Trupanion, Inc. (TRUP) Q3 2021 Earnings Report, Transcript and Summary

Greetings and welcome to the Trupanion, Inc. Third Quarter 2021 Earnings 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, Laura Bainbridge, Investor Relations.

Good afternoon and welcome to Trupanion's third quarter 2021 financial results conference call. Participating on today's call are Darryl Rawlings, Chief Executive Officer; and Drew Wolff, Chief Financial Officer. Margi Tooth and Tricia Plouf, our Co-Presidents will be joining Darryl and Drew for the Q&A portion of today's call. Before we begin, I would like to remind everyone that during today's conference call, we will make certain forward-looking statements regarding the future operations, opportunities, and financial performances of Trupanion within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These statements involve a high degree of known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed. A detailed discussion of these and other risks and uncertainties are included in our earnings release, which can be found on our Investor Relations website, as well as the company's most recent annual report on Forms 10-K and subsequent filings with the Securities and Exchange Commission. Today's presentation contains references to non-GAAP financial measures that management uses to evaluate the company's performance, including without limitation, fixed expenses, variable expenses, adjusted operating income, acquisition costs, internal rate of return, adjusted EBITDA, and free cash flow. When we use the term adjusted operating income or margin, it is intended to refer to our non-GAAP operating income or margin before new pet acquisition. Unless otherwise noted, margins and expenses will be presented on a non-GAAP basis, which excludes stock-based compensation expense and depreciation expense. These non-GAAP measures are in addition to, and not a substitute for, measures of financial performance prepared in accordance with the U.S. GAAP. Investors are encouraged to review the reconciliations of these non-GAAP financial measures to the most directly comparable GAAP results, which can be found in today's press release or on Trupanion's Investor Relations website under the Quarterly Earnings tab. Lastly, I would like to remind everyone that today's call is also available via webcast on Trupanion's Investor Relations website. A replay will also be available on the site. With that, I will hand the call over to Darryl.

Thanks Laura and good afternoon. I'm excited to share with you our key financial measures for the quarter. Total revenue increased 40% over the prior year period. Adjusted operating income increased 44% year-over-year, and in total, the team was able to deploy 42% more capital year-over-year at an estimated internal rate of return of 36%. As a reminder, adjusted operating income represents the cash generated from our existing pets in a given period. Typically, we will invest the majority of these dollars growing our portfolio of new pets. Growing adjusted operating income and deploying compounding sums at high internal rates of return are the drivers of intrinsic value in our business. Because adjusted operating income is the primary input of our discounted cash flow model, we view it as a proxy for value creation. In a large underpenetrated market, we aim to grow intrinsic value per share 25% per year, year-to-date, growth and adjusted operating income of 39% for the first nine months of our 60-month plan, means we are currently tracking well ahead. In the quarter, performance benefited from expanding margins and sustained high levels of retention. Compared to the prior year period, average monthly retention increased to 98.72% on a trailing 12-month basis. The average pet stays with Trupanion for 78 months, up from 76 months in the prior year period. In times of accelerated growth, I believe this performance is exceptional and very hard to do. Well done team. The impact of the sustained high levels of retention is reflected in our progress towards TruTopia, our defined state of self-sustaining growth. In TruTopia, members adding pets or referring friends offset pets turning off. In the quarter, we narrowed the gap to TruTopia to a mere 0.28%. TruTopia is also a leading indicator of net pet growth, which increased 41% over the prior year period. Over the long-term, we believe company is most likely to be successful are those who can invest in innovation and expand their addressable market. Achieving operating scale, compounding adjusted operating income, and our team's growing ability to put greater sums of capital to work in a disciplined manner, position us to do so. We highlighted the ways we are growing and investing in our business in our 60-month plan, which can be found in this year's Annual Shareholder Letter. I'll focus my remarks on a few areas. In the quarter, we launched our low and medium ARPU products, Furkin and pet health insurance direct both in Canada. We will operate both brands within our same capital allocation parameters, and over time, we'll aim to grow our addressable market, while offering greater transparency to the industry. Our ability to operate at scale means that we are also able to support the launch of new markets. By the end of 2025, we aim to grow our addressable market by 40%. We intend on doing this by adding 10,000 international hospitals. This will increase our overall market from 25,000 in North America to 35,000 globally. While doing so, we also expect to expand our active hospital base. Nine months into our 60-month plan, active hospitals totaled over 15,000. For more information on the growth interactive hospitals over the years, please see our prior shareholder letters. As we grow and scale new products, distribution channels, and international markets, our mix of business should continue to evolve. Our metrics will reflect that progression. What won't change are the drivers of the value creation for our business; our adjusted operating income, the amount of capital we can deploy, and the return on our invested capital. Before I hand it over to Trish, I want to take a moment to welcome Drew formally to the call and congratulate him on his promotion to CFO. Drew joined us in May and has quickly shown himself to be a strong leader and a great all around team member. Drew, it's a pleasure to have you on board. I continue to be humbled by the talent we are attracting to the team. To me, it speaks to our culture and our mission-driven organization. With that, I'll hand it over to Trish.

Thanks Darryl. I want to take a moment to echo Darryl's sentiment and congratulate Drew on his promotion to CFO. We were hopeful when he joined Trupanion as EVP of Finance that this would be the outcome. I'm thrilled that Drew's quick transition and strong leadership provided a pathway to do so on a timeline that has felt natural and seamless. I look forward to focusing my responsibilities on our long-term strategy and in coordination with Margie, the execution of our 60-month plan. My purview will remain all of operations, finance included, and I will continue to work closely with, as well as be a resource to, Drew and his team to ensure a smooth transition. With that I will turn the call over to Drew to discuss our third quarter results in further detail.

Thank you, Tricia and Darryl and good afternoon, everyone. I'm honored to be speaking with you today as Trupanion's Chief Financial Officer. I've been on a steep learning curve over the past several months and I'm thankful to Tricia and the rest of the team for their guidance and counsel during this time. The talent, passion, and humility the team brings to their work every day is inspiring, and I'm excited to be a part of where Trupanion is headed. Trupanion is a mission-driven organization with a massive total addressable market and a business model that not only drives value creation for shareholders, but does so while targeting the highest value proposition for our members and aligning the interests of all stakeholders. I've been especially impressed with the compounding engine of our business or our ability to reinvest our adjusted operating income at high rates of return. All that starts with Trupanion's exceptional retention, which means more of our investment is going into growth not churn, which allows us to target the highest sustainable lifetime value in the industry. We're delivering these results with a fundamentally different approach, one that focuses on aligning the needs of pets, pet owners, and veterinarians. Unlike other retail pricing approaches I've experienced in my career, Trupanion is truly a cost plus model. This approach means that we aren't pricing to the point of maximum elasticity. This is evidenced by our ability to adjust pricing to keep veterinary invoice expenses at our 71% value proposition, while increasing growth. In short, it's a great business and one that I'm excited to be a part of. With that, I'll turn to our results for the quarter. Total revenue for the quarter was $181.7 million, up 40% year-over-year. Our performance was led by sustained high levels of monthly retention and solid gross additions in our subscription business and continued strong growth in our other business. Within our subscription business, revenue was $127.1 million, up 28% over last year or 26% on a constant currency basis. Total enrolled subscription pets increased 22% year-over-year to approximately 676,000 pets as of September 30th. Average monthly retention, which is calculated on a trailing 12-month basis was 98.72% compared to 98.69% in the prior year period. I'll reiterate that our strong monthly retention means we spend less energy standing still than many consumer subscription businesses, and the fact that we're able to do so while accelerating our growth, is especially impressive. Monthly average revenue per pet was $63.60, an increase of 4.5% year-over-year or an increase of 3.2% on a constant currency basis. Growth in ARPU is reflected of mix of business in the quarter across products and geographies. It's for this reason, I'll reemphasize Trupanion's unique cost plus approach to pricing. If we do our job well, ARPU will be the output of pricing accurately to our value proposition. On our P&L that value proposition is represented in the cost of paying veterinary invoices. For the third quarter, the cost of paying veterinary invoices for our subscription business was 71%, in line with our annual target. This shows that our pricing in aggregate is aligned with our cost plus model and emphasizes our commitment and ability to deliver for our customers. As a percentage of subscription revenue, variable expenses increased slightly over last year to 10% and fixed expenses were consistent with last year at 5%. Future scale in these areas paves the way for us to continue to drive our positive flywheel, reinvest in our value proposition, driving even higher retention and lifetime value, while staying true to our adjusted operating margin target. Across our expanding pet base, this means even more funds to invest in the growth of the business at compounding high rates of return. After the cost of paying veterinary invoices, variable expenses, and fixed expenses, we calculate our adjusted operating income. Of these, adjusted operating income is the most important contributor to our conversion, retention, and long-term growth. With this in mind, we're pleased with our continued progress in delivering adjusted operating margin for our subscription business near our target of 15%. In the quarter, adjusted operating margin was 14.6%, marking the third quarter over the last eight that we were within 100 basis points of our target. In dollars, our subscription business delivered adjusted operating income of $18.6 million, an increase of 35% over the prior year period. Turning briefly to our other business segment, which is comprised of revenue from other products and services that generally have a B2B component and different margin profiles than our subscription business, total revenue was $54.6 million. Compared to the prior year quarter, this is an increase of 78% year-over-year, reflecting an increase in pets enrolled within the segment. Adjusted operating income for the segment was approximately $2.2 million. While low margin, our other business provides scale and data and fixed expenses. In addition, we incur virtually no acquisition span within the segment provided a small profit we can then reinvest in the growth of our core business. As a result, our total adjusted operating income was $20.8 million, which is up 44% over the prior year quarter. Our net loss was $6.8 million, which I will discuss in more detail momentarily. During the quarter, we invested $17.5 million or 42% more year-over-year to acquire approximately 58,000 new subscription pets. This resulted in a pet acquisition costs of $280 at an estimated 36% internal rate of return for a single average pet. Given our strong balance sheet and scale, we're also investing in new product development and international expansion. Long-term, we expect these investments to deepen our modes and expand our addressable market. These initiatives are included in development expense as they are pre-revenue and were $0.9 million in the quarter and $2.9 million in the first nine months of the year. This resulted in an adjusted EBITDA of $2.2 million compared to $1.8 million in the prior year quarter. Depreciation and amortization was $2.9 million, an increase of $1.3 million year-over-year. This increase was primarily due to the amortization of assets from our software acquisition in the fourth quarter of 2020. Total stock-based compensation was $6.4 million, in line with our projection of $6 million to $7 million in stock-based compensation per quarter. As a result, net loss was $6.8 million or a loss of $0.17 for basic and diluted share compared to a net loss of $2.6 million or a loss of $0.07 for basic and diluted share in the prior year period. On a year-over-year basis, the increased stock-based compensation impacted net loss by $0.10 and the increased depreciation and amortization impacted net loss by $0.03. I'll now turn to cash flow. Operating cash flow was $6.2 million compared to $9.8 million in the prior year quarter. The year-over-year decrease in operating cash flow reflects our accelerated pet growth and investment in development initiatives I discussed earlier. We have also increased our investment in capital expenditures by $1.5 million compared to the prior year period, totaling $2.8 million during the quarter. The increased capital expenditure is primarily related to software, driving our member experience and new product initiatives. As a result, free cash flow in the quarter was $3.5 million. At quarter end, we held cash in investments of over $221 million and no debt. I'll now turn to our outlook for the full year 2021, which we are updating to account for our year-to-date performance. We are increasing our total revenue range at $696 million to $698 million, representing 39% year-over-year growth at the midpoint. Subscription revenue for the full year is expected to be in the range of $495 million to $496 million, representing 28% year-over-year growth at the midpoint. Turning next to our most important metric, adjusted operating income, we're increasing our expectations to $77 million, which is growth of 35% over the prior year. Of this $77 million, we expect to invest approximately $69 million or 56% more capital year-over-year in acquiring pets within our subscription business. At our targeted internal rates of return, this results in a pet acquisition cost of around $280. For the full year 2021, we continue to expect to spend $3 million to $5 million on development initiatives discussed earlier. 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 used an 80% conversion rate in our projections, which was the approximate rate at the end of October. Thank you for your time today. It's been great speaking on my first earnings call with Trupanion and I look forward to meeting more of you at upcoming conferences. With that in mind, Darryl and I will be at the Guggenheim Animal Health Summit on December 6th. I hope to speak to many of you there. With that. I'll hand it back over to Darryl.

Thanks Drew. We'll open the call up for questions momentarily. Before we do so, I'll remind you that Margie and Trish are also available on today's call and can answer questions on the execution of our 60-month plan. Under Margie's purview are all areas of growth, including product, distribution, pet acquisition, international, and our new product and channel offerings. Trish's purview includes all areas of operations, including IT, finance, people operations, legal and regulatory, claims, contact center, and actuarial. I'll reinforce that our 60-months plan is off to a flying start. Year-to-date adjusted operating income is up 39% year-over-year. With the 25% target we laid out in our 60-month plan, every quarter doesn't need to be as strong as the one we just reported for me to be happy with our performance. With Trisha and Margie at the wheel, I'm confident in our direction and execution. As CEO, I will continue to focus on our culture and our long-term vision and strategy beyond 2025. With that, we'll now open the call up for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Maria Ripps with Canaccord. Please proceed.

Great and thanks for taking my questions and Drew congrats on your new role. So, it seems like you had another quarter with really strong retention. Can you just talk about sort of how various lead channels performed during the quarter? And is there anything you can share with us about your new elite program? Are you seeing any sort of contribution from this initiative? Or is it still early there? And then I have a quick follow-up.

Hi, Maria, it's Margi here. So, just to start-off with a strong retention, we've been investing in retention really doubling down on this, as you know, for the last 18 months and I think whereby the team has really kicked into high gear is with having a very strong retention roadmap. Much like many of our areas of our business, they're segmenting and targeting specific initiatives based on where the member is and their journey. So, from a first year perspective, we're thinking about the rate as we get to renewal, making sure we're adding value throughout the cycle and ultimately, then working with Tricia and the operations team in the contact center to give a first rate member experience. All of this comes down to the fact that if we can pay the veterinarian directly at the time of checkout, that member experience allows them to then refer to their friends, which then kind of creates that flywheel we've talked about and that kind of dovetails into the channels and how they're performing. We do look at retention by channel. Overall, all channels are performing particularly well and as the teams get more sophisticated in the way that they approach it, they're deploying more tactics that help us to really just continue to move the needle from a retention perspective. At this stage, with retention rates as high as they are, it's really hard to make incremental changes and to continue to do that the way that we are, I think, is a testament to the team. In terms of new needs, -- particularly this is still -- we're developing it, it's in test mode. It takes a little while to get it ramped up, but we're making progress all the time. It is too early to say, speak of any impact at the moment, but we'll be able to give you an update in the coming quarters.

Got it. That's very helpful. And secondly, can you maybe just talk about what's driving this continued strength within your other segment? We know there are several businesses in there and in the past, I think you talked about pets best allocating sort of newer book of business to Trupanion. Is that still sort of the main growth driver here? And sort of how long do you anticipate elevated growth in other revenue sustaining?

Well, the other business, as you pointed out, it's -- and Drew mentioned in his opening remarks, is where it's kind of a B2B instead of a direct-to-consumer approach. In aggregate, it is much lower margin business. Last year, it contributed about 5.3% of our adjusted operating income, we're projecting this year, it will contribute about 9.1%. We do have the addition of our software acquisition last year and the market revenue and profits that go into that is also into this group now. So, we're really pleased with the progress and we'll just see how it ramps next year and the year after, but hopefully continues to grow nicely.

Got it. Thank you so much.

Our next question comes from John Barnidge with Piper Sandler. Please proceed.

Thank you and congrats on the quarter. With the Aflac-Trupanion alliance in the broker channel for benefits being heavily weighted towards fourth quarters given open enrollment, how should we be thinking about that channel really near-term and longer term?

Hi, John, it's Margi. So, I'll kickoff and pass those to my colleagues in a second to speak a little bit more about this too. So, as a reminder, the Aflac-Trupanion alliance, really, really well-aligned strategic partner. We've been working with them for the past year on developing our entry point, which is through the work benefits channel. We didn't anticipate any progress in this in terms of going to market in 2021, we anticipate going to market in 2022. So, there won't be an impact this year from any revenue perspective. And when we think about the rollout, you would expect to do something hit in Q4 2022. So, the channel in terms of progress is going well, working really well with that team there and excited to be launching next year. Anyone care to add anything to that?

Nothing to add.

And then a follow-up question, rather subscription revenue in the quarter, $127.1 million, still within the range, but toward the lower end. Was there anything that developed over the quarter that drove it to that?

Hi, John. This is Tricia. Overall strong quarter for us in terms of enrollments. The one thing I would point out is ARPU is coming in a little lower this quarter than prior quarters. So that's driving it as well as about few 100,000 impact from foreign currency. High level when we think about ARPU increases overall. This quarter and in the future, the one thing I would highlight is, as a reminder, we're a cost plus model. And so, we're always looking at the cost of our veterinary invoices, adding our margin on top and pricing to our 71% value proposition, not only on a consolidated basis, which you can see we've been doing well, but also at a granular level by regions, breed and so on. When we look big picture for the full year, just some numbers for context, the cost of veterinary invoices on a per pet basis in 2021 in our book of business, has been going up about 4.9% for the full year and our ARPU increases we're projecting to go up for the full year at 5.3%, led 40 basis points that our ARPU is going up, ahead of our cost of goods. So on a high level, we feel good about pricing. Now, we are always trying to be as granular as possible because behind the scenes, we have certain regions, like a particular region where costs are going up closer to 15% and we're raising ARPU a little ahead of that. And we have other regions, where we actually were slightly overpriced and true to our value proposition or decreasing those prices. So, we're always endeavoring to be as granular as possible. Now on a macro level, when we look at our data overall, on a frequency basis, how often are our customers visiting the veterinarian, we've been seeing that pretty normal with outside of the small blip last year in Q2, pretty normal level, so not seeing dramatic differences and how our insured client base is visiting the veterinarian. And when we look at the average dollar amount of those invoices this year that's going up 6%. So this year so far at least our client base, it's been going up pretty normal as well. So that really gets back to kind of what we're seeing in our data and how we're staying up -- staying in line with the pricing, but obviously we will stay on top of that, continue to monitor it and update as needed. But that's kind of my long answer to the point of, we are seeing a little bit of mix and other things going on within that ARPU and that's the main driver.

Very helpful. Thank you.

Our next question is from Josh Shanker with Bank of America. Please proceed.

Thank you very much. Can you talk a little bit about the strategies that Pets Best is using to attract customers? Obviously, the growth there on unit basis is very impressive. I should say of the other category, which is mostly pet best, I guess. What learnings can you take from their marketing approach? Obviously, there's something quite different than yours. But as you launch Furkin, it's going to have some similar economics to it, and also may compete with that Pets Best Business? Is there a cannibalization risk? And how would that transition sort of play out?

Well, we don't get into too much details of our partners' businesses, particularly on live calls, but there's a lot of ways that are differentiated on where people are getting their leads and how they're able to convert them. I think the growth we're seeing in our other businesses shows you the macro, which is veterinarians are needing to charge more and people's disposable and discretionary income means getting insurance to make it easier for them to budget makes a lot of sense. And our channels and strategies are playing out well proven by our growth in our adjusted operating income and our overall revenue, both in our subscription segment and our other segment. But I think that's about as much details I can give you.

Can you add whether Furkin and Pets Best can exist happily alongside one another?

Well, there's over 24 brands in the marketplace. So the difference between having 24, 22 or 26, I don't think is significant. And those two brands currently are only in Canada.

And then if we think about the Aflac money coming in. It allows you to make some investments on things that you long wanted to do, but you're always investing in the future of your business. Can we sort of map out the elevated spend? Are we through this period of elevated spend or when do you expect your investment in the company to be at a run rate level I suppose?

Is the question on an elevated spend on development or elevated spend on acquiring pet?

I mean, I guess, I'm interested in both. It does seem like variable expenses were ramped up a little bit compared to the trajectory and I'm wondering if they might converge with the normal...

Yes, got it. So our variable and our fixed expenses were up combined, about 10 basis points. And in general, we would expect to see a little bit of scale show up over the next couple of years. We have been investing more in our customer experience and working on retention and that is priority number one before margin expansion. But as Trish mentioned earlier, we had a 40 basis point increase in our margin expansion on our adjusted operating income based on our pricing. And we're pleased with that.

And I can add as well, John, just in terms of investments as we grow the business and an underpenetrated market has a lot of greenfield space growing and continue to get the elevation we've seen. So from a growth perspective, as long as we're always testing within our guardrails, there's 30% to 40% IRR. We'll continue to spend as much as we can. And I don't think it will slowdown down anytime soon.

Okay. Thanks for all the answers.

Our next question is from Ryan Tunis with Autonomous Research. Please proceed.

Hey, thanks. Just a follow-up on the ARPU coming in a little bit lower growth level that what we've seen. You mentioned, it had to do with the mix, just hoping maybe you could drill into that a little bit more. Is that -- are they purely like fewer brands or something like that or I just want to make sure you haven't like changed kind of the rate of inflation you think breed by breed. Is that the right way to interpret it?

Yes, I mean, in general, there's a lot of different things that can go into mix, depending on distribution channels, regions. The main mix for us has to do more with the regional level. I mean our footprint as we continue to grow and all the key metrics that you've seen improve our footprint, is bigger, and with that comes different mix and at different periods of time that can evolve. And we are seeing that a little bit, as well as just needed rate increases and some of that is regional as well. There are certain places like I mentioned, where we're seeing needed rate increases due to the cost of that invoices over 10% and some actually based on our data is lower. And so there's really a lot of different things that go into play. Success for us is really how does that manifest itself in aggregate and in detail as to hitting the 71% loss ratio.

And Ryan, I'd add just as I get to know the business. I'm seeing that we grow the fastest in areas where we've priced closest to our 71% value proposition and have good lifetime values and IRRs. And so -- where we don't have to move price as much as where we grow the fastest and that contributes to our mix.

Got it. And there have been some concerns broadly, obviously, about inflation, but I think also in terms of how that might be affecting just general that invoice. I guess, Darryl, when you see those headlines about inflation and things like that, to what extent does that bother you, like what are the places where you think that could be impacting you or is impacting currently?

Well, I think, there's two things to talk about there. One is, sometimes headlines talk about total spend in the category, where when we're pricing, we're looking at what's the spend for 1,000 pets, what's the average frequency and average invoice for a 1,000. And as Trish mentioned earlier, we're seeing the average invoice dollar amounts going up about 6%. So that's the amount that veterinarians are charging more on average across all of our categories and the frequency is normal, it's up 0.17% over two years ago, so basically flat. I mean, pets don't suddenly become more sick or more injured. But if you think about that on a macro basis, we think veterinarians need to charge more. The average veterinarian graduating from university has a lot of debt. We know that it is a very hard and demanding job as a technician, people working in the front of the house or the back of the house. And we think it's really important that veterinarians charge more for their services. From our standpoint, that is not scary. It actually increases the demand or need for our product. And our challenge with it is -- and it's the same challenge we've been running for 20 years, it is we need to monitor the underlying cost and we need to in a timely, quickly, in a very accurate way update our pricing and we do that in a very granular way. And this has been under Tricia's purview now for several years, and she is making good progress and the margin expansion that we described earlier is proof of it.

Thanks.

[Operator Instructions] Our next question is from Jean Lee with Evercore ISI. Please proceed.

Hey, thanks for the question, and apologize to kind of belabor this point again. But like to your point, if you think that kind of costs could -- should go up at a more like healthy pace over the longer-term. Do you think, you'll be able to maintain this level of like pass through to the rate increase? And over next several years, what would be the implication to your like retention and gross adds or if they would -- it would impact retention at all? Thanks.

So I can kick off with a retention perspective, I think as to Darryl's point, if I can go, when you see the demand increase of best services in vet care, especially the way that the vet industry has been heavily in demand over the last few months, there's more of a need for our products, and so we're solving a bigger problem. And that is felt more and none more done with the member directly. So, we look at retention rates and to the point of looking at the data at the granular level. The cost of the monthly invoiced to a member as well as the value proposition is right, is obviously, the retention is not impacted at all. We see the best retention rates where we're priced appropriately, and we're priced appropriately based on the cost of goods in that specific area for that specific pet. So as long as we continue to slice and dice our data and really get into the details of what each of those members should be paying. We're very confident in retention rates remaining as strong as they are, especially with the level of granularity we're looking at it today. In terms of the cost gap and healthy pace, again at the same point and we think about, okay, data in general across the board is one thing, but as we started to get really detailed, we would expect a way through to get cost of goods, making sure that we're pricing appropriately. And I'm really helping to reinforce our value proposition. So, we don't see any issues. And when we look at our market today, we look at it by market, by geography, by state by region, by neighborhood, we don't see that changing. The consistent pattern there is when you price appropriate the retention in growth is consistent and very strong.

Yes, I would just reemphasize one thing that Margi said, which is key is, we need to stay on top of this and the team, we've increased the size of the team to really focus through our 60-month plan on staying on top of the trends, increasing the frequency and granularity that we're monitoring and filing for these adjustments as they're needed. If we do this well and we've done this well historically, as you can see from our results, we can always do better and we're working on continuing to do so. If we do this well, we shouldn't see dramatic impacts to retention. When you see dramatic impacts is when you whipsaw customers around, because you don't get the retention rate or you're delayed or you don't get the pricing right and you're delayed and moving it as opposed to being on top of it, so that is the key to that and if we do it while, we shouldn't have issues then on the retention side.

Great. Thank you for the answer.

Our next question is from David Westenberg with Guggenheim Securities. Please proceed.

Hi. This is John on for Dave. Thanks for taking my question. We saw a private equity firm who owns the second largest animal health hospital group, acquired a pet insurance company recently. Do you think this is one-off or part of a trend? And would you say that consolidators owning pet insurance is good for the industry? Thank you.

Yes. We would expect over the next 10 years to 20 years to see the same level or even greater number of new entrants. So over the last 20 years, we've competed against 60 plus brands and today there's about 22 brands in the marketplace, 24 brands. The ownership groups, they tend to be either owned by marketing company, or underwriters. In some cases, you can have partnerships that have some agreement with some type of channel. I think all of those business models makes sense. From our perspective, if we're offering the best value proposition with the best customer experience, we've got a national sales force calling on the veterinarians, which not only helps on leads, but retention and conversion rate. I think we're well positioned and it's hard to predict, who is going to be the new entrants in the marketplace or not doesn't really matter to us too much.

Great. Thank you.

Our next question is from Jon Block with Stifel. Please proceed.

Great. Thanks. This is Tom Stephan on for John. Thanks for the questions, just to start off on PHI Direct and Furkin. Any early learnings in Canada that you'd be willing to share? And then fully just on the timing of the US launch?

Yes. So PHI Direct and Furkin were launched back through in the middle of the quarter, it's really early days for them. I think we're very happy with the way they've been adopted in the market, with things that can lead growth, which is good as positive sign and need for products like them. As a reminder, the reason we've introduced them to the market is to really create clear swim lanes and clarity points of difference between the three different types of products available. Those three being PHI Direct being the low cost, high value proposition, Furkin being the mid-cost value proposition and Trupanion being the best coverage with the highest value prop. We've seen, as I said strong lead volume. We're really working on conversion rates. When we get conversion rates, the point where we feel that it's ready to go and we'll bring it to the US market and happy with what we've seen so far. I think the biggest thing I see that sort of is a necessary intuitive. PHI and Furkin are the two products that we -- the first two products of our 60-month plan that we've launched and one of the things that we've really focused on is how can we maintain the growth and performance of the core business without disrupting it by launching these two products. So, I'm really pleased to say the teams did a fantastic job across the board launching these two products in market without any disruption at all, which is for us the real, final positivity as we move into the next phase of our 60-month plan and let me that broader.

Great. That's helpful. And then maybe just a two-parter, quickly on the Apple iOS changes, any impacts to leads or conversion that you guys maybe or maybe not experiencing? And then the subscription gross adds, they've been, I guess, increasing sequentially throughout 2021, but kind of got a fairly modest pace. Can you talk to your conviction sort of in the ability to grow those at an accelerating rate in 2022? And while still staying within the 30 to 40% IRR, guardrails? Thanks.

Yes. So ARPU, we actually didn't see anything major change when we were anticipating the changes everybody was. So the teams already rallied and come up with ways that we could solve any potential issues there. In terms of this volume, we have a number of different funnels that we've been able to tap into as we've gone through the last 18 months, and we've got better at deploying on capital, which meant that we could fill in a lot of gap. So our lead volume has continued to rise quarter-over-quarter seeing really strongly growth as well as conversion rates and conversion rates across the board from web to phone. So no changes there, and anticipate there shouldn't be anything further down the line. In terms of subscription, gross ads, and I think we've been increasing quite dramatically over the last few quarters. And I'm happy really happy with the way the team is deploying more capital, when we think about the fact that we're always operating within our guardrails, so within that 30 to 40%. And that's our target to spend as much as we possibly can to grow in the market. We are very encouraged by what we see not just within our core channels, but as we add new channels into the mix. And as we start to get more granular with growth and the team and focus on the team with the data points to see what cohort can we grow? What rate can we grow them? How quickly can we grow them as long as we keep finding new ways that we can expand whether it's lead related, conversion related and also retention, which is it's helpful for refer a friend and add a pet. We feel very, very positive about that going into 2022. We have really strong momentum across the board and looking forward to seeing that growth continue.

I think I'd like to kind of just level set from my perspective, I mentioned on the opening remarks, but you know, if in 2022 our net pet growth is flat from 2021, we'll see our revenue and adjusted operating income grow by 25%-plus year-over-year, which to me is phenomenal growth. I know we have a lot of things in our plan, and we'll want to be more ambitious than that. But you know, we've got a lot of momentum going into 2022. And I think the team is doing an incredible job executing.

Very helpful. Thank you.

Our next question is from Elliot Wilbur with Raymond James. Please proceed.

Hi, guys. Thanks for taking my questions. This is actually Michael Parolari on for Elliott. So I guess, we talked a little bit about inflation in the business earlier, but can you just kind of talk about some of the other key items that are driving the higher that tickets, and if these costs are seen as like more of a permanent step up or temporary? And then also with the vet capacity problems, that's getting overworked and the shortage of technicians just talk about any sort of impact that that might have on your costs or your business model please? Appreciate it.

Sure, Michael, I can start and others can chime in, I mean, overall, cost that we're seeing ticket wise on the pet invoices, like we mentioned earlier, right now, we're seeing those costs increase on average this year about 6%. So in line with what we would expect. In general, our business model is created so that veterinarians and pet owners can take advantage of, any procedures that are designed to help the pet. And so we encourage that -- like jobs that we encourage, higher salaries to veterinarians and their staffs, and higher levels of medicine, and our job is to monitor those costs, and price appropriately. We've done that pretty well. And we'll continue, continue to do so. So, we encourage that. I don’t know if others want to comment on the staff.

But just to kind of give us an example on this. I mean, we have many, many markets and regions across North America. You know, we have a city where year-over-year, the veterinary inflation has gone up 15%. We were priced accurately the previous year, and rates went up approximately 15%, keeping to our value proposition. And our growth rate is greater than 30% year-over-year. Our conversion rates and leads and retention are up across the board in that market. So if we have greater rates of inflation will be on it. And it's good for our business. And we have many cohorts and many points of history to say that that's good for our business. But as Trish mentioned before, it's we have to monitor very closely and very granularly. And that's what we do.

And I would just start as well, from a field perspective. We do here have the capacity problems, we understand that there is a shortage, not just the technicians, but across the board in many ways. And the problem we're solving is to help pets get the care they need when they need it. And in order for them to get the care they need when they need it. They need to have that that can support them. And that's technicians, that's fun desktop, it's was everybody. And the conversations we're having with our partners, both from a territory partner perspective, the people that have got those deep relationships in the field is that we're there to support the business no matter what. And bats need to do the right thing, whether their team by themselves and for their business, to be able to treat the pets, they went into practice to treat the pets, and to give them the care they need. So, we're solving that problem with them. We're seeing that growth continue into Darryl's point in areas where that we've kept up our value proposition. We're seeing that the less of a demand on the on the hospital directly, because they're in -- they're maintaining that pace. So as much as we can encourage and support the industry we will do, our business is here to support them for that purpose.

Got it. That's helpful. Thanks guys.

Our next question is from Greg Gibas with Northland Securities. Please proceed.

Great. Good afternoon. Thanks for taking the questions, and congrats on the promotion, Drew. With a quick follow-up on the low medium ARPU products, where do you see the blended ARPU trending maybe once those new products have seen increased adoption perhaps relative to the traditional 5% to 6% year-over-year increases?

Hi, Greg, yes, I mean it's hard to have a crystal ball in terms of the mix of business overall. The main thing that we're looking to do is always make sure that we're pricing to that 71% value proposition and increasing our adjusted operating income as revenue increases as well, so that we can deploy that capital. Margi, you have anything to add on those products?

No, I mean I think it's too early for us to know exactly what that impact is going to be. But the key thing is, as Trish mentioned, the AOI profile and the adjusted operating income is consistent on all of them. So we're going to see mix of business change naturally. It changes actually with the core subscription business as we add more products through the mix, whether it's PHI or Furkin or anything else. We'd expect to see that adjust as the market grows and expands. And we're reaching new part time ARPU as we're reaching new distribution channels, we'll see the mix are coming through.

Okay, great. And nice progress made towards TruTopia as well this quarter. I wanted to ask if you had any updated thoughts or estimations on when you can finally reach TruTopia?

I wish I knew the answer to that, Greg. I think, honestly, the team is on a fantastic trajectory. We're seeing the mixture of TruTopia, again, just to remind you is when we see our refer a friend and add a Pet are being offsetting the churn that we've seen actually. We've seen tremendous progress this year from a retention point of view. And in doing that and having the best possible member experience. We've seen our refer a friend rates naturally increase. There's a lot of tactics that we're rolling out. I think we're very close to it. We keep making up ground. I think when we can do that in a market where we're growing as quickly as we are from a retention perspective that's particularly impressive. And we're kind of like giving ourselves our own headwind sometimes. But I think that the teams have kind of -- they keep going through it. We're happy and much like Trish, I don't -- I haven't yet got a crystal ball, but it's not too far away, I'm sure.

And Greg, if you look at it on a two year basis, it's almost half from where it was even just two years ago. And when I look at the book the bigger our book gets, the more valuable that refer a friend and add a pet business becomes. So it's just a powerful part of the flywheel.

Great. Appreciate it.\

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