Trupanion Inc (TRUP) 2016 Q3 法說會逐字稿

Good Afternoon 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 question session will follow the formal presentation. (Operator instructions). As a reminder this call is being recorded. I would now like to turn the conference over to your host, Ms. Laura Bainbridge with Investors Relation.

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 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 website as well as the company's most recent reports on form 10-Q. and 8-K filed with the Securities and Exchange commission. Today's presentation contains references to nonGAAP 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, of, 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 share base compensation expense and depreciation expense. These non-GAAP measures are in addition to and not a substitute for measures of financial performance, preparing in accordance with the US 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 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 Relation website. 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.

Thank you, Laura and good afternoon everyone. I am 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 effort 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 36th 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 have 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 one. We slightly overshot our five to one target in the quarter. Largely, a function of our continued efforts to optimize pet spend by sub category. 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 have 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 have 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 are pleased with 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 sub category of pets is a profitable sub category today. We are focused on leveraging our data to maximize the percentage of pet sub categories 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 base to operate a national sale 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 partner and the rest of the organization.

We are 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 are 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 veterinarian channel today. In addition to the efforts within the veterinarian channel, we have increased our focus on communicating to consumers what differentiates Trupanion from our competitors. As part of this effort, we have developed additional customer facing content that when accessed is driving improved engagement and conversion rates. Though, it's early days on optimizing both the 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 have paid approximately $22 million directly to veterinarians. We are also continuing to invest in our in-house veterinary support, customer service, and claims departments. 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 are also seeing improved efficiency and service levels in key departments. For example, we have paid over 360,000 veterinarian invoices year-to-date. With 58% paid within 24 hours. Within our Customer Contact Center we answered over half a 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 are also seeing a greater number of leads from pet owner referral, and just this past quarter one of our Contact Center associates, Trish Sellers, enrolled her 10,000th pet. I am optimistic that the continued roll out 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 the cost-effective pet acquisition, and improving the customer experience.

With that I will turn the calls 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, scale and 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 total 334,000 as of September 30th. 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 deaths 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 B to B 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 experiences 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 as 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 one, up from 4.6 to one in the prior year period.

As Darryl mentioned this was slightly higher than our target of five to one, 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 and lifetime value at a ratio of five to one. 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 and fixed expenses and continued discipline in new pet acquisition spend. We ended the quarter with $49.3 million in cash, cash equivalence, 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 and 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 matter 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 and cost effective pet acquisition. Also, please keep in mind that our revenue projections are subject to conversion rate truck fluctuations between the US and Canadian currencies.

For our full year guidance, we used 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 and 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 there 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 have provided on our Investor Relations website, I think you will 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 will open up the call for questions. Operator?

(Operator Instructions) Our first question comes from Jon Block Stifel Nicolaus

Great, thank you, and good afternoon, guys. I think maybe the first one, may be a high level question, in terms of when you look out and see this market, how do you see your gross addition growth if you would, at a five to one LVP to PAC. And I ask because you see a market at two to 3% penetrated or maybe even south of that, but yet the adds have missed us a bit for the past 2-quarters. And I know there's obviously the emphasis at growing at the right cost so to say, if we were to look out at our models what is 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, how do you see the add, in other words the gross additions that has come in light relative to us for the past two quarters, I guess what I am struggling with as a high level there's a market that is one or two percentage or so penetrated. I know you put an emphasis on growing at the right price, while maintaining the 5 to 1 LVP to PAC. When we look out, how should we view the rate of growth in gross editions?

Well, as I have said in my shareholder letters and the size of the market. This is a very large under penetrated market which Jon, you understand very well. We expect that we can grow our topline revenue 20% to 30% year-over-year, for the foreseeable future. What we are trying to do is make sure that we are growing in a smart way. What I brought up in my opening comments is if we had 20% of our sub category - 20% of our pet a year ago, being brought in that were sub optimized we want to optimize as many as we can. We would like to optimize 99% of all the pets we enroll. And that's going to help build a 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 leverage of growth that we would otherwise not have.

So getting the right mix of sub category long term is 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 verses I think the same time last year is about 4.5 to one, is not really an apples to apples comparison. So going back to the beginning of your question, if you are looking long term modeling we expect in this marketplace we can grow top line revenue 20% to 30%, and as we optimize all of our sub categories, that will help to create our LVP longer term, which will give us more leverage for future growth.

Okay. Very helpful. Maybe one follow up. I think I got some of these metrics right, I was scribbling them down, you mentioned the 360,000 invoices to date, 58% pay within 48 hours, customer reps like 9 1/2 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 are doing there? Clearly those are differentiating factors I would think, relative to your competition, where are you in effectively getting that across to perspective customers and how do you improve that over the next six to twelve months? Thank you.

Thanks Jon. The question I think the way you framed it was 360,000 inside a 48 hour -- I think it is actually inside a 24 hours we were paying those.

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

Thank you.

Yep.

All right, the next question comes from Mark Argento of Lake Street Capital Market.

I just wanted to expand more on the whole concept of the LVP to PAC, and drill down a little bit more on the customer acquisition expense in particular. The category to me seems to be one that would be ready made for the online acquisition channel, just given the-- how passionate many pet owners are and how active they are in social media and other online channels. You talk about anything that you have been doing to try to explore, and develop a little more in your online acquisition channel? I know you sited a cost that is 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 is 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 is that has not been happening. We have seen Trupanion as a key word that has been growing dramatically over the last number of five, six, seven years. Really what is driving the growth of the category in our opinion is Veterinarians and that is why we are the only company with a national sales force. What happens with the online, particularly in a generic, or in review sites or other places like Google are really good at driving the most (inaudible) of companies.

So not only is the number of people typing it in is not dramatically increasing but more competition, and companies having algorithms to figure out how to garner as much from the company from either a lead basis or conversion basis makes them not as beneficial. So if we continue with our strategy, of building it from pet owner and veterinarian referral, we will see more people searching for us on line or calling us. 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 the space that will allow us to spend more to acquire pets and will open up other direct to consumer leverage before anybody else tries to enter the space. Including non-incumbent large players that may anchor the space over the next five years or existing players in the space.

That's very helpful. Then when you--taking it back to 5,000 (inaudible). 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 the 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 27% growth. Subscribers (inaudible) grew 21%. Get the growth out of your customer basically the --- (inaudible) going up as well. When you percolate that up to the topline do you think you can continue to perpetuate that mid 20% type revenue growth, organically, how do you think about the model when you sit back and say you can compound the rate over the period of time.

Well let's look back at (inaudible) We grew year-over-year our revenue at 28% and (inaudible) we are at 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 right 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 2030. And the mechanisms that we need to help us with that is being really good at understanding our data, interpreting our data, understanding it by sub category, making sure we are lining up our PAC spend, with those LVPs, but also growing our lifetime value of a pet, so that some other channels such as direct to consumer we will be the first company to cost effectively create those ads moving forward. Trish, do you have anything to add on there?

No, I think Darryl covered it pretty well. We are targeting that 20% to 30% growth long term, and we think if we are cost effectively acquiring pets and (inaudible) we can do that.

Very helpful. Thank you.

Our next question comes from Kevin Kopelman with Cowen & Company.

Hi, thanks. Just to start can you give us just a update on the-- just the industry landscape-- where are we?-- How far along have Vets come in terms of recommending this product and education? Thank you.

Kevin, thank you for joining us on the call. Your first part is about general landscape, so for new people, following Trupanion, about 180 million cats and dogs in North America penetration rates a little over 1% today, when we entered the U.S. marketplace it was about a quarter of 1%. Every one point penetration is about 1 billion in revenue. We know in other markets where there's 25%, 26% of penetration rate, in places like the U.K., 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 13 years before 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 we have some that are even higher. We know the messaging is getting easier, but we have a lot to overcome.

Our territory partners -- when we enter a new marketplace-when we say, "Hi I am Darryl with Trupanion" and they say what is Trupanion? We say it is medical insurance for cat and dogs. The veterinarians and their staff will say that sounds like traditional pet insurance, we say it is a little different, it is only catastrophic care. And they will 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 will it be easier in two years 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 about $0.70 on the dollar and up paying Veterinary invoices.

Thank you, and so just drilling in on near term pet trends. All year, the pet acquisition costs have been coming down, we have also seen the gross ads slow, is it fair to think of Q4 as being another kind of tough comp? And then the pet comps getting easier in 2017 as you anniversary is kind of a little bit more focused marketing?

I think as we mentioned before, if you are looking period over period, comparing a 5 to 1, versus as 4.5 to 1, it 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, it is the top end of our range. We have narrowed our guidance with it going on the upside. So, we feel very confident that we have lever to drive this ship to continue to be the category leader in a large under penetrated market.

And getting our growth rate in line with our PAC spend and LVP is not only foundationally important, it is what is going to differentiate us in the marketplace. Using our data in a smart way to grow. So, I am very confident on our growth rate. I feel good about our growth rate, next quarter and next year. But behind the scenes I don't want to see us enrolling the last ten pets in a month where we don't have good metrics. I would 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 are trying to build into the company, and it isn't something that flips really easy, a lot of people have said to me, why don't you accelerate growing your higher LVPs?

Categories, places where we with have 1,000 LVP, or 1500 LVP., and that will take us more time to get around. Because it is how we compensate people. It is how onboard people, it is how we have our department set up, and we will get better at it over the year. We are spending let's call it $13 million, $15 million a year on pet acquisition. For us to be a really good company, we have to learn how to spend $100 million one day and we want to spend that cost effectively we do not want to spend inefficiently. So, everything we are doing today, we think will help us in 2017, 2018,2019 and 2020.

Thank you. Darryl did you give a new number on territory partners?

No, I did not give a new number on territory partners, I will update that in the shareholder letter, thank you.

Thank you.

Our next question comes from Andrew Bruckner of RBC Capital Markets.

Thank you. Just a couple of quick ones here. One, you kind of mentioned on your call earlier, about trying to increase same store sales and I am wondering if there's any change to the commission structure, or how you going about doing that, to push greater penetration within a given set. And secondly, how long before you know your LVP for a given Petco subcatagory -- is not optimized? Is it a year? Is it couple of months if you can dive a little deeper into that. Thank you.

Thank you. I'll answer that in reverse order. The last question was about how long does it take for us to understand our LVP. Now remember, our LVP is 12 months, it is taking our contribution margins for the previous 12 months and multiplying it by the expected number of months. We constantly have that set, 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 (inaudible) and low retention rates and you might have a lifetime value of a pet of $100 and yet you are optimized on price. You are paying out $0.70 on the dollar for the average pet in that sub category. But in that scenario, you are optimized, you need to spend $20 to acquire that pet on $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. Those are the levers that we have.

The flip side is you might have one where your retention rates are good, but you are just mispriced, and instead of paying out $0.70 on the dollar, say you are paying out $0.90 or even worse your paying at $1.05 on the dollar. So, the size of the categories, our real big categories you should find them closer to our target, when you have new categories it take as little while for us. 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 will start to get information based on the volume of pet enrollments. But it is something we are constantly looking at, we have a team of nine people that are full time dedicated on this and taking that information and disseminating it across the company. Your first question, was more of a same store sales. And for competitive reason I am not going to dive into all the things we want so do on that. I can tell you it is not driven by commissions. It is driven by us being better in the field with better sets of tools so that's about as much as I want to get into with that.

Okay that's fair, if I can follow up quickly with how are you seeing on the whole pricing for the veterinarian industry trends. I know your pricing correlates closely to that, and anything to look out for in the future on an overall industry perspective?

Well, it's been pretty consistent for the last 20 or 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 veterinarian hospital. Some of the better performing veterinary hospitals it is closer to 80%. If you look at our ARPU increase which is about 7%, it is a pretty good trend. Over the last year, but if you are modeling we have said historically, kind of a 5% to 6% ARPU increase year-over-year, is what we'd expect to see just if you want to call a veterinarian inflation, or utilization of veterinarian services.

Perfect. Thank you.

(Operator instructions). Our next question is from Michael Graham of Canaccord.

Thank you. Just wanted to ask two, one on the comments you made about the new billing system, and the impact on Trupanion I am just wondering are you confident that the billing system has already been fully implemented and is there any potential for some noise as that impacts the way customers are interfacing, with Trupanion as we get through Q4. And then I was just looking for a quick update on your direct to consumer marketing effort?

Hi Michael, I will answer your first question and then I will have Darryl talk to the 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 be a dramatic impact in one single quarter, especially because our retention is calculated on a trailing twelve-month basis. We do expect to see incremental improvement over the next couple of quarters. And that being said, the impact that we have seen of these cards not being updated as timely as we would like, has been very slight, and gradual. And so we are encouraged by what we are seeing and we are happy to have gotten that system in at the end of the quarter, as you mentioned it isn't going to flip the switch overnight, it will happen over time.

Michael, I will answer your second question about what we have learned on direct consumer marketing updates-we continue to test-we are seeing some encouraging results in a few different areas. I expect that we are 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 are in a testing mode. We are testing subtly in markets where we have a higher concentration of active hospitals but we are also testing in some markets that we are newer in and seeing to understand the delta. Trying to improve the messaging as I talked about earlier. More direct consumer messaging, things about how Trupanion stacks up, all the little things we are working on. So, incremental small progress but no home runs 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.