increase our level of acquisition investment here.

Moving away from a north American coverage in Europe, we invested just $800000 to add approximately 3400, new pets in the quarter keep in mind that today. These products are not yet fully underwritten by Japan in and thus the revenue is not yet fully realized international expansion is a key part of our 60 month plan and over the last three years, we've more than <unk>.

Doubled our addressable market to over 50000 veterinary hospitals.

Margin expansion, coupled with lower acquisition spend helped generate over $13 million in free cash flow in the quarter on an annualized basis, we continue to target 2.5% of revenue, which we believe is a prudent amount given the strength of our capital position and our desire to grow in such a large underpenetrated global market as I look back over the loss.

Margie Tooth: On an annualized basis, we continue to target 2.5% of revenue, which we believe is a prudent amount given the strength of our capital position and our desire to grow in such a large, underpenetrated global market. As I look back over the last 12 months, I want to take a moment to recognize and thank the team for their efforts and commitment to Trupanion, and to the vets and pet parents who choose us to support them. This team includes over 1,300 pet-passionate individuals from across the globe, including our territory partners who serve as our frontline resource to veterinarians and their teams.

12 months I want to take a moment to recognize and thank the team for their efforts and commitment to Japan in and to the vets and pet parents, who chose us to support them. This team includes over 1300 pet passionate individuals from across the globe, including our territory partners, who serve as a frontline resource to veterinarians and that team collectively we've grown our business to over one.

Margie Tooth: Collectively, we've grown our business to over $1 billion in revenue. We generated $83.5 million in discretionary income and added over 286,000 new pets. We developed and continue to evolve a more decentralized operating structure and moved key aspects of the business forward at a rapid pace. Most importantly, we continue to advance our mission to help the pets we all love receive the very best veterinary care. On that note, I'm proud to share that we're rapidly approaching an exciting milestone that serves as a testament to our mission. In a matter of days, we should cross the threshold of one million subscription pets. That's a lot of lives helped and so many lives saved. This is why we do what we do. With that, I'll turn it over to Fawad.

Dollars in revenue, we generated $83 $5 million in discretionary income and added over 286000, new paths, we developed and continue to evolve a more decentralized operating structure and moved key aspects of the business forward at pace.

Most importantly, we continued to advance our mission to help the pets, we all love receive the very best veterinary care.

On that note I'm proud to share that we're rapidly approaching an exciting milestone that serves as a testament to our mission in.

In a matter of days, we should cross the threshold of 1 million subscription pets.

So lots of lives how to and so many lives saved this is why we do what we do.

With that I'll turn it over to Ford.

Thanks, Marty and good afternoon, everyone, having passed my first hundred days with Japan yen I'm pleased to say that it's been a great experience working with the team as I'm learning more about the business I remain excited about the significant opportunities ahead.

Today, I will share additional details around our fourth quarter performance as well as provide our outlook for the first quarter and full year of 2024.

Fawad Qureshi: Thanks, Margie, and good afternoon, everyone. Having passed my first 100 days with Trupanion, I'm pleased to say that it's been a great experience working with the team. As I'm learning more about the business, I remain excited about the significant opportunities ahead. Today, I will share additional details about our fourth quarter performance, as well as provide our outlook for the first quarter and full year 2024. Total revenue for the quarter was $295.9 million, up 20% year-over-year. Within our subscription business, revenue was $191.5 million, up 21% year-over-year. Total subscription pets increased 14% year-over-year to over 991,000 pets as of December 31, 2023. This includes approximately 40,000 pets in Europe which are currently underwritten by third-party underwriters.

Total revenue for the quarter was $295 9 million up 20% year over year within our subscription business revenue was $191 5 million up 21% year over year.

Total subscription pets increased 14% year over year to over 991000 pets as of December 31, 2023. This includes approximately 40000 pets in Europe, which are currently underwritten by third party underwriters.

Total monthly average revenue per pet for the quarter was $67 seven up six 3% over the prior year period. As a reminder, this is inclusive of all north American subscription products and will reflect mix of business.

Subscription business cost of paying veterinary invoices was $139 3 million, resulting in a value proposition of 72, 7%, a 321 basis points sequential improvement towards our target over the prior quarter.

As a percentage of subscription revenue variable expenses were nine 6% relatively consistent year over year and sequentially.

Fawad Qureshi: Total monthly average revenue per pet for the quarter was $67.07, up 6.3% over the prior year period. As a reminder, this is inclusive of all North American subscription products and will reflect the mix of business. The subscription business cost of paying veterinary invoices was $139.3 million, resulting in a value proposition of 72.7%, a 321 basis points sequential improvement towards our target over the prior quarter.

Fixed expenses as a percentage of revenue were 4.7% up from 4.1% in the prior year period, primarily due to investments in G&A.

After the cost of paying veterinary invoices variable expenses and fixed expenses, we calculate our adjusted operating income.

Our subscription business delivered adjusted operating income of $24 9 million or 13% of subscription revenue. This is up from 10.1% in the prior quarter or approximately 340 basis points of sequential margin expansion.

Fawad Qureshi: As a percentage of subscription revenue, variable expenses were 9.6%, relatively consistent year-over-year and sequentially. Fixed expenses as a percentage of revenue were 4.7%, up from 4.1% in the prior year period, primarily due to investments in G&A. After the cost of paying veterinary invoices, variable expenses, and fixed expenses, we calculate our adjusted operating income.

Now I'll turn to our other business segment, which is comprised of revenue from other products and services that generally have a b to b component and a different margin profile than our subscription business. Our other business revenue was $104 3 million for the quarter, an increase of 19% year over year.

Fawad Qureshi: Our subscription business delivered adjusted operating income of $24.9 million, or 13% of subscription revenue. This is up from 10.1% in the prior quarter, or approximately 340 basis points of sequential margin expansion. Now I'll turn to our other business segment, which is comprised of revenue from other products and services that generally have a B2B component and a different margin profile than our subscription business. Our other business revenue was $104.3 million for the quarter, an increase of 19% year-over-year. Adjusted operating income for this segment was $2.6 million.

Adjusted operating income for this segment was $2 6 million in total adjusted operating income was $27 5 million. In Q4 ahead of expectations. This was up 15% from Q3 and up 11% from the prior year period.

Our higher value subscription business comprised approximately 90% of our adjusted operating income in the quarter.

We expect this to increase as a percentage of total revenue as one of our partners and our other book of business pets Best continues to roll off.

This provides us the opportunity to move our investment dollars from lower value to higher value opportunities in our subscription business.

During the quarter, we deployed $15 5 million to acquire approximately 67000, new subscription pets, excluding the approximate 3004 hundred European pets. This translated into an average pet acquisition cost of $217 per pet in the quarter. This compares to $283 in the prior year period and $212.

Fawad Qureshi: In total, adjusted operating income was $27.5 million in Q4, ahead of expectations. This was up 15% from Q3 and up 11% from the prior year period. Our higher-value subscription business comprised approximately 90% of our adjusted operating income in the quarter. We expect this to increase as a percentage of total revenue as one of our partners in our other book of business, Pets Fest, continues to roll off. This provides us with the opportunity to move our investment dollars from lower value to higher value opportunities in our subscription business. During the quarter, we deployed $15.5 million to acquire approximately 67,000 new subscription pets. Excluding the approximately 3,400 European pets, this translated into an average pet acquisition cost of $217 per pet during the quarter.

In Q3.

We also invested $1.7 million in the quarter and development costs.

Stock based compensation expense was $6 6 million during the quarter. As a result, net loss was 2.2 million or a loss of five cents per basic and diluted share compared to a loss of $9 3 million or a loss of 23 cents per basic and diluted share in the prior year period.

In terms of cash flow operating cash flow was $17 5 million in the quarter compared to 1 million in the prior year period capital expenditures totaled $4 million.

As a result free cash flow was a positive $13 5 million, an approximate $18 million improvement from the prior year's fourth quarter.

Keep in mind that historically, we have seen seasonal fluctuations in free cash flow with veterinarians typically implementing new rates at the beginning of the year, we see lower free cash flow in the first quarter in higher inflationary environments. As we are currently experiencing this effect will be more pronounced. It is for this reason we have set an annual free cash flow target.

Fawad Qureshi: This compares to $283 in the prior year period and $212 in Q3. We also invested $1.7 million in the quarter in development costs. Stock base compensation Expense was $6.6 million during the quarter.

Fawad Qureshi: As a result, the net loss was $2.2 million, or a loss of $0.05 per basic and diluted share, compared to a loss of $9.3 million, or a loss of $0.23 per basic and diluted share in the prior year period. In terms of cash flow, operating cash flow was $17.5 million in the quarter compared to $1 million in the prior year period. Capital expenditures totaled $4 million. As a result, free cash flow was a positive $13.5 million, an approximate $18 million improvement from the prior year's fourth quarter. Keep in mind that historically, we have seen seasonal fluctuations in free cash flow. With veterinarians typically implementing new rates at the beginning of the year, we see lower free cash flow in the first quarter.

Turning to the balance sheet, we ended the quarter with $277 2 million in cash and short term investments outside of our insurance entities, we held $46 6 million in cash and short term investments with an additional $15 million available under our credit facility at.

At the end of the quarter, we maintained 241.3 million of capital surplus at our insurance subsidiaries, which was $64 1 million more than the estimated risk based capital requirement of $177 2 million.

During the quarter, we took additional steps to improve the strength of our cash held outside of our insurance entities, including an ordinary dividend from APAC and shifting our building ownership, we intend to continue to make strategic use of our assets moving forward.

One final point as was noted in today's press release related to the 2023 annual audit we expect to report in our Form 10-K, two material weaknesses and internal controls.

Fawad Qureshi: In higher inflationary environments, as we are currently experiencing, this effect will be more pronounced. It is for this reason we have set an annual free cash flow target. Turning to the balance sheet, we ended the quarter with $277.2 million in cash and short-term investments. Outside of our insurance entities, we held $46.6 million in cash and short-term investments, with an additional $15 million available under our credit facility.

The first material weakness related to information technology controls primarily in the areas of user access and program change management over certain information technology systems.

The second material weakness relates to internal controls over financial reporting pertaining to our other business segment. The 2023 audit remains open and we are working with our auditors to complete the process as a result financial statements for the full year 2023 are preliminary and subject to the completion of the audits efforts to remediate these material weaknesses.

Fawad Qureshi: At the end of the quarter, we maintained $241.3 million of capital surplus at our insurance subsidiaries, which was $64.1 million more than the estimated risk-based capital requirement of $177.2 million. During the quarter, we took additional steps to improve the strength of our cash held outside of our insurance entities, including an ordinary dividend from APIC and shifting our building ownership. We intend to continue to make strategic use of our assets moving forward. One final point. As noted in today's press release related to the 2023 annual audit, we expect to report in our Form 10-K two material weaknesses in internal controls. The first material weakness relates to information technology controls, primarily in the areas of user access and program change management over certain information technology systems.

These are underway now.

Now I'll turn to our outlook for the full year of 'twenty 'twenty four we are planning to grow revenue in the range of $1.241 billion to $1.273 billion. This is approximately 13% growth at the midpoint. We are planning to grow subscription revenue in the range of 842 million to 862 million representing 20%.

Year over year growth at the midpoint.

We expect total adjusted operating income to be in the range of 100 million to 120 million or 32% year over year growth at the midpoint.

As we think about the shape of the year, our expectation is that similar to prior years, we will start the year from a lower margin standpoint within our subscription business and build back to a 15% adjusted operating margin by Q4 of this year.

Fawad Qureshi: The second material weakness relates to internal controls over financial reporting pertaining to our other business segments. The 2023 audit remains open, and we are working with our auditors to complete the process. As a result, financial statements for the full year 2023 are preliminary and subject to the completion of the audits. However, efforts to remediate these material weaknesses are underway. Now I'll turn to our outlook. For the full year of 2024, we are planning to grow revenue in the range of $1,241,000,000 to $1,273,000,000. This is approximately 13% growth at the midpoint. We are planning to grow subscription revenue in the range of $842,000,000 to $862,000,000, representing 20% year-over-year growth at the midpoint. We expect total adjusted operating income to be in the range of $100 million to $120 million, or 32% year-over-year growth at the midpoint.

We will continue to be disciplined in our allocation of capital and as our margins expand more meaningfully in the second half of the year, we will look to be more aggressive in acquiring pets within our higher value subscription business, while operating within our IRR and free cash flow guardrails.

With that as context, I'll move to our Q1 outlook.

Total revenue is expected to be in the range of 297 million to 302 million subscription revenue is expected to be in the range of 198 million to 200 million. This is 21% year over year growth at the midpoint.

Total adjusted operating income is expected to be in the range of 21 million to $23 million. This represents nearly 42% growth year over year at the midpoint.

Keep in mind that our revenue projections are subject to conversion rate fluctuations, most notably between the U S and Canadian currencies for our first quarter and full year guidance, we used a 74% conversion rate in our projections, which was the approximate rate at the end of January we expect this will amount to a neutral year over year foreign exchange impact.

Fawad Qureshi: As we think about the shape of the year, our expectation is that, similar to prior years, we will start the year from a lower margin standpoint within our subscription business and build back to a 15% adjusted operating margin by Q4 of this year. We will continue to be disciplined in our allocation of capital, and as our margins expand more meaningfully in the second half of the year, we will look to be more aggressive in acquiring pets within our higher-value subscription business while operating within our IRR and free cash flow guardrails. With that as context, I'll move to our Q1 outline. Total revenue is expected to be in the range of $297 million to $302 million. Subscription revenue is expected to be in the range of $198 million to $200 million. This is 21% year-over-year growth at the midpoint. Total Adjusted Operating Income is expected to be in the range of $21 million to $23 million.

Thank you for your time today with that I'll hand, it back over to Darryl.

Thanks, a lot in a few weeks, we will be releasing my 20 twenty-three shareholder letter. These letters serve as a resource to gain deeper insights into our company highlighting both our accomplishments as well as our hurdles faced over the past year for those interested in learning more about your opinion and how we think and act I encourage you to read it.

I'll also point out that we recently announced the date of our annual Investor day to be held September 18th here in Seattle. This marks a decoupling from our annual shareholder meeting to be held in June the intent behind the changes to facilitate greater in person attendance and participation. We hope to see you there.

Fawad Qureshi: This represents nearly 42% growth year-over-year in the mid-basin. However, keep in mind that our revenue projections are subject to conversion rate fluctuations, most notably between the U.S. and Canadian currencies. For our first quarter and full year guidance, we used a 74% conversion rate in our projections, which was the approximate rate at the end of January. We expect this will amount to a neutral year-over-year foreign exchange impact. Thank you for your time today. With that, I'll hand it back over to Darryl.

With that we'll open it up for questions.

Ladies and gentlemen at this time, we'll begin the question and answer session.

To join the question queue. Please press Star and then one using a touchtone telephone if you are using a speaker phone. We do ask that you. Please pick up the handset prior to pressing the keys to ensure the best sound quality.

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We will pause momentarily to assemble the roster.

Our first question today comes from Maria <unk> from Canaccord Genuity. Please go ahead with your question.

Darryl Rawlings: Thanks, Fawad. In a few weeks, we'll be releasing my 2023 shareholder letter. These letters serve as a resource to gain deeper insights into our company, highlighting both our accomplishments as well as our hurdles faced over the past year. For those interested in learning more about Trupanion and how we think and act, I encourage you to read it.

Oh, great. Thanks for taking my questions.

I wanted to ask about your pet acquisition cost, which was down more than 20% for three consecutive quarters sort of understanding that some of that is mix shift, but kind of more broadly.

As you are gradually moving towards your target a loss ratio can you maybe expand on your thoughts on potentially becoming more aggressive unpack, especially in some of your more profitable markets.

Darryl Rawlings: I'll also point out that we recently announced the date of our annual Investor Day to be held September 18th here in Seattle. This marks a decoupling from our annual shareholder meeting to be held in June. The intent behind the change is to facilitate greater in-person attendance and participation. We hope to see you there.

Yeah, Hi, Thank you for your question is it's a lot yeah. So a couple of thoughts on that.

Packets something that from a 23 perspective.

Any reduced just given the environment.

Operator: With that, we'll open it up for questions. Ladies and gentlemen, at this time, we'll begin the question and answer session. If you have joined the question queue, please press star and then one on a touch-tone telephone. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality.

Air environment, though we tried to be very thoughtful as we think about 2024 and the shape of the investment in pack, we would love to invest more of course, where we feel like the returns are within our guardrails and we're trying to be very prudent and ensure that we have seen more of that margin expansion happened. So I would say on the first.

Maria Ripps: To withdraw your questions, you may press star and two. Again, that is star and then one to join the question. We'll pause momentarily to assemble the roster. Our first question today comes from Maria Ripps from Canaccord Genuity. Please go ahead with your question. Thanks for taking my questions.

Half of the year were a little bit more cautious until we see the realization of that.

Then as we get into the second half of the year, we feel more comfortable margins will expand as they've been continually expanding through the course of 'twenty three.

And that's where we feel like we have an opportunity to do more.

Be more aggressive.

Maria Ripps: I wanted to ask about your PAD acquisition cost, which was down more than 20% for three consecutive quarters. I understand that some of that is makeshift, but kind of more broadly, sort of now as you're gradually moving towards your target loss ratio, can you maybe expand on your thoughts on potentially becoming more aggressive on PAD, especially in some of your more profitable markets? Yeah, hi. Thank you for your question. This is for us.

Got it that's very helpful and then secondly.

Any additional color you may be can share about your recently filing with California, and so can you maybe put sort of the 50% plus a requested increase in the context of that delta between requested and proved our increase from back in June, especially given that sort of thought that cancellation Harris Simmons.

<unk> stabilized since then.

Unnamed Speaker: Yeah, so a couple of thoughts on that. Pack is something that, from a 23-year-old perspective, the company, and the environment.

Yeah, Hi, Mary Smoggy. Thank you for the question. So as we think about California. This is this is again a typical cadence prosper rating increases as the cost of care is at the time.

Maria Ripps: Got it. That's very helpful. And then secondly, is there any additional color you maybe can share about your recent refiling with California? And so can you maybe put sort of the 50% plus requested increase in the context of that sort of delta between requested and approved increases from back in June, especially given that sort of VAT-K inflation has seemingly stabilized since then? Yeah. Hi Maria. It's Margie.

The rate approval in August with one that we got to allow us to continue to grow and meet our value proposition for a broad a proportion of the population in California. As you mentioned it wasn't it wasn't all the way to ask since that time cost of can continue to rise for that year and say this rate increase to rectify the gap that we have between our target value proposition while the car.

Margie Tooth: Thank you for the question. So, as we think about California, this is, again, the typical cadence for us for rate increases as the cost of care rises over time. The rate approval in August was one that we needed to allow us to continue to grow and meet our value proposition for a broader proportion of the population in California. But, as you mentioned, it wasn't all the way there.

You're trending well.

We're working with them to bring us to our value proposition and over time expect to get there I would just say kind of draw attention to the fact that our biggest competitor in the state of California had a rate approvals over 70%. This is not atypical in this market that Germany has higher access to care and for US This new rate request.

Margie Tooth: Since that time, the cost of care continued to rise through that year. And so, this rate increase rectifies the gap that we have between our target value proposition and where we're currently trending. We're working with them to bring us to our value proposition. And, you know, over time, we expect to get there. I would also kind of draw attention to the fact that our biggest competitor in the state of California had a rate approval of over 70%. This is not atypical in this market, which generally has higher access to care.

Pushes to an average of a 13% increase over the past five years every year say, 13% in that in California is that effectively what we're seeing in our cost of goods and that's what's reflected in our latest funding.

Got it. Thank you so much for the color and congrats a question $1 billion in annual revenue.

Thank you.

Our next question comes from.

Grocery up from Evercore ISI. Please go ahead with your question.

Oh, Hey, Thanks. This is Jan freshwater so first just to kind of follow up on the rate increase question I understand that this is an ongoing process, but what type of kind of expectations is baked into your full year guide them like you know how much of the price increase do you expect to flow through the books this year.

Margie Tooth: And for us, this new rate request puts us at an average of a 13% increase every year. So, 13% in California is effectively what we're seeing in our cost of goods. And that's what's reflected in the latest filing.

Maria Ripps: Thank you so much for the caller and congratulations on crossing the billion dollars in your revenue. Thank you. Our next question comes from Shweta Khajuria from Evercore ISI. Please go ahead with your question. Hey, thanks, this is Jan for Shweta.

And then I have a follow up.

Yeah. So currently we have 26% flying through all our back in terms of price increases for our members.

Currently as we think about I'll pay you know our model is broken out by business unit. So as we said earlier, we've got different a different mix of different products that we have new products coming into play and say the pricing doesn't manifest itself in our case as we think about that expanding sequentially every quarter as you get more of the book of business, receiving a higher rate.

Shweta Khajuria: So first, just to kind of follow up on the rate increase question, I understand that, you know, this is an ongoing process, but what type of expectations are baked into your full-year guide? Like, you know, how much of the price increase do you expect to flow through the books this year? And then I have a follow-up.

As I mentioned earlier, we have placed a 300000 members now receiving a 20% increase now we've got 26 line three that's on average are.

Margie Tooth: Yeah, so currently, we have 26% flowing through our book in terms of pricing increases for our members. Currently, as we think about ARPU, you know, our model is broken out by business unit. So, as we showed earlier, we've got a different mix of different products as we have new products coming into play. So the pricing does manifest itself in ARPU.

More of our top line is going to be driven in RP versus pet counts at this point in time as we get to to get back on track from a margin perspective I wish. It was just demonstrating the benefit of inflation on that book of business and overall, we'd expect to see.

Margie Tooth: So as we think about that expanding sequentially every quarter, as you get more of the book of business receiving that higher rate increase, as I mentioned earlier, we have close to 300,000 members now receiving a 20% increase. Now we've got 26% flowing through. That's on average.

That shape of the year started to turn in in terms of all periods for 26% by the end of the year, assuming that inflation continues to be consistent and at the 15% Mark.

Got it thanks, and then the second question I apologize if you addressed this before but like for the Aflac partnership can you talk more about just the pivot out of Japan and focusing on the U S. Like why is that and also like does that change your view of potential other market expands.

Margie Tooth: More of our top line is going to be driven by ARPU versus PET count at this point in time as we look to get back on track from a margin perspective, which is demonstrating the benefit of inflation on a book of business. And, you know, overall, we'd expect to see the shape of the year start to turn in terms of ARPU to 26% by the end of the year, assuming that inflation continues to be consistent at the 15% mark. I got it.

And the timeline of that or or the scope of that thanks. Yeah. Yeah. Sure is it's a great question say, Japan was one of the many countries that we were looking at any thoughts about 16 months on it is something that we were talking to to do in conjunction with that lockup on our and we were exploring it for a number of years as we do with any market. We go into as they are really understanding of terex.

Margie Tooth: And then the second question, apologies if you addressed this before, but for the AFLEC partnership, can you talk more about just the pivot out of Japan and focusing on the U.S., like why is that? And also, like, does that change your view of potential other market expansion, the timeline of that or the scope of that? Thanks. Yeah, yeah, sure. This is a great question.

We understand the operations underlying that Carsten and also that immediate opportunity. After the research that we conducted were in tandem with Aflac, we realize it's not an appropriate time for us at the moment, it's still obsidian is an opportunity in the future and we mutually decided to redeploy our resources into other areas it doesn't impact condensate.

Margie Tooth: So Japan was one of the many countries that we were looking at at the start of our 60-month plan. It's something that we were looking to do in conjunction with Aflac, our partner. And we have been exploring it for a number of years, as we do with any markets we go into, so really understanding the territory, understanding the operations, understanding the costs, and also that immediate opportunity. After the research that we conducted in tandem with Aflac, we realized it's not an appropriate time for us at the moment.

Across Europe here, the European progress is going really well happy to see that we've now expanded all title addressable market now is at 50019 hospitals. When you include Europe, which is a great opportunity for us.

And when we feel like we've got a lot of a lot of room to grow in a space that we're in today say overall happy with that decision and still continue to be exceptionally inline with aflac.

Margie Tooth: It still absolutely is an opportunity in the future, and we mutually decided to redeploy our resources into other areas. It doesn't impact our decisions across Europe.

Thanks, a lot.

Our next question comes from Josh Shanker from Bank of America. Please go ahead with your question.

Margie Tooth: The European progress is going really well. I'm happy to see that we've now expanded our total addressable market now to 50,000 active hospitals when you include Europe, which is a great opportunity for us. And we feel like we've got a lot of room to grow in the space that we're in today. So overall, we are happy with that decision and still continue to be exceptionally aligned with Aflac. Our next question comes from Josh Shanker from Bank of America. Please go ahead with your question. Hi there. I know you might be limited in exactly what you can say, but could you talk about these material weaknesses a little bit more?

Hi, there I know it might eliminate exactly you can say, but.

Can you talk about beef a material weakness was a little bit more when were they noted they impact prior year numbers are what was the Genesis of this all coming together.

Yeah, Hi, Thanks for your question.

You know I I think I speak for all of us as a leadership team that we.

We take a finding of a material weakness very seriously.

As we mentioned earlier the audited the Logan L. Right now we're focused on putting the remediation in place for the two material weaknesses and that is the that.

Josh Shanker: When were they noted? Did they impact prior year numbers? What was the genesis of this all coming together?

That is a top priority for the company.

We're also planning to further invest in controls and compliance.

Unnamed Speaker: Yeah, hi, thanks for your question. You know, I think I speak for all of us as a leadership team when we take a finding of material weakness very seriously. As we mentioned earlier, the audit is still open.

To ensure we meet our own internal standards for Boston.

As the company grows we expect to continue to scale, our processes scaler systems to ensure where we're operating to that to the highest standards.

Unnamed Speaker: Right now, we're focused on putting remediation in place for these two material weaknesses, and that is the, is a top priority for the company. We're also planning to further invest in controls and in compliance to ensure we meet our own internal standards of robustness. And as the company grows, we expect to continue to scale our processes and scale our systems to ensure we're operating to the highest standards. And just to add, as of today, we are not aware of any issues related to financial results as a result of the pandemic. And were the weaknesses you discovered already present in the company in prior periods, or did they emerge in this past? They were Josh, and this is Darryl.

So I decided.

Yeah as of today, we are not aware of any issues related to financial.

Financial result, as a result of this.

And then from where the weaknesses you discovered already present in the company and in prior periods or did they emerge in this past year.

They were Josh this is Daryl.

You know as the company crossed the billion dollar Mark we've been creeping our scope and scrutiny across the company. So this was all areas of increased scope.

Okay. Okay, and then I noted that you mentioned are among the high price increase cohort are 98.28 monthly persistency.

Darryl Rawlings: You know, as the company crossed the billion dollar mark, we've been increasing our scope and scrutiny across the company. So these are all areas of increased scope. Okay, okay.

Josh Shanker: And then I noted that you mentioned among the high price increase cohort a 98.28 monthly persistency. That's down a bit from 98.6 I think in 2022. Is that, is there, sort of a bottoming out, or do you think that it could go lower? No, I think overall 98.28%. This is something that we obsess with at Trupanion. It's a little bit lower than it has been. We've now got 300,000 of our members and counting that have gone through this bucket.

That's down a bit from 98, six I think in 2022.

Is that a is there.

Sort of a bottoming out or do you think that that it could go lower from here.

No I think in our April 9% to 8.28% and this is something that we are obsessed with Japan in.

It is it's a little bit lower than it has been we've now got 300000 of our members and counting that have gone through this buckets. It is a significantly and shift our highest shift and we typically expect is as you know we don't typically have like a 20% increase that's flowing through our book of business I think we've seen some decent results I thought you know we we feel good about the fact that we have.

Margie Tooth: It is a significantly higher shift than we typically expect. As you know, we don't typically have over 20% increases flowing through our book of business. I think we've seen some decent results so far.

More about the pricing to the value proposition and because we hold ourselves to a high standard I expect that we'll be able to improve on the 90 828, but overall, we fail, but feel good about where we are and will continue to focus on this as we have an increased number of pets going through that but I certainly don't think it's a symptom of a of anything anything else out.

Margie Tooth: We feel good about the fact that we have shifted more of our book pricing to the value proposition. Because we hold ourselves to a high standard, I expect that we'll be able to improve on the 98.28%, but overall, we feel good about where we are and we'll continue to focus on this as we have an increased number of pets going through there. But certainly, I don't think it's a symptom of anything else other than we've got a high number of people going through that rate increase. Thank you very much for the answer. Our next question comes from Ryan Tunis from Autonomous Research.

Then we've got a high number of people going through that rate increase.

Okay. Thank you very much for many answers.

Yeah.

Our next question comes from Ryan Tunis from Autonomous Research. Please go ahead with your question.

Ryan Tunis: Please go ahead with your question. Hey, thanks. Good evening.

Hey, thanks.

Ryan Tunis: Good afternoon there, I guess. I guess I'm just kind of looking for a qualitative discussion of, you know, where do you view the subscription pet book in terms of rate adequacy today? relative to the start of the year. I mean, should we be thinking about this kind of broadly, and you mentioned the 15% loss trend? Is it going to be a similar year in terms of the rate of activity you take in during 24? Is that what you're thinking?

Good evening good afternoon, there I guess.

And then just kind of looking for a qualitative discussion you know where do you view the subscription book in terms of rate adequacy today.

Relative to the start of the year.

I mean should we be thinking about kind of broadly you mentioned, 15% loss trend.

And you're going to be a similar year in terms of the rate activity you've taken 24.

King or.

<unk>.

Margie Tooth: I guess other places the rate need last last today. Yeah, so so far this year we've seen veterinary inflation coming in in line with our expectations of 15%. We have a 26% rate flowing through our book of business. Those two things combined mean that we are nicely on track at this point to get to our target adjusted operating margin of 15% or annual margin of 15% by the end of the year. You know, I think as we look at those vet costs, we'll continue to monitor them closely, and we'll continue to refine our pricing to ensure as many of our members as possible are hitting that target. The more that we can get the rates by across all of our cohorts, the more we can grow and expand. But as Paul had mentioned beforehand, we will prioritize our margin growth before we start to invest in pet acquisition.

I guess are there places.

Is the rate need lashed way.

Yeah. So far this theory seen the veterinary inflation coming in in line with our expectations at 15%, we have 26% rate flying tropical business. They see things combines mean that we are nicely on track at this point. So you get to a target adjusted operating margin of 15%.

Annual margin of 15% by the end of the year you know I think as we as we look at that is that cost will continue to monitor in place today and will continue to refine our pricing to ensure as many of our members as possible are hitting that target. The more that we can get the rate buy across all of our K, what's the more we can grow and expand recipe.

I've mentioned beforehand, we will prioritize all are margin great before we start to invest into and to pet acquisition, but by and large I think that 15% inflation seems to be consistent with last year and and now that we have some some good adequate rate things, where we feel good about the trajectory for the year ahead.

Margie Tooth: But by and large, I think that 15% inflation seems to be consistent with last year. And now that we have some good adequate rates flowing through, we feel good about the trajectory for the year ahead. Does that answer your question? We'll move on to the next question.

Does that answer your question.

We'll move onto the next question. The next question comes from Jon Block from Stifel. Please go ahead with your question.

Jonathan David Block: Please go ahead with your question. Thanks, guys. Good evening.

Thanks, guys good evening.

Jonathan David Block: Maybe just to start on the 2024 adjusted operating income, the 100 to 120 million guidance. It seems wildly wide, the growth is, I think, like 20 to 42, 43% year over year. So maybe you can talk about what takes you to the low end or the high end. And what I'm struggling with is it seems like, based on Margie's recent comments, you're confident in the 15% adjusted OI by the end of the year, but that would seem to land you towards the high end. So maybe you could just walk through that and reconcile it. Again, what is the dynamics that takes you to 100? What is the dynamics that takes you to 120?

Maybe just to start on the 'twenty 'twenty four adjusted operating income of 100 to 120 million guidance.

Seems wildly why the growth is I think like 20 to 40% to 43% year over year, so well.

Maybe you can talk about what takes you to the low end or the high end and what I'm struggling with is it seems like.

For mortgage recent comments, you're confident in the 15%.

Just at a wide by the end of the year, but that would seem to lead you towards the high end. So maybe if you could just walk through that and reconcile it again what are the dynamics that takes you to 100 what are the dynamics. It takes you to one 'twenty you seem confident in the 15% does that linear one tenant that linear one 'twenty, maybe you could walk through the walk through those moving parts.

Fawad Qureshi: You seem confident in the 15%. Does that land you at 110? Does that land you at 120? Maybe you could walk through those moving parts.

Arch.

Fawad Qureshi: Yeah, thanks for your question. So, you know, I'd say a couple of things. I think the things that inform our guidance, because of our subscription business, the majority of our revenue is repeatable. And then, obviously, we have a huge underpenetrated market, so we expect revenue growth. I think one of the things we paid attention to then was whether that revenue growth was accelerating or decelerating. And if I look just at our subscription business, you know, if you compare Q3-22, that showed a 19.9% year-over-year increase. If you compare it to Q3-23, that then went to 20%. So, you can do a similar analysis comparing Q4-22, which was 18.2, to Q4-23, which was 20.8.

Yeah. Thanks for your question.

You know I pick up all of things I think the things that inform our guidance.

Cause of our subscription business. The majority of our revenue is repeatable and then obviously, we have a huge underpenetrated markets, where we expect revenue growth.

I think one of the things we paid attention to that as well.

That revenue growth is accelerating or decelerating and if I look just at our subscription business you know if you can.

Compare Q3 'twenty two.

That showed a 19, 9% year over year increase.

Compared to Q3 'twenty three that then went to 20% that you can do a similar analysis comparing Q4, 'twenty, two which was 18.2 and in Q4 23, which was 28.

You look at our guidance for Q1.

Fawad Qureshi: If you look at our guidance for Q1, that gave us some confidence that the acceleration of revenue growth would continue. So, that combined with the sequential improvement in margin, you know, gives us a high degree of – I would say a high degree of certainty that we can achieve those numbers by year-end. There is also going to be a seasonal aspect to our forecast. So, in any given year, you would see lower free cash flows.

That gave us some confidence that the acceleration of revenue growth rate would continue.

So that combined with the sequential improvement in margin.

And it gives us a high degree of of having a phase out some high degree of certainty that we can achieve those numbers five by year end. There is also going to be.

Seasonal aspect to our forecasts so in any year, you would see a lower free cash flow as a for instance in the first half of the year as rates or is that split right through there was also a higher frequency in a normal year, where you have 5% to 6% inflation you'd see that dynamic obviously, we're dealing with an environment that.

Fawad Qureshi: For instance, in the first half of the year, as rates – as VETs put rates through, there's also a higher frequency. In a normal year, where you have 5% to 6% inflation, you'd see that dynamic. Obviously, we're dealing with an environment that is significantly higher inflation.

It is significantly higher inflation, so rather than have say a one to two point impact in terms of margin Youre looking more at $3. Six so it's more of a down in Q1, and then making sequential progress as we go through the year, that's the thinking behind the guidance.

Fawad Qureshi: So, rather than have, say, a one-to-two point impact in terms of margin, you're looking more at a three-to-six. So, it's more of a downturn in Q1 and then making sequential progress as we go through the year. That's the thinking behind the guidance. And I think the other thing I'd add to that, John, is just as we consider inflation, you know, to touch on that point, if you know, if it's 15, if it goes to 18%, obviously, that, as we've seen, can have a very material impact on the margins. So at this point, we feel good about where things are trending. So that hopefully gives you a bit of context to that, the breadth of the guidance. Okay, that was helpful. I guess I can also follow up with you offline.

And I think the other thing I'd add to that John is just as we consider that in place and to touch on that point with 15.

<unk> I think I used the 18% obviously that as we've seen them you know that can have a very material impact on the margin. There at this point, we feel good about where things are trending.

Such as such as actually gives you a better context to that that with the guidance.

Okay.

That was helpful. I guess I can I'll follow up with you offline and then maybe just to pivot and maybe I'll try to jam two questions in here, but you know in the Pea.

Past, you've talked about inflation, increasing the demand for pet insurance, but I believe your four Q23 gross adds were down again year over year and that's also with the quality of gross adds declining as well and that's in a market. That's 5% penetrated. So how are you doing from a share perspective, maybe you could talk about that as you slowed the dollar.

Jonathan David Block: And then maybe just to pivot, and maybe I'll try to jam two questions in here. But in the past, you've talked about inflation increasing the demand for pet insurance. But I believe your 4Q23 gross ads were down again year over year, and that's also with the quality of gross ads declining as well. And that's in a market that's 5% penetrated.

To deploy.

Then separately I'm, just having a hard time reconciling it seems like total subscribers were all 2000 Q over Q, but subscription pets were up 22000 Q over Q. So other pets, we're down roughly 20000 Q over Q you had other revenues were up sequentially.

Jonathan David Block: So how are you doing from a share perspective? Maybe you could talk about that as you slow the dollars to deploy. And then separately, I'm just having a hard time reconciling.

So is that just like an arb, who think that went through the roof with other or maybe you could walk through that.

Jonathan David Block: It seems like total subscribers were up 2,000 Q over Q, but subscription pets were up 22,000 Q over Q. So other pets were down roughly 20,000 Q over Q. Yet other revenues were up sequentially. So is that just like an ARPU thing that went through the roof with others? Or maybe you could walk through that as well.

Well thanks for your time.

Yeah. So I can I can take the first part of your question that in terms of the overall inflation increase in demand for pad for us.

As you know, we're always going to operate within our guardrails than we've prioritized the theory with launching compression ready, Pakistan and the amount of money that we have to spend to acquire this that what the team has done very diligently for the past six months, it's really pullback nicely with on Pac spend and focus on areas, where we can get that efficient growth that naturally brings days IRR guardrail down with it because the life.

Margie Tooth: Thanks for your time. Yeah, so I can take the first part of your question. So in terms of overall inflation and increasing demand for pets, now for us, as you know, we're always going to operate within our guardrails, and we've prioritized this year with margin compression, really focusing on the amount of money that we have to spend to acquire those pets. What the team has done very diligently for the past six months is really pull back those levers on pack spend and focus on areas where we can get that efficient growth. That naturally brings those IRL guardrails down with it because the lifetime value is reduced when the margin is reduced. And as you've all seen in the supplemental, we document out exactly what that impact is, and so that means that the allowable pack dollars are reduced as well. So therefore, super efficient; when our allowable dollars go down, our gross pet ads are still efficient. There's less money to spend, so those gross ads are toggled down.

Standby rates or juice and the margin is ritchie.

And as you'll have seen in the supplemental we know we document out exactly what that impact is and so that means that the allowable Pac dollars are reduced as well. So therefore taper of fish and you know I went off went on allowable Donuts go down I'm, sorry, but that's still efficient there's lower that's less money to spend today's grace as a troubled down we fully expect this margin.

Expands his thought.

And the second half of the year.

And just a sequential margin from Q1 to Q2, so we're expecting that inflation that we typically would stay at the beginning of the year as Phil had mentioned will be accelerated by 15%.

Well, even double it would normally see in inflation. So if you assume that margins for Q1 Q2 will be somewhat flat then they start to pick up that means our Pac spend picks up say you know we feel good about that future state. We're seeing strong lead volume was saying good conversion rate and retention rates of our core co channel inventory channel in terms of the April market share you know I think the the market Hasnt.

Margie Tooth: We fully expect margins to expand and start to, In terms of overall market share, you know, I think the market hasn't shifted significantly. You know, we don't, we don't, we still have the veterinary channel as a heartland, and we feel good about that. And then, Darryl, did you want to talk about the second part of the question, which I think you were asking about subscription pets and other pets? John, would you mind just repeating that part of your question again, please, so we can......... Yeah, sure. When I look at some of the data that you break out, I mean, it's hard to, you know, tell you what page it is on, but your total pets were, you know, 1.714 million up from 1.712. So your total pets are up 2,000 sequentially. Your subscription pets are up 22,000. So your other is down 20,000 sequentially to sort of reconcile the total. Yet your other revenue, right, was up sequentially from 3Q to 4Q, despite other pets being down 20,000 sequentially. So I'm sort of asking, how does that take place?

Shifted significantly you know we don't we don't we still have the veterinary channel as the Heartlands and we feel good about that and then Gerald do you want to talk to the second part of the question, which I think you were asking about subscription pets.

And other pet so would you mind just repeating that part of your question again places that we can.

Yeah sure.

The data that you break out I mean, it's hard to tell you what page. It is but your total pets or $1 71, 4 million up from $1 seven one twos. Your total Petrobras 2000 sequentially. Your subscription pets are up 22000, and so your other is down 20000 sequentially just sort of reconcile it.

Total yes, your other revenue right was up sequentially.

From three two to four Q, despite other pets being down 20000 sequentially. So I'm sort of asking how does that take place as in other or Peru that comes up a lot because your other pets are back at a base, where they were in <unk> yet the revenues for other is up notably from that period of time.

Jonathan David Block: Is it other ARPU that comes up a lot? Because your other pets are back at a base where they were in 1Q, 2Q, yet the revenues for other are up notably from that period of time. And I'm trying to figure out what that is, if it's ARPU, and if so, why.

And I'm trying to figure out what that is if it's our pool and if so why.

Jonathan David Block: Yeah, I think it's a question we can follow up with you on, John. But the key factor for me that I would take away is when you look at the shape of the other businesses in terms of revenue throughout the year, you see the opposite of what you're seeing in subscription. So in subscription, we're seeing accelerating growth rates, and other businesses are seeing diminishing. But we can certainly follow up with you in terms of the lag between, you know, the change in pet count and then how that manifests in terms of landing. Yeah, it's like a 30 year biz, right? I mean, it's pretty straightforward.

Yeah, I think it's a it's a question we can follow up with you on John but I think the key factor to me that I would take away is when you look at the shape of the other business in terms of revenue throughout the throughout the year you see the opposite of what you're seeing in subscriptions and subscription we're seeing accelerating growth rates in our other business you're seeing diminishing.

But we can certainly follow up with you in terms of the lag between the.

The change in head count and then how that manifest in terms of Atlantic revenue.

Yeah, it's like a third of your business right I mean, it's pretty straightforward you. Your other patch went from 742% to 723, 7% for 2000 and 723000 Q over Q. So first time the other pets were down I don't know.

Jonathan David Block: Your other pets went from 742 to 723, 742,000 to 723,000. Q over Q. The first time that other pets were down, I don't know, in at least probably four years, the revs were up sequentially. How is that possible?

Least probably four years, the revs were up sequentially, how is that possible whatever the arcos is what I'd love to hear thanks, guys.

Jonathan David Block: What happened to the ARPOs is what I'd love to hear. Thanks, guys. Thanks, John. We'll follow up. Our next question comes from John Barnidge of Piper Sandler. Please go ahead with your question. Good afternoon.

Thanks, Tom will follow up.

Our next question comes from John Barnes.

Arledge from Piper Sandler. Please go with your question.

Good afternoon, and thank you very much for the opportunity. We've you mentioned a shift in the quarter and the building ownership can you talk about that.

John Bakewell Barnidge: Thank you very much for the opportunity. We've mentioned a shift in the quarter in building ownership. Can you talk about that? Yeah, this is Fawad.

Yeah. This is Paul thanks for the thanks for the question.

Fawad Qureshi: Thanks for the thanks for the question. Yeah, so there's a couple of things if you sort of look at the opportunities we have from creating operating cash that we can then deploy into business. PACAs, for instance, we did two things, and really it was to try and take advantage of the overcapitalization of our insurance entities. So we took an ordinary dividend, which is basically accrued interest income. With higher interest rates, we now have the opportunity for that to be a more meaningful contribution based on our existing portfolio. And then from a building ownership perspective, the building is shared between our insurance entities and our MGA, our operating entities. So again, in consultation with regulators, we increased the insurance entity ownership, so that then frees up cash that can be used for operating purposes by our MGA.

So it was a couple of things if you sort of look at.

The opportunities we have from creating operating cash that we can then deploy in the business pack as a for instance, we.

We did two things that really was to try and take advantage of the over capitalization of our insurance entities.

So we took an ordinary dividend, which is basically accrued interest income.

With higher interest rates, we now have the opportunity for that to be a more meaningful contribution based on our existing portfolio and then from a building ownership perspective. The building is shared between our insurance entities in our MGA, our operating entities. So again in consultation with with regulators, we increase the insurance entity ownership for that then frees.

That cash that can be used for operating purposes by our MGA.

Fawad Qureshi: We thought it was a prudent use of our assets, and we think we can reinvest those dollars at higher rates of return to grow the business. And I would just add to that, John, one of the reasons we bought the building in the first place was for this very purpose. So, you know, happy to be able to realize that activity and see it come to fruition. When that occurred, was there any change in the valuation of the building? No.

We thought it was a prudent use of our of our assets.

And we think we can reinvest those dollars at high rates of return to a growth business and I would just add to that John one of the reasons. We bought the building in the first place with words for this very purpose. So you know happy to be able to realize that that activity and as they come to fruition.

When that occurred was there any change in valuation of the building.

No.

Yes, Andrew.

John Bakewell Barnidge: And our next question comes from Wilma Burness from Raymond James. Please go ahead with your question. Hey, good evening, guys. How do you view the need for scale?

Our next question comes from well my Burtis from Raymond James. Please go ahead with your question.

Hey, good evening guys.

How do you view the need for scale, there's a lot of rollouts going on in the pet insurance industry would you guys consider any acquisitions combinations anything like that.

Wilma Burness: There are a lot of roll-ups going on in the pet insurance industry. Would you guys consider any acquisitions, combinations, or anything like that? No, I mean right now I think we are very much focused on our core growth. We've got a number of different products and channels that we're looking to continue to grow and invest in. We have different priorities across those in terms of looking at continuing to operate within our guardrails, return to our overall target P&L margin profile, and looking at scaling there. I think we, you know, we have made acquisitions in the past. I think it certainly has not been, they were the first that we did, and we're not looking to do any more.

No I mean right now I think we are very much focused on uncle uncle Grace you know, we've got a number of different products and channels that we're looking to continue to grow and invest them. We have different priorities. The cost saves in terms of looking at continuing to operate within our guardrails returning to our overall target P&L margin.

Paul.

And I can't scaling that I think we you know we have made acquisitions in the past I think it certainly has not been there was the first that we've done we're not looking to do anymore and I think we have some big nights that we've been we've been building 80 years, and we'll continue with all of them.

Margie Tooth: And I think we have some big moats that we've been building for years, and we'll continue with our own pet growth. Yeah, I'll just add that. You know, this veterinary inflation that we went through, we saw five consecutive quarters of margin compression, and now we've seen three quarters of margin expansion. We're prioritizing free cash flow above growth, but as you can see, the team has been able to deploy at a 42% internal rate of return. We can get very high rates of return on our internal pre-tax capital, and we have lots of opportunities. We really want to see our margins fully expand so that we can deploy greater sums of capital in our core channels at these high rates of turn.

Okay great.

Yeah, I'll just add that.

No that's.

Cause veterinary inflation that we went through we saw five consecutive quarters of margin compression.

And now we've seen three quarters of margin expansion, we're prioritizing free cash flow above growth.

But as you can see the team has been able to deploy at a 42% internal rate of return we can get very high rates of return on our internal pretax capital.

We have lots of opportunities, we really want to see our margins fully expand so that we can deploy greater sums of capital in.

In our core channels that these high rates of churn. So that's our overall strategy.

Darryl Rawlings: So that's our overall strategy. Got it. Thank you. And maybe, maybe I missed this.

Got it thank you and maybe maybe I missed this did you guys talk about how much capital you freed up via both the ordinary dividend and.

Wilma Burness: Did you guys talk about how much capital you freed up via both the ordinary dividend and, if there was any associated with the building, the movement with the building? Yeah, hi, thanks for the question. So there's a couple of elements to that. So when you look at our, They're the MGM. The Bulletproof Executive 2013, and then the building. The evidence that we took was part of..., give us for you.

If there is any associated with the building the movement with the building.

Yeah, Hi, Thanks for that question. So there's a couple of elements to that so when you look at our beginning balance of $37 9 million.

Q4 balance of $46 six.

There.

The MGA fees that we would normally get from our insurance entities and as I said earlier, that's what we use for operating expenses, whether it be claims contact center, our fixed cost et cetera, including pack.

And then the building and.

The dividend that we took was part of that walk from Q3 Q4.

To help give us the $46 6 million.

Fawad Qureshi: Okay, thank you. And ladies and gentlemen, with that, we'll be concluding today's question and answer session, as well as today's conference call. We thank you for joining us for today's presentation. You may now disconnect your line.

Thank you.

And ladies and gentlemen, with that we will be concluding today's question and answer session as well as today's conference call. We thank you for joining today's presentation.

You may now disconnect your lines.