Good afternoon, and welcome to the Trupanion, Inc. Third Quarter 2014 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. .

I would now like to turn the conference over to Quynh Pham. Please go ahead. .

Thank you, operator. Good afternoon, and welcome to the Trupanion Third Quarter 2014 Financial Results Conference Call. Joining me today to discuss 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'd 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.

Any statements that we make today October 30, 2014 are based on assumptions as of today's date. Actual 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 expected to be filed with the SEC on October 31, 2014.

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 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. .

In our remarks, the non-GAAP financial measure adjusted EBITDA will be referred to simply as EBITDA, which excludes certain financial items such as share-based compensation. .

on November 11, 2014, our CEO, Darryl Rawlings will present at the RBC Telecom Media and Technology Conference in New York City. On November 18, 2014, our CEO, Darryl Rawlings will present at the Stifel Healthcare Conference in New York City. All conference presentations will be accessible live via webcast from our website at www.trupanion.com. .

Following the call, investors may also access our website to replay this call and access the copy of today's prepared remarks there as well. .

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

Good afternoon, everyone, and thank you for joining Trupanion's third quarter earnings conference call. As you know, Trupanion is a direct-to-consumer monthly subscription business model that provides medical plan for pet owners in North America and Puerto Rico.

Our product pays 90% of the actual invoice demand with no limits if a cat or dog becomes sick or is injured. We cover all diagnostic tests, medications and surgery recommended by the pet owners veterinarian of choice, and we have very few exclusions that we try to make the policy as simple as possible for our customers.

Pet owners learned about Trupanion from 2 main sources, their veterinarian and from pet owners. In combination, these 2 sources drive 81% of our leads. Conversions occur at our website or our 24-hour call center. Historically, our website has a 7% to 8% conversion rate and our call center converts at a 30% or greater.

Pet owners must go to our website or call center, as we have over 1.2 million price categories for one simple product, requiring an individual to get a quote for each pet. .

North American families own 183 million cats and dogs. 120 million of those visit the veterinarian at least once a year. There are 28,000 veterinary hospitals, 26,000 of them are independently owned. Trupanion has the first and only national sales network of territory partners calling on approximately 16,000 of these hospitals today. .

The third quarter was a strong showing for our team. We are pleased with our consistent growth and our strong cohort metrics. Our Q3 metrics were all at or above our expectations. The number of subscription pets equaled 207,843. Our ratio of lifetime value to pet acquisition cost was a 5.2:1. Average monthly retention was at 98.67%.

Adjusted revenue per pet or our version of ARPU was at $44.98. Total revenue was $30 million, and our adjusted EBITDA was negative $2.9 million. .

Our net loss for the quarter was a negative $8.5 million, but it included $4.3 million of noncash items related to our IPO in July and to equity compensation. .

Now our gross margin under pressure in the third quarter. This came about mainly as a response to our continued desire to improve the customer's experience by making it easier for us to pay veterinary invoices. These initiatives help both the pet owner and the veterinarians and are good for the business.

They build brand loyalty, increase lifetime value of our members. .

In the third quarter, we saw downward pressure on our gross margin, but in the mid to longer term, we expect these metrics to normalize. And that these initiatives will help drive our per adjusted revenue or ARPU, which in turn should increase our contribution dollar amount and therefore, our lifetime value of a pet. .

We continue to grow our subscription business in a measured predictable manner that can be seen on our revenue growth slides, both by quarter and by cohort. The primary growth drivers for Trupanion continue to be our relationships with the veterinarian hospitals and our existing members adding pets or telling their friends. .

We are in the early days of building our territory partner network, the category's first and only national sales network designed to inform, educate and position Trupanion as the first true partner with as many of the 28,000 veterinarian hospitals across North America as possible.

Going forward, we intend to disclose the number of active hospitals, the size of the territory partner network and the number of face-to-face visits with the veterinary hospitals on an annual basis. .

As of the time of the IPO in July of this year, we indicated that we had approximately 5,000 active hospitals in the Q4 2013, and we had 60 territory partners in the field at the end of Q1 2014. We strongly believe in our direct-to-veterinarian territory partner network.

Today, 65% of our existing territory partners have gone through our new Tru-University, a 3-week Seattle-based training course, where we are having them hone their presentation skills, get up to speed on our newest technologies such as Trupanion Express and learn best practices to maximize their messaging to veterinarians and their staff. .

In the fourth quarter, we are hosting a territory partner conference here in Seattle, where we'll have all territory partners into Seattle to further drive territory partner engagement. .

lead from veterinarians, direct-to-consumer lead; and the infrastructure and similar costs associated with converting those leads. Leads from veterinarians is about 55% of our sales and marketing. Our direct-to-consumer, we're spending about 24% of our sales and marketing, and we've allocated about 21%, driving up our conversion rates. .

In aggregate, we have spent $8.4 million on sales and marketing for the first 9 months 2014, up from $6.9 million from the same period in 2013. 45% of our sales and marketing expenses are related to headcount and 55% are incremental spent. .

Please note, 100% of our sales and marketing spend, excluding stock-based compensation is used to calculate our average pet acquisition costs or our similar to our PAC. We believe that Trupanion has multiple strong mote surrounding our business model as we create and build this category in North America. .

As a reminder, our motes include over 14 years of proprietary data, which has created over 1.2 million price categories. Our territory partner network, the first and only national sales network in the category responsible for over 280,000 face-to-face visits since we entered the U.S. marketplace.

An industry-leading product offering with coverage at pet owners want, where we have a value proposition of spending over $0.70 of each revenue dollar on claims. An award-winning customer service team that supported 166,000 client touchpoints in the third quarter alone.

A claims department working with our proprietary technology that had us paying 99,495 veterinary invoices in the third quarter. Many at the time of invoice, eliminating the reimbursement model for those customers. .

And we are the only vertically stacked company providing medical insurance to cats and dogs. This means that we eliminate frictional cost that competitors typically have and we're able to pass that value proposition onto the pet owners. In our opinion, this is critical if we want to build a meaningful category in North America. .

proof of concept of both our product and distribution, I think, we're 90% or 95% of the way there. Using a LVP-to-PAC ratio of 5:1 I believe we're about 90% complete. Our variable expenses, I think, we're about 90% complete.

But rolling this product and distribution across North America we're only about 50% or 55% complete and our fixed expenses and technology infrastructure, we're about 30% complete. .

The reason that I'm giving you my view on our march towards scale is that when we are at scale, our operating margin before sales and marketing will be 15% of revenue. At that point, we can then focus the business on reinvesting the remaining available cash on a 5:1 basis to achieve what we believe is a very compelling IRR. .

Now I'd like to turn the call over to Mike Banks, our CFO. .

total pets enrolled, monthly adjusted revenue per pet, the ratio of lifetime value of pet to our average pet acquisition cost and average monthly customer retention. Our recurring revenue base enrolled pets continues to produce stable and predictable revenues.

Our members continue to be very loyal, reflected by our average monthly retention rate of 98.67% as of September 30, 2014. This implies that our customers are enrolled with us for 75 months. .

Consequently, existing pets accounted for 94% of the subscription revenue from the third quarter. .

Looking at the same quarterly revenues, but by customer cohort shows just how stable and predictable our revenues are. You can see strong retention in every cohort, with annual premium increases partly offsetting the very low churn that occurs. This produces high visibility into future revenues.

The next few quarters revenues are substantially onboard now. .

Since we began offering a medical plan for cats and dogs, the number of pets enrolled has increased every quarter. Total enrolled pets increased 30% from just over 160,000 pets at the end of Q3 2013 to almost 208,000 pets at the end of the third quarter of this year.

And for the third quarter of 2014, our average monthly adjusted revenue per pet was $44.98, an increase of 5.6% over the same period last year. .

Our 30% increase on the number of enrolled pets, combined with our 5.6% increase in average monthly adjusted revenue per pet, has resulted in the 38% increase in our subscription revenues over the same quarter last year. Adjusted revenues for our subscription business from the third quarter of 2014 was $27 million.

When we add in revenues from our other business segment, total revenues for the third quarter was $30 million, a 37% increase over the third quarter of 2013. .

I will now turn the discussion to our financial results and talk in terms of cost drivers and our trends. Unless I state otherwise, I'll be talking about non-GAAP expenses that exclude stock-based compensation as a percent of revenues.

We have a number of initiatives designed to pay veterinary invoices faster and provide real value to the customer and the lighter in a way that the industry has never done before. We're figuring out how to pay even more benefits and to pay them faster. These initiatives are resulting in a great customer experience and provide a high-value proposition.

These initiatives have also increased the number of veterinary invoices that we are paying and lowered our gross margin profile in the third quarter. .

These short-term fluctuations are normal part of our business and reflect the timing differential between delivering superior value and applying the appropriate price that gets us to our target gross margin.

In the past when this has happened, we have implemented significant price increases, and we are still continued to improve our retention rate year-over-year. .

Our customers appreciated the value we provided, and we're willing to pay for the increase. Our customers are value sensitive, not price sensitive. .

The increase in the number of veterinary invoices that we are seeing from our initiatives produced a gross margin for the third quarter that was 15% of revenues compared to 19% for the third quarter of 2013. This brought our year-to-date gross margin to 17%.

As we have done in the past, we anticipate realizing increases in our average monthly revenue per pet that reflect the higher cost of veterinary care for our members. .

We're expecting the fourth quarter gross margin to come in around 17% to 18% of revenues, and we expect our gross margin to normalize to 19% to 20% of revenues by the end of 2015. .

We also expect that the additional veterinary spending will cause our average monthly revenue per pet to grow up 5% next quarter and to grow at 6% annually starting next year, reflecting an increase from our prior expectations of 4%. .

In addition to our core technology spend, we're developing a new technology, Trupanion Express that we expect will improve the member claims experience by making the claims process easier, faster and more efficient.

Trupanion Express will also pay vet invoices directly to a veterinarian instead of the traditional model of reimbursing members after they have paid the veterinarians out of their pocket.

We believe this technology will drive higher member satisfaction, reduce frictional claim costs for Trupanion and veterinarians, and when deployed in a large number of veterinary clinics, will create a substantial competitive advantage in mote. .

Our expense on this direct pay initiative has averaged 4% of revenues during the year ended in Q3. We expect the spend on this project will increase to 6% of revenues for the next 3 quarters, after which we believe the development work is done and the future cost will move into our core technology. .

Our sales and marketing was 10% of revenues in the third quarter and 9% for the 9 months of 2014. As Darryl mentioned, we communicate the benefits of Trupanion to pet owners by generating engagement and active support with the veterinary community through our territory partner network. This distribution approach is both effective and cost efficient.

Our customer acquisition costs are typically 20% of the lifetime value of our customers. .

For the third quarter, Trupanion spent an average of $113 to acquire a pet that has an estimated customer lifetime value of $584, which is a 5.2x return on the acquisition cost. .

first, our 14 years of business experience has shown that new pet enrollments are lower in the fourth quarter due primarily to visits to veterinary hospitals in the fourth quarter being seasonally lower; this naturally will inflate our acquisition costs per new pets in the quarter since the majority of our sales and marketing spend is not seasonal.

Second, we are also hosting a national sales conference for our territory partners. The cost of this meeting will be included in our sales and marketing expense, resulting in a higher average acquisition costs for new pets in the fourth quarter. .

Our adjusted EBITDA loss was $7.4 million for the year-to-date. For the third quarter, the adjusted EBITDA loss was $2.9 million and was within our expectations. The decrease in gross profit for the quarter was largely offset by spending less than we had previously forecast on technology and other operating expenses. .

The net loss for the third quarter of 2014 was $8.5 million compared to a loss of $1.2 million in the third quarter of 2013.

The third quarter 2014 net loss included noncash charges totaling $4.3 million comprised of $2.3 million from expensing of debt discounts related to debt repayments and the reevaluation of warrants related to adjustments triggered by our initial public offering plus $2 million of stock-based compensation related to equity awards. .

We entered the third quarter with $59.1 million in cash and cash equivalents and our debt totaled $15 million. We paid off $12 million of debt with our IPO proceeds and $3 million using restricted cash. .

With regard to share count for the full year of 2014, we expect weighted average basic shares to be approximately 13 million and for Q4 2014, we expect weighted average basic shares to be approximately 28 million. .

Regarding taxes, our income tax expense is primarily associated with our Canadian business, and we expect to pay minimum taxes for the foreseeable future. .

Our federal net operating loss carryforward as of December 31, 2013 was $24.4 million. .

Let's move to guidance for the fourth quarter. As mentioned previously, we have increased the long-term growth rate for our forecasted average monthly revenue per pet, our metric of ARPU to 6%. As a result, we are raising the range of our fiscal 2014 total revenue guidance to between $115 million and $117 million.

We are reiterating our full year adjusted EBITDA guidance range of negative $11.8 million to negative $9.8 million. .

As such, for the fourth quarter of 2014, we expect total revenue to be in the range of $31 million to $33 million and our fourth quarter adjusted EBITDA range to be between negative $4.4 million and negative $2.4 million. .

With that, let me turn the call back over to Darryl to wrap up before we take your questions. .

By all key metrics, Q3 was a strong quarter enrolled pets revenue, our LVP-to-PAC ratio, member retention, revenue for pet or ARPU and adjusted EBITDA were all at or above our plan. We are 14 years into this business and I'm proud of our accomplishments thus far. That being said, we are still ways away from achieving operational scale.

In particular, we are still actively trying to increase the penetration rate in veterinary hospitals and to become more disciplined in our fixed expenses. .

We are the fastest growing and the second largest company in this category in North America. Trupanion, 1 of 19 brands represented 40% of the categories growth over the last few years. We believe we're doing many things right. .

As a reminder, we have a massive market opportunity. North America currently has a 1% penetration rate. In contrast, Europe ranges between 10% and 40%. But in North America, each 1% penetration rate calculated at our ARPU is $1 billion of revenue.

To provide context and being in the Halloween spirit, North America pet owners are expected to spend between $350 million and $400 million on Halloween costumes this year. .

We are investing in our foundation and for the long term. Key investments include building out and up our national sales force of territory partners calling on veterinarians. This is our #1 lead resource.

Investing in technology and our value proposition to improve our customer experience and make it easier for pet owners to have their veterinarian invoices paid. These initiatives over time are expected to result in larger ARPU and retention, improving our overall lifetime value of a pet and driving our #2 lead source, pet owner referrals. .

In closing, I want to reiterate management's theme that we've been addressing on prior calls and our initial public offering. We manage this business with a long-term vision of focusing on disciplined growth using the ratio of LVP-to-PAC. But in the near term, we're also managing this business to become cash flow breakeven.

We believe this is important to show discipline and to reduce the risk of shareholder dilution. .

Now I would like to open up for questions at this time. .

[Operator Instructions] Our first question comes from Rohit Kulkarni at RBC Capital. .

Two questions. One on pet acquisition costs. I think it was mentioned that it would sequentially go up on a -- as Q4 you get into seasonally softer.

How should we think about pet acquisition costs for next year, especially as you think about rolling into more hospitals with Trupanion Express? And any additional color on gross margin in terms of number of claims or severity of claims or any per claim expense as to how that trended versus your prior experiences?.

So I think if you're looking at the cost to acquire a PAC going into 2015, we're not expecting any change to guidance of what we've stated earlier at the time of IPO and then our S-1 documentation.

We As Mike did mention, we are expecting it to be a little higher for Q4 because we're doing this additional territory partner trading in a time when we're seasonally low. And that's the best time, it's kind of take them out of the marketplace.

Your second question was related to gross margin on claims expense versus prior experience? I think what we are understanding is when we're making it easier for our clients to submit claims that they're otherwise was some slippage in people leaving their invoices in their shoe box or in their glove compartment of the car, and we're seeing all of those in and that's why as Mike mentioned, we are expecting to see higher ARPU moving forward.

.

The next question comes from Chris Merwin at Barclays. .

So just a follow-up on the gross margin topic. Obviously, that's been very stable historically. And Darryl just spoke to, I guess, some of the changes that are driving the near-term impact to gross margin.

As you integrate things like direct pay, I mean, what gives you the confidence, I guess, that will get back there, it's just a question of continuing to scale the business and adding more pets and overtime, that will get gross margin back to 20%. Just wondering if you could help flush out some of the drivers for getting that metric back up again.

And then another question, just on LVP-to-PAC. I'm not sure if you provided guidance for that metric in the 4Q. But is the expectation for that still to stay at or above the 5x ratio? And also, it looks like the -- some of the reported LVP numbers might have changed historically.

Was there any recasting there that you've done?.

Let me answer your first question. We do not need scale to get back to our typical 19% to 20% gross margin. What we do need is a little bit of time. We procedurally have made a decision years ago that we would not be adjusting members pricing more than once a year.

So when we see adjustments, we -- it will take us a full 12 months to roll our entire book. So that's the biggest thing. It doesn't take scale to do that. It's just going to take us a little time to roll our entire book plus for new policyholders. For your second question on LVP-to-PAC guidance for Q4, I'll let Mike answer that question. .

Yes, Chris, that's -- with that higher pet acquisition cost, LVP-to-PAC probably will come in at 4.3 to 4.5x that acquisition cost. So it will be down. .

Got it.

And in terms of recasting, was there any change in terms of how you're calculating that?.

No, Chris, there was no change. .

The next question comes from Jon Block at Stifel. .

I guess maybe third question in row on the margin. But Darryl, if I can just sort of show [ph] down. I'm trying to tease out, if you isolate cost of revenue within the subscription business, I mean, break it into the 2 components of claims expense or other cost of revenue, which I believe is more infrastructure-based.

What ran ahead? In other words, were the actual claim submissions in the claims paid that ran ahead or is it staffing up the infrastructure of the business to go ahead and turnaround and pay these claims quickly that caused, call it, the deviation from I think where the rest of us were?.

It's mainly increased frequency where we are otherwise, in the traditional model that has been a reimbursement model, there's a slippage in that's some invoices just never make it to historically made it to Trupanion or to competitors in the space where invoices are just left as I mentioned in the glovebox of a car, forgotten about.

So it's mainly just driven by all of those invoices arriving. It has a very small impact on the other expenses. But it's almost all just frequency of invoices. .

Okay, okay. And then, I'm trying to go back on my model quickly, but it looks like you got down to around 16% in 1Q '12. And then to your point, the next 2 quarters actually went 18.3% and well north of 20%.

So is that sort of the similar thought process here, when you call a little bit back in the fourth quarter and then you get back closer to 19%, 20% as we enter 2015?.

Yes. Exactly. In the last 10 years, as -- I mean, we've done this many times. It will take us about a full calendar year to roll it right through our book. But we're expecting Q4 to make up about 50% of the delta and then in 2015 kind of relatively on a linear basis get us back to our long-term target by the end of the '15. .

And then several times in the call, you mentioned the number of claims being paid direct or quickly, and maybe if you can just highlight for us, where are you on a percentage basis in terms of call it direct pay and I don't know if that's necessarily Trupanion Express, but where are you today and where do you expect to be 12 months from now with sort of that direct pay initiative of yours?.

We're a little over 20% of our claims dollars are now being paid in that methodology. We're not giving great guidance right now on what we expect that to be in a year from today. We're still testing both kind of a high touch and a low touch deployment.

And until we have enough time to capture retention rates and other things that take a little bit of time to book to completely understand it. We're going to reserve judgment on how quickly we roll this out. .

Okay.

And then last one for me, maybe just a few parts, to punch a little bit on Chris's question earlier, I mean if you x-ed out the training costs of a conference, if you would with the territory partners? Would that 4.3 to 4.5 LVP-to-PAC look a lot closer to 5 in the fourth quarter? And then when we sort of think long term with our models, is it still this the long-term trajectory of LVP-to-PAC covering around 5x?.

Absolutely, if we didn't have this one-time expense, that we did not amortize over on an annual basis, it's all going to show up in Q4. We would be at a kind of a 5:1, and we're expecting the 5:1 ratio moving forward. .

Our next question is from Michael Graham at Canaccord Genuity. .

I have 2 questions. The first one is on the vet, I guess, cohorts.

I'm just trying to see if you can give us an update on how many of your new pets came from existing vets or veteran vets in your system versus new ones? And could you update us on some of your most penetrated vet hospitals? Like how many of their pets do you have on board and do you expect to see the majority of growth over the near term coming from those highly penetrated vet hospitals? Or just what color can you give us around that?.

Well, we can give you color in kind of 2 different ways. First of all, over 60% of all of our leads are coming from veterinarians, and we expect a similar ratio moving forward. The biggest area of growth for us is kind of moving that 5,000 active hospital number up, and we've got a long runway. I mentioned before on the level of scale.

That scenario, we are today visiting about 16,000 to 28,000 hospitals, all varying in the degree of certain level of buy-in and building relationships with our territory partners.

So we expect that that's going to be the biggest driver of growth for the next several years and why we're investing so heavily on upgrading our territory partners and building out that sales force. I can tell you that in more mature markets places, we've been there longer.

You can look at 10% to 15% penetration rate inside of a hospital with Trupanion. Another way to think about it is although there might be 1% penetration rate today, it might be 3% to 4% of puppies and kittens getting Trupanion or getting medical insurance for the cats and dogs.

And at the current run rate, we're one pet generation rate of getting to 3%. Obviously, we're going to be trying to drive that up over the next couple of years as well. So think of the markets kind of like OpenTable in the early days we've got markets where brand-new and having to build relationships.

The cost there are a lot higher than in more mature markets where we've been there for 5, 6, 7 years. .

No. That's really interesting.

Is that higher penetration rate with puppies and kittens? Is that because it's perceived to be a better value for the new pet owner? Or is it because you have the best relationships with the vets that cater to new puppies and kittens or how would you sort of explain that variance?.

Well, the times when responsible pet owners are most apt to think about medical insurance or Trupanion is at the times that they're getting a new pet, when it's a new pet comes into their household.

If somebody's had a dog for 7 years and they haven't had a lot of medical problems, they're not -- it's not top of mind they're not really thinking about Trupanion. But when somebody's getting a new pet that's the time that it's most acutely aware to them.

Layer that onto the fact that, that is the point in time when most messaging happens at a veterinary hospital, the first year, the average puppy or kitten visits a veterinary hospital 3x. And then their visiting closer to 1x per year in the later years. .

And of that are 3% to 4% for puppies and kittens do you think that Trupanion is getting it's -- is your share of that group above or below your sort of market share in general?.

What we mentioned earlier on the call and over the last few years, the number of brands has bounced around. But there's about 19 brands in the category. And the best information we have were about 40% of the categories growth, and we think that's proportional across age groups. .

Okay. And then the next one is just if you could give us a quick reminder of the penetration in the U.K. so much higher than it is here.

And I'm just hoping you could give us a quick reminder of why that is?.

Well, it's not just in the U.K. But in any country where there is greater than 5% penetration rate, 90% of those that early 5% penetration rate come from -- came from veterinarian referrals. So you need to start where a place where you have a strong foundation.

In the U.K., where it started in the late '70s that first 5 points of penetration rate took about 20 years. And it was all veterinarian referrals making it so that when you walk into the veterinarian, the first thing they ask you at check in is who's your insurance with. Similar to in the U.S.

right now, when you walk into a dentist, the first thing they ask is who is your insurance with. Once that foundation is built and you're trying to build it from 5% to 10% to 15% to 20%, then I think you'll see more direct-to-consumer being layered on top of it. And what we're doing, North America is obviously a much more -- much larger market.

It's a lot more costly to get out of national sales force. That's an area we've been investing in for the last over 10 years. And something that we've spent a lot more time and money on since 2008 when we entered the U.S. marketplace, of which we're a little bit over 55% of the way there of building those relationships. .

Our next question comes from Kevin Kopelman at Cowen and Company. .

This is Andrew Marok, I'm for Kevin. I apologize if you've already answered this since my line was kind of cutting out.

But if you x out of the one-time sales conference, how much would PAC increase in that case?.

We would be at a kind of our traditional 5:1. .

Okay.

And then if you can break out how much was paid to territory partners in the quarter? And just your general philosophy on the expansion of the territory partner network?.

We don't break out kind of the compensation for our territory partners. It's not a metric that we have. It shows up in 2 places. It shows up in our cost to acquire and it also shows up in our other cost of revenue as a variable expense. .

Okay.

And just your general philosophy on the expansion of the territory partner network?.

Well, we had about 60 territory partners. And we believe we need to get to about 90 territory partners, 95 territory partners calling on veterinarians to get the majority of the North American market covered. We're not going to be able to have face-to-face visits in some small market where the drive time is over 2 hours to get to.

But that will get us to about 25,000 or 26,000 of the hospitals. .

[Operator Instructions] And our next question comes from Steven Tomingas at RBC. .

Question is -- a few qualitative of questions, Darryl. One is, you've been public for a short period of time now.

But what's the biggest surprise you had since you went IPO? And how did you deal with it?.

and they're not often discussed. The first advantage is we get the opportunity to get feedback from what I think are very smart institutional investors, that try to push maybe some of our thinking. And I believe over the last year, some of those dialogues and questions going back and forth have made us a smarter company.

The second one is by being a public company, I think the management team is more challenged and more disciplined, able to move faster. And I think quite frankly, that has made my life a little bit easier. And we'll see if that continues moving forward. But so far, I've been pleasantly surprised. .

Also, related to your fourth quarter conference, can you share with us 2 or 3 of the objectives for the territory partners? What are you trying to accomplish there? I heard you use the word training. I know that you've really focused on that quite a bit.

But if you were to use just highlight 2 or 3 objectives, goals, what would they be in the fourth quarter conference?.

So the first one is really highlighting what buy-in is at a hospital. And one of the tools that we're finding the best practices out in the field. The second one is about implementation. It's one thing for a hospital to be bought in and be a big fan or love Trupanion.

But for them to have the confidence to initiate conversations to clients, who are otherwise not asking is a new skill set that we're teaching. We're trying to create that as a habit inside of a veterinary hospital.

And I think the last one is really sharing our broad strategy of technology customer experience in making sure that our territory partners can articulate that plan going out to the field. .

And my final question is related to the competitive environment. Because it just seems like you have to undo some work that was done by others out there that are your competitors. What kind of response are you getting now with this, with your approach and your branding and the attack that you're making on the market.

What's the competition doing?.

Overall, I think competitors are getting stronger. They have been getting stronger over the last number of years. And that in aggregate is going to help the category. I think in some ways we're certainly leading that way. We have our own vision, our own strategy that differs from others.

We spent most of our time thinking about going after the 99% of pet owners that don't currently have this. We're not trying to steal market share from an existing or steal clients from existing competitors. But I think overall, as the products get better, the offerings get better.

Covering things like in general hereditary, the things most likely to happen to a pet. The category has a better chance of rebounding its reputation and being seen as something that is normal for responsible pet owners.

We're keeping our head down, and we think the market share gains that we have with 19 brands show that what we're doing is being -- is successful. And we'll keep our head down and try to build those relationships, one pet owner at a time and one veterinarian at a time. .

This concludes our question-and-answer session.

Would like to make any closing remarks?.

The only closing remarks I'd like to make is we appreciate the institutional investors that bought in at the IPO and believing in our story. We've had great feedback. We're also encouraged by those people that are starting to dig in and understand our story.

We believe the more people research and understand what we're doing, the easier it is for us to continue to drive our execution. So thanks for all those people on the call. And we'll talk to you next quarter. .

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