Trupanion, Inc. (TRUP) Q2 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to the Trupanion Second Quarter 2017 Financial Results 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 second quarter 2017 financial results conference call. Before we begin, I would like to remind everyone that during today's conference call, we will make certain forward-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 Form 10-K and 8-K filed with the Securities and Exchange Commission. Today's presentation contains references to non-GAAP financial measures that management uses to evaluate the company's performance, including, without limitation, fixed expenses, variable expenses, adjusted operating income, acquisition costs, 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 stock-based compensation expense and depreciation expense. These non-GAAP measures are in addition to and not a substitute for measures of financial performance prepared in accordance with 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 this site. With that, I would like to turn the call over to Darryl, Trupanion's Founder and CEO.

Thanks, Laura. On today’s call, we will recap our second quarter results as well as remind everyone about Trupanion's strategic initiatives that we discussed in detail during our annual shareholder meeting in June. For those of you who were unable to attend our shareholder meeting, we look forward to hosting you in future years. Our annual shareholder meeting is designed to be a special once per year opportunity to interact with our team, experience our culture and have an in-depth discussion about our strategic initiative. Turnout at this year’s event was good and feedback was very positive. We look forward to building on this momentum in the future. For your reference and planning purposes, we’ve published the data of our upcoming shareholder meetings for the next two years in our most recent annual shareholder letter which can be found on our IR Web site. Our next shareholder meeting will be held June 7, 2018. Turning to our financial performance for the second quarter, we grew total revenues by 27% year-over-year. We expanded our adjusted operating margins to approximately 10% and we delivered our fifth consecutive quarter of positive free cash flow. In short, our financial performance was in line with our expectations but we do feel that we left some opportunities on the table when it comes to execution. We have a number of relatively new initiatives underway and we’re early in the process of optimizing and executing in these initiatives. During the quarter, we made a deliberate change to targeting an internal rate of return with our PAC spend, allowing us additional funds to explore and test new acquisition initiatives. This drove our LVP to PAC ratio to 4.6 to 1, below our historical target of 5 to 1. We continuously evaluate the effectiveness of these tests, ensuring we operate within our long-term objective to deliver incrementally more effective pet acquisitions by subcategory. I’ve provided more detail about this in our 2016 annual shareholder letter. The first of five key initiatives that we highlighted during our annual shareholder meeting is the expansion of our adjusted operating margin. Expansion of our adjusted operating margin allows us to achieve higher internal rates of return and have additional funds available to invest in new pet acquisitions. Trish will discuss our continued progress with this metric in her prepared remarks. Our second key strategic initiative is to grow same-store sales, that is the number of new member referrals that we attribute to a specific hospital. Historically, growth within a hospital has followed a natural curve that we have been unable to accelerate. Towards the end of last year, however, we ran a small but encouraging pilot that provided us with enough conviction to pursue this initiative more aggressively. As a result, we are investing in the expansion of our pilot program in connection with our rollout of Trupanion Express. A key part of this initiative is the creation and expansion of an inside sales team to deliver more consistent communication in between territory partner visits. This initiative is hard, it’s going to take a long time and we’re investing ahead of the curve. Our third area of focus is on improving conversion rates. We believe that we are generating the majority of leads in the industry through our territory partner relationship. Improving conversion rates will be a significant part of our continued growth. For competitive reasons we won’t go into the details, but this remains a key focus area for our business. Our fourth initiative is claims automation. We view our data and analytics as a key competitive mote and our business intelligence team leverages our data to help drive decision making across the organization. Claims automation has been aided by our ability to integrate with veterinary practice management software and we expect to go live with some testing by the end of the year. And our final strategic initiative is what we refer to as Nirvana. Today, we lose about 1.4% of pets on a monthly basis and existing members who add a pet or refer a friend offset about half of this number or 0.7% of our total pets enrolled. Our strategy is to close this gap by providing an increasingly high-value proposition that pet owners both feel and appreciate. Our strategic initiatives are longer term in nature and it is our expectation to leverage our future annual shareholder meetings as a venue to update you on our progress on each of these fronts. And with that, I’ll hand the call over to Trish.

Thanks, Darryl, and good afternoon, everyone. We are pleased with our second quarter financial performance. Total revenue for the quarter was 58.3 million, up 27% year-over-year. Total enrolled pets increased 19% year-over-year to over 383,000 pets enrolled as of June 30. Subscription revenue was 52.6 million in the quarter, up 25% year-over-year and comprised 90% of total revenue. Growth again was driven by increases in average revenue per pet as well as growth in enrolled subscription pets. Total enrolled subscription pets increased 16% year-over-year to approximately 346,000 pets enrolled as of June 30. Monthly average revenue per pet for the quarter was $51.47, an increase of 9% year-over-year. In local currency, monthly average revenue per pet increased by 10% from the prior year for our U.S. members and by 8% from the prior year for our Canadian members. Average monthly retention was 98.57%, a decrease from 98.64% in the prior year period. Our other business revenue, which generally is comprised of revenue that has a B2B component, totaled 5.6 million for the quarter, an increase of 54% year-over-year. Year-over-year growth in our other business segment reflects an increase in the number of pets enrolled within this segment. Total enrolled pets in our other business segment was over 36,000 at quarter end. Subscription gross margin was 19% for the quarter, within our annual target of 18% to 21%. Total gross margin was 18% for the quarter. Fixed expenses for the quarter represented 9% of total revenue, down from 10% in the prior year period, reflecting increased scale in our technology and general and administrative departments. Adjusted operating income totaled 5.6 million in the second quarter, a 41% increase from the prior year period. As a percentage of revenues, adjusted operating margin expanded to 10% from 9% of revenue in the prior year period. We continue to view expansion in adjusted operating margin as one of the most important measures of shareholder value creation longer term. Net income was 0.4 million in the quarter, which benefited from a one-time gain that I will detail more momentarily. I first want to turn to our acquisition costs. In the second quarter, we spent 4.2 million on pet acquisitions compared to 3.4 million in the prior year period. This equated to an average of $143 per acquired pet with a corresponding average lifetime value of $654 and LVP to PAC ratio of 4.6 to 1 compared to 5.3 to 1 ratio in the prior year period. As Darryl mentioned, this reduction in LVP to PAC ratio followed our decision to adjust our pet acquisition spend based on a targeted internal rate of return, allowing us additional funds to explore new acquisition tests and initiatives. We carefully monitor and measure the outcome of these tests to ensure that over time, they perform at our long-term target. We aren’t just looking to achieve our desired LVP to PAC on a blended basis, but also at a more granular level. This is the reason we’re so focused on our pricing by subcategories and also monitoring and iterating on our testing initiatives. In the second quarter, we generated net income of $0.4 million or $0.01 per basic and diluted share compared to a net loss of $1 million or a $0.03 loss per basic and diluted share in the prior year period. Our net income in the second quarter benefited from a one-time $1 million gain on the sale of an equity method investment. Excluding this gain, we would have had a net loss of 0.6 million or a loss of $0.02 per basic and diluted share. From time-to-time, we make strategic investments that tend to be rather small and motivated by a strategic value, and we may realize small investment gains or losses as a result, as evidenced by this transaction. Adjusted EBITDA was 1.4 million in the quarter and excludes the aforementioned gain on the sale of our equity method investment. This compares to adjusted EBITDA of 0.5 million in the prior year period. We focus on free cash flow, which was 1 million in the quarter, marking our fifth consecutive quarter of positive free cash flow and our operating cash flow was 1.8 million in the quarter. We ended the second quarter with 30 million basic shares outstanding and 32.7 million shares outstanding on a weighted average diluted basis. At June 30, we have 57.2 million in cash, cash equivalents and short-term investments. I’ll now turn to our outlook for the third quarter and full year 2017. Revenue for the third quarter is expected to be in the range of 61 million to 62 million, representing 27% year-over-year growth at the midpoint. At this revenue range, and assuming a 4 to 1 LVP to PAC ratio for the third quarter, we would expect adjusted EBITDA to be around breakeven. Based on our performance in Q2, we are increasing our outlook for the full year. Revenue is now expected to be in the range of 238 million to 240 million, representing 27% year-over-year growth at the midpoint. At this revenue range, and assuming a 4.6 to 1 LVP to PAC ratio for the full year, we would expect adjusted EBITDA to be in the range of 3 million to 5 million. Also, please keep in mind that our revenue projections are subject to conversion rate fluctuations between the U.S. and Canadian currencies. For our third quarter and full year guidance, we use the 77% conversion rate in our projections, which was the approximate rate at the end of June. With that, I would like to thank you for your time today and we will now open up the call for questions.

At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from Mark Argento of Lake Street Capital Markets. Please proceed with your question.

Hi, Darryl. Hi, Trish. Congrats on a solid quarter. Just wanted to get a little bit more thought around the experimentation that the LVP to PAC are freeing up the opportunity to do some other types of spend or other types of pet acquisition. Can you talk a little bit about the philosophy behind that and what you’re doing with that extra money?

Yes, thanks, Mark. Let’s focus first on our adjusted operating income which has been compounding over the years. I think in 2015, we had about 4 million, 5 million in operating income; 2016, it was about 15 million. This year it’s tracking to 21 million, 22 million. And then in '18, '19 and '20, it will probably go up to like $30 million, $40 million, $50 million as the years go on. What we have been doing at the core of our business is spending about $15 million to acquire approximately 100,000 pets and that has been relatively consistent for the last couple of years. And in this year, which we didn’t have the room last year, we’re going to be doing – spending a couple of million dollars in testing to find out if we can pull some levers to help to cost effectively accelerate growth in future years, as our adjusted operating income becomes larger and larger, we then need to invest it with strong internal rates of returns or have that money go into EBITDA or pay dividends back to our shareholders. So with the size and penetration rate of the market, we want to be able to grow consistently 20% to 30% year-over-year. And the testing that we’re going to be doing is regional test, kind of TV, radio-type testing. When we test it out, it might have an LVP to PAC ratio of maybe 1 to 1 or 1 to 2, but we’ll want it to get to a place where it has an internal rate of return of a longer term target of maybe 40% for us to start to deploy bigger amounts of that capital. So I would think for the balance of this year and probably for 2018, we’ll be spending more money testing. And as we become effective at it, then we can use that to help accelerate growth in the outer years as we have more free cash flow to do so. But last year, as a reminder, we had about 15 million in adjusted operating income and we spent about 15 million acquiring pets. That kind of got us to cash flow breakeven. This year, we’re tracking for about 22 million adjusted operating income and maybe we’ll spend 15 million on core and 2 million to 3 million on tests will give ourselves a little bit of EBITDA, unless some of these tests become fruitful and then we can start to kind of pull those levers.

Great. That’s it for me. Thanks.

Our next question comes from Jon Block of Stifel. Please proceed with your question.

Great. Thanks, guys, and good afternoon. Darryl, maybe the first one for you. The gross adds grew year-over-year according to our estimates and still have to tie off for churn, et cetera, but grew for the first time year-over-year in about three quarters or so. I’m assuming that the LVP to PAC coming down I think, Trish, to alluded to 4 to 1 for the third quarter, is that the safe assumption? In other words, that growth should be back in gross adds for the balance of 2017 as you modestly bring down that LVP to PAC goal?

Jon, I wouldn’t go to that conclusion at this point. We’re going to be spending some more money on tests, and they’re called tests for that reason. They may have very low returns with very few pets enrolling. If we had confidence that we deploy $1 million or $100,000 and we knew what result we would get, then that’s when it would move outside of testing. But I would not take that assumption. We went into the year saying that we wanted to grow revenue between 20% and 30%, and with the guidance that Trish gave, we’re on the upper end of that. We’re not really trying to accelerate growth of pets. We’re really wanting to be cash flow positive. We’re trying to get the pets that we are coming on being the right mix of pets, so that’s getting back to the subcategory pets. We’re making good progress in that area. We plan to continue to make good progress. And as these tests come through the next few quarters, if some of them are positive and we can get a strong rate of return, that will be the point that we start to deploy more capital and then that will give us the ability to kind of accelerate pet growth. But we are not – we don’t have that conviction yet. We’re still in a testing mode.

Okay. And maybe I’ll just jump around a little bit for the next couple of quarters. You talked a little bit about how you’re out there with the territory partners stimulating demand for the market and you want to work on the conversion. Darryl, for a lot of good reasons, you’re not going to tell us exactly how in a public conference call, but where are you with that initiative? In other words, is this something that is just taking off at Trupanion and is something that you’ve been going down this road for a little while, maybe if you can talk to us about where you are with improving conversion rather than specifically how?

Yes, another good point for you to be bringing up, Jon, because of the five key initiatives that we talked about at the annual shareholder meeting that are all kind of longer term. The first one was focused on the adjusted operating income, we’re making decent progress on there. We’re working on same-store sales. We’re working on trying to increase the conversion rate both over the phone and on the Web. Claims automation and trying to offset churn with add a pet. The conversion rate, we’ve been working on this for well over a year. I think in certain areas, we made good progress. For example, last quarter we had record conversion rates on the telephone. So although we’re having higher ARPU and everything else, we now that when we get our value proposition across that we get long-term sticky customers at high conversion rates. We’re not seeing that uniformly across all of our channels. So this is why it’s a long-term initiative. At a high level without giving you detail, I’d say half of the things we’re working have made progress and the other half have not, and we need to stick to it. The key for it is particularly when you start to do some more testing on direct-to-consumer and other things, one of the biggest drivers to make those more cost effective is increasing your conversion rate. And when we look out in 2019 or 2020 or 2021 as we have, say, $50 million of adjusted operating income that we try to pull levers to accelerate growth, conversion rates are going to be really key for us to be cost effective where we can hit our internal rate of return hurdles, say, 40%. So I feel okay on the progress. I mentioned on our opening remarks that I think we left – Q2 from an execution standpoint was not perfect. Of the key initiatives that I went over, we did make as much progress during the quarter as I would have liked on many of them. They’re multiyear initiatives, so that doesn’t mean they’re dead or anything else. I would have liked to seen a little bit more progress and I think conversion rate is an example of that.

Okay. And last one for me. Trish, I think I heard you say 4 to 1 LVP to PAC for 3Q. I missed, my apologies, what you said for full year? And then, Darryl, just so I’ve got my arms around this correctly, to your earlier point, that doesn’t mean that we’re at 4 to 1 in '18, '19, '20 and beyond. You’ve got some tests. Some of these tests have 1 to 1 or 2 to 1 LVP to PAC that accompany them. And so arguably, if successful, we could see this LVP to PAC somewhat compressed over the next several quarters stabilize and possibly work their way modestly higher in the out-years? Thanks, guys.

Sure, Jon. So to your question on what we’re thinking on LVP to PAC for the full year, it was 4.6 to 1 and that’s based on our actuals for Q1 and Q2. And the assumption currently that will operate out of 4 to 1 for Q3 and Q4. And I’ll just add a little bit more context to that. It’s mainly around us targeting the internal rate of return, like Darryl said, based on our adjusted operating margin expanding and us being able to spend a little bit more to acquire those pets. But when we’re just starting out, it’s very possible that some of the initiatives could have an LVP to PAC of 1 to 1 or 2 to 1, so much lower than what we ideally would have them be when they’re optimized. So that’s what’s bringing down our core business, although it’s still coming in at the 5 to 1 ratio, but we do have some coming in and closer to 1 to 1 ratio, which is where you get that 4 to 1 on a blended basis. And we’re just really focused then and very disciplined in how we go about this testing, monitoring, reiterating, trying to drive these up over time. It’s based on each initiative as to how much time we give them; some we know in a day, if they’re working; some take longer. And so we’re constantly monitoring them to try to get them up to internal rate of return that makes sense long term, which is closer to the 40%. But starting out, they’re a little lower. And I’ll touch a little bit on your second question and then Darryl can expand if needed. How much we’re able to spend to acquire pets is based on how our adjusted operating margin expands over time. So while we’re okay with the 4 to 1 for right now, based on where our adjusted operating margin is at, which is the 10% level, as we expand closer to 15%, that margin could potentially go to a 3.2 to 1 and we would still achieve our 40% IRR. Now that only makes sense if we’re pursuing areas where we’re accelerating growth. If those aren’t there, that’s when – or they’re not there for a particular quarter, that’s when you could see us going to a higher LVP to PAC ratio. So it kind of depends on what we’re pursuing. But it allows us to pursue additional channels. And I’ll let Darryl expand on that.

Jon, the only thing I’d say and first of all I’d probably focus people back to my last year shareholder letter which has about three pages talking about this concept. LVP to PAC does not include fixed expenses, so it doesn’t encapsulate all of our cash flow. Internal rate of return encapsulates all of our cash flow. So it’s a more meaningful metric. And ultimately we want to have an internal rate of return that is higher than what most shareholders can get in the market. We think a long-term target of 40% plus internal rate of return is great. And when we can add pets at that rate, we will do it. We don’t want to do that on a blended basis, we want to be doing that on each channel or each subcategory. We’ve done a pretty good job this year learning how to optimize our subcategories. Last year about 20% were sub-optimized. We went down to about 17%. We’re probably tracking to maybe hit 10% by the end of the year. So it’s really having the discipline to say when we spend incremental dollars, are we getting good returns. And that real return is what we think about on our internal rate, including fixed expenses. So we’re making good progress there.

All right, great. Thanks guys for the color.

Our next question comes from Tom Champion of Cowen and Company. Please proceed with your question.

Hi. Good afternoon. Last quarter, you discussed efforts to share more data with your Trupanion Express hospitals. I was wondering if you can maybe just talk about that a little bit and the benefits that hospitals and customers are gaining from that new insight.

Well, we provided a lot of detail on that in the annual shareholder meeting which we had over four hours of open Q&A which is difficult to do in this format. So I would encourage existing or long-term shareholders to try to attend that event in the future. The short answer to it was that we ran a test last year incorporating Trupanion Express with some other initiatives including inside sales, some other programs to try to improve our same-store sales and that test garnered results of little bit over a 40% increase, which were encouraging enough for us to expand the test and try to do more work. And it’s one of our long-term initiatives to take the combination of the tool Trupanion Express as well as some other things we’re doing to improve same-store sales. So we feel like we’ve got a good roadmap but its early days on execution. We’ve got to build our teams. We need to invest over this long term, but they’re encouraging enough for us to keep moving forward.

Okay. Thank you.

Our next question comes from Mark Mahaney of RBC Capital Markets. Please proceed with your question.

Hi. Good afternoon, guys. Thanks for taking my question. It is actually Jim Shaughnessy stepping in for Mark. Just a quick question on the other revenue line, second consecutive quarter of really nice strong growth there and I’m just wondering if there’s other – if adding more of these type of deals that you did with PetSmart last quarter, if this is part of the longer-term strategy if there are more deals out there like this that you can go chase or that you plan to announce? Thanks.

So let me just go over our other revenue in general. So most of our business is direct to consumers’ monthly recurring subscription business. The other revenue tends to have a business-to-business component. So we’re working with another company who are bringing us pets where they’re spending the money to acquire the pet. They could have different distribution channels that could be different products at different price points. We think as this category grows, if you look at what’s happened in the UK and other markets, is that there will be additional distribution channels and pricing products. And we think we can be a great partner. So we can either sit on the sidelines and watch or we can be a part of helping this category grow in North America. And we think the strategy, because of our unique experience in having data and metrics and teams and 17 years of experience in this space, makes us a great choice to partner with. So I think you said PetSmart, the one that we brought on in the beginning of the year was actually a marketing company called Pet's Best. We’re not going to breakout specific details on our partners but most of – we’ve been growing this area because that book of business has been rolling on as we said at the beginning of the year. We do continually look for these type of opportunities. They tend to take a long time to cultivate. And when they do cultivate, it takes a long time to roll on. So there’s nothing that short term on a quarterly basis that’s going to surprise anybody. They roll on as a group or they roll off as a group. But we think over the next 5, 10 years this is an important part of our strategy.

Thank you.

Our next question comes from Paul Penney of Northland Capital. Please proceed with your question.

Hi, Darryl and company, great quarter. Back to conversion rates and building the business, you guys do obviously a great job on the veterinarian and referral channels. Is there any plan to improve your ratings and awareness across the B2C-related consumer channels?

Yes, there is. So I think what you’re talking most specifically to is probably mostly Internet and online review sites, et cetera. I’m not going to provide any specific details but we know that’s an opportunity for improvement. And what’s important for us is to have the best value proposition, have the best product offering, the best customer experience and be able to articulate that to consumers. We believe we are leading the category in growth. We believe that we are at the most important juncture which is veterinarians making this product more accepted so that penetration rates, which are now over 1%, continue to grow. And we think that’s the most important place for us to be. That being said, we think there’s areas for us to improve online and a bunch of other channels and we are focused on it. Some of them are longer term initiatives though.

Okay, great. And then switching gears, specifics around hiring additional TPAs, is there an opportunity to go deeper within existing large MSAs or is there potential to look into smaller relative markets?

Yes, so I’ll remove some acronyms for other people on the call. So our territory partners are geography based – it’s kind of modeled after the early Coca-Cola distributor model where the average person has 2 million to 3 million human population and about half that in cats and dogs. What we found over time is most of our growth has come from adding new markets. And then in a new market, we get more hospitals recommending us and we have a duration curve that it takes us X number of years to get to half of the hospitals actively recommending us and it continues to grow over time. What we’ve learned over the last couple of years is that adding more people – like adding a second Coca-Cola truck or a third Coca-Cola truck in a given geography improves our penetration rate and can also affect our same-store sales. So we have been doing more of that and I think there is more opportunity for us to continue to do that over the next three to five years. But there’s also a place – we still have some open market that we need to get to. And when I talk about some places we haven’t done a great job executing on in Q2 and prior, filling out some of those newer markets we haven’t been doing recently as good of a job. We’ve been doing a better job adding more people into our larger existing markets. So we need to focus on both areas.

Great. Thank you.

Our next question comes from Mike Graham of Canaccord Genuity. Please proceed with your question.

Okay. Thank you. Nice job on the quarter. And I just wanted to ask on retention rate and on the Nirvana. On the retention rate, just can you give us any update or thoughts on where we are in the evolution here and when you think it might bottom out based on some of the initiatives to clean up the enrolled pet base? And then on Nirvana, just any updated thoughts on how the product needs to change or the pricing needs to change or the experience needs to change together?

Yes. So let me start on a macro level. Our retention rate – our 10-year average retention rate is about 98.5% per month. I’d like that number to be closer to 98.7% or 98.8% if we can get ourselves to the point where we have it offset by refer of PetMed – refer a friend and add a pet. We haven’t really made any progress this year in this area. I went into the year and talked a couple quarters ago about I didn’t expect retention to be improving this year because we’re trying to fix our subcategories of pet and when you are – for a small percentage of people giving them a larger year-over-year rate change when people don’t sense or feel the value, that’s not going to help retention rates. But getting our pricing right is at the core of what we need to do well. Our job to consumers, to veterinarians is to put our pets in nice groups that we think are fairly justified and payback the $0.70 on the dollar for the average pet. And we’re getting better at doing that. We’ve got the data on it and I’d rather do that first than focus on retention rate or trying to increase retention after. On the other side of the Nirvana having increasing their number of refer a friend or add a pet, I don’t think that’s so much a pricing issue. When you have pricing stable in each subcategory and it goes up 5% to 6% year-over-year on an inflation basis or maybe 0% to 10% for the average person, we’ll find our retention rates are high there. I think our bigger challenge here is having consumers understand the product better. So at the time of enrollment clearly understanding what’s covered or what’s not covered, understanding what our pricing promise is, understanding that our product is for the life of the pet, understanding that we don’t have limits, understanding that we cover congenital and heredity. And then our backend process is the speed in which we pace things. When we pay a hospital directly in under five minutes, we’re having higher retention rates than if we do it in through an old reimbursement model. So driving more hospitals to a point where we’re paying them directly, having more hospitals understand our value proposition, that will help. So upfront, people understanding the product, having a better customer experience, having a pricing by subcategory as accurately as they can be are all the keys. And I think we can do a better job in our communications to our existing clients, those that have used the product and those that have not. If you have a seven-year-old Golden Retriever who has not had any medical problems, letting that person understand the things that are most likely to happen to an eight or nine-year-old Golden Retriever and the value of keeping the product is another opportunity for us to improve and keep people for the life of the pet.

Okay. That makes sense. Thank you.

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