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

I'm Maria Reps, Internet Analyst here at Canaccord Genuity, and it's my pleasure to introduce Yemi Okupe, Hims & Hers CFO. Yemi, thank you so much for joining us today.

Really excited to be here.

Awesome. Well, first of all, congrats on your strong Q2 results that you just reported last week. It was great to see the continued strength in your core product offerings as well as robust early momentum with GLP-1 treatment. We'll dive into sort of the specifics of the business in a few moments here. But can you maybe give us a sort of broader overview of the platform, what you've been able to achieve in such a short period of time? And what are some of the sort of key strategic priorities for the management team in this space?

Yes, absolutely. So I think just taking a step back in terms of the genesis for Hims & Hers and why we've seen some of the success in some of the key principles. Really, when you look at technology and how it's transformed so many different facets of our lives from how it moves around, how we consume media, how we order goods in e-commerce. The underlying themes across all of those areas has been greater convenience for consumers, greater transparency, greater affordability, customization and personalization. When you look at health care in general, like that has largely lagged behind. And so the genesis for Hims & Hers was to really moved down or remove barriers that are preventing people from getting treated, through leveraging technology to bring greater transparency, greater affordability, more personalized products. And so as you look at the platform and what it provides today, it's really those things across 5 different specialties that tend to be some of the emotionally resonant conditions for our consumers. And so the specialties that we operate in today include mental health, sexual health, men's and women's dermatology and weight management. And so our ability to leverage our platform, which we can go into a little bit later, to enable consumers to access provider in hours or a day as opposed to weeks, provide greater transparency around the pricing for a good upfront. And then more importantly, increasingly also provide personalization to what are the unique needs to each individual. I think it's having phenomenal success, and we're seeing that show up quarter after quarter and the results of more and more users coming to the platform.

Got it. So given sort of recent macro developments, I wanted to ask about sort of the resiliency of your platform in a more challenging economic times. Given that your offerings address sort of emotionally resonant conditions, is it reasonable to expect that those would be sort of last types of expenditures to be cut by consumers?

Yes. I think across numerous macro environments, we view the consumer as being very durable. Like as you mentioned, the overall conditions that we treat are incredibly emotionally resonant in nature. These effect how you show up every day, how you feel about yourself, how you engage with your partner. I think there's also a couple of other elements that give us confidence across numerous macro environments to the platform and the consumer will be durable. The second element is the specialties that we operate in truly have the ability to impact every household across the country. So this is not segmented to you just 1 given demographic, whether wealthy or less wealthy, but really, the specialties that we operate and span across numerous demographics, different age ranges, different geographic locations, different income levels and so forth. And lastly, I think that what we've really been able to provide with greater efficiency on the platform as effectively greater affordability. And so on our platform, you have the ability to engage with a provider. You also have the ability to access medical solutions that are personalized to you, often the convenience of your own home. Oftentimes at price points that when you collect the deductibles that you would need to do that in a brick-and-mortar environment, are on par, if not at times, even more favorable than what you would get in a brick-and-mortar setting.

So let's delve a little bit deeper into personalization. Could you maybe spend a few minutes talking about the investments you've made in your affiliated pharmacies over the past few years? And maybe walk us through your pipeline of new personalized products that are coming to market?

Yes, absolutely. So I think that 1 of the benefits of the platform upfront has been the fact that the platform is both from the ground up. And so our EMR system was effectively homegrown. And so with provider input over the last several years, we've iterated on that and continue to do so. One of the key outputs for that has been the fact that we get a ton of consumer feedback around what are the barriers that are preventing them from potentially getting treated. And so we receive consumer feedback around things like they prefer a different form factor or it'd be great if they could treat multiple conditions inside of 1 solution. And so really, what we've done is we've leveraged that feedback from consumers with our experts to really hone in and think through what are the characteristics of our solutions that would really resonate with consumers. And so a couple of years ago, we bought out Apostrophe. It's a 503A facility that really gave us the ability to verticalize and fine-tune compounded treatments. And so we're able to take the feedback that we received from the EMR that consumers are giving us around, I would prefer it to form factor, a topical solution for my hair loss product versus an oral solution or I want the ability to treat multiple conditions in one. And you're seeing that show up in the form of the platform, where there's unique form factors of things like mints, gummy bears in the future, topical solutions for medications that have historically been oral-based. You're seeing more multi-condition treatments at very mass market price points. It's really generating a lot of excitement for consumers. And so recently, we launched the ability to treat men's sexual health and men's hair loss in 1 solution at a price point for $49 per month. And so I think that these types of innovations that we continue to bring to the platform are generating more and more consumer excitement. We're now north of 40% of users or subscribers on the platform are opting for a personalized solution through winding a little over 2 years ago, that was less than 15%. And so the strategy of offering high-quality personalized solutions that are able to treat multiple conditions, in form factors that consumers prefer or adjust dosage strength to balance side effect concerns with efficacy levels is really resonating with the consumers.

And the affiliated pharmacies have also enabled you to realize operational efficiencies and pass some of those savings to customers in the form of price reductions. How should we think about the company sort of expected cadence of price reductions? And what are some other ways you're looking to pass value back to consumers?

Yes. It's a really great question. So overall, I think we are very rigorous with the pricing changes that we make to the platform where oftentimes, we'll run experiments for months, if not a couple of quarters before executing on those en masse. I think pricing changes and continuing to place those at more mass market prices inevitably are going to be important. But there are also numerous other ways that we can pass value to consumers that will increasingly [ look ] to DSO. That can include giving consumers more value within a product at the same price point. So using the sexual health and hair loss example, the ability to put that at $49 is something that we view is incredibly compelling. We're oftentimes if you were to get those treatments individually across separate platforms. That could be $100-plus. The other element is there's value-added services where the consumers are giving us feedback around. They want to know more information around themselves and so through partnerships. We're able to do things like loyalty programs or effectively past value that way. And lastly, even the prices of products yet to come on to the platform, given the historical operational excellence we've seen on the platform, we have the ability to do things like offer the ability to treat multiple conditions for a price point less of $50. We have the ability to have a weight management offering that starts as low as $79 for orals or $199 for injectables. And so the verticalization of the pharmacies, combined with the operational excellence of our teams really is a strong point that enables us to put forth a compelling value proposition to the consumer.

So let's move on to the topic that I'm sure everyone is anxiously waiting for, which is GLP-1s. On your Q2 call last week, you addressed sort of what has been top of mind for most investors, which is the sustainability of the GLP-1 revenue stream post shortage. So could you maybe recap for the broader audience, why sort of -- why are you confident that in your ability to continue compounding at scale after semaglutide and other GLP-1 sort of ingredients are no longer on the shortage list?

Yes. I think it's a really great question. And so we'll provide a little bit of context around like how we're able to do it today. And so effectively, what we see is thousands of consumers are coming to us on a daily basis, stating that they're having problems even today accessing branded medications. And so as a result of that, many of the medications, such as semaglutide, tirzepatide, remain on the FDA shortage list. And so what that enables you to do is compound dosages at the commercially available dosage levels. And so that's what we rolled out at the start for GLP-1s. But when we look across our other specialties, there's really 2 foundational principles that irrespective of a shortage list like are game changing for the platform, and we believe are unique to Hims & Hers. The first is the aspect of personalization, right? And so if you step back and you look at the platform at scale, we're 1 of the few platforms that has the ability to see the end-to-end journey of a user who came on to the platform, who opted to switch to you a different medication, who opted to switch to different dosage, what were the side effect profiles that they ran into and so forth. And so what that enables us to do is leverage technologies like MEDMATCH, combine that with the technology that we have in the pharmaceutical facilities to offer personalized dosages. So it may be for a subset of consumers that the low dose of a commercially available product may not be strong enough, but the high dose comes with too many side effect concerns. And so our ability to identify those users, offer them a personalized treatment. We view that as being fundamental to the platform, irrespective of the shortage list and will be truly compelling. And the compounding laws that enable personalization. This is not a new phenomenon. These loss have existed for decades. And so historically, they've been honored by all the players in the industry. And so we're confident that they will continue to do so. What that does do is when we approach shortage that will all be swim lanes for the commercially available products, like those products will go away and the subset of users will opt to switch for personalized products that does narrow the addressable population, but in an environment where 100 million people across the country are suffering for weight related challenges. Our view is that there are still millions of users or potential consumers that would benefit from personalization. The second aspect that, again, holds true across all specialties is really the concept around having a breadth of holistic options. And so if you look across all of our specialties, you notice that, and in our view, weight management is not going to be any different. To start with the category, we launched oral based solutions. That business in the span of 7 months scaled to north of $100 million. We'll continue to iterate on that product. We'll also look to bring on the personalized dosages like we talked around as supply becomes sustainable, branded products will also be an option. And then lastly, there are other GLP-1s, such as liraglutide that are nearing the ends of their patent lives. We'll also look to bring many of those onto the platform. So I think in summary, similar to what we've done in other specialties, irrespective of a shortage environment the concept of parent personalization with breadth of choice has been the winning formula, and we don't view weight management as any different.

Got it. And can you maybe talk about the halo effect of the GLP-1 offering on your platform overall?

Yes. I would say that there's our platform, and there's like the broader society. And so I think we saw this when we launched the oral medication kits is that GLP-1s have made it socially acceptable to view weight management as a medical condition versus purely lifestyle. And so I think the platform even when it was just oral-based solutions benefited from that immensely. Like that's been 1 of our fastest scaling specialties because GLP-1s have elevated the awareness that weight management can be a medical condition. I think with respect to GLP-1 specifically on our platform, I think it's a little bit of a symbiotic relationship where because we offer it, that is generating more eyeballs in the platform. But also, I think that when we saw this in the oral solution as well, there are a ton of people that are suffering from weight-related challenges, and they are looking for a solution. I think that Hims & Hers has also benefited from years of building a trusted brand in the years of becoming known for personalization and quality where GLP-1s are success in the platform as a result of those investments, users tend to associate our products with high quality and trust. So as a result of having that, they are more amenable to taking the offering and trusting that the offering will be at high quality.

Got it. So you also announced the acquisition of 503B outsourcing facility to support sort of scaling this offering. Talk to us about some of the operational efficiencies and productivity sort of gains that this should unlock?

Yes. We'll definitely go into some of the productivity gains. I think we're very excited there. But even just strategically what that facility will enable us to do is pretty powerful. So when we acquired the 503A, that accelerated our ability to do many of the personalized products that we do today, years early. And so the 503B facility sets the foundation for interesting product and specialty expansion in the future. As we look to offer things such as hormonal therapy or other specialties that require sterile facilities, the 503B will be instrumental in accelerating the path to offer some of those broader specialties. Secondarily, the ability of what we've seen in personalization and verticalization is the ability to listen to the consumers and have that go all the way down the supply chain shows up in the form of many different benefits. One is being able to respond faster to consumers to give them exactly what they want. The second shows up in things that may be counterintuitive on you're able to get more efficiencies on things like customer support cost because you're able to iterate further up the stream. And then lastly, I think just we've seen this across how the teams have executed. If you look at Q4 of '21 to Q4 '23, gross margins on the platform expanded 10 points, just as a result of the operations teams looking for ways to optimize processes, looking through how do we bring on more verticalization and realize benefits from economies of scale. We're confident that they'll be able to do something very similar with the 503B facilities for injectables which is 1 of the reasons why we felt comfortable placing the price point as low as 199, which is truly compelling for users.

So let's switch to marketing for a couple of minutes here. Marketing expense as a percent of revenue was at 46% in Q2 and has been sort of moving lower over the past couple of quarters. So you are expecting a modest step up in the second half largely to support the GLP-1 offering. But maybe longer term, talk about sort of the company's framework for driving 100 to 300 basis points of annual marketing leverage as you kind of look forward?

Yes. Really great question. And so I think on a quarter-to-quarter basis, marketing investment is going to ebb and flow, but we're confident on the annual basis. We'll get 1 to 3 points of leverage. I think really what we tend to lean into marketing is when there is a new event on the platform. And so in the back half of the year, we expect a few things. One is we have multi-condition treatments across our core specialties. We will also have additional form factor [ fits ]. It's definitely something that we're going to want to do. As you mentioned, as GLP-1s go into national coverage, weight is such a broad category that there is the ability to make specialty-related investments in marketing that we've historically on a mass market basis have not done. So if you look at Hims & Hers TV, it's usually speaking about multiple specialties in the benefits of coming to the platform for mental health, sexual health, men's dermatology or women's dermatology, respectively. Way to such a broad category and the solutions are so expensive that there really is the ability to start to invest in unique education campaigns around that holistically a specialty, and we're very excited by that. As we look to where is leverage going to come from on marketing, I think there's a few factors that give us conviction One is the conditions that we treat are chronic in nature and most of the marketing dollars go towards the acquisition of new consumers. And so each cohort of consumers that you bring basically provides a platform for greater and greater leverage. The second element is we've seen a ton of success with personalization that we're now north of 40% of users are opting for a personalized product. Historically, what we've seen for personalized products is that comes to stronger retention. And so you get the compounding effect of more cohorts coming in with stronger retention as they offer more personalized products, that inherently provides more leverage as well. The final element is -- and we're really seeing this and we've observed this dynamic is for categories that are visible in nature, hair, skin, weight, there's a component of word of mouth and organic acquisition that we typically see out there that we expect to benefit from. And so organically, Reddit communities have popped up for weight management offering where users are speaking to the success that they're seeing. My wife utilizes the hair loss platform, and she tells everyone about the success that she's seen. In our historical categories like men's sexual health, you typically wouldn't see that word of mouth or folks telling their friends about it for obvious reasons. Whereas more visible categories like dermatology, both hair and skin as well as weight. Those are things that are very visible and so people are more open to speak to those. And so we're seeing the benefit of those categories scale quite rapidly with word of mouth and lower-cost channels. And so the combination of stronger organic acquisition, a shift towards more personalization, which carried stronger retention and the [ seeing ] of cohorts is what gave us the conviction to commit to having a line of sight to 1 to 3 points of leverage on marketing for the next -- or the remainder of the decade.

Got it. That makes sense. So let's shift to a couple of financial questions before we wrap up. You raised your full year guidance by nearly 10% last week. How conservative would you say the sort of updated outlook maybe sort of given the momentum with your core offerings as well as GLP-1s sort of -- and also, I feel like you have several new products coming to market later this year.

Yes. So I think it's -- I think particularly in a rapidly scaling environment, guidance is always a tough 1 in particularly a change when you're increasing at $75 million to $80 million quarter-on-quarter. I think that from our vantage point, our philosophy is to set guidance based upon what we currently see what's in front of us. We've been pleasantly surprised in the past by products that greater hit than we thought things like hard men's on the platform or the topical solutions for hair or at times we've beaten -- if that trend would hold true for GLP-1s, there is potential upside there. But generally, the philosophy for guidance is to try to be as close to the pin as possible with innovation comes inherent volatility though.

Right, right. So let's talk about gross margins. And you guided to 300 to 400 basis points of gross margin compression in the second half of this year versus the first half as you sort of support the GLP-1 investments. You expect to record some sort of margin compression sort of in the medium term as operational efficiencies are sort of achieved. But sort of how should we think about price reductions sort of coupled with sort of, I guess, how the price reductions kind of feed in your overall sort of view of margins over the next few years?

Yes, absolutely. So I mean, I think just like kind of setting the stage for the question, the aspiration of the company is not to be an 85% gross margin business with 6 million or 7 million users on the platform. The aspiration is to have tens of millions of users on the platform. And so with that, we are willing to give up some gross margin to have greater scale. That said, I think we can still do that while also maintaining a path to EBITDA margins north of 20%. In terms of how we intend to give some of that value back to consumers, I think you're starting to see this show up in the form of prices that we -- either we placed some of the product set, whether they're multi-condition treatments or the GLP-1 offering. And so I think that over the next couple of years, what we would expect is gross margins to ebb and flow. There are going to be periods of time where it goes up. Our operations team, as I mentioned earlier, have demonstrated extreme excellence. I think that is a strength of the company at being able to identify efficiencies, capture them. And then we'll look to be very disciplined and thoughtful at returning some of that value back to our consumers. That can come in the form of value-added services. It can come in the form of more aggressive pricing for newer offerings. I think what you're also likely to see is, historically, we've played in the spectrum of price point around $50 and that's been more of a premium offering, that's very compelling. But I think that we've operated more on a better best model. As a platform evolves to tens of millions of users, there's likely to be a good, better, best model that carries a broader spectrum of price points and margin points. And so you can envision a world where in order to get tens of millions of users, you have a broader spectrum of products that we're very excited to roll out in the coming years. And so that's really where the margins ebb and flow. So periods of time will go up when we get efficiency, but as we brought in spectrum of products, as we also look to cash value back to consumers, whether it's pricing or value-added services over the long term, we expect to be in the mid-70s, while still maintaining an EBITDA margin north of 20%, but having much greater scale in tens and millions of users on the platform.

Got it. That makes sense. I want to pause here and see if we may have any questions from the audience. All right. So we have maybe a minute or so left. So as we sit here today, are there any sort of aspect of your platform, business model or opportunity that you think investors may be not -- may not fully understand or sort of appreciate at this point?

Yes. I think there are really 2 aspects. And so I'll start with kind of the more straightforward one. And I think that there's been a lot of excitement around GLP-1s and that is likely being accelerated to what's an already phenomenal trajectory. I'm thinking that excitement, folks still live sight at times of what the core business has done, right? And so I think in advance of GLP-1s, Hims & Hers was able to deliver GAAP profitability, be free cash flow positive, have guidance that has $1.2 billion of revenue and $100 million in EBITDA, which was our 2025 floors pulling that 4 year early in the absence of GLP-1s. And so while we're super excited by GLP-1s, I think the core is performing phenomenally well. I think the second element shows up in the form of many different things where investors will ask, well, why are you a consumer? Are you health care? Are you technology and so forth. And I think that a lot of that confusion stems from the simple fact of we're doing something, right? So I think the concept of leveraging technology to bring a personalized experience to a set of users is something that's new and does not look like anything out there and currently is flipping the health care system on it's head. This is not the first time the industry has undergone change. And so I think what change creates confusion. So if you look at the most valuable companies in technology today, many of them underwent a similar revolutionary change for consumers, whether that's how we move, whether it's how you run a property, whether it's how you consume media, there's been questions any time you've revolutionized a platform for consumers. But with that has come a great benefit to society. What that has also come a great benefit to the shareholders of folks that held into those companies. And so for Hims & Hers is to basically follow a similar process for the greater good of consumers in the health care space.

Got it. Well, with that, we're out of time. That was great, Yemi. Thank you so much for joining.

Perfect. Thank you so much, Maria.