Good afternoon, and welcome to the Trupanion Second Quarter Earnings Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. .

I would now like to turn the conference over to Quynh Pham, Director of Investor Relations. Please go ahead. .

Thank you, operator. Good afternoon, and welcome to the Trupanion Second Quarter 2014 Financial Results Conference Call. Joining me today to talk about our results are Darryl Rawlings, our Chief Executive Officer; and Mike Banks, our Chief Financial Officer. Each will be available for question and answer following today's prepared remarks.

Our prepared remarks are supported by slides, which are viewable via webcast and accessible from the Investor Relations section of our website at www.trupanion.com. .

Before we begin, I would like to take this opportunity to remind you that during the course of this conference call, management will be making forward-looking statements, which are subject to various risks and uncertainties.

These include statements related to our expectations regarding future operating results and expenditures, as results may differ materially from those results discussed and reported results should not be considered as an indication of future performance.

A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in our filings with the Securities and Exchange Commission, including our prospectus filed with the SEC pursuant to Rule 424(b)(4) on July 18, 2014, and our quarterly report on Form 10-Q to be filed with the SEC.

We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this conference call. .

Also, I would like to remind you that during the course of this conference call, we may discuss non-GAAP measures in talking about the company's performance. These non-GAAP measures are in addition to, not as a substitute for or superior to, measures of financial performance prepared in accordance with U.S. GAAP.

A reconciliation of non-GAAP financial measures to the corresponding GAAP measures is provided in the appendix to the accompanying slide presentation that is available at the Investor Relations section of our website. .

Now I'd like to turn the call over to Darryl, our Chief Executive Officer. .

Thank you, Quynh. I want to start by saying that the management team has been very humble to be able to take this company public on the New York Stock Exchange, and we have a number of people we'd like to thank.

It starts by thanking the veterinarians who have supported us over the last 14 years of building this company, which started in Canada and in the last number of years has entered the U.S. market. It has to include our territory partners who are building those relationships with those veterinarians.

They're our national sales force and have been a key driver of our success and includes our members, which is our second-largest referral source, telling their friends and their neighbors about Trupanion. And I'd also like to thank the -- our competitors, who have started to help build this category by providing better and stronger products.

We all need to work together to build and capture the size of the marketplace. .

In July, we had our initial public offering, where we issued 8.2 million shares and raised approximately $73 million, net of our fees. We intend on using these proceeds to help grow and capture and become the category leader that we believe that we're well positioned to do.

We're going to focus on getting out to more hospitals, building up more territory partners and spending money on technology we believe will support a better customer experience as well as pay off outstanding debt. .

So Trupanion delivered solid second quarter results in 2014. I am pleased with the results, pleased with the management team for providing this performance. Key metrics included our revenue, which totaled $28 million, up 42% over the previous year. And it starts with the visibility that we have.

94% of our Q2 revenue was from existing clients, kind of prebaked before the quarter started, something that we're excited about having in our business model and believe it makes it easier for us to achieve the success we want to short term and long term.

The total number of enrolled pets got to approximately 195,000, which is a 32% improvement year-over-year. And our average monthly cost paid by our subscribers grew to $43.90, a 4% improvement from the same time last year. .

Now we're certainly in a growth stage with this business. We need to grow the size of our business to gain the scale of our G&A and to help build things out. While we are doing this, we are investing in G&A and technology, building out our sales force. And for the short term, we are going to have a negative EBITDA.

This is reflected with an adjusted EBITDA of $2.5 million in Q2 and our net loss of $3.5 million during the quarter. .

So at Trupanion, we're a monthly recurring subscription business, and we believe monthly recurring revenue or subscription companies, one of the key metrics they need to focus on is the difference between the cost of acquiring a client and the lifetime margin of that client. For Trupanion, we look at it on a per-pet basis.

So we talk about the lifetime value of a pet. We look at the cost of acquiring a pet. So we call that our PAC. The range that we are working at between the lifetime value and our PAC ratio, our target is to have a 5:1 ratio. .

We believe 5:1 is the key ratio which balances us being growing aggressively after this market, which has a very large TAM, as well as being financially responsible to make sure that we are getting the proper returns for our shareholders. Historically, we've had that ratio as high as 6:1, but our long-term goal is to have that a 5:1 ratio.

In the second quarter, I'm very pleased to say, we had a 5.4:1 ratio, which gives us an opportunity to be a little bit more aggressive in the next few quarters to target it closer to a 5:1 ratio. .

Trupanion is at an early growth stage. The company needs to reach scale to get to our long-term margin profile. For us, scale means 650,000 enrolled pets to 750,000 enrolled pets, of which we believe we are going to be able to accomplish by getting and staying focused to the 5:1 LVP-to-PAC ratio.

Long term, this is going to give us a 13% to 15% margin before sales and marketing, and we believe that margin is going to make us a durable, sustainable business with a high value proposition for our pet owners. .

We're also very pleased to compare our LVP-to-PAC ratio to those of other monthly recurring subscription businesses that we admire, companies like Xoom, Pandora, Netflix and Ancestry. I think when the people dig in and look at it, they'll see that our 5:1 ratio is comparable and it's favorable for us.

And we believe that staying to this discipline gives us a strong focus to grow the company year-over-year into 2020 and into 2030. .

One of the things that Trupanion is most excited about is the size of the addressable market. Today, in Canada and the United States, there are 193 million cats and dogs. About 1% of them currently have medical plans. By contrast, if you look in Western Europe, somewhere between 10% and 25% of pets there have medical plans.

And we believe that the pet owners in North America love their pets as much, visit their veterinarians and are spending piles of money on pet products and pet services and that the addressable market is there. .

On the road to get there, we believe that Trupanion's market focus of building relationships with veterinarians and educating the market is going to continue to allow us to be the category leader. Today, 30% to 40% of the category growth is driven by Trupanion, and that's amongst about 19 or 20 brands currently available.

We think we will be able to continue that category leadership, and the IPO proceeds and our growth plans will help us drive there. .

As we discussed during our roadshow and in our S-1 documentation, Trupanion has a unique go-to-market strategy, and it drives our subscription business and our growth. In Q2, 82% of all of our leads came from 2 sources. The veterinarian referrals were about 62%, and pet owners telling pet owners are adding policies for new pets equal to another 20%.

If you combine that with the conversion rates we achieved in the second quarter, 33% of all sales calls converted into a new enrollment and 9% of all web quotes converted into an enrollment. These are the things that drove our second quarter results. .

At the core, Trupanion is a data-driven technology company that relies on our infrastructure difference as well as the data to help us compete after this large category. As we mentioned on the roadshow, we have become our own underwriter to reduce frictional costs.

In average, we're reducing about 20 points of frictional cost compared to most of our 19 competitors, and we have given that frictional cost back to the competitor -- or our customers in the way of having a higher value proposition. .

Today, we have one simple plan that we're paying 90% of the veterinarians' actual invoice for all accidents and illness that are covered underneath our policy. Pet owners can use any hospital anywhere in the United States, Canada or Puerto Rico.

And as the cost of veterinary medicine is outpacing that of inflation, having these value propositions and these structural advantages and the data to drive accurate pricing is what is giving us the foundation to go ahead and build this business. .

We leverage our technological expertise to develop new innovative systems that support our business initiatives and help to redefine the way the industry conducts business.

As an example, our powerful technology infrastructure generates actionable data insights for over 14 years of amassed data, resulting in 1.2 million pricing categories based on factors such as breed, age, zip code, et cetera.

These unique pricing capabilities allow us to mitigate coverage risks while still maintaining a reasonable and consistent margin across all those 1.2 million categories. .

Our latest development, Trupanion Express, is a software solution for veterinarians that enables a direct-to-veterinarian claims payment and a more efficient claims handling. Trupanion Express significantly shortens the reimbursement time by processing claims so quickly that claims can be paid during the vet visit.

Imagine a scenario where a client comes in and has to pay out of pocket with their credit card, cross their fingers, submit a bunch of paperwork and weeks later, receive a reimbursement. In comparison with Trupanion Express, the client is not having to reach into their pocket.

We are paying 90% of the actual invoice directly to the veterinarian and typically in under 5 minutes. We believe this is a big advantage for the consumer and a helpful advantage for the veterinarians. .

One of the reasons why we IPO-ed was the goal to support the drivers of our business. We are using our IPO proceeds to improve the infrastructure for our territory partners who build our veterinary hospital referral network. Trupanion Express is one such form of an investment that is gaining strong traction.

Today, 20% of total claims dollars are currently being paid to veterinarian hospitals directly. We eventually want to drive that to 80% of claim dollars being paid to veterinarians directly through Trupanion Express.

Achieving this type of penetration will build significant value and support our territory partners and our partners at the veterinary hospital. .

In summary, I'm very pleased with the performance that the company had in the second quarter of 2014. And yet, we have so far to go. And using the analogy of a marathon, we've warmed up, we've learned how to run, but we're on mile 3.

We've got a very large marketplace in front of us, and we're excited about the opportunity to take this public company, get to know our shareholders better and to deliver consistent, reliable results. We realize there'll be bumps along the road, but we're humbled to be in this position to go after this large category. .

And at this point, I'd like to turn the call over to our Chief Financial Officer, Mike Banks. .

Thank you, Darryl. We're very pleased with our second quarter results, which demonstrate a strong financial performance across all key metrics, including total enrolled pets, average monthly retention, average revenue per pet, lifetime value of a pet and average pet acquisition cost. .

The number of pets enrolled in our medical plan has increased every quarter for over 10 years. Year-over-year, total pets enrolled increased 32%, from approximately 148,000 at the end of the second quarter 2013 to approximately 195,000 at the end of the second quarter of this year.

For the second quarter of 2014, our average monthly adjusted revenue per pet was $43.90 per month. This is a 4% increase over the average revenue in the second quarter of 2013. .

One key to this growth is retention of existing customers. Due to our focus on providing a superior value proposition and customer experience, our pet owners are very loyal. Our average monthly retention rate was 98.65% as of June 30, 2014. This equates to member retention of 74 months.

On average, we estimate our members are with us a little over 6 years. .

Looking at our subscription business. Quarterly revenues by member cohorts shows us just how stable and predictable our revenues are. There is strong retention in every cohort, and the annual premium increases partly offset the very low churn that occurs.

This produces high visibility into future revenues, and the next few quarters' revenues are substantially onboard now. .

The 32% increase in the number of enrolled pets, combined with the 4% increase in average monthly adjusted revenue per pet, has resulted in a 38% increase in our subscription revenues over the same quarter last year.

When we include revenues from our other business segment, our total revenue for the second quarter of 2014 was $28 million, a 42% increase over revenues in Q2 of 2013. .

The predictable nature of our subscription business yields attractive, proven unit economics. In the second quarter 2014, we spent on average $113 to acquire a new pet.

We calculate this customer acquisition cost by taking our total sales and marketing expenses, less stock comp expense and offset by sign-up fee revenues, divided by the number of new pets enrolled in the quarter.

These sales and marketing expenses include both indirect marketing expenses, such as headcount, and direct marketing expenses, such as print advertising and online marketing. .

We calculate the lifetime value of a pet as the monthly contribution profit after claims and other directly variable expenses, multiplied by the 74 months that the pet is expected to be with us, based on our retention rate. For Q2, the lifetime value of a pet was $605.

So this $113 pet acquisition cost yields an estimated $605 lifetime value, which is a return on investment of 5.4x the acquisition cost. We believe this is a great return on the spend. .

Note that this acquisition cost is not deferred and amortized over the lifetime of the customer, but rather, it is expensed immediately, while the related contribution profit is realized over the subsequent 6 years.

As Darryl discussed, we're very focused on earning an appropriate return on our marketing spend and manage our lifetime-value-to-acquisition-cost ratio. Managing to this ratio helps us to assess the effectiveness of our growth investments and helps to ensure adequate returns on our capital investments. .

first, to penetrate the large addressable market by creating customers with discipline, where the cost of acquiring a customer is around 1/5 of the lifetime value of that customer; and secondly, to achieve scale in general and administrative and technology support functions. .

I will talk about our financial results in terms of cost drivers, our trends and where we see our long-term margins going. Unless I state otherwise, I'll be talking about non-GAAP expenses that exclude stock-based compensation as a percent of revenues.

Our cost of revenues consists of approximately 70 points of claims expense and approximately 10 points of other costs that vary directly with the number of pets that we have enrolled. This claims ratio is an essential part of our value proposition to our members, and it results in strong member retention and a high lifetime value of a pet.

Our long-term target is to maintain a stable gross profit margin of 19% to 20% of revenues. As we have seen, a gross profit margin of 19% to 20% each year for a member that stays with us for 6 years is a very profitable customer. .

General and administrative expense has generally been 10% of total revenues, as we've been expanding our management team and we're preparing to become a public company. We believe that our G&A expenses will decrease as a percentage of revenue after 2014 and will scale to 3% to 4% of revenues long term.

Our core spend on technology today is approximately 4% to 4.5% of total revenues. We expect that our technology expenditures will remain about the same during the remainder of 2014 and 2015 and then decrease as a percent of revenue after 2015 and scale to 2% to 3% of total revenues long term. .

In addition to our core technology spend, we're developing a new direct pay technology, which we refer to as Trupanion Express, which has the potential to improve the member claims experience by making the claims process quicker and more efficient as it enables vet invoices to be paid directly to the veterinarian instead of the traditional model of reimbursing members after they have paid out of pocket.

We believe this technology will attract members, drive higher satisfaction rates and reduce frictional costs for Trupanion and veterinarians. .

More importantly, we believe that when Trupanion Express is deployed in a large number of veterinarian hospitals that it will create a substantial competitive advantage. Our expense on this initiative was 4% of total revenues in the first half of 2014.

We expect this expense will increase to 5% to 6% of total revenues over the next 4 quarters in order to complete all of the development work. Once the development work is completed, we expect the ongoing costs to be blended into our core technology spend. .

When we consider the technology and general and administrative costs that scale long term, we expect the resulting margin to be 13% to 15%. At this margin level, Trupanion's portfolio of subscribers generates significant cash flows.

If we were not pursuing significant growth, our sales and marketing spend would be low and the business would be profitable. Our goal, however, is to create and capture as much of the greenfield market opportunity as possible, which results in our sales and marketing spend reaching 10% of revenues. .

We generate an excellent return on our sales and marketing spend and will continue to invest in our disciplined manner to acquire new customers. But we gain leverage on the sales and marketing spend as it becomes a smaller percent of total revenues as existing members generate a larger percent of revenues.

Over the long term, we expect sales and marketing to be 4% to 5% of revenues. .

With member acquisition spend and the development of Trupanion Express, our adjusted EBITDA margin was a negative 8.7% for the second quarter of 2014. The adjusted EBITDA loss was negative $2.5 million, and our net loss was $3.5 million for the second quarter of 2014.

Due to the timing of our IPO, we've moved an anticipated $700,000 of technology spend from the second quarter of 2014, and we're going to spend it in Q4 and the first 6 months of 2015. We ended the second quarter of 2014 with $9.3 million in cash and cash equivalents, and our debt totaled $29.6 million. .

Turning to events that occurred after the second quarter. In July, $3 million of debt was paid off using restricted cash. We completed our initial public offering, whereby 8.2 million shares of common stock were sold to the public at a price of $10 per share.

We received aggregate net proceeds of approximately $72.9 million from the initial public offering. From these proceeds, we repaid $12 million of existing debt, leaving us with $14.9 million of debt remaining on the balance sheet. .

As a result of the shares issued from the offering and the conversion of preferred shares, we expect basic shares in the third quarter to be approximately 28 million shares and our fully diluted shares outstanding to be approximately 33 million.

Regarding taxes, our income tax expense is primarily associated with our Canadian business, and we expect to pay minimal taxes for the foreseeable future. Our federal NOL carryforward as of December 31, 2013, was $24.4 million. .

Let me close by turning to guidance for the third quarter and the remainder of the year. For the third quarter of 2014, we expect total revenue to be in the range of $29 million to $30.2 million. We expect third quarter adjusted EBITDA to be between negative $4.3 million and negative $3.1 million.

For the full year, we expect total revenue to be in the range of $114 million to $116 million, and we expect full year adjusted EBITDA to be between negative $11.8 million and negative $9.8 million. .

Now I'm going to turn the call over to the operator, and we'll be happy to take your questions. .

[Operator Instructions] And our first question will come from Chris Merwin of Barclays. .

I think, firstly, you mentioned a 13% to 15% margin before sales and marketing. I think you also guided to sales and marketing expense of 4% to 5% longer term. So just to confirm then, you're looking for, like, roughly a 9% to 10% or 11% adjusted EBITDA margin at scale.

And what level of revenue -- at what level of revenue, I guess I should say, do you expect to get to that target margin? And then this is sort of a related question, but as it relates to the LVP-to-PAC ratio, I think you said you're targeting a 5:1 ratio there.

But obviously, if you're scaling sales and marketing over time, should we expect to see that ratio also expand as the marketing expense becomes a lower percentage of revenue? And again, at what point should we really start to see that ratio expand from 5:1 to something much higher than that?.

Thanks, Chris. This is Darryl. Great questions. Starting by the scale. We're looking between 650,000 and 750,000 enrolled pets to get to that operating margin that you spoke of. The LVP-to-PAC ratio, we think we should maintain long term at a 5:1 ratio.

Principally, at a 5:1 ratio, we think we're aggressively going after the marketplace, and our internal rate of return, particularly when we've got it scaled, is something that we think will reward our shareholders. We could, in mature markets, achieve a higher LVP-to-PAC ratio, a 6:1 or a 7:1.

But we think we're foregoing some opportunities to aggressively grow our brands, we do think, to help our conversion rates and so on. So long term, at this point, we're looking at maintaining a 5:1 ratio going out. As far as the EBITDA percentage goes, those long-term numbers are all dependent on our growth opportunities.

So if we're growing greater than 30% or 40%, you're going to see that EBITDA percentage go down at a 1:5 ratio. And if we're growing at a slower rate, then you can have those types of EBITDA ratios long term. .

And the next question will come from Rohit Kulkarni of RBC Capital Markets. .

A couple of questions, one on Trupanion Express. I think it was an interesting data point on -- was it related to Trupanion Express, just one clarification, 20% of the claims being paid directly? Just a clarification point.

And then just overall, can you talk about where are you as far as the rollout of Trupanion Express? I think, Mike, you said another 4 to 6 quarters of added technology spend.

But just big picture, what percentage of progress have you done? And downstream, how should we think about the benefits of this offering, software solution, more vets, more claims, lower retention -- higher retention rates, lower churn, all those good things?.

Rohit, thanks for great questions. So Trupanion Express is a technology that helps us with paying veterinarians directly. Principally, to get to 20% of our claims dollars paid directly in Q2, the main driver was Trupanion Express.

We also have kind of a manual workaround that we do on smaller exceptions for hospitals that do not yet have Trupanion Express. When we think about the rollout, we -- there's a couple of strategies.

One is you can focus on Trupanion Express in hospitals that have smaller number of enrollments and you need to hit bigger number of hospitals where you can focus on the number of hospitals that have a higher percentage of enrollment.

In the early days, what we've been doing is focusing on the hospitals that have been with us for a longer period of time. And we're looking at having kind of 2-touch types of deployments, one that is a higher touch in hospitals that were -- that make sense and a lighter touch in other ones.

As far as the long-term benefits, the first key benefit that we want to look at is giving our claims-handling people some efficiencies and scale. So we believe Trupanion Express will pay for itself long term by making our claims processing easier and faster, not only for ourselves, but also for the veterinarian.

In addition to that, we know that it improves the customer experience. We talked about this on the roadshow, where we had much higher Net Promoter Scores in a direct pay versus a reimbursement model. We expect over time that, that should help with referrals and retentions.

But the key drivers for us right now are really trying to improve the customer experience, making it easier for veterinarians and in the long term, lowering our claims-handling expenses. .

Okay, great. And on the long term, you talked about 700,000 pets to reach that target margin. That's about 3.5, 4x today's number.

So can you talk about where you are as far as territory partners are concerned? As in, would that number need to grow 3x? Or is that just mostly in improving productivity, ramping them up as you probably accelerated hiring over the last 12 months or so?.

So our territory partners drive relationships in a geographical territory. And when a territory partner enters a new territory, they are obviously less effective as they're making initial introductions to a hospital. So over time, a territory partner becomes more efficient. Think of it like OpenTable.

When they went public, they were very mature in the San Francisco market and had different levels of penetration rate and then they had different levels in different types of markets. Our territory partners are very similar.

We have territory partners that have been with us for over 10 years, and 3 out of 4 hospitals in their area are actively recommending us. In other places where our territory partner has been out for maybe 1 to 2 years, you might see it's 1 out of 4 hospitals recommending us. And if they've been out for 6 months, even less than that.

Today, and as we mentioned on the roadshow and in the S-1 documentation, we have about 60 territory partners, and it's going to take us a number of years to get to 90 territory partners.

Part of that is we tried to accelerate this a number of years ago, and our speed of -- kind of a quantity versus quality as well as our training did not serve us well. So we've learned some lessons, and we know that we need to make sure we have the right people with the right type of training.

Today, we do 3 weeks of training for a territory partner before they get out on the road. And because of that and some natural churn that will happen, we expect it's going to take us a few more years to get to about 90 territory partners. .

Okay. And one last question, if I could. On the pet acquisition costs, can you just explain what are the various drivers behind that? As in, I know over time, there would obviously be leverage- and scale-driven benefits that you would have.

And so what are the drivers over the last 3, 4 quarters that probably have kind of tweaked up those costs? And how should we think about that going forward?.

So sales and marketing overall is about, say, 40% of it is salaries, and those salaries go towards marketing and helping to support our territory partners. About 53% of it has to do with advertising, both online and print, and trade shows. And then there's some territory partner's commissions in there, too.

So the increase in acquisition costs per pet is as we spend -- invest a little bit more in the development of existing territory partners. .

The next question will come from Jon Block of Stifel. .

Maybe the first one, Darryl, just sort of a big picture. You mentioned your subscription business growing, I think it was in the mid- to high-30s. Maybe if you can talk to -- from a market share perspective, where you think Trupanion is today, maybe where you were roughly a year ago.

In other words, what's this market growing in relation to what Trupanion is growing?.

So there's about 19 brands across North America. We think the category itself is growing around 12% to 14%. We're obviously growing a lot faster than that. We believe we're capturing about 30% to 40% of the category's revenue growth over the last couple of years. We're not at a 40% market share today.

But if we continue to track the way we have for the last couple of years, we should get there. So I think long term, we should be looking in the 30% to 40% market share, would be an expected and strong outcome for us in 2020. .

Okay, great. And then if you can just give us some examples. Maybe -- I mean, clearly, you've been in the U.S. in and around '08, but in Canada for a much longer period of time.

Are there some markets, Darryl, that you can just call out where you've been for, pick a number, north of 5 years and maybe just give us some rough penetration metrics on where you see markets where you're -- they are north of 5 or 7 years?.

Yes. So we started in western Canada. We're more established there. If we were to look in a market where we've been for 10 years, I think you're going to see that you can be looking in the 5% to 10% penetration rate in some of those markets, and we might have 3 out of 4 or 4 out of 5 hospitals actively recommending us.

Some of it differs if you're looking at the total category, what the market penetration rate is and how we play into it. But we know that on a per-hospital basis, we've seen market shares as high as 20% to 25% of pets insured with Trupanion inside of a hospital.

In broader markets, we see maybe 10% of pets could -- puppies and kittens could be enrolling with us. By contrast, in the U.K., 25% of pets are insured. They've been at it for quite a bit longer than what Trupanion. We have been in business for about 15 years. It took about 40 years for the U.K.

to get to 25% penetration rate and about 20 years for the -- to get to about 5%. So we're really trying to build that foundation out and make it that response -- part of being a normal responsible pet owner is having medical plans for their pets, and we've seen that in higher penetration rates in markets where we've been longer.

As I've mentioned, I think that's very similar to what you saw with OpenTable years ago. In markets where we've been there for 3 or 4 years, I think you're going to see that we might have 1 out of 3 hospitals active with us, maybe 1 out of 2 hospitals active with us and penetration rates in the 2% to 3% range. .

Okay, great. And last one for me and then I'll hop off. We've done some work that shows Trupanion Express can sort of be a difference-maker for you guys longer term. So I guess a couple of questions there. One, do you know if any of your competitors started to go down that road and replicate a Trupanion Express-type offering, is the first question.

The second one is where do you see the bigger difference-maker longer term? Is it you get Trupanion Express into a hospital and, arguably, the utilization of that hospital goes up meaningfully because it's so much easier for the veterinarian to process claims and get paid? Or are your territory partners coming back to you and saying, "You know what, this can make the difference if some guy who's on the sidelines and he's willing to jump in with 2 feet if we can get Trupanion Express deployed to his hospital?".

Thanks, Jon. So Trupanion Express is something that is unique to Trupanion. Even in Europe, where they have been doing this a lot longer, there's no other offerings that are directly paying under 5 minutes with an actual invoice in dollar amount for a vet hospital. So I think it's unique. It's something that we've been working on for years.

We've got a strong management technology team all around it. It has taken a lot of data to get to the point that we have and is a very difficult thing to implement. At the core of it is the relationships we have with the veterinary hospital. We need to be working with Trupanion Express in cooperation with these veterinarians.

And we know that when Trupanion Express is installed that a higher percentage of actual claims invoices are going to hit us. You can think about it that, in a reimbursement model, maybe 1 out of 10 or 2 out of 10 claims may be forgotten by the pet owner or left in the glove box.

So what naturally happens is this is a better customer experience in that the pet owners are being -- utilizing our services each and every time that their pet goes in that's qualifying for an accident or illness.

I think we're going to see a difference in a couple of areas, where some hospitals are going to use this as a leading indicator to jump in bed with Trupanion. We've seen this. In other cases, it's established hospitals that already had a relationship and realize that this is going to lower their burden of paperwork. But we're in early days.

We only have 20% of our claims dollars now paid in Trupanion Express. We focus mainly on hospitals that knew us longer and had more enrolled clients. So although we've been working with it for a couple years and 20% is a meaningful number, the deployments and learnings going forward will continue for the next couple of years. .

And next, we have a question from Michael Graham of Canaccord Genuity. .

Just a couple, the first is on the -- you mentioned 62% of the pets were -- of your new pets came from vet hospitals. And I'm wondering if you can make a comment around what you're seeing in terms of the mix of pets coming from new relationships with new vets versus existing hospitals.

And a quick follow-up on Trupanion Express, can you just -- when you do get into a vet with Trupanion Express, do you have evidence that the penetration within those -- within that pet population goes up once you're established?.

So on the first one, we don't have an 80-20 rule in our business, where 80% of all of our business comes from 20% of our hospitals. It's actually much wider. About 80% of our business comes from about 50% of the hospitals recommending us.

And we'll find that any new market that we go into, the adoption is a little bit slow and hesitant as it takes time to earn the trust of the veterinary hospital and their staff.

And then once they've been working with us for a period of time and their clients have had some unlucky pets who have needed to utilize our services, their confidence gains over time. So as I mentioned before, we mentioned on the roadshow, this is a long-term play to build this foundation. It doesn't turn on quickly by vet hospital.

We rate all of our hospitals an A through an F as far as the levels that they're participating, and we watch the movement of them or kind of the same-store sales.

As far as are we going to see higher penetration rates inside of Trupanion Express hospitals, it kind of goes back to Rohit's comment on what are we expecting from retention rates and referral rates.

Our business, it takes several years to get great data about retention rates that are meaningful, and I think it's a little bit early in that we've only had Trupanion Express out for 2 years and really only at about 14 months in a somewhat meaningful way for us to estimate what's going to happen.

I will tell you this, this is not a golden -- a silver bullet that's going to solve everything and immediately get us to penetration rates that you found in Europe. This is a part of our toolkit that we have.

It's an important part to improve the customer experience, but you need claiming clients to realize the benefits of it and you need veterinarians to trust and recommend us before you get any clients. So you can't lead with this and expect a big change in enrollments.

It's more of an impact for clients that already have it and their pets become unlucky and need to use the services of a veterinarian. .

Okay. And the other question I had was, it came up during your roadshow, about -- just about fraud in claims. I think that there have been some other insurance markets, like the dental insurance market comes to mind, where, as penetration grew that fraud became a major issue.

And I'm just wondering are we far enough along in the development of this market in the U.S. where you think you have a good understanding of how to deal with potential claim fraud.

Is that a big issue? Or do you think that we need to get further along in the penetration for you to really have a handle on how it might impact your business? And just generally, how you're thinking about that. .

Well, we've been doing this for 14 years. We've faced fraud and had some learnings over that time. Fraud can happen from 3 different places. It can happen from a pet owner, it can happen from people inside a vet hospital and it can happen from our own staff.

What we have is a lot of data analytics and a lot of flags that help us quickly identify if there is fraud. And I think we're quite actively on that. In addition to that, our claims staff, which is well over 100 people, have in excess of 5 years of experience working in vet hospitals each. We see things that are odd or irregular.

We're also managing in pricing -- we talk about our 1.2 million price categories. In each of those 1.2 million price categories, we're understanding our acquisition cost and our lifetime value. Those go as wide as saying a golden retriever versus a shih tzu. It also includes looking at New York versus Winnipeg.

But we actually get down to very granular level, where we're looking at it on -- by individual vet hospitals. We're looking at acquisition and lifetime value by each of our referral sources. We're also looking at it and watching that data on times of first claims and retention rates and individual severity.

So the data we've accumulated over the last 14 years makes it a lot easier for us to detect if there's a problem.

The last thing I'd kind of mention on this is, at the end of the day, catching or monitoring fraud is important, but it doesn't materially affect our business model because we are not trying to sell a product for a price and then to find a product to meet those limits, for the same reasons we're not trying to define veterinarians what they should charge for veterinary care.

We are purely a cost-plus system, where we understand what the cost is for the average pet in New York and we add the 20 points of margin on top of it to tell us what we need to price.

When you get at a granular level and you're doing that at a vet hospital level, if there is fraud or irregular activity or just a hospital that has a much lever of higher -- sorry, a higher level of medicine or diagnostics, that's okay for us, and we're pricing it appropriately.

So having a cost-plus system allows us to monitor that, and our data helps us with any fraud issues. So thanks for that question. It's very appropriate. .

And the next question comes from Kevin Kopelman of Cowen and Company. .

This is Andrew Marok on for Kevin. You talked about your goal above 5x LVP-to-PAC ratio. I was just wondering how quickly you guys are thinking about moving to that ratio, whether it could be as soon as this quarter or whether it might ramp over the next couple quarters. .

Well, we're very close to it this quarter at a 5.4:1. So our goal is to ideally be running at a 5:1 ratio. You don't have perfect precision with this, but I think you can be looking at each of the quarters going out and anticipating that we're trying to hit a 5:1 ratio. .

[Operator Instructions] And we have a question from Steve Tomingas of RBC. .

Darryl, it's a real pleasure to hear the story and also very refreshing to hear the frankness. I appreciate it very much. I'm sure a number of people do.

And what I'm referring to is when companies make mistakes or learn from their mistakes, I think it's very important and I appreciate the fact that you're addressing the issue relative to -- or you have addressed the issue relative to the partners.

But I think it's also worth delving into a little bit more and really giving us a good feel in terms of the focus on your partners. It seems to me like you're in the prime territories now and 60 partners. You've got 30 to go, like your target.

Those I would characterize as, maybe a bad word, but maybe secondary markets or not as important, not prime markets.

That being the case, since you are 60 in the prime markets, can you give us a feel qualitatively, quantitatively, whatever it is, in terms of there are 60 people, their backgrounds, their qualifications, your controls, your incentives for them? And I'm sorry it's such a broad question, but I think it's really helpful for us to understand your important relationship with the territory partners.

.

Well, thanks for the question. So the relationships with our veterinarians is critically important to us. We -- as we talked on the roadshow, we have about 5,000 active hospitals, and there's about 28,000 independent hospitals across North America.

We have got a long ways to go to win the hearts and minds of those vet hospitals, and it is an uphill battle to overcome a lot of preconceptions of what they believe medical insurance can be or how it can be treated. The territory partners are the key catalysts that we have on building and forging those relationships.

It is required to make face-to-face visits to make it to the point that when they slide through the door that they know each other's names. And over time, we know that those relationships foster bigger trust and help us in the long run.

So our territory of partners range from people that have worked in vet hospitals in the past to people who have been in professional sales, relationship sales.

And what we're looking for are people -- to be a territory partner are people that are, first, pet passionate, people that really understand and can understand the motivations of people that work inside of a vet hospital, build those long-term relationships and then get to the point of being able to have people inside of the vet hospital, have enough trust to be able to initiate conversations about Trupanion.

And what we've done in the past where we've made mistakes is trying to hire people really quickly and maybe not training or equipping them with all of the skills that they needed to be as successful. We've really focused on learning from our best territory partners, what those skills are, best practices in the field.

We're trying to make sure every time we bring in a new territory partner that they have those qualifications and skills.

And then, it comes back to something we call Tru-University, where we're now doing 3 weeks of training where people sit in the claims handling, customer service, retention teams, work with the marketing team, get to know people in technology and HR so that they can clearly explain the vision, the passion and what happens in Seattle and our Vancouver office when they're out in the field at the hospitals.

So managing a large national sales force is always a challenge. You want the best people. We want to make fewer and fewer mistakes, quite frankly, not only for ourselves, but not to waste the times of those individuals, those territory partners.

And I think we'll continue to make strides, but we'll have hiccups along the way when it comes down to people. .

And then one quick follow-on question, somewhat related.

Since you're very open about what you've learned, is there anything that you've learned since the IPO and now that maybe surprised you, where you had to tweak or make a major adjustment?.

Well, I'll tell you what I've been most humbled about the IPO process was it's often described as hectic and running and hard and difficult, and here I am doing my first earnings call.

What I've learned is by being a public company and meeting a lot a very smart, intelligent institutional investors and having the controls and mechanisms it takes to be a public company, it is going to make us a better company.

And that's one of the things that I'm pleasantly surprised about is the discipline it requires to get out an IPO a company as well as everything it's going to take to continue to run it is only going to make us stronger and better. At times, it may be more difficult and make us stay at work longer.

But at the end of the day, it's rewarding for the management team, and I think it will be rewarding for the shareholders long term. As far as the business itself, no, nothing is -- we have no new learnings, no new changes. We are predictable as we were a year ago or 2 years ago.

As we mentioned before, 94% of our revenue for Q2 was prebaked before the quarter started. So no new learnings or challenges. We clearly understand the road ahead of us, what we need to do. I am confident that we have the strongest management team in this category and that we're going to build this category to something we can be proud of.

We have a bunch of key milestones we need to hit. I'm very focused about becoming EBITDA positive. I don't think we're ready yet to do that. We need to build our foundation on our G&A. As Mike told you earlier, we missed some technology spends because of the IPO and some of that will funnel into the back half of this year and into Q1.

But being -- becoming EBITDA positive is very important. Reaching the scale of 650,000 to 750,000 pets is also very important to us. And we're a company that IPO-ed with roughly $100 million of revenue, and we clearly have our eyes and target on getting to $1 billion of revenue.

At that moment, we will stop, take a breather, pat ourselves on the back and then go after and chase and be disappointed that we're not a $2 billion or a $3 billion company. So as I mentioned, mile 3 of this marathon is very early on. We've got a lot to do, but I don't think it's a lot of learnings.

I think it's a lot of execution, and I'm proud of the management we've -- team that we have to accomplish that. .

This concludes our question-and-answer session. I would like to turn the conference back over to Darryl Rawlings for any closing remarks. .

I'd just like to thank all those shareholders who have put their trust in us, and we appreciate the support. We understand what it takes to win the hearts and minds of veterinarians, and we look forward to the challenges of winning the hearts and minds of the institutional investors. And thank you for being part of this call. .

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..