Margi Tooth: And I think the other thing I’d add to that, Jon, is just as we consider that inflation to touch on that point. If it’s 15% if it goes to 18%, obviously, that as we’ve seen, that can have a very material impact on the margins. So at this point, we feel good about where things are trending. So just hopefully gives you a bit of context on that with the guidance.
Jon Block: Okay. That was helpful. I guess I can also follow up with the offline. And then maybe just a pivot and maybe I’ll try to jam 2 questions in here. But in the past, you’ve talked about inflation increasing the demand for pet insurance — but I believe your 4Q ’23 gross adds were down again year-over-year, and that’s also with the quality of gross adds declining as well, and that’s in a market that’s 5% penetrated. So — how are you doing from a share perspective? Maybe you could talk about that as you slowed the dollars to deploy. And then separately, I’m just having a hard time reconciling. It seems like total subscribers were up 2,000 Q-over-Q, but subscription pets were up 22,000 Q-over-Q. So other pets were down roughly 20,000 Q-over-Q, yet other revenues were up sequentially. So is that just like an ARPU thing that went through the roof with other? Or maybe you could walk through that as well? Thanks for your time.
Margi Tooth: Yes. So I can take the first part of your question. So in terms of overall inflation increase in demand for pets. For us, — as you know, we’re always going to operate within our guardrails and we’ve prioritized this year with margin compression really focused on the amount of money that we have to spend to acquire the pets. What the team has done very diligently for the past 6 months is to really pull back those levers on PAC spend and focus on areas where we can get that efficient growth. That naturally brings those IRR guardrails down with it because the lifetime value is reduced when the margin is reduced. And as you all have seen in the supplemental, we document out exactly what that impact is. And so that means that the allowable pack dollars are reduced as well.
So therefore, super efficient when our allowable dollars go down, our growth can add that’s still efficient. There’s lower — there’s less money to spend. So those gross adds will trouble down. We fully expect as margins to expand to start to enter second half of the year. We’re expecting to see sequential margin from Q1 to Q2. So we’re expecting that inflation that we typically would see at the beginning of the year. As Fawwad mentioned, will be accelerated by 15% as well over double we’d normally see inflation. So if you assume that margins for Q1, Q2 will be somewhat flat, then they start to pick up, that means our PAC spend picks up. So we feel good about that future state. We’re seeing strong lead volume. We’re seeing good conversion rate and retention rate through our core channel, veterinary channel.
In terms of the overall market share, I think the market hasn’t shifted significantly. We don’t — we still have the veterinary channel as a Heartland, and we feel good about that. And then, Darryl, did you want to talk to the second part of the question, which I think you were asking about subscription pets and other pets. Jon would you mind just repeating that part of your question again, please, so we can.
Jon Block: Yes, sure. When I look at some of the data that you break out, I mean, it’s hard to tell you what page it is, but your total debt were 1.714 million, up from 1.712 million. So your total pets are up 2,000 sequentially. Your subscription pets are up 22,000. So your other is down 20,000 sequentially to sort of reconcile the total, yet your other revenue, right, was up sequentially from 3Q to 4Q despite other pets being down 20,000 sequentially. So I’m too of asking — how does that take place as another ARPU that comes up a lot because your other pets are back at a base where they were in 1Q, 2Q, yet the revenues for other is up notably from that period of time. And I’m trying to figure out what that is, if it’s ARPU and if so, why?
Darryl Rawlings: Yes. I think it’s a question we can follow up with you on Jon. But I think the key factor to me that I would take away is when you look at the shape of the other business in terms of revenue throughout the year, you see the opposite of what you’re seeing in subscription. So in subscription, we’re seeing accelerating growth rates, in other business you’re seeing diminishing. But we can certainly follow up with you in terms of the lag between the change in pet count and then how that manifests in terms of landing revenue.
Jon Block: Yes, it’s like one third of your bids, right? I mean it’s pretty straightforward. Your other pets went from 742 to 723, 742,000 to 723,000 Q-over-Q. It’s the first time that other pets were down, I don’t know, in at least probably 4 years the revs were up sequentially. How is that possible? What happened to the ARPU is what I’d love to hear. Thanks guys.
Margi Tooth: Thanks, Jon. We’ll follow up.
Operator: Our next question comes from John Barnidge from Piper Sandler. Please go ahead with your question.
John Barnidge: Good afternoon. Thank you very much for the opportunity. I believe you mentioned a shift in the quarter in the building ownership. Can you talk about that?
Fawwad Qureshi: Yes. This is Fawwad. Thanks for the question. Yes, so there’s a couple of things. If you sort of look at the opportunities we have from creating operating cash that we can then deploy in the business, PAC as for instance, we did two things. And really, it was to try and take advantage of the overcapitalization of our insurance entities. So we took an ordinary dividend, which is basically accrued interest income. With higher interest rates, we now have the opportunity for that to be a more meaningful contribution based on our existing portfolio. And then from a building ownership perspective, the building is shared between our insurance entities and our MGA our operating entities. So again, in consultation with regulators, we increased the insurance entity ownership, so that then frees up cash that can be used for operating purposes by our MGA.
We thought it was a prudent use of our assets. And we think we can reinvest those dollars at higher rates of return to growth business.
Margi Tooth: And I would just add to that, John. One of the reasons we bought the building in the first place was for this very purpose. So happy to be able to realize that activity as it comes to fruition.
John Barnidge: When that occurred, was there any change in valuation of the building?
Margi Tooth: No.
Operator: And our next question comes from Wilma Burdis from Raymond James. Please go ahead with your question.
Wilma Burdis: Hi. Good evening, guys. How do you view the need for scale? There’s a lot of rollouts going on in the pet insurance industry. Would you guys consider any acquisitions, combinations, anything like that?
Margi Tooth: No. I mean right now, I think we are very much focused on our core growth. We’ve got a number of different products and channels that we’re looking to continue to grow and invest in. We have different priorities across those in terms of looking at and continuing to operate within our guardrails, return to our overall target P&L margin profile. And looking at scaling there. I think we have made acquisitions in the past. I think it certainly has not been — they were the first that we’ve done. We’re not looking to do any more. And I think we have some big moats that we’ve been building over years, and we’ll continue with our owned pet growth.
Darryl Rawlings: Yes. I’ll just add that — this veterinary inflation that we went through, we saw 5 consecutive quarters of margin compression. And now we’ve seen 3 quarters of margin expansion. We’re prioritizing free cash flow above growth. But as you can see, the team has been able to deploy a 42% internal rate of return, we can get very high rates of return on our internal capital, and we have lots of opportunities. We really want to see our margins fully expand so that we can deploy greater sums of capital in our core channels at these high rates have churned. So that’s our overall strategy.
Wilma Burdis: Got it. Thank you. And maybe I missed this, did you guys talk about how much capital you freed up via both the ordinary dividend and if there is any associated with the building the movement with the building?
Fawwad Qureshi: Yeah. Hi. Thanks for that question. So there’s a couple of elements to that. So when you look at our beginning balance of 37.9 million and then the Q4 balance of 46.6 million, there’s the DMGP [ph] that we would normally get from our insurance entities. And as I said earlier, that’s what we use for our operating expenses, whether it be claims, complex center or fixed costs, et cetera, including PAC. And then the building and the dividend that we took was part of that walk from Q3 to Q4 that helped give us the 46.6 million.
Wilma Burdis: Okay. Thank you.
Operator: And ladies and gentlemen, with that, we’ll be concluding today’s question-and-answer session as well as today’s conference call. We thank you for joining today’s presentation. You may now disconnect your lines.
