Q4 2024 Trupanion Inc Earnings Call
Speaker Change: After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Gil milk here director of.
Gil: Investor Relations. Please go ahead.
Gil Milk: Good afternoon, and welcome to companions fourth quarter and full year 'twenty 'twenty four financial results conference call.
unknown: Participating on today's call are Moggy tooth, Chief Executive Officer, and President and throw out Qureshi Chief Financial officer for ease of reference. We've included a slide presentation to accompany today's discussion, which will be made available on our investor Relations website, and our quarterly earnings tab before.
Speaker Change: Before we begin please be advised that remarks today will contain forward looking statements all statements other than statements of historical facts are forward looking statements. These include but are not limited to statements regarding our future operations key operating metrics opportunities and financial performance pricing and veterinary industry inflation.
unknown: And our ability to immediate all material weaknesses. These.
unknown: These statements involve a high degree of known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed today.
unknown: Discussion of these and other risks and uncertainties are included in today's earnings release as well as the Companys. Most recent reports, including Form 10-K, 10-Q, and 8-K filed with the Securities and Exchange Commission.
unknown: Today's presentation contains references to non-GAAP financial measures that management uses to evaluate the company's performance, including without limitation cost of paying veterinary invoices variable expenses fixed expenses adjusted operating income acquisition cost internal rate of return adjusted EBITDA and free cash flow when we used.
unknown: The term adjusted operating income or margin is intended to refer to our non-GAAP operating income or margin before new pet acquisition and development expenses, unless otherwise noted all margins and expenses will be presented on a non-GAAP basis, and excluding stock based compensation expense and depreciation expense.
unknown: These non-GAAP measures are in addition to another substitute for measures of financial performance prepared in accordance with U S. GAAP.
unknown: I encourage 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, and lastly, I would like to remind everyone that todays conference call is also available via webcast on <unk> Investor Relations website, a replay will also be available on the site.
Speaker Change: I will now hand over the call to marquee.
Speaker Change: Thank you Gail and Hello, everyone.
Speaker Change: 2024, with a significant year for Japan in March by strong operational and financial execution.
Speaker Change: We started the year with ambitious goals to repair and expand our margins and fortify our balance sheet, while simultaneously continuing to enroll pets with less Pac spend against these guarding mandates I'm pleased to report we delivered.
Speaker Change: Here are some of our 'twenty 'twenty four highlights.
Prescription revenue grew 20% year over year, and we drive meaningful margin expansion and the subscription business, achieving an industry, leading 71% value proposition for the second consecutive quarter in the fourth quarter, we achieved the highest quarterly subscription adjusted operating margin in our history more than doubling our margin from a quote.
Speaker Change: The low point in early 2023.
Speaker Change: For the full year of 24, adjusted operating income grew nearly 40% to a record $114 million.
Speaker Change: We always said generated $39 million in free cash flow, an all time high with the vast majority of the improvement being driven by higher adjusted operating income.
Speaker Change: And a large underpenetrated market our focus is on growing adjusted operating income and strategically reinvesting at high estimated internal rates of return to help more pets received the care they need.
Speaker Change: And again, our team has demonstrated their ability to deliver on this objective and 'twenty 'twenty four was no exception.
Speaker Change: In line with our mission, we reached a major milestone early in the year protecting more than 1 million cats and dogs of which approximately 257000 were added over the last 12 months. The vast majority of these coming from our flagship couponing and branded products Arkansas.
Speaker Change: Our consistent and proven ability to great pack count in spite of a purposeful decision to reduce acquisition spend for five consecutive quarters directly illustrates the growing demand and need for our product in support of pet parents today too.
Speaker Change: Couponing is commitment to our members is at the heart of our business and upholding our value proposition has been and will continue to be the driving force of our team.
Speaker Change: In 2024, we continue to invest meaningfully to improve our best in class member experience, including advancing our software that eliminates the need for reinvestment and doing say, we made significant progress across our claims experience with record levels of direct payment and speed of traditional claims payment, resulting in a claims inventory needs are all time low.
Speaker Change: <unk>.
Speaker Change: Just three months ago, we hit another milestone surpassing $3 billion in paid veterinary invoices, the last billion being achieved in less than 24 months.
Speaker Change: This unmatched level of veterinary invoice support directly demonstrates the growing role she panning plays in solving the new normal and veterinary care.
Speaker Change: As we extend our support to an increasing number of pet parents. We remained focused on ensuring members feel competent in our value to canyon provides.
Speaker Change: While there is still work to be done refining our pricing across every cohort such as making necessary adjustments when needed and maintaining rates why costs have stabilized. We have reached a solid foundation on which to build we're pleased to now be largely in a phase of refinement, leading to lower average increases that make budgeting easier for our members.
Speaker Change: Of course, the real proof of our priorities and our member attention and as we close the year. We saw continued strengthening across all retention cohorts, especially with members receiving a rate increase of over 20% when most of our business sits today in fact fourth quarter retention for this cohort was among the highest rate of retention for over two years.
Speaker Change: With refi normalizing, we've been adjusting our attention FX to span across our entire member base, including Nathan that first year and with rate changes of less than 20% and we're encouraged by the early improvements. This focus is making.
Speaker Change: Thanks to our strong ARPA growth and margin expansion, we saw a 45% increase in our PA patch profit even with the anticipated pullback in retention. This expansion is what increases are allowable pet acquisition costs also many setting the stage for greater investment impact Grace.
Speaker Change: With regards to hospital performance, we ended 2024 with strong back meaning you'd bought him an all time high in veterinary hospitals using onto right payment solution and over 15000 active hospitals built.
Speaker Change: Building on this foundation, we took a significant strides forward during the year with the launch of our veterinary fast strategy in international markets, where the introduction of the true panning brand in Europe per.
Speaker Change: Pet parents in Germany, and Switzerland, which is home to approximately 12000 battery hospitals will now have access teach opinions high value products and replicated back direct payment solution. We have also continued a minor investment into newer products and channels with a purpose of reaching pet parents, where they are in partnership with household brands to connect with those with <unk>.
Speaker Change: <unk> consumer needs.
Speaker Change: And a large underpenetrated market these opportunities enhance our long term growth potential and with it our intrinsic value.
Speaker Change: To summarize 2024 was a very strong financial year and the timing point for the company, we made meaningful progress and achieved what we set out to do we've developed a solid and scalable foundation financially and operationally. So now we'll turn our attention to the year ahead. The final year of our 60 month plan.
Speaker Change: In 2025, we anticipate steady sustainable growth in our subscription business, we expect margins to continue to expand and rate changes to normalize driving increased profit per patch and improve retention will step up our pet acquisition investment in tandem gradually increasing spend as the year progresses.
Speaker Change: Our confidence in our margin trajectory is reinforced by recent trends in veterinary inflation, which continue to align with our expectations veterinarians typically raise prices at the start of the year contributing to a seasonal step up in costs that drives stronger margin performance in the second half of the year.
Well early into 2025, we are seeing this pattern play out and anticipate a similar yet improve margin journey throughout the next 12 months at the same time the progress made over the last quarter, increasing actually have hospitals in battery needs has reinforced our confidence in our team's ability to accelerate that growth as we ramp up acquisition investments.
Speaker Change: Our approach this acquisition spend is designed to reinforce conversations happening within the hospital, creating a brand halo effects the benefits not just the veterinary channel, but all channels. This investment also plays a key role in improving retention, particularly among first year members by reinforcing the value of Japan post enrollment having.
Having scaled back in this area over the past year were beginning to rebuild momentum and brand awareness similar.
Speaker Change: Similar to prior years, the majority of our pet acquisition dollars will be reinvested into growing our core Japan and brand in North America. This remains the foundation of our business and our primary growth engine.
Speaker Change: Underpinning our anticipated growth is our commitment to ongoing investment in our systems and infrastructure in 2025, we expect to build on the use of new technology designed to elevate the member experience retire legacy platforms and strengthen our control framework to ensure a longtime scalability and effectiveness.
Speaker Change: Along these lines I'm pleased to share that as part of our 2024 audit. We are on track to remediate. The two previously identified material weaknesses. This progress towards a successful resolution highlights the diligent efforts of our team and strengthening internal controls and implementing sustainable price that says I want to take a moment to recognize the tremendous work and.
Speaker Change: Dedication from everyone involved.
Speaker Change: In total if we achieved the great Scotia today by the end of our 60 month plan, we would expect a compound annual revenue growth rate to be 23% robust and just shy of about 25% goal gross and adjusted operating income would be near 20%. This last metric if delivered will be a significant achievement given the.
Speaker Change: Margin erosion caused by veterinary inflation following the pandemic.
Speaker Change: Exiting 2025, we expect strong fundamental performance across key metrics, including retention RP and margin with a gradual step up impact gross.
Speaker Change: Growth in these metrics along with the expansion in our active hospital base and same store sales is central to our business model and long term value creation by continuing to drive these core metrics, we aim to create even greater value in the year ahead setting the stage for sustained momentum in 2026 and beyond.
Speaker Change: While we still have time to run on our current strategic journey.
Speaker Change: Going into this final year with tremendous gratitude to the team that has made these results possible time and again. This team has demonstrated their commitment to our members and there isn't an ecosystem and with it built a strong track record of success.
Speaker Change: With that I'll hand, the call over to for what.
Thanks, Marty and good afternoon, everyone today, I will share additional details around our fourth quarter performance as well as provide our outlook for the first quarter and full year 2025.
Total revenue for the quarter was $337 3 million up 14% year over year.
Speaker Change: Within our subscription business revenue was 227.8 million up 19% year over year and up 20% on a constant currency basis.
Speaker Change: Monthly average revenue per pet for the quarter was $76.02 up 13% over the prior year period.
Speaker Change: Within our courtroom Fanion brand ARP, who expanded even faster at 14% year over year and 15% on a constant currency basis, marking our highest rate of growth in the company's history.
Speaker Change: Total subscription pets increased 5% year over year to over 1.041 million pets as of December 31st. This includes over 51000 pets in Europe, a majority of which are currently underwritten by third parties.
Speaker Change: Average monthly retention for the trailing 12 months was 98.25% down versus last year, which was 98.49% on a trailing three month basis retention was up sequentially from Q3.
Speaker Change: The subscription business cost of paying veterinary invoices was $159 5 million, resulting in a value proposition of 70% an improvement from 72.7% in the prior year period the.
Speaker Change: The drivers of this improvement were margin expansion from our ongoing pricing actions and continued efficiency in our cost of processing invoices. These improvements more than offset adverse development from prior periods in the quarter totaling <unk> 7 million or approximately 30 basis points of revenue.
Speaker Change: As a percentage of subscription revenue variable expenses were 9.2% down from 9.6% a year ago.
Speaker Change: We have made significant investments in technology and are now realizing efficiencies in our contact center on top of the cost improvements and invoice processing I just mentioned.
Speaker Change: Fixed expenses as a percentage of revenue were 5.5% up from 4.7% in the prior year period in line with our expectations. This is the result of significant additional investments in internal controls technology and Sox compliance.
Speaker Change: In that regard, we have made substantial progress and remediate ing. The two material weaknesses identified in the 2023 audit while.
Speaker Change: While the final outcome will be determined upon completion of the 'twenty 'twenty four audit we remain on track to remediate. These two items and we expect to file our 10-K on schedule.
Speaker Change: I would like to extend my gratitude to everyone at Japan yen for their dedication and hard work throughout this process.
Speaker Change: After the cost of paying veterinary invoices variable expenses and fixed expenses, we calculate our adjusted operating income our subscription.
Speaker Change: <unk> business delivered adjusted operating income of 35 million, an increase of 40% from last year.
Speaker Change: Subscription adjusted operating margin was 15.3% of subscription revenue. This is up from 13% in the prior year and represents approximately 230 basis points of margin expansion.
Speaker Change: This represents the highest subscription adjusted operating margin in our company's history.
Speaker Change: Now I'll turn to our other business segment, which is comprised of revenue from other products and services that generally have a beta V component at a lower margin profile than our subscription business. Our other business revenue was $109 5 million for the quarter, an increase of 5% year over year, we expect growth for this segment to continue to decelerate as one of our partners pets.
Speaker Change: Best has completed its transition to a new underwriter in the majority of U S States and we are no longer enrolling new pets in those geographies.
Speaker Change: Adjusted operating income for this segment was point 8 million adjusted operating margin for this segment was 0.8% down from 2.4% last year margin for the quarter was inclusive of a point 9 million accounts receivable write down if we were to exclude this one off expense adjusted operating margin would've been approximately in line with the first three quarters of 'twenty.
Speaker Change: <unk> 24.
In total adjusted operating income was $35 8 million in Q4 up 30% from Q4 last year and in line with our expectations.
Speaker Change: We acquired approximately 60200, new subscription pets in the quarter and deployed 16.9 million to do so.
Excluding the pets that are underwritten by a third party. This translated into an average pet acquisition costs of $261 per pet in the quarter up from $217 in the prior year period. The estimated internal rate of return on the spend was 32% in the quarter in line with our target of 30% to 40%.
Speaker Change: We also invested $1.3 million in the quarter and development costs noncash expenses in the quarter included 8 million in stock based compensation as well as a 5.3 million goodwill impairment charge related to our European businesses. This impairment was taken after completing a detailed business review and which medium term profit and cash forecasts were lower.
Speaker Change: Than previously assumed we remain excited about our long term prospects in Europe.
Speaker Change: As a result, we reported net income for the quarter of 1.7 million or four cents per basic and diluted share compared to a net loss of $2 2 million or five cents per basic and diluted share in the prior year period.
Speaker Change: In terms of cash flow operating cash flow was $23 7 million in the quarter compared to 17.5 million in the prior year period capital expenditures totaled 1.9 million down from $4 million in Q4 last year as a result free cash flow was 21.8 million, an 8.3 million improvement from the prior year's fourth.
Speaker Change: <unk> on our third quarter 2023 earnings call, we introduced an annual free cash flow target at two 5% of revenue. We exceeded this goal in 2024 by generating free cash flow of $38 6 million a margin of 3%. This represents an improvement of 38.2 million over the prior year and puts us in a very strong position to further.
Speaker Change: Increase our investments into pet acquisition.
Speaker Change: Turning to the balance sheet, we ended the quarter with $307.4 million in cash and short term investments at the end of the quarter, we maintained $288 million of capital surplus at our insurance subsidiaries, our largest insurance entity apex maintained $245 5 million of capital surplus, which was 140.2 million above the.
Speaker Change: Company action level risk based capital requirements. This excess capital has increased by $78 2 million since year end 2023 due to changes in underwriting risk factors used in the calculation of risk based capital requirements by the NTIC the retained earnings within apex, and the slowing growth in our other business.
Speaker Change: Now I'll turn to our outlook for.
Speaker Change: For the full year of 2025, we expect revenue in the range of 1.379 billion to 1.414 billion. We expect subscription revenue in the range of 961 million to 984 million, representing approximately 14% year over year growth at the midpoint at approximately 15% on a constant.
Speaker Change: <unk> basis.
Speaker Change: We expect total adjusted operating income to be in the range of 120 million to 140 million or 14% year over year growth at the midpoint, we expect fixed expenses to increase as a percentage of revenue in 2025 due to higher underwriting fees in Canada and continued investments in technology and compliance but remain committed to our.
Speaker Change: Model P&L over the medium and long term.
Speaker Change: As in 'twenty 'twenty, four we expect to generate higher margin in our subscription business in the second half versus the first half and our deployment of pet acquisition dollars should mirror the seasonality.
Speaker Change: With that as context I'll move to our Q1 outlook total revenue is expected to be in the range of 334 million to 340 million subscription revenue is expected to be in the range of 230 million to $233 million. This represents 15% year over year growth at the midpoint and 17% on a constant currency basis total.
Speaker Change: Operating income is expected to be in the range of 26 million to 29 million. This represents nearly 29% growth year over year at the midpoint.
Speaker Change: As a reminder, our revenue projections are subject to conversion rate movements predominantly between the U S and Canadian currencies for our first quarter and full year guidance, we used a 69% conversion rate in our projections, which was the approximate rate at the end of January.
Marty: Let me now pass it back to Marty.
Speaker Change: Thank you for what before.
Speaker Change: Before we move to questions I'd like to underscore a comment for what made earlier the last quarter of 'twenty 'twenty four marked the highest subscription adjusted operating margin in the history of true Pan in.
Speaker Change: Well as a growth business, we're always focused on achieving new highs. This one comes with some significant pride and a return to more normalized rate play for our member base I fully expect this improvement will benefit our member experience that in time will enhance our retention rates and member referrals, which along with increased off a margin expansion will increase.
Speaker Change: Pat profit throughout the year. This gives me confidence in as a business and a team we will exit 2025 with the highest per pet profit and expanding allowable Pac we have ever seen giving us the opportunity to return to our historical growth rates in our underpenetrated market.
Speaker Change: 95% of pet parents have yet to make a choice about insurance the opportunity is enormous and we will be very well placed for growth.
Speaker Change: With that I'll turn it over for questions.
Speaker Change: We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speaker phone. Please pick up your handset before pressing the keys. If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star and then two.
Speaker Change: Also please limit yourself to one question and one follow up the.
Speaker Change: The first question comes from Brandon Bad close with William Blair. Please go ahead.
Brandon Bad: Hey, everyone. Thanks for taking the question, maybe if I can start first on guidance, Ken maybe you can talk to us a little bit about the progression of how a subscriber growth may grow throughout the year, because I know we've talked in the past about our Pac spend needs to pick up it and theres a little bit of a delay behind that so maybe just a little more context on the the rest of the three.
Brandon Bad: Quarter, there that we couldn't get if I could just to make sure we have the models kind of lined up.
Ken: Yeah. Thanks for the question.
Brandon Bad: So let me give you a couple of dimensions in terms of guidance and kind of the thinking behind it obviously, it's grounded in the 'twenty four results, which.
Brandon Bad: It gives us a lot of confidence in terms of being able to.
Brandon Bad: You need to grow margin expand margin as we get into 2025 I think as you pointed out the thing that we're really excited about is all of the work. We did in 2024 to increase financial capacity through free cash flow and now gives us the ability to invest those dollars two years in a row. The company has reduced total Tac dollars.
Brandon Bad: Obviously out of necessity, but that's been really unusual if you look at the company's history I think over the last 10 years. There was only one year, where it was flat as Marty said and we'd say constantly we're a growth company. So we're going to deploy a pac investment.
Increasing rates as we go through the year.
Brandon Bad: Objective our goal is to try to approach the level of investment that we hit in 2022.
Brandon Bad: On a total dollar basis that was about $80 million.
And that would be a significant step up in investment so it'll be gradual it will always be within the guardrails are.
Brandon Bad: We want to be prudent as we deploy that capital, but having the financial capacity, having generated a free cash flow, that's given us choices and we're in a position where when we see great opportunities for investment and obviously, we're seeing those.
Brandon Bad: We can invest so it'll be a progression through the year I think if you look at mix in terms of how much pricing has contributed how much head count is contributed.
Brandon Bad: Coming out of last year and Q4, it was about 60% pricing about 40% related to pet count. So we have been increasing pets, even over the last two years.
Brandon Bad: Gross hasnt been north of half a million, but we have a standard that we set but we want to continuously grow and so we're looking for more solid second half of next year for pet count to contribute more than it would in first half and that's as a result of deploying those dollars.
Speaker Change: Great maybe on a on a similar but slightly different angle on that topic of growth through the year. Mark you made a comment about being in record number of hospitals now sometimes they use that as kind of a gauge of accounts that are bought in on the true banyan kind of model here what does that mean, what are you guys seeing in terms of.
Speaker Change: That leads given that's kind of your your leading indicator as you put more money towards pack you kind of go to those that lead to closed more so talk to us a little bit about that leaves anything you can quantify there would be great.
Speaker Change: Yeah. Thanks for the question Brandon you're absolutely right as we see the hospital the hospital activity, increasing and and really our goal is to continue to expand on that course I've of course as well that does is it means that we're really getting to more pet parents as they go through their wallets.
Speaker Change: They meet them after the first time and they have that introduction outside of Japan in what we're saying is in Q4 that leaves over all were up 30% year over year. So really strong lead generation from that night wishes on territory partners. There's people that are going into hospitals, and having that conversation well Wayne now focused on entering into force point, Darius deploying nice pet acquisition.
Speaker Change: As to really reinforce the conversion element of Japan, Ian So why is pet insurance important to start with in a very underpenetrated market today, we're still focusing on that education level, we're still helping people to understand what the cost of carriage for that Pat and then from that reinforcing from a brand perspective. So the increase in acquisition Daus will allow.
Speaker Change: Really dip into that bigger brand effect, which we expect will help to pull those leads through the funnel and the great news is for US all of that volume has always about lead volume has always been high throughout the year, where we saw it get to at the end of Q4 and again.
Speaker Change: Good and healthy and in January.
Speaker Change: It's really a case now for us to take that off the change he redeploy that Pandora is to help to stop that grace that gross cash.
Speaker Change: And the next question comes from Jon Block with Stifel. Please go ahead.
Jon Block: Thanks, guys good afternoon.
Jon Block: Just the first one the 14th 24 gross adds were.
Jon Block: What does he pretty fall below well below us and they've been modest for an extended period of time now so what.
Jon Block: What are you doing this is in this light.
Speaker Change: Our lead problem a conversion problem, maybe if you could just give a little bit more detail and then more specifically when do you expect that to really pick up and flat in 2025.
Jon Block: Yeah, Hi, John Thanks for the question.
Jon Block: The 'twenty 'twenty four I think we really had three goals going into the year are the fastest margin expansion second free cash flow and fed balance sheet strength, and really kind of reinforcing that financial strength of the company. We achieved all three of those goals and that margin expansion was absolutely at the top of that list. When we think about what that means for us at ally.
Jon Block: Owes us natural pivot Chi about 2025 goals, which are really very clear for us as a business. One is improving conversion. The second is in training and retention.
Jon Block: So that will help to ultimately drive that high lifetime value. So as we think about margin expansion now where I'll focus has been as a business hasn't been all that combat more patch in 2024 inch being about as top three goals. We're now pivoting to watch your opinion has historically done very normally its in all DNA in terms of helping to convert people helping to understand why.
Jon Block: Opinion, we have a very high lead volume coming into the business and that hasn't really shifted significantly over the last 18 months as we pull back our Pac spend but what we did pull back was the dollars that really helps drive us through the funnels to drive that pet parent in places, where they all said that might be above the line media, it's more social media, it's more getting the <unk>.
Jon Block: Eyeballs and Chi the content that we're providing and producing that hasn't been something that we've been investing in even in Q4, while we did see a step up in the back half of the of our pet acquisition spend it wasn't meaningful enough to really to really move the needle. We're now building that up nicely and we have some higher lifetime value coming through it increases our level of pack and now.
Jon Block: Patent always building reinforced I would expect over the next two quarters to start to see that move nicely as Phil had mentioned at the back half of this year is really why we expect to see the elevations ice pack doesn't really help them starting to compound trusts.
Jon Block: That was great. Thank you and maybe just a little bit of a two part follow up the subscription revenue guidance I've got 90 72 at the midpoint.
Jon Block: So a little bit below us.
Jon Block: I might have missed what you said did you say driven 60% price, 40% pads My apologies I didn't know if that was for 25 or prior years, maybe you can clarify.
Jon Block: Because I am curious on the split between you know.
Jon Block: Called the <unk> contribution in pet growth specific to 2025, and then more you need to go back to.
Jon Block: The pet adds or the gross adds but at some point.
Jon Block: The dynamic needs to shift right from being overly dependent on ARPA to more pad. So I'm just curious when we think about the gross adds like do you need those lower or Puma plans to be more successful in getting scale. So you can do a better job competing for call. It the more cost sensitive consumer.
Jon Block: On the margins.
Jon Block: Yeah, just to touch on the point that I made.
Jon Block: I've mentioned also in the call last time, it's at a it approximate mix of how much is pricing contributing versus how much is gross adds.
Jon Block: Contributing to revenue.
Jon Block: And that was a 24 comment so full year 'twenty four.
Jon Block: And then some.
Speaker Change: Sorry, what about for 'twenty.
Speaker Change: Yeah, we haven't we haven't necessarily given guidance, specifically down to that level of granularity I think what I can say is obviously as we're looking to increase the Pac investment.
Speaker Change: Yeah. The historical has been the opposite it's more pet count driven than pricing driven.
Speaker Change: Ultimately, we want to get back to that I would expect that mix dynamic to shift how much is going to depend on the pace at which we deploy that back dollar.
Speaker Change: That's gonna be that the dependency.
Speaker Change: Okay.
Speaker Change: I'll just jump in here.
Speaker Change: Excuse me quickly speak to the they are the lower Aki plan say at a high level John I think the biggest opportunity we have at the business today is really helping to really drive our conversion rate.
Speaker Change: So as we think about where the biggest opportunity changed we already have the leads coming to refund tower and she found is now what we're doing is adding the ability to spend more to drive conversion all Fang conversion right. Now is at an all time high despite all of the rate increases and then you put I'll pay that we have so we have the content and we have the ability to engage this is a product.
Speaker Change: That has to be sold this is a product people need to understand because it's designed for the life of the pet. So we're doing some testing on this now we've really only kicked off over the last few weeks and so you'll see some money iterations on the website trying to explain the difference between that your opinion pricing model and our competition because when pet parents, ctrip fanion, they're not necessarily going to see.
Speaker Change: Like for like product and we need to do a much better job of articulating. This frankly. This is an ongoing thing that we need to really step up the painful I will say to your point. They currently the other product stays low are the other swim lane products to the ph highest back ends of the wall that we have we introduce them to absolutely speak to other pet parents that depending on where they are.
Speaker Change: And in their stage of life and what they're looking for that as an opportunity for them. They are tiny in terms of the contribution to us at the moment, we haven't focused on that because of margin compression, we've really pivoted to I'll call, but I would expect to see them play a bigger role over the coming years. It's not why are we going to be focused on in 'twenty five.
Speaker Change: She thinks that you should expect more growth in our core business and also had kind of a rainy reinforcing the reasons why it's your opinions that we haven't pushed that to a degree in 24 because of the other things we're focused on as we move forward, we should see that they've come true and this is this is the same.
It always been the same price point, when we think about the delta between us and our competition. It's been the same consistently through this whole period. So I know that we've done historically in and as we've proven in 'twenty full when this team focuses on goals they deliver and I have no reason to believe that won't happen in 'twenty five.
Speaker Change: Thanks, guys for the color.
Speaker Change: Yeah. Thank you.
Speaker Change: And the next question comes from Wilma Burtis with Raymond James. Please go ahead.
Wilma Burtis: Hey, good evening could you talk a little bit about the outlook for the 20th twenty-five adjusted operating margins just based on some.
Wilma Burtis: Quick calculation I think it appears maybe a bit lower than I would've expected.
And my correct on my calculations and can you just talk about what's driving that thank you.
Wilma Burtis: Yes, I will I can just give you some commentary just on kind of what is our guidance what are the major guidance assumptions I talked about the pack investment rolling through the year. The other big factor is inflation so.
Wilma Burtis: Right now our assumption is inflation will continue at the levels exiting 2024, so we've talked to about 15% and so we're still seeing that unexpected natural through next year, obviously, if we see a reduction in inflation and abatement of that that would be.
Wilma Burtis: Significant positive for us, but that's probably the biggest factor in terms of year over year improvement, we're still expecting margin expansion.
Wilma Burtis: But obviously, it's gonna be factored into or dependent on the amount of inflation we see.
Wilma Burtis: And then in terms of expense. So it's just kind of round out the P&L, we are expecting to see leverage across fixed and variable expense fix.
Wilma Burtis: Fix will be up a bit in first half largely due to an uptick in our Canada underwriting fees.
Wilma Burtis: I talked about in our last call that we wanted to grow into our expense base and that's absolutely part of our plan for 2025, So we will see combined fixed and variable.
Wilma Burtis: <unk> see some leverage as the year progresses, and then we're going to continue to target free cash flow generation. So we have our two 5% free cash flow as a percent of revenue.
Wilma Burtis: As we talked about in the prepared remarks, we were able to achieve 3%. That's tremendously important for us that gives us the capacity to be able to make the investments that we want to make sure. We're going to continue to focus on that and then the last thing I would say there are some currency headwinds from Canada, it's approximately 1% for the full year in terms of subscription revenue growth, there's like some of the dementia.
Wilma Burtis: Of the guidance and if I can answer that as well and then when we think about all of them for a long time go a long term goal is still at 15% and that's for one side. We are continuing to see margin expansion through the year just to sort of put a finer point shall not our expectation is by the end of 2025 in a two year period, we will have expanded our margin by over 300 basis points that's in <unk>.
Wilma Burtis: 80% increase in the two year periods, so significant for a margin of all size and as it expands keep in mind. So changes our allowable Pac so there's a lifetime value, which is great for growth, which is ultimately why we're intending to get back to you in the not too distant future.
Wilma Burtis: Not perfectly in 15 for the full year. The reality is at this stage as rates of inflation that are very different across the geographies that we're in at this point that now as we think about finding for rates throughout this year.
We're in a stage of refinement. So keep in mind. The first half of 2025 is already benefiting from the rate changes we've pushed through in 'twenty for the back half of the year is what will start to refine those prices and that's really when you start to see the ultimately that retention kick in because you've got you've got a more even rate approval for pet parents and we'd expect to see the majority of.
Wilma Burtis: To move into the under 20% rate increase which we know is good for attention.
Speaker Change: Okay. Thank you a quick follow up on that just.
Speaker Change: I'll touch on it but what are you seeing as far as the pricing that's coming in.
Speaker Change: It sounds like what you're saying is that it's in line with the 15% you expected, but I just wanted to confirm that and then I guess another piece of it other revenue appears to be rolling off a bit slower than we expected.
Speaker Change: In 2025 D kind of talk about the driver there. Thank you.
Speaker Change: Yes, I'm from event, despite shave and right in line with our expectations, we have seen 15 coming into the air and waste so far saying that we do expect Q1 is obviously the big the big horse when people put their price is free from a hospital perspective, so we're monitoring it very closely but nothing different to our expectations.
Speaker Change: Yeah, then in terms of other revenue.
Speaker Change: We've talked about over the last four or five quarters.
Speaker Change: Businesses in secular decline, we've had consecutive quarter over quarter reductions in pet months, we expect that it's going to continue.
Speaker Change: Largely ARPA driven the reason for revenue still being up slightly.
Speaker Change: The pace will be dependent on the pet's rolling off.
Speaker Change: And I would expect that that that will continue over the next couple of years as we roll off the books.
Speaker Change: But for the most part the increase in revenue that you are seeing is as ARPA driven that's vessels have gone through the same experience. We have they've seen margin compression and have had to take pricing actions as a result.
Speaker Change: Okay. Thank you.
Speaker Change: The next question comes from John Barnidge with Piper Sandler. Please go ahead.
John Barnidge: Good afternoon. Thank you for the opportunity when you talk about the normalization of pricing increases love to hear a bit more about that there is a history of prior year pricing increases on the anniversary and dining.
Speaker Change: A dynamic where the written needs to earn it.
Speaker Change: As we get into the second half of the year that normalization do you anticipate the earned rate increases for twenty-five will remain in excess of 15%.
Speaker Change: Throughout the year. Thank you.
Speaker Change: Okay.
Speaker Change: Yeah, and thank you for your question, John saying, while we generally expect to see rate increases remaining in excess of 15%. So as we think about the pricing flowing through the back half of this year and again it does depend on what we're seeing in the first quarter that will dictate all our pricing strategy in the back end of the year, but we expected to be slightly out of Asia that being said it will be.
Speaker Change: Less than it has been over the last few years. So that's why we talk about the normalization of rage is getting into the realm of where our pet parents typically will say and it's.
Speaker Change: In theory. It will then help people to budget for the unexpected costs, if a pet cat because they know what they're going to say from the monthly premium.
Speaker Change: Time will help from a retention perspective.
Speaker Change: In terms of the rate and we expect as that starts to come down that makes the business potentially will shift slightly but also that means into our growth as well. So when we think about the geographies, we're growing and we're going to not see a bit of a mix change anyway, because we will start growing more broadly across the geographies. We're in today.
Speaker Change: As I answer your question.
Speaker Change: Good good. Thank you and my follow up question on the goodwill write down can.
Speaker Change: Can you talk about how far off the Mark who they were and the decision.
Don: Don Thank you.
Don: Sure Yeah, so on the on the goodwill impacts.
Don: Our normal process.
Don: Good well so this pertains to smart pause in pet expert.
Don: The two acquisitions and in.
Don: In the case of spark pause I think one of the factors with just the delayed launch of Japan and Europe.
Don: What's your plan in Germany to the end of 2024 and so as a result, we have adjusted valuation model Accordingly, and then in the case of pet expert where really we are really trying to focus on fewer markets.
Don: As a result put on hold growth plans in Poland.
Don: We're still committed to the business there are additional countries check, yes, Milwaukee, Belgium, we just happen to have.
Don: Pushed those out because we felt.
Don: It was more appropriate to focus on the existing business. So those are the drivers of the.
Don: The goodwill charge.
Don: How much of the 37 million that remains on the balance sheet is related to the two properties specifically thank you.
Don: Yeah. The majority of the goodwill that we have today is related to our aquarium acquisition.
Don: The smart pause right that effectively reduced the goodwill on that to zero. There is still some remaining on that export it wasn't a complete right Tom.
Speaker Change: And I, if I can just add Paul I mentioned in the in the earlier remarks, but we're still very excited about this the way really eager to do is ensure that we're reinforcing our focus in areas where.
Speaker Change: We see that we have the greatest opportunities today, the long term road map hasn't changed in terms of international expansion and we're really happy to see that we've got that Germany Swiss entry.
Speaker Change: Entry market entry point in the back half of last year, which will help us to build this year.
Speaker Change: This concludes our question and answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Yeah.
Speaker Change: Yeah.