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Trupanion Inc (NASDAQ:TRUP)
Q4 2019 Earnings Call
Feb 13, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Trupanion Inc. Fourth Quarter and 2019 Results Call.

[Operator Instructions]

It is now my pleasure to introduce your host, Laura Bainbridge, Head of Corporate Communications for Trupanion. Thank you. You may begin.

Laura Bainbridge -- Head of Investor Relations

Good afternoon, and welcome to Trupanion's fourth quarter and full-year 2019 financial results conference call.

Participating on today's call are Darryl Rawlings, Chief Executive Officer, and Tricia Plouf, Chief Financial Officer.

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 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'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.

Darryl Rawlings -- Founder & Chief Executive Officer

Thanks, Laura. Good afternoon, everyone.

2020 marks the start to a new decade, our 20th year at Trupanion. In those 20 years, we've delivered consistent growth while scaling our operating expenses. Today, we have over 650,000 total enrolled pets, 500,000 of which are covered by the Trupanion brand. In the last 20 years, we've held over 1 million pets in aggregate and paid out close to $1 billion in veterinary invoices. Of all of our accomplishments, this is the one I'm most proud of. At the end of the day, Trupanion exists to solve a problem. It is very difficult for pet owners to budget for veterinary care if and when their pet becomes sick or injured. When Trupanion was introduced nearly 20 years ago, we wanted to offer loving responsible pet owners a product with the broadest coverage, highest value proposition and best customer service. We take great pride across the organization in helping solve a large problem for our members while building moats around our business.

As a reminder, our moats are our value proposition, our veterinary relationships, our proprietary software, our data, and now our operating scale. These moats have taken decades for us to dig, and by definition, are difficult to replicate. I'll briefly touch on each. First, our value proposition. The measure of how much we pay back to the consumer. Historically, we've targeted 70% value proposition for our subscription business. I noted in my 2016 Annual Shareholder letter that we intend to drive this number as high as possible. Scaling our variable expenses to a consistent 9% of subscription revenue from our previously targeted 10% of revenue, allows us to now target 71% value proposition.

Our second moat, our veterinary relationships. Today, we are visiting over 22,000 of the 25,000 veterinary hospitals across North America. And last year, our active hospitals totaled more than 10,000. It took years of effort to earn the trust of these veterinarians and staff, a privilege we do not take lightly. Third, our proprietary patented software. Our software makes Trupanion the only brand in the industry that can pay a pet owner invoice directly to the veterinarian at the time of checkout. With claims automation, we're processing invoices in about 15 seconds. Not only does our software improve the customer experience, but it also adds to our data advantage, our fourth moat. Our data enables us to price more accurately across a greater number of categories, pricing as accurately to our value proposition by sharing risk equally and fairly among like pet groups is our pricing promise, and we believe key to continued healthy and sustainable growth.

And lastly, after 20 years, I'm excited to be on the brink of operational scale. Since our IPO in 2014, we've driven meaningful scale in our fixed expenses, ending the year just about 5% [Phonetic] of revenue, with total enrolled pets at the low end of our range for operating scale. We're approaching this milestone while returning more back to the customer, a benefit of our better-than-expected scale and variable expenses. We have more work to do in getting veterinary invoice expense in line with our 71% value proposition. At the end of the year, we were running about 1% above our target. We are nevertheless pleased with the progress we've made toward achieving our target margin profile in recent years and expect incremental improvement in 2020.

Let me be clear. If we had to choose where to overshoot, it would be on returning more back to the pet owner. Long term, we believe returning a higher percentage back to the pet owner will drive higher retention and higher lifetime value. We designed our product to be used by loving, responsible pet owners and built our product in consultation with veterinarians and veterinary professionals to facilitate the practice of high-quality medical care. We believe the long-term success of this category lies with the veterinary channel, and we've positioned our business model around this belief. When we entered the United States over 10 years ago, veterinary acceptance of insurance was low. Products with poor coverage and extensive fine print had tainted the market and alienated veterinarians. The industry's revenue, with Trupanion included, was growing in the low-double digits. Building a brand, a company and a category against this backdrop was immensely difficult.

Compare this to today. Revenue growth for the category accelerated in 2018 to approximately 22% year-over-year. We believe Trupanion, across all our lines of business, was the largest contributor of that growth. Sentiment is shifting. For example, I recently returned from VMX, the largest East Coast veterinary trade show where relative to prior years, there was more excitement around the category and interest in Trupanion. And lastly, opportunities are being created from the growing spotlight on the category. After years of conversations, I'm optimistic that medical insurance for cats and dogs will get its own line of business in the not-too-distant future. Channels are opening up that we too are able to invest in. We expect these will be able to add to the growth and awareness of Trupanion and the overall category.

Today's environment, when coupled with the moats around our business, increase my conviction around our ability to be successful. At Trupanion, we measure our success based on the number of pets we help and the dollars we pay toward veterinary invoices. And the more the better. Our key measures, which include things like revenue and retention, adjusted operating income and internal rates of return, help us diagnose the health of our business. Our moats and our culture give us the confidence to consistently deliver. I'll touch on our 2019 financial performance of these key measures. Revenue grew 26% year-over-year to $384 million. Adjusted operating income, or the profit we make before new pet acquisition or incremental investments, was $44 million, $42 million of which was driven from our subscription business. In total, we invested $33 million of our adjusted operating income in pet acquisition initiatives related to our subscription business, where our calculated internal rate of return for an average pet was 40% for the year.

Tricia will provide more details into our segments and margin profiles in her remarks. The internal rate of return was at the high end of our targeted 30% to 40% range. And we accomplished this while making investments in newer, unproven initiatives including continued growth of our inside sales force, accelerated deployment of our patented software, building out our conversion and content teams, piloting our State Farm partnership, expanded direct-to-consumer spend and efforts focused on reducing 90-day churn. At 40% internal rate of return, there is room to be more aggressive in the deployment of our acquisition spend. At the consolidated level, we operate a multi-channel, multi-product strategy. Our other business, which operates at a lower margin, adds to our data advantage, provides us insights into alternative products and channels, allows us to share in the success of the broader category, and helped us hit our operating scale sooner than we otherwise would have. We also spent very little to acquire pets within this segment.

Continued growth in the adjusted operating income provides us opportunities to reinvest an increasing amount of our discretionary income at high internal rates of return. In addition to testing and acquiring pets in our subscription business, this discretionary income could fund longer-term strategic initiatives.

In summary, we are pleased with our progress in 2019 and are well positioned headed into 2020. But our success is not predicated on one year and certainly not one quarter. Our success has been built over the past two decades by providing pet owners with high-quality medical insurance, by investing in and deepening the competitive moats around our business, and by attracting the talent to advance our initiatives. Every year, we get incrementally better, our moats a little deeper, and our conviction a little stronger. Much of my conviction lies in the strength of our team. I invite you to come to Seattle and meet the team at our 2020 Annual Shareholder Meeting to be held on June 11. This once-a-year event represents the best opportunity to meet the people behind Trupanion and gain access and insights from our key business leaders.

Specific updates on our five key strategic initiatives will be discussed, as well as our lengthy Q&A with the team. Additional details will be forthcoming on our Investor Relations website. With that, I'll hand the call over to Trish.

Tricia Plouf -- Chief Financial Officer

Thanks, Darryl, and good afternoon. As Darryl covered many of our 2019 financial highlights, I'll focus my commentary primarily on our fourth quarter performance, as well as provide our outlook for the first quarter and full year of 2020.

Total revenue for the fourth quarter was $105.5 million, up 28% year-over-year and led by strong pet enrollment in both our subscription and other business segments. Total enrolled pets increased 24% year-over-year to nearly 650,000 pets as of December 31. Subscription revenue was $86.6 million in the quarter, up 22% year-over-year. Total enrolled subscription pets increased 15% year-over-year to over 494,000 pets as of December 31. Pet growth within our subscription business primarily reflects the benefit of increased leads in our core veterinary channel. Monthly average revenue per pet for the quarter was $58.58, an increase of 6% year-over-year. Average monthly retention was 98.58%. I do want to highlight that our product is sold as a monthly subscription, and in any given month, we will have some payments that fail.

In the fourth quarter, we updated the process related to failed payments, shortening the collection period from approximately 60 days to 30 days as we believe there are benefits to this being streamlined. This change resulted in the acceleration of 700 cancellations during the quarter. Outside of this process change, retention was consistent across all categories. Our other business revenue, which is comprised of revenue from other product offerings that generally have a B2B component, totaled $18.9 million for the quarter, an increase of 61% year-over-year. Year-over-year growth in our other business segment reflects an increase in the number of pets enrolled. Subscription gross margin was 19% in the quarter, within our annual target of 18% to 21%. Total gross margin was 17%, including our other business segment, which has lower margins. Fixed expenses in the quarter represented 5% of total revenue, down from 6% in the prior year period and in line with our target at operational scale.

I echo Darryl's sentiment that we are very pleased to be nearing operational scale in fixed expenses at the low end of our target of 650,000 to 750,000 pets. We generated $12.4 million of total adjusted operating income during the quarter, an increase of 35% over the prior-year period. Net income in the quarter was $0.6 million.

Turning to each segment. We generated $11.5 million or 93% of our adjusted operating income from our subscription business during the quarter. When calculating adjusted operating income, note that we allocate fixed expenses pro rata based on revenues. We believe this is appropriate as our fixed expenses support both segments. As a reminder, our target margin profile for our subscription business is to generate 15% adjusted operating margin before our new pet acquisition spend. In the fourth quarter, we generated 13% adjusted operating margin in our subscription business, an expansion of about 1% compared to the prior year. Our long-standing 15% target margin profile for our subscription business consisted of spending approximately 70% paying veterinary invoices, 10% on variable expenses and 5% on fixed expenses.

In the fourth quarter, we spent 72% paying veterinary invoices, 9% on variable expenses and 5% on fixed expenses. Achieving our target margin profile will require an approximate 1% improvement in cost of goods as a percentage of revenue, as well as a small amount of incremental scale in fixed expenses. We expect to drive incremental scale in fixed expenses in 2020 and we continue to work toward more accurately pricing to our 71% value proposition in order to achieve our target margin profile in future periods. It's worth noting, however, that about 1% variability in the cost of paying veterinary invoices on an annual basis, is considered normal when looking at our margin profile. Adjusted operating income within our other business segment totaled $0.9 million during the quarter compared to $0.4 million in the prior-year period.

As Darryl noted, we spend very little to acquire pets within this segment, about $200,000 in the quarter, and believe there are multiple strategic benefits related to this segment, both near term and longer term. During the quarter, we deployed $8.5 million of our adjusted operating income to acquire over 35,000 new subscription pets, resulting in a PAC of $222 a quarter. Of the $8.5 million, approximately $2.8 million was spent on newer and unproven initiatives. This compared to $6.6 million in the prior-year period to acquire over 31,000 new subscription pets, resulting in a PAC of $186, with approximately $1.8 million spent on newer and unproven initiatives. Inclusive of this spend, we estimate our internal rate of return for a single average subscription business pet at 40% for the quarter, at the top end of our 30% to 40% target range.

Note that we are now updating our calculation to isolate our subscription business unit economics, since this is the focus of our acquisition spend. The unit economics for our average subscription pet are also inclusive of fixed expenses, and we have updated our calculation of lifetime value to reflect this. We believe this results in a more fulsome metric when estimating the payback period, and it is an important consideration to measure the effectiveness of our acquisition spend. And it's for this same reason that we also include an estimated surplus capital charge in our calculation of internal rate of return. It is important to note that our lifetime value and internal rate of return calculations assume that an acquired pet behaves like the average pet in our current book of business when estimating future returns.

Additional details behind these calculations and the margin profiles for our two business segments can be found in our supplemental materials on our Investor Relations website. Free cash flow was $2.7 million in the quarter, and operating cash flow was $4.5 million, compared to $3.7 million in the prior year period. Adjusted EBITDA was $3.7 million for the quarter, up from $2.5 million in the prior year period. Net income was $0.6 million or $0.02 per basic and diluted share, compared to a net loss of $0.3 million or $0.01 loss per basic and diluted share in the prior year period. At December 31, we had $98.9 million in cash, cash equivalents and short-term investments, and $26.1 million of long-term debt.

I'll now turn to our outlook for the first quarter and full-year of 2020. For the first quarter of 2020, revenue is expected to be in the range of $110 million to $111 million, representing 27% year-over-year growth at the midpoint. Revenue for the full-year 2020 is expected to be in the range of $476 million to $482 million, representing 25% year-over-year growth at the midpoint. Embedded in our revenue guidance for 2020 is ARPU growth in line with historical average of 5% to 6%. We expect revenue in our other business segment to be around $93 million for the year. At these forecasted revenue levels, we expect total adjusted operating income for the year to be around $57 million, with approximately 95% coming from our subscription business. At the midpoint of our targeted internal rate of return range for the subscription business, our allowable acquisition spend would be around $45 million.

Also, please keep in mind that our revenue projections are subject to conversion rate fluctuations between the US and Canadian currencies. For our first quarter and full-year guidance, we used 76% 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.

Darryl Rawlings -- Founder & Chief Executive Officer

Thanks, Trish.

Before we open up for Q&A, I'd like to highlight our participation at the upcoming Raymond James Conference to be held in March. In addition, we are quickly approaching two important events for the year. First, our open Q&A session to follow the Berkshire Hathaway Annual Meeting in Omaha on May 2, and secondly, our Annual Shareholder Meeting to be held in Seattle on June 11. We received great feedback from last year's shareholder meeting and expect this year to be even better. More details can be found on our Investor Relations website. We hope to see many of you there.

With that, we'll open it up for questions. Operator?

Questions and Answers:

Operator

[Operator Instructions]

Our first question comes from the line of Shweta Khajuria with RBC Capital Markets. Please proceed with your question.

Shweta Khajuria -- RBC Capital Markets -- Analyst

Great. Thank you. A few quick ones, please. First, on the retention rate. Could you please talk about what's the change in the process? What are the pros and cons of the decision that you made from 60 days to 30 days? And second is on other revenue growth. That came in stronger than expected. Anything to call out? The guidance seems good for full-year 2020. And third, leads grew in double-digit growth last quarter, Q3. Any updates on just general trends on leads and conversion that you're seeing based on the initiatives that you've been making over the past several months or quarters? Thank you.

Tricia Plouf -- Chief Financial Officer

Sure, Shweta. Thanks for the questions. I'll handle the first two and then Darryl can take the third one. In general, what we believed was in having a longer failed payment process before a cancellation occurred that we likely weren't saving as many customers as we could have if we shortened the process, and we're able to recover them with only basically one outstanding month of payment rather than two. And we're seeing positive trends albeit all very incrementally small, but moving in the right direction since making that change, but it did accelerate a few of them in the current quarter. Absent kind of that move forward of about 700 cancellations, our retention would have been consistent. And it's one of the initiatives among many that we have been looking at to improve our 90-day retention in the long-term and made that change during the quarter.

In terms of other revenue growth, as you recall, there are four different items in that segment. It's a B2B segment with a little less visibility, and it's been growing nicely and consistently among all products within the segment. So nothing specific to call out there.

Darryl Rawlings -- Founder & Chief Executive Officer

And Shweta, I think your last question was just a general trend on leads versus conversions. I would say that for the year, we had both leads and conversions help drive the growth in 2019. For Q4, in particular, it was mainly driven by leads. Conversions were a little bit flat or softer than they were in Q3. So we had really strong lead growth.

Shweta Khajuria -- RBC Capital Markets -- Analyst

Thanks, Darryl. Thanks, Trish.

Operator

Our next question comes from the line of Maria Ripps with Canaccord. Please proceed with your question.

Maria Ripps -- Canaccord Genuity -- Analyst

Thanks. So just wanted to ask you about your updated targeted payout of 71%. How does that impact your long-term margin outlook? And do you see that 71% going higher over time? And also, do you expect it to improve retention longer term?

Darryl Rawlings -- Founder & Chief Executive Officer

Great question. So we're trying to operate a subscription business at 15% margin before acquiring new pets. The change from 70% to 71% as a target has not changed our goal of hitting 15%, so that remains. What we would like to do over the next five or 10 years is to have 15% margin and be able to pay $0.72, $0.73, $0.74 on the dollar in the way of paying veterinary invoices. The aggregate, we believe, continue to dig the most around our business a little deeper and better value proposition, which long term we believe helps conversion and retention rates. But we are still looking to hit that 15% target. And we're excited that our variable expenses and our fixed expenses over the last five years have really driven ourselves into the -- get us to that point.

Maria Ripps -- Canaccord Genuity -- Analyst

Great. Thank you.

Operator

Our next question comes from the line of Jon Block with Stifel. Please proceed with your question.

Jonathan Block -- Stifel -- Analyst

Thanks, guys. Good afternoon. First one, Trish, I think for you, just the guidance. The $93 million for other growth in 2020 implies about $386 million for subscriber business, which is slightly below where we were. We were $390 million. So I guess a couple of questions here. First is the other. Is there a good long-term growth rate to think about? Because now you're coming off big back-to-back 50%, give or take, growth in that division. And then the other part of the question would just be any more details on that subscriber business number of around $386 million, if you could detail what you're thinking about in terms of sub growth or pet growth? Thanks.

Tricia Plouf -- Chief Financial Officer

Sure. Yeah. In terms of the other business, we're coming off of Q4 and really that current run rate and modeling consistency there as we have a little less visibility given partnerships in that area. Longer term, book of businesses grow, churn grows and things may move around in terms of growth rates in that segment. When you're modeling out a DCF and the cash flows that come from that, we would suggest -- longer term, as you get out in the model, to think more about industry growth rates. In that, low 20% range is kind of how we think about us participating really through other business segment and other products in the markets longer term for the advantages that Darryl mentioned.

In terms of our subscription business, if you are looking at the midpoint, roughly $386 million, $387 million, it's really modeling out with the visibility we have going into the year that we are going to be growing pets pretty consistently in terms of total enrolled pets with the prior year. And then the ARPU, while we were at kind of the high end of our range in terms of 6% year-over-year growth in ARPU, starting the year, we're modeling the midpoint here based on the visibility that we have closer to 5% to arrive at the midpoint number. Obviously, as the year goes on and we have more visibility, particularly in the back half of the year, we will update those. But that's kind of the details that drove that guidance.

Jonathan Block -- Stifel -- Analyst

Okay. Very helpful. And Darryl, the second one is for you. I think you mentioned roughly another third of the PAC spend, give or take, went into experimental. And I'm just curious how we should think about that long term? In other words, is that the right way to think about it that there's a lot of levers to draw down upon an experiment that's really somewhat into perpetuity? Or does part of the third graduate into the underlying PAC spend and that sort of diminishes over time as a percent of the overall PAC? Thanks, guys.

Darryl Rawlings -- Founder & Chief Executive Officer

When we think about our PAC spend, we first go -- care most about our allowable PAC spend. So based on the stream of cash flow that this generated, which is the combination of that adjusted operating income or margin for the subscription business, you multiply that by the number of months and it gives us a stream of cash flow. We are targeting to have internal rates of return between 30% and 40%. For the year, that's probably a balance between somewhere of a PAC spend somewhere from $240 to $280 in that range. What we think about -- and we think about the business over the next five, 10, 15 years, is having higher allowable PAC spend increases the likelihood of us to be able to consistently grow year after year in five and 10-year groups. And the fact that we are able to deploy a third of our spend and had 40% internal rate of return in 2019 tells me that we can be a little bit more aggressive in 2020.

The fact that we're able to do it in more testing and more building out different teams just gives me a higher degree of confidence of being able to continually execute not only in quarters, but in years and decades.

Jonathan Block -- Stifel -- Analyst

All right, guys. Thanks for your time.

Operator

Our next question comes from the line of David Westenberg with Guggenheim Securities. Please proceed with your question.

David Westenberg -- Guggenheim Securities -- Analyst

Hi, thanks for taking the question. So the subscription gross margins missed me by a bit. I think you kind of gave a little bit of color on that on the gross -- I mean, on the prepared remarks, but I didn't totally get it. It was down sequentially a tad year-over-year. Was there anything different in this quarter? Or is it just kind of the quarterly cadence or just general ebbs and flows of this kind of business?

Tricia Plouf -- Chief Financial Officer

Yeah. I mentioned this briefly in my prepared remarks, but I think that's a worthy topic to expand upon. Gross margin, the one item that does move around based on the nature of our business and the timing of when premium increases come through versus the cost of paying veterinary invoices, we're now targeting that being 71%. And it's -- it was 72% in the quarter. And variability of plus or minus 2% on a quarterly basis, 1% on an annual basis, is considered very normal and very accurate. Now there are many things that we are doing to try and always be as accurate as possible to this value proposition. But there are a few headwinds, as we talked about before, when we roll out more software and see a bit higher claims come through. We are trying to update neighborhood pricing that we've talked about at the last shareholder meeting to be more accurate, particularly when we're going to locations where we don't have good data yet to accurately price those in advance.

And then as we roll out more and more claims automation, which we've made very good progress on this year, making sure that that is as accurate as possible as well. So a lot of the things that we're doing that deepen our moat can cause a bit of that variability nearer term, but it's very positive trade-off in terms of customer experience longer term.

Darryl Rawlings -- Founder & Chief Executive Officer

Dave, when I think about our subscription margins, the ones that I'm focused on is how much is delivered back to the consumer and what's hitting our bottom line for cash. And over the last three years, we've had consecutive increases in not only year-over-year increase in the bottom line margin, but we're also guiding to that for the next year, although being -- our target would be 15%, we're targeting 14%. So a little bit behind where we would otherwise like to be, but that progress we've made from '17 to '18 and '18 to '19, I'm pleased with.

David Westenberg -- Guggenheim Securities -- Analyst

And then, you've mentioned that you feel like you're getting the scale right now. I know you're not giving like long-term opex -- I mean, you kind of do give long-term opex in the sense that you have that 15% margin. But as we're looking for kind of percentage growth of opex now, we should be expecting a little bit of a decel right now relative to revenue growth, right?

Tricia Plouf -- Chief Financial Officer

Well, I would say it depends on the particular opex that we are looking at. We would expect the variable expenses to stay consistent at 9% and grow in line with revenue. We are targeting the scale of 5% on the fixed expenses, the G&A and technology. And we would expect, once we hit that, that that would remain consistent. If we do, as Darryl mentioned, see more efficiencies in either of those areas in longer-term future years, we would return that to the customer for benefits ideally to conversion, retention and referrals longer term. In terms of the sales and marketing expense for pet acquisition, that will be dependent on how many pets are added, because we monitor it on a per pet basis and being within our targeted internal rate of returns range.

David Westenberg -- Guggenheim Securities -- Analyst

I have a couple of more, but I'll hop back in queue.

Operator

Our next question comes from the line of Andrew Cooper from Raymond James. Please proceed with your question.

Andrew Cooper -- Raymond James -- Analyst

Hey, thanks for the question. I guess, just thinking high level in terms of expectations and what the next steps are as you started to really realize the operational scale that, to your point, you've been striving for, for a number of years now. Darryl, I think you mentioned opportunities in new channels. What's the willingness for you guys to sort of step a little bit outside what's been your bread and butter in the vet channel, and start to do a little bit more and look at partnerships or things like that? How do you approach those opportunities and just think about them from a strategic perspective of what you may be willing to do or how aggressive you may be willing to get on things like that?

Darryl Rawlings -- Founder & Chief Executive Officer

Well, we think as the category is accelerating, we're seeing a number of opportunities both in partnership, different distribution, maybe participating in products at different ARPU levels, as well as geographic expansion. We think what we've gained over the last 20 years in our operating scale of the teams and the systems and the data puts us very well positioned. When we look at it, I would say, we do -- we care about deployment of capital and getting those 30% to 40% internal rates of return. So that is one of our barriers that we would want to go into. Strategically, we want to make sure that what we're doing is helping the aggregate category grow, not hurting it. And within those guardrails, we care about do we have the right team and execution to do something at a given period of time.

I would expect, over the next five, 10, 15 years, that you will see us have bigger percentages of our new business coming from what are today's non-core channels. But I think that's part of the opportunity.

Andrew Cooper -- Raymond James -- Analyst

Okay. That's helpful. Just to have the view on. And then I think yesterday or the day before, you put out a news release about a hire and mentioned potentially digging deeper into the underwriting side in Canada. Is there any context you could add around what the thinking is there? Is there a pull from existing non-subscription customers in the US that are looking to have a Trupanion -- or an American pet insurance company available to them in Canada and North America? And is it a little bit more of a pull? And to the degree that you do that, does it provide a margin opportunity within the subscription business as well, if you could add any context around that, and what the timing might be if you do decide to pursue that? That would be great.

Darryl Rawlings -- Founder & Chief Executive Officer

Yeah. It's pretty simple. We're always trying to remove frictional costs so that we can offer better value back to the consumer. The efforts we're making in Canada to give us greater flexibility and lower frictional costs, something we've been working on for a number of years.

Andrew Cooper -- Raymond James -- Analyst

Okay. That's helpful. I'll leave it there, and circle back after. Appreciate it.

Darryl Rawlings -- Founder & Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Greg Gibas with Northland Capital. Please proceed with your question.

Greg Gibas -- Northland Capital Markets -- Analyst

Good afternoon. Thanks for taking the questions. First, just to clarify, within the PAC spend in 2019, you said roughly one-third was allocated to new and unproven initiatives. Could you guide to what that range would be in 2020 out of that $45 million or so of acquisition spend?

Darryl Rawlings -- Founder & Chief Executive Officer

Probably be a similar amount, might even be able to be a little bit more than that. Because as we said, in 2019, we calculated our internal rate of return at 40%, and we think we can be a little bit more aggressive than that. So in that range, maybe a little higher.

Greg Gibas -- Northland Capital Markets -- Analyst

Okay. Good to know. And then as you get pretty close to penetrating the vast majority of that 25,000 or so vet clinics just in North America, I guess, how are you thinking about those international opportunities that you've talked a little bit about in the past? And when will those initiatives [Indecipherable] in terms of your growth initiatives?

Darryl Rawlings -- Founder & Chief Executive Officer

Well, we are now calling on about 22,000 of 25,000 veterinary hospitals in North America. But as I mentioned in my opening remarks, we only have -- well, we have about 10,000 active, which has taken us 20 years to get there. And I'm really proud of that achievement, but we've got a lot of opportunity for that 10,000 to grow to 15,000, 18,000, 20,000 over the next five to 10 years. So we think we've got a lot of growth there. In addition to that, we've been working on a lot of initiatives to improve same-store sales. We'll be sharing some of that information at the shareholder meeting, excited to talk about that. That's an area that we've been working on in some -- a lot of our investments.

But I would say, when we get to the point that we are now calling on close to the 25,000 hospitals, that's why we start to think about adding international markets. Australia was the first one. The Australian numbers are not currently showing up in our P&L. It's just kind of a balance sheet item today and it's not meaningful. But if you think over the next five or 10 years, we would expect we want to increase the universe of addressable market. And we think about that in the addressable number of hospitals. So we are working on that. And over the next five to 10 years, you should expect that we will have additional international geographies added.

Greg Gibas -- Northland Capital Markets -- Analyst

Very helpful. Thank you.

Operator

Our next question comes from the line of Mark Argento with Lake Street Capital Markets. Please proceed with your question.

Mark Argento -- Lake Street Capital Markets -- Analyst

Hi Darryl. Hi Tricia. Just a couple of quick ones. I know there seems like a lot more activity in terms of additional competition in the space. I know that you guys have been at it for quite a while. But from a pricing perspective or things that you see when you get new entrants into the markets, pricing rationale, behavior rationale at this point, maybe you could talk a little bit about what you're seeing on the competitive front.

Darryl Rawlings -- Founder & Chief Executive Officer

Sure. Well, the aggregate business today kind of falls into three buckets in North America. You have the area that we are focused on and we think we dominate, which is veterinarian business. We've got a unique product and the sales force and data, customer experience and value proposition that is all derived around there. When we talk about increased competition, and at any given time we've competed about 20 brands, most of the -- well, all of the increased competition is either in the kind of online direct-to-consumer space, or it's showing up in kind of the corporate employee benefits. I will tell you that my belief is the corporate employee benefits, if it accelerates, it's going to be due to low unemployment rates, and anything that happens there should be incremental to the growth of the category. We're doing more and more things in that area, and we may benefit if that section of the category growth.

When people are in the direct-to-consumer side and online, I would say, most additional brands, it's really a market shift among the competitors competing in there. So it doesn't have a material impact on our business. But it's good to see that there are -- the category continues to grow and get the appropriate attention.

Mark Argento -- Lake Street Capital Markets -- Analyst

That's helpful. And then just pivoting to the clinics, the hospitals, any updates on Trupanion Express? That continues to be -- talk about taking friction out. I'm assuming that continues to keep competitive advantage of yours. Any updates on kind of penetration rates or any other kind of partnerships on the data side and providing any other tools to the vet clinics?

Darryl Rawlings -- Founder & Chief Executive Officer

Well, 2019 was a continued year on expanding that, and we expect the same in 2020. We have the additional lever in the last year or so, which is becoming more meaningful. Not only are we getting the software, which is a much better customer experience when you layer on claims automation, which adds up customer experience and makes us more efficient, reduces the number of inbound phone calls. Those are things we're really excited about. So we're going to keep our foot on the pedal and keep moving those forward. Outside of that, if I was to stand back and let's say, at 30,000 feet, it's going to be the same as the last couple of years. We just want to get more software out there, improve the customer experience and really make it so that when pet owners walk into a veterinary hospital to any hospital anywhere in North America, they're asking at the front desk whose their insurance with. And us being able to pay directly, gives them the reason to ask that question.

Mark Argento -- Lake Street Capital Markets -- Analyst

Great. Thanks, guys.

Operator

We do have a follow-up question from the line of David Westenberg with Guggenheim Securities. Please proceed with your question.

David Westenberg -- Guggenheim Securities -- Analyst

Hi, thank you for taking the follow-up here. So can you remind us about your deal with IDEXX? And is that contributing to enrollments?

Darryl Rawlings -- Founder & Chief Executive Officer

We don't try to talk about our partners in any detail. We mentioned, I believe, on the last call that we had long-term agreements with two companies that provide most of the practice management software globally, and we continue to work with them, and they've been good partners. We've got good alignment.

David Westenberg -- Guggenheim Securities -- Analyst

Great. And then one more follow-up. There is a company that's doing insurance and partner, and packaging it with drugs and diagnostics. Is that kind of a strategy that worries you? Or is that just -- you've been competing in this kind of category for so many years that you've kind of seen everything?

Darryl Rawlings -- Founder & Chief Executive Officer

Well, we've competed against many brands over many years. And the most we have are that their moats -- we don't think any one company entering the space is going to have any material impact on our business. That being said, we believe that any wellness components, meaning things that a consumer doesn't need help budgeting, but may want to get a discount to move it into monthly payments, that approach should be supplied by the veterinary hospitals themselves. They are the best ones to be providing wellness packages for the consumer, and a wellness plus an accident/illness together is a great combination. And we work very hard and diligent to make sure that the consumers, A, understand the difference, but also that we could work with the hospitals providing wellness packages, and we're making good progress there.

David Westenberg -- Guggenheim Securities -- Analyst

Sorry, just a follow up on that last question I had. So just for clarification purposes, you said you have two partnerships in PIMS. Does that imply that you have partnerships into maybe 80% of the PIMS in the market? Is that -- I don't know if that's a metric that you might be able to give or not. And if not, that's OK.

Darryl Rawlings -- Founder & Chief Executive Officer

Yeah. We believe that the software that we have is 80%-plus of the hospitals we're currently compatible with. And over the next number of years, we hope to drive that number closer to 90%. And that's kind of -- for us, that's kind of a global number.

David Westenberg -- Guggenheim Securities -- Analyst

Thank you so much.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Laura Bainbridge -- Head of Investor Relations

Darryl Rawlings -- Founder & Chief Executive Officer

Tricia Plouf -- Chief Financial Officer

Shweta Khajuria -- RBC Capital Markets -- Analyst

Maria Ripps -- Canaccord Genuity -- Analyst

Jonathan Block -- Stifel -- Analyst

David Westenberg -- Guggenheim Securities -- Analyst

Andrew Cooper -- Raymond James -- Analyst

Greg Gibas -- Northland Capital Markets -- Analyst

Mark Argento -- Lake Street Capital Markets -- Analyst

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