Jon Block: Thanks guys. Good afternoon. First question, Darryl, maybe for you, just the change in the other revenue strategy, I guess those are my words, but why now was is it a free up capital? And also, was anything in response to regulations changing, I thought there might have been some regs that were changing or had changed in California. So, maybe you can elaborate on that, please?
Darryl Rawlings: Yes. No, I think these conversations started over 2 years ago, and it was to free up capital. I think if COVID didn’t happen, it might have occurred a little bit quicker. If we had not got the $200 million cash infusion from Aflac a couple of years ago, it probably would have moved a little bit quicker, but we were able to spend the time with our partner to come up with a solution that was beneficial to us and allowed them to kind of have a smooth transition, so, long-term in the planning.
Jon Block: Okay. But just to push you a little bit, regs didn’t change in California on that. It just seems like you took this business from 4% of revenue to 30%. Part of the reasoning was to get leverage in fixed expenses down to 4%, which you did seem to work out. I thought I came across regs changing in California. That wasn’t €“ that didn’t play a role in this?
Darryl Rawlings: No. We had come to this agreement in before any reg changes in California. It just took us a while to get it all papered. So, the reg changes in California did not drive this decision.
Jon Block: Okay. And then, Drew, for you, my same sentiments to the prior question on ARPU. I guess it’s an offline. I just always struggle with a base of 800,000. You added 70,000 pets, how it’s that dilutive. I am guessing there is also a component where higher ARPU pets must be churning off to get the suppression. But maybe just looking forward, do we still think ARPU in 2023 is up 5%. I know you went through some of the big increases that’s on the come in February and March that we will see start to roll through. But call it realized after we take this mixed dynamic into play, do we think about ARPU up 5%, €˜23 versus €˜22 in the P&L?
Drew Wolff: Yes. No, we are looking at for the full year of 3% to 3.5%. And that is driven by mix. Geography is the biggest driver of that, which then goes hand-in-hand with claims. And so parts our new business is above the portfolio and parts, new business is below, but that’s, we are pricing to the value proposition and not just to the top line. And so that’s what’s driving that dynamic. It gives us this growth. It’s €“ we continue to have ongoing strong growth, which is driven by this positive mix.
Jon Block: Okay. I have last two questions, I will take it offline. Thanks guys.
Darryl Rawlings: Thank you.
Operator: Our next question comes from Shweta Khajuria with Evercore. Please proceed with your question.
Unidentified Analyst: Hi. Thanks. This is Jian for Shweta. I guess maybe not to belabor this point further, but on ARPU, I guess more conceptually beyond this year, how should we think about the progression of this line? Like, I mean do you expect this mix to continue to drive ARPU down? Is there anything that could kind of balance that out, if you can kind of talk about the long-term thinking on ARPU progression?
Darryl Rawlings: Yes. Mix is an interesting dynamic. The more successful we are in certain areas has lower ARPU. For example, we are about one decade in the penetration rate into the United States. We have been in Canada for two decades. Our growth rate in Canada is faster than our growth rate in the United States. The long we have been in market, the faster we grow, the more veterinarians recommend us. The cost of veterinary care in Canada is lower than it is in the United States. So, every time we are growing a higher percentage in Canada versus U.S. that lowers our mix. When you layer on top of that currency exchange and the U.S. dollar has been growing a lot faster than the Canadian dollar, that’s another factor. But now you got to take into effect, we have now added new distribution channels.
All those distribution channels have lower-cost products and lower coverage. We have also added two new lines of products. Both of them have lower coverage, and that’s before we get into going into Europe. And the cost €“ the average cost of veterinary care in Europe is lower. So, once again, we are a cost plus model, and we €“ our job is the cost appropriately. It is also to understand the lifetime value of each of those streams of pet and to make sure that we are spending appropriately on pet acquisition to get those strong rates of return. Margi mentioned earlier, in Drew’s implied guidance for the year, we are looking to be growing PAC 20% year-over-year, but basically at the same amount of PAC dollars. That shows you that as mix is changing, so is the discipline around our PAC spend.
So, our PAC spend is getting also equal. I know it’s hard for modeling. But as Drew said, in our forecast, we are currently looking at about 3% in ARPU, although the underlying increase for existing clients can be 15% to 18% as the year goes on, but it’s the nature of our business. Lots of categories of pet, lots of distribution channels and now multiple levels of products. So, hopefully that helps.
Unidentified Analyst: Got it. Yes. Very helpful. And one other question, if I may, just on the new distribution channels for this year. I think Margi, you said like 10% to 20% contribution from these channels. Does that include the Chewy partnership? And also, if you could just kind of rank order which channel do you expect to be €“ which of the new channels do you expect to be the more significant? And what’s kind of the linearity of that, especially just given €“ I am just thinking that Chewy, I guess the size of the base is quite significant for Trupanion, but if you can respond on that.
Margi Tooth: Yes. No, of course I can. So, you are right. I do say we expect to see somewhere between 10% and 20% for all of those new channels combined. So, that would be inclusive of the European acquisitions, Chewy, Aflac and all those price plan, so second. In terms of the contribution, when we are operating within the same margin profile for all of them, we are looking at the same guardrail. So, for us, we are totally agnostic and the expectation is we have got to get better in all instances learning how to generate leads and some of it is in others, it’s about conversion retention. I would say that all of them have got huge opportunities. All of them are things that we felt were, as we mentioned in our 60-month plan going back a couple of years now, something that we would be able to get to $100 million worth of revenue within 5 years of starting.
I think kind of that’s still absolutely true. And for us, we are really kind of getting out of the gate this year and kind of putting the pedal to the metal and making sure that we are in a position to start to generate revenue. But I wouldn’t want to rank one above the other. I think overall, we can expect to see that 10% to 20%. And as we go through the year, we will have a little bit more color to share on which ones are leading the PAC. But they are all in good position to go forward and actually start to contribute to revenue quite meaningfully over the next couple of years, which is part of the plan.
Unidentified Analyst: Great. Thanks for the time guys.
Margi Tooth: Yes. Thank you.
Operator: We have reached the end of our question-and-answer session. And this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
