Good afternoon, and welcome to the Trupanion Second Quarter Earnings Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Quynh Pham, Director of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, and welcome to the Trupanion Second Quarter 2014 Financial Results Conference Call. Joining me today to talk about our results are Darryl Rawlings, our Chief Executive Officer; and Mike Banks, our Chief Financial Officer. Each will be available for question and answer following today's prepared remarks. Our prepared remarks are supported by slides, which are viewable via webcast and accessible from the Investor Relations section of our website at www.trupanion.com. Before we begin, I would like to take this opportunity to remind you that during the course of this conference call, management will be making forward-looking statements, which are subject to various risks and uncertainties. These include statements related to our expectations regarding future operating results and expenditures, as results may differ materially from those results discussed and reported results should not be considered as an indication of future performance. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in our filings with the Securities and Exchange Commission, including our prospectus filed with the SEC pursuant to Rule 424(b)(4) on July 18, 2014, and our quarterly report on Form 10-Q to be filed with the SEC. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this conference call. Also, I would like to remind you that during the course of this conference call, we may discuss non-GAAP measures in talking about the company's performance. These non-GAAP measures are in addition to, not as a substitute for or superior to, measures of financial performance prepared in accordance with U.S. GAAP. A reconciliation of non-GAAP financial measures to the corresponding GAAP measures is provided in the appendix to the accompanying slide presentation that is available at the Investor Relations section of our website. Now I'd like to turn the call over to Darryl, our Chief Executive Officer.

Thank you, Quynh. I want to start by saying that the management team has been very humble to be able to take this company public on the New York Stock Exchange, and we have a number of people we'd like to thank. It starts by thanking the veterinarians who have supported us over the last 14 years of building this company, which started in Canada and in the last number of years has entered the U.S. market. It has to include our territory partners who are building those relationships with those veterinarians. They're our national sales force and have been a key driver of our success and includes our members, which is our second-largest referral source, telling their friends and their neighbors about Trupanion. And I'd also like to thank the -- our competitors, who have started to help build this category by providing better and stronger products. We all need to work together to build and capture the size of the marketplace. In July, we had our initial public offering, where we issued 8.2 million shares and raised approximately $73 million, net of our fees. We intend on using these proceeds to help grow and capture and become the category leader that we believe that we're well positioned to do. We're going to focus on getting out to more hospitals, building up more territory partners and spending money on technology we believe will support a better customer experience as well as pay off outstanding debt. So Trupanion delivered solid second quarter results in 2014. I am pleased with the results, pleased with the management team for providing this performance. Key metrics included our revenue, which totaled $28 million, up 42% over the previous year. And it starts with the visibility that we have. 94% of our Q2 revenue was…

Thank you, Darryl. We're very pleased with our second quarter results, which demonstrate a strong financial performance across all key metrics, including total enrolled pets, average monthly retention, average revenue per pet, lifetime value of a pet and average pet acquisition cost. The number of pets enrolled in our medical plan has increased every quarter for over 10 years. Year-over-year, total pets enrolled increased 32%, from approximately 148,000 at the end of the second quarter 2013 to approximately 195,000 at the end of the second quarter of this year. For the second quarter of 2014, our average monthly adjusted revenue per pet was $43.90 per month. This is a 4% increase over the average revenue in the second quarter of 2013. One key to this growth is retention of existing customers. Due to our focus on providing a superior value proposition and customer experience, our pet owners are very loyal. Our average monthly retention rate was 98.65% as of June 30, 2014. This equates to member retention of 74 months. On average, we estimate our members are with us a little over 6 years. Looking at our subscription business. Quarterly revenues by member cohorts shows us just how stable and predictable our revenues are. There is strong retention in every cohort, and the annual premium increases partly offset the very low churn that occurs. This produces high visibility into future revenues, and the next few quarters' revenues are substantially onboard now. The 32% increase in the number of enrolled pets, combined with the 4% increase in average monthly adjusted revenue per pet, has resulted in a 38% increase in our subscription revenues over the same quarter last year. When we include revenues from our other business segment, our total revenue for the second quarter of 2014 was $28 million, a…

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

I think, firstly, you mentioned a 13% to 15% margin before sales and marketing. I think you also guided to sales and marketing expense of 4% to 5% longer term. So just to confirm then, you're looking for, like, roughly a 9% to 10% or 11% adjusted EBITDA margin at scale. And what level of revenue -- at what level of revenue, I guess I should say, do you expect to get to that target margin? And then this is sort of a related question, but as it relates to the LVP-to-PAC ratio, I think you said you're targeting a 5:1 ratio there. But obviously, if you're scaling sales and marketing over time, should we expect to see that ratio also expand as the marketing expense becomes a lower percentage of revenue? And again, at what point should we really start to see that ratio expand from 5:1 to something much higher than that?

Thanks, Chris. This is Darryl. Great questions. Starting by the scale. We're looking between 650,000 and 750,000 enrolled pets to get to that operating margin that you spoke of. The LVP-to-PAC ratio, we think we should maintain long term at a 5:1 ratio. Principally, at a 5:1 ratio, we think we're aggressively going after the marketplace, and our internal rate of return, particularly when we've got it scaled, is something that we think will reward our shareholders. We could, in mature markets, achieve a higher LVP-to-PAC ratio, a 6:1 or a 7:1. But we think we're foregoing some opportunities to aggressively grow our brands, we do think, to help our conversion rates and so on. So long term, at this point, we're looking at maintaining a 5:1 ratio going out. As far as the EBITDA percentage goes, those long-term numbers are all dependent on our growth opportunities. So if we're growing greater than 30% or 40%, you're going to see that EBITDA percentage go down at a 1:5 ratio. And if we're growing at a slower rate, then you can have those types of EBITDA ratios long term.

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

A couple of questions, one on Trupanion Express. I think it was an interesting data point on -- was it related to Trupanion Express, just one clarification, 20% of the claims being paid directly? Just a clarification point. And then just overall, can you talk about where are you as far as the rollout of Trupanion Express? I think, Mike, you said another 4 to 6 quarters of added technology spend. But just big picture, what percentage of progress have you done? And downstream, how should we think about the benefits of this offering, software solution, more vets, more claims, lower retention -- higher retention rates, lower churn, all those good things?

Rohit, thanks for great questions. So Trupanion Express is a technology that helps us with paying veterinarians directly. Principally, to get to 20% of our claims dollars paid directly in Q2, the main driver was Trupanion Express. We also have kind of a manual workaround that we do on smaller exceptions for hospitals that do not yet have Trupanion Express. When we think about the rollout, we -- there's a couple of strategies. One is you can focus on Trupanion Express in hospitals that have smaller number of enrollments and you need to hit bigger number of hospitals where you can focus on the number of hospitals that have a higher percentage of enrollment. In the early days, what we've been doing is focusing on the hospitals that have been with us for a longer period of time. And we're looking at having kind of 2-touch types of deployments, one that is a higher touch in hospitals that were -- that make sense and a lighter touch in other ones. As far as the long-term benefits, the first key benefit that we want to look at is giving our claims-handling people some efficiencies and scale. So we believe Trupanion Express will pay for itself long term by making our claims processing easier and faster, not only for ourselves, but also for the veterinarian. In addition to that, we know that it improves the customer experience. We talked about this on the roadshow, where we had much higher Net Promoter Scores in a direct pay versus a reimbursement model. We expect over time that, that should help with referrals and retentions. But the key drivers for us right now are really trying to improve the customer experience, making it easier for veterinarians and in the long term, lowering our claims-handling expenses.

Okay, great. And on the long term, you talked about 700,000 pets to reach that target margin. That's about 3.5, 4x today's number. So can you talk about where you are as far as territory partners are concerned? As in, would that number need to grow 3x? Or is that just mostly in improving productivity, ramping them up as you probably accelerated hiring over the last 12 months or so?

So our territory partners drive relationships in a geographical territory. And when a territory partner enters a new territory, they are obviously less effective as they're making initial introductions to a hospital. So over time, a territory partner becomes more efficient. Think of it like OpenTable. When they went public, they were very mature in the San Francisco market and had different levels of penetration rate and then they had different levels in different types of markets. Our territory partners are very similar. We have territory partners that have been with us for over 10 years, and 3 out of 4 hospitals in their area are actively recommending us. In other places where our territory partner has been out for maybe 1 to 2 years, you might see it's 1 out of 4 hospitals recommending us. And if they've been out for 6 months, even less than that. Today, and as we mentioned on the roadshow and in the S-1 documentation, we have about 60 territory partners, and it's going to take us a number of years to get to 90 territory partners. Part of that is we tried to accelerate this a number of years ago, and our speed of -- kind of a quantity versus quality as well as our training did not serve us well. So we've learned some lessons, and we know that we need to make sure we have the right people with the right type of training. Today, we do 3 weeks of training for a territory partner before they get out on the road. And because of that and some natural churn that will happen, we expect it's going to take us a few more years to get to about 90 territory partners.

Okay. And one last question, if I could. On the pet acquisition costs, can you just explain what are the various drivers behind that? As in, I know over time, there would obviously be leverage- and scale-driven benefits that you would have. And so what are the drivers over the last 3, 4 quarters that probably have kind of tweaked up those costs? And how should we think about that going forward?

So sales and marketing overall is about, say, 40% of it is salaries, and those salaries go towards marketing and helping to support our territory partners. About 53% of it has to do with advertising, both online and print, and trade shows. And then there's some territory partner's commissions in there, too. So the increase in acquisition costs per pet is as we spend -- invest a little bit more in the development of existing territory partners.

The next question will come from Jon Block of Stifel.

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

So there's about 19 brands across North America. We think the category itself is growing around 12% to 14%. We're obviously growing a lot faster than that. We believe we're capturing about 30% to 40% of the category's revenue growth over the last couple of years. We're not at a 40% market share today. But if we continue to track the way we have for the last couple of years, we should get there. So I think long term, we should be looking in the 30% to 40% market share, would be an expected and strong outcome for us in 2020.

Okay, great. And then if you can just give us some examples. Maybe -- I mean, clearly, you've been in the U.S. in and around '08, but in Canada for a much longer period of time. Are there some markets, Darryl, that you can just call out where you've been for, pick a number, north of 5 years and maybe just give us some rough penetration metrics on where you see markets where you're -- they are north of 5 or 7 years?

Yes. So we started in western Canada. We're more established there. If we were to look in a market where we've been for 10 years, I think you're going to see that you can be looking in the 5% to 10% penetration rate in some of those markets, and we might have 3 out of 4 or 4 out of 5 hospitals actively recommending us. Some of it differs if you're looking at the total category, what the market penetration rate is and how we play into it. But we know that on a per-hospital basis, we've seen market shares as high as 20% to 25% of pets insured with Trupanion inside of a hospital. In broader markets, we see maybe 10% of pets could -- puppies and kittens could be enrolling with us. By contrast, in the U.K., 25% of pets are insured. They've been at it for quite a bit longer than what Trupanion. We have been in business for about 15 years. It took about 40 years for the U.K. to get to 25% penetration rate and about 20 years for the -- to get to about 5%. So we're really trying to build that foundation out and make it that response -- part of being a normal responsible pet owner is having medical plans for their pets, and we've seen that in higher penetration rates in markets where we've been longer. As I've mentioned, I think that's very similar to what you saw with OpenTable years ago. In markets where we've been there for 3 or 4 years, I think you're going to see that we might have 1 out of 3 hospitals active with us, maybe 1 out of 2 hospitals active with us and penetration rates in the 2% to 3% range.

Okay, great. And last one for me and then I'll hop off. We've done some work that shows Trupanion Express can sort of be a difference-maker for you guys longer term. So I guess a couple of questions there. One, do you know if any of your competitors started to go down that road and replicate a Trupanion Express-type offering, is the first question. The second one is where do you see the bigger difference-maker longer term? Is it you get Trupanion Express into a hospital and, arguably, the utilization of that hospital goes up meaningfully because it's so much easier for the veterinarian to process claims and get paid? Or are your territory partners coming back to you and saying, "You know what, this can make the difference if some guy who's on the sidelines and he's willing to jump in with 2 feet if we can get Trupanion Express deployed to his hospital?"

Thanks, Jon. So Trupanion Express is something that is unique to Trupanion. Even in Europe, where they have been doing this a lot longer, there's no other offerings that are directly paying under 5 minutes with an actual invoice in dollar amount for a vet hospital. So I think it's unique. It's something that we've been working on for years. We've got a strong management technology team all around it. It has taken a lot of data to get to the point that we have and is a very difficult thing to implement. At the core of it is the relationships we have with the veterinary hospital. We need to be working with Trupanion Express in cooperation with these veterinarians. And we know that when Trupanion Express is installed that a higher percentage of actual claims invoices are going to hit us. You can think about it that, in a reimbursement model, maybe 1 out of 10 or 2 out of 10 claims may be forgotten by the pet owner or left in the glove box. So what naturally happens is this is a better customer experience in that the pet owners are being -- utilizing our services each and every time that their pet goes in that's qualifying for an accident or illness. I think we're going to see a difference in a couple of areas, where some hospitals are going to use this as a leading indicator to jump in bed with Trupanion. We've seen this. In other cases, it's established hospitals that already had a relationship and realize that this is going to lower their burden of paperwork. But we're in early days. We only have 20% of our claims dollars now paid in Trupanion Express. We focus mainly on hospitals that knew us longer and had more enrolled clients. So although we've been working with it for a couple years and 20% is a meaningful number, the deployments and learnings going forward will continue for the next couple of years.

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

Just a couple, the first is on the -- you mentioned 62% of the pets were -- of your new pets came from vet hospitals. And I'm wondering if you can make a comment around what you're seeing in terms of the mix of pets coming from new relationships with new vets versus existing hospitals. And a quick follow-up on Trupanion Express, can you just -- when you do get into a vet with Trupanion Express, do you have evidence that the penetration within those -- within that pet population goes up once you're established?

So on the first one, we don't have an 80-20 rule in our business, where 80% of all of our business comes from 20% of our hospitals. It's actually much wider. About 80% of our business comes from about 50% of the hospitals recommending us. And we'll find that any new market that we go into, the adoption is a little bit slow and hesitant as it takes time to earn the trust of the veterinary hospital and their staff. And then once they've been working with us for a period of time and their clients have had some unlucky pets who have needed to utilize our services, their confidence gains over time. So as I mentioned before, we mentioned on the roadshow, this is a long-term play to build this foundation. It doesn't turn on quickly by vet hospital. We rate all of our hospitals an A through an F as far as the levels that they're participating, and we watch the movement of them or kind of the same-store sales. As far as are we going to see higher penetration rates inside of Trupanion Express hospitals, it kind of goes back to Rohit's comment on what are we expecting from retention rates and referral rates. Our business, it takes several years to get great data about retention rates that are meaningful, and I think it's a little bit early in that we've only had Trupanion Express out for 2 years and really only at about 14 months in a somewhat meaningful way for us to estimate what's going to happen. I will tell you this, this is not a golden -- a silver bullet that's going to solve everything and immediately get us to penetration rates that you found in Europe. This is a part of our toolkit that we have. It's an important part to improve the customer experience, but you need claiming clients to realize the benefits of it and you need veterinarians to trust and recommend us before you get any clients. So you can't lead with this and expect a big change in enrollments. It's more of an impact for clients that already have it and their pets become unlucky and need to use the services of a veterinarian.

Okay. And the other question I had was, it came up during your roadshow, about -- just about fraud in claims. I think that there have been some other insurance markets, like the dental insurance market comes to mind, where, as penetration grew that fraud became a major issue. And I'm just wondering are we far enough along in the development of this market in the U.S. where you think you have a good understanding of how to deal with potential claim fraud. Is that a big issue? Or do you think that we need to get further along in the penetration for you to really have a handle on how it might impact your business? And just generally, how you're thinking about that.

Well, we've been doing this for 14 years. We've faced fraud and had some learnings over that time. Fraud can happen from 3 different places. It can happen from a pet owner, it can happen from people inside a vet hospital and it can happen from our own staff. What we have is a lot of data analytics and a lot of flags that help us quickly identify if there is fraud. And I think we're quite actively on that. In addition to that, our claims staff, which is well over 100 people, have in excess of 5 years of experience working in vet hospitals each. We see things that are odd or irregular. We're also managing in pricing -- we talk about our 1.2 million price categories. In each of those 1.2 million price categories, we're understanding our acquisition cost and our lifetime value. Those go as wide as saying a golden retriever versus a shih tzu. It also includes looking at New York versus Winnipeg. But we actually get down to very granular level, where we're looking at it on -- by individual vet hospitals. We're looking at acquisition and lifetime value by each of our referral sources. We're also looking at it and watching that data on times of first claims and retention rates and individual severity. So the data we've accumulated over the last 14 years makes it a lot easier for us to detect if there's a problem. The last thing I'd kind of mention on this is, at the end of the day, catching or monitoring fraud is important, but it doesn't materially affect our business model because we are not trying to sell a product for a price and then to find a product to meet those limits, for the same reasons we're not trying to define veterinarians what they should charge for veterinary care. We are purely a cost-plus system, where we understand what the cost is for the average pet in New York and we add the 20 points of margin on top of it to tell us what we need to price. When you get at a granular level and you're doing that at a vet hospital level, if there is fraud or irregular activity or just a hospital that has a much lever of higher -- sorry, a higher level of medicine or diagnostics, that's okay for us, and we're pricing it appropriately. So having a cost-plus system allows us to monitor that, and our data helps us with any fraud issues. So thanks for that question. It's very appropriate.

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

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

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

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

Darryl, it's a real pleasure to hear the story and also very refreshing to hear the frankness. I appreciate it very much. I'm sure a number of people do. And what I'm referring to is when companies make mistakes or learn from their mistakes, I think it's very important and I appreciate the fact that you're addressing the issue relative to -- or you have addressed the issue relative to the partners. But I think it's also worth delving into a little bit more and really giving us a good feel in terms of the focus on your partners. It seems to me like you're in the prime territories now and 60 partners. You've got 30 to go, like your target. Those I would characterize as, maybe a bad word, but maybe secondary markets or not as important, not prime markets. That being the case, since you are 60 in the prime markets, can you give us a feel qualitatively, quantitatively, whatever it is, in terms of there are 60 people, their backgrounds, their qualifications, your controls, your incentives for them? And I'm sorry it's such a broad question, but I think it's really helpful for us to understand your important relationship with the territory partners.

Well, thanks for the question. So the relationships with our veterinarians is critically important to us. We -- as we talked on the roadshow, we have about 5,000 active hospitals, and there's about 28,000 independent hospitals across North America. We have got a long ways to go to win the hearts and minds of those vet hospitals, and it is an uphill battle to overcome a lot of preconceptions of what they believe medical insurance can be or how it can be treated. The territory partners are the key catalysts that we have on building and forging those relationships. It is required to make face-to-face visits to make it to the point that when they slide through the door that they know each other's names. And over time, we know that those relationships foster bigger trust and help us in the long run. So our territory of partners range from people that have worked in vet hospitals in the past to people who have been in professional sales, relationship sales. And what we're looking for are people -- to be a territory partner are people that are, first, pet passionate, people that really understand and can understand the motivations of people that work inside of a vet hospital, build those long-term relationships and then get to the point of being able to have people inside of the vet hospital, have enough trust to be able to initiate conversations about Trupanion. And what we've done in the past where we've made mistakes is trying to hire people really quickly and maybe not training or equipping them with all of the skills that they needed to be as successful. We've really focused on learning from our best territory partners, what those skills are, best practices in the field. We're trying to make sure every time we bring in a new territory partner that they have those qualifications and skills. And then, it comes back to something we call Tru-University, where we're now doing 3 weeks of training where people sit in the claims handling, customer service, retention teams, work with the marketing team, get to know people in technology and HR so that they can clearly explain the vision, the passion and what happens in Seattle and our Vancouver office when they're out in the field at the hospitals. So managing a large national sales force is always a challenge. You want the best people. We want to make fewer and fewer mistakes, quite frankly, not only for ourselves, but not to waste the times of those individuals, those territory partners. And I think we'll continue to make strides, but we'll have hiccups along the way when it comes down to people.

And then one quick follow-on question, somewhat related. Since you're very open about what you've learned, is there anything that you've learned since the IPO and now that maybe surprised you, where you had to tweak or make a major adjustment?

Well, I'll tell you what I've been most humbled about the IPO process was it's often described as hectic and running and hard and difficult, and here I am doing my first earnings call. What I've learned is by being a public company and meeting a lot a very smart, intelligent institutional investors and having the controls and mechanisms it takes to be a public company, it is going to make us a better company. And that's one of the things that I'm pleasantly surprised about is the discipline it requires to get out an IPO a company as well as everything it's going to take to continue to run it is only going to make us stronger and better. At times, it may be more difficult and make us stay at work longer. But at the end of the day, it's rewarding for the management team, and I think it will be rewarding for the shareholders long term. As far as the business itself, no, nothing is -- we have no new learnings, no new changes. We are predictable as we were a year ago or 2 years ago. As we mentioned before, 94% of our revenue for Q2 was prebaked before the quarter started. So no new learnings or challenges. We clearly understand the road ahead of us, what we need to do. I am confident that we have the strongest management team in this category and that we're going to build this category to something we can be proud of. We have a bunch of key milestones we need to hit. I'm very focused about becoming EBITDA positive. I don't think we're ready yet to do that. We need to build our foundation on our G&A. As Mike told you earlier, we missed some technology spends because of the IPO and some of that will funnel into the back half of this year and into Q1. But being -- becoming EBITDA positive is very important. Reaching the scale of 650,000 to 750,000 pets is also very important to us. And we're a company that IPO-ed with roughly $100 million of revenue, and we clearly have our eyes and target on getting to $1 billion of revenue. At that moment, we will stop, take a breather, pat ourselves on the back and then go after and chase and be disappointed that we're not a $2 billion or a $3 billion company. So as I mentioned, mile 3 of this marathon is very early on. We've got a lot to do, but I don't think it's a lot of learnings. I think it's a lot of execution, and I'm proud of the management we've -- team that we have to accomplish that.

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

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

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