Trupanion, Inc. (TRUP) Q2 2015 Earnings Report, Transcript and Summary

Good day and welcome to the Trupanion Incorporated Second Quarter 2015 Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. At this time, I would now like to turn the conference over to Ms. Laura Bainbridge of Investor Relations. Ma'am, please go ahead.

Thank you. Good afternoon and welcome to the Trupanion second quarter 2015 financial results conference call. Joining me today to discuss Trupanion’s results are Darryl Rawlings, Chief Executive Officer; and Mike Banks, Chief Financial Officer. Each will be available for question and answer following today’s prepared remarks. Before we begin, I’d like to take this opportunity 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 uncertainty that could cause actual results to differ materially from those to be discussed. A detailed discussion of these and other risks and uncertainty that could cause actual results and events to differ materially from such forward-looking statements 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-Q and 8-K filed with the Securities and Exchange Commission. Also I would like to remind everyone that during the course of this conference call we will be discussing non-GAAP measures when talking about the company's performance. These non-GAAP measures are in addition to not a substitute for measures of financial performance prepared in accordance with U.S. GAAP. Investors are encouraged to review the reconciliation 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 website under the financial information tab. Lastly, I would like to remind everyone that today’s call is also available via webcast on Trupanion’s investor website. A replay will also be available on the site. And with that I now like to turn the call over to Darryl, Trupanion’s Chief Executive Officer. Darryl?

Thank you, Laura and good afternoon everyone. On the hills of our one year anniversary of our initial public offering, I am pleased to report the both operationally and strategically our businesses right in line today with where we had anticipated we would be over a year ago. On today's call, I will briefly highlight our financial results, summarize our progress since our July 2014 IPO and review some of our key strategic initiatives, Mike will then walk through by second quarter financial results in greater detail before we conclude our prepared remarks and open the call up for your questions. Turning to our second quarter results, our fifth quarter as a public company, performance was in line with our expectations and places are on track to deliver against our full year guidance. Total revenue was $36 million, a 30% increase year-over-year on a constant currency basis. Within our core direct-to-consumer subscription business, revenue grew 33% year-over-year on the same basis. In addition to our steady revenue growth, we saw continued improvement in our key operating metrics. During the second quarter, we had several significant milestones including surpassing a quarter million total enrolled pets to end the quarter at approximately 260,000, up 25% over the prior year period. Growth in total enrolled pets continues to be driven by our direct-to-consumer monthly subscription business which comprised over 90% of our total enrolled pets at quarter-end. Member retention during the quarter was 98.7%. This was a new company record. Clearly, our members are recognizing the value we provide to them. We believe that bodes well for us in the long term, as member referrals are one of the largest and most cost-effective sales channels. Our voluntary cancellations those members that have actively decided to cancel for reasons other than the pet dying or payment issues was 0.7% in the quarter. This is also a metric that we are very proud of achieving. And lastly, our cash position is strong. We have no debt, and we remain on track to achieve cash flow breakeven in the second or third quarter 2016. Our performance in Q2 builds upon our operating and financial momentum since last year's IPO. In my annual shareholder letter, I provide a more detailed analysis about our performance in 2014 and how we view our business. It has significantly more information in it then you may find in a typical shareholder letter which I hope you will find helpful. If you have not already had an opportunity to review this letter, I encourage you to do so. It’s available on the investor relations page on our website. While we are pleased with our progress since going public, we remain focused on the enormous opportunity in front of us. As a reminder, penetration rate in the U.S. and Canada for medical plans similar to Trupanion are only 1% today. By comparison, in the U.K. 25% of cats and dogs have medial insurance. At Trupanion's average monthly membership fee, each additional percentage point of penetration equates to about $1 billion in revenue. Over the 15 years, we have learnt many lessons as well as made significant investments into our company. Today, we continue to invest and focus on our customer experience, data analytics and our veterinary relationships. In addition to building our foundation for the long term, our team must become an increasingly efficient and focused on driving the business to scale. Once again, you can learn more about what we think about Trupanion scale in my 2014 annual shareholder letter. Looking to the future, I want to highlight four strategic initiatives we will be concentrating on in the coming quarters. First, we are finalizing our trial deployment phase of Trupanion Express and preparing for implementation on a larger scale. Second, we are growing the number of Territory Partners in the field to provide veterinarian with fact to fact guidance and assistance. Third, we are focused on growing the number of active hospitals. And fourth, we plan to begin to explore direct-to-consumer marketing strategies in cities where we have a higher proportion of active hospitals. I will now discuss each of these initiatives in more detail. Among the most meaningful contributors to enhancing our customer experience is the ongoing rollout of Trupanion Express. Trupanion Express is our preparatory technology designed to disrupt this category. With Trupanion Express, we are eliminating ineffective reimbursement model and delivering a method where we pay veterinarians directly. Usually another five minutes from the time of invoice and most important before pet owner needs to pay out of pocket, we believe this give us a long term competitive advantage with consumers and veterinarians. Over the past few quarters we have made meaningful strides in increasing our deployment rate of Trupanion Express, while simultaneously reducing our deployment cost. Some second quarter highlights include, first, we completed over 10 Trupanion Express deployments in a single day, a new milestone for us. And secondly, our deployment costs are now trending to be in line with our long term goal of $250 to $300 per hospital. Once we have finalized our testing phase in 2015, we expect to be ready for more rapid expansion of Trupanion Express deployment in 2016. I am also pleased to announce that we continue to make progress and expanding the number of cities and regions in which we have Territory Partners visiting veterinarian hospitals. We are now also increasingly focused on expanding the number of Territory Partners we have in our existing cities, allowing us to increase our visit and implementation rate among existing hospitals and assist us in growing same-store sales longer term, and we are doing all of this while we continue to raise the bar on our training and selection process. Partnering with larger organizations is another strategy we employ to increase the number of active hospitals. As we previously announced earlier in the year we have a couple of notable wins on this front. Our preferred vendor relationship with VCA, one of the largest corporate owned veterinary hospitals in the U.S. and with MWY, a distributor to the veterinary industry with our over 300 national representative, we are encouraged by the early results. The work we are doing with our territory and corporate partners it translating to progress in the number of active hospitals. As a reminder, we estimate there are 28,000 veterinary hospitals severing the 180 million cats and dogs in the United States and Canada. As I discussed in my shareholder letter, with only 6,000 active hospitals at the end of 2014, we have a long way to go to earn the trust with the majority of these hospital owners and their staff. We report our number of active hospitals on an annual basis, and I will be providing the next public updates in the 2015 shareholder letter. And lastly, we are preparing to test direct-to-customer marketing strategies in isolated markets where we have a greater penetration of active hospitals. We know through our previous efforts as well as the efforts of other that direct-to-customer campaigns in cities with low veterinarian and pet owner acceptance, our pet medical insurance translates into inefficient pet acquisition cost. But in the market where Trupanion brand awareness, the number of active hospitals, conversion rate and pet owner referral rates are higher; we want to understand if we can cost-effectively deploy additional direct-to-customer campaign. To describe this approach, it will be helpful for me to provide greater visibility into the evolution of a single market or city and to provide you a cohort analysis of one of our more mature markets. At a high level, the first few years in the territory are usually spent breaking down the barrier that have historically existed between veterinarian and traditional pet insurance provider, by educating veterinarians on the value proposition Trupanion offer. We then turn our focus on the implementation. After which we reach an accelerated growth phase adding active hospitals and increasing enrollment and a more dramatic rate. A typical region or city that we target will have a human population of approximately 2.5 million, which translates into approximately 1.2 million cats and dogs and 250 to 300 veterinary hospitals. To provide with you an example of a single mature cohort, we can take a look at a region in Canada where we had an experienced territory partner building veterinarian relationship for more than 10 years. In this region, we estimate that 65% of veterinarian hospitals in this area were active with Trupanion in the second quarter. In this region where the human population is approximately 2.7 million, and therefore the population of cats and dogs has estimated at 1.3 million, Trupanion has over 18,000 enrolled pets. Most significantly, because we now have a high percentage of active hospitals and pet owner referrals in this region, we are getting better traction with the owners of newly acquired cats and dogs. We estimate that we have a quote per new pet ratio of one to four, and we are signing up what we believe is approximately 5% of newly home cats and dogs each month. This bodes well for us for the long term. After more than 10 years in this particular market, we experienced an annual pet growth rate of 23% in 2014 and 31% annual revenue growth in this cohort. In addition, our LVP to PAC ratio exceeds our five to one target in this market. Though this is just one example, it is a powerful case study on how our model can scale over time. It is in market such as these that we intent to evaluate opportunities to test new marketing strategies and significantly increase deployment of Trupanion express. Please note that while we have over 1.2 price categories that we track the LVP and PAC for, we do not plan to publically disclose specific cohort or category details. Similarly for competitive reasons, we're not going to provide updated information on this specific cohort moving forward. In summary, I'm happy with the state of the business. We're seeing strong growth in both new and mature markets. I continue to see great early result from Trupanion express and we're learning how to deploy a faster and at a lower cost. Active hospitals are trending in the right direction. Thanks in a large part to the hard work of our territory partners and corporate partners. All of these trends are moving in the right direction. Additionally, the growth that I just mentioned in our cohort example where we're signing up 5% of new pets in a market that we've been in 10-plus years gives me even more confidence that we will able to lead this category through the 25% penetration rate that the U.K. achieved over the last 40 plus years. With that, I'll turn the call over to Mike to go over second quarter financial performance.

Thanks Darryl and good afternoon everyone. As Darryl discussed, our second quarter performance was again in line with our expectations. Second quarter marks our 30th quarter of sequential revenue growth since we entered the U.S. market, demonstrating the power of our monthly recurring revenue business model. Total revenue for the quarter increased 27% year-over-year to $35.6 million. As expected year-over-year revenue growth was negatively impacted by Canadian foreign exchange rates. Our Canadian business represented 22% of our total revenue in the second quarter and during the second quarter; the Canadian currency exchange rate was at an average of 81% compared to an average of 92% in the second quarter of 2014. To illustrate the significance of these fluctuations, if FX rates had remained constant at the Q2, 2014 average rate, our second quarter 2015 total revenue would have been approximately $1 million higher and would have grown 30% year-over-year. Subscription revenues which were 91% of our total revenues in the second quarter were up 29% from the second quarter 2014 and totaling $32.2 million. The increase in subscription business revenue was driven by a 26% increase in enrolled subscription pets during the quarter, supported by increased average monthly adjusted revenue per pet and a very strong average monthly retention rate of 98.67%. Our average monthly adjusted revenue per pet grew at 6.2% for our U.S. customers year-over-year and at 8% for our Canadian customers in local currency year-over-year. In U.S. dollars after FX, our blended average monthly adjusted revenue per pet increased 3% from a year ago to $45.10. Other business revenues which generally comprised of revenues that have a B2B component totaled $3.4 million, up 6% from the prior year. Total gross profit for the second quarter was $5.8 million. Subscription gross profit represented $5.6 million of that amount, a 19.6% increase over the prior year period. Our non-GAAP subscription business gross margin was 17.4% for the quarter. Again, this was in line with our expectations and we're on track to reach 18% to 21% by year end. Turning to our cost structure, we made good progress decreasing fixed expenses as a percent of revenues in the quarter. In the second quarter, our general and administrative and technology expenses excluding stock based compensation represented 17.3% of total revenues for the second quarter, down from 19.3% of total revenue in the prior year period. As you may have read in Darryl's shareholder letter, we're extremely focused on scaling on our fixed expenses in the coming quarters. As a reminder, that operational scale of 650,000 to 750,000 pets, our goal is to have these expenses represent 5% to 6% of total revenues. In addition to realizing scale on fixed expenses, we have been and remained focused on maintaining the ratio between our average pet acquisition costs versus the lifetime value of a pet. We believe this is a key metric for our business to ensure that we employ disciplined growth. In the second quarter, Trupanion spend an average of $133 to acquire a pet with an average lifetime value of $570, a 4.3 times return on acquisition spend and in line with our expectations. We plan our pet acquisition spend assuming a 20% gross margin, because our LVP to PAC ratio is a trailing 12-month metric, we expect LVP to PAC to move back in line with our five to one target as gross margin returned to 18% to 21%. In the second quarter, we generated a net loss of $4.6 million. Adjusted EBITDA was a loss of $3.2 million for the quarter within our guidance range. Turning to our balance sheet, we ended the second quarter with $47.7 million in cash and cash equivalence and short-term investments. As Darryl mentioned, our cash position is strong, we have no debt and we remain on track to achieve cash flow breakeven in the second or third quarter of 2016. Let's now move on to discuss our outlook for Q3 and full year 2015. For the third quarter, we're initiating guidance as follows. Total revenue is expected to be in the range of $36.5 million to $38.5 million, an increase of 20% to 27% year-over-year. Adjusted EBITDA for the third quarter is expected to be a loss of $4.5 million to $2.5 million. It is important to keep in mind that these quarterly projections are impacted by the decline in the Canadian currency conversion rate, relative to last year. The average currency exchange rate we have used in calculating these projections was 79%, the approximate rate in affect at the end of July. With respect for the full year 2015, we're reiterating our total revenue guidance and narrowing our adjusted EBITDA guidance to the following. Total revenue is expected to be in the range of $145 million to $150 million, an improvement of 25% to 29% year-over-year. Adjusted EBITDA for the full year 2015 is now expected to be a loss of between $13 million and $10 million, previously the low end of our guidance range to a loss of $15 million. In closing, we continue to expect strong growth in the second half of 2015 and we remain on track to achieve cash flow positive by the middle of 2016. Thank you for your time today. We will now open the call for questions, operator?

Ladies and gentlemen we will now begin the question-and-answer session. [Operator Instructions] And our first question today comes from Jon Block from Stifel. Please go ahead with your question.

Great thanks and good afternoon guys. Maybe two or three questions and then I'll just jump back in the queue. But the first one I know you mentioned or you kept the revenue guidance for the year, Mike, at $145 million to $150 million, but if I sort of take a 1H of $69 million, even assume sort of upper end of your 3Q, just say $38 million, you get about $107 million for the first nine months, it would imply, I guess where I'm going with this, it would imply a very big fourth quarter to get to the upper end of the range. I know you guys have been battling currency moving against you throughout the year, just looking at the $145 million to $150 million, what implies about 4Q, are we better off maybe towards a low end of that, versus a high end of that? And if not, can you talk to why 4Q would be very big.

So, Jon the revenue growth is just so consistent and so predictable that Q4 isn't anything out of line. It's just on track with our normal monthly growth, albeit as you mentioned, we've now been impacted somewhat by foreign currency dropping yet again and let me talk to that a little bit. Our Canadian business as we mentioned represents 22% of our total revenues. 1% change in the foreign exchange rate means about $100,000 per quarter. And so we're coming up -- second half of the year is going to be impacted by that a little bit. But our good strong growth combined with this change in foreign currency and we're getting good ARPU price, rate changes coming through in the second half of the year. We're going to see that help our gross margin, but it also helps the topline.

Perfect. That was helpful. Thank you. And then Darryl, you're hitting, if not your pass in the subscriber, at least, our subscriber estimate, but we get very little public data or information from other players out there. So, can you just maybe take a step back and let us know what you're seeing or experiencing in terms of market growth or market share or Trupanion versus the other players?

There's roughly about 20 brands, nothing that's really significantly changed over the last 12 months. We think we're pretty close to 40% of the revenue growth across the category. We think that's been pretty consistent. I think there's a group of about five of us that are outgrowing the rest of the marketplace. But no real big changes over the last 12 months.

Okay. And last one from me and I'll jump back in the queue. You mentioned that right to consumer, anything more that you can share with us just sort of level of spend in a given market, what you'll be targeting, I don't know TV, print? And then will express be a part of the DTC, in other words, will that be front and center or will you look to accelerate express in the markets that you're pursuing DTC just to sort of increase the overall level of user experience. Thanks guys.

We're going to be testing a little bit TV in the DTC -- direct to consumer. We're going to be testing in places where we've got higher penetration with Trupanion express and testing that messaging as well. We'll also test that against other markets where we don't have as much Trupanion express and pull their bags, so we can kind of AB test that. The amount of dollars that we're doing is not material enough that we expect it to really shop in our pack in Q3 and Q4. We always have a percentage of our pack that is kind of allocated for testing. So, it should fall within there.

Perfect. Thank you, guys.

Our next question comes from Rohit Kulkarni from RBC Capital Markets. Please go ahead with your question.

Thank you. This is Andrew on for Rohit. Two questions. The first one if you can talk about your capital needs going forward as you continue to grow. If you're going to need to go back to the capital markets with this 27% -- high 20% growth. And the second one is if you can give us kind of order of magnitude difference between Trupanion express hospital and a non-Trupanion express hospital in terms of revenue per store. Thank you.

Hello, Andrew this is Mike Banks, I'll take the first one. The -- our capital needs, as I mentioned, we've got about $48 million of cash and cash equivalents on hand. We believe that that is enough to support our operating needs and our revenue initiatives for as f account receivables as we can look out and we think we got all the cash plus credit facility that we need to support our operations.

Andrew I'll just add, I mentioned this in the previous call, we capitalized a 100% -- sorry, we do not capitalize; we expand 100% of the pet acquisition cost upfront. So, as long as we're growing in around the 30% range or a little bit less than that, then we believe that we've got all the capital we need moving forward. To your second question order of magnitude between express hospitals and non-express on a per pet or revenue per pet. We've actually put Trupanion express in a big range of hospital so far. We've put them in a predominantly our busier hospitals are AND hospitals that know us better. We've also started testing a few of them in kind of our CD hospitals, people that don't know us as well. So, because we're in about 350 hospitals and the tests are in different types of hospitals at different maturity levels. It's hard for us to draw any specific conclusion. So, we're not making any big ones now, except for that we know the customer experience has dramatically improved, we net promoters scores where we have Trupanion express, we do --we know that the customers like it and that gives us the confidence to continue to drive ahead.

Thank you. That's helpful.

Our next question comes from Michael Graham from Canaccord Genuity. Please go ahead with your question.

Hey, good afternoon. This is Ryan filling on -- filling in for Mike. I was wondering on the active hospital front, the 28,000 hospitals across the U.S., just understanding how important they are to driving new subscriptions going forward. Can you just talk for a moment and give us a sense of what the competitive landscape is like at a lot of these hospitals where Trupanion doesn’t already have a relationship? I mean is there sort of one preferred provider there or the hospitals working with a number of different providers. Like when the territory partners in new hospital, sort of, what are they up against from a competitive standpoint?

Well, let me kind of level-set for everybody. There's about 28,000 veterinary hospitals across North America. Approximately 26,000 are independently owned. Of the total 28,000, we're currently visiting about 16,000. So, in those hospitals, we might have our brochures and information in say 12,000 or 13,000 of those hospitals. We don't consider them active. Having our brochure is -- in a hospital, is not what we consider active. In the shareholder letter, we described that we got about 6,000 active hospitals. Those are hospitals that more engaged with us and ultimately, have the confidence to initiative conversations about Trupanion. Our experience tells us that there are very few hospitals and I would suggest that there's probably less than -- far less than a 1,000 hospitals in total that are actively recommending any of our competitors. You could find brochures in many of the hospitals, but as I said, putting brochures on a wall mount, doesn’t make them active.

Thank you.

[Operator Instructions] Our next question comes from Kevin Kopelman from Cowen & Company. Please go ahead with your question.

Hi, this is Andrew Marok on for Kevin. Just wanted to get a sense of how to think about technology expense as Trupanion express rolls out, if there will be any additional development expense on the back end our anything related to additional support or anything like that? Thank you.

Hello, Andrew this is Mike Banks. Our technology expense is going to increase modestly over time from here. So, the developmental -- the future development for Trupanion express is going to be incorporated in that amount of expense. I think we're going to see on a cash flow basis, some improvement as we gap capitalizes some of this effort and depreciates it over the future. But I think we're going to see on a cash flow basis some benefit from the development spend decreasing over time.

Okay. Thank you.

And our next question comes from J.D. Delafield from DHI. Please go ahead with your question.

Hey, Darryl, hey Mike.

Hello.

So, on TP -- on Trupanion express, are you going to provide numbers in terms of install and the rate at which it sounds like you're installing now, it's substantially higher than before. So, how should we think about the growth in install over the next three, six, nine months?

So, we said earlier in the year that we expected to end the year in about 350-ish hospitals were on track to do that. What we've been testing is can we do it faster, can we do more in a single day, what are the costs of doing that. And when you look out into 2016, we expect that we will -- 3 to 4x the number of installations by the end of 2016. So, that's probably the best guidance we can give you at this point.

And $350 an install, you must be doing some sort of digital delivery as opposed to right thing, involves any teams at site to give training. Have you changed the deliver method?

Yeah, we have, and in the last year we worked very hard to take our early learnings which proved up to concept and the technology to us to figure it out how we could scale and deploy faster. So we are not as -- we are trying to get to more of an open table method when we have a veterinarian hospital raise their hand that we are able to do it remotely, with remote training and we've gotten the technology there now. We still need to work on some more messaging within training, but that's why we've been able to drive the deployment cost down and speed it up.

And just on, case maybe you mentioned you did 10 in one day. What you activity with Trupanion express now imply that you are doing an install everybody or some number of installs every day. This is a continuous stream of installs or is it more of a patch.

No it’s continuous. We have targeted a couple of regions, so we will finish with one, we may take a three or four weeks to ramp up, to go into another region and then take kind of a batch after that. We are also not just looking -- we are looking kind of shotgun approach as well. So we are still really kind of in the testing phase and we will continue to test deployments and communications and trainings for the balance of the year.

Okay. And just one more follow-up on this, because -- and I'm travelling, I don’t have this with me, but the ratio of your revenue coming from TP installed hospitals -- to not Trupanion express installed hospitals was super high, I think 20% of your revenue was coming from something like 5% of the hospitals that were active.

I think the number you are looking at is 20% of our claims dollars are being paid directly to veterinarian hospitals and that's off a relatively small number of hospital counts. But the reason for that is, we have targeted high dollar, high volume hospitals early on and we also in large dollar claims and some other areas people are -- know what we are doing and they are requesting it, so we are sending the money directly.

Okay, so that ratio should shift down as you expand into other less high volume hospitals

Yes, on a per hospital basis, absolutely. But we -- I mean, our goal is to have 90%, 95%, 98% of all invoices paid directly to hospitals long-term.

Okay. And then on the territory partners, you mentioned that you we were going to, I guess, increase the gross number of territory partners form -- I think it was a previous target of 90. Is that right and if so how many deals we will see having in future.

So we started the period around 70, our target is to try to get to 85. We are on pretty good track. But I'm not going to substitute quantity over quality or training. So target is 85, we will see how we hit it up by the end of the year. Long-term we expect it to be around 100 or so. We are now doing a little bit in bigger markets adding more territory partners so we can increase the frequency of visits and implementation and long-term, hopefully, improved same store sales. So we've been doing that for last about nine months and seeing some good response from that.

Okay. And if you have new territory partners going into existing territories, which I think is what I heard you say. How do you manage that with the existing territory partners who may feel their opportunity is diluted?

So if you think about our territory partner as being like a Coco-Cola distributor in the early days. Now, Coco-Cola it’s all regional. They may be the first truck and the second or third truck might be managed by the first person.

Okay. Fine. Okay, I guess, the last question I had was is there was any more updates on the white label product. Anything to discuss on plans to underwrite for other carriers.

No, nothing specific. We were always in conversations. But if something happens that will be going into other revenue and if it’s significant we will announce it to the markets.

Okay. Thank you.

And our next question comes from Josh Tarasoff from Greenlea Lane Capital. Please go ahead with your question.

Hi, can you hear me.

Yeah, we can.

Thanks for taking my call. I was wondering if we could talk about denial rates and I guess I have three questions about that. First, could you talk about how you think about the importance of driving down denial rates? And underlying my question is the idea that there seems to be key issue that will affect trust strength and brand strength over the long-term. And then second could you talk about how some of the initiatives in the business like Trupanion express are helping with this. And I'm curious if you have any ideas for something new or big that might possibly lead to a breakthrough for this. Anything you've been thinking about or thought about. And then third, any numbers you can give around denial rates would be interesting. And do you think it’s possible that in the long-term making denied claims a truly infrequent occurrence for a low single digit percentage of total claims might be possible. Thanks.

Denial rate is something, an internal metric that we monitor and measure on regular basis. What I can tell you is that when we enter a new city or a new region, we typically have higher denial rates and those denial rates might be 15% to 20%, that's largely because of veterinarian hospital who often is submitting the claim on behalf of the pet owner is not yet accustomed to Trupanion. So they may be sending something in for a dog vet or for a vaccination. When we have a more mature market that number drops in about half. So once a city or region has more exposure with our territory partner, our denial rates drop in about half. And then as we've been rolling out Trupanion express there is much more insight. So not only we are receiving the claims every time an invoice is created. We have a lot more visibility. So denial rates go down further because those veterinarian hospitals clearly understand what Trupanion covers and they do not. I think ultimately you could be looking at a number -- on a good veterinarian hospital might have a denial rate of about 3% to 5%. And if we could get our entire business to be at that level, that would exceptional. And as I mentioned before, our hit through would tell us, we start higher in the new market and then improves over time.

Thanks. Yeah that would be great. One more small question if I could. Did you give the direct pay spend in technology for the quarter?

It will be disclosed at our 10-Q and that direct pay number is about $1.3 million.

Okay. Thanks.

Ladies and gentlemen, this does conclude our question-and-answer session. At this time, I'd like to turn the conference call back over to Darryl Rawlings for any closing remarks.

In summary, we're encouraged by our performance to-date in 2015, operationally, strategically, and financially, we're right on tract. Our monthly subscription revenue model is translating into high growth recurring revenues and strong pet enrollment. We continue to invest in our market leadership, member experience, and the technology to grow and scale our business for the long-term and look forward to achieving cash flow positive next year. Special thanks to all of our stakeholders for making that possible. We great appreciate your trust and support. Mike looks forward to seeing many of you next week at the Canaccord Conference in Boston. Thanks everyone.

Ladies and gentlemen that does conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your telephone lines.