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 U.S. 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 conference call is also available via webcast on Trupanion's Investor Relations website. A replay will also be available on the site.

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

Darryl Rawlings: Thanks, Laura. Good afternoon. Across our key financial metrics, Trupanion made strong sequential progress in the fourth quarter. We delivered significant margin expansion in our subscription business. Since Q1, our adjusted operating margin has expanded approximately 540 basis points. Quarterly capital allocation was highly efficient. And we generated another quarter of positive free cash flow. I'm pleased with this improving trend in our results, but they don't tell the whole story. Entering the year, we faced unprecedented levels of veterinary inflation. We experienced margin compression in our subscription business, the first period of sustained compression since going public in 2014. We also made the necessary decision to transition to a more decentralized operating structure, which will better set us up to grow and be nimble in the years ahead.

The team navigated well for this period of adversity. We took meaningful and deliberate actions to reduce expenses. We're operating with increased efficiency and discipline across the organization. I've also been impressed by the innovation and evolution of our tools the team is leveraging to drive our performance. I expect that we will carry our learnings forward with increasing levels of discipline and rigor. On that note, I also want to acknowledge the two material weaknesses reported today. We're committed to remediating and to doing better in the future. In 2024, we will look to grow our adjusted operating income by greater than 30%. As our margins expand, the team will be more aggressive in growing, deploying the majority of these pre-tax funds at our high rates of return in our large underpenetrated global markets in which only 3% of pets have pet medical insurance.

We intend to do so while remaining free cash flow positive on an annual basis. Delivering on this plan will translate into strong value creation for our shareholders. We've done so for shareholders every year, but this past one. Well, I'm disappointed with the year-over-year results of our adjusted operating income per share in 2023, I'm proud of the team. The inherent challenges of the post-COVID veterinary inflation environment has made us a stronger and more capable team setting us up well headed into 2024 and beyond. With that, I'll hand it over to Margi.

Margi Tooth: Thanks, Darryl. Good afternoon, everyone. I'm pleased to share that our results in the fourth quarter showed continued momentum across multiple areas of the business. Our performance speaks to our ongoing focus on disciplined growth, margin expansion and operating with increased efficiency across the business. In the quarter, total revenue grew 20% to $296 million. Subscription revenue increased 21% year-over-year, benefiting from a 14% pet growth and a 6% increase in average revenue per pet. Growth in ARPU for our core Trupanion product, which makes up 98% of our subscription business, was even higher increasing 7.5% year-over-year as our approved rate flow continues to show more meaningfully. Retention for this book of business was 70 months on a trailing 12-month basis, in line with our expectations.

While we continue to closely monitor our retention rates across our three key retention cohorts of first year under 20% rate increase and over 20% rate increase, we are paying particular attention to this latter bucket as a larger than normal portion of our members are seeing a pricing adjustment in excess of 20%. Over the last 12 months, approximately 298,000 members have had this experience, and through year-end, we had retained over 98.28% of them on a monthly basis. We now have an average of 26% pricing rolling through our book. And while still early in the year, inflation remains in line with our expectations at 15%. Against this backdrop, we are continuing to invest in our member retention efforts, both operationally and through direct member outreach, increasing member education around our value proposition and the increased need for Trupanion as the cost of care rises.

We have also identified opportunities to improve execution around our member experience. This relates predominantly to the use of our new policy administration system, which we expect will take some time for team members to learn. Meanwhile, while we ramp up the system, we're seeing lower than expected service levels. With our migration nearing completion, we look forward to leveraging our latest technology platform to deliver an exceptional member experience and ultimately enhance our claims automation rates, a key differentiator as a low-cost operator. Ultimately, the investments we have made are intended to help scale our business globally with greater levels of control and oversight, both from a member perspective as well as operationally.

Adjusted operating margin for our subscription business was 13% in the quarter. While not yet at our target, I am pleased with the strong quarter-over-quarter expansion. This is a reflection of deliberate and meaningful actions surprised to our value proposition, drive efficiencies and reduce any and all cost a member would not thank us for. This will be an ongoing focus in 2024. In total, we generated over $27 million in adjusted operating income, which marks a new quarterly record. Of this, we deployed approximately $15.5 million to acquire nearly 67,000 pets. This represents the same level of pet additions year-over-year, but with 23% less spend. As margins continue to expand year-over-year, we expect to grow our allowable per pet acquisition costs in line with our guardrails.

While we're pleased to deliver growth efficiently, it is not our plan to throttle down growth so significantly over the long term. Once again, our veterinary channel drove the majority of our growth for our core Trupanion product. Since early 2022, we have experienced an unprecedented inflationary environment, during which time the need for Trupanion has never been greater. As a direct result of this, we continue to see strong leads, conversion and retention rates from our heartland, the veterinary channel. In the quarter, we spent just over $13.7 million to add approximately 54,200 new pets at an average new pet ARPU of $67.61. We estimate the average lifetime value of these pets at $615 and at an average cost to acquire of $233, the estimated internal rate of return of these pets was 42%, above our guardrails of 30% to 40%.

We also continue to see steady growth from our new products, channels and geographies, which collectively represented approximately 19% of our gross pet adds in the quarter. Within our newer North American products, which include Furkin, PHI Direct and are powered by offerings for Chewy and Aflac, we added approximately 9,000 new pets at a new pet ARPU of $38.06. As noted, overall, these products have lower coverage, which ultimately leads to lower retention and therefore, lower lifetime value. Given the early stages of development, investment in growth of these products continues to be minimal. In the quarter, we spent just $1.1 million to acquire these pets, which is just 7% of our total acquisition spend and equating to an average pet acquisition cost of $119.

Because these products are not yet operating scale, the estimated lifetime value and internal rate of return to these pets was negative. Achieving 15% adjusted operating margin for these new offerings will be a primary focus for us before we look to increase our level of acquisition investment here. Moving away from our North American coverage, in Europe, we invested just $800,000 to add approximately 3,400 new pets in the quarter. Keep in mind that today, these products are not yet fully underwritten by Trupanion and thus the revenue is not yet fully realized. International expansion is a key part of our 60-month plan and over the last three years, we've more than doubled our addressable market over 50,000 veterinary hospitals. Our margin expansion, coupled with lower acquisition spend helped generate over $30 million in free cash flow in the quarter.

On an annualized basis, we continue to target 2.5% of revenue, which we believe is a prudent amount, given the strength of our capital position and our desire to grow in such a large underpenetrated global market. As I look back over the last 12 months, I want to take a moment to recognize and thank the team for their efforts and commitment to Trupanion and to the vets and pet parents who choose us to support them. This team includes over 1,300 pet passionate individuals from across the globe, including our territory partners who serve as our frontline resource to veterinarians and their team. Collectively, we've grown our business to over $1 billion in revenue. We generated $83.5 million in discretionary income and added over 286,000 new pets.

We developed and continue to evolve a more decentralized operating structure and moved key aspects of the business forward at pace. Most importantly, we continue to advance submission to help the pets we all love receive the very best veterinary care. On that note, I'm proud to share that we're rapidly approaching an exciting milestone that serves as a testament to our mission. In a matter of days, we should cross over the threshold of 1 million subscription pets, that's a lot of lives helped and so many lives saved. This is why we do what we do. With that, I'll turn it over to Fawwad.

Fawwad Qureshi: Thanks, Margi, and good afternoon, everyone. Having passed my first 100 days with Trupanion, I'm pleased to say that it's been a great experience working with the team. As I'm learning more about the business, I remain excited about the significant opportunities ahead. Today, I will share additional details around our fourth quarter performance, as well as provide our outlook for the first quarter and full year 2024. Total revenue for the quarter was $295.9 million, up 20% year-over-year. Within our subscription business, revenue was $191.5 million, up 21% year-over-year. Total subscription pets increased 14% year-over-year to over 991,000 pets, as of December 31, 2023. This includes approximately 40,000 pets in Europe, which are currently underwritten by third-party underwriters.

Total monthly average revenue per pet for the quarter was $67.07, up 6.3% over the prior year period. As a reminder, this is inclusive of all North American subscription products and will reflect mix of business. Subscription business cost of paying veterinary invoices was $139.3 million, resulting in a value proposition of 72.7%, a 321 basis points sequential improvement towards our target over the prior quarter. As a percentage of subscription revenue, variable expenses were 9.6%, relatively consistent year-over-year and sequentially. Fixed expenses as a percentage of revenue were 4.7%, up from 4.1% in the prior year period, primarily due to investments in G&A. After the cost of paying veterinary invoices, variable expenses and fixed expenses, we calculate our adjusted operating income.

Our subscription business delivered adjusted operating income of $24.9 million or 13% of subscription revenue, this is up from 10.1% in the prior quarter or approximately 340 basis points of sequential margin expansion. Now I'll turn to our other business segment, which is comprised of revenue from other products and services that generally have a B2B component and a different margin profile than our subscription business. Our other business revenue was $104.3 million for the quarter, an increase of 19% year-over-year. Adjusted operating income for the segment was $2.6 million. In total, adjusted operating income was $27.5 million in Q4, ahead of expectations. This was up 15% from Q3 and up 11% from the prior year period. Our higher-value subscription business comprised approximately 90% of our adjusted operating income in the quarter.

We expect this to increase as a percentage of total revenue as one of our partners in our other book of business Pets best, continues to roll off. This provides us the opportunity to move our investment dollars from lower value to higher value opportunities in our subscription business. During the quarter, we deployed 15.5 million to acquire approximately 67,000 new subscription pets. Excluding the approximate 3,400 European pets, this translated into an average pet acquisition cost of $217 per pet in the quarter. This compares to $283 in the prior year period and $212 in Q3. We also invested 1.7 million in the quarter in development costs. Stock-based compensation expense was 6.6 million during the quarter. As a result, net loss was 2.2 million or a loss of $0.05 per basic and diluted share compared to a loss of 9.3 million or a loss of $0.23 per basic and diluted share in the prior year period.

In terms of cash flow, operating cash flow was 17.5 million in the quarter compared to 1 million in the prior year period. Capital expenditures totalled 4 million. As a result, free cash flow was a positive 13.5 million, an approximate $18 million improvement from the prior year's fourth quarter. Keep in mind that historically, we have seen seasonal fluctuations in free cash flow. With veterinarians typically implementing new rates at the beginning of the year, we see lower free cash flow in the first quarter. In higher inflationary environment, as we are currently experiencing, this effect will be more pronounced. It is for this reason, we have set an annual free cash flow target. Turning to the balance sheet. We ended the quarter with 277.2 million in cash and short-term investments.

Outside of our insurance entities, we held 46.6 million in cash and short-term investments with an additional 15 million available under our credit facility. At the end of the quarter, we maintained 241.3 million of capital surplus at our insurance subsidiaries, which was 64.1 million more than the estimated risk-based capital requirement of 177.2 million. During the quarter, we took additional steps to improve the strength of our cash held outside of our insurance entities, including an ordinary dividend from APIC and shifting our building ownership. We intend to continue to make strategic use of our assets moving forward. One final point. As was noted in today's press release related to the 2023 annual audit, we expect to report in our Form 10-K two material weaknesses in internal controls.

The first material weakness relates to information technology controls, primarily in the areas of user access and program change management over certain information technology systems. The second material weakness relates to internal controls over financial reporting pertaining to our other business segment. The 2023 audit remains open, and we are working with our auditors to complete the process. As a result, financial statements for the full year 2023 are preliminary and subject to the completion of the audit. Efforts to remediate these material weaknesses are underway. Now I'll turn to our outlook. For the full year of 2024, we are planning to grow revenue in the range of 1.241 billion to 1.273 billion. This is approximately 13% growth at the midpoint.

We are planning to grow subscription revenue in the range of 842 million to 862 million, representing 20% year-over-year growth at the midpoint. We expect total adjusted operating income to be in the range of 100 million to 120 million or 32% year-over-year growth at the midpoint. As we think about the shape of the year, our expectation is that similar to prior years, we will start the year from a lower margin standpoint within our subscription business and build back to a 15% adjusted operating margin by Q4 of this year. We will continue to be disciplined in our allocation of capital. And as our margins expand more meaningfully in the second half of the year, we will look to be more aggressive in acquiring pets within our higher-value subscription business while operating within our IRR and free cash flow guardrooms.

With that as context, I'll move to our Q1 outlook. Total revenue is expected to be in the range of 297 million to 302 million. Subscription revenue is expected to be in the range of$198 million to 200 million. This is 21% year-over-year growth at the midpoint. Total adjusted operating income is expected to be in the range of 21 million to 23 million. This represents nearly 42% growth year-over-year at the midpoint. Keep in mind that our revenue projections are subject to conversion rate fluctuations, most notably between the U.S. and Canadian currencies. For our first quarter and full year guidance, we used a 74% conversion rate in our projections, which was the approximate rate at the end of January. We expect this will amount to a neutral year-over-year foreign exchange impact.

Thank you for your time today. With that, I'll hand it back over to Darryl.

Darryl Rawlings: Thanks, Fawwad. In a few weeks, we will be releasing my 2023 shareholder letter. These letters serve as a resource to gain deeper insights into our company, highlighting both our accomplishments as well as our hurdles faced over the past year. For those interested in learning more about Trupanion and how we think and act, I encourage you to read it. I'll also point out that we recently announced the date of our Annual Investor Day to be held September 18 here in Seattle. This marks a decoupling from our Annual Shareholder Meeting to be held in June. The intent behind the change is to facilitate greater in-person attendance and participation. We hope to see you there. With that, we'll open it up for questions.

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