Payables was $3 million in the quarter. Other was one-time of $2 million in the quarter. So how sustainable are some of those when we think about free cash flow going positive? Thanks guys.
Margi Tooth: Yes. Hi Jon. So you’re right. So the 71,000 approximately a year ago, that was largely not entirely, but largely the core Trupanion subscription business. And part of our distribution strategy and the reason we’ve developed these new products and distribution channels is to provide us with different opportunities for growth and growth levers as and when we can push them. The core Trupanion product we have been very deliberate about ensuring our growth is happening in areas where we know we’re priced appropriately. The last thing we want to do is bring a member on Board and then have to change their rate quite steeply as quickly and we know we’re not bringing them on at the right rate. So it doesn’t make sense to us to do that in terms of our value proposition.
So for us, we’ve been very specific and strategic with how we’re taking that pact on and looking at where we should be investing. Also, this quarter specifically, we had that goal of by the end of Q4 to be free cash flow positive, we’ve achieved that a quarter earlier than we anticipated doing so, which is really down to us prioritizing that cash and acknowledging that with margin, where margin has been this year, that’s important to us. To really be in a position to get control over that operating position, that financial stability, to really be able to give us that cushion and then push into gross add. So, all in all, it’s part of the strategy to ensure that we can get pet growth from any of our different business units. Really happy to see that extra contribution and it just helps us to grow into future spaces, future markets.
In terms of Furkin and PHI, you mentioned suppressing the pack absolutely. When we think about that middle bucket, that middle tier that we talked about, and you hopefully saw that slide on the screen and we were showing how that middle bucket performs very differently to the core subscription business. Within that, you do have Furkin, PHI, Chewy and Aflac, and they all perform differently as individual groups. And we mentioned that they are not at scale. That scale is not related to their pricing. It is to your point, related to how much money we’re spending and that comes into pack. It also comes into fixed expenses. And we’re looking at working to bring those products to scale over the next several months to make sure that we can continue to push on that as much as possible too.
So, still very happy about the deliberate execution. And I think that large sequential improvement and seeing that 20% reduction impact just means that the team is pulling those levers the way we want them to. And I’ll hand over to Wei to talk about the sources of cash. Wei?
Wei Li: Yes. So with a free cash flow positive $7 million this quarter, that’s $15 million improvement over Q2. And as we mentioned before, our margin continues to expand. We’re getting back to our target value proposition next year and we’re stay disciplined on our capital deployment. So we’re actually very confident about our cash position, about the free cash flow to continue to be positive going forward on an annual basis.
Operator: The next question comes from Wilma Burdis from Raymond James. Please go ahead.
Wilma Burdis: Hey, good afternoon. Could you help – this is a pretty broad question, but just help me, walk me through the cash flow. It improved pretty dramatically. I know some of it was less pet acquisition spend, but maybe just help me think through what led to that improvement.
Darryl Rawlings: Yes. Wilma, I’ll take that. There’s two main components. We’ve had sequential margin expansion largely due to our pricing, variable and fixed expenses are generally in line. And then we were deliberate about spending 20% less total dollars on growth. So we could achieve free cash flow of about this quarter was about 2.5%. And we want to be modestly free cash flow moving forward, so that we control our destiny and we feel really good about the growth opportunities. One thing that I think is underappreciated is in the coming year, we mentioned earlier we had 209,000 pets that saw greater than a 20% rate increase. And after that, we had a 10% increase in revenue, and adjusted operating income was up 300%.
Over the next year, we have about another 300,000 pets that will have that same opportunity. So what we’re trying to do is to grow revenue year-over-year. And sometimes you grow it with just pets, sometimes you do it with just ARPU. And we’re going to be gaining the benefit of having those ARPU increases as well. So great opportunity for pet growth, ARPU growth, margin expansion, free cash flow positive, and feel good about the future.
Wilma Burdis: Is that a good run rate into 4Q then on the cash flow?
Margi Tooth: Sorry. What was that? We didn’t quite catch that, Wilma.
Wilma Burdis: Sorry. So is this a good run rate into 4Q on the cash flow side?
Margi Tooth: I didn’t catch that.
Darryl Rawlings: So let me make sure we understand the question. Is the good run rate for Q4 cash flow?
Wilma Burdis: Yes.
Darryl Rawlings: Yes. We’re expecting Q4 cash flow to continue to be positive.
Wilma Burdis: Okay. And then could you talk a little bit about the average price of the policies today both for new business and for the in-force and how that’s changed? I mean, I can estimate it, but just maybe give us some color on that.
Margi Tooth: Yes. So if we break out, if we think specifically about the core Trupanion business we’ve talked about that $66 average revenue, you can see how that’s sequentially up 4.3% for ARPU, which is 1.1% sequentially. Nice improvement on that. And it’s been something that we’ve been trying to push through the year. And now we’ve got that pricing taking hold. To Darryl’s point, with that 209,000 cohorts that have now had that larger than 20% increase. We’re starting to see that really manifest itself in the numbers. In terms of our existing book of business, that’s new business will come on at the right rate. Existing business to Darryl’s earlier point is now being priced. It’s priced in line, so you’re not going to see a different rate. We’re making sure that we’re able to uphold that value proposition to all of our members consistently.
Wilma Burdis: Okay.
Operator: Our next question comes from Katie Sakys of Autonomous Research. Please go ahead.
Katie Sakys: Hi there, thank you for the question. First, I guess to continue the discussion of free cash flow. I’m curious what’s giving you guys the confidence that it’ll continue to be positive over the next immediate couple of quarters? And as you think about turning on growth again, what failsafe do you have in place to ensure that that doesn’t complicate the free cash flow story?
