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Trupanion, inc (NASDAQ:TRUP)
Q3 2021 Earnings Call
Nov 3, 2021, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to Trupanion, Inc. Third Quarter 2021 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Laura Bainbridge of Investor Relations.

Laura Bainbridge -- Head of Investor Relations

Good afternoon and welcome to Trupanion's third quarter 2021 financial results conference call. Participating on today's call are Darryl Rawlings, Chief Executive Officer; and Drew Wolf, Chief Financial Officer; Margi Tooth and Tricia Plouf are Co-Presidents who will be joining Darryl Andrew 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 Annual Report on Form 10-K and subsequent filings 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 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 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 and Chief Executive Officer

Thanks, Laura and good afternoon. I'm excited to share with you our key financial measures for the quarter. Total revenue increased 40% over the prior year period. Adjusted operating income increased 44% year-over-year and in total the team was able to deploy 42% more capital year-over-year at an estimated internal rate of return of 36%. As a reminder, adjusted operating income represents the cash generated from our existing pets in a given period. Typically, we will invest the majority of these dollars growing our portfolio of new pets. Growing adjusted operating income and deploying compounding some at high internal rates of return are the drivers of intrinsic values in our business.

Because adjusted operating income is the primary input of our discounted cash flow model, we view it as a proxy for value creation. In a large, underpenetrated market, we aim to grow intrinsic value per share 25% per year. Year-to-date, growth in adjusted operating income of 39% for the first nine months of our 60-month plan, means we are currently tracking well ahead. In the quarter, performance benefited from expanding margins and sustained high levels of retention.

Compared to the prior-year period, average monthly retention increased to 98.72% on a trailing 12-month basis. The average pet stays with Trupanion for 78 months, up from 76 months in the prior year period. In times of accelerated growth, I believe this performance is exceptional and very hard to do, well done team. The impact of these sustained high levels of retention is reflected in our progress toward Trutopia, our defined state of self-sustaining growth. In Trutopia, members adding pets or refer a friend and add a pet churning off. In the quarter, we narrowed the gap to Trutopia to a mere 0.28%. Trutopia is also a leading indicator of net pet growth, which increased 41% over the prior year period.

Over the long term, we believe company is most likely to be successful, are those who can invest in innovation and expand our addressable market. Achieving operating scale, compounding adjusted operating income and our team's growing ability to put greater sums of capital to work in a disciplined manner, position us to do so. We highlighted the ways we are growing and investing in our business in our 60-month plan, which can be found in this year's annual shareholder letter, I'll focus my remarks on a few areas.

In the quarter, we launched our low and medium ARPU products, Furkin and pet health insurance direct, both in Canada. We will operate both brands within our same capital allocation parameters and over time, we'll aim to grow our addressable market, while offering greater transparency to the industry. Our ability to operate at scale means that we are also able to support the launch of new markets. By the end of 2025, we aim to grow our addressable market by 40%. We intend on doing this by adding 10,000 international hospitals. This will increase our overall market from 25,000 in North America to 35,000 globally.

While doing so, we also expect to expand our active hospital base. Nine months into our 60-month plan, active hospitals totaled over 15,000. For more information on the growth in our active hospitals over the years, please see our prior shareholder letters. As we grow and scale new products, distribution channels and international markets, our mix of business should continue to evolve. Our metrics will reflect the progression. What won't change are the drivers of the value creation for our business, our adjusted operating income, the amount of capital we can deploy and the return on our invested capital.

Before I hand it over to Trish, I want to take a moment to welcome Drew formerly to the call and congratulate him on his promotion to CFO. Drew joined us in May and has quickly shown himself to be a strong leader and a great all around team member. Drew, it's a pleasure to have you onboard. I continue to be humbled by the talent we are attracting to the team. To me, it speaks to our culture and our mission-driven organization.

With that, I'll hand it over to Trish.

Tricia Plouf -- Co-President and Chief Financial Officer

Thanks, Darryl. I want to take a moment to echo Darryl's sentiment and congratulate Drew on his promotion to CFO. We were hopeful when he joined Trupanion as EVP of Finance that this would be the outcome. I'm thrilled that Drew's quick transition and strong leadership provided a pathway to do so on a timeline that has felt natural and seamless. I look forward to focusing my responsibilities on our long-term strategy and in coordination with Margi, the execution of our 60-month plan. My purview will remain all of operations, finance included and I will continue to work closely with as well as be a resource to Drew and his team to ensure a smooth transition.

With that I will turn the call over to Drew to discuss our third quarter results in further detail.

Darryl Rawlings -- Founder and Chief Executive Officer

Thank you, Trish and Darryl and good afternoon everyone. I'm honored to be speaking with you today as Trupanion's Chief Financial Officer. I've been on a steep learning curve over the past several months and I'm thankful to Tricia and the rest of team for their guidance and counsel during this time. The talent, passion and ability [Phonetic] the team brings to their work every day is inspiring and I've decided to be a part of where Trupanion is headed.

Trupanion is a mission-driven organization with a massive total addressable market and a business model that not only drives value creation for shareholders, but done so while targeting the highest value proposition for our members in aligning the interest of all stakeholders. I've been especially impressed with the compounding engine of our business or our ability to reinvest our adjusted operating income at higher rates of return. All that starts with Trupanion's exceptional retention, which means more of our investment is going into growth, not churn, which allows us to target the highest sustainable lifetime value in the industry.

We're delivering these results with a fundamentally different approach, one that focuses on a line that need to pets, pet owners and veterinarians. Unlike other retail pricing approaches I've experienced in my career, Trupanion is truly a cost-plus model. This approach means, we aren't pricing at the point of maximum elasticity. This is evidenced by our ability to adjust pricing to keep veterinary invoice expenses at our 71% value proposition, while increasing growth. In short, it's a great business and one that I'm excited to be a part of.

With that, I'll turn to our results for the quarter. Total revenue for the quarter was $181.7 million, up 40% year-over-year. Our performance was led by sustained high levels and monthly retention and solid gross additions in our subscription business and continued strong growth in our other business. Within our subscription business, revenue was $127.1 million, up 28% over last year or 26% on a constant currency basis. Total enrolled subscription pets increased 22% year-over-year to approximately 676,000 pets as of September 30th. Average monthly retention, which is calculated on a trailing 12-month basis was 98.72% compared to 98.6% in the prior year period.

I'll reiterate that our strong monthly retention means we spend less energy standing still in many consumer subscription businesses and the fact that we're able to do so while accelerating our growth, this is especially impressive. Monthly average revenue per pet was $63.60, an increase of 4.5% year-over-year or an increase of 3.2% on a constant currency basis. Growth in ARPU is reflected of mix of business in the quarter across products and geographies. It's for this reason. I'll reemphasize Trupanion's cost plus approach to pricing. If we do our job well, ARPU will be the output of pricing accurately to our value proposition.

On our P&L that value proposition is represented in the cost of paying veterinary invoices. For the third quarter, the cost of paying veterinary invoices for our subscription business was 71%, in line with our annual target. This shows that our pricing in aggregate is aligned with our cost plus model and emphasizes our commitment and ability to deliver for our customers. As a percentage of subscription revenue, variable expenses increased slightly over last year to 10% and fixed expenses were consistent with last year at 5%. Future scale in these areas paves a way for us to continue to drive our positive flywheel, reinvesting our value proposition, driving even higher retention and lifetime value, while staying true to our adjusted operating margin target. Across our expanding pet base, this means even more funds to invest in the growth of the business at compounding high rates of return.

After the cost of paying veterinary invoices, variable expenses and fixed expenses, we calculate our adjusted operating income. Of these, adjusted operating income is the most important contributor to our conversion, retention and long-term growth. With this in mind, we're pleased with our continued progress in delivering adjusted operating margin for our subscription business near our target of 15%. In the quarter, adjusted operating margin was 14.6%, marking the third quarter over the last eight that we were within 100 basis points of our target. In dollars, our subscription business delivered adjusted operating income of $18.6 million, an increase of 35% over the prior year period.

Turning briefly to our other business segment, which is comprised of revenue from other products and services that generally have a B2B component and different margin profiles than our subscription business, total revenue was $54.6 million. Compared to the prior year quarter, this is an increase of 78% year-over-year, reflecting an increase in pets enrolled within this segment. Adjusted operating income for this segment was approximately $2.2 million, while low margin, our other business provide scale and data and fixed expenses. In addition, we incurred virtually no acquisition spend within this segment, provided a small profit, we can then reinvest in the growth of our core business.

As a result, our total adjusted operating income was $20.8 million, which is up 44% over the prior year quarter. Our net loss was $6.8 million, which I will discuss in more detail momentarily. During the quarter, we invested $17.5 million or 42% more year-over-year to acquire approximately 58,000 new subscription pets. This resulted in a pet acquisition cost of $280 at an estimated 36% internal rate of return for a single average pet. Given our strong balance sheet and scale, we're also investing in new product development and international expansion.

Long term, we expect [Technical Issues] these investments to deepen our modes and expand our addressable market. These initiatives are included in development expenses, they are pre-revenue and were $0.9 million in the quarter and earlier quarter. Depreciation and amortization was $2.9 million, an increase of $1.3 million year-over-year. This increase was primarily due to the amortization of assets from our software acquisition in the fourth quarter of 2020.

Total stock-based compensation was $6.4 million in line with our projection of $6 million to $7 million in stock-based compensation per quarter. As a result, net loss was $6.8 million or a loss of $0.17 per basic and diluted share compared to a net loss of $2.6 million or a loss of $0.07 per basic and diluted share in the prior year period. On a year-over-year basis, the increased stock-based compensation impacted net loss by $0.10 and the increased depreciation and amortization impacted net loss by $0.03.

I'll now turn to cash flow. Operating cash flow was $6.2 million compared to $9.8 million in the prior year quarter. The year-over-year decrease in operating cash flow reflects our accelerated pet growth in investment and development initiatives I discussed earlier. We have also increased our investment in capital expenditures by $1.5 million compared to the prior year period, totaling $2.8 million during the quarter. The increased capital expenditure is primarily related to software driving our member experience and new product initiatives. As a result, free cash flow in the quarter was $3.5 million. At quarter end, we held cash and investments of over $221 million and no debt.

I'll now turn to our outlook for the full year 2021, which we are updating to account for our year-to-date performance. We are increasing our total revenue range $696 million to $698 million, representing 39% year-over-year growth at the midpoint. Subscription revenue for the full year is expected to be in the range of $495 million to $496 million, representing 28% year-over-year growth at the midpoint. Turning next to our most important metric, adjusted operating income, we are increasing our expectations to $77 million, which is growth of 35% over the prior year. Of this $77 million, we expect to invest approximately $69 million or 56% more capital year-over-year in acquiring pets within our subscription business. At our targeted internal rates of return, this results in a pet acquisition cost of around $280.

For the full year 2021, we continue to expect to spend $3 million to $5 million on development initiatives discussed earlier. Also, please keep in mind that our revenue projections are subject to conversion rate fluctuations between the U.S. and Canadian currencies. For our full-year guidance,, we used an 80% conversion rate in our projections, which was the approximate rate at the end of October.

Thank you for your time today. It's been great speaking on my first earnings call with Trupanion and I look forward to meeting more of you at upcoming conferences. With that in mind, Darryl and I will be at the Guggenheim Animal Health Summit on December 6th. I hope to speak to many of you there. With that, I'll hand it back over to Darryl. Thanks, Drew. We'll open the call up for questions momentarily. Before we do so, I'll remind you that Margi and Trish are also available on today's call and can answer questions on the execution of our 60-month plan. Under Margi's purview, our all areas of growth including product, distribution, pet acquisition, International and our new product and channel offerings. Trish's purview includes all areas of operations including IT, finance, people operations, legal and regulatory, claims, contact center and actuarial. I'll reinforce that our 60-month plan is off to a flying start. Year-to-date, adjusted operating income is up 39% year-over-year. With the 25% target we laid out in our 60-month plan, every quarter doesn't need to be a strong as the one we just reported for me to be happy with our performance. With Tricia and Margi at the wheel, I am confident in our direction and execution. As CEO, I will continue to focus on our culture and our long-term vision and strategy beyond 2025. With that, we'll now open the call up for questions.

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Maria Ripps with Canaccord. Please proceed.

Maria Ripps -- Canaccord Genuity -- Analyst

Great. And thanks for taking my questions. And Drew, congrats on your new role. So, it seems like you had another quarter with really strong retention. Can you just talk about sort of how various lead channels performed during the quarter and is there anything you can share with us about your new lead program? Are you seeing any sort of contribution from this initiative or is it still early there? And then I have a quick follow-up.

Margi Tooth -- Co-President

Hi, Maria. It's Margi. So, just to start off with a strong retention. We've been investing in retention really doubling down this, as you know, for the last 18 months and I think where the team has really kicked into high gears with have a very strong retention roadmap, much like many of our areas of our business that's segmenting and targeting specific initiatives based on where the member is in that journey. So from a first-year perspective, we're thinking about the rates, as they get a renewal, making sure we're adding value throughout the cycle and ultimately then working with Tricia and the operations team in the contact center to give a first rate member experience.

All this comes down to the fact that if we can pay the veterinarian directly at the time of checkout, that member experience allows them to then refer to their friends, which then kind of create flywheel toward amount and that kind of dovetails into the channels and how they're performing. We do look at retention by channel, overall all channels are performing particularly well and as the teams get more sophisticated in the way that they approach it, they're deploying more time it takes to help us to really just continue to move the needle from a retention perspective.

At this stage, with the retention rates as high as they are, it's really hard to make incremental changes and to continue to do that the way we are, I think it's a testament to the team. In terms of new leads, eLeads particularly, this is still we're developing it, it's in test mode, takes a little while to get it ramped up, but we're making progress full-time and it is too early to say -- speak of any impacts at the moment, but we'll be able to give you an update in the coming quarters.

Maria Ripps -- Canaccord Genuity -- Analyst

Got it. That's very helpful. And secondly, can you maybe just talk about what's driving this continued strength within your others segment. We know there are several businesses in there and in the past. So, I think you talked about pets best, allocating sort of newer book of business to Trupanion. Is that still sort of the main growth driver here and sort of how long do you anticipate elevated growth in other revenue sustaining?

Darryl Rawlings -- Founder and Chief Executive Officer

Well, the other business as you pointed out, as Andrew mentioned in the opening remarks, is where it's kind of a B2B instead of a direct-to-consumer approach. In aggregate, it is much lower margin business. Last year, it contributed about 5.3% of our adjusted operating income. We're projecting this year we'll contribute about 9.1 [Phonetic]. We do have the addition of our software acquisition last year and the revenue and profits go into that -- also into this group now. So, we're really pleased with the progress and we'll just see how it ramps next year and the year after, but hopefully continues very nicely.

Maria Ripps -- Canaccord Genuity -- Analyst

Got it. Thank you so much.

Operator

Our next question comes from John Barnidge with Piper Sandler. Please proceed.

John Barnidge -- Piper Sandler -- Analyst

Thank you and congrats on the quarter. With the Aflac-Trupanion alliance in the broker channel through benefit being heavily weighted toward fourth quarters given open enrollment. How should we be thinking about that channel really near term and longer term?

Margi Tooth -- Co-President

Hi, John. It's Margi. So, I'll kick off and pass those to my colleagues in a second to speak a little bit more about this too. So, as a reminder, the Aflac-Trupanion really, really well aligned strategic partner. We've been working with them for the past year on developing our entry points, which you see at the work site benefits channel. We didn't anticipate any progress in this in terms of going to market in 2021. We anticipate going to market in '22. So, there won't be an impact this year from any revenue perspective and when we think about the roll-out, you would expect to see something hit in Q4 '22. So, the channel in terms of progress is going well, working really well with that team there and excited to be launching next year. Anyone can add anything to that.

John Barnidge -- Piper Sandler -- Analyst

And then a follow up question, rather subscription revenue in the quarter, $127.1 million, still within the range, but toward the lower end. Was there anything that developed over the quarter that drove it to that?

Tricia Plouf -- Co-President and Chief Financial Officer

Hi, John. This is Tricia. Overall strong quarter for us in terms of enrollments. The one thing I would point out is ARPU is coming in a little lower this quarter than prior quarters. So that's driving it as well as about few 100,000 impact from foreign currency. High level when we think about ARPU increases overall. This quarter and in the future, the one thing I would highlight is, as a reminder, we're a cost plus model. And so, we're always looking at the cost of our veterinary invoices, adding our margin on top and pricing to our 71% value proposition, not only on a consolidated basis, which you can see we've been doing well, but also at a granular level by regions, breed and so on.

When we look big picture for the full year, just some numbers for context, the cost of veterinary invoices on a per pet basis in 2021 in our book of business, has been going up about 4.9% for the full year and our ARPU increases we're projecting to go up for the full year at 5.3%, led 40 basis points that our ARPU is going up, ahead of our cost of goods. So on a high level, we feel good about pricing. Now, we are always trying to be as granular as possible because behind the scenes, we have certain regions, like a particular region where costs are going up closer to 15% and we're raising ARPU a little ahead of that. And we have other regions, where we actually were slightly overpriced and true to our value proposition or decreasing those prices. So, we're always endeavoring to be as granular as possible.

Now on a macro level, when we look at our data overall, on a frequency basis, how often are our customers visiting the veterinarian, we've been seeing that pretty normal with outside of the small blip last year in Q2, pretty normal level, so not seeing dramatic differences and how our insured client base is visiting the veterinarian. And when we look at the average dollar amount of those invoices this year that's going up 6%. So this year so far at least our client base, it's been going up pretty normal as well. So that really gets back to kind of what we're seeing in our data and how we're staying up -- staying in line with the pricing,, but obviously we will stay on top of that, continue to monitor it and update as needed. But that's kind of my long answer to the point of, we are seeing a little bit of mix and other things going on within that ARPU and that's the main driver.

John Barnidge -- Piper Sandler -- Analyst

Very helpful. Thank you.

Operator

Our next question is from Josh Shanker with Bank of America. Please proceed.

Joshua Shanker -- BofA Securities -- Analyst

Thank you very much. Can you talk a little bit about the strategies that pets best is using to attract customers, obviously, growth there is on a unit basis is bearing impressive. I mean I should say the other category, which is mostly pets that's I guess. What learnings can you take from their marketing approach, obviously [Indecipherable] different than yours, but as you launch Furkin, it's going to have some similar economics to it and also may compete with that Pets Best business. Is there a cannibalization risk and how would that transition sort of play out?

Darryl Rawlings -- Founder and Chief Executive Officer

Well, we don't get into too much details of our partners' businesses, particularly on live calls, but there's a lot of ways that are differentiated on where people are getting their leads and how they're able to convert them. I think the growth we're seeing in our other businesses shows you the macro, which is veterinarians are needing to charge more and people's disposable and discretionary income means getting insurance to make it easier for them to budget makes a lot of sense. And our channels and strategies are playing out well proven by our growth in our adjusted operating income and our overall revenue, both in our subscription segment and our other segment. But I think that's about as much details I can give you.

Joshua Shanker -- BofA Securities -- Analyst

Can you add whether Furkin and Pets Best can exist happily alongside one another?

Darryl Rawlings -- Founder and Chief Executive Officer

Well, there's over 24 brands in the marketplace. So the difference between having 24, 22 or 26, I don't think is significant. And those two brands currently are only in Canada.

Joshua Shanker -- BofA Securities -- Analyst

And then if we think about the Aflac money coming in. It allows you to make some investments on things that you long wanted to do, but you're always investing in the future of your business. Can we sort of map out the elevated spend? Are we through this period of elevated spend or when do you expect your investment in the company to be at a run rate level I suppose?

Darryl Rawlings -- Founder and Chief Executive Officer

The question on an elevated spend on development or elevated spend on acquiring pets?

Joshua Shanker -- BofA Securities -- Analyst

I mean, I guess, I'm interested in both. It does seem like variable expenses were ramped up a little bit compared to the trajectory and I'm wondering if they might converge with the normal...

Darryl Rawlings -- Founder and Chief Executive Officer

Yes. Got it. So our variable and our fixed expenses were up combined about 10 basis points and in general, we would expect to see a little bit of scale show up over the next couple of years. We have been investing more in our customer experience and working on retention and that is priority number one before margin expansion. But as Trish mentioned earlier, we had a 40 basis point increase in our margin expansion on our adjusted operating income based on our pricing and we're pleased with that.

Margi Tooth -- Co-President

And I can add as well, John, just in terms of investments as we grow the business and an underpenetrated market has a lot of greenfield space growing and continue to get the elevation we've seen. So from a growth perspective, as long as we're always testing within our guardrails, there's 30% to 40% IRR. We'll continue to spend as much as we can. And I don't think it will slowdown down anytime soon.

Joshua Shanker -- BofA Securities -- Analyst

Okay. Thanks for all the answers.

Operator

Our next question is from Ryan Tunis with Autonomous Research. Please proceed.

Ryan Tunis -- Autonomous Research -- Analyst

Okay, thanks. Just a follow-up on the ARPU coming in a little bit lower growth level that what we've seen. You mentioned, it had to do with the mix, just hoping maybe you could drill into that a little bit more. Is that -- are they purely like fewer brands or something like that or I just want to make sure you haven't like changed kind of the rate of inflation you think breed by breed. Is that the right way to interpret it?

Margi Tooth -- Co-President

Yes, I mean, in general, there's a lot of different things that can go into mix, depending on distribution channels, regions. The main mix for us has to do more with the regional level. I mean our footprint as we continue to grow and all the key metrics that you've seen improve our footprint, is bigger, and with that comes different mix and at different periods of time that can evolve. And we are seeing that a little bit, as well as just needed rate increases and some of that is regional as well. There are certain places like I mentioned, where we're seeing needed rate increases due to the cost of that invoices over 10% and some actually based on our data is lower. And so there's really a lot of different things that go into play. Success for us is really how does that manifest itself in aggregate and in detail as to hitting the 71% loss ratio.

Darryl Graham Andrew Rawlings -- Founder and Chief Executive Officer

And Ryan, I'd add just as I get to know the business. I'm seeing that we grow the fastest in areas where we've priced closest to our 71% value proposition and have good lifetime values and IRRs. And so -- where we don't have to move price as much as where we grow the fastest and that contributes to our mix.

Ryan Tunis -- Autonomous Research -- Analyst

Got it. And there have been some concerns broadly, obviously, about inflation, but I think also in terms of how that might be affecting just general that invoice. I guess, Darryl, when you see those headlines about inflation and things like that, to what extent does that bother you, like what are the places where you think that could be impacting you or is impacting currently?

Darryl Rawlings -- Founder and Chief Executive Officer

Well, I think there's two things to talk about there, one is sometimes headlines talk about total spend in the category, where when we're pricing, we're looking at what's the spend for 1,000 pets, what's the average frequency and average invoice for a 1,000. And as Trish mentioned earlier, we're seeing the average invoice dollar amounts going up about 6%. So that's the amount that veterinarians are charging more on average across all of our categories and the frequency is normal, it's up 0.17% over two years ago, so basically flat. I mean, pets don't suddenly become more sick or more injured. But if you think about that on a macro basis, we think veterinarians need to charge more.

The average veterinarian graduating from university has a lot of debt. We know that it is a very hard and demanding job as a technician, people working in the front of the house or the back of the house and we think it's really important that veterinarians charge more for their services. From our standpoint, that is not scary. It actually increases the demand or need for our product. And our challenge with it is -- and it's the same challenge we've been running for 20 years, it is we need to monitor the underlying cost and we need to in a timely, quickly, in a very accurate way update our pricing and we do that in a very granular way. And this has been under Tricia's purview now for several years and she is making good progress and the margin expansion that we described earlier is proof of it.

Ryan Tunis -- Autonomous Research -- Analyst

Thanks.

Operator

[Operator Instructions] Our next question is from Jeaney Lee [Phonetic] with Evercore ISI. Please proceed.

Jeaney Lee -- Evercore ISI -- Analyst

Hi, thanks for the question and apologize to kind of belabor this point again. But like to your point, if you think that kind of costs could -- should go up at a more like healthy pace over the longer term, do you think, you'll be able to maintain this level of like pass through to the rate increase. And over next several years, what would be the implication to your like retention and gross adds or if they would -- it would impact retention at all? Thanks.

Margi Tooth -- Co-President

So I can kick off with a retention perspective, I think as -- to Darryl's point, if I can go, when you see the demand increase of best services in vet care, especially the way that the vet industry has been heavily in demand over the last few months, there's more of a need for our products. And so we're solving a bigger problem. And that is felt more and none more done with the member directly. So, we look at retention rates and to the point of looking at the data at the granular level, the cost of the monthly invoiced to a member as well as the value proposition is right, is obviously, the retention is not impacted at all. We see the best retention rates where we're priced appropriately and we're priced appropriately based on the cost of goods in that specific area for that specific pet.

So as long as we continue to slice and dice our data and really get into the details of what each of those members should be paying, we're very confident in retention rates remaining as strong as they are, especially with the level of granularity we're looking at it today. In terms of the cost gap and healthy pace, again at the same point and we think about OK data in general across the board is one thing, but as we started to get really detailed, we would expect a way through to get cost of goods, making sure that we're pricing appropriately and I'm really helping to reinforce our value proposition. So, we don't see any issues. And when we look at our market today, we look at it by market, by geography, by state by region, by neighborhood, we don't see that changing. The consistent pattern there is when you price appropriate the retention in growth is consistent and very strong.

Tricia Plouf -- Co-President and Chief Financial Officer

Yes, I would just reemphasize one thing that Margi said, which is key is, we need to stay on top of this and the team, we've increased the size of the team to really focus through our 60-month plan on staying on top of the trends, increasing the frequency and granularity that we're monitoring and filing for these adjustments as they're needed. If we do this well and we've done this well historically, as you can see from our results, we can always do better and we're working on continuing to do so. If we do this well, we shouldn't see dramatic impacts to retention. When you see dramatic impacts is when you whipsaw customers around because you don't get the retention rate or you're delayed or you don't get the pricing right and you're delayed and moving it as opposed to being on top of it. So that is the key to that and if we do it while, we shouldn't have issues then on the retention side.

Jeaney Lee -- Evercore ISI -- Analyst

Great, thank you for the answer.

Operator

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

John -- Guggenheim Securities -- Analyst

This is John on for Dave. Thanks for taking my question. We saw a private equity firm who owns the second largest animal health hospital group, acquired a pet insurance company recently. Do you think this is one-off or part of a trend? And would you say that consolidators owning pet insurance is good for the industry? Thank you.

Darryl Rawlings -- Founder and Chief Executive Officer

Yes. We would expect over the next 10 to 20 years to see the same level or even greater number of new entrants. So, over the last 20 years, we've competed against 60 plus brands and today there's about 22 brands in the marketplace, 24 brands. The ownership groups, they tend to be either owned by marketing company or underwriters. In some cases, you can have partnerships that have some agreement with some type of channel. I think all of those business models makes sense. From our perspective, if we're offering the best value proposition with the best customer experience, we've got a national sales force calling on the veterinarians, which not only helps on leads, but retention and conversion rate. I think we're well positioned and it's hard to predict, who is going to be the new entrants in the marketplace or not, doesn't really matter to us too much.

John -- Guggenheim Securities -- Analyst

Great, thank you.

Operator

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

Tom Stephan -- Stifel -- Analyst

Great, thanks. This is Tom Stephan on for John. Thanks for the questions, just to start off on PHI Direct and Furkin. Any early learnings in Canada that you'd be willing to share? And then fully just on the timing of the US launch?

Margi Tooth -- Co-President

Yes. So PHI Direct and Furkin were launched back through in the middle of the quarter, it's really early days. For them. I think we're very happy with the way they've been adopted in the market, with things that can lead growth, which is good as positive sign and need for products like them. As a reminder, the reason we've introduced them to the market is to really create clear swim lanes and clarity points of difference between the three different types of products available. Those three being PHI Direct being the low cost, high value proposition, Furkin being the mid-cost value proposition and Trupanion being the best coverage with the highest value prop.

We've seen, as I said strong lead volume. We're really working on conversion rates. When we get conversion rates, the point where we feel that it's ready to go and we'll bring it to the U.S. market and happy with what we've seen so far. I think the biggest thing I see that sort of is a necessary intuitive. PHI and Furkin are the two products that we -- the first two products of our 60-month plan that we've launched and one of the things that we've really focused on is how can we maintain the growth and performance of the core business without disrupting it by launching these two products. So, I'm really pleased to say the teams did a fantastic job across the board launching these two products in market without any disruption at all, which is for us the real, final positivity as we move into the next phase of our 60-month plan and let me that broader.

Tom Stephan -- Stifel -- Analyst

Great. That's helpful. And then maybe just a two-parter, quickly on the Apple iOS changes, any impacts to leads or conversion that you guys maybe or maybe not experiencing? And then the subscription gross adds, they've been, I guess, increasing sequentially throughout 2021, but kind of got a fairly modest pace. Can you talk to your conviction sort of in the ability to grow those at an accelerating rate in 2022 and still staying within the 32% IRR guardrails? Thanks.

Margi Tooth -- Co-President

Yes. So, Apple, we actually didn't see anything major change when -- I mean, we're anticipating the change as everybody was. So the team has already arrived and come up with ways that we could solve any potential issues there in terms of these volume. We have a number of different tunnel that we've been able to tap into as we've gone through the last 18 months and we've got better at deploying our capital, which meant that we could fill in a lot of GAAP. So our lead volume has continued to rise quarter-over-quarter. There's been very strong lead growth as well as conversion rates, not conversion rates across the board from web to sign. So no changes there and anticipate there shouldn't be anything further down the line.

In terms of subscription gross adds and I think we've been increasing quite dramatically over the last few quarters and I'm happy -- really happy with the way the team is deploying more capital. When we think about the fact that we're always operating within our guardrails, so within that 30% to 40% and it's our target to spend as much as we possibly can to grow in the market, we are very encouraged by what we see, not just within our core channels, but as we add new channels into the mix and as we start to get more granular with growth in the team and focus on the team with the data point to see what cohort can we grow, at what rate can we grow them, how quickly can we grow them as long as we keep finding new ways that we can expand, whether it's lead related, conversion related and also retention, which is helpful for refer a friend and add a pet. We feel very positive about that going into 2022. We have very strong momentum across the board and looking forward to seeing that growth continue.

Darryl Rawlings -- Founder and Chief Executive Officer

I think I'd like to kind of just level set from my perspective, I mentioned in the opening remarks, but if in 2022, our net pet growth is flat from 2021, we will see our revenue and adjusted operating income grow by 25% plus, year-over-year, which to me is phenomenal growth. I know we have a lot of things in our plan and we want to be more ambitious in that, but we've got a lot of momentum going into 2022 and I think the teams are doing an incredible job executing.

Tom Stephan -- Stifel -- Analyst

Very helpful. Thank you.

Operator

Our next question is from Elliot Wilbur with Raymond James. Please proceed.

Michael Parolari -- Raymond James -- Analyst

Hi guys. Thanks for taking my questions. This is actually Michael Parolari on for Elliot. So, I guess, we talked a little bit about inflation in the business earlier, but can you just kind of talk about some of the other key items that are driving the higher tickets and if these costs are seen as like more of a permanent step up or temporary? And then also with the vet capacity problems, that's getting overworked and the shortage of technicians, just talk about any sort of impact that might have on your cost to your business model, please? Appreciate it.

Tricia Plouf -- Co-President and Chief Financial Officer

Sure. Michael, I can start and others can chime in. I mean overall costs that we're seeing ticket-wise on the vet invoice as -- like we mentioned earlier, right now we're seeing those cost increase on average this year about 6%, so in line with what we would expect. In general, our business model is created, so that veterinarians and pet owners can take advantage of any procedures that are designed to help the pets and so we encourage that, like Darryl that we encourage higher salaries to veterinarians and their staff and higher levels of medicine and our job is to monitor those costs and price appropriately. We've done that pretty well and we'll continue to do so. So, we encourage that. I don't know if others want to comment on this topic.

Darryl Rawlings -- Founder and Chief Executive Officer

Well, just to kind of give an example on this. I mean, we look -- we have many, many markets and regions across North America. We have a city where year-over-year, the veterinary inflation have gone up 15%. We were priced accurately the previous year and rates went up approximately 15% keeping to our value proposition and our growth rate is greater than 30% year-over-year. Our conversion rates in leads and retention are up across the board in that market. So, if we have greater rates of inflation, we'll be honored and it's good for our business and we have many cohorts and many points of history to say that that's good for our business, but as Trish mentioned before, it's -- we have to monitor very closely and very granularly and that's what we do.

Margi Tooth -- Co-President

And I would just that as well. From a field perspective, we do hear of the capacity problems. We understand that there is a shortage, not just the technicians, but across the board in many ways. And the problem that we're solving is to help pets get the care they need when they need it. And in order for them to get the care they need -- when they need it, we need to hand back, they can support them and technicians at front desktop, it's everybody and the conversations we're having with our partners, both from a territory partner perspective, the people that have got those deep relationships in the field, is that we're there to support the business.

And vets need to do the right thing, whether it's the team, by themselves, into the business to be able to treat the pets. They went into practice to treat the pets and to give them the care they need. So we're solving that problem with them, we're seeing that growth continue and to Darryl's point in areas where that we've kept up our value proposition, we're seeing that -- the less of a demand on the hospital directly because they're maintaining that pace. So as much as we can encourage and support the industry, we will do and our business is here to support them for that purpose.

Michael Parolari -- Raymond James -- Analyst

Got it. That's helpful. Thanks guys.

Operator

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

Greg Gibas -- Northland Securities -- Analyst

Great. Good afternoon. Thanks for taking the questions and congrats on the promotion group. With a quick follow-up on the low medium ARPU products, where do you see the blended ARPU trending maybe once those new products have seen increased adoption, perhaps relative to the traditional 5% to 6% year-over-year increases?

Tricia Plouf -- Co-President and Chief Financial Officer

Hi, Greg. Yes, I mean it's hard to have a crystal ball in terms of the mix of business overall. The main thing that we're looking to do is always make sure that we're pricing to that 71% value proposition and increasing our adjusted operating income as revenue increases as well, so that we can deploy that capital. Margi, you have anything to add on those products.

Margi Tooth -- Co-President

No, I mean, I think it's too early for us to know exactly what that impact is going to be, but the key thing is as Trish mentioned, the AOI profile and the adjusted operating income is consistent on one of them. So we're going to see mix the business change naturally, it changes naturally within core subscription business as we have more products through the mix, whether it's PHI, Furkin, anything else, we would expect to see that adjust as the market grows and expands. And we're reaching new pet owners, were reaching new distribution channels, we'll see a mix coming through.

Greg Gibas -- Northland Securities -- Analyst

Okay, great. And nice progress made toward Trutopia as well this quarter. Wanted to ask if you had any updated thoughts or estimations on when you can finally reached Trutopia.

Margi Tooth -- Co-President

I wish I knew the answer to that, Greg. I think honestly the team is on a fantastic trajectory. We're seeing -- the mixture of Trutopia again just to remind you is when we say I'll refer friends and out of pet are being offset -- offsetting the churn that we see naturally. We've seen tremendous progress this year from our attention point of view and in doing that and having the best possible member experiences, we've seen our refer a friend rates naturally increase. There's a lot of tactics that we're rolling out, I think we're very close to it. We keep making up grounds. I think when we can do that in a market where we're growing as quickly as we are from a retention perspective that's particularly impressive and we kind of like giving ourselves own headwind sometimes, but I think there's a team that kind of -- they keep going through it. We're happy and much like Tricia, I haven't yet got a crystal ball, but it's not too far away, I'm sure.

Darryl Rawlings -- Founder and Chief Executive Officer

And Greg, if you look at a two-year basis, it's almost half from where it was even just two years ago and when I look at the book, the bigger our book gets, the more valuable that refer a friend and add a pet business becomes. So it's just a powerful part of the flywheel.

Greg Gibas -- Northland Securities -- Analyst

Great. I appreciate it. [Operator Closing Remarks]

Duration: 53 minutes

Call participants:

Laura Bainbridge -- Head of Investor Relations

Darryl Rawlings -- Founder and Chief Executive Officer

Tricia Plouf -- Co-President and Chief Financial Officer

Margi Tooth -- Co-President

Darryl Graham Andrew Rawlings -- Founder and Chief Executive Officer

Maria Ripps -- Canaccord Genuity -- Analyst

John Barnidge -- Piper Sandler -- Analyst

Joshua Shanker -- BofA Securities -- Analyst

Ryan Tunis -- Autonomous Research -- Analyst

Jeaney Lee -- Evercore ISI -- Analyst

John -- Guggenheim Securities -- Analyst

Tom Stephan -- Stifel -- Analyst

Michael Parolari -- Raymond James -- Analyst

Greg Gibas -- Northland Securities -- Analyst

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