Q2 2021 Hims & Hers Health Inc Earnings Call

Good afternoon, and thank you for joining us on today's call conference call to discuss <unk>.

And her health, Inc. Second quarter tend to any one financial results.

Joining me on the call are Andrew Ahlborn.

Our Chief Executive Officer.

Spencer Lee, our Chief Financial Officer.

On this call, we'll be making forward looking statements, including financial guidance and expectations for Alberta, clutter and fiscal year tend to anyone's growth expansion into new categories and try to use plus.

From a demand and products.

These statements reflect our best judgment based on factors currently known to us and actual events or results may differ materially.

Please refer to documents that we fall where the S E C, including the form 8-K filed with today's press release.

Those documents contain risks and other factors that may cause our actual results to differ from dose contained in our forward looking statements.

These forward looking statements are being made as of today and we disclaim any obligation to update or revise these statements.

If this call is reviewed after today the information presented during this call may not be current or accurate.

We will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles.

For historical periods, a reconciliation with GAAP and non-GAAP results is provided in the press release filed today with the S. E. T on an 8-K and also available on our website.

And with that I'll now turn it over to Andrew did in.

Welcome and thank you all for joining our Q2 earnings call.

We're proud to share that we've continued our outperformance on both the topline and bottom line of our guidance range. This quarter with revenue of 60 million plus and adjusted EBITDA coming in at a loss of $5 million.

With the team's steadfast focus on growth and efficiency, we've expanded gross margins to an all time high of 78%, while adding nearly 200000 subscription over the last 12 months.

The results. This quarter are a continued validation of our innovative consumer oriented business model and we believe we are leading a secular trend that will transform healthcare as we know it.

As a newly public company HIMSS and hurts us in the earliest chapters of our story and as such we're excited with each quarter to share more insights into our vision for the years ahead.

We have built a management team of both industry veteran and technology innovators, who are combined capable of making big bets on the future of digital health.

I'm confident our unique growth mindset, our commitment to a multi year time horizon and our proven diligent execution will continue to be the engine for our success.

Our vision for the future is simple.

We are building HIMSS and hers into the new front door to healthcare.

A new front door that will span dozens of medical specialties welcoming customers of all demographics into a unified consumer platform that looks and feels and talks to them in a way that gives them confidence they are in the right hands.

I strongly believe that the great unlock and telemedicine will be the power of personal.

The winners in this emerging category will be providers, who offer a level of service familiarity and quality on par or above that of the relationship you have with your primary care physician.

That's why we're putting personal on our strategic agenda as a key pillar of success.

For the first time in history, we believe the infrastructure and capabilities exist deliver care made for each patient uniquely.

This is a new frontier to medicine, not a nice to have for the strategic driver of the business.

For these reasons I believe the majority of healthcare delivery will begin on a platform like ours in the future no waiting in lines are jumping through hoops to find clinics specialists pharmacies or in network care.

I also believe the new front door will have an international entrants shaped by the U S. As innovation in telemedicine, but quickly followed in dozens of major international markets.

International is an area, we made important progress during this quarter, which I'll touch on later in my remarks.

The opportunity to digitize and consumer is a healthcare system on behalf of everyday people is one of the largest transformation in technology and innovation globally over the next decade.

And while many industry veterans have yet to realize this new model will be the primary way in which people engage with healthcare. We are quickly moving ahead in.

Investing in the brand the experiences the technology and the capabilities for the future.

Given this opportunity our strategy is long term oriented ever.

Everything we do is in service of an opportunity that will continue to accelerate and grow over years, both in the U S and overseas.

Our investments in infrastructure differentiated technology and capabilities and our continued excellence in building long term equity in our brand will be how we win.

I've often spoken about our plans for continued specialty expansion international ambitions and strategic technologies and defensible infrastructure I'm proud to say this quarter was one where we took large strides in laying foundation across all three of these areas.

Our investments here are the crux of our strategy to build a differentiated healthcare platform for consumers let.

Let me share a little bit about each.

As of this quarter Hims is fully rolled out in four major specialty categories sexual health dermatology primary care and most recently behavioral health.

Each specialty is growing quickly layering diversity into our business as we scale.

And while early categories, such as sexual health continue to scale, our newest categories, such as psychiatric services therapy and broad behavioral health are growing the fastest.

Our behavioral health specialty has the potential to be a meaningful pillar for him and hers offering a differentiated service relative to other providers as we combined psychiatry live group sessions and individualized therapy within a unified platform.

This quarter, we launched our behavioral health dashboard, allowing customers a centralized hub for flexible and affordable mental health services.

Within their dashboard patients can coordinate care select providers schedule therapy appointments track their progress messages or psychiatrist and manage the medications.

All from one mobile first system.

From the consumer demand, we've seen to date and the early acceleration of that business. We believe this specialty to be a foundational pillar of the company in the future.

Differentiated by the comprehensive set of services and offerings from Psychiatry and life group sessions to Individualize psychotherapy, we believe the HIMSS in Hurst mental health platform offer something truly unique to patients in need.

With nearly 80% of our patients leveraging our psychiatric services reporting improvements to their mental health our team is more motivated than ever to double down on these initiatives.

This new category only fully released this quarter is just another data point proving our consumer first business model can and will scale as we continue to introduce more offerings and categories.

We expect the future of the company to progress like its past.

Rapid expansion into new specialties, frankly, doubling the number of core categories were in by 2025.

The same approach the same model getting more efficient and delivering more value along the way.

As I've mentioned before we believe him and her has a unique opportunity to become a consolidator and ultimately the leader in this digital transformation of consumer health.

Every month, we see dozens of opportunities to acquire teams technologies and brands to help accelerate the reality of our vision.

The HIMSS and her brand as an attractive strategic partner for many innovators in the space, providing us ongoing access to deal opportunities.

We've looked at hundreds of these companies over the last few years with few generating excitement for management.

This quarter I was thrilled to share that we announced two transactions that not only fits squarely into our long term vision, but accelerate our ongoing initiatives specifically relating to our international ambitions and investment in differentiated technologies and capabilities. So let me take a moment to provide some color from both of these.

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First we acquired honest health, which accelerates our geographic expansion with operational capabilities to support our long term plans for the U K and Western Europe led by Sam and Pablo honest health has demonstrated a powerful combination of leadership.

<unk> and innovation and digital health that will further elevate our ability to provide the HIMSS and her experience to a new segment of consumers in the U K and beyond.

Similar to our commitment to expand into more specialty categories in the coming years, we too have the same ambition in key international markets.

I believe the new front door to healthcare will be open to a worldwide audience and as such we will continue to find opportunities to invest both organically and inorganically and teams and infrastructure for that global future.

In our second announced acquisition this quarter, we acquired apostrophe, a leading tele dermatology platform and compounding pharmacy in the U S.

As I've shared before clinical dermatology today stands at a staggering 44 billion dollar market.

However, what is even more staggering is the retail dermatology market think sephora stands at a whopping 150 billion dollar market.

It is my belief shared with the founders of the posture fee that over the next five years innovative platforms, such as HIMSS and hers, an apostrophe will continue to move market share from retail to clinical.

Why pay $50 for an over the counter cream with no studied clinical efficacy when a personalized bespoke prescription treatment can be compounded for specific needs and delivered to your door within days for the same price.

My long term belief in this market transformation is at the core of why we acquired apostrophe.

Built upon their Arizona based compounding pharmacy apostrophe has garnered deep love from their consumers with revenue growing at 120% CAGR over the last four years and building one of the most loyal and diverse patient populations in dermatology.

This acquisition was a no brainer for management.

Dermatology market is so large and growing so quickly that the front door as I've spoken about needs to be broad.

Apostrophe widened that door with a new brand entrants for new segment of consumers.

Dermatology was the second fastest year over year category last quarter yeah.

Acquisition increases both the volume and variety of our dermatology consumers and even more importantly, this investment in infrastructure is second to none accelerating many of our existing initiatives.

Ben Hulburt, founder and CEO of Apostrophe has built a company capable of delivering a range of bespoke clinical compounds for dermatology conditions, ranging from melasma to hormonal acne.

His custom formulations provide patients with a degree of personalization rarely found in even the most high end dermatology offices.

Furthermore, potential for leveraging this compounding infrastructure in new avenues, not only in dermatology, but for future personalized experiences are vast and exciting.

These types of capabilities change the game for clinical Optionality patient personalization and ultimately customer delight.

With a posture fee hinson her strength things our competitive capabilities in dermatology unlocking our ability to accelerate the expansion of treatments and categories on behalf of customers across the United States.

At the core of our success and quick scale is a differentiated platform for both consumers and physicians and an integrated pharmacy system and medical fulfillment center capable of delivering a seamless end to end experience for the customer.

As a technologist for the last 15 years I have a deep belief that defensible infrastructure and software is a significant advantage to our company.

A pillar of our long term competitive strategy is differentiated capabilities through proprietary infrastructure and medical capabilities I believe it streamlines efficiency of the legacy healthcare system and unlocks uniquely seamless consumer experiences.

As such our investments this past quarter are reflective of a modern approach to building a defensible healthcare company.

Last year, nearly all of our pharmaceutical delivery.

Over the counter fulfillment and topical compounding capabilities for outsourced to third parties.

Today, just one year later I can report that nearly 50% of our order volume is now being fulfilled out of our Ohio pharmacy and fulfillment center.

This 300000 square foot centralized hub has been a large investment in technology off we're an infrastructure with a vision towards non reliance on third parties and a platform suited with unique capabilities.

I'm excited to share by year end 2022, we believe nearly 100% of our services and treatment will be filled via our hurdle collided infrastructure further unlocking efficiencies and capabilities consumers are looking for.

In addition to the purchase of honest in the U K the <unk>.

Strategic acquisition and integration of apostrophes and their compounding capabilities and the quick rollout of our Ohio based pharmacy and fulfillment services.

Also have been investing deeply this quarter and our anticipated mobile platform in insurance offering.

Everyday consumers search for him his and hers across the iOS and Android App stores, our brand and consumer awareness drives people to find us across all of their devices and we're working hard to build what we believe will be an exceptionally unique experience for them.

One should look for exciting announcements regarding our mobile platform in the coming quarters.

Our teams are hard at work designing and building what I believe to be the future home for him and her members a home that helps drive deeper engagement and ultimately healthier lives.

In addition, our team continues the integration of insurance reimbursement as part of the hands in hers platform.

This is a key component to affordability for certain types of care and patient populations, which is core to our mission of expanding access for everyone expect to hear more about this rollout in the second half of this year.

While early in our company's life.

Road ahead is as clear as day.

More specialty condition that consumers love like our newest offerings in psychiatry.

Our investments in personalization and bespoke treatment capabilities like apostrophe and.

And more laying the global groundwork to take this model.

So clearly the healthcare model of the future to more markets overseas.

All in service of delivering personalized healthcare at scale that people love.

I've said this before but our organization is made up of people passionate about building the future of healthcare, we pride ourselves on being visionary in our sector sustaining consistent execution and delivering growth and I feel this quarter is again highly reflective of our ability to be the leader in this transformation.

With that I want to thank everyone on our team who has continued unwavering focus on our vision is driving such outperformance and welcome. The teams at apostrophe, an honest health to the family we couldn't be more excited about our future together.

I'll now turn the time over to Spencer, who can share more about this past quarter's results.

Thank you Andrew I'm pleased to report another incredibly strong financial quarter for Q2, I'll walk through the details behind our performance for the quarter provide some high level details on our recent acquisitions and discuss our revised upward guidance for Q3 and the full year first let's jump into the Q2 results from my perch.

Q2 was another three months of the continued long term secular trends that we've been describing to investors and the public.

There's a set of really personal medical conditions that people deeply care about where there's always been deep consumer demand for treatments, but numerous barriers and market, including accessibility price stigma trust and especially experience have prevented or deterred consumers are actively seeking the treatment they want.

In the last 12 months, we've met with numerous investors and we often get the question won't consumers just go get your products and services for cheaper somewhere else our results, especially in Q2 provide a definitive answer absolutely not these types of questions fundamentally assume that experience doesn't matter to people.

Which is ironic to assume or expect that in healthcare experience doesn't matter Atkins and hers, we understand that in healthcare experience matters, a lot to consumers as much and often more than for any other industry.

This attitude in healthcare that ignores consumer experience is why so many are frustrated with the healthcare system and it's why it's one of the lowest NPS industries in the country and this has been our opportunity.

Our laser focus on building and constantly improving set of experiences that consumers love that motivate and inspire people to seek the treatment. They need we have demonstrated that subtle improvements and experience can drive meaningful increases in conversion and retention demonstrating that for healthcare consumers experience truly.

Matters.

<unk> also built and heavily invested in our brands that people Trust and love, we have unlock and mobilized an audience that is clearly seeking an alternative to the traditional healthcare system. When we survey our customers who purchased medication on our platform, 80% tell us they are purchasing the medication for the first time the.

The combination of a world class experience aimed at a shockingly underserved audience wrapped in a beloved and trusted brand. This has allowed us to harness the deep underserved demand that lives in the market consumers are voting with their wallets and they are clearly voting for him and her.

As a result in Q2, we added nearly 200000 subscriptions to the platform versus Q2 of last year up 76% year over year to 453000 subscriptions in our most recent investor presentation that we filed in June we showed that within our oldest subscriber cohort we are driving 88 per.

<unk> long term revenue retention in year, three as compared to your to the.

The combination of continuing to captured deep consumer demand driving strong new customer growth and strong retention resulted in Q2 revenues of $67 million, an increase of 69% year over year exceeding the high end of our Q2 revenue guidance of $57 million.

In Q2, we generated 786000, net orders, which accelerated to 37% year over year growth growth in net orders was primarily driven by growth in subscriptions and strong retention of existing customers.

Average order value or <unk> in Q2 was $74, which increased 28% year over year.

He was in line with Q1, which was expected as we are now well into our second year of uptake into bigger bundles and multi month subscriptions as we discussed on our previous earnings call in.

In Q2, we generated a 78% gross margin up 700 basis points versus 71% in Q2 of 2020, the combination of strong revenue growth and expanding gross margins compounded to generate even faster gross profit growth up 84% year over year, our focus over the last two years.

On expanding unit economics, and increasing subscriber lifetime values has not only driven rapid revenue growth, but also year over year gross margin expansion at the same time in our most recent investor presentation filed in June on page 13, we showed the incredible impact our execution has had on our subscriber unit economics.

Yes.

Our 2020 subscriber cohort, we meaningfully improved retention as evidenced by the increasing slope of the cohort curve compared to prior cohorts. We also increased monetization through larger product bundles and multi month subscriptions, which increased <unk> such that the average subscriber acquired in 2020 generated 306.

$3 in revenue in their first 12 months compared to $191 for the average subscriber in 2018, that's a 90% improvement in fact, the average subscriber in 2020 generating nearly the same amount of revenue in their first 12 months as an average subscriber in 2018 generated over the.

Course of three years $363 compared to $384 respectively.

All while also delivering on long term revenue retention of 88% and our oldest subscriber cohort.

All of our hard work, improving and expanding our product offerings enhancing the user experience and developing marketing campaigns and brand assets that connect with our audience. All have served to increase retention, increasing a b's expand ltvs drive broader awareness increased traffic and improved conversion.

Ltvs effectively make our marketing more efficient, which has allowed us to drive incredibly efficient growth.

In Q2, our adjusted EBITDA loss was $4.7 million meaningfully outperforming our Q2 loss guidance of $10 million to $12 million.

In Q2, our marketing expenses increased by less than $1 million quarter over quarter, while revenues increased by $8.4 million over the same period.

This level of growth efficiency further highlights the impact that improving the fundamental customer experience that drive higher engagement conversion and ltvs can have on both growth and efficiency.

I wanted to note that in Q2, we expense $2.9 million in costs related to the acquisitions of helping apostrophe in SG&A, which we've added back to adjusted EBITDA.

So I wanted to note that honest health closed on June 11.

Immaterial impact on our Q2 financial results contributing less than $100000 in revenue for the period.

Speaking of honest health in June we acquired honest held for $10 million, primarily in store with over half of the purchase consideration deferred and to be paid out over time.

There's also an additional $10 million earn out component to be paid primarily in cash upon the achievement of certain future revenue targets.

We also completed the acquisition of apostrophe in July for $150 million of which approximately $50 million was paid in cash in July.

Apostrophe also includes an additional earn out component of $50 million to be paid in cash upon the achievement of certain future revenue targets.

How do you, possibly transaction closed in Q2 pro forma for the cash used in the transaction, we would have had $269 million in cash and short term investments as of June 30.

In Q3, we expect honest health, an apostrophe to generate between $4 million to $5 million in revenue. We also expect our consolidated gross margins to be between 74% and 76% in Q3, which was driven by continued steady margins from him his and hers and a weighted average impact of lower margins from apostrophe.

We also expect a overuse of decreased slightly in Q3 to 72 to $73 as a result of the acquisitions overall as Andrew mentioned, we are incredibly excited about the tremendous opportunity in both of these acquisitions represent they provide key assets and leadership to take more share address massive market and ACA.

Accelerate growth in important strategic areas. It's early days for both on and felt an apostrophe and we see the same opportunities to enhance unit economics expand margins and drive efficient growth that we saw at HIMSS in hers not too long ago now moving on to financial guidance for Q3.2021.

We are raising our revenue range $2.69 million to $71 million and are guiding to an adjusted EBITDA loss of $9 million to $11 million I want to note for Q3, we expect to expense approximately $4 million to $5 million and additional costs associated with the honest health, an apostrophe acquisitions, which will be expense through S. G.

Ne and added back to adjusted EBITDA.

We also expect marketing expenses to increase by $9 million to $11 million quarter over quarter, driven by one inheriting the ongoing marketing expenses of honest, helping apostrophe and to cost associated with celebrity endorsement agreements, including Miley Cyrus, which will include approximately $2 million to $3 million in stock based compensation.

Expenses within marketing expense in addition to other cash based expenses.

We expect total stock based compensation expenses for Q3 to be between $12 million to $14 million for.

For the full year 2021, we are raising our revenue guidance to a range of $251 million to $255 million, an increase of $29 million at the midpoint versus our previous guidance.

We are narrowing the range for adjusted EBITDA losses to $35 million to $40 million for the year.

Similar to last quarter's guidance current internal financial forecast as Q4 revenues roughly in line with Q3 or Q4 revenue guidance can be implied from our full year guidance of $69 million to $71 million as I mentioned on our last call as a young and newly public company, we intend to provide guidance that we are constantly.

And our ability to achieve based on the current data points, we see in the business given the data points. We have from last year, we feel like it is appropriate to keep our Q4 revenue guidance in line with Q3 final.

Finally, I wanted to provide a brief update on our share count given that both our announced warrant redemption and the apostrophe acquisition happened after quarter end.

As of 630, we had approximately 193 million common shares outstanding 8 million warrants 17 million options and 4 million <unk> for a gross total of 222 million shares the warrants and options include a weighted average strike price of $10.89, and $3.28, respectively.

We expect warrant redemptions to eliminate 7.6 million warrants and to issue approximately 2 million shares of common stock through the redemption.

We issued $8.1 million shares and 700000 Rfps in July in connection with the apostrophe acquisition pro forma for these two transactions. We would have had approximately 203 million common shares outstanding 600000, warrants 17 million options and $4.6 million of our shoes for a total gross.

<unk> of approximately 225 million shares.

We are exceptionally pleased with the results we were able to deliver in Q2, the strength of our financial performance in the first half of the year and the strong guidance for the second half really highlight the power of our core differentiation across audience brand and experience, we are absolutely resonating with and delivering on all fronts for a generation.

Technology first and experience oriented buyers, who are seeking help for deeply personal medical conditions. We continue to see strong investment opportunities ahead, including our partnerships with Jennifer Lopez and now Miley Cyrus, which all further validate the quality and power of the brand that we've built and our ability to uniquely reach an audience of burn.

Savvy consumers our full year revenue guidance now represents a year over year growth rates of 69% to 71% for 2021 in fact, the midpoint of $253 million in revenue is now substantially ahead of the 2022 revenue guidance of $233 million, we provided last year.

Feels pretty good to deliver over two years' worth of growth in just 12 months I look forward to a strong second half of the year with that we can open the call to questions operator.

Thank you at this time I would like to inform everyone in order to ask a question. Please press star one on your telephone keypad.

We have your first question from calorie Linda Dale Landra Singh with Credit Suisse. Your line is open.

Yeah.

Hi, This is actually Adam on for Julien today. Thanks for taking the question congrats congrats on the quarter and the two acquisitions you guys are now closed.

I wanted to just step back and just ask about some other developments in our marketplace, but.

Specifically around OSM, so curious to get your take on solutions that often is rolling out in the at home store.

And I know, it's early since their launch plus the more solutions coming out, but you know I guess, just how do you think about a large scale players such as optum entering the markets and making the market more competitive at this point.

Thanks, Alan that's a great question.

I think we'll look at what they've done and I think theres a number of players that are starting to think about moving towards.

This type of an operation.

I think where we're really we think of ourselves as different is this ability to build truly a beginning to end experience for the consumer that people love right and this is not traditional healthcare talk just as traditional consumer Internet talk actually right at its core.

And so from the moment people come to us.

Get educated out about a specific condition to that comfort in knowing the meeting with a specialist and then all the way down funnel when they're getting a personalized treatment delivered to their door that that that was actually made exactly for them right and built for them by their provider in their physician groups.

That is really special and I think it's really unique and so.

I'm excited that the investment dollars moving into the space, because frankly, a lot of people need help in this country, but I think the reality is that you've got a four trillion dollar market of which I think about 80% of healthcare delivery is going to be moving towards essentially delivery service that looks like him and her in the next five or 10 years.

And so this market is massive.

I think one of the things that is practically around reality is that.

You know there has been a tremendous amount of investments in this space in the last couple of years, especially going into Covid.

And none of these external factors have frankly impacted our core business at all right. We've got increasing revenue growth accelerating 70% upwards guidance. This year subscriptions growing incredibly gross margins growing to an all time high as we expand and innovate into new categories and new services and so on.

Havent seen these external factors affect us to date, nor do I expect frankly for any of these elements to affect us in the future I think we have a a ridiculously focused vision of delivering a world class consumer experience from start to finish and I think that's really different frankly than most things in market.

Got it and then as a follow up I just wanted to go back to the kind of mix of growth coming from <unk> and net orders so with apostrophe, an honest self coming on board, how should we be thinking about.

The opportunity there for AWS to accelerate once youre able to refine their existing pricing subscription types and alongside the launch of new products.

Yeah.

Yeah. So I think for both acquisitions in the near term for Q3, I'm gonna be guided to a little.

Margin compression and slightly lower <unk> in Q3, and frankly that opportunity that youre describing is was one of the main strategic reasons. Why we were so excited about these acquisition opportunities.

It's early days for on his health, an apostrophe and their businesses are in a fairly similar place where we were a couple of years ago and we have executed on that playbook have unlocked a ton of value in terms of expanding margins growing adobe's, improving unit economics growing ltvs and PC.

The exact same opportunity with these two assets and know that playbook well. So I think you can expect us to work really hard and capture this opportunity and unlock this value here in the near term.

Got it thank you.

We have your next question from Daniel Crosslight with Citi. Your line is open.

Hi, guys. Thanks for taking the question and congrats on another strong quarter here.

Some of your competitors have seen pretty dramatic increases in CAC, particularly on the mental health side of the business. It doesn't appear that you've seen quite as a dramatic increase I'm. Just curious how you shifted your business or marketing campaigns to offset some persistently high direct response AD rates and as you know I think kind of in relation to <unk>.

Until health in particular would be very helpful.

Yeah, that's a great question, Danielle and I think the.

The ability to maintain.

<unk> see on the acquisition side is is a part of the engine and expertise that I think we've built in the last few years, specifically on mental health. What I think is very unique about about that category for us and it's similar to all the other categories in our business is.

Those two are 100% of those patients coming to us for first time buyers right. These are people who are being activated by the brand if we're being activated by our D. Stigmatization campaigns by the fact that we're partnering with with celebrities to talk authentically about different issues that are struggling with.

And then they're coming to us getting educated on our blog there talking to the psychiatrist and they're learning about options.

And then down funnel converting and I think that's a really different.

Experience from traditional players in mental health. So I think it's worth mentioning because I think that's really where an expertise exists within this company, which is <unk>.

Targeting customers, who we know could use help leveraging a bridge to give them a trusted place to be exposed them to be vulnerable connecting with education that makes them feel like they are in the right place and then ultimately help them downstream and I think that's been a really big part of across all of our categories.

<unk> been able this year to frankly spend tremendous amounts of marketing at a more efficient rate youth.

Usually it's the opposite right you're spending warrants going in the wrong direction, and I think that capability that engine and expertise. We spent a lot of time on and I think he meant all in particular.

It's the extra focus and the other thing I would add there that I think has been a huge advantage to ours is the comprehensive.

Service services provided within our mental health offering this is not just simple.

Group therapy conversations its not just simple text based chat with a therapist. It's not just like Yatra is all of that it flies group sessions for core topics.

Such as grief management or anxiety and depression are parenting during COVID-19.

All of these services together in one place.

It's an incredible amount of efficiency and leverage at the front door right. If you think about it you can you can message and market a unified whole.

And hub for all of these these offering and then downstream convert appropriately into the right selection and so I think that differentiated I think more comprehensive set of offerings compared to what the market has also created a tremendous amount of leverage when you think about efficiency and driving acquisition on the Dr side of the house and Spencer I'll, let you add anything.

Alastair.

I mean to put a finer point on our Q2 performance I mean, Q2 was an incredibly efficient quarter.

Our tax in Q2 were roughly in line with where they were in Q1, so others in market to the extent that they're seeing upwards pressure you've been able to maintain in Q1 for us was already already in arguably very efficient quarter.

I think where this manifests itself is the fact that in Q2, our marketing expenses increased by less than $10 million quarter over quarter, but revenue increased by $84 million over the same period. So the level of efficiency that we're able to generate and strategically investing in brand and driving organic traffic and having them.

<unk> diversified.

Marketing mix is our budget strategy has.

You can see beginning to pay off in the broad efficiency that we've been able to generate year to date.

Got it very helpful and as we look at implied adjusted EBITDA guidance for Q looks like you're assuming at the midpoint around 4 million Bucks of sequential EBITDA degradation.

Whats driving that degradation in <unk> should we think about gross margins kind of stabilizing in the mid Seventy's range and you're just making some more investments in the back half of the year.

Yes.

Adjusted EBITDA, I mean, I think high level.

The quarter that we just put up right demonstrates just the level of efficiency and leverage that we have in the business right. In Q2 effective we are monthly EBITDA loss was about $1 million of house per month.

I think there is a clear path to profitability for us just given the performance that we put up in Q2 I think on your window.

Rest of the year for the second half of the year, we're really excited about the investment opportunities and ability to drive efficient growth that we're seeing in the second half of the year I mean, one investing in them and a big new market like the U K with honest health.

Vesting and a $40 billion category and continuing to take share in that massive dermatology category with a brand like apostrophe and investing in behavioral health, which is already the fastest growing business line in the whole company. So there's just tremendous opportunities that we're seeing in the second half of the year to continue to invest in growth.

And invest efficiently.

That's that's what we're guiding to.

Got it thanks guys.

We have your next question from Michael Cherny with Bank of America. Your line is open.

Hi, This is Charlotte on for Mike. Thanks for taking my question I was just wondering if you could provide some more color on how youre thinking about category expansion.

Hi, Thanks, so much for the question.

I think at a high level. The way you should think about it is fairly reflected to what we've seen in the past right I think the future will look relatively simple are similar which is.

Probably systematic expansion into specialty categories that we know are patients absolutely need them. So when we started the business. There was a core focus on hair care on sexual health for men. We then launched dermatology psychiatric services.

And it's these four categories along with primary primary care that are the core of the business today is three to four years in right. Since we founded it I think it's our expectation that you can expect to see that number of categories like the double by 2025, and I think we have an immense amount of connectivity and.

Relationship with these patients frankly to understand where to go next and I think that was a big part of how we got to the psychiatric service offering and ultimately why it's one of the fastest growing categories within the business I mean, its because we understand these patients and we're treating them on a daily basis, and so I think you should expect the same kind of systematic expansion would not the tight.

A team just just to be honest, that's throwing a tremendous amount of things against the wall and seeing what sticks. That's just not that's not who we are I think we want to understand the fundamentals of an existing category understand why there's so much friction in it understand my patients aren't seeking care how to remove costs how to remove stigma.

Remember all of the elements getting away at them really thoughtfully launch it in a way we know it's going to be received exceptionally well and I think that's really what you've seen on the derm side of the business as well as the psychiatry side of the business and I think that's what you should expect in the next few years.

Yeah.

Great. Thank you.

Again, if you would like to ask a question. Please press star one on your telephone keypad again that is star one to ask a question.

We have your next question from Jessica <unk> with Piper Sandler Your line is open.

Hi, Thank you for taking my question and congratulations on the quarter.

So I guess, maybe just building off that question just prior how are you thinking about maybe the trade off between expanding into new specialties, and then just building kind of density of providers in your existing specialty and then further to that how are you employing the providers.

Within each of our specialties today or are they independent contractors or employees, how does that work.

Awesome, that's great question.

I think I think I kind of touched on this in the last question, but you know we believe that each of the core categories. We're in today sexual health dermatology psychiatric services primary care. These are deep deep categories, let's take dermatology is as an example, and it's you know related to apostrophe an acquisition. We made this quarter no that's it.

<unk> 40 billion dollar clinical dermatology market.

I think what's most interesting about this market and it's similar to a lot of the other markets. We're talking about there's a $150 billion retail dermatology market think sephora.

I think in the next five years Theres going be rapid dollar shifting from retail to clinical dermatology, because if you can get an affordable prescription that's compounded and bespoke exactly for your skin that that works with clinical efficacy why would you then spend the same amount of money on something that that really doesn't have that clinical efficacy. So I think all of these.

Laurie is that we're in today are going to continue to be rapidly expanding and I think that's why you know.

Spencer put forward a guidance raised 78% year over year, we believe there's very robust growth within them and then when you look at the pharmaceutical side of the house essentially that the percentage of these patients suffering in the U S are actually getting treated each of these conditions, it's 1% to 2% penetration.

These are massive markets very under penetrated and so we think there's years of continued robust growth within them and so for that reason the expansion in systematic right. We are introducing new categories that we believe are capable of being pillars in the company in the next five and 10 years and so a lot of focus internally.

A lot of strategic focus on maybe one or two new categories every single year, but it's weighted just for some color context, it's weighted in that that type of a manner because of the robust amount of opportunity we see in the core the core experiences that we have today.

And with respect to.

How are our providers are employed the vast vast majority are 10, 99 contractors and paid on an hourly basis.

Thank you that's helpful. If I could.

Follow up with one quick one.

I mean on the ramp of <unk> and pharmacy fulfillment center in Ohio, what are kind of the incremental ongoing costs and operating at that facility and we're wherever they find that in our P&L.

Yes, so all of the cost to run the facility are run through SG&A effectively.

And you know a lot of the fixed costs are already in place. So the biggest chunks of this are things like rent expense.

The capex that we've already spent to build out the facility and install machinery, which is flowing through the P&L through depreciation expense in SG&A.

Primary variable expense that exists going forward as we ramp this up is essentially labor right. So staffing up the warehouse down staffing up the pharmacist as we increased volume through the facility, but the fixed costs already exist in the P&L today and as we ramp up volume we're just.

Going to windup amortizing all of these fixed costs over a larger order base essentially getting operating leverage out of G&A as we increase volume overtime and overtime I think we shared this in a few calls at.

At this point, but we expect in the long run that we'll be able to get an additional one to two points of operating margin as we scale this and sort of fully fully utilized the facility.

Got it thank you.

We have your next question from Ivan Fine said with Tigress Financial Partners. Your line is open.

Thanks for taking my call and congratulations on another great quarter and the ongoing progress.

Can you dive in a.

A little bit more detail on your M&A strategy and your product development like where do you see the opportunity to acquire or how do you measure the opportunity to acquire versus development.

One line of products like you did with apostrophe as an example.

Yeah. That's a great question. Thank you for that I think at a high level.

And I think we've shared this in the past.

Core business on his and hers it continuing to grow extremely fast rate and so from a focus standpoint.

The vast majority of focus is internally, we believe those categories.

Last question a massive we believe they are accelerating and we believe the adoption rates are increasing we believe they're going to take more share and we believe we can activate these patients and are really unified.

Unique way and so.

Most of those efforts internal.

I think what we have realized.

And just provide color on the strategy.

His and hers is incredibly strategic partner for a modest innovators I think they look to us as a partner they're excited to work with.

Look to us as an opportunity to find leverage in their business as Spencer was talking about with an apostrophe theres an operational capability that we have that can help unlock accelerated efficiency on their behalf and so while hundreds of these opportunities and are quite literally hundreds of these.

Come through Spencer and I, our inbox and desk, probably on a yearly basis.

Very very few ever meet.

Criteria that guest management excited I think it's a rare opportunity to find unique talent.

Any capabilities or experiences.

Our unique infrastructure that can unlock some type of world class next level customer experience right and so when you look at apostrophe. When you look at honest helped with those teams have done is built a degree of infrastructure and capabilities capable of creating.

Bespoke personalized treatments for patients that are incredibly rare to find even at the most expensive dermatology office or hair care office specialist, it's incredibly hard to find them. If you do it is hundreds of dollars and they've built an infrastructure capable of delivering that at scale and so that was one of the few diamonds in the rough service.

Yeah.

But I think we are opportunistically, keeping our eyes open right. We have a vision for what we believe is a five and 10 year plan to transition the vast majority of healthcare delivery to a platform like Hinson hurts I strongly believe that's going to happen and so there will be opportunistic opportunities to accelerate expertise with team.

Accelerate accelerate the brand entrances more front doors into this healthcare system metric different customer segments or provide an integrate differentiated capabilities and infrastructure that give us more defensible.

More defensible optionality and better treatments more personalized treatments on behalf of of the market. So maybe that's a little bit of color on how we think about the trade off there and the focus there.

And you said earlier that you kind of I'm going to let you know.

Client base like guide, where youre going to want to go with new products, what kind of feedback or guidance, so far you're experiencing.

Customers want to see.

Additional services and products.

Yes.

Where we see demand is.

Fairly straightforward when you understand this patient population and we have a very unique patient population. It's first time buyers. These are not patients that have been treated by chronic care specialists for a decade and are trying to fill a prescription fill a prescription cheaply online that's not our customer our customer is the first time buyer.

They're young they're millennial in their twenty's early thirties, and they're concerned about something and they come to us I think with that anxiety right. They come to us concerned and self conscious and looking for somebody to tell them. They are in the right place and tell them that we can help them navigate to feeling better and so the psychiatric services that was something we heard.

Loud and clear for a very very long time.

So tremendous amounts of investment in the past and in the future in that category.

More behavioral health related items burnout sleep deeper types of depression. These are also exceptionally comment. So I think you should expect us to get more invested in that category would you also what you also see frankly is people concerned about more chronic conditions.

Not necessarily sure how would you go in and get treated or established baseline. So you have a lot of patients that are in their thirties kind of coming of age into their forty's and they're concerned about weight management.

30, 40 pounds overweight or they're concerned not concerned about diabetes, because it's in their family or they're concerned because the last blood test of their annual was high.

High cholesterol high lipids profile right. So you're starting to identified patients I think that are at that crux in life. When they are out there, they're becoming aware of the more chronic nature condition.

But theyre looking at a platform like ours, who can seamlessly onboard them and educate them and take care of it and so I think those are also categories. We really believe are widespread within our customer base and it's an opportunity for us to grow with these patients and increase the lifetime value with these patients in the next five and 10 years.

And then on geographic expansion.

You expanded into Europe with the acquisition of honest.

What other.

AGA fees, you think create the best opportunities for you and how do you go about entering those do you think it will be through an acquisition or you can just what kind of.

Barriers to entry are there for international expansion.

Yes, it's a great question, we're exceptionally excited about honest and I think it's reflective of the type of international expansion you should expect for us whether that's an organic.

Investment or an inorganic which as you have a market in the U K and also in Western Europe, where you have similar consumer dynamics consumer expectations consumer frustration with the healthcare market.

At the same type of frictions exists in high cost exist.

At the same type of delay it might take with NHS. It might take weeks for you to schedule, an appointment or even months to meet with a therapist.

So I think we look for markets, where theres similar consumer dynamics, but also similar regulatory right. I think we are in the early days in the last let's say three to five years of the U S really.

Coming to a point, where it's accepting the synchronous and asynchronous modalities for telemedicine.

I think COVID-19 really helped accelerate people's awareness of the benefits of these types of dynamics and so I think the international markets are catching up I think you see in the U K and Australia.

Germany.

In Canada, a lot of these markets are starting to get to a place where it makes a lot of sense for us to take a look and then also two years ago pre COVID-19, but spent a lot of time in Asia and the middle East meeting with their health systems and meeting with.

Their their governments and regulation teams and they are also looking at the U S innovation and.

I'm trying to figure out when they can do the same thing and so I think.

Key Asian markets and the Middle East, you'll also have that coming just probably a couple of years behind those others that we first mentioned.

Thank you and congratulations on the great results again.

Thank you Ivan.

I'm showing no further questions at this time I would now like to turn it back to Mr entry Didnt for any closing remarks.

Awesome. Thank you and thank you all for joining today.

Thank you for the great questions I want to send a special thank you to our team to apostrophe to honest, we're exceptionally excited and proud of everything that you guys have accomplished today and then looking forward to sharing more with you all very soon so everyone. Please have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

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