Greetings, and welcome to the Trupanion Inc's Third Quarter 2019 Results Call. [Operator Instructions] It is now my pleasure to introduce your host, Ms. Laura Bainbridge, Head of Investor Relations. Thank you. You may begin..

Good afternoon, and welcome to the Trupanion's third quarter 2019 financial results conference call. Participating on today's call are Darryl Rawlings, Chief Executive Officer; and Tricia Plouf, Chief Financial Officer.

Before we begin, I would like to remind everyone that during today's conference call, we will make certain forward-looking statements regarding the future operations, opportunities and financial performance of Trupanion within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995.

These statements involve a high degree of known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed.

A detailed discussion of these and other risks and uncertainties are included in our earnings release, which can be found on our Investor Relations website as well as the company's most recent reports on Forms 10-K and 8-K filed with the Securities and Exchange Commission.

Today's presentation contains references to non-GAAP financial measures that management uses to evaluate the company's performance, including, without limitation, fixed expenses, variable expenses, adjusted operating income, acquisition cost, internal rate of return, adjusted EBITDA and free cash flow.

When we use the term adjusted operating income or margin, it is intended to refer to our non-GAAP operating income or margin before new pet acquisition. Unless otherwise noted, margins and expenses will be presented on a non-GAAP basis, which excludes stock-based compensation expense and depreciation expense.

These non-GAAP measures are in addition to and not a substitute for measures of financial performance prepared in accordance with the U.S. GAAP.

Investors are encouraged to review the reconciliations of these non-GAAP financial measures to the most directly comparable GAAP results, which can be found in today's press release or on Trupanion's Investor Relations website under the Quarterly Earnings tab.

Lastly, I would like to remind everyone that today's call is also available via webcast on Trupanion's Investor Relations website. A replay will also be available on the site. And with that, I will hand the call over to Darryl..

Thanks, Laura, good afternoon. We delivered strong results in the third quarter, revenue grew 27% year-over-year, the highest rate of growth since Q1 of 2018. Subscription revenue grew 23% over the prior year, led by double-digit increase in lead volume.

In addition to solid growth in our leads from our core Veterinary Channel, we saw an increase in referrals from existing members adding pets or referring friends. Our conversion rate also continue to improve for the quarter.

In the third quarter, we saw marked progress toward Nirvana led by improved 90-day retention and strong refer a friend and at a pet growth. As a reminder Nirvana is our ambitious long-term goal of offsetting monthly cancellations with the addition of new pets by existing members or friends they've referred.

Adjusted operating income increased 35% to $12.6 million in the quarter and we are on track to deliver around $45 million in adjusted operating income for the year.

Over the next decade, we expect our adjusted operating income to continue to expand and we want to reinvest as much of it as we are able to, in order to grow revenue within the range of 20% to 30%. To operate at these revenue growth levels, we target an estimated internal rate of return on pet acquisition spend of 30% to 40% for a single average pet.

Strategically, we view these ranges as linked. Expansion of our adjusted operating income provides us the ability to invest in areas previously unavailable to us.

Within our targeted an internal rate of return we estimate acquisition spend in 2019, to be around $34 million, approximately $10 million of this spend is being allocated to newer or unproven initiatives that may or may not be helpful contributors to our growth long term, but will allow us to learn and iterate.

As I stated in my 2016 annual shareholder letter, we are working together to build a new category, and that means we must be able to test and learn. Areas in which we are investing and learning include the continued growth of our inside sales force accelerated deployment of our patented software.

Building out our conversion and content teams, piloting our State Farm partnership and continuing to iterate on our direct to consumer spend. Additionally, a portion of our acquisition spend is being used for efforts focused on reducing our 90-day churn.

In the third quarter, we were able to deploy $8.7 million of our adjusted operating income, which is up from $6 million in the prior year period. Our estimated internal rate of return for our single average pet inclusive of these investments was 33%.

I am encouraged by the teams ability to deploy approximately 40% more cash, while still operating within our internal rates of return guardrails. As this category continues to grow in both size and acceptance.

We believe the company offering the broadest coverage, coupled with the highest targeted value proposition and the best customer experience will produce the strongest retention rates.

The combination of these factors allow Trupanion to target and otherwise higher allowable pet acquisition spend which we believe best positions our company for sustainable long-term growth. Recent data points suggests a more favorable industry backdrop, then we have seen in the past 5 to 10 years.

Over the past decade revenue growth for the category has accelerated from the mid teens in 2009 to the low '20s in 2018. And for the first time ever we've seen accelerated growth in the search term pet insurance.

Organic searches for the term Trupanion continue to increase and it even faster rate and represented over 40% of the volume of queries compared to the term pet insurance. To me, these data points speak to the progress of the category as well as the gains we have made building our brand.

Additionally, in August, the American Veterinary Medical Association revised its policy around pet medical insurance. The AVMA now encourages veterinarians to educate their clients about the availability of medical insurance options for their pets.

The AVMA also noted that study show that pet owners are more likely to accept pet medical insurance if it is brought to their attention by the veterinarian. As this category continues to grow we expect additional competitors to enter the space.

Competition is nothing new to Trupanion, since we enrolled our first pet in 2000 we have competed against over 40 brands in North America.

Over that time, we have delivered consistent 20% plus revenue growth, improved conversion and retention rate, expanded our adjusted operating margin, increasing our allowable pack spend and strengthened our competitive modes.

We believe the categories growth has been driven, not by awareness of pet insurance, but by the acceptance of high quality medical insurance by the veterinary community. Our success has been built around this belief with over 75% of our enrollment coming from organic unpaid referral sources, including existing members and veterinarians.

We recently entered into long-term partnerships with two strategic players and animal health Covetrus and Idexx that together on the vast majority of the veterinary practice management software worldwide. Across our organizations, we are well aligned.

Clients with high quality insurance visit more frequently and more often choose the best course of treatment. Through these partnerships we expect to incrementally add to our data leadership and over time, better identify new pets entering the household.

Our patented software, along with our veterinary relationships and our pricing data our competitive moats and cannot be understated nor easily replicated. We look forward to building upon our modes in the years ahead.

Our perspective and strategy spends decades to the day when one and four loving responsible North American Pet Owners has high quality medical insurance for their pet. The runway for growth between now and then is significant.

And as we've noted historically at our current average monthly revenue per pet each one point a market penetration represents more than 1 billion in revenue for the industry. For illustrative purposes if Trupanion grew revenue 20% annually for the next 10 years. Market penetration for Trupanion would approximate 1.3% in the year 2013.

Following this assumption at our current market share market penetration for the entire North American category would approximate just 5%, leaving decades of runway for continued growth. As the industry continues on this growth trajectory Trupanion is well positioned to maintain its market leadership.

Our Trupanion brand offers the broadest coverage, the highest value proposition and the best customer experience delivered through our proprietary patented software allowing us to be the only company in the space to pay veterinarians directly without paperwork and within seconds I'll now hand the call over to Trish, who will discuss our quarterly results in more detail..

Thanks, Daryl, and good afternoon everyone. We are very pleased with our third quarter results, which reflect strong execution across all areas of the business.

Revenue of $99.3 million was up 27% year-over-year due to slightly stronger than forecasted enrolled pets in both our subscription and other business segments, as well as slightly higher average revenue per pet then forecasted in our subscription business segment. Total enrolled pets increased 23% over the prior year period to approximately 614,000.

Subscription revenue was $82.6 million in the quarter, up 23% year-over-year. Total enrolled subscription pets increased 15% year-over-year to 479,000 pets as of September 30.

Pet growth within our subscription business continued to benefit from increased leads in our core veterinary channel and strong contribution from our refer a friend and add a pet initiatives. As Darryl noted, we also continued to see conversion rates improved in the quarter.

Monthly average revenue per pet for the quarter was $58.12, an increase of 7% year-over-year. In local currency monthly average revenue per pet increased by 8% from the prior year for our U.S. members and by 4% for our Canadian members.

Our other business revenue, which is comprised of revenue from other product offerings that generally have a B2B component totaled $16.7 million for the quarter, an increase of 55% year-over-year. Year-over-year growth in our other business segment primarily reflects an increase in the number of enrolled pets.

Subscription gross margin was 19.5% in the quarter, in line with our annual target of 18% to 21%. Total gross margin was 18%, which includes our other business segment. Fixed expenses were $5.1 million, representing 5% of total revenue in the quarter, down 80 basis points from the prior year period.

Adjusted operating income totaled $12.6 million in the third quarter, a 35% increase from $9.3 million in the prior year period. Net income for the quarter was $0.8 million. As a reminder, adjusted operating income represents the funds available to us to invest in pet acquisition or other strategic initiatives.

As a percentage of revenue, adjusted operating margin expanded approximately 70 basis points year-over-year to 13%. Expansion in our adjusted operating income, allows us to deploy greater amounts of capital, which we intend to do so long as we can achieve our targeted internal rates of return, and remain free cash flow positive.

During the quarter, we deployed $8.7 million of our adjusted operating income compared to $6 million in the prior-year period, which resulted in the acquisition of approximately 37,000 new subscription pets. Of the $8.7 million approximately $2.8 million was spent on newer and unproven initiatives discussed earlier by Darryl.

Inclusive of this spend, we estimate our internal rates of return for a single average pet at 33% for the quarter, in line with our 30% to 40% target.

Additional details behind the calculation of adjusted operating income and internal rate of return can be found in our quarterly earnings supplement on our Investor Relations website, which we would encourage you to review. Adjusted EBITDA was $3.9 million for the quarter compared to $3.7 million in the prior year period.

Net income was $0.8 million or $0.02 per basic and diluted share compared to net income of $1.2 million or $0.04 per basic and $0.03 per diluted share in the prior year period. Free cash flow was $2.9 million, operating cash flow in the quarter was $4.7 million compared to $4.2 million in the prior year period.

At September 30, we had $96.5 million in cash, cash equivalents and short-term investments and $22.1 million of long-term debt. I will now provide a quick update on our settlement with the California Department of Insurance, which as you will recall relates to the years old matter of call center licensing that we corrected years ago.

As part of the settlement, we have agreed to pay a $500,000 fine which is reflective of the size of business we do in California, and for which we were appropriately reserved. In addition, we will work with the Department over the next six months to confirm that we continue to use licensed employees to enroll California pet owners over the phone.

As part of the settlement should any unlicensed employees process California enrollments during this time period, we may become subject to an additional fine of up to $500,000. We do not anticipate any issues arising out of this audit process as our agents have been licensed in California, for many years.

We are pleased to have reached the settlement with California, which resolves the majority of our known regulatory matters. We take these matters seriously and are committed to maintaining prioritizing and investing in our relationships with state regulators. Before I turn to our outlook.

I'll highlight today's announcement of a share repurchase program under which our Board of Directors has authorized the repurchase of up to $15 million over the next 12 months.

While the board has authorized this program any repurchases will be subject to quarterly assessments based on parameters we set, these include uses of capital in a given quarter, and the stock price relative to our estimate of intrinsic value.

If given the opportunity these potential repurchases are not expected to exceed a small percentage of our adjusted operating income in a given quarter. Turning now to our outlook for the full year 2019.

For the full year, we are increasing our revenue guidance range to reflect our overall performance year-to-date and visibility into the fourth quarter. We now expect revenue for the full year to be in the range of $383 million to $384 million representing 26% year-over-year growth at the midpoint.

This implies expected fourth quarter revenue growth of 27% at the midpoint. We now estimate our other business revenue to be around $62 million for the year.

At our forecasted revenue levels, we continue to expect adjusted operating income for the year of around $45 million and allowable acquisition spend of around $34 million within our targeted IRR range of 30% to 40%. Also, please keep in mind that our revenue projections are subject to conversion rate fluctuations between the U.S.

and Canadian currencies. For our full year guidance, we used a 76% conversion rate in our projections, which was the approximate rate at the end of June. Thank you for your time today. And I will now turn the call back over to Darryl..

Thanks, Tricia. Before we open up the call for questions. I wanted to take a moment to reference my inaugural 2014 shareholder letter in which I foreshadowed our compounding adjusted operating income. We said our job is to invest these discretionary funds had outsized internal rates of return when acquiring new pets.

We also stated that if and when we have additional capital beyond what we can cost effectively deploy acquiring pets, we may opportunistically invest these dollars repurchasing our stock. If we believe we can earn greater internal rates of return.

Our share repurchase philosophy reflects our long-term intent to take advantage of points in time in which our share price is trading well below our estimate of intrinsic value and when we have a high degree of confidence that the rate of return on that investment will be greater than our existing acquisition spend.

I'll also take this moment to highlight our participation has several upcoming investor conferences this month, including the Credit Suisse HealthCare Conference in Scottsdale, as well as the Stifel Healthcare and RBC TMT conferences both being held in New York. We hope to see you there. And with that, we'll open the call up for questions.

Operator?.

Thank you. We will now be conducting a question-and-answer session. [Operator Instruction] Our first question comes from the line of Jon Block with Stifel. Please proceed with your question..

Thanks, and good afternoon. Nice quarter, guys.

Darryl, maybe I'll start with you if you're willing to share what were some of the initiatives that helped with the conversion rates in the quarter that you called out and do you think there is more room to run with further improvements since it is really, you guys that are generating a lot of the leads in the space? And then I've got a follow-up..

Thanks, John. You know, when I think about some of the initiatives that we talk over here investing this extra $10 million this year that we didn't have in previous years conversion rate retention rates acceleration of it's same-store sales.

Some of the specific tactics, I think for competitive reasons, we won't get into any details, but I will tell you that we're going to continue to invest in these areas, because we think they give us leverage in the system and as the category continues to grow and the acceptance goes up, we feel like we're in a strong position..

Okay. Got it. And on pivot Tricia this one might be for you, but you know the fixed expenses in the quarter, I think you know it was 5% of revenue, which I believe is a company goal and you got there quicker than certainly, we had anticipated you purchased the building a little while ago.

So I guess is there a revised target there? Or how do we think about fixed expenses as a percent of sales over the next several quarters?.

Sure.

I mean in general, like you said, we've been working very hard to get to our fixed expense target a single quarter, while we're really happy with the results of this quarter, doesn't mean, that it won't move around slightly over the next couple of quarters, but we feel like we're well positioned going into 2020 with the scale that we have overall and 5% -- fixed expenses being the right target.

Although we'll definitely give more detail on that and how we're thinking about 2020 on our February call..

Okay. And last one if I can just ask one more quick follow up. Darryl, according to on work, you know what we saw from the veterinarians you guys are being recommended multiples higher than that of your peers, and it seems like you mentioned the accelerated growth for the industry that you're growing.

I don't know maybe in your around the rate of the industry, so I think that you guys can do from a company perspective to leverage the positive recommendations that clearly you have among the veterinarians and get them to convert to the pet owners before you lose them through a Google search to a potential competitor and hopefully that made some sense..

Yeah, it did make sense, I mean, we think we're driving most of the leads and the acceptance of the category, but there is always going to be many brands and it's going to take probably decades until there is brand dominance.

I mean, I would say from the veterinary side Trupanion is well known, but from a direct to consumer side, Trupanion brand is in the very early days.

So those are areas that we're now able to invest greater and greater sums of dollars, building our brand which is conversion retention rates, all of those things and you know I mentioned my opening remarks, we think we've got the broadest coverage, the best value proposition in the best customer experience and it's our job to make sure that consumers can understand that..

Thank you. Our next question comes from the line of Shweta Khajuria with RBC Capital Markets. Please proceed with your question..

Great. Thank you. Two questions please. One, can you please comment on just generally with the pricing environment you're seeing maybe in California are compared and what, how is there has been rate increases and what Trupanion's versus others in the market potentially just you don't have to quantify, but just the trends.

And then the second is on retention any additional detail on which kind of cohort you saw better retention of -- in the quarter and what really help to grow that retention? Thank you..

Sure. You know, I think for the quarter, our ARPU was up 7% year-over-year, you're going to typically see the veterinary inflation going up 5%, 6% when we got the headwind of installing our software where we pay hospitals directly maybe adds another point on it.

It's important for us to be slightly out scaling our ARPU versus what we're spending a veterinary invoices to be hitting our long-term margin profile and then -- we made progress this quarter and have made progress year-to-date.

When I think about any particular state some have higher rates of inflation than others, some you have longer cycle -- cycles between rate increases and that's not for one particular company it tends to happen across the Board.

California somebody that tends to have a little bit longer cycle, so when rate changes happen they tend to be a little bit steeper and California has a little higher inflation than many.

When we compare ourselves, historically, the amount of rate changes we're seeing are getting smaller and smaller, in most of the states in California, similar and when we look across the industry we see people having wider changes.

We think the data leave that we have and trying to price down to neighborhood levels is something we'll continue to work on for the years and decades ahead. And the second question on retention -- you know on my shareholder letter as I talk about how we kind of bucket one areas to think about first year retention.

Another one is retention of clients that are getting less than a 20% year-over-year change, which is the vast majority. And then some people, they're getting outsize changes.

The biggest bucket for us of improvements is really been in that first year that we've been focused on, it's more important for us to be priced accurately then to be going after that third bucket. So it's really 90 day or first year retention that we've been focused on in the last year or so. But we look at each of them very carefully..

Thank you. Our next question comes from the line of Andrew Cooper with Raymond James. Please proceed with your question..

Hi guys. Thanks for the questions. Just a quick one for me. I think in terms of, obviously there was expectations in the back half of the year around claims expense.

And I think we saw the kind of bounce back that we expected, but any commentary there in terms of kind of tying into the prior question on ARPU, but how to think about that for our 4Q? And kind of over the long term, I know it's been asked or maybe just asking a little bit of a different way?.

Sure, Andrew. I can give a little bit more color there as Darryl mentioned, it's really important as we're trying to get our invoice expense as a percentage of revenue, which has been running closer to 72 and our target is 70 that our ARPU increase is are outpacing the -- that invoice expense per pet increases on a quarterly and annual basis.

We're making good progress year-over-year today where ARPU is outpacing claims slightly. And so we feel good about the work we're doing and that continuing into 2020. That being said, as you can see when you look through our results in past quarters, it does move around on a quarterly basis.

So it's important to look at these things on an annual basis and look at incremental improvement as opposed to a single quarter. It's the way things roll on and days in the quarter and holidays in the quarter and things like that, albeit, slate.

So as I was saying we're making very good progress moving into this and we think we'll continue to make progress toward our goal of 70, but we do have that 1% headwind when we're accelerating more of our software, which continues to be one of our strategic initiatives that we're focused on as well.

So we'll make progress probably won't get all the way to 70 next year just based on that..

Okay. That's helpful. And then just looking at kind of down the P&L, it looked like again sort of as maybe expected at least, to some degree the Australia results were better quarter-over-quarter.

But just any context in terms of any early learnings there or any change to sort of the aggressiveness that what you're going after it or any takeaways on Australia and international markets in general and sort of how you think about them would be great?.

Yeah. When we think -- the next five or 10 years we think it's important that we're going to have more of a global presence. Australia, similar to our Canadian market where we started, we think, Australia, it's kind of a sister to Canada, they speak the same language is about the same size of market.

We thought it's an easier place for us to go test and learn. We are in very early stages, we're in a handful of clinic there and we're making sure that we've got a great customer experience and we can discuss the value proposition before we roll things out, so early days..

Okay. I'll stop there. Thanks. Appreciate it..

Thank you. [Operator Instructions] Our next question comes from the line of David Westenberg with Guggenheim. Please proceed with your question..

Hi, thanks for taking the question and congrats on a great quarter. So I'm just going to continuation of an earlier question. Can you talk about, and just in terms of the 20% price increases in California.

Can you just maybe talk about the correlation in price increases with the availability of specialty markets and if there is any correlation with like a willingness for a heart to spend more on pets in those particular markets and willingness to maybe pay higher price increases.

I'm just getting a lot of questions on the increases in prices in California. And I just want to get, all those ducks in a line between what that market looks like. And if that looks like other geographies in the U.S.

Is that clear?.

Yeah, it is. I mean so California, on its own, we have been historically. We don't break things down by categories, but there is a fair amount of visibility here, we're off our target in California by about four points. And the inflation rate there is closer to 10% year-over-year versus 6%.

The reality is, as you don't add 10 plus 4 and have a 14% rate increase, because it's going to take about a full 18 months until you've got everybody through the midpoint. So you're actually pricing into the future and that's why we've put a larger rate increase in California.

I would say when everything is perfectly executed on our end, which may take a few years to get to. And if California considered continued at the rate that it normally has on inflation, it's a state that's going up about 10% a year. I don't think California has a much higher percentage of referrals, specialty hospitals going in.

I mean you don't have to go far from the bay area to see what's happening and housing costs and everything else in the pressure downward pressure that puts on the veterinarians and what they need to pay their staff, California is a little bit unique in that market, but it's not, when you get down to neighborhood levels or other ones or some places go up 10% of the places go 2% or 3%.

California, like I said take the little bit longer for approvals to go through and incrementally we continue to get better..

All right. Thank you. And then just cosmetically I'm looking at Q3 the last three years, I think kind of a hi-fi in gross margin, is that kind of coincidence? Or is that -- is there actually an seasonality component to gross margins in the Q3. Thank you..

I would say we do have a little bit of seasonality in our business, albeit very slate involve kind of the enrollment side as well as the claim side. We tend to see more our claims that invoices albeit very slight.

And typically those second quarter because of allergy season ramping up and things like that and then it's slightly different in the third quarter. It also we typically have more of just based on our pricing cycle, more of our pricing have enrolled through our book by the third quarter of a given year than earlier in the year.

So there's a lot of different dynamics at play in general, I'll be them very slight..

Thank you. Our next question comes from the line of Maria Ripps with Canaccord. Please proceed with your question..

Great. Thanks for taking my questions. Can you talk about what's driving momentum in the other business, any specific partners, you would highlight there and what's the opportunity to perhaps add more partners there. And then secondly, can we just take a step back and maybe revisit some of the key things that have to happen in the U.S.

for the penetration to increase. And I think there were a couple of competitive launches in the quarter. Do you view that as a competitive threat at this point? Or do you see that kind of help in the market grow more quickly at this stage..

Great questions. So -- you started off by talking about momentum in our other business, which is broken down into kind of three buckets, but they're all B2B. All of them are trending well, they're all on much smaller basis than what our regular subscription businesses are.

But if you think about our overall strategy at Trupanion at a Incorporated level. What we believe is the category is going to grow by more veterinarians having higher acceptance of the product. If you take a look at what has happened in the UK markets historically when it started to get traction, a lot more brand came into the marketplace.

We think we're very well positioned to be the company behind other distribution channels, as well as being the company that could be behind low ARPU or medium ARPU products in the future. That's part of our aggregate strategy.

So we will stay focused on building the acceptance of high quality medical insurance with the veterinarians and if there is other distribution channels or other opportunities in the years to come. We expect to be able to play in that we're well set up to do that.

If you think about changes in the market in the last year, there has been a change in ownership of a couple of brands. But as I mentioned in my opening remarks, we've competed against over 40 brands in the last 20 years. At any given time there has been about 20 brands in the marketplace.

There's also been two new brands that have been introduced in the last few months, those are not new products they're redressings of existing products.

We would expect that when lower Media Market through product, which was those when they will really affect market share of some of our competitors and some dynamics, we don't really think more competition is going to accelerate the growth of the industry, but we do believe that we should expect more as more distribution comes into play..

Thank you. Our next question comes from the line of Kevin Ellich with Craig-Hallum. Please proceed with your question..

Good afternoon. Thanks for taking my questions. Darryl, I guess, thinking about the increase in referrals, you talked about the double-digit increase in lead volume. Couple of things, is this proof that the initiatives that you guys are investing in are working.

And I guess when you talk about double digits that we're talking low double digits or high double digits.

Any detail would be helpful?.

Well, I mean I think our quarter shows that a lot of our initiatives are working. You know, this is the strongest growth we've had, going back to the beginning of 2018 and their subscription business as well as our total revenue. We also have our margin expansion.

The opportunity that we put into play years ago about trying to get scale in our fixed expenses.

Shortens the payback period, which allows us to invest greater dollars in areas to grow the business and we feel and I mentioned in my opening remarks, a bunch of areas that we're focused on, I don't expect all of them to work, but we're excited about each of them and we're going to continue to invest in these areas and we think it will give us a higher probability of having higher growth rates for not only the years to come, but the decades to come..

Okay. That makes sense. And then I guess going back to David's question on the seasonality and gross margin, Tricia.

Explain I guess why there would be seasonality in the business, I mean, I understand allergy and things like that, but those can't be a big, big driver of claims or is it?.

I would say no single thing is a big, a big driver, part of it just has to -- part of it just has to do with the fact obviously think about it in our revenue, revenue is recognized kind of equally over a time period versus claims are recognized as the information comes in.

So the number of holidays can impact whether there is more week days versus weekends in a given period can impact it slightly, it's all -- quite subtle, like what that's coming quarter in Q1 has an extra day with the leap year an extra day it means we'll get slightly more claims than we would otherwise get in a Q1 comparable.

These are all very subtle slight things and I would say a 1% variability on gross margin in general is very slight, in this business. So I get back to what I said earlier, which is these things are interesting on a quarterly basis. But when you're looking at trends and understanding how we're doing as a business.

Looking at things annually is much more representative, especially in these areas..

Got it. That makes sense and then Darryl last one from me.

Can you give us a little bit of detail or color and thought behind some of the new policy changes you guys are thinking about you're trying to make it look like you had tried to ask some of the state regulators for changes allowing you to make mid-term changes to deductibles or existing policies.

Just wanted to see what was going on behind that?.

Well, let me stand back for a second and kind of paint the industry.

I think there is roughly three buckets of products there is low ARPU products that have very restrictive policies that would not cover things like -- congenital or hereditary issues which is code for things most likely to happen to a breed, they tend to have things like fee schedules, they tend to have rules like if you have a problem this year, you won't be covered the next year.

And those are a ways to drive low monthly costs. Then you have another bucket, which are kind of your mid-range products and I think the mid range products are the ones that have is where as most people are kind of centered on right now and if you look at most of the companies that have had market share gains, the kind of in that bucket.

And those ones have things like longer waiting periods and they have, they automatically increase rates because pets have birthdays they have limits in caps, they have longer exclusions. They're all reimbursement models. But they kind of fall in the middle bucket and they might be what I would call middle medium ARPU products.

Trupanion's product, which is designed for our veterinarians have the confidence to recommend is the broadest coverage. Not only is it the product coverage because we target $0.70 on the dollar, we believe it is the highest targeted value proposition and you couple that together with our ability to pay hospitals directly with our patented software.

And you end up with what we believe is about service. When we think about creating new products, as I mentioned in our other revenue will have strategies for the kind of the low and the medium ARPU in the years to come.

But we're also trying to figure out what would it do to have a product that would have higher conversion rates and higher retentions with higher product coverage and that we currently do and that's an area that we will probably test over the next one to three years. We don't know if we'll ever be able to exceed what we currently have.

But we'll certainly look at testing it. And I think, we mentioned in our opening remarks kind of the combination between the patents we have and these new 15-year agreements with people in animal health.

They all give us kind of incrementally better positioned to understand some things about data, but really, but enhancing our customer experience for the long term and we're going to design products and features around the areas that we have our mode..

Thank you. Our next question comes from the line of Mark Argento with Lake Street. Please proceed with your question..

Hey, this is Jaeson Schmidt on for Mark. Just a quick question on the competitive landscape, there is recently a scratch pay a private company that's offering payment plans for pet services that just to raise some money.

Just curious how you view some of these financing plans bidding into the broader competitive landscape?.

Well, the financing plans have been in the space for decades. I think there is always an opportunity for companies to come in and either provide either a better customer experience or a differentiated product. I know that in the last 10 years I've seen probably five or six versions of this, I think most of it is dominated right now by one player.

And I think it's solving a different problem. This is for people that didn't have the foresight to be able to help budget in advance and it's a safety net for pet owners that don't have it. I don't really think it cannibalizes our business, one way or the other.

When we're looking at less than 5% market penetration today and maybe one day getting that to 25% is going to need to be solutions for the other 75% of pet owners out there and the financing options, I think are interesting and could be helpful.

There are other areas, which I talked about is the wellness products which are things to pay for, help to budget or get a return on investment on things that the pet owner knows they're going to need to pay for vaccinations fully controlled.

And you know often what we've seen in the past as people to try to package and act on their plan, with the wellness plan.

And we don't think that really provides a good value proposition for the consumer, we strongly believe that wellness plans need to be provided by veterinarians and a lot of the veterinarians are offering them and they can do it, where they are, there is a return on investment, here's $100 of stuff that you need to do every year, and we'll give it to you for $90 record in the monthly payments if you come back to us.

So I think there is a place for wellness plans provided by veterinarians. I think there is a place for high quality medical insurance. And I think there'll be a place for financing for those people that didn't have the foresight to buy medical insurance..

Thank you. Our final question comes from the line of Greg Gibas with Northland Capital. Please proceed with your question..

Good afternoon, and thanks for taking my questions. Just when we think about the blended conversion rates. I think you said previously that they were above the 30% range, roughly, how should we think about how those have trended over time.

Would we expect those to maybe go office marketing and you know marketing effects kind of our more effective or with those maybe level off the market becomes a little bit more saturated.

Any color you can provide on that trend would be beneficial?.

Well, we did talk about that at our Annual Shareholder Meeting and the teams that are working on it gave a lot more visibility. Over time our conversion rates have been trending up. I think it is a partly as brand awareness and it's -- the other one is being able to distinguish our share.

The value proposition to a consumer and needing to be able to do that over multiple mediums, including mobile phones, online, video, etc. We are investing significantly in this area for us. We expect that we will outspend other people in this category for the years to come and our expectations as it will be able to get progress year-over-year.

I wouldn't expect every quarter to have progress it's going to be a lot of test and learns and it's not always up into the right, but if I think over the next five to 10 years, we would expect that to increase. And it really does help give us leverage..

Yeah, that makes sense. And then closer to the beginning of this year, you had 10 open territories that were actually included some pretty sizable markets.

I guess, I was just wondering if you could provide an update on how those investments in new territory partners have been going?.

We've made, I'll get more details in my shareholder letter, but we are focused last year and this year on not only adding the number of territories or the number of active hospitals, but we've really been bearing down on same-store sales and trying to figure out how to get our software and build out our inside sales.

We're trying to do both at the same time doing both, it's difficult, but we've made progress, both on adding hospitals as well as same-store sales this year and we'll provide more details as the year concludes..

Got it. Thank you..

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