Hims & Hers Health, Inc. (HIMS) Earnings Call Transcript & Summary

All right. We'll get started. Thank you all for joining us for the Hims & Hers fireside chat. My name is Daniel Grosslight, I'm the health care technology analyst here at Citi. And I'm very pleased to welcome the CFO of Hims & Hers, Yemi -- I don't want to butcher this, Okupe. Thanks for joining us this afternoon.

Thanks, appreciate it.

So let's start off with the quarter you just announced on Monday, a very impressive beat and raise. It seems like in a world where there's been some disappointing earnings from telehealth companies, you've kind of stood out from the pack with continued beats and raises throughout the last year. And just to recap for folks in the room who might not be familiar, you introduced guidance that implies around 40% top line growth and your EBITDA is going to be solidly positive this year. And then for '25, a couple of years from now, you plan to reach above $1.2 billion in revenue and above $100 million in EBITDA. I guess, first question for you, can you help us kind of bridge to that growth and margin expansion, what levers can you pull to drive that growth, particularly?

Yes. I think on the growth side, we continue to see very strong momentum from across multiple areas of the business. I think one of the things that gave us conviction in delivering strong 2023 guidance and beyond is we really see the growth of multiple channels and more and more consumers coming to us. And that's really a testament of the flywheel that we speak around working, where as we continue to develop our trusted brand, we see more and more users coming to the platform, providing feedback around the types of products that resonate with them, whether that's in the form of creative formulations or creative form factors. And then as we've started to increasingly offer more of those personalized products, we just see greater adherence to the solutions that we offer, which drives higher clinical excellence. And so we -- throughout 2022, we really saw that flywheel continue to take hold, where revenue growth actually started to accelerate in the back half of the year. As a result of those dynamics, we are confident that we're going to continue to see very strong subscriber growth throughout 2023, that's both in terms of bringing more and more users to adopt products on the Hims platform. We continue to see the Hers platform scale in an amazing way. And so we're very excited to continue to see that grow and scale over the next couple of years. And lastly, as we mentioned, we're going to do it in a very disciplined way, but we do expect over the next couple of years to start to expand the capabilities across categories that we start to offer. And so I think between seeing the flywheel come together, a very exciting set of products, with products that are going to start to launch throughout 2023. We're confident not only in the near term, which is this year, but really also what the outlook looks like for the longer term.

Yes. Yes, that makes sense. And to hit that $1.2 billion target, $100 million of EBITDA, you're going to have to grow outside, I think, of what most folks know you for, which is men's health. You just started out as your ticker rate is Hims. So as we think about you growing not just in '23, but reaching that $1 billion-plus mark by '25, how many categories do you have to expand into?

Yes. We think around it like less around the number of categories that we need to be in. I think that when you step back and you look at what is the value proposition that Hims and Hers really bring, our growth engine in the equation is less around an offline to online conversion play. We definitely see some of that on the platform, but really as you think around, what are we trying to accomplish and what are we trying to deliver with our mission to help the world feel great through the power of health, it's bringing more and more people into the ecosystem to address whatever their health and wellness challenges are. I think as a result of that, we're seeing more and more users adopt our products as we start to break down barriers through personalized products, making conditions overall more accessible and approachable. That said, I think we will opportunistically look to expand into potentially on one of the categories per year at the most. We want to ensure that we do it correctly. We want to ensure that we want to do it deliberately. But really, even in the terms of the categories that we play in right now, there's the ability to basically touch an individual in every household, if not even every individual at some point in their lives, things like mental health, dermatology and skin, men's health, women's health. These are very broad categories where I think we're just scratching the surface of the tampon.

Yes. Yes, that makes sense. And as we think about product and category expansion, at some point, you hit a wall because you are DTC, meaning are you kind of confined to conditions that can be treated with cheaper generics? Or is there a strategy in the future to work more closely with insurance companies or perhaps with pharma companies with our co-pay assistance programs.

Yes, I think it's a great question. I think what we see today is even in the categories that we're in, we're just scratching the surface. I think for some conditions, something like 90% of individuals are currently not seeking treatment for one reason or the other. Whether it's confusion, whether it's fear, whether it's even the overall approachability of what the solutions in the market look like today. There's a whole host of reasons behind why folks are not getting treated. And so our ability to start to remove some of those barriers, gives us a wide runway that we're confident in will last multiple years. That said, we want the ability to provide treatments and offerings to folks, whether the Hims or Hers platform as it looks today may or may not be right for them. And so as a result of that, we've established partnerships with a whole variety of medical groups across the country that enable us to refer patients out when in an instance, the Hims or the Hers platform may not be right for them. There's the ability to point them in the right direction to get treated for someone that has the ability to take care of their needs.

Yes. Yes. Makes sense. As I look at the components of growth and really since you've been public to now, you've had -- most of your growth is driven by subscriber growth, but you've also had a very nice uplift in AOVs. What's driven that uplift in average order values? And as we think about growth this year and beyond, how should we think about that dynamic between subscriber growth, order growth and AOV growth?

Yes. I think that we expect the majority of our growth to continue to come from bringing new subscribers onto the platform. I think you're correct in that we've also seen some pretty meaningful gains in AOV. I think in its simplest form, what we've seen that is really just a focus on the customer. And so the management team does not spend time thinking through how do we optimize AOV and get higher dollar from a customer on a given order. But really, the focus is how do we build long-lasting relationships with our customer base. I think as a result of that, you started to see innovative solutions, whether that's in the form of giving customers multi-month offerings, which has been a driver of AOV or even just offering more creative solutions take customers on the platform for a longer duration. That focus on the customer is really what's driving them to have longer, deeper relationships with us. And we've seen the benefits show up in the form of a higher AOV more as a derivative of that as opposed to a focus of it.

Got it. One of the big questions I get from investors on you guys, are you guys just a pharmacy company? And if so, how can a pharmacy company have nearly 80% margins, gross margins. So 2-part question here; one, are you really just a pharmacy? But more seriously, how are you able to achieve such good gross margins -- and you did mention that margins are going to compress a little bit in the future to around mid-70s probably. What's driving some of that compression in the future?

Sure. I think the first part of the question, the answer is like a resounding no. I think that what we do is we take the best from the consumer brands. We also take the best from the technology brands and the best from the health and wellness platforms and bring them all together in unique value proposition. For instance, when you look at the flywheel that we talk around in our strategic pillars, I think that that's one of the reasons why we've executed in such a strong fashion. We put the consumer forefront and center and think around like what's good for them. As a result of that, we're already seeing more and more consumers, more and more providers come into our platform looking to foster relationship with us. And they're constantly providing feedback around what are the things that are working, what are the things that concern them that are top of mind for them day-to-day, and we listen. And so as a result of that we incorporate that into the personalized uniform factors, one of the recent ones being the Hard Mints product that we just launched as well as some of the innovation that we've done in the men's health category as well. I think as a result of those dynamics, we create a very powerful flywheel where consumers see the value of our platform. I think as a result of that, that is one of the reasons why the gross margins have been quite healthy. That said, when you step back and you look at what is the mission for the Hims & Hers platform, and it's really to make the world feel great through the power of health. I think as a result of that, like we really are looking to do a couple of things across the health and wellness ecosystem. Number one, that's to basically personalize solutions and really treat every customer different because every customer has different needs. The second is to increase accessibility to the solutions that we offer. And then lastly, we also want to make them affordable. And so I think as we think around our long-term EBITDA targets, as we want to expand the term, like we don't necessarily need an 80-plus percent gross margin to effectively do that. And so we'll look to increasingly offer our products to a wider set of customers. I was actually joking with the team earlier a little bit. When I joined last year, we were at a 73% gross margin, and the questions were, do you have the ability to keep that? And I think that really the strong execution of the team and the innovation has enabled gross margins to drift higher. But really what we want to do is, again, just to the principle of putting the customer first, we want to take and reinvest that to ensure that the customer has an amazing experience and they keep coming back to us for years to come.

Yes. Yes. You mentioned kind of the long-term EBITDA targets here. I think you spelled those out at around 20% to 30% once you reach scale. So if you've got 75% gross margins, and let's say you spend around 20-ish percent on SG&A and R&D, that leaves around 30% to spend on marketing to hit those margins. Are we thinking about that correctly? And how quickly do you think you can ramp to those margins?

Yes. So I think to hit the first part of that question on SG&A support, R&D collectively, you're correct that we're in the 30s today. We feel that there's still a ton of runway that we have on G&A costs. We also believe that there is a ton of runway that we still have on the operations and support. And so over time, we will continue to get leverage. That's one of the reasons why we have the conviction and confidence to say that we would deliver $100 million of EBITDA for 2025. As we look to the long term, one of the reasons why the platform has enjoyed the scale that it has, has been that we've been at the forefront of experimenting across a variety of different marketing channels. And what you're seeing from us now as well as throughout 2022 is really leaning into the long-term development of the brand. And I think over the long haul, we do expect benefits for that to accrue that we will start to see leverage on the marketing spend over the long term. There's not necessarily a similar to when we hit profitability, a set timeline that the teams are gunning for and optimizing for, but really what we see is through the organic leverage that the platform gets crews. We'll naturally drift there over time, I think to hit the 20% to 30% targets, it's going to be probably roughly in the 5 to 10-year horizon. Again, we just have a substantial runway for the TAM ahead of us. We want to continue to basically operate and optimize for that.

Yes. Yes. Turning back more towards the near term, and you've mentioned this a couple of times already. The customized products are a big part of your strategy, you just launched those mints, for example. How are you driving growth in your customized products? And what does that do to margins? Is that accretive to your margins?

Yes. I think with respect to the personalized products, I think that even in the early days for the products that we recently launched, we see an immense amount of demand. I think as you personalize solutions to customers, we have a way of finding it pretty quickly, particularly if it works, as well and if it also is -- it meets the desired feedback they've given us. I think that because we're at the forefront of this type of innovation, that gives us substantial control of our own destiny for how do we price it? What do the margins look like. Again, I think just stepping back to our mission, building the customer trust and making the world feel great through the power of health, we're very thoughtful around the types of premiums that we do put on it. We don't think it's going to cause substantial gross margin it dilution, but we have the ability to be creative there.

Yes. Yes. What about retention? I would assume that if people are getting customized products that are only being compounded by you guys, it really improves that churn, the retention rates as well.

Yes. I think we view that as a substantial differentiator. It's definitely part of a much broader ecosystem. And so I think that, again, just going back to our first principles, really the things that we do is to just make the overall customer experience better. And so we roll out the customized products, which we do feel over the long term will just differentiate us from many of the other players out there. But even just removing friction around that exists in the current ecosystem, I think when you combine that with an amazing experience, personalized solutions, technology, easily accessible and friendly end-to-end experiences, that's going to continue to drive meaningful retention on the platform.

Yes. Yes. Let's turn to mental health because that's been a bit of a controversial I guess, from a macro standpoint, issue more recently. Because there were some unscrupulous companies out there that grew a ton during the pandemic by prescribing Adderall, Xanax, Benzos, so I'm just curious to get your thoughts on how the market broadly is going to shape up? Obviously, you didn't touch those products, which was great to see. And what kind of growth you're experiencing within that segment specifically?

Yes, I think we've made the conscious choice to not offer controlled substances on the platform. One of our strategic pillars is clinical excellence. And another key specific pillar is a trusted brand. I think those 2 things go hand in hand. And so I think each decision that we've made around the decisions that we've made across the last couple of years have been in the spirit of ensuring that we are abiding and living up to these strategic standards. And so we have a team of medical advisers that's constantly advising us. We brought back Dr. Pat Carroll to the company as well. There's a whole host of different levers that we do pull there to ensure that we are driving high clinical excellence that consumers can trust us. I think as a result of that, we've seen consumers adopt multiple products on the platform. We're very excited by the great trajectory of mental health, amongst many of the other emerging categories such as dermatology and others. But we do view that as we continue to execute across those strategic pillars, customers are going to keep coming back to us for more and more. And I think it really just speaks to the power of the platform.

Yes. And do you think the fact that we have seen this crack down on some of those other platforms, do you think that will be a tailwind for you as you see patients turn off there and look for treatment in other places?

I think it definitely has the potential. I think, again, I don't think that there's -- there's very few patients out there that don't want a high degree of clinical excellence. And so I think as we become recognized by that, I think we'll continue to see patients come to our platform. I think we'll also see the best-in-class providers can do our platform as well. I think these 2 things work in unison. And so I think we're very excited, not just in the metal space, but many of the other categories. And I think for some of the increased regulation, maybe we would just welcome it. I think it's better for the broader industry to just hold everyone to a higher bar.

Yes. And you mentioned on your earnings call that a few categories were growing triple digits. Is mental health still in that triple-digit growth area?

Yes. I think that's not necessarily a change. We do still have several categories that are growing in the triple digits. We're excited by mental health, we're also excited by dermatology, we're also excited by even some of the emerging categories that we have yet to launch that we spoke around in our investor materials as well.

Yes. Yes. Let's talk about marketing because it is such a big portion of your spend in DTC Health. In general, it's very important. We've seen CACs in this segment really remained pretty persistently high. How have you changed your marketing strategy or developed your marketing strategy amid some pretty difficult cost pressures?

Yes. I think it's being creative from the start. And so I would say that we've benefited through some pretty choppy periods through really enjoying the benefit of a few key things. The first is when you look at the breadth of the offering on the platform, the number of different conditions that we have, we're able to rotate capital dynamically across each of those conditions. The second is pretty early on in the company's life cycle. We had a diverse set of marketing channels, right? And so when you step back and you look at the retail partnerships that we've established, the celebrity partnerships, being one of the first adopters of leveraging alternative channels such as TikTok, Instagram that other players are coming into, I think the creativity to be at the forefront of those things enabled us to navigate some of the CAC dynamics that you're talking around. Now what you see us increasingly do is we're investing more into the long-term development of the brand. And we feel that the benefits of that are going to accrue over the long-term in a pretty meaningful way.

Yes. Yes. And I think one of the interesting things about you guys, too, is despite the high marketing costs and your ability to offset that your retention rate remains pretty high, 85%. Your payback period is pretty efficient, less than 1 year. How has that been trending recently? Is that kind of a new development? Or have you always kind of been pretty steady at 85% in less than 1-year payback.

So 2019, the payback period was over a year. We actively did a ton of execution and activities to bring that down over time. We saw in 2021 that that came down to less than a year, roughly 6 months. As we look at the early 2022 cohorts that are now hitting a year, those have also had a payback period roughly in the month -- the 6 to 7 month time frame. And so I think that we increasingly just see very strong strength across the customer cohorts that really is just a testament to how customers value our platform.

Yes. And where do you think those can go? Are you at your target? Do you think it can get lower realistically?

Yes. I mean our target is less than a year, and we're currently sitting well below that. I think that we're going to continue to release capital and deploy capital in a judicious way. But I think that it's not as if we're looking to force those targets lower. I think a payback period of less than a year is very strong and very ambitious. And so really, I think what we're after is we're going to continue to very much invest in a disciplined way, but continue to grow and show at that large runway for the TAM that we mentioned. And so that really, that's our focus is how do we bring in more and more customers into the ecosystem, get them to know the Hims platform, get them to know the Hers platform and continue to just make a broader set of people feel great.

Yes. Yes. And directly related to the payback period is churn. How has churn trended recently? I assume it's very similar to your payback period. And when people do churn off, where are they going?

Yes, it's a great question. It's hard to know exactly like where folks are going. I think the way that we define churn is even if there's an exogenous event and someone leaves the platform temporary and then it comes back. In the period, they'd technically be classified as churn. So I think there's all kinds of interesting dynamics where we actually do see a healthy number of users that we call internally reactivate. And so I think that's one of the things that gives us conviction in the long-term durability of the platform. I think increasingly, what you also see is even upfront, customers are wanting to establish longer and longer relationships with us. And so when you look at the number of customers that have signed a multi-month relationship with Hims, north of 70% of subscribers are opting for multi-month conditions, which again, just speaks to the value that our platform is bringing to them.

And have you kind of tapped out on your multi-month orders? 70% a portion of folks are always going to be a single month order, but where can that 70% go to?

Yes. I think it has the potential to go higher, but really what we're after is putting forth the right offering for the right consumer and what they want. And so for the consumers that want multi-month offerings, we want to ensure that it's compelling that they have that opportunity if the consumer wants to go month to month with us as well where that makes sense. We also want to offer them that opportunity. And so really it's a matter of fulfilling what the consumers want and need, but we do think that there's additional potential there.

Yes. Yes. That makes sense. [ Certainly ] one of the controversies in the DTC health space, there was a consumer report article a few months ago, Wall Street Journal article a few months ago on this as well. But the utilization of patient data for marketing, not just kind of the direct marketing, but also using Meta Pixel and some performance marketing through Google by using patient data. How are you guys using patient data for marketing? And are you sharing data with Facebook and the other performance markers that might be considered sensitive?

Yes. I think it's a really, really great question. I think what I'd first point to you and reiterate is in our strategic pillars, the 4 that we talk around, 2 of those are, again, the trusted brand and the clinical excellence. And so we take the trust of our consumers incredibly seriously. I think as a result of that, we generally are not using any type of data for various purposes. Any type of consumer data that we do use to drive the feedback that they give us to increase the consumer excellence. The short answer is, we abide by all of the state, federal and platform regulations that we're required to them. But by the same token, we're really looking to just drive high degrees of clinical excellence for our customers, and we take the trust of our customers very seriously. So any data using the platform fully anonymized again, just because we take the trusted brand very seriously.

Got it. And has this intense scrutiny, even though you might not be running a fall of any of these regulations. But has any of this intense scrutiny change how you're thinking about marketing or performance marketing in general?

I think the shorter answer is, it really hasn't I think from day one. We've always looked to protect the customer data. We'll always look to ensure that we are building that trust. I think just having that in our DNA has enabled us not to have to make a hard pivot that you're seeing others potentially have to make.

Got it. Good. Let's talk about your app. You recently launched a Hims & hers app, that was I think November of '21. Can you share any data around the utilization of that app and what it does to your retention and churn?

Sure. I think that we see the majority of consumers, new users on the platform, adopting the app as they come on board. Really, the intention of the app is to provide consumers with access whenever mobility or modality that they choose to engage with the platform. And so to some degree, we even see some consumers engage with us at touch points whether it's both web and app at any given point in time. And so I think through offering consumers more choice, more touch points to engage with their providers, that enables us the ability to, again, increase the durability of those relationships over the long-term.

Yes. Yes. Let's talk about the macro environment a little bit. Still a bit if you -- if we're going to see a hard landing, soft landing recession, days like this, it feels more like a hard landing than anything. But I'm curious how you've positioned yourself in the event that we do have a recession. And are you seeing more as discretionary in nature by your customers? And if so, how have you sought to increase utilization among a potential weakening environment?

Sure. I think while the company is relatively young in its tenure less than 6 years old. We've been through a variety of different environments over the last 6 years from the pandemic, across the pandemic, leaving it to even some of the choppiness that started to emerge last year. I think what we've seen is we've seen across all those environments, the platform continue to grow. And there's a few reasons behind that. I think, first and foremost, the offering that we have of the end-to-end optimized experience really does resonate with consumers and provides them with solutions for some of the most emotionally resonant conditions that they're facing, how they look and feel every day, how they're showing up, what their mental health is and so forth. I think as a result of that, we view the resilience of the model to be quite high. I think the second element that is also important is we don't cater to one specific demographic. The diversity of demographics of users on the platform is pretty vast from income levels, geographic locations, gender, so forth, you name it. I think that that diversity has enabled us to really be able to navigate through a variety of different environments. And again, I think we're confident that we can build a long lasting and durable business in whatever environment emerges.

Yes. One of the biggest questions that we get on you guys also, apart from the question about your margins, sustainability of those gross margins is just competition. And I guess it's related because we have seen some big players like in Amazon, come in with a solution that seems very similar to yours, Amazon Clinic. They just acquired One medical, and there's other players too that have come up as well. Can you talk a little bit about the competitive dynamic with a specific focus on some of these very large new entrants that might come into play?

Yes, sure. I think that the entry of the large players that you're mentioning really is a testament to how big this opportunity is. And so stepping back, I think that health and wellness space has largely gone and optimized when you think around how technology has touched so many different assets of consumers lives here in the U.S. health and wellness and we still definitely have a long way to go. It's one of the largest verticals in the nation. And so I think as a result of that, I think it would be naive for us to believe that we're going to be the only players in the space, but we think that strong execution across the 4 pillars is going to enable us to be a leader in the space. And so building a branded consumer is, again, trust, providing them with leveraging technology to provide the innovative services and solutions, and establishing a high degree of clinical excellence. When you package that in a relatively frictionless end-to-end amazing experience, we feel that that's going to enable us to be market leaders and what's likely to be one of the largest opportunities remaining in the country.

Okay. So I know you don't really have this track in detail, but when you do lose a customer, you're not seeing them necessarily go to a competitor like Amazon or any -- has there been any data out there on where customers are going if they go to a competitor?

Yes. To our knowledge, there's not. I think usually what we oftentimes see is there's an exogenous event that oftentimes, it will result in a customer temporarily leaving the platform where we also do see that gives us conviction because that we see a lot of customers, as I mentioned before, come back and reactivate. And so I think that, for instance, there might be periods in time like where if you're taking a vacation or if you were on our sexual health platform and you potentially lose your partner. Those are all reasons that are not necessarily within the control of Hims or Hers to retain a customer. And again, we want to do it right by them. So we're not going to push our products on an environment where it doesn't make sense. But usually, I think like what we're competing with is more of an exogenous event. I think that the platform that we provide, the value that it brings when the consumers to recognize it. And so I think what also gives us the conviction that we're not losing share to others is the fact that for consumers that leave the platform, we oftentimes see many of those users come back.

Yes. Yes. Let's talk about your provider network. That's been one of the difficulties for a lot of telehealth platforms out there just because there's so much demand for providers now. State licensing rules are pretty onerous, as you know, and they're probably going to get more ones after the PHE expires. So how are you managing your provider network? Have you seen -- have you had any issues with recruitment retention and compensation?

Yes. We've not had any issues with the recruitment providers. I think that we have an amazing platform. We also provide them with an amazing set of tools that help drive efficiency, better outcomes, remove some of the administrative burden that they face. And so I think through having a world-class EMR tool that providers can interact with enables us the ability to draw some of the best providers out there. I think also being known to have a trusted brand and making very conscious decisions and protecting that not only helps us acquire consumers, but also helps us to draw on providers as well, which are a very critical and important part of that flywheel in ensuring that we establish the high clinical excellence that we hold ourselves to.

Yes. And all of your providers are 1099 contractors, right?

The majority of the providers are kind of contractors on the platform for flexibility. It's not 100%, but the vast majority are.

Yes. Yes. Makes sense. Well, I do want to leave some time for some Q&A if folks want to ask questions. But before I do that, anything that you think is particularly misunderstood about Hims or anything you want to say before we wrap it up?

Yes. I would just say that I think 2022 is definitely a phenomenal year for us, crossing 1 million subscribers, hitting over $525 million of revenue, generating our first quarter of adjusted EBITDA profitability. And so I think while 2022 is definitely an outstanding year. I think what excites myself and the broader management team and the entire company really is the future. I think that we are just scratching the surface of this opportunity and there's so much more to come and so much more excitement. And I think that we firmly believe that we'll be at the forefront of that.

Great. Well, let's open it up to Q&A. I believe we have some mics here if folks want to ask a question. All right. Well, no questions, we'll wrap it up a little early. Really appreciate your time, Yemi.

Thanks so much.