Greetings, and welcome to Trupanion, Inc.'s First Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Laura Bainbridge, Investor Relations, Trupanion, Inc. Please go ahead. Good afternoon, and welcome to Trupanion's First Quarter 2022 Financial Results Conference Call. Participating on today's call are Darryl Rawlings, Chief Executive Officer, and Drew Wolff, Chief Financial Officer. Similar to prior earnings calls, Margi Tooth, President, and Tricia Plouf, Chief Operating Officer, will be available for the Q&A portion of today's call. 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, and good afternoon, everyone. Earlier this week, we published my annual shareholder letter. Outside of our annual meeting, my letters are intended to be the best source of information to educate yourself on Trupanion. It explains the way we think about and run our business. I'll touch on a few of the highlights today, but I would encourage you to read it in its entirety. Turning to Q1. The year is off to a strong start, as shown in our financial results. Adjusted operating income or the funds generated from our existing portfolio of pets increased 29% to approximately $22 million. You've heard me say this before, but it's worth repeating. The vast majority of Trupanion's intrinsic value is derived from our core subscription business. In the quarter, approximately 90% or $20 million of our adjusted operating income was generated from our subscription business. This represents growth of 26% year-over-year. As a percent of our subscription revenue, adjusted operating income expanded 40 basis points year-over-year to 14%. In our large under-penetrated market, pet acquisition remains the primary use of our adjusted operating income. In the quarter, we were able to deploy approximately 14% more funds year-over-year or $19 million within our subscription business at a 34% estimated internal rate of return. In the quarter, we added nearly 60,000 new subscription pets in line with our expectations at another all-time high. Members with our Trupanion-branded products are staying with us longer than ever before, on average 80 months. This highlights our exceptional member experience and continues to be especially impressive in light of our accelerated growth. Improvement in our trailing twelve-month retention, coupled with expansion in our subscription adjusted operating margin, drove a 7% increase in lifetime value of a pet, which topped $730 in the quarter. In short, performance was strong, and we are optimistic about the road ahead. With many of the COVID disruptions of the past two years hopefully behind us, we are excited to get back in front of veterinarians and their staff. In my shareholder letter, I share key metrics around the veterinary channel. Active hospitals totaled 14,700 at the end of 2021. Since then, that number has continued to grow to over 15,600 at the end of the first quarter. Though face-to-face visits have been lower over the past two years, growth in active hospitals continues to benefit from the strength of our brand. As the penetration rate of Trupanion members continues to increase within individual veterinary clinic, in some markets, we are beginning to witness a flywheel effect where our value proposition and customer experience increases the confidence and trust of our product to both new pet owners, veterinarians, and their staff. With veterinarian doors opening again and territory partners back in the field, we are excited to continue to build on the momentum of this key metric. On a trailing twelve-month basis, our TruTopia gap was 30 basis points. TruTopia provides the pathway to self-sustaining growth with minimal acquisition spend. For additional details on TruTopia, please refer to our shareholder letters. Achieving a state of TruTopia is a key component of our 60-month plan, as is new products, international markets, and distribution channels, including through our partnerships with Aflac and Chewy. While it's early days, we are excited to see how both of these key strategic partnerships will play out. Long-term initiatives such as these increase the odds of us growing at sustainably higher rates for longer periods of time. For companies that are constantly reinvesting in growth, tracking value creation can be difficult. At Trupanion, we want to maximize value creation while at the same time making it easy for all of our constituents to track our progress in a very transparent way. In my recent shareholder letter, I provide more thoughts around value creation, including laying out the ways we intend to fund our growth. At our annual shareholder meeting, we provide a high degree of transparency into our business through an extensive Q&A with the team members directly responsible for the execution of our 60-month plan. This year, our annual shareholder meeting will be held on June eighth at our Seattle headquarters. This event is optimized for an in-person attendance, and I would highly encourage those that are looking to better understand our business, our strategy, and our culture to attend. With that, I'll hand it over to Drew. Thanks, Darryl, and good afternoon, everyone. Total revenue for the quarter was $206 million, up 33% year-over-year, driven by strong pet additions and continued high levels of retention in our subscription business along with continued growth within our other business. Within our subscription business segment, revenue was $139.8 million, up 23% over last year. Total enrolled subscription pets increased 21% year-over-year to over 736,500 pets. Average monthly retention, which is calculated on a trailing twelve-month basis, was 98.75% compared to 98.73% in the prior year period. Given our accelerated growth, we're especially pleased to see first-year retention continue to improve on a year-over-year basis. Continued expansion of our average monthly retention rate means we're able to invest more in our growth and target the highest sustainable lifetime value in the industry. As the size of our pet portfolio grows, so too does the value created from our high retention rates. Monthly average revenue per pet was $64.21, an increase of 2% year-over-year, and growing ahead of our cost of veterinary invoices, which increased 0.8% over the same time period. This is probably not intuitive given the headlines around inflation. Let me explain why. As a reminder, ARPU is an output of pricing accurately to our value proposition, and in the quarter, we delivered on our value proposition of 71%. While we hit our target in aggregate, we continue to refine our approach across over 1 million subcategories, including increasing or decreasing prices as necessary. Over the past year, we've worked hard to optimize pricing, leading to more growth in some areas where our loss ratio was previously too low and less growth in some areas where it was too high. This is positively impacting the overall mix of our business. For example, we are seeing higher rates of growth within the category of younger pets. Year-over-year growth in ARPU reflects this dynamic as well as our broadened geographic distribution. As a percentage of subscription revenue, variable expenses were 10%, reflecting investments in our member experience. We believe the benefit of this investment, as well as pricing accurately to our value proposition, is reflected in our increased retention. Fixed expenses were consistent with last year at 4.9% of revenue. After the cost of veterinary invoices, variable expenses, and fixed expenses, we calculate our adjusted operating income. Our subscription adjusted operating margin was 14% for the quarter, up from 13.6% in the prior year period and within 100 basis points of our target margin. We expect to continue to see scale on our variable and fixed expenses over the next 12 months, resulting in our adjusted operating margin being closer to our 15% target on an annual basis. In dollars, our subscription business delivered adjusted operating income of $19.5 million, an increase of 26% over the prior year period. In the quarter, our subscription business accounted for 90% of our total adjusted operating income. Now I'll turn briefly to our other business segment, which is comprised of revenue from other products and services that generally have a B2B component and different margin profiles than our subscription business. Total revenue was $66.2 million. Compared to the prior year quarter, this is an increase of 60% year-over-year, reflecting an increase in pets enrolled within this segment. Adjusted operating income for the segment was approximately $2.1 million. While lower margin, our other business provides scale in data and fixed expenses, and we incur virtually no acquisition spend within the segment. As a result, our total adjusted operating income was up 29% over the prior year period to $21.6 million. During the quarter, we were able to invest 14% more year-over-year or $19.2 million to acquire nearly 60,000 new subscription pets. This resulted in a pet acquisition cost of $301, an estimated 34% internal rate of return for a single average pet. As a reminder, our pet acquisition cost is fully loaded, meaning it includes marketing, sales, call center, and IT personnel that work on pet acquisition, as well as marginal advertising and promotion spend. We provide the details of how we calculate our IRR in the financial supplemental tables that can be found on our IR website. I'll reinforce that unlike some other consumer financial products where customer acquisition costs are amortized over the life of that customer, based on the nature of our monthly recurring policy, we recognize our acquisition spend up front. We recoup these costs over the duration of a pet's life with Trupanion. We also invested $1.3 million in the quarter on development costs. These are primarily related to new products, channels, and international expansion, which we expect to deepen our competitive moats. We continue to expect development expense of approximately 0.5% of revenue for the year. This resulted in an adjusted EBITDA of $1.2 million, compared to an adjusted EBITDA loss of $1.1 million in the prior year quarter. While we have ample growth opportunities ahead, we're often asked about steady-state and what this business looks like if we were keeping pet count flat. I'll provide an illustrative example, but first, it's important to highlight our TruTopia dynamic or the growing portion of Trupanion's book that comes from cost-effective referrals, pet owners adding pets or friend referrals. Of the 1.25% of pets we lose a month, approximately 95 basis points or 76% of that is being replaced by these lead sources. We refer to this frequently as our gap to TruTopia. As our book grows, our brand and its reputation also grows, and with it, the number of pets enrolling through word of mouth. When we are in TruTopia, these sources of pet enrollments entirely offset those that churn, delivering steady-state or a neutral pet count. In the first quarter, if we were to enroll just enough pets to offset churn, excluding our other business segment, we would estimate standstill EBITDA would have been around 10% of subscription revenue. This also assumes our current variable and fixed expense ratios and reflects the powerful referral dynamic in our portfolio. However, today, with our large and under-penetrated market of just 2%, we are making the strategic decision to invest for growth and increase the embedded cash flow generation of our business. Deploying greater sums of capital at a rate of return well in excess of our cost of capital over long periods of time is what drives value creation in this business. We provide additional thoughts around value creation, including the effect of growing adjusted operating income and deploying compounding amounts at high internal rates of return in Darryl's most recent annual shareholder letter. Total stock-based compensation expense was $7.4 million, in line with our expectations. This expense includes the initial amortization of our 2021 annual performance grants in February, which relate to the year-over-year growth in our estimated intrinsic value for 2021. We estimate that we increased intrinsic value by 41%, and after adjusting for cash usage, we shared approximately 1.5% of this increase with the team. We believe this level of dilution is appropriate given the value creation. I'll reiterate that the majority of our share-based compensation is performance-driven. If the company doesn't grow intrinsic value by over 10%, there would not be any expected annual performance grants. We expect stock-based compensation to be around $9 million per quarter for the remainder of this year. As a result, net loss was $8.9 million or a loss of $0.22 per basic and diluted share, compared to a net loss of $12.4 million or a loss of $0.31 per basic and diluted share in the prior year period. Turning to our balance sheet, we ended the quarter with over $259 million in cash equivalents, and short-term investments. Prior to quarter end, we entered into a five-year, $150 million debt facility with an initial draw of $60 million. Further to my previous comments on capital allocation, the facility provides us a lower cost alternative to fund our growth, including offsetting amounts held for regulatory capital requirements. With initiatives like Aflac and Chewy coming to market, we're thrilled to have additional flexibility and allow for the allocation of our discretionary income to areas where we can earn our targeted 30%-40% estimated rates of return. We approximate the cost to service this debt at less than 1% of revenue. In terms of cash flow, operating cash flow was -$3.6 million in the quarter compared to -$1.7 million in the prior year period. Capital expenditures totaled $3.6 million in the quarter, and as a result, free cash flow was -$7.1 million. Following the first quarter of 2022, I'll reiterate that we continue to target growing subscription adjusted operating income by 25% for the year. We plan to continue deploying as much capital as we are able to within our IRR guardrails of 30%-40%. We continue to be on track to ramp up several of the initiatives in our 60-month plan that, if successful, will begin to manifest in our results in the second half of 2022, but more meaningfully so in 2023. We look forward to keeping you apprised of our progress. With that, I'll hand it back over to Darryl. Thanks, Drew. Before we open it up for questions, I want to remind you of a few upcoming investor relations events. This weekend, Margi, Tricia, Drew, and myself will be hosting our annual Q&A in Omaha. This is a great venue to connect with like-minded investors. We hope to see you there. As I mentioned earlier, but worth repeating, our annual shareholder meeting will be held on June eighth. We are excited to once again host shareholders and guests at our headquarters in Seattle. I encourage you to visit in person if you are so able and to register as soon as possible on our investor relations website. With that, we'll open it up for questions. Thank you very much. At this time, we will be conducting our question and answer session. If you would like to ask a question, please press star one on your telephone keypad. Confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. We have our first question from the line of Shweta Khajuria with Evercore ISI. Please go ahead. Okay, thank you. Let me try. Shweta, are you there? Shweta, could you please repeat your question again? Can you hear me? Yes. We can now. Okay. Thanks for the question. Hi, everyone. I have, let me try two, please. On page 15 of your shareholder letter, you have this table with the active hospitals, and Darryl talked about it a little bit in your prepared remarks. I guess the question really is: Where do you think that can go? Right now it seems like your active hospital penetration is about 52%. There are 28,000 in three countries. You're at 14.7K. Where do you think that can go? The same question for, you know, 1.26 in terms of new pets for active hospital. How should we think about where that can go? That's the first question. The second question is: How do you think you did in the quarter if, in your subscription revenue or subscription pets, versus your internal expectations for the quarter? Thank you. Well, the active hospitals is a really important question. I mean, if you go back to how we build out our DCF model to value us from an intrinsic value standpoint, the biggest drivers we have is the number of active hospitals, and then the second is same-store sales. We ended the year at about 14,700, I believe. I mentioned in my opening remarks we were about 15,600. Oh, okay. When I look at certain markets that we've been in longer, I can see that we could get to the point where 80%-90% of hospitals in an area are actively recommending us, and that's what we'll be focused for in the years to come. As far as same-store sales, you know, I don't think we've seen the upper limit on that number yet. We certainly have many of our A-rated hospitals that have same-store sales of over 10 pets per month. What percentage of active hospitals we can get to that level I think is a little early. I would expect that year-over-year that we see improvements. You know, I'm not really here to speculate on the growth of that over the next five or 10 years. As far as our revenue expectations, I think I'll hand that over to Margie. Yeah, in terms of overall pets and how did we do in Q1, I think, you know, we talked a lot about momentum in the last call, last quarter, and that momentum continued right the way through the end of the quarter and continues now into April. Expectations, it was bang on. I think we are performing well. The team is very aligned. We're seeing some really strong communication and really the flywheel is turning quite nicely. All in all, really in line with the expectations and encouraged by what we're seeing for that momentum to continue. Okay. Thanks, Darryl. Thanks, Margi. Thank you. Thank you. We have our next question from the line of Maria Ripps with Canaccord Genuity. Please go ahead. Great. Thanks so much for taking my questions, and appreciate all the color in the shareholder letter. First, on your annual scorecard this year, you rate your member experience as B, while your sort of monthly retention rate continues to improve year after year. I guess, what are some areas where you think you can still improve? If your member experience is at an optimal level, where would you like to see your retention level versus 98.25% that you just reported? Well, this year in my shareholder letter, Margi and Tricia drove the scorecard, so I'll let them answer the question. Thank you, Darryl. Hi, Maria. Just as a reminder, when we were scoring this, the way that Trish and I were looking at this through the lens of we have a 60-month roadmap and let's look at the 12 months and where are our expectations in the first 12 months of the 60-month plan. Our expectations of a B were, you know, it's performing pretty well, pretty happy with it. You've seen the retention rates. We're very happy with the way that's been moving. In terms of areas of opportunity, we believe we can definitely increase the penetration rate of our software, make sure that we've got more hospitals utilizing that on a very more routine basis, on a regular basis. We're seeing it moving in a positive direction. We know when we see that being used more frequently, then the overall retention rate improves. Our member experience is better. We have less need for people to contact us because their claim is being settled. They know what's happening, and the vets are happy too. I think, you know, all in all, that's probably the biggest opportunity we have there. The teams are doing a really good job of making sure that there's clarity with their coverage, which leads to a better, more positive member experience and higher refer-a-friend. In terms of where can retention get to, our goal in the 60-month plan is 99%. We think that's as good as virtually perfect. I will tell you now, there are areas we have above 99%, so that's beyon d an A+, and we're happy with that. I think all in all, we're shooting for 99%. Unfortunately, we can't save the pets that will ultimately end up passing away, but we believe that 1% is an area that we can get to, hopefully. Trish, anything you would add? Great. Thanks, Margi. Maybe my second question is: Can you maybe update us on your progress with the Chewy and Aflac partnerships? Any color you can share on how close you are to launching with Chewy and whether there are any states that were already launched? Sure, yeah. If I take Chewy first, Chewy, really well-aligned partner. Both actually, Chewy and Aflac, very well-aligned partners. For Chewy, we are commencing imminently our phase launch. We're very excited, and we remain excited about the potential there with that partnership. You know, our core business has continued to perform strongly, while behind the scenes we've had both teams with Chewy, Aflac, and Trupanion, all of them working hard to basically get ready for these product launches. Really excited to see that coming to fruition very soon. In terms of Aflac, phase 1 launch was in March. As a reminder, the sales cycle takes a long time, so anything that we would expect to come from the launch, wouldn't hit until 2023, realistically. Just talking about what a launch means, it really means that we're starting to work with the brokers, with the Aflac team who have been partnering with us to introduce us to the brokers to have the conversations and start that pipeline opening up, which has been encouraging to begin with. Great. Thank you so much for the call. You're welcome. Thank you. We have next question from the line of Elliot Wilbur with Raymond James. Please go ahead. Thanks. Good afternoon. First question is just with respect to sort of the trends in overall vet clinic visit volumes we've seen year to date. I guess just given some of the services they're reporting, a deceleration or actually decline in overall vet visits. Wondering if that has impacted your deployment of discretionary capital at all between lead generation and conversion strategies. Let me get Tricia to answer the first part of it with kind of the data that we're seeing on the claims side and visit patterns, and then Margy can follow up. Sure. I'm happy to kick it off. You know, in general, we've seen some of those industry details as well, and we're not seeing that same trend in our data. We are seeing you know, overall increase in frequency, so kind of the frequency of invoices that come in was up a little bit over the quarter. We're accident and illness coverage, so you know, we're happy that when we're here for our members, when they need to use the product, they're using it. We're here for them. We're paying the claims. We're actually paying claims now faster than we ever have before, which is helping with that member experience. Our overall data trends within our membership base are not following that. Another data point that I'll give that looks at longer periods of time because things have kind of moved around the past two years with COVID impacts in particular at the vet hospital. When we look back to 2019 Q1 pre-COVID, our average frequency, the number of the invoices that we get, as well as the average dollar amounts per invoice are actually up compared to 2019. We're seeing the trends, we're seeing the usage, and we're encouraged by that and obviously continue to then price to our value proposition. I'll let Margi speak to kind of the lead side of it. Thanks, Trish. In terms of the leads overall and the impact on discretionary spend, one of the things we mentioned in the last quarter call was the fact that our territory partners can get back out in the field and visiting hospitals and rebuilding those relationships. We saw that in Q1. We've seen a tremendous uplift in our lead channel that's coming from the vets, the vet channel specifically. When we talk about vet traffic, that certainly hasn't been reflected on our metrics, and the vet channel for us is the heartland of everything that we do. As we think about the benefit to the business, that means that we have a more efficient lead source, and the conversion then is also more efficient because we know that we can convert at a higher rate. That ultimately then allows us to think about other areas that we'd be investing our discretionary capital. It's all in all looking very healthy from a vet perspective, and really pleased to see the impact of having territory partners back in the field and having conversations with hospitals. Thanks. I guess your comments sort of lead into my next question, but just thinking about Table 19 in Darryl's letter with that deals with the vet hospital metrics. If you think about just sort of the number of you know, high-frequency hospitals or hospitals that you're visiting within every 60-90 days, I mean, that metric is still down roughly 20% versus 2019. The number of hospitals you're calling on has expanded so that in aggregate, the number of face-to-face visits has increased. You know, how do we think about the recovery in call patterns in terms of hospitals that you're visiting every 60-90 days in terms of, you know, impacting your overall book of business? Trying to get a sense of just, you know, how important it is sort of, you know, recapturing the higher frequency of visits here versus just expanding the overall number of hospitals that you're calling on. Yeah. I mean, I think you said it very well yourself. In terms of the impact to the business, it's incredibly impactful. When we're thinking about 2019, 2020, 2021, and now where we are in 2022 with the first quarter behind us, our visit pattern has got back up to 2019 levels, which is what we were aiming for, and it honestly got there a little quicker than I think any of us were expecting. People are really excited to have the territory partners back in hospitals. The territory partners are very excited to have them going back in. The impact overall to the business is throughout the performance of the business. It helps from a lead generation perspective. It helps with conversion because the introduction is that much stronger. People understand the benefits of high-quality medical insurance. Ultimately, from a retention perspective, member experience, referral rates, we see all of that coming together to improve the experience both for the hospital but also from a member point of view. I think, you know, for us it's critical that we were getting back in the field as quickly as we could without putting hospitals and territory partners at risk. We now feel confident about that. I think just seeing the momentum that we've had over the last three months and now carried on into April will tell you just how critical that is for us as a moat and how deep that moat is because it's continuing to help us grow that lead volume. You know, I think in terms of the number of hospitals that we address, we're always looking at making sure that we can go, or we internally would refer to going wide, so as many hospitals as we possibly can, but also going deep. We're looking at, as Darryl mentioned a moment ago, how do we get that same-store sales number up? How do we build the habit? How do we help people to understand that that repeat conversation about insurance is really critical, and it helps get greater frequency of care, greater numbers going into the hospitals and pets having the treatment that they need, which reinforces the value of Trupanion. Does that answer your question? Yes. Thanks. Just last question, I believe for Drew. I just wanna ask, maybe get a little bit more insight into what is driving the relative increase in terms of subscription variable expenses. I think that number has gone up as a percent of subscription revenue by about 100 basis points since year-end 2020. Just maybe wanna get a little bit more granularity in terms of some of the incremental investments that are being made, you know, whether that's member experience or if it's just kind of this is just kind of a natural evolution of sort of, you know, the higher, you know, retention costs kind of embedded in a larger book of business. Just trying to get a sense as to, you know, when that number may moderate, you know, what investments are being made that, you know, maybe you might consider, you know, transitory or temporary. You know, just trying to get a sense of, you know, when that, you know, basically, when that expense ratio basically caps out. Thanks. Yeah, our target 15% margin is an annual target, and it does fluctuate quarter to quarter. Q1 tends to be a heavier quarter for us, just as a seasonality of summer expenses. Specifically, we invested in retention this quarter. We won't get into the specifics of what those initiatives were, but I would say that Q1 is always a harder quarter for retention, and we put up our best Q1 retention number ever, specifically in first-year retention. You know, we saw the value of making that investment and dialing it up. There's interplay between fixed and variable, and between the two, we expect those to scale down and march down throughout the year as a percentage of revenue. We expect to end the year between 14% and 15% margin, but we do expect to get scale. This is probably the high point. Thank you. Operator, there are other callers? Yes. Thank you. With the next question from the line of Joshua Shanker from Bank of America. Please go ahead. Yeah. Thank you for taking my call. I guess, Drew, for the first question, and I joined a few minutes late, you might have mentioned it. It looks like there were a lot of prepaid expenses, vet bills, accounts payable, and prepaid expenses broadly in the quarter that hit cash flow in 1Q. Wondering what's going on. Is there some seasonal information there? Does that have a true up later in the year? Yeah. Q1 tends to be a heavier quarter for us. We do have, you know, some prepaid licenses that come through in Q1. In general, it's been seasonally heavy, and we do expect to get, you know, scale, for it to scale down as a percent of revenue throughout the year. The drag we're seeing in free cash from the first quarter, that should be recurring in Q1 and reverses as the year goes on? Yes. The first half, I would split it into two halves. The first half of the year is a more negative cash flow part of the year, and then we have, you know, more positive flows in the back half in general. All right. You know, obviously, refer a friend and recurring customers are becoming a bigger and bigger portion of the business. It suggests that the acquisition costs per pet gained through other channels is even higher than what you publish. When you're thinking about spending on acquiring new pets, to what extent do you think acquisition dollars are being well spent at this point versus experimentation in trying to find new ways that may or may not be successful in acquiring pets but worth it as long as you keep the IRR profile intact? Yeah. Yeah. Just, I mean, if you could restate your question, I wanna make sure I get it right. Right. Just so, like, you know, $303 to acquire a new pet, but it really costs very little to acquire a pet versus a refer-a-friend, and it costs almost nothing for a recurring customer, and they're coming in with new pets. There's actually a higher spend per pet through the other channels averaged across all those pets. You're experimenting right now. Some of it. It's hard to figure out how to acquire new pets. I'm wondering the extent to which when you look at the money you're spending, how much of ad spend and marketing spend do you think is well spent that you're getting a knowable return on it versus experiments and trying to figure out the right way to cut the knot in half, I guess? Josh, I'll let Margie answer the main part of that question. I just wanna. On the first part of your free cash flow, you know, the rate of growth is the single biggest factor of our cash flow and the IRR, the guardrails that we run within. Let Margie answer the specifics around the IRR. Yeah. Darryl hit the nail on the head. IRR. When we're thinking about different channels, the most cost-efficient are, as you point out, refer a friend and recurring customers, word of mouth, which is fantastic for a brand. It allows us to, you know, really see the difference a member experience makes. When we're thinking about our spend and which channels we're investing in, we're looking across a gamut of different features and metrics for the specific environment. For example, we know that if we have a higher lifetime value, we have more opportunity to spend more in that space. If you're looking at the pure dollar amount, you're gonna see that go up, but the IRR is gonna be consistent. We don't just take an overall look at IRR coming in at say 35%-34%. We're looking at what does it mean for this particular cohort. The teams are much like our pricing team. They're looking at a very granular level of detail. They're looking at geography, they're looking at breed, they're looking at species, they're looking at every type of element we can to get really specific with the way we're marketing. That allows us to have some areas that, to your point, are experimental. You know, we're not looking at a set percentage every month, but if we find that there are areas we can test in that we haven't otherwise tried before, we'll go there and that may be a lead test, it may be a conversion test. The beauty of it is that we know what we're testing when we're testing, and we track the results, so we can get better all the time. You can see consistently quarter-over-quarter, our goal is to be between 30%-40% IRR, and the teams are very good and very disciplined the way they do that. You know, when we're thinking about that number, that dollar, it's not about focusing on the dollar amount, it's about focusing on the IRR, and that's what we're doing specifically for every pet that we're enrolling. One quick one in another quarter with better persistency. How far away are you from reasonable perfection in persistency? Josh, you, I think you've dialed in a little bit late, but Margie answered the question before that in our 60-month plan, our 99% monthly retention or persistency is our long-term goal. She mentioned that in some areas and regions, we've already achieved that. Getting any higher is really difficult with pet death. Appreciate it. Thank you. Thank you. We have next question from the line of Jonathan Block with Stifel. Please go ahead. Thanks. Hey, guys, good afternoon. Drew, maybe the first one, the modest 2% ARPU, I thought you explained that pretty well, you know, talking about repricing some plans, but why the invoice growth of less than 1% year-over-year? I mean, you know, we just hear about the inflationary environment, vets are increasing prices. I think Trish said earlier that the number of invoices were going up. Sort of give a good explanation on why the ARPU is somewhat muted. Let's just stick with the invoice growth. Why are you guys seemingly, you know, one of the only parts where we're just seeing such a modest climb, less than 1% this quarter. I think it was actually less than 2% last quarter. If you could expound upon that'd be very helpful. Sure. No, I would reiterate. I mean, we're seeing the cost of veterinary services in line with what the rest of the market is seeing, where it's just masked by this powerful mix dynamic. We are pricing to our value proposition, so aligning that ARPU with that overall cost to plan. Pricing is just foundational in this business. As we optimize, and I'm talking across a million subcategories, you know, breed, neighborhood, age. As we're doing that, we're aligning our ARPU with our cost of care that we're seeing. In any specific one, we are seeing pretty typical, but we're just growing now where we're getting the value proposition a lot more aligned. You can see in the quarter, we hit 71% in aggregate, which is what we were shooting for. If I can add to that as well, John, when we think about the way the business is operating, and I mentioned it a second ago, when everyone is communicating, if you think of pricing as the brain of the company, what the pricing team is doing is giving the rest of the team information as to where we should be targeting. So whereas before, if we were to take a broad brush approach, maybe in that broad brush approach, we would be targeting people that weren't hitting value proposition, that would be changing that ARPU mix a little bit more. But now we're going after pets we know are being priced at 71, and when we go after those specifically, you're gonna see that mix influenced directly by that. Okay. I guess I can follow up offline. I don't fully get it. I mean, you're saying the pets you're going after. Your installed base is so big, you're not growing that fast. It's just hard to offset it that much because, again, your base is so big. I can't see that completely being offset by the 50 or 60,000 pets that you're bringing on every quarter. But I can follow up offline on that. Maybe it's just a sort of a segue into my next question. You know, Margi, last quarter you talked about conversion rates, and you said you had some challenges in the fourth quarter of 2021. You know, I don't know if you want to touch on what those challenges were. Maybe more importantly, were those challenges resolved? You know, I think you slightly beat our gross add number, but if you go ahead and you normalize for the 4,000 pets that didn't occur in the fourth quarter because of COVID, your sequential step up in gross adds from 4Q to 1Q was actually below trend line historically. Usually you see a little bit of a high single digit bump, and it was more maybe low to mid. Maybe if you can just talk on, again, conversion rates, what the challenges were, where the company is in trying to resolve some of those past issues. Thanks, guys. Yeah, no, definitely. From a conversion perspective, you know, we're making progress. When we think about our growth, we think about it from two angles. We think about lead generation, so how do we actually make sure pet owners are aware of us, and then we think about the conversion space. Our lead generation is outpacing in terms of progress than our conversion. Both of them are moving forward. We have full momentum in both areas, which is what we want to see. Phone conversion's trending really well. The area that we mentioned last time was web conversion. We are making improvements, we are adjusting, and we have resolved the issues that we have within our website. That said, there's a tremendous opportunity there. When we think about the fact that we can grow our leads at the pace that we're growing, if we can get our conversion rate to move in the same direction, the same pace, we're gonna be significantly growing even faster than we are today. So it's really about thinking, how do we take our new distribution channels that we've really started to open up over the last two years, make sure that we're tailoring our journeys appropriately to those specific pet owners, so we're thinking about the journeys in a slightly different way, and being able to say the right thing at the right time to help pull people through the funnel. I will say in terms of the progress we're making, we are, as I said, positively improving. What's particularly exciting, we've just hired two folks who will be joining the team at the back end of this quarter at the end of June that will be driving specifically a focus on conversion. They come with a ton of experience, and excited to have them in place so we can really start to make the most of that opportunity in front of us. Perfect. Thanks for your time, guys. Thank you. We have next question from the line of John Barnidge with Piper Sandler. Please go ahead. Thank you very much. You were talking about international growth aspirations, and I believe it was 0.5% of revenue with development spend. Can you maybe expound upon that? The product's more developed overseas, so I assume you'd be going to market with a unique offering. Thank you. I'll touch on that. In our 60-month plan, we're trying to look at, over a long period of time, doubling our addressable market. If you look in the shareholder letter, you can see that we're now in three countries, and we have about 28,000 hospitals that we think is the addressable market. Over a long period of time, we'd like to get that number closer to 50,000. That allows us to not only have a growth lever with same-store sales, but to continue to add the number of active hospitals. Those two drivers have been the growth engine of this company. We have other areas where we're adding distribution channels and different products as additional growth levers, but international is really about increasing the size of our addressable market. We are in early stages of trying to determine when and where we're going to be going. We hired Simon Wheeler, who joined the company in the last 12 months, and we're making some pretty decent progress and looking forward to being more of a global player. Great. My follow-up question, if I could. When we had this call in February, you gave us the kind of rate of growth in the early weeks of the quarter had reverted similar to the third quarter. I know you're holding the call a little bit early, so you can have the Omaha. Could you maybe refresh us on what is the growth rate so far in the early weeks of April and the second quarter, and how does that maybe compare to the first quarter's rate of growth on subscription pets? Thank you. Yeah, sure. We talk about momentum. If we look at the quarter one, January started off ahead year-over-year. February picked up even more. March was a pretty big step up for us, and that was where we saw the territory partners, the hospital visits, that lead generation from the vet channel really coming back strong. That was a nice big step up. April is ahead of that. We're talking well into double-digit growth year-over-year from a lead perspective. We're excited by what we see. We feel like we, you know, we mentioned, you know, getting a lot of momentum. We're seeing that traction come through. I think just in general, the team is executing really strongly, and we're excited to see what we can do with that for the rest of the quarter. Really encouraging signs so far. Thank you. Thank you. We have our next question from the line of Greg Gibas with Northland Securities. Please go ahead. Hey, good afternoon. Thanks for taking the questions. First, you know, now that the newer low and mid-level offerings have been out for a while, are you seeing any movements between those offerings, either, you know, pets moving up or down? Yeah. Hi, Greg. I think you're referring to Furkin and PHI Direct, so they're our low- Yeah. mid-tier products. We are testing in Canada. The last time we discussed them, we were talking about how we're able to continue to generate new volume, which is lovely, and then we need to look at the other side of that, which is the conversion rate. We're making improvement on conversion rate, actually. We're happy with the way that that's progressing. We're probably about halfway to where we want to be, and which is nice to see. Every month, we're getting better. We're increasing the team size and focus and dedication there, and we think that it's performing nicely. Okay, got it. You know, regarding your comments on having, you know, the chance to rebuild relationships with vets, now that your territory partners can kind of revisit a lot more frequently and in person, could you kind of discuss the improvements that you're seeing? Maybe it's, you know, in terms of vet channel leads or conversions as a result of that? Yeah, sure. Our lead traffic, our exam day offers, is significantly up. When we think about our lead channels, we're looking at them in terms of where does the conversation originate from? While vet has continued to be strong for us for, you know, several quarters, it always is our strongest channel. We've seen that really pick up in the last three to four months. Having the territory partners back in the hospital, it just allows them to have the conversation, help to remind the team why it's important to talk about high quality medical insurance, introduce the concept of insurance, and just really get people thinking about it. The other difference as well we're seeing is because curbside is starting to pull back and people are getting back into that typical workflow, it's a lot more normal for the team to start thinking about those conversations again. The vet helps us from every single element of that journey, and the benefit of having high quality insurance for them means that they can treat those pets far more efficiently and effectively and do the jobs that they've been training so hard to do. I think for us, it's critical from a lead perspective. The conversion rate's much, much more efficient. It's a much quicker process. People understand that when you have the authority of that veterinarian who's been chosen by their pet center saying that this is an important thing you need to be thinking about, it just helps the conversion all the more and then subsequently the retention rate. The experience is just much better because those hospitals have our software there. We're paying them directly at the time of checkout. When we do that, we see that the referral rate's higher, the retention rate is higher, the experience is better, and for us, it's a far more efficient way to manage that experience for a pet owner as well. All in all, it really is the foundation of what we're trying to do as a business and just helps everything be more effective. Okay. Helpful. You guys have really good visibility in terms of, you know, your vet partners', veterinary costs. You know, are you at all surprised that maybe the cost side of that isn't increasing at a faster rate, you know, especially when we think about inflation and, you know, if we do think about maybe your premiums catching up with that? I know you're kind of perfecting the value proposition, you know, that 71%, but do you kind of see premiums increasing at a faster rate than historically going forward? Hi, Greg Gibas, this is Tricia Plouf. I can speak to this a little bit. It's obviously something that we keep our eye on. We're looking at pricing from our over 1 million different categories and make sure we're pricing as accurately as possible based on the data that we're seeing. Now, I will say, and Drew Wolff mentioned this earlier, What we're reporting is, you know, our consolidated numbers. When we disaggregate them, we are seeing costs going up in many of the areas in line with inflation like you would expect. As we price those neighborhoods, breeds, categories, we're reflecting that in the pricing that we're pushing through and maintaining that pricing accuracy. The one thing we've been doing, it hasn't just been this single quarter. We've been doing it for the last couple of years, and you're kind of really seeing it in our numbers more, is really a conscious effort at that very disaggregated level to be priced as accurately as possible, and we've seen a lot of movement there, even if sometimes that means we're decreasing the price. We talked about that more on the last couple calls. We've decreased prices in some areas where we weren't hitting a 71%. We were hitting, you know, a 65% instead of a 71%. We were not returning as much value to the member as we should have, and we've updated that. As Margie said before, we've given that information to her team, and they have been deploying more capital in those areas to drive growth as well because we're more accurately priced. You're seeing kind of all of that starting to come through because we've been doing that for much more than a single quarter. To get back to your initial question, we're monitoring it. We do see it at a disaggregated level, but you know, you've got the mix going on. If we do see the claims data start to move, we continue to then update our pricing, which could cause premiums to go up. It's a cost plus model, so it's a continuous process. Okay. Got it. Thank you. Thank you. We have next question from the line of Ryan Tunis with Autonomous Research. Please go ahead. Hey, thanks. Good afternoon. I might have missed it. If I did, I apologize. Just on the Chewy launch, you mentioned that that's launching imminently. Could you maybe give us a little more color on, you know, what is gonna be the geographic reach of that when we meet again in three months? Is it five states, 10 states? Is it slower than that? Hi, Ryan. It's a soft launch, so when we talk about the launch, it's something that we're rolling out slowly as we typically will do with anything. We want to make sure that everything is performing as we expect. We're not gonna go into specific details of where we're launching in the geography, but I can tell you that the launch will roll slowly through the year, will roll out state by state, and we'll work with Chewy to make sure that we're all aligned on what that roadmap looks like. It's moving at a pace that both of us are happy with and just move forward based on controlling that launch, the right way. Got it. Thanks. A follow-up, I guess, just on the annual letter. I always love the report card. I was hoping you could maybe go into a little more. You gave yourself a, I think, two or three Cs, which sounded pretty harsh, but I was hoping maybe you could, you know, expand on, I think it might have been the new product piece in particular you gave yourself a C for. What was the thinking that went into that? Yeah, I can speak to that. I don't know if you heard earlier, Darryl, Tricia and I sat down and scored this, and we're thinking about new products just to be more specific about what that entails. That's looking specifically at our food initiative and our GPS initiative. They're new products that are outside of the typical insurance space that we exist in. Just to recap again, as I mentioned earlier, when we think about giving ourselves a score within our 60-month plan, but for the first 12 months, we're looking at where would we expect to have been from January to December of 2021. In our first 12 months, what do we feel good about? Getting a C isn't horrible. It's fine. Fine is never the best, but it's certainly not the worst. When we think about a C, the reason we didn't score higher was because honestly, we would have liked to have made more progress in both of these as products. I think in general, we've learned a ton. These are, as I said, different to insurance. We're going into spaces that we have to do a lot of deep dive, a lot of research, make sure that it's in keeping with everything that we said it would do in the 60-month plan. They're difficult to do, and we like difficult, we like hard. It means when we get there, it'll be worth it, and it's hard to replicate. I think, all in all, we're happy with the progress, and we didn't expect to kind of come out the gate getting As and A-pluses for everything. Because frankly, if we were, we would have been sandbagging. I think, in general, we feel good about a C. We've got a lot of work to do. We've still got 44, 43 months to go of our 60-month plan, and we've set up well to make progress to get that a little bit higher next year. Gotcha. It didn't include the lower ARPU products. It did not. Out of curiosity, when you sat around, what grade would you have given yourself for those for Furkin? PHI and Furkin are included in our additional insurance products. We gave them a B-minus, above our new products, but not as good as the member experience and our intrinsic value and revenue. Overall, they're doing well. I mean, we talk about the lead and convert side of them, the areas that we're looking to improve are conversion. We want to be able to operate that within the same guardrails as we operate our core business. We're learning all the time and making improvements all the time. I would say that since we put the scorecard together, we've taken another step forward, which is what we want. We're probably about halfway to where we would like to be before we feel good about bringing that into the US market. They're in Canada, lots of good stuff happening. Again, another score that I suspect if we continue with the momentum we're seeing today with those two products, we'll be getting a much higher score than a B-minus for 2023. Awesome. All right. Thanks for the answers. Thank you. Thank you. Ladies and gentlemen, that was the last question. That concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.