Greetings, and welcome to Trupanion Fourth Quarter 2020 Results Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I would now like to turn the conference over to your host, Laura Bainbridge, Vice President of Corporate Communications. Thank you. You may now begin.

Good afternoon, and welcome to Trupanion's fourth quarter and 2020 year-end financial results conference call. Participating on today's call are Darryl Rawlings, Chief Executive Officer; and Tricia Plouf and Margi Tooth, who were recently promoted to Co-Presidents. Similar to prior earnings calls, Margi will be joining Darryl and Tricia 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 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 Forms 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, 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 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'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. Good afternoon. The fourth quarter capped off a strong year for Trupanion. Total revenue grew 31% over the prior year. Adjusted operating income totaled $57 million, up 29% over 2019. We invested approximately $44 million of these funds within our subscription business at an estimated internal rate of return of 41%. Our performance in 2020 is a testament to the consistency of our business model, the strength of our positioning in a large underpenetrated market, and the power of the pet. In 2020, against the backdrop of shock and uncertainty, pets reminded us of the importance of unconditional love. For my Zoom screen to yours, pets were everywhere this past year, and not just new pets in the household. While much has been written about the rapid rise in pet ownership, our data suggests a modest single-digit increase. To put this in context in a typical year, with 180 million pets in North America, we'd expect 12 million pets to pass away, and about 12 million new pets to be born. This year, we've seen the new pet population grow to approximately 13 million, about a million increase. Although the small increase has been helpful, the bigger opportunity remains increasing the overall penetration rate of the category. What COVID did do is accelerate the pet humanization trend that we've been witnessing over the past several decades. We'd expect this will help grow the penetration rate of the category for years to come. Our data suggests veterinary revenue and visits were up in 2020, and we saw strong growth from this important lead source. Outside of the veterinary channel leads, we are up across the board, providing additional evidence that we're growing our brand. We're also keeping pets longer than ever before; about 78 months in 2020 compared to 70 months in 2019. The combination of increasing adjusted operating income and improved retention resulted in an impressive 25% year-over-year increase in lifetime value of a pet. Expansion in lifetime value increases our allowable pet acquisition spend giving us the opportunity to be more aggressive in deploying our capital while maintaining our targeted internal rates of return. More broadly, we believe the category of pet medical insurance is growing in acceptance, and we're seeing additional opportunities as a result. I expect to share more details in my upcoming shareholder letter which should be available in April. Our positioning coupled with the expansion in our key metrics sets us up well to continue to grow. This is evident in our fourth quarter results. Total subscription revenue grew 23% in the fourth quarter led by a 17% increase in subscription enrolled pets. Underlying this acceleration is net new pet growth, which is a leading indicator for a monthly recurring revenue business. Net pets increased 72% in the quarter benefiting from increased lead conversion and strong retention. Maintaining and improving upon our first-year retention remains an ongoing area of investment and focus. As a reminder, we see lower retention among pets within the first year with Trupanion. Please see my past shareholder letters for more details. Adjusted operating income grew 35% year-over-year to $16.6 million in the quarter. The team was able to deploy approximately $14 million of these funds within our subscription business at an estimated 35% internal rate of return, which is the midpoint of our 30% to 40% target. The team continues to impress as they demonstrate an ability to invest increasing amounts of capital against our opportunities in this large and underpenetrated market. This sets us up well into 2021 and ahead. With that, I'll hand the call over to Trish.

Thanks, Darryl, and good afternoon, everyone. As Darryl covered some of our 2020 financial highlights, I'll focus the majority of my commentary on our fourth quarter performance. I will also provide our outlook for the first quarter and full year of 2021. I echo Darryl's sentiment that it was a strong quarter for Trupanion. Our outperformance was driven by an acceleration in net pet growth within our subscription business and continued strong performance within our other business. Total revenue for the quarter was $142.7 million, up 35% year-over-year. Within our subscription business, revenue was $106.4 million in the quarter, up 23% year-over-year. Total enrolled subscription pets increased 17% year-over-year to approximately 578,000 pets as of December 31. Average monthly retention, which is calculated on a trailing 12-month basis, was 98.71% compared to 98.58% in the prior year period. The improvement in retention extended the average pet's life with Trupanion by approximately 8 months and is impactful to our calculation of lifetime value and internal rate of return when we look at the unit economics of a single average pet. The increase over the prior year can be attributed to our improved service levels, a focus we spoke about on our last call and have continued through the year. Monthly average revenue per pet for the quarter was $62.03, an increase of 6% year-over-year. In local currency, U.S. ARPU increased by 6% and Canadian ARPU increased by 4% over the prior year period. We are pleased to deliver continued acceleration and ARPU growth in the quarter, which reflects progress on our pricing initiatives, particularly in the second half of the year. Our subscription cost of revenue includes the cost of paying veterinary invoices and variable expenses. The cost of paying veterinary invoices for our subscription business was 71% of revenue during the quarter. Variable expenses remained consistent with the prior year at 9% of revenue as we continue to focus on the member experience. Subscription gross margin was 20% of revenue in the quarter compared to 19% in the prior year period, and within our annual target of 18% to 21%. Our other business segment is comprised of revenue from other products and services that generally have a B2B component and different margin profiles than our subscription business. This now includes revenue from the sale of software solutions. In the fourth quarter, we completed a strategic acquisition of a software company that was predominantly focused on improving our back-end processes and adding talent, but also had a small P&L impact. In total, other business revenue was $36.3 million for the quarter, an increase of 92% year-over-year. Growth in the number of pets enrolled and products within this segment increased revenue 87% year-over-year. Additionally, the sale of software solutions contributed 6% to the growth of other revenue. Costs of revenue for our other business segment was $33.3 million compared to $17 million in the prior year quarter. The year-over-year increase is consistent with the increase in segment revenue over the same period. Total fixed expenses, which are shared services that support both our subscription and other lines of business, were 5% of revenue in the quarter consistent with the prior year period. Adjusted operating income was $16.6 million in the quarter, an increase of 35% over the prior year period, and our net loss was $3.5 million. The vast majority of our adjusted operating income was generated from our subscription business during the quarter at $15.6 million and with 15% of subscription revenue. During the quarter, we deployed $13.8 million of our adjusted operating income to acquire over 47,000 new subscription pets. This resulted in a pack of $272 in the quarter, an estimated 35% internal rate of return for a single average pet. For more detail on how we calculate internal rate of return and adjusted operating income, please refer to our supplemental financial materials on the Investor Relations portion of our website. As we enter the next phase of our growth, we expect to invest in initiatives that are pre-revenue, including adding new products and international expansion. These development expenses are costs related to product exploration and development that are pre-revenue and historically have been insignificant. We view these activities as uses of our adjusted operating income separate from pet acquisition spend. In the quarter, we deployed $0.3 million of our adjusted operating income on these activities. Additional detail can be found within our supplemental financial materials. Adjusted EBITDA was $2.2 million for the quarter as compared to $3.7 million in the prior year period. Net loss was $3.5 million or a loss of $0.09 per basic and diluted share compared to net income of $0.6 million or $0.02 per basic and diluted share in the prior year period. As a reminder, profitability is impacted during periods of accelerated pet growth as was the case in 2020. Free cash flow in the quarter was $1 million compared to $2.7 million in the prior year period. Operating cash flow in the quarter was $4 million compared to $4.5 million in the prior year period. I'll now turn to our balance sheet, which we meaningfully strengthened during the quarter. Most notably, we received a $200 million strategic investment with a 3-year lockup from Aflac in the fourth quarter. The net proceeds of which were used to fund the strategic software company acquisition I mentioned earlier, as well as to repay all outstanding obligations under our long-term credit facility. As a result, we ended the quarter with cash and investments of over $230 million and no debt. Our balance sheet at year-end also reflects goodwill and intangible assets related to our software acquisitions. The amortization of the intangible assets increased depreciation and amortization expense by $0.6 million in the quarter. Beginning in Q4, we have separated depreciation and amortization from our other operating expenses on our financial statements to make it easier to identify variances compared to the prior year and better align with management's view of operating results. Note that the recent acquisitions are expected to increase depreciation and amortization expense by approximately $1 million per quarter in 2021. In summary, 2020 was a strong year financially. We were able to drive expansion in key metrics, including retention, lifetime value of a pet and adjusted operating margin, while deploying increasing amounts of our adjusted operating income at strong internal rates of return. The net result was a 33% increase in net pet growth within our subscription business, and $57 million of adjusted operating income or 29% year-over-year growth. Our strong growth was also disciplined at an estimated full year internal rate of return of 41%. Finally, our strengthened balance sheet sets us up well to execute on the opportunities ahead of us as we move into 2021. We entered the year with strong momentum, which is reflected in our outlook for the full year and first quarter of 2021. For the full year of 2021, total revenue is expected to be in the range of $659 million to $669 million. Subscription revenue for the full year is expected to be in the range of $481 million to $487 million, representing 25% year-over-year growth at the midpoint. At the midpoint, we expect total adjusted operating income for the year of around $73 million, an increase of 28% over the prior year with over 90% being generated from our subscription business. Of the $73 million, we would expect to invest approximately $60 million in acquiring pets within our subscription business, and expect to spend an additional $2 million to $5 million on development initiatives discussed earlier, as well as on our other business. Should we have the opportunity to deploy more adjusted operating income while operating within our IRR guardrails of 30% to 40%, we will likely choose to do so. And for the first quarter, total revenue is expected to be in the range of $151 million to $153 million. Subscription revenue is expected to be in the range of $111 million to $112 million, representing 25% year-over-year growth at the midpoint. Also, please keep in mind that our revenue projections are subject to conversion rate fluctuations, most notably between the U.S and Canadian currencies. For our first quarter and full year guidance, we used a 78% conversion rate in our projections, which was the approximate rate at the end of January. Thank you for your time today. And I will now turn the call back over to Darryl.

Thanks, Trish. 2020 was a year unlike any other. The team navigated through a period of unprecedented change and came together in support of every veterinarian and pet owner who placed their trust in Trupanion. For this, I want to say thank you to the team. I look forward to seeing what we can accomplish together in 2021. With that, Margi, Trish and I are available for questions.

Our first question is from Mark Argento with Lake Street Capital Markets. Please proceed.

Hi, everyone. This is John on for Mark. I appreciate you taking my question. First of all, just kind of looking back at the past year, maybe could you break out some of the areas where you've seen the highest returns on capital for investments. And if any of that has changed, kind of since the pandemic started?

Hi, John. We don't break down kind of the categories of our internal rates of return neither by channel nor by pet or geography. But what I can say is that we saw increased leads and conversion rates across the board, particularly in the back half of the year.

Fair enough. For my second question, I understand that you have prioritized customer experience significantly over the last few quarters. Has this focus resulted in any measurable data or insights regarding your objectives in specific markets?

We initially discussed this in the second and third quarters, focusing on improved retention rates as our key metric. The ideal scenario, which we refer to as nirvana, occurs when our existing members add pets or refer friends, effectively balancing out pet cancellations. This year, we saw more markets than ever reach that target, and we'll provide more details at the upcoming shareholder meeting. We are definitely increasing our investment in customer experience, which can be divided into two main areas. The first involves educating clients at the time of enrollment or shortly thereafter, which includes costs related to shopping or acquiring pets. The second focuses on enhancing our customer service, from improving our phone response times to our year-round availability. We're investing in technology, expanding our software capabilities, and automating processes. The software acquisition that Tricia mentioned is part of our investment initiatives, and we are also hiring more staff to ensure we can maintain high service levels. The main challenge we anticipate is keeping up with operational excellence amid accelerated growth, but we are committed to making those investments to achieve our goals.

I would like to add a couple of points. As mentioned, our main focus is on enhancing the member experience to maintain retention and its positive impact on our results. This remains a significant priority for us, and we plan to invest more in the member experience, including the claims process and overall service provided by our team. Based on our guidance, we anticipate our adjusted operating income for the subscription business to be closer to 14% for the year, slightly below our target of 15%. This adjustment reflects our emphasis on the member experience, which we recognized as crucial for improving retention in 2020. Therefore, we are committed to strengthening this focus into 2021. Additionally, as Darryl briefly mentioned, a key takeaway from Q4 is the investments we've made in technology and scalability. Our long-term strategy to enhance member experience relies heavily on technological advancements and increased automation, and we are actively investing in these areas.

Okay. That's helpful. Thank you guys and congrats on the nice quarter and year.

Thanks, John.

Our next question is from Maria Ripps with Canaccord. Please proceed.

Good afternoon, and thanks for taking my questions. And Trish, Margi, congrats on your expanded roles. First, can you please expand on this new product initiatives that you mentioned and what are those investments and how should we think about sort of any revenue related to that?

Yes, we first started talking about this, Maria, at our shareholder meeting last year. And you can expect more details in the upcoming shareholder letter and the following shareholder meeting. As the category expands, as you know, we really spent the first 20 years of the company trying to get to operating scale. We've built a lot of foundation. Foundation around our data, foundation around our national sales force, we call territory partners; investing in our customer experience to be the only company able to pay hospitals directly at the time of service. And when we look out the next 5, 10, 15 years, additional growth channels that we're going to be exploring are expanding out into other international markets. It's going to be adding new products that are designed specifically for new distribution channels. The acquisition of the software company will help us take advantage of those areas. But in 2021, the guidance that Tricia provided really doesn't anticipate any of those having any material impact on our P&L in 2021 and 2022 and '23, we will start to see it. But really, these are long-term investments.

Got it. That's very helpful. Regarding your full year outlook for subscription, which suggests a 25% growth, can you provide some insights on what you expect for pet growth compared to ARPU expansion? In the last quarter, you mentioned that you might need to increase ARPU beyond your usual 5% range. Can you share the progress on that pricing initiative and whether all necessary regulatory approvals for price increases are in place?

Sure. Thanks for the question, Maria. Yes, I mean, pricing is something that we are constantly monitoring and making sure is as accurate as possible. As we've talked about previously, we really try to price as granular as possible down to the neighborhood level. And so that pricing, particularly at a neighborhood level, is something that is continuous. We have a large team that focuses on that, and we don't expect that to change. I would highlight that I think we did a good job in 2020 in pricing, particularly in the second half of the year, moving pricing up closer to 6% versus 5%. And we expect that to continue going into 2021, and we'll remain focused on it. As we've mentioned before, in general, our historical ARPU increases over the past 10 years have been 5% to 6%. With some of the corporate consolidation and other pricing trends that we see in this space, we think, really, we should be in the foreseeable future, targeting closer to 6% to 7%. And our initiatives and kind of analysis of the data is focused on that, so that we can be as accurate as possible. The guidance in the projects that's being closer to 6%, getting closer to 6% in 2021. And then the remainder obviously comes from pet growth as well as some resemblance. We're not projecting dramatic improvements in retention. But we're obviously have a lot of initiatives to do that. But we haven't pre-baked those into our guidance. So it's really maintaining that retention momentum that we currently have.

Got it. Thank you both.

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

Hi. Thank you for taking my question and congrats on a great year here. Can you help us reconcile new patient growth at the veterinary clinic? I know you mentioned that new pets were around 13 million versus lost pets at around 12. I am curious because kind of industry data suggests new patient growth is accelerating or has been quite robust at the practice. And I'm just wondering if that maybe helped you in the year and how to maybe think about that reconciled with, of course, pet adoption. Does that make sense?

It does make sense. Hi, Dave. So in terms of the data that we see, while the traffic is definitely up in the veterinary industry, in general, most of those coming through people visiting, as opposed to new pets going in. The bulk of the change that you see there is people are at home with their pets during COVID. They're seeing issues with their pets and are taking their pets to the vet more frequently. So there's an increased visit pattern there. For us, the way that reconciles with the data we're seeing is, naturally, as you're going into the pet more, you're having those conversations, you're taking care. But the care of your pet and the veterinary channel for us is that kind of that call mode that really we've developed those relationships with those ventures over the years through our Territory Partner Network has allowed them to appreciate the value of high-quality pet insurance. And so we think about that coupled with the increased conversation happening at the vet level, as people pay more attention to their pet. The power of the pet in the household at times of crisis, they're taking better care of them, as well as that slight increase that we see in new pets coming in, so puppies and kittens. Overall penetration rates in general, are going up slightly in markets. And we can see that, but generally, it's down to people taking better care of their pets in times of crisis.

Got it. Yes, it did help you in the quarter. The support stems from your focus on the veterinary channel, which was strong. It's more than just the overall increase in new pets. Okay. That's …

I would answer that as well. When you think about the industry in general, having moved to curbside to see the VAT lead growth as strong as it was particularly promising, and I think just reinforces the value of the relationship that we have there. Because curbside, as many of us know, is particularly challenging for the veterinary industry. But to appreciate the volume, the use of the insurance is really good.

Got it. And for Trish, I apologize for missing this. I recently got a new phone and I'm having some connectivity issues. When you provided guidance, I believe you mentioned in past calls that you expect to increase ARPU by 7% compared to the historical rate of 6%. I also think you indicated there would be an increase in retention rates and growth in new pets. Could you clarify if you still anticipate that 7% increase in ARPU and whether you expect it to reach the 71% ratio? Also, should we be concerned about any potential headwinds to new pet growth with ARPU on the rise? Thank you.

Yes, I'll try to cover everything. Please let me know if I miss anything. In general, based on current trends, costs, and industry data, we are executing well and getting closer to a year-over-year ARPU increase of 7%. This is the increase we need to aim for, as we target that 71% value proposition. Historically, our increases have ranged from 5% to 6%, and we are focusing on achieving 7% to align with our goals. The guidance reflects 6% since we do not expect to reach a full year at 7% immediately. We are transitioning from a full year at 5% in 2020 to a closer 6% in 2021, with our current target being 7%. Margi, would you like to discuss the growth aspect?

Yes, happy to. So I think when we think about the headwinds and new pet growth, and we look at our performance and the business over the past 12 months, believes that our conversion rates are up and our retention rate is up. All of that would suggest that the value proposition, the retention rates being as strong as they are taking into 17 months. So a significant increase through the year means that there is value in the product and the product is doing what it needs to do. And so an increase in ARPU does not present any headwind to us.

Great. Thank you so much.

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

Thanks and good afternoon, everyone. As we look ahead to 2021, building on Maria's earlier question, the gross additions this quarter are very strong, showing over 30% year-over-year growth. In the first half of 2020, this figure was under 10%. We're likely to see something in between for the third quarter. Considering 2021, how do we project the gross additions year-over-year, potentially exceeding 20%, and what is the expected pace given the differing year-over-year comparisons throughout 2020?

Hi, Jon, I can start. In reviewing 2020, we were focused on the aspects we could control. During the year, our priority was the member experience rather than pet growth. We made a concerted effort to be there for our members when they needed us, concentrating on the veterinary experience and partnerships. We chose to prioritize numbers over growth initially. As COVID started to normalize, we began to seek ways to achieve that growth while maintaining our focus on members. Our team, which has become increasingly adept in the digital space, helped us enhance our conversion rate. Looking ahead to 2021, we anticipate a consistent growth pattern, aiming to drive lead volume and improve conversion rates where possible. Now, I'll turn it over to Trish to discuss the year's pet growth and the 20% figure you mentioned.

Yes, I agree with what Margi said. We anticipate good momentum as we enter the year and consistency as we progress. Regarding your question, the year-over-year comparisons for the first and second quarters of last year are lower than those for the second half of the year. You will likely see this reflected in the growth rates as they work through their models. As we advance further into the year, we can provide updates if trends change from our current visibility. To answer your question, we have lower comparisons and higher costs that will affect that calculation.

Okay. Thank you for that helpful. And then Trish, the contribution, I might have missed you a little bit. The contribution from the acquisition in the quarter, if you can revisit that, what that was and what will the SaaS contribution be in 2021? I mean, the guide was ahead on revenues, but right in line with us on subscription revs. And I'm just curious the contribution from the acquisition full year in 2021, as well.

Thank you for the question. I'd like to emphasize our excitement about the acquisition of Aquarium Software. They are providing us with back-end systems as well as solutions that can be offered externally. The company has a talented team, and we are pleased with their contributions over the past two months, which amounted to approximately a million dollars in top-line revenue and about 300,000 in additional operating margin, classified within our other business segment. Our main strategy is to enhance Trupanion's back-end systems, which we believe will improve our execution capabilities with their support and solutions. We are looking forward to integrating this software to bolster our products and initiatives in 2021, while also collaborating with their team on our long-term strategy. This acquisition is anticipated to contribute about 4% to 5% to the growth of that segment's revenue. Overall, our focus in 2021 will be on strengthening our systems while achieving modest adjusted operating income profitability.

Okay, great. And last one for me, increasing ARPU. That’s the allowable spend to increase for pet acquisition, if you will. Retentions also improved a good amount. So really, you've had two levers on the LVP. Darryl, can retention improve further from here? You've gotten a very kind of a high bar, if you will, and it can improve further, especially in light of the accelerating gross adds? Or to your point, you've talked about higher year one churn in the past. We'd love to get your thoughts there. Thanks, guys.

Yes, I mean, our lifetime value improved 25% year-over-year, which is a staggeringly high number for the average pet. In a normal situation where retention stays the same, the lifetime value of a pet would be going up about the same as ARPU. So around 6% or 7%. Unless we're able to do increase the retention rates, and our retention rates moving from 70 to 78 months in the last year, it's created a new high water level for ourselves. The question is going to be can we sustain those with higher growth rates? We're making a lot of investments to try to do that. But to your ultimate question is, where can we go? I ultimately believe that we could get to 99% retention if we could execute perfectly. I think we have roadmaps on how to get there. I would not speculate in a model that we're going to get there anytime soon. But internally, I think that's where we think perfection would be. And we were going to put our money and resources behind the teams to try to achieve that. But don't expect it over the next couple of years. If we can maintain the 98, 71 or the 78 months in 2021, that would be a really impressive result.

Okay. I will take the rest offline. Thanks, guys.

Our next question is from Andrew Cooper with Raymond James. Please proceed.

Thanks for the question, guys. Maybe just to go a little bit different way thinking about 2021. One of the things we've heard from a lot of peers in the animal health space, not necessarily insurance, was about limited access to clinics. And so just as we think about the growth in 2020 and then looking at 2021, is there anything to consider in terms of Trupanion Express installations, potentially having been a little bit tougher to do this year, because you did have a little bit more limited access to those new clinics, whereas where you already had the software installed or stronger existing relationships, I think, is the assumption that maybe that's what drove more of the growth appropriate, and just how do we think about that going forward?

Yes, Andrew, that's a great question. Looking back at 2020, we had a very strong year. As you mentioned, one area where we did see a slowdown was in the installation rate of our software. However, as we look ahead to 2021, we’ve noticed an increase in usage among those who have already adopted it. They are starting to use it more, even as the adoption rate plateaued. This can happen for a few reasons, including conversations among veterinarians about managing curbside service and the current circumstances. Additionally, members appreciate the ease it provides, allowing them to care for their pets without added stress. We’re observing these dynamics despite the challenges posed by limited access to clinics. It's also essential that hospitals continue to focus on installations. We're actively driving to enhance our members' experiences because we understand the overall benefits. We've learned a lot from 2020 and have several strategies in place to boost installation rates in 2021, including the positive impact of word-of-mouth recommendations we’re beginning to see. Darryl, do you have anything to add?

No.

Great. That's helpful. And then, while it's already been asked, so maybe just a quick update. The Florida trial has been out in the market for a little while now. Do you feel like you're at the point, given that a lot of the churn typically happens in that first year? Do you feel like you're at the point where you've seen some results that give you confidence one way or the other? Anything to add about that program or potential other tweaks to a broader rollout of a little bit different plan or anything like that?

Yes, it's a great question. So on a broad level, we're always looking to improve and simplify what we have out there as a product. And our products are built for use in the veterinary hospitals and make sure it's as strong as simple as possible and can give the highest and broadest coverage, I'll go with a new product, see if we can have a product that's going to increase distribution, so increased lead volume, better conversion, increase in ARPU and therefore longer retention and higher lifetime value. We're seeing some positive signs. Our business is complicated, so it's not just a case of putting the product out there and letting it sit. We need to keep marketing on data. We don't have anything stable and long-term metric wise that we'd want to share at this point. But it has been just shy of a year; there'll be a year in March. We're encouraged by what we see. And it takes time to get it right, but as soon as we're in a position where we can share more about that, we'll do that. We just keep watching and monitoring it in the meantime.

Great. I'll stop there. Appreciate the questions.

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

Hey, Darryl, Trish and Margi. Thanks for taking the questions. Sorry, if I missed this, but with respect to your guidance, what are your kind of thoughts or assumptions around that lead volumes, where they go from maybe Q4 levels? What are you expecting regarding lead volume growth from that channel?

Well, when you talk about Q4, I mean, the big standout was not just the number of new pets that we enroll, but the net pet growth. At 71% year-over-year, net pet growth, it's a super high number. We saw increases in leads and conversions across the board. We also saw increases in retention. And as we go into the guidance of 2020, we expect continued growth in our leads and conversions from the back channel to existing members telling their friends. And we're going to be investing more dollars to try to maintain these higher retention rates. And we'll have to see how they play out during the year.

Okay, sounds good. I don't think we touched too much on this, but regarding the partnership with Aflac, how's that progressing? You mentioned previously that deal kind of taking a while to ramp to reach its full potential. So just wondering, I guess, for an updated timeline on when we'd see a noticeable impact from that partnership?

Aflac is now one of our largest shareholders with just under a 10% ownership of the company. We see two markets where Aflac has a long history, particularly in Japan, where we will explore bringing Trupanion into the market. This process will take several years. Overall, there's nothing in our guidance that suggests any impact from Aflac in 2021. Regarding North America, I'll let Margi provide more details as she is closer to that aspect.

Yes, thanks, Darryl. So really kind of when we think about the North American side, specifically in the U.S. market, we've got three different stages. And we talk about timeline. If I could, the first one that will be first to market will be direct-to-consumer. We wouldn't expect that to have any impacts this year really particularly. So that would be just going straight on the aflac.com website. Beyond that, we then have two other markets, one of them would be leveraging the expertise and the power of Aflac as a partner from the relationships they have with the large and medium-sized businesses through their technology and their broker infrastructure. They're working at launching something in 2022. It will be initially a soft launch and soft rollout to see kind of how does that work? What do we see from that? So maybe if we're successful, and we execute well, we'll see some small benefit from that in '22. And then in 2023, the third part of that core is looking at how do we go after the small businesses. They're working with the 20,000 strong Aflac army of agents, who work specifically with small businesses across the American market, which we wouldn't be doing until 2023. So we have a very tiered release program. We're working really closely with a team; they're a great team, really good partnership and seeing some really good signs in terms of the roadmap and the skills. And I'm really kind of building on that core competency that we believe we have, which is developing the right product for the right channel with a partner that understands the worksite benefits so well. So really encouraged by what we see early stages yet, but some sort of solid timeline built out and developed.

Got it. That's helpful Margi. Last one for me, just relating to those pre-revenue initiatives. Trisha, I think you said it was $0.3 million in the quarter. So a pretty small at this point. But how much we expect those initiatives to increase going forward? And can you maybe talk about some of the bigger initiatives that fall in there?

I'll begin with a high-level overview, and then Darryl or Margi can discuss specific initiatives if they wish to highlight any. Generally, our activities will vary from year to year based on opportunities and the timing of product launches. As we consider our partnership with Aflac and other developments over the next five years, we are sharpening our focus. We've dedicated a significant amount of time, especially in the past five years, to scaling the business and meeting margin targets. Now, we have the chance to adopt a more strategic and expansive approach, along with the funds necessary to invest in these initiatives. This focus is central to our efforts. In the upcoming year, alongside the usual sales and marketing expenses for other business activities, we anticipate being in the $2 million to $5 million range. The exact amount will depend on the speed at which timelines and product developments progress, as Margi mentioned. However, from a broader perspective, we want to ensure that these new initiatives can generate internal rates of return of 30% to 40% at launch, while also aiming for a 15% adjusted operating margin, similar to our existing subscription business. We are evaluating everything through these various lenses. Darryl, do you have anything to add?

Yes. Just for the impact on the business, we don't need to be doing these for the next couple of years to hit our growth goals. But we're making these investments to think about making meaningful impacts on our P&L in the 5, 10, 15-year range. And they include international expansion, working with distribution partners where they can be powered by Trupanion. Meaning they got access to us paying hospitals directly, our data, the same value proposition, but as designing specific products that meet the need for those distribution channels. And we just see a lot of opportunity ahead of us, and we're going to be planting those seeds over the next couple of years, because we've now broken it out into the P&L. Over the next year or two, we'll be able to start to talk about what those short-term investments look like and why we're making those investments. I look forward to my shareholder letter in April to provide more. But long-term, we would expect that they're going to act more like a subscription business with 15% margin targets and 30% to 40% internal rate of returns.

Great. That's helpful. Thank you.

And that does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.