Hims & Hers Health, Inc. (NYSE:HIMS) Q2 2023 Earnings Call Transcript

Hims & Hers Health, Inc. (NYSE:HIMS) Q2 2023 Earnings Call Transcript August 7, 2023

Hims & Hers Health, Inc. misses on earnings expectations. Reported EPS is $-0.03 EPS, expectations were $0.06.

Operator: Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the Hims & Hers Second Quarter 2023 Earnings Conference Call. Please note that this call is being recorded. All lines have been placed on listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. I would now like to turn today’s call over to Alice Lopatto, Vice President of Investor Relations. Please go ahead.

Alice Lopatto: Good afternoon, everyone, and welcome to the Hims & Hers Health second quarter 2023 earnings call. On the call with me today is Andrew Dudum, our Co-Founder and Chief Executive Officer; as well as Yemi Okupe, our Chief Financial Officer. Before I hand it over to Andrew, I need to remind you of legal safe harbor and cautionary declarations. Certain statements and projections of future results made in this presentation constitute forward-looking statements that are based on among other things, our current market, competitors and regulatory expectations and are subject to risks and uncertainties, and that could cause actual results to vary materially. We take no obligation to update publicly any forward-looking statements after this call, whether as a result of new information, future events, changes in assumptions or otherwise.

Please see our most recently filed 10-K and 10-Q reports for a discussion of risk factors as they relate to forward-looking statements. In today’s presentation, we have certain non-GAAP financial measures. We refer you to the reconciliation tables contained in today’s press release available on our Investor Relations website for reconciliations to the most directly comparable GAAP financial measures and related information. You’ll find a link to the webcast and Investor Relations website at investors.forhims.com. After the call, this webcast will be archived on the website for 12 months. And with that, I’ll now turn the call over to Andrew.

Andrew Dudum : Thank you Alice. This quarter, we drove excellent results on both the top and bottom line. Growth remained exceptionally strong with revenue up 83% year-over-year in the second quarter to $207.9 million. Our platform continues to benefit from diversity of the state’s brand categories helping lay the foundation for many years of robust growth ahead. Our more mature offerings within the Hims brand continued to expand with little sign of market saturation, as we gain benefits of scale and continue to build a clear market leadership position via the capture of increasing share within the competitive landscape. Newer categories in markets such as mental health and our U.K. operations are growing mid triple digits and demonstrating strong quarter-over-quarter unit economic improvement.

In lockstep we continue to drive meaningful efficiency gains from our efforts to verticalize our affiliated pharmacies and optimize our processes, which allowed us to generate $16.8 million in cash flow from operations and $10.6 million in adjusted EBITDA in the second quarter. This increasingly powerful flywheel model provides us reassured confidence in our ability to achieve and surpass our 2025 target of at least $1.2 billion in revenue and over $100 million in adjusted EBITDA. Indeed we believe the strength and composition of revenue and overarching durability of the model we’re building is pointing towards many years of robust growth and increased profitability ahead. While I’m proud of the company’s quarterly financial outperformance, I’d like to spend most of today sharing some of what’s happening under the hood with long-standing initiatives, capabilities and soon-to-launch categories , I believe has believe potential to meaningfully accelerate the already exciting trajectory Hims & Hers.

As I’ve shared in the past, I believe Hims & Hers is a unique competitive advantage. Myself and the rest of the management team think in multi-year horizons and are not afraid to tackle complex challenges. While not for many years ahead, I wholeheartedly believe most of our management team will retire with this company. This long-term orientation is based upon the foundational belief that over the long-term, we can deliver a platform so differentiated and so valuable that nearly every household in the country will benefit from its existence. Our orientation to the long-term has been in our DNA from the start. And it’s what’s enabled us to get to where we are and build a company that today services customers across multiple categories, acquires consumers through some of the most creative channels and has a foundation from which to bring some of the most innovative personalized products to market.

Looking ahead, the number of lives that we positively impact over the course of the next 10 years is a key benchmark for how we evaluate our progress and celebrate our successes. We believe that step change gains in long-term shareholder value will be a derivative of this. To look under the hood, I’d like to walk you through a few transformative shifts taking place in our business. For simplicity, I’ll group them into four buckets. The first is a material mix shift in consumer preference moving from generic to personalized treatments. The second is the rapidly accelerating strength of our data platform and AI capabilities that are enabling individual providers to leverage the collective knowledge of hundreds of providers and millions of historical clinical decisions to support these precision treatments.

We recently filed multiple trademark applications for the name MEDMATCH and plan on showcasing this AI technology more specifically and the clinical benefit it’s delivering next quarter. Third, our new multi-action capabilities to enable providers to customize single fill treatment for multi-category conditions. And lastly, the exciting new frontiers and offerings we have recently launched and will be launching soon. From the earliest years, Hims & Hers delivered on in its simplest form access. Access to a provider, access to clinically appropriate generic treatment and access to solutions for singular issue patients were challenged with. Today that story has become wildly more exciting, as initiatives have been in development for years are beginning to come to market.

Our story is no longer one of simple access, but a story of bolstered capabilities in diagnostics, treatment and care that we believe can deliver truly better outcomes. Our mission to help the world feel great was never just about providing access to the existing system of healthcare. While this is where we began our true purpose all along has been to transform that system for the better. We want to improve the intelligence and capabilities of providers. So that a customer’s clinical experience and outcome are not dependent on the sole experience of an individual provider who rather the collective knowledge derived from hundreds of thousands or even millions of clinical encounters. Our ambition is we never just to provide access to commonly prescribed medications with to build capabilities across pharmacy and clip excellence to establish a new standard of entirely personalized, customized solutions.

And lastly, our mission was never limited to enabling treatment of a patient for singular issues, but rather to build on human relationships and patient trust such that we could expand into a multi-treatment experience that tackles not only the patient’s initial concern, but key underlying conditions that impact their overall health and ultimately their life. From a business that delivers on access alone to now a business that is personalizing the patient experience and treatment opportunities in order to deliver on better results and outcomes. we are propelling one of the most meaningful industry transformation that I have been witnessed to. We believe this transformation has massive implications for the future of Hims & Hers from competitive differentiation to enduring growth, improved customer lifetime values, extensive and deep moats, and an offering that can no longer be compared to those in market, something truly unique.

To dig in further, let’s start with that first bucket. The material product mix shift within our customer base from that of generic treatments to personalized treatment opportunities. Our confidence in personalized solutions is high, based upon insights and feedback from hundreds of thousands of customers on our platform. Feedback is confirming our belief that our innovations on this front are delivering on an unmet customer need that radically changes the relationship with and appreciation of our platform. Category-wide the personalization of patient treatment by providers has rocketed reflecting the desire and need for customized treatment of patients. Over 35% of online revenue from customers acquired in the second quarter came from personalized treatments.

From our most tenured categories like ED, providers and patients are increasingly turning to personalized solutions made available through hard min and multi-action HARP report. In Hims Hair, over 80% of new subscribers in the quarter opted for personalized treatment. The ability to tailor treatment in dose, form, and composition is giving many of our providers and customers their first real experience with precision medicine. The simple takeaway customers are loving it. They select to get more, willing to pay more, engaging with the platform more, adhering to treatment more, and even indicating that they have no desire to return to the world of generic treatment. We expect to have personalized offerings across each of our main categories by the end of this year and anticipate that curated, personalized experiences and treatment will increasingly drive the differentiation of our business in the coming years.

This business transformation is a result of years of innovation in pharmacy, clinical excellence, and platform technology. As the shift continues to flow through our business, we will enter a world where Hims & Hers is known for these personalized capabilities, lifting the platform to new levels of customer appreciation and value. Personalization is not possible without our second bucket, which is the massively improved data and AI capabilities that we’ve spent years building in the background. As mentioned previously we recently filed a trademark application for the name Med Match and plan on showcasing this AI technology more specifically and the clinical benefits it’s delivering next quarter. The move to personalized medicine and dramatically improved data capabilities are intrinsic to the third bucket which is our new multi-action capabilities to enable providers to customize single pill treatments for multi-category conditions.

Our newest offering launched just last week was our first foray into preventive cardiovascular care, Heart Health by Him. Heart Health is one of the most meaningful launches since our founding. Heart disease is the number one cause of death for men worldwide and approximately 30% of our male customers have at least one risk factor of developing it. This extension enables providers to prescribe compounded formulas that combine the active ingredients found in ED medications and states like the generics for Lipitor and Crestor, which can reduce the risk of having a heart attack by upwards of 33% and debt by 8%. In partnership with the American College of Cardiology and LabCorp, we brought together what Hims does best, innovative products, leading technology and clinical excellence that work together to deliver on our experience in defending the curve of death caused by heart disease.

The market for cardiovascular support is massive with nearly 100 million people suffering from heart disease in the United States alone. And I couldn’t be more proud of the team for being patient and strategic in building the foundational capabilities over the last few years in anticipation of this launch. And this is just the beginning of what we will be able to do for our patients. For many years, patients have come to us to solve a single issue, while actually struggling with many. Hims & Hers now offers providers the clinical capability to address multiple conditions in a single treatment, leveraging the demand from high interest categories to treat other clinical areas for which patients need support. In the e-commerce world, this is a cross-sell strategy.

In our world, it’s a clinical capability that allows patients to access more personalized, meaningful care, addressing a multitude of issues simultaneously, supporting simpler treatment regimens and ultimately increasing the value, we are delivering to our customers. Multi-action capabilities further deepen the defensibility of our platform, as the offerings become more and more customized and inevitable to customers. It’s easy to imagine the many powerful avenues where this could be beneficial, from chronic disease management, like heart disease and diabetes to bundle cosmetic capabilities for anyone interested in treatments across categories and even to help providers address sometimes stubborn and challenging issues more comprehensively, such as menopause or the interrelated dynamics between mental health, metabolic health, insulin resistance and weight gain.

These multi-action capabilities open us up to the last bucket, which are the new frontiers and categories we can bring to market in a way that’s competitive, effective, affordable and attractive to existing and new customers alike. We’re excited to announce that Hims & Hers will launch our comprehensive weight management offering in time for this coming January New Year rush to self-improvement. Our weight management category will leverage all of the strengths of our platform. This means access to personalized treatments, customized for customers’ clinical needs, powered by our enhanced pharmacy capabilities. This offering will enable providers to more comprehensively address a range of underlying conditions, clinically tied to weight gains, such as metabolic disorders, insulin resistance, over eating habits, depression and more.

At launch, the offerings will include access to treatment formulations that are affordable and that can combine and leverage the active ingredients in proven prescription medications and supplements, as well as behavioral and nutritional focused plan. The platform is being built to support both existing GLP-1s and future pharmaceutical innovation. But given the instability of the current supply chain inconsistent reimbursement and outstanding safety valuations, these products likely will not be available at launch. Dr. Craig Primack joined us this week as our new Medical Director in Weight Management, bringing to our organization nearly two decades optimizing treatment protocols for the complex underlying factors driving weight gain. Our weight management offering has been in research and development for over a year.

And with nearly 100 million Americans suffering from the disease of obesity, we want to ensure it is positioned to make a real dent in this crisis. That means delivering on an offering to a mass market audience, with pricing in line with core everyday prices offered across our categories, in experience that’s streamlined and consistent and a focus on safety and efficacy. Leveraging widely understood and available treatments, sophisticated pharmacy capabilities and deep data-driven archetype matching, we hope to deliver exciting treatment efficacy at scale. Like I said at the start, our mission is to make the world feel great through the power of better health. An often underappreciated aspect of this mission is the necessity of ensuring our platform can reach as many people as possible.

The level of scale that we have combined with the efficiency of our affiliated pharmacies enables us to orient users to a model with a treatment-based construct versus a pill-based construct at exceptional value to them. This will continue to become more meaningful, as we move further away from subscribers with one treatment to subscribers with multi-category treatment. As part of this mission and our ambition to reach as many people as possible, we’re excited to share that in the past few months we’ve begun to systematically lower prices for many of our longer duration offerings to make our more personalized subscriptions even more mass market accessible. The pricing rollout which we expect to continue in the coming months have been in process while simultaneously expanding gross margins to 82% and as our operational scale and efficiency allows us to accelerate profitability on an adjusted EBITDA basis and also expand market share and access.

We are already seeing the signs that these strategic actions are having a strong market impact. After the implementation of strategic pricing adjustment the ratio of new Hims & Hers loss subscribers that selected a personalized offering with the duration of five months or more, increased over 25 points during the course of the second quarter. Our belief is that consumer is making longer upfront commitments for effective and unique products is an equation that provides a path for users to remain on the platform for decades. This quarter’s announcement reflects years of hard work from the team and I’m thankful for their commitment to building this platform the right way. I’m confident the methodical nature of our team and their time horizon for investments will have a uniquely meaningful impact to our customers and ultimately our shareholders.

With that I’ll turn the conversation over to Yemi to discuss further financials.

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Yemi Okupe: Thanks, Andrew. Hello, everyone and thank you for joining us today. I’ll start by providing an overview of our second quarter’s financial performance and then provide additional details behind our expectations for the remainder of the year. We are pleased to see continued strong momentum across Hims & Hers, which we believe reflects the sound execution of our strategy that centers on enabling access to innovative products through world-class technology with the brand that consumers love and trust. Revenue in the second quarter grew 83% year-over-year to $207.9 million. Revenue growth was primarily driven by a robust performance in our online channel. Online revenue increased 87% year-over-year to $201.2 million in the second quarter.

The continued addition of subscribers onto the platform was the primary driver of online revenue growth. The number of subscribers on the platform increased 74% year-over-year to 1.3 million subscribers. This quarter, we expanded the portfolio of personalized solutions accessible across the Hims & Hers platform. Notable examples of this include the national rollout of the Hims & Hers offering, additional hair-loss solutions within the Hers portfolio, the launch of Heart Health. Early consumer feedback and reactions, indicate a strong user preference for these personalized offerings. Historically, we have reinvested efficiency gains into marketing as well as the research and development of new solutions. With this much more expensive portfolio of personalized and differentiated offerings, combined with record level gross margins, our investment opportunities have expanded.

We made the strategic decision to reinvest a portion of the efficiency gains that scale and strong execution have provided us, into more attractive pricing for a subset of offerings on the platform. Specifically, meaningful changes were made across longer duration and sexual health and Hims & Hers loss subscription plans. The net effect is that more customers than ever have access to personalized solutions to improve their daily health, for as low as $39 per month in some circumstances. These changes resulted in an estimated online revenue headwind, of $5 million in the second quarter, as monthly average online revenue per subscriber declined 4% quarter-over-quarter to $53. Already, we have received several strong signals that these changes have the potential to accelerate adoption of personalized solutions, across a broader set of users on our platform.

Over 35,000 existing subscribers, switched to a longer duration or personalized offering in the second quarter. We believe personalized solutions combined, with our overall strong value proposition, will enable us to retain our users for decades. At the end of the second quarter, over 20% of total subscribers across all of our offerings were on a personalized solution. This is a clear signal that consumers are drawn to, and appreciate personalized solutions that our providers can prescribe. We believe offering unique solutions at attractive price points, as a powerful combination that positions us for significant market share gains. Economies of scale in our operation, enable us to do this while maintaining healthy margins in a way that few can match.

Our gross margin trajectory in the second quarter is, a textbook example of the power of sound execution combined with economies of scale. Gross margins expanded over 140 basis points quarter-over-quarter, to 82% in the second quarter. Gross margin expansion was the result of lower product costs, increased efficiency across our provider base, a move to longer duration subscriptions and improved efficiency from a migration toward affiliated pharmacies. These dynamics more than offset degradation from our strategic pricing actions The ability to strategically adjust prices and simultaneously expand margins is a truly unique advantage. Our belief is that this capability to benefit from scale, and can currently offer differentiated products, uniquely positions us to become the leading platform for personalized helping on the solutions.

We made meaningful progress on our transition toward affiliated pharmacies in the second quarter. Over 70% of orders were fulfilled by affiliated pharmacies in the second quarter. This provides a robust platform from a systemically transition the business to personalized centric offerings. Turning toward elements of our cost structure. Marketing, as a percentage of revenue was flat quarter-over-quarter at 51%. And Marketing investments were more heavily weighted toward the back end of the quarter, as a result of the timing of new product launches, strategic pricing actions and large brand campaigns. Customer acquisition was slower at the start of the quarter, as a result of those dynamics in a somewhat more challenging marketing environment, relative to the first quarter.

We expect that investments made at the end of the second quarter, will provide meaningful customer acquisition tailwind in the third quarter. Our expectation is for continued investment in marketing, as we launched new personalized offerings throughout the year. Similar to prior periods, we intend to do so while maintaining a one-year payback period. Operations and support costs as a percentage of revenue, excluding stock-based compensation in the second quarter, came in at 14% stable with the first quarter. We see potential for continuing modest gains in this area through the year, as we benefit from economies of scale and continue to make efficiency gains on the cost structure for personalized products. Technology and product development costs as a percentage of revenue, excluding stock-based compensation came in at 6% in the second quarter stable to the first quarter.

Continued investment is expected in this area through 2023, as we augment data science capabilities and expand upon capabilities available to providers on the platform. General and administrative costs as a percentage of revenue was 15% in the second quarter, representing a 5-point improvement relative to the second quarter of 2022 and a one point improvement relative to the first quarter. Excluding the impact of stock-based compensation G&A costs were 9% of revenue in the second quarter, representing a 4-point year-over-year improvement from 2022. Adjusted EBITDA increased 73% quarter-over-quarter to $10.6 million in the second quarter. Gains from efficiency improvements and economies of scale offset the estimated $5 million headwind from strategic pricing actions I discussed earlier.

In the second quarter, we made considerable investment into the affiliated pharmacies that will set the foundation for greater personalization capabilities in the future. Capital expenditures related to the purchase of property, plant, equipment and intangibles were $4.7 million in the second quarter. We are pleased to see our balance sheet continue to strengthen, while we can currently build future capabilities. Cash and short-term investments increased $8.7 million quarter-over-quarter to $193.1 million in the second quarter, as cash flow generated from operations continued to exceed capital expenditures. Momentum has remained strong in 2023, as we rapidly evolve our platform’s capabilities across a level of breadth and depth that we feel is currently unmatched.

We are excited to continue to make significant strides in our transformation from an access-oriented platform toward one that offers personalized solutions with the potential for better adherence and outcomes. Equally exciting is the pace at which we continue to drive efficiency across the platform, which allows us to enable access unique personalized and compelling solutions at affordable prices. We are confident this will feel a market leadership position, as well as more importantly, the ability to improve millions of lives. Our updated outlook for the remainder of 2023 reflects these dynamics. In the third quarter, we are expecting revenue of between $217 million to $222 million, which represents a year-over-year increase of between 50% to 53%.

On the bottom line we expect adjusted EBITDA of between $10 million to $13 million, representing an adjusted EBITDA margin of 5% at the midpoint of both ranges. For the full year, we are raising our outlook for revenue to $830 million to $850 million translating to a year-over-year increase of between 58% to 61%. The midpoint of our updated range is $20 million higher than our prior range. We are also increasing our outlook for 2023 adjusted EBITDA to $35 million to $40 million, reflecting continued efficiency gains across the business. These adjusted EBITDA and revenue ranges resulted in an adjusted EBITDA margin of 4% at the midpoint of both ranges. No material contributions from Weight Management or Cardiovascular Health are assumed in 2023.

Generally, we expect new categories to take at least 12 to 18 months from launch before they meaningfully contribute to the business. Reflected in our guidance is an assumption that the extremely favorable marketing environment that emerged in the back half of 2022 does not repeat in the back half of 2023. Additionally, our guidance incorporates a negative impact of between $12 million and $18 million in the second half of the year for both revenue and adjusted EBITDA, as a result of the strategic pricing changes previously discussed. We believe these strategic moves will drive both stronger retention and acquisition dynamics in the future as customers have the ability to access a unique and differentiated set of solutions on our platform that are less readily available with standard generic solutions.

We have high conviction that gains in efficiency from strong execution and economies of scale will enable us to continue to expand our adjusted EBITDA margins over time. Our ability to deliver these strong results is the result of efforts of hundreds of employees across Hims & Hers that work hard each day to help the world go great through the power of better health. I’d like to thank them as well as all of our customers and partners that support us in our mission. With that, I will now turn it over to the operator for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Daniel Grosslight with Citi. Your line is now open.

Daniel Grosslight: Hi, guys, congrats on the quarter, and thanks for taking the question here. Just a couple of quick ones on the new weight loss category that you’re expanding into. So it sounds like there’s going to be like a behavior modification aspect to it maybe nutrition coaching, fitness coaching, as well as some type of either nutritional supplement or prescription along with it. But it also seems like the GLP-1s aren’t going to be available at these at first. So I was wondering if you can just dig in a little more on what kind of treatment away from the behavior modification and fitness and nutrition. What kind of treatment you’re going to provide with this new weight loss category?

Andrew Dudum: Thanks, Dan. It’s Andrew. Yeah. So I think what we’re going to start with is a wide range of likely generic options and personalized treatments that are going after some of the underlying factors of weight gain. So this could be metabolic resistance, hormonal issues, could be underlying mental health concerns such as depression or unhealthy eating habits. Dr. Craig Primack who joined as our weight management medical director has a couple of decades of experience specifically leveraging, I think this wide range of treatment offerings to go after what is often a multipronged issue for weight gain. And I think that’s what the approach is going to be. It’s going to be built on, I think a lot of phenotype and archetype data of understanding this patient really well in partnership with the clinical advisors in a way that we can leverage some of those dual action and multi-action treatment capabilities that we recently launched with the Heart Health launch and leverage those same abilities with the wave management category.

So really simple protocols. But from a patient standpoint, highly personalized and hoping to go after a lot of those underlying conditions and ultimately have great efficacy, but with affordable and well-tested and safe options.

Daniel Grosslight: Yeah, makes sense. And then this quarter AOV growth was really strong. It came in around 22% or so this quarter year-over-year which would be the fastest growth since 2021. Just curious what’s driving that AOV growth this quarter given your lowering prices on some treatments and revenue per subscriber is dropping a little bit?

Yemi Okupe: Yeah, Dan, this is Yemi. Thanks for the question. Really there’s a few factors. And so I think one of the reasons behind why we made the strategic pricing actions is really to start to make both longer-duration subscription attractive for users as well as the proprietary products attractive to users. And so what we saw as we made those is both users coming in as well as existing users started to switch to longer duration proprietary products that come with a larger commitment upfront. And so you have more people that are on long duration plans as they pay for those upfront. That really is the factor driving AOV and the fact that more customers as Andrew mentioned previously are also switching to the proprietary products which still come at a bit of a premium through the…

Daniel Grosslight: Yeah, make sense. Thanks for the color.

Operator: Your next question comes from Jack Wallace with Guggenheim. Your line is open.

Jack Wallace: Hey, congrats on the quarter. And Andrew congrats on the birth of your second child. We’ve got two questions here. One on the cardiovascular entry. So, this is a statin, we just think that this would help you target maybe an even older demographic maybe that is outside some of the younger millennial demo that you placed so well in. Is that part of the kind of the TAM expansion thought process? And then second is — are we expecting any attractive pricing with this, or how should we think about pricing with that combined product? Thank you.