Trupanion, Inc. (TRUP) Q3 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to the Trupanion Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Laura Bainbridge with Investor Relations. Thank you. You may begin.

Good afternoon, and welcome to the Trupanion third quarter 2016 financial results conference 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 Web site as well as the company's most recent reports on Forms 10-Q 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, 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 acquisitions. Unless otherwise noted, margins and expenses will be presented on a non-GAAP basis, which excludes share-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 Investors Relations Web site 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 Web site. A replay will also be available on the site. With that, I would like to turn the call over to Darryl, Trupanion's Founder and Chief Executive Officer.

Thanks, Laura, and good afternoon, everyone. I’m joined today by Tricia Plouf, our Chief Financial Officer. We appreciate your participation on today’s call and your interest in Trupanion. Today, we look forward to reviewing our third quarter highlights and financial performance in greater detail, particularly in the context of our efforts to balance growth with our targeted return on investment spend. We delivered another quarter of consistent revenue growth. On a constant currency basis, revenue grew 28% year-over-year marking our 36 consecutive quarter of revenue growth in excess of 25%. At the same time, we reduced fixed expenses as a percentage of revenue and scaled adjusted operating margin. Adjusted operating margin totaled 8% of revenue, a 620 basis point improvement year-over-year. As a reminder, adjusted operating income represents the funds available to Trupanion to invest in pet acquisition. We view expansion in our adjusted operating margin as one of the most important measures of shareholder value creation longer term. As you’ve heard us talk about in the past, our growth strategy is to build the category through cost effective pet acquisition while minimizing shareholder dilution. We grew total enrolled pets by 21% year-over-year to end the quarter with 334,000 enrolled pets. During the quarter, we spent 3.7 million on pet acquisition at an LVP to PAC ratio of 5.2 to 1. We slightly overshot our 5 to 1 target in the quarter, largely a function of our continued efforts to optimize pet spend by subcategory. Managing our pet acquisition spend in relation to lifetime value remains a key strategic priority for the organization and one that we expect will take several years to perfect. Year-to-date, we’ve made progress in reducing spend on lower LVP categories. For example, this time last year approximately 20% of the new pets enrolled were sub-optimized and well below our targeted LVP to PAC ratio. We’ve made improvements and we estimate that in the third quarter, we reduced this number to approximately 17% of new pets enrolled, a difference of approximately 800 pets in the quarter. While we’re pleased with the incremental progress, there is much room for improvement, particularly around accelerating growth in our higher LVP categories. This strategy is all about growing in a smart way. We have a large market opportunity but not every subcategory of pet is a profitable subcategory today. We are focused on leveraging our data to maximize the percentage of pet subcategories that we enroll within our desired rate of return. If we continue to execute this strategy, I am confident we can cost effectively grow for years to come. At Trupanion, we believe that veterinarian support is fundamental to our customer experience and growth. Our national sales force, which we call territory partners, is responsible for calling on veterinarians and educating them on the benefits of medical insurance and Trupanion. We are the only company in this space to operate a national sales force, a key competitive mode. Just last month, we hosted our annual territory partner conference here in Seattle. It was a great event; one that provided us the opportunity to get together in person, share experiences and best practices and discuss key organizational initiatives. Improving the customer experience and increasing same-store sales were the areas of focus during this year's conference. Feedback was overwhelmingly positive and I am encouraged by the level of alignment between our territory partners and the rest of the organization. We’re proud of the foundation that we have built. Our territory partners are visiting approximately 20,000 of the 28,000 veterinary hospitals in North America. Our reach is expanding as we add territory partners in more geographies and the caliber of our territory partners is also improving. As we move forward, we’re increasing our focus on driving same-store sales. That is engaging more consistently with those hospitals that have referred cats and dogs to Trupanion in the past. We expect growing the number of stores and same-store sales will continue to be a long-term strategy. We are focused on acquiring pets from highly efficient channels. For example, year-to-date, 78% of our leads have come from veterinarian referrals and pet owners adding pets or referring their friends. Another 15% have come from where people get their pets such as breeders or shelters. Only an estimated 7% of our leads were generated within the highly competitive online channel. The cost of generic paid search or review site referrals drives the average online acquisition cost per pet for the industry to an estimated three times higher than what we spend in the veterinary channel today. In addition to the efforts within the veterinary channel, we've increased our focus on communicating to consumers what differentiates Trupanion from our competitors. As part of this effort, we've developed additional customer facing content that when accessed is driving improved engagement and conversion rates, though it's early days on optimizing both visibility and messaging. Equally as important is our continued efforts to improve the customer experience in hospitals. One of the primary ways in which we are doing so is by eliminating the reimbursement model through our direct pay initiative. We are pleased to report that year-to-date, we’ve paid approximately $22 million directly to veterinarians. We’re also continuing to invest in our in-house veterinary support, customer service and claims department; and as we had hoped, the move to our new headquarters has provided us the additional space and resources to improve our collaboration and training. We’re also seeing improved efficiency and service levels in key departments. For example, we’ve paid over 360,000 veterinary invoices year-to-date with 58% paid within 24 hours. Within our customer contact center, we answered over 0.5 million phone calls and delivered meaningful improvement in first call resolution. Our call center agents are averaging a rating of 9.5 out of 10 year-to-date based on over 62,000 customer surveys. We’re also seeing a greater number of leads from pet owner referrals. And just this past quarter, one of our contact center associates Trish Sellars enrolled her 10,000th pet. I am optimistic that the continued rollout of our direct pay initiative will further strengthen the customer experience and drive greater operational efficiencies moving forward. To recap, we are pleased with our execution in the third quarter and year-to-date. We are in a strong financial position which enables us to continue to invest in our growth through cost effective pet acquisition and improving the customer experience. With that, I'll turn the call over to Trish to review the details of our third quarter results.

Thanks, Darryl, and good afternoon, everyone. We are pleased with our performance this past quarter. We again delivered strong revenue growth, scaling fixed expenses and another quarter of positive free cash flow. The consistency of our financial performance highlights our recurring and scalable subscription-based revenue model. Total revenue was 48.4 million, a year-over-year increase of 28%. Total enrolled pets increased 21% year-over-year and totaled 334,000 as of September 30. Subscription revenue was 44.6 million comprising 92% of our total revenue. Year-over-year growth was 30% driven by growth in enrolled pets as well as continued increases in average revenue per pet. Average monthly retention was 98.61%, down from 98.66% in the prior year period though remaining above historical averages. In general, our cancellations fall into three different buckets. The first relates to pet death or a pet being rehomed. The second is due to customers being dissatisfied in some way. And the third relates to failed payments, for example, expired credit cards. When we look at recent trends, cancellations in the first two categories have been flat to slightly better in recent quarters but the third bucket has trended in the wrong direction. We believe this is primarily a result of changes in our processes to update customers’ payment information as we have grown. The first step in correcting this is the implementation of a new billing system at the end of the third quarter, which incorporates a more robust credit card updater. Monthly average revenue per pet was $48.37, an increase of 7% year-over-year. In local currency, monthly average revenue per pet increased by 8% from the prior year for our U.S. members and by 4% for our Canadian members. Our other business revenue, which generally is comprised of our revenue that has a B2B component, totaled 3.7 million, up 8% from the third quarter of 2015. Total gross profit for the quarter was 8.6 million, a 29% improvement over the prior year period. Our subscription gross margin was 19%, in line with our annual target of 18% to 21%. Turning now to our cost structure, a key focus of ours continues to be driving scale in the company's fixed expenses which are comprised of our technology and general and administrative costs. In the third quarter, our fixed expenses as a percentage of revenue decreased sequentially and year-over-year, representing 9% of total revenue. This was down from 15% of revenue in the prior year period and 10% of revenue in the second quarter. Once again, the scale we realized in our fixed expenses was primarily a result of revenue outpacing our expenses as well as additional efficiencies within our general and administrative and technology departments. I now want to turn to our acquisition costs. In the quarter, Trupanion spent an average of $120 to acquire a pet with an average lifetime value of $624. Our LVP to PAC ratio for the quarter was 5.2 to 1, up from 4.6 to 1 in the prior year period. As Darryl mentioned, this was slightly higher than our target of 5 to 1 largely the result of our efforts to optimize our pet acquisition spend. Our strategy remains to grow pet acquisition costs in line with the anticipated expansion in lifetime value at a ratio of 5 to 1. Adjusted operating income, the measure we use to track operating income before any cost to acquire new pets, totaled 4 million in the third quarter or 8% of revenue compared to 0.8 million or 2% of revenue in the prior year period. This significant improvement reflects our continued progress in scaling fixed expenses. We generated a net loss of 1.6 million or $0.06 per share during the quarter compared to a loss of 4.6 million or $0.17 per share in the prior year quarter. We ended the third quarter with 29.2 million basic shares outstanding and 33.1 million shares outstanding on a fully diluted basis. Adjusted EBITDA was a positive 0.3 million compared to a 3.2 million loss in the prior year period. We generated positive free cash flow of 0.9 million in the quarter benefiting from the growth in our core subscription business, scale in fixed expenses and continued discipline in new pet acquisition spend. We ended the quarter with 49.3 million in cash, cash equivalents and short-term investments. During the quarter, we drew down approximately $3 million against our line of credit to end the quarter with 4 million in long-term debt. We intend to continue to leverage our line of credit which carries a low cost of capital in combination with our free cash flow to grow in a non-dilutive manner and satisfy our capital requirements. Turning to our outlook for the full year, we are tightening our revenue guidance and reiterating our adjusted EBITDA guidance as follows. Revenue is now expected to be in the range of $187 million to $188 million, representing 28% year-over-year growth at the midpoint. Adjusted EBITDA for the year is expected to be around breakeven. As a reminder, we have a long-term strategy to invest in growth. Our expectation for breakeven adjusted EBITDA is consistent with our strategy to reinvest our profits in cost effective pet acquisitions. Also, please keep in mind that our revenue projections are subject to conversion rate fluctuations between the U.S. and Canadian currencies. For our full year guidance, we use the 76% conversion rate in our projections which was the approximate rate at the end of the third quarter. With that, I would like to thank you for your time today and will now turn the call back over to Darryl.

Thanks, Trish. Before we open it up for questions, I want to take a moment to thank our investors for their continued support. For those of you joining today who are considering becoming a shareholder of Trupanion, we would encourage you to review the materials we’ve provided on our Investor Relations Web site. I think you'll find they provide a lot of insight and transparency. We have plans to be at several upcoming conferences in November and I hope to see many of you there. With that, we’ll open up the call for questions. Operator?

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from Jon Block of Stifel.

Great. Thanks. Good afternoon, guys. I think maybe the first one, Darryl, might be just sort of a high level question in terms of when you look out and you see this market, how do you see your gross addition growth, if you would, at a 5 to 1 LVP to PAC? And I ask because you see a market at 2% to 3% penetrated or maybe even south of that but yet the adds have missed us a bit for the past two quarters. And I know there’s obviously the emphasis at growing at the right cost, so to say. But if we were to look out at our models, what’s the right way to view the gross additions? Thank you.

Repeat the question, I had a little mute problem on my side.

Maybe to try to do a better job of framing the question, just when you look out, Darryl, how do you see the adds, in other words the gross additions? It has come in light relative to us for the past two quarters. And I guess what I’m struggling with is at a high level there’s a market that’s 1% or 2% or penetrated. I know you put an emphasis on growing at the right price while maintaining the 5 to 1 LVP to PAC. So when we look out, how should we view the rate of growth in gross additions?

Well, as I’ve said in my shareholder letters and the size of the market, this is a very large underpenetrated market, which Jon understands very well. We expect that we can grow our top line revenue 20% to 30% year-over-year for the foreseeable future. What we are trying to do is make sure that we’re growing in a smart way. And what I brought up in my opening comments was, if we had 20% of our subcategory [indiscernible] pets a year ago being brought in that were sub-optimized, we want to optimize as many of them as we can. We’d like to optimize 99% of all the pets we enroll. And that’s going to help build the strong foundation for the company but more importantly the result of that will be our lifetime value of a pet will increase over time allowing us to increase our PAC spend in a 5 to 1 ratio and open up some levers of growth that we would otherwise not have. So getting the right mix of subcategories is long-term extremely important for our growth. I’d also say that if you look at it year-over-year growing at 5 to 1 or 5.2 to 1 versus I think the same time last year, it was about 4.5 to 1 is not really an apples-to-apples comparison. So going back to the beginning of your question, if you’re looking long-term modeling, we expect in this marketplace we could grow top line revenue 20% to 30%. And as we optimize all of our subcategories, that will help increase our LVP longer term, which will give us more levers for future growth.

Okay, very helpful. Maybe just one follow up. I think I got some of these metrics right. I was scribbling them down. But you mentioned the 360,000 invoices to-date, 58% pay within 48 hours, customer reps at 9.5 out of 10. Last quarter you talked a lot about messaging and doing a better job with messaging out in the marketplace. How do you think you’re doing there? Clearly, those are differentiating factors I would think relative to your competition. Where are you in effectively getting that across to prospective customers and how do you improve that over the next 6 to 12 months? Thank you.

Thanks, Jon. The question I think the way you framed it was 360,000 inside of 48 hours, I think it’s actually inside 24 hours we were paying those, so very, very quickly. So the majority of our pets were having a great customer experience. Where we have been focused on in the last year and we’re getting better at is using different mechanisms including the Web, Internet, other marketing materials to educate consumers on the benefits of Trupanion versus other providers. And our early results are positive. And we are seeing better engagement. We’re seeing better conversion rates. But we’re not yet optimized on getting that message out in front of as many eyeballs or ears as we need to. So I think over the next several quarters we’ll be taking our better data and our better information and learning how to share it in a stronger way.

Great. Thank you.

Yes.

Our next question comes from Mark Argento of Lake Street Capital Markets.

Thanks. Good afternoon, guys. Congrats on a solid quarter. Just wanted to kind of expand a little more on the whole kind of concept of the LVP to PAC and drill down a little bit more on the customer acquisition expense in particular. This category to me seems like one that would be readymade for the online acquisition channel just given how passionately pet owners are and how active they are in social media and other online channels. Can you talk a little bit about anything that you’ve been doing to try to explore and develop a little more your online acquisition channel? I know you cited a cost that’s kind of three times the average from a customer acquisition expense position. But maybe just drill down on that a little bit, if you could.

Sure. I don’t think it’s intuitive to many people, so let’s spend a little time going into it. I think most people observing the company would think that the number of people that are typing in generic things like pet insurance would be going up dramatically over the last number of years. The reality of it is that has not been happening. We have seen Trupanion as a keyword that has been growing dramatically over the last number of five, six, seven years. Really what’s driving the growth of the category in our opinion is veterinarians. And that’s why we are the only company with a national sales force. And what happens with the online, particularly in generic or in review sites or other places, is places like Google are really good at driving the most out of companies. So it’s not – not only is the number of people typing it in and not dramatically increasing but more competition and companies having algorithms to figure out how to garner as much money from the companies – from either a lead basis or a conversion basis makes them not as beneficial. So if we continue with our strategy of building it from pet owner and veterinarian referral, we’ll see more people searching for us online or calling us. And if we can increase our conversion rate over time, then we think that gets us the most efficient. If we can build our brand recognition and we have higher conversion rates and higher lifetime value than other people in this space, that will allow us to spend more to acquire pet and will open up other direct to consumer levers before anybody else trying to enter this space, including non-incumbent large players that may enter the space over the next five years or existing players in the space.

That’s helpful. And then when you kind of – taking it back to 5,000 feet kind of thinking about the opportunity, I know you have been very focused on taking your excess free cash flow or excess operating profit and reinvesting it back into subscriber acquisition, customer acquisition. When you think about at a high level the way the model should work, do you think you can continue to grow revenues – this quarter revenues I think was about 27% growth, subscriber grew 21%. So we’re getting the growth out of your customer, basically the ASP or the amount you’re getting paid by per customer is going up as well. But when you kind of percolate that back up to the top line, do you think you can continue to perpetuate that 20% type revenue growth organically? How do you think about the model when you sit back and say, all right, we can compound that X rate over a period of time?

Well, let’s look back 5,000 feet. So we grew year-over-year our revenue at 28% and pets I think around 21%. With the size of the market, 180 million cats and dogs, the aggregate spend on pets which is over $60 billion, the current low penetration rate, this is really about us setting up the rate foundation to organically grow in the 20% to 30% revenue year-over-year not only for next year and the year after but setting us up if we execute well to be doing this in 2020 and then 2030. And the mechanisms that we need to help us with that has been really good at understanding our data, interpreting our data, understanding it by subcategory, making sure we’re lining up our PAC spend appropriately with those LVPs. But also growing our lifetime value of a pet so that some other channels such as direct to consumer will be the first company to be able to cost effectively create those adds moving forward. Trish, do you have anything to add on that?

No. I think Darryl covered it pretty well. We’re targeting that 20% to 30% growth long term and we think we – before cost effectively acquiring pets and growing LVP we can do that.

Very helpful. Thank you.

Thanks, Mark.

Our next question comes from Kevin Kopelman of Cowen and Company.

Hi. Thanks. Just to start, can you give us just an update on just the industry landscape? Where are we, how far along have that’s come in terms of recommending this product and education? Thanks.

Kevin, thanks for joining us on the call. Your first part is about general landscapes. So for new people following Trupanion, about 180 million cats and dogs; in North America, penetration rate’s a little over 1% today. When we entered the U.S. marketplace, it was about a quarter of 1%. Every 1 point of penetration is about 1 billion in revenue. We know in other markets where there’s 25%, 26% of penetration rate in places like UK, over 50% in places like Sweden, 5% to 15% penetration rates in Western Europe, 5% to 10% penetration rates in places like Australia and New Zealand, South Africa. The marketplace, there is a very large opportunity and veterinarians are getting more and more onboard. The better metric to be looking at is how many new puppies and kittens are hearing about medical insurance and how many of those are signing up. If we get 10% of all puppies and kittens signing up today, it would take – as a category, it would take a pet generation 12, 13 years until we had a 10% penetration rate. We have pockets where Trupanion has over 10% penetration rate by hospital, so not even by category but individual hospitals or that, we have some that are even higher. We know that messaging is getting easier but we have a lot to overcome. Our territory partners when we enter a new marketplace, we still when we say, hi, I’m Darryl with Trupanion. They say, what’s Trupanion? We say, it’s medical insurance for cats and dogs. The veterinarians and their staff will say, that sounds like traditional pet insurance. We say it’s a little bit different. It’s only catastrophic care and they’ll say, you know what, traditional pet insurance sucks. You guys need to leave. So we still need to overcome those but I think it is easier today than it was five years ago and I expect it will be easier in two to three years, if we continue to have good execution and improve the customer experience and have a very high value proposition where the average pet owner is getting back both $0.70 on $1 and us paying veterinary invoices.

Thanks. So just drilling in on near-term pet trends. All year the pet acquisition costs have been coming down. We’ve also seen the gross adds slow. Is it fair to think of Q4 as being another kind of tough comp? And then the pet comps getting a little bit easier in 2017 as you anniversary this a little bit more focused marketing?

Well, I think as I mentioned before, if you guys are looking period-over-period, comparing 5 to 1 versus 4.5 to 1 is not apples-to-apples. In my opening remarks, I also bring up the fact that we need to grow in a smart way. So quite frankly knowing what we know today, having 20% of pets that were sub-optimized last year lowered our LVP this year, getting that right is the foundation to kind of grow this business. Now, we still grew 28% year-over-year, so at the top end of our 20% to 30% range. We’ve narrowed our guidance going on the upside, so we feel very confident that we have the levers to drive this ship to continue to be the category leader in a large underpenetrated market. And getting our growth rates in line with our PAC spend and LVP is not only foundationally important, it’s what’s going to differentiate us in the marketplace using our data in a smart way to grow. So, I’m very confident on our growth rates. I feel good about our growth rates next quarter and next year. But behind the scenes, I don’t want to see us enrolling the last 10 pets in a month where we don’t have good metrics. I’d rather us have the discipline to stop growing when we don’t have the best metrics and grow in a smart way, and that’s what we’re trying to build into the company. And it’s not something that flips real easy. A lot of people have said to me, well, why don’t you accelerate growing your higher LVP category in places where we have a $1,000 or $1,500 LVP? And that’s going to take us more time to get around, because it’s how we compensate people, it’s how we onboard people, it’s how we have our departments set up. And we will get better at it over the year. We’re spending let’s call it $13 million, $15 million a year on pet acquisitions. For us to be a really good company, we’re going to have to learn how to spend $100 million one day and we want to spend that cost effectively. We don’t want to spend it inefficiently. So everything we’re doing today we think will help us in '17 and '18, '19 and '20.

Okay. Thanks, Darryl. Did you give a new number on territory partners?

No, I did not give a new number on territory partners. I’ll update that in the shareholder letter.

Okay. Thank you.

Thank you.

Our next question comes from Andrew Bruckner of RBC.

Thank you. Just a couple of quick ones here. One, you kind of mentioned on your call earlier about trend increased same-store sales and I’m wondering if there’s any change to the commissions structure or how are you going about doing that to push greater penetration within a given vet? And secondly, how long before you know your LVP for a given pet cohort or subcategory is not optimized? Is it a year? Is it a couple of months? If you can dive a little bit deeper into that? Thank you.

Thanks, Andrew. I’ll answer that in reverse order. So your last question was about how long does it take for us to understand our LVP? Now remember, our LVP is 12 months – taking our contribution margin for the previous 12 months and multiplying it by the expected number of months based on our retention rates. We constantly have that, that our LVP we have over 1.2 million categories and that gets updated on a monthly basis. There’s two areas when we have low LVP. One is you can have low ARPU and low retention rates and you might have a lifetime value of a pet of $100 and yet you’re optimized on price. You’re paying us $0.70 on $1 for the average pet in that subcategory. In that scenario, you are optimized. You need to spend $20 to acquire that pet on a $100 LVP. You could figure out how to change your messaging to improve retention rates and maybe get it to go from $100 to $200. But those are the levers that we have. The flipside is you might have one where your retention rates are good but you’re just mispriced. And instead of paying us $0.70 on $1, say you’re paying us $0.90 on $1 or even worse you’re paying $0.105 on $1. Now the size of the categories are real big categories. You should find them closer to our target. When you have new categories, it takes a little while for us. But we start to get pretty accurate with about 3,000 pet months and we get more accurate at 5,000 and 10,000 pet months. So it doesn’t take us a great deal of time, a year or two entering a new channel. We’ll start to get information based on the volume of pet enrollment. But it’s something we’re constantly looking at. We’ve got a team of nine people that are full-time dedicated on this and taking that information and disseminating across the company. Your first question was more about same-store sales. And for competitive reason, I’m not going to dive into all the things that we want to do on it. I can tell you it’s not driven by commissions. It’s driven by us being better in the field with better sets of tools, but that’s about as much as I want to get into.

Okay, that’s fair. Then if I could just follow up quickly with how are you seeing on the whole pricing for the veterinary industry trends, because I know your pricing correlates very closely to that, and anything to look out for in the future just on an overall industry pricing perspective?

Well, it’s been pretty consistent for the last 20, 30 years. I think the most recent data that I’ve heard shows that across the industry there was about a 6% increase in average billing at a veterinary hospital. Some of the better performing veterinary hospitals, it’s closer to 8%. And if you look at our ARPU increase, which is about 7%, is a pretty good trend over the last year. But if you’re modeling, we’ve said historically kind of 5% to 6% ARPU increase year-over-year is what we’d expect to see just if you want to call it veterinary inflation or utilization of veterinary services.

Perfect. Thank you.

Yes.

[Operator Instructions]. Our next question comes from Michael Graham of Canaccord.

Hi. Thank you. Just want to ask two. One on the comments you made about the new billing system and the impact on churn. I’m just wondering, are you confident like that billing system’s already been fully implemented and is there any potential for some noise as that kind of impacts the way customers are interfacing with Trupanion here as we get through Q4? And then I was just looking for a quick update on your direct to consumer marketing effort. Thanks.

Hi, Michael. I’ll answer your first question and then I’ll have Darryl talk to your second one. Our billing system that I mentioned in my remarks, it was implemented at the very end of the quarter. And so when we see the impact of that and the more robust card updater flowing through, we may not see a dramatic impact in one single quarter especially because our retention is calculated on a trailing 12-month basis. But we do expect to see incremental improvement over the next couple of quarters. And that being said, the impact that we’ve seen of these cards not being updated as timely as we would like has been fairly slight and gradual. And so we’re encouraged by what we’re seeing and we’re happy to have gotten that system in at the end of the quarter. But as we mentioned, it’s not going to flip the switch overnight. It will happen over time.

Michael, I’ll answer your second question. I think what we learned on our direct to consumer marketing update. We continue to test. We are seeing some encouraging results in the few different areas. I expect that we’re going to be doing more testing this quarter and in 2017. If we find any of these that is material and is a large lever that will have large expected growth, you guys will hear about it. But right now we’re still in kind of a test mode. We’re testing not only in markets where we have a higher concentration of active hospitals but we’re also testing in some markets that we are newer in and seeing that to understand the delta in trying to improve the messaging. As I talked about earlier, more direct to consumer messaging, things about how Trupanion stacks up are all little things that we’re working on. So, incremental small progress but no homeruns yet.

Okay. Thank you.

Ladies and gentlemen, we have reached the end of our question-and-answer session. This does conclude today’s conference. Thank you for your participation. You may disconnect your lines at this time.