Greetings and welcome to the Trupanion Inc. First Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Ms.

Laura Bainbridge, Head of Corporate Communications. Thank you. You may begin..

Good afternoon, and welcome to Trupanion's First Quarter 2020 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 costs, internal rate of return, adjusted EBITDA and free cash flow.

When we use the term adjusted operating income or margin, it is intended to refer to our non-GAAP operating income or margin before new pet acquisition. 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. With that, I will hand the call over to Darryl..

Thanks, Laura. Good afternoon, everyone. I hope this call finds you safe and healthy. Just a few days ago, we published our annual shareholder letter. I'll review a few highlights today, but would encourage you to read it in its entirety. Sorry, in advance for the length.

We intend to hold a more fulsome discussion at our annual shareholder meeting on June 11. Similar to past years, we will have members of the management team available in a Q&A focused forum. It had been our hope to host at our headquarters in Seattle, but we will be moving to an online format this year. We hope you will join us.

At Trupanion, we've been working remotely since early March. The move was initiated proactively to support pet owners, employees and community members amid COVID-19 concerns around the world. In just a handful of days, we were able to transition an estimated 90% of our workforce to a remote work environment. We were well positioned to do so.

At Trupanion, we know that pets get sick on weekends, holidays and after hours. And that's why we designed our workflow to provide 24/7 365 support. Prior to the transition approximately 50% of our workforce, including our team of territory partners worked remotely.

Throughout this period of change, the team has done a tremendous job stepping up and reinforcing our commitment to the pet owners, who have placed their trust in Trupanion. In fact, since the move customer experience metrics such as length of time to answer phone calls, and the time to pay veterinary invoices have been better than ever.

I've never been more proud of the team. Trupanion was designed to help pet owners budget and care for their pets when they become sick or injured. In times of uncertainty, our assurance is even more important. I can think of several other crises in our 20-year history, but not one that so clearly embodies the challenges of an unexpected health crisis.

This will be an opportunity to reinforce our positioning to let every veterinary hospital and every Trupanion pet existing or new know we are here and ready to stand behind them. I'll talk a bit more about our plans to do so momentarily, but first I'll recap a few highlights from the first quarter.

Total revenue grew 28% year-over-year, and we ended the quarter with over 687,000 total enrolled pets. Adjusted operating income grew 26% to $12 million $11.4 million of which was from our subscription business.

In total, we deployed $9.7 million of our adjusted operating income in pet acquisition spend related to our subscription business where our estimated internal rate of return was 38%. Our first quarter results highlight the reoccurring nature of our business model supported by high retention rates and an underpenetrated market.

In our 20-year history we've experienced multiple system shocks including 9/11, the dot.com crash, the 2008/2009 great recession, and regional recessions including the oil induced crisis in Alberta in 2015 and 2016. Trupanion has persisted and grown through these periods of change and disruption.

In our history, there has not been one quarter where we have not had more revenue than the previous quarter. When the economy struggles, the need to help loving responsible pet owners, budget and care for their pets only becomes more important.

With each system shock, we saw a temporary slowdown of new enrollments as people digested changed or uncertainty. The shock period varied between weeks and months, following which veterinarians became busier again and the world began to normalize. When the shock was followed by a recession, messaging at the veterinary level strengthened.

Pet ownership during the 2008 recession grew. I've likened the behavior during the quarantine period of this pandemic to that which we see during a snowstorm. For pets in need pet owners, particularly those with Trupanion will seek out hospitals to ensure they get the veterinary care their pets require regardless how deep the snow is.

Remember Trupanion is not wellness. We are accident and illness. We cover that which cannot be foreseen. But for those pets, who are not in immediate need, owners will sit tight, postpone their routine or wellness exams or leverage phone or email for non-urgent veterinary advice. In short, they'll wait for the storm to pass.

As the pandemic took hold in the quarter, veterinary visits dropped on average by about 20% a trend that continued into April. As a reminder, wellness visits act as a primary lead source for Trupanion, and we saw a corresponding decline in leads through the veterinary channel during the same time period.

Interestingly, over the past several weeks, we've seen other channels increase in both lead volume and efficiencies. Lead quality is high, and in early Q2, we recorded several consecutive days of record conversion rates. I'll say it again.

In times of uncertainty, the need for our product and the ability to budget for unexpected veterinary care is even greater. This is evident in our monthly retention, which remains in line with recent historical levels even though we saw a small increase in churn for a two-week period.

Net, we exited the quarter at a slightly reduced revenue growth run rate within our subscription business. But as Tricia will discuss, we continue to expect respectable revenue growth in Q2. We are well positioned to navigate the evolving landscape including by adjusting our PAC spend in relation to market and channel opportunities.

This is not a new skill to Trupanion. We continuously evaluate how much we can spend on a per pet basis while operating within our guardrails of a 30% to 40% internal rate of return. This discipline is critical in the allocation of our capital. It is important to highlight that revenue growth and cash flow are strategically linked.

In periods of slower revenue growth and reduced PAC spend cash flow and profitability improves. After the quarantine stage, we will likely enter a recessionary period that may last months or years. But unlike prior recessions, this one is the result of an unexpected medical problem. This is at the center of our wheelhouse.

The challenges of an unexpected health crisis will be at the top of mind for pet owners and veterinarians. At Trupanion, we understand the power of the pet, and the love, joy, and healing that they bring to the family every day, especially in times like these.

We expect the need for our product among pet owners to grow the messaging at the veterinary level to strengthen and the value of our patented software to be even greater. Our team of territory partners is at the core of these efforts and of the veterinary communities they serve.

Today's pandemic requires our field team to be creative in finding opportunities to interact with and support veterinarians and their staff. Unsurprisingly, they have risen to this challenge. We ended the year with 130 territory partners in the field visiting nearly 22,000 veterinary hospitals across North America.

In 2019 the number of active hospitals those that had at least one pet enrolled with Trupanion in the past three months averaged 10,315 during the year. We ended the year with over 4,850 hospitals with our software a number that has since surpassed 5,000 and about three dozen inside account managers.

The combination of our software and account managers continues to deliver encouraging same-store sales results with a sustained uplift in the number of pets added per hospital per month of 48%.

The ability to pay veterinary invoices directly on behalf of our pet owners cannot be replicated nor understated, especially in times of economic and financial uncertainty. In the coming months we expect to lean into this messaging. In 2019 we paid over $65 million in veterinary invoices through our software of which an estimated 32% were automated.

Like conversion rates automating claims provides benefits across your organization and pushing the team to get above 50% in 2020. Paying the invoice instantaneously at checkout will remain a competitive advantage and key differentiator when communicating our value proposition to pet owners.

We continue to test and iterate our messaging to prospective members with the goal of improving our overall conversion rates. As we discussed in more detail in the shareholder letter, our efforts to do so during 2019 did not move the needle, despite significant investment year-over-year.

Though as I noted earlier in my remarks we have reason to be optimistic. Customer education does not stop at the time of enrollment. We need to become proficient at reinforcing this content to new members to help increase first-year retention which along with building our refer-a-friend and add-a-pet channels is key to our goal of nirvana.

In 2019 pet owners adding pets or referring friends represented an average of 0.74% of our overall monthly book. Churn for the year averaged 1.42% per month the difference between the two the gap to nirvana was a 0.04% improvement over 2018. In summary our financial position is solid our positioning strong and our capital deployment disciplined.

We are operating with high retention rates in an underpenetrated market. Execution is difficult yet rewarding. And with that I'll hand the call over to Tricia..

Thanks Darryl and good afternoon everyone. I'd like to echo Darryl's sentiment hoping you are all safe and well. On today's call I will discuss our first quarter results in more detail including the trends that we saw exiting the quarter on the heels of the COVID-19 pandemic.

Along these lines I'll provide context into our business model and financial levers including how we managed to our guardrails in today's environment. Finally I'll discuss our outlook for the second quarter and full year 2020.

Turning to our first quarter results, at a high level our performance was in line with our expectations, highlighting our highly visible and recurring revenue model. While we are not immune to the economic challenges the COVID pandemic presents our high retention rates and underpenetrated market help deliver consistency during periods of instability.

Total revenue for the first quarter was $111.3 million, up 28% year-over-year and led by consistent pet enrollment in both our subscription and other business segments. Subscription revenue was $89.5 million in the quarter up 21% year-over-year. Total enrolled subscription pets increased 14% year-over-year to over 508,000 pets as of March 31.

Lead growth within our veterinary channel was strong to start the year, but as Darryl mentioned slowed in mid-March due to the pandemic impacting wellness visits. Overall lead quality was high with conversion improving over the same time period. We estimate this slowing resulted in about a thousand fewer new enrollments in the quarter.

It's worth highlighting that nearly 96% of our subscription revenue for the quarter was from our existing book of business, further demonstrating the impact of strong retention rates on our business model. Average monthly retention was 98.59% compared to 98.58% in the prior year period.

We continue to see strong retention rates in Q1, but did see a small uptick in COVID related cancellations of about 500 pets at the very end of the quarter. We have not seen this trend continue into Q2 and as of today see retention rates consistent with historical averages.

Net we estimate the impact of COVID-19 on our pet enrollment at approximately 1,500 subscription pets in the quarter. Monthly average revenue per pet for the quarter was $58.96, an increase of 5% year-over-year and in line with our historical average of 5% to 6%.

Our other business revenue, which is comprised of revenue from other product offerings that generally have a B2B component totaled $21.8 million for the quarter an increase of 71% year-over-year. Year-over-year growth in our other business segment reflects an increase in the number of pets enrolled.

We saw strong growth in all product offerings within this segment. Subscription gross margin was 18% of revenue in the quarter within our annual target of 18% to 22%, compared to 19% in the prior year period. Our gross margin was comprised of 72.6% paying veterinary invoices and 9.1% variable expenses as a percentage of revenue.

As a reminder, February included a leap day this year, which means an extra day of veterinary invoice activity compared to Q1 2019. We estimate this additional day impacted our veterinary invoice expense and margin by 0.7% as a percentage of revenue.

Absent this impact, our margin would have been in line with the prior period at just under 19% of revenue. Additionally, I want to note that the decrease in wellness visits that Darryl mentioned did not result in any meaningful impact to veterinary invoice expenses.

Our product does not cover predictable costs such as wellness, but rather the unexpected accidents and illnesses.

While we've seen some fluctuations in this expense over the past two months, we have not seen any significant decreases in our veterinary invoice expense as pets are still needing Trupanion when they are sick or injured and we have been here for them. Total gross margin was 16%, which includes our lower margin other business segment.

Total fixed expenses in the quarter scaled to 5.5% of total revenue down from 6.7% in the prior year period. We generated $12 million of total adjusted operating income during the quarter, an increase of 26% over the prior year period. Net loss in the quarter was $1.1 million.

Adjusted operating income from our subscription business segment during the quarter was $11.4 million or 13% of subscription revenue. This margin expanded 40 basis points over the prior year period. As a reminder, our target margin profile for our subscription business is to generate 15% adjusted operating margin before our new pet acquisition spend.

Achieving our target margin profile of 15% will required a 1% to 2% improvement in cost of goods as a percentage of revenue as well as a small amount of incremental scale in fixed expenses.

We expect to close the gap on fixed expenses by year end and will continue to move the ball forward on initiatives aimed at pricing as accurately to our 71% value proposition as possible.

During the quarter, we deployed $9.7 million of our adjusted operating income to acquire over 36,000 new subscription pets, resulting in a pet acquisition cost of $247 in the quarter. This compared to $7.7 million in the prior year period to acquire approximately 34,000 new subscription pets resulting in a PAC of $205.

I'll take a moment to reiterate that we are continuously evaluating our PAC spend, ensuring we operate within our internal rate of return guardrails and to reflect current market opportunities. We continue to monitor the market real-time and are flexing our spend up or down as needed.

Our revenue growth will in part depend on the opportunities available to us to deploy capital within our targeted internal rates of return. As a reminder, we view these revenue growth and cash flow measures as strategically linked. In periods where we're dialing back spending, we would expect to see greater free cash flow generation.

While we believe the most value is created through the compounding effects of cost effective pet acquisition, we do not intend to deploy capital if we cannot achieve our targeted 30% to 40% returns.

In the first quarter, we estimate our internal rate of return for a single average subscription business pet was 38% at the top end of our 30% to 40% target. As we noted on the prior call, we are now isolating our subscription business unit economics in our calculation of internal rate of return.

We believe this is appropriate since it is the focus of our acquisition spend. Additional details behind this calculation and the margin profiles for our two business segments can be found in our supplemental materials on our Investor Relations website. Free cash flow was $1.4 million during the quarter.

Operating cash flow in the quarter was $2.9 million compared to $4 million in the prior year period. Adjusted EBITDA was $2 million for the quarter, up from $1.7 million in the prior year period. Net loss was $1.1 million or a $0.03 loss per share compared to a net loss of $1.3 million or a $0.04 loss per share in the prior year period.

Trupanion's balance sheet remains strong with over $100 million of cash and investments and ample availability on the company's existing line of credit. At March 31, we had approximately $29.8 million of long-term debt. I'll now turn to the outlook for the second quarter and an update for the full year of 2020.

While we cannot predict the future, especially during these uncertain times, the recurring nature of our business model provides us with a higher degree of visibility into our future performance than most. Our subscription revenue is being impacted by a change in the foreign exchange rate between the U.S.

and Canadian dollars from 76% at the end of January to 70.5%, which was the approximate rate at the end of March. This has a $4 million negative impact on full year revenue if rates remain consistent through the end of the year.

Although we have monthly recurring revenue, we have also widened our guidance range to account for some uncertainty around the overall COVID-19 impact. As a result, we are now updating total revenue for the full year to be in the range of $471 million to $478 million or 24% year-over-year growth at the midpoint.

For the second quarter, we are expecting total revenue in the range of $114 million to $115 million, representing 24% growth at the midpoint or 26% growth excluding foreign exchange conversion impacts.

At these updated revenue levels, we expect total adjusted operating income for the year to be around $55 million with approximately $52 million coming from our subscription business. This compares to our prior guidance of adjusted operating income for the full year of $57 million with approximately $54 million coming from our subscription business.

Including the $4 million impact of FX and accounting for some uncertainty around COVID, we are now updating our full year subscription revenue guidance to be in the range of $376 million to $381 million, 18% growth at the midpoint or 19% growth excluding foreign exchange conversion impacts.

Our other business segment got off to a good start to the year and we're now expecting revenue from this segment to be around $96 million for the full year and adjusted operating income to be approximately $2.7 million. As I mentioned earlier, our total pet acquisition spend will flex up or down as needed in response to market opportunities.

With this in mind, we estimate our allowable acquisition spend per pet within our 30% to 40% internal rate of return guardrails is $235 to $270 for the full year.

At the midpoint, this would equate to total pet acquisition spend for the year of around $41 million resulting in slightly higher profitability and cash flow compared to our outlook earlier this year. In summary, we're pleased with our Q1 performance and our ability to navigate through the current market landscape.

Our financial position is strong and we will continue to be disciplined in the allocation of our capital. Thank you for your time today and I will now turn the call back over to Darryl..

Thanks, Tricia. Before we open it up to Q&A, I'd like to highlight a few upcoming investor relation events. This weekend we'll be hosting our annual Q&A around the Berkshire-Hathaway Annual Shareholder Meeting. Unlike prior years, the event will be hosted virtually and will feature our executive team.

To maintain the feel of the event, space is limited though we intend to post a replay to our IR website shortly after the conclusion of the event and available for a short time only. In May, we'll be participating virtually in Stifel's Jaws and Paws Conference. And remember to mark your calendar for June 11, our annual shareholder meeting.

Similar to Berkshire, space in the webinar event will be limited, but we do intend to stream the event live on the investor relations portion of our website. Additional details will be forthcoming. With that, we'll open it up for questions.

Operator?.

Thank you. [Operator Instructions] Your first questions comes from Mark Argento with Lake Street Capital. Please proceed with your question..

Hi, good afternoon. A couple quick questions.

In terms of the guidance and when you're thinking about more particular kind of the full year guidance, what are you anticipating or what did you break in there in terms of expectations of some type of return to normal in terms of stay at home? And more specifically what kind of expectations do you have in terms of vet traffic and vet visits given that's a pretty decent part of your customer acquisition channel currently?.

Thanks Mark. So in guidance, we thought about it in a few ways. One of the reasons that we wanted to maintain guidance was that we've got high visibility with strong retention rates and we thought it was only appropriate to kind of update it.

We saw for about a two-week period at the end of the quarter and for about a one or two-week period in the beginning of April vet visits down by about 20%. We have seen in the last two to three weeks an uptick in the number of leads we're getting.

It has not yet fully reached 100%, but we put into the guidance that there would be some type of hesitation. We obviously don't know how long something is going to continue on for if it's going to go on for months or weeks. But as we've seen in the last few weeks vet visits are really kind of starting to tick back up.

The guidance that we really thought was important for us was showing the impact on our adjusted operating income because I think in times of uncertainty the most important outlook for shareholders and investors is to understand cash.

So with our guidance we lowered our adjusted operating income from about $57 million to $55 million, so just about a $2 million reduction. But as Tricia mentioned in her opening remarks, if we would have slower growth, we would have about an additional $2 million of EBITDA. So it's just kind of a wash.

So we're seeing or anticipating slightly lower growth or leads from the veterinarian.

We're not sure how long that's going to continue, but as I mentioned in the opening remarks, we're also seeing some really strong retention rates, conversion rates and growth in places like referral and Add-a-Pet as our customer experience -- the team has kind of hit it out of the park..

It's very helpful. And just a follow-up. In terms of additional potential pet acquisition channels, we're hearing from a lot of other companies the ad environment, CPMs down pretty dramatically.

Have you guys looked at some of the traditional media and social media in terms of maybe cranking up ad spend? Or is it just not the right environment for that?.

We'll certainly be opportunistic. I mean, this quarter is really no different than any month or quarter for the company. Our goal is to deploy as much of our free capital as we can getting between a 30% and a 40% internal rate of return.

What the team did in Q1 with just kind of a big shock hitting for the last month and maintaining a 38% internal rate of return I think is absolutely impressive. We will be opportunistic where we can, but we're going to stay within our guardrails. We're not going to try to grow faster than we need to. We are going to be very concentrated on our cash.

If this is like we move into a typical recession mode, there will be opportunities where there will be lower acquisition buys and spend in some D2C. The loss would be some areas on conversion rate that we can spend more money on. We'll continue to focus on them and the team has really been dynamic in how they've been moving week-to-week..

Great. Thank you..

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

Thanks for taking my question, and I hope everyone is safe. Darryl, I just wanted to go back to the three competitive modes you outlined in the shareholder letter, which are direct pay automation and pricing.

Maybe looking beyond COVID, do you feel like your business in sort of a broad adoption could benefit in the near-term if you were to be more aggressive pursuing any of these three pillars and allowing your margins to sleep in the near term? And then secondly, you called out approximately 11% active hospital growth in 2019.

What's your view on active hospital growth this year in light of the pandemic?.

Okay. So there's a couple areas to that questions. There's a number of areas that I outlined in the shareholder letter and thanks for bringing that up. For those that haven't had a chance to read it, I would recommend that they do.

We differentiate our products not only by having the broadest coverage what we believe is the highest value proposition, the best customer experience.

I think when you look about our ability to pay hospitals directly and getting our software installed and you layer on top of that an increasing amount of claims automation, that customer experience is going to be more important at a time when people are concerned about their finances both from the veterinarian standpoint and the pet owner standpoint.

I think that is going to be the biggest area of leverage of strength. The other one is we've really been able to get our variable and fixed expenses at operating scale over the last 15 years, and I think that puts us in a really strong cash position if we enter a long recession.

So those are the two areas that I think are the most obvious and helpful to Trupanion. For the entire category, the demand or the need for a way to budget for if and when a pet becomes sick or injured is even greater.

The fact that we have a national sales force calling on veterinarians and having the relationship, I think will enhance it because this is not just a consumer message, but veterinarians are going to see and understand the need of having a higher insured client base.

So not only because of what we've seen historically, but even what we've seen in the last couple of weeks of lead volume and conversion rates, we're very confident that we will fare extremely well over the next several months and the next year.

We are planning to be able to grow slower than we might have otherwise for COVID and we'll just see where our opportunities lie. The last part of your question talked about growth in active hospitals. That's a tough one. We grew last year about 11%.

Our goal would be to grow something similar and in the shareholder letter it talks about the impact of adding the number of stores and how it's ultimately one of the major underpinnings in the value of the company. So I would like to be able to grow it another 11% or 12%. It's a little early to say with COVID.

On one side, I think the demand or need is going to be higher for the veterinarians. On the other side, I think it depends on how quickly the territory partners are able to get back into the hospitals. We are interacting with them both on text message, voicemail, email.

We've been able to do that, because we've made historically over a million face-to-face visits and we have strong relationships. So when we look at trying to expand the number of hospitals, it's going to take earning the trust. Another kind of data point. We've had a number of webinars that have been both consumer and veterinarian facing.

We've had record attendance there. So, I think there's some places that would say I could be bullish and growth on the number of active clinics might accelerate. On the other side with more lockdowns or quarantine it might be harder. So we'll have to just wait to see how it plays out..

Great. Thanks very much for the color..

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

Great. Thank you. I have a follow-up on the same-store sales comment that you made. So in the shareholder letter, you mentioned that the growth in same-store sales in 2019 was driven by increased leads. Well active hospitals also helped. Benefiting the number of hospitals that have installed software. So 4,850 in 2019. Now over 5000.

What's the goal for this year and could you also remind us, as you have more hospitals install software and have more account managers. What are some headwinds that you face in the ability to accelerate that process? Thank you..

Well, for those that don't have all the details our software installs it's a no-cost -- it's a free software to install with veterinarians. It integrates with practice management software in as way that an existing client with Trupanion is able to with the click of a button have an invoice sent to us.

And in many cases, we're paying the hospital in under 15 seconds. If it needs to be manually adjusted it's being done typically in under five minutes. That customer experience is unique to Trupanion. I believe it's going to become more and more important.

The biggest headwind that we have of getting more installed is really the timing from the veterinarian. We're busy. Can we do it next month? We've got a lot on the go. It will be interesting to see if COVID will increase the urgency. But we'll have to wait and see. I think it's still a little early.

All else being equal prior to COVID, we wanted to make sure we were adding more hospitals than we did the prior year. So getting to 6,000 to 7,000 hospitals with software would be a good result in 2020..

Thanks, Darryl.

Thank you. Our next question comes from the line of Jon Block with Stifel. Please proceed with your question..

Great. Thanks. Good afternoon guys. The first one is just on the gross adds. I think by our calculation, we had gross adds up about 7% year-over-year. I think Tricia you gave a couple reasons why that might have been depressed to the tune of around 1,500 pets. But you also mentioned improving conversion rates more recently.

So, how should we think about the gross adds for the year Darryl in terms of the trend line? Should that 1Q '20 gross add number as a percentage should that be the low watermark for the year?.

Hi, Jon. I'll give a little bit of color on the numbers and then Darryl can pipe in more on just the overall strategy. So, gross adds in Q1 was 36,218, so just a little under that 7% mark. We estimate there was about a 1,000-pet impact right in the last couple weeks of the quarter on actually Q1.

With the conservatism on the subscription business, we only added about three million of conservatism from the prior guidance when you back out any kind of like for like FX. That was really to account for some uncertainty particularly in Q2 is the recovery faster or slower.

So, currently within our guidance, Q2 is more of the low point and then a ramp up as opposed to Q1 in terms of the numbers..

Okay. Got it. And then maybe Darryl this one is for you. Just so many initiatives that you're working on to maybe better convey the direct pay ability of Trupanion. And you mentioned that several times. It seems like that's going to be a focus for the company.

I'm just curious is that solely Trupanion's responsibility or do you believe or do you hope that any of that resides with the veterinarian as well in terms of being able to convey the advantages of Express? Thanks guys..

Well, I -- we expect that the benefit is communicated by everybody in our ecosystem. So it happens on our sales team that's here 24/7 to talk to pet owners. It should be on mobile devices. It should be clear online. We should be seeing it in our press. We should be seeing it in veterinary communication.

We should be seeing it from our existing clients telling their friends in their neighborhood. And all of those are the impacts that we have seen historically. I still believe there's a lot of opportunity to do a better job particularly online, but we have made progress and we've seen conversion rates upticking year-over-year.

So we're encouraged by the strategy..

Thank you guys..

Our next question comes from the line of David Westenberg with Guggenheim Securities. Please proceed with your question..

Hi. Thanks for taking my question. I apologize if I ask anything, I've been hopping between calls today. So a question that I got actually a lot today was on a competitor entering kind of an adjacent space to what you're doing.

Now I know for years and you've addressed this a lot on the call about how you've competed with large companies before and there's always a dozen or so competitors in the market at any given moment. This one might be a little bit different, because it would have a national sales force.

So just given the call volume I did want to just maybe ask you to address that question..

Sure. Thanks David. I believe what you're talking about is the press release that came out from Zoetis talking about how they have a wellness plan that's integrated with an accident and illness plan. The press release kind of talks about it being an innovative and new product.

From a reality standpoint, it is an existing accident and illness plan that has been in the marketplace for about 10 years underwritten by a third-party company. And they added a wellness component to it. We've competed against many companies that have had a combination of accident and illness historically.

Typically, and if you watch market trends, wellness plans integrated with accident and illness have much lower retention rates. The reason for that is wellness plans are typically sold as a return on investment.

So a consumer says, I'm going to buy a wellness plan because it's going to be cheaper for me to buy it than if I was to outlay the cash on my home. Now when it's being offered by a third-party company, it's very hard to live up to that promise. I think in the press release the quick math on it is about $190 worth of wellness.

If you went out to Costco or Amazon or Chewy and bought the similar wellness products and added on the exam fee and the vaccines it's about $140 worth of value. So it's a similar scenario where it's going to be hard for the consumer to feel the return on investment.

And then you add that to an existing accident and illness product that has lower coverage. It would be interesting to see if they want to use their national sales force for it, because the wellness plans are actually, I would see, direct competition to wellness plans being offered by veterinarians.

And in my view, the only time a consumer should buy a wellness plan is when it is being offered by the veterinarian. Now the reason for that is, the veterinarian can actually provide it at a discount and they do it for a reason. I will give you $300 worth of stuff for $270 break it into monthly payments if you come back to me.

That is a benefit to the veterinarian, because it creates a sticky client and it's a benefit to the pet owner. So we are completely supportive and work in many cases in the veterinary industry in parallel with existing wellness plans offered by veterinarians.

But when it's being offered by a third-party company it's harder to offer the same value proposition. Zoetis is certainly a very capable company and I'm sure they will do well in the marketplace, but I think that strategy is something different than what we would do and primarily driven about wellness retention rates over time..

I realize you've had to answer a similar type of question on a conference call yearly for like the last five years. But it was a topic of discussion today..

I'm glad you brought it up..

So can you just talk about the cancellations at the end of the quarter? Five-hundred cancellations, I think you said at the end of the quarter and then it stopped.

Can you give a little bit more explanation in terms of the theory behind? How it happened like that and why this later impact to COVID had no change in that kind of turnover? It just seems odd for me to conceptualize that..

Yeah. A lot of people -- and this is similar with wellness plans. Wellness plans can also often be considered disposable or discretionary. You can turn them on and off. An accident and illness plan a way for people to budget particularly for our target market. They don't consider our product disposable or discretionary.

That's why through previous recessions, and other times, we have maintained very high retention rates. What typically happens when, headlines are dominated like 9/11 or any other dramatic change is you'll see a very short little spike. And we saw a spike that was for about a two week period.

And we had an increase of about 500 cancellations that we otherwise would not have seen. In the last 3.5 weeks since that time, we're actually seeing very, very strong retention rates. I think that's being coupled by the fact that, we are treating our customers today than we ever have.

We're answering the phones faster paying claims faster than we've ever done. So our customer experience right now is top notch, so a call out to the team. But I think it also underpins the demographic. If you're selling a product based on price, these are not people that value the product to start with.

If you're selling a product recommended by veterinarians that has the broadest coverage, the best value proposition and the best customer experience, you would expect high retention rates..

Got it. Thank you very much..

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

Good afternoon, Tricia and Darryl. Thanks for taking my question.

First, how did I guess next pet additions in March compare to other two months in the quarter? And maybe if you could break that down in terms of the percentage of total adds in the quarter? Just because you mentioned that you saw them starting to tick back up in April despite the 20% or so decline that you saw at the end of March.

So just wondering how would you think about the level that you're maybe currently seeing relative to those 20% declines?.

Hi, Greg, I would say the net additions we had a run rate going into January and February that was obviously net about 1500 pets higher than what we experienced in March. So I mean I would think about it that way. The 1,500 net impacts were all within the last couple weeks of the month. And then, we've obviously seen as that's how we entered Q2.

And then, every week we're seeing things kind of trend a little bit better week-over-week. Going into April was definitely, I think, the lower part of our lead and our enrolment volume and then it's been ticking up intellectually week-over-week..

Got it, okay. That's helpful. And then, in your annual report card you did mention the solid progress just towards achieving nirvana. And it looks like the spreads between referrals. And churn has reduced a little bit compared to 2018.

So I guess, I was just wondering if you could maybe elaborate on the categories or territories where you saw the success.

And then maybe how we should think about that improvement difference between referrals and churn in 2020 relative to 2019?.

Greg, I'm real excited about what the team is doing around nirvana for us. And I think there's a lot that I'd like to be able to share. The format I'd like to share, it is really at the shareholder meeting when we can actually address and talk to the teams that are implementing it. But we are looking at it both on regional and territory basis.

We're looking at it in a very granular way. So the most important part is we've been focused. We're making progress and at the shareholder meeting you can ask the teams directly, what some of the tactics they’re doing..

Okay, thanks guys..

Thank you. We have reached the end of the question-and-answer session and the conclusion of today's call. Thank you for your participation. You may disconnect your lines. And have a wonderful day..