Q3 2022 Hims & Hers Health Inc Earnings Call
Good afternoon, everyone and welcome to the third quarter 2022 earnings call. My name is Lisa and I'll be your operator today.
At this time all parties are any of us and only mode until we conduct a question and answer session at which time instructions will follow now I'll turn the call over to Christine Greenie from the Blue shirt group to begin.
Good afternoon, ladies and gentlemen, and welcome to the HIMSS and Hurts health third quarter 2022 earnings call.
On the call with me today is Andrew Dude, I'm co founder and Chief Executive Officer.
Well it would be I mean, okay, Chief financial officer.
Before I hand, you over to Andrew I need to remind you of legal safe Harbor and cautionary declarations.
Statements and projections of future results made in this presentation constitute forward looking statements that are based on our current market competitors and regulatory expectations.
And are subject to risks and uncertainties that could cause actual results to vary materially.
We take no obligation to update publicly any forward looking statements. After this call.
Whether as a result of new information future events changed.
And assumptions or otherwise.
Please see our most recently filed 10-Q and 10-K reports for a discussion of risk factors as they relate to forward looking statements.
In today's presentation, we have certain non-GAAP financial measures. We refer you to the reconciliation table contained in today's press release.
Available on our Investor Relations website for reconciliation to the most directly comparable GAAP financial measures and related information.
You'll find a link to the webcast on Investor Relations website at investors got forehand dotcom.
After the call. This webcast will be archived on the website for 12 months.
And with that I will now turn the call over to Andrew to begin.
Thanks, Christine good afternoon, everyone and thank you all for joining us today.
I'm proud to share the results of another record quarter as we continue on our mission to make health and wellness more accessible than ever before.
The power of our trusted brand innovative technologies and seamless customer experience continue to lay the foundation for a robust and consistent growth.
After a very strong first half business trends further accelerated in Q3.
Revenue, which was predominantly driven by recurring online subscriptions grew 95% reaching $145 million for.
For the third straight quarter, we saw sequential growth in the number of net new subscriptions are up 174000 to nearly 1 million subscriptions.
We are building tremendous scale, which had a meaningful impact on the bottom line.
During the quarter adjusted EBITDA loss was a relatively modest $6 million.
Even more exciting is the adjusted EBIT guidance, we're providing today, which anticipates our transition to profitability beginning in Q4.
We've been on this path since inception, and it is particularly gratifying to see this organically materialized.
Underlying strength of our model and ongoing momentum across the business gives us confidence that we can operate profitably on a go forward basis, while continuing to invest for growth.
During the third quarter growth was driven by multiple offerings strong consumer adoption of the HIMSS in her platform and record subscription growth.
Underpinning. These incredible results is our transformational business model and World class teams were executing with critical precision.
This is evident across the business from the creativity and increased reach of our marketing campaigns to the speed of innovation across our expanding compounding capabilities and strengthening infrastructure.
The muscle we're building has not only enabled us to drive growth and build scale at unprecedented levels to date. So we'll continue to pay dividends for years to come.
The underlying strength of our model and accelerating momentum has allowed us to double down on our business. We continue to see success in our traditional marketing channels and continue to successfully scale investment in the long term development of our brand and technology platform.
Each of these has been a critical part of our success in 2022, we expect these investments will continue to drive traffic and long term tailwind in the quarters ahead.
It is clear there is tremendous white space in front of us as we redefine how individual think about their own health and wellness by offering a superior level of care and product breadth at incredible value.
As we see this opportunity we are building a best in class Foundation that we believe will compound over many years.
From day, one we are acting with discipline to establish building blocks that we can leverage as we scale and equally important we've harnessed key learnings along the way.
Now at a time when others may be pulling back or fully hitting the brakes on new investments, we're taking advantage of marketplace opportunities to continue building long term foundational elements throughout our business.
In 2022, we've been expanding our bench with the addition of top tier talent to support our growth.
This includes key hires in R&D fulfillment communications and finance.
In the third quarter alone we brought on our first Chief Communications Officer, and a new VP of fulfillment operation.
Amidst an incredibly dynamic and volatile macro environment, we are operating and investing from a position of strength.
Key to our consistent execution is our ongoing focus on our three key growth pillars brand technology and experience.
Since founding the company we have made every decision with at least one of these pillars in mind and the success, we've experienced thus far in 'twenty two and in the third quarter, specifically is a testament to that model and focus.
Our ability to win in this challenging environment is a direct result of building each of these aspects of our business into a uniquely defensible pillar of our success.
Let me now update you on each of these starting with our brand.
The third quarter was a continuation of the strategy. We have utilized throughout all of 2022 to build greater brand awareness and brand equity.
We are thoughtfully deploying marketing dollars principally toward efficient customer acquisition and long term development of our brand.
These conversations through numerous high impression media placements create trusted relationships with a variety of consumers at a formative time in their lives, which we believe paves the way for us to become a trusted partner throughout their health and wellness journeys.
As other companies across the landscape continued to decrease their marketing investments, we have seized a significant opportunity to capture mind share generate high rois and further deepen our relationships people have with our brand.
This year, we have doubled down on high profile opportunities that focus on specific demographics and extend our reach to new audiences.
As a result, we've been able to accelerate the momentum behind our brand.
During the quarter, we saw multiple initiatives begin to yield some exciting results.
Him side of the business, we launched campaigns with the NFL during prime time games on Sunday, Monday, and Thursday night.
And on the her side, we added moments around leading programs on Hulu.
The increasing size and significance of these campaigns speaks to the strength of our brand platform, particularly as we gain a deeper understanding of our customers and how to best engage with them.
This confidence also resulted in the signing of a new celebrity partnership that will begin in early 2023.
Leave you with just that teaser for now and look forward to sharing details after the launch.
Turning now to the progress we're making on technology.
We continuously seek to engage with our customers in more personalized ways and do so via multiple platform technologies.
Following the successful rollout of our hands in hers apps on iOS in Q1, we launched on the Android platform in Q3.
Engagement on iOS, thus far has been robust and we are pleased to note that early response to the new Android offering is extremely positive.
We have been energized by the early reads of higher conversion rates and increased engagement across our mobile platforms.
It is through our websites or mobile apps, we were proud to be a trusted place for our customers to engage with health care providers become educated about their conditions and find sustainable solutions that improve their day to day wellbeing.
Building these capabilities improves our ability to personalize interactions with our customers and also gives us deeper and growing insights into how to best attract and serve them on an ongoing basis.
With the launch of our Android platform and expansion of more care entry point, we've meaningfully improved the sophistication of our routing technologies. These.
These improvements expedite the speed with which we're able to connect customers to the appropriate individuals to address their questions.
This provides a more seamless experience as well as increases the efficiency of our customer service operations.
The breadth of treatments conditions and care options continue to expand this intelligent routing platform will become an integral part of the delivery of great care.
We're also continuing to build defensible capabilities to support more personalized prescription treatments on our platform.
Notably we are building the teams and technology that will enable us to expand our product portfolio and leverage compounding capability to deliver groundbreaking personalized solutions across our categories.
This past quarter, we took possession and fully moved in to our new 25000 square foot, Arizona pharmacy, which should further help scale many of these investments.
You can expect to see us bring an increasing number of proprietary products to the marketplace and when we deliver this kind of innovation. We expect the end result to be a more sticky customer.
Looking now at our third pillar experience.
We have found that once customers are on the platform not surprisingly one of the most important parts of their experience is the relationship and quality of the healthcare provider they are engaging with.
I am incredibly proud to say that this is another aspect of our business that is improving dramatically as we scale.
We have developed a strong reputation within the medical community, which values, how we operate from both a clinical and regulatory perspective.
This is enabling us to attract quality physicians to our platform from both other digital platforms as well as brick and mortar health care.
There are a number of key factors that attract healthcare providers terms and hers.
First and foremost we are providing them with the tools to achieve significant impact with patients which is incredibly empowering.
We do this through our user friendly EMR platform mobile apps that allow for ease of access and predictive clinical education to support improved decision making.
We believe access to great health care requires great providers as such we will continue to invest in our clinical experiences to empower and attract the best medical talent and market.
In short <unk>.
Investments across brands technology and experience a model, which we think of as our company's consumer adoption flywheel are not only driving the incredible results you see today, but we believe are also setting us up for tremendous growth over the long term.
This business was founded to solve what I believe to be one of the most significant challenges in this country.
Access to affordable and excellent health and wellness solutions.
We are operating across large and untapped Tam, which requires that we remain incredibly disciplined we.
We will continue to invest in our brand technology and world class experiences and our investments will continue to be highly targeted with clearly defined goals in mind.
I'm incredibly proud of the growing number of individuals', we're able to help on a daily basis.
Given the momentum we are seeing in the business and the scale benefits. We continue to realize we are raising our 2022 guidance and now expect to eclipse $515 million in revenue this year and become adjusted EBITDA profitable beginning in Q4.
This is gratifying for us as a young company and I couldnt be more appreciative of our teams have gotten us to this point and we will continue to propel us forward.
Now I'll turn the call over to Jamie to discuss the financials and provide more details on our outlook.
Thanks, Andrew Hello, everyone and thank you for joining us today.
Start by providing additional color into our third quarter financial performance talked through the additional transparency pertaining to our cost structure a bit we are now disclosing and expand upon andrew's comments regarding our outlook for the remainder of the year.
The compounding effect of investments and strong execution across each of our pillars brand technology and customer experience resulted in continued momentum and record performance in the third quarter.
Revenue grew 95% year over year to $144 8 million, representing an eight point acceleration in year over year growth relative to the second quarter.
Revenue growth accelerated despite lapping the close of the honest helped an apostrophe acquisitions at the end of the second quarter and start of the third quarter of last year.
Our online channel was the most significant driver of growth in the quarter.
Online revenue grew 94% year over year to $139 $8 million that continues to be driven primarily by the expansion of our subscription base.
In the third quarter subscriptions on our platform increased 174000 quarter on quarter to 990, 100000, representing an 80% increase from the third quarter of last year.
While our traditional longer tenured core offerings, such as men's sexual health HIMSS here continue to drive the majority of our revenue growth. We are seeing the balance shifts at several of our more recent offerings continue to scale.
Online revenue generated per subscription in the third quarter was $141 up $9 relative to the prior quarter.
This increase was driven by higher user adoption of longer duration subscriptions as well as changes in product mix, we believe.
Our ability to continue building brand equity and trust among consumers over the last several quarters has been instrumental to our success in expanding the number of users on our platform and the amount of revenue generated per user.
In the third quarter wholesale revenue increased 136% year over year to $5 1 million.
This represents a decline of $1 million relative to the second quarter.
The primary drivers of this are seasonality trends as well as delayed inventory purchases from our partners. We expect revenue for our wholesale channel to expand slightly in the fourth quarter.
Third quarter gross margins expanded over 200 basis points quarter over quarter to 79%.
Margin expansion can be traced to a few key factors. This includes continued efficiency gains in our operations increased volume from our affiliated pharmacies and a higher mix of online channel revenue.
Notably our supply chain continues to remain durable and we remain confident that our increasing scale and actions taken in the second quarter of this year are sufficient to avoid any material disruptions.
This quarter, we have started to provide additional transparency into our operating cost structure, which can be found in our 10-Q filings going forward.
Before diving into dynamics across the components of our cost structure I'll take a moment to provide additional clarity around how to interpret the three line items.
First operations and support represents the cost of our operations team encompassing supply chain management fulfillment of orders and customer support services.
Technology and development includes costs related to the operation and enhancement of our digital platform as well as the development of new products and services.
Lastly, general and administrative costs related to corporate functions, such as finance human resources legal and other general corporate costs.
The components of marketing costs remain unchanged from our prior disclosures.
Turning now to additional granularity on expenses marketing as a percentage of revenue in the third quarter was 54% representing a slight increase over the second quarter one.
When excluding stock based compensation marketing as a percentage of revenue was 53% which is in line with our commentary last quarter.
A significant portion of our incremental investment went towards scaling new channels, which we believe carry both near and long term benefits as we bring new consumers to the platform and the long term brand equity.
As such we expect to continue investing in the development of our brand in the coming quarters and years.
That said, we have hit a critical mass of spend required to see benefit from the newer channels, such as TV and digital video.
We expect to see leverage on marketing spend in the fourth quarter as we highlighted earlier this year.
Operations and support costs as a percentage of revenue came in at 15%, both including and excluding stock based compensation.
It represents a slight decrease from the second quarter and 200 basis point improvement from the same period last year.
Historical efficiency gains in this channel have come from a shift towards fulfillment via our affiliated pharmacies better rates from several suppliers as a result of greater scale and leverage on overhead.
Technology and product development costs represented 6% of revenue in the third quarter and 5% when excluding the effects of stock based compensation.
Over the mid term, we expect investment in this area to expand as we continue to launch new capabilities on our platform as well as continuing to your vault products across each of our categories.
General and administrative costs for the third quarter were 18% of revenue. This.
This represents a 17 point improvement to the same period last year.
There may be some quarter to quarter fluctuation and the efficiency of this line. Our expectation is that we will continue to gain leverage in this area over the long term.
Excluding the impact of stock based compensation G&A costs were 13% of revenue in the third quarter.
We narrowed our adjusted EBITDA loss in the third quarter to $6 1 million adjust.
Adjusted EBIT margin was negative, 4%, representing an improvement north of 200 basis points quarter over quarter, and 900 basis points year over year.
Margin improvement was driven by gross margin gains as well as continued improvement within our overall operating cost structure.
Our cash cash equivalents and short term investments balance increased $3 4 million in comparison to the prior quarter to $198 million as cash flow from operations exceeded our investment in capital expenditures.
As a reminder, we expect to pay $13 million in the fourth quarter for earn outs related to M&A activity from last year.
We are very excited about the performance of the business in the third quarter.
It is the result of superior execution over several quarters across multiple areas of the business. This is driving a powerful economic model with compounding benefits that includes the following.
First the capability to assess our operations end to end and identify ways to capture efficiencies and benefits from economies of scale.
Second and ability to reinvest a portion of those efficiency gains across each of our pillars for.
For example, long term development of our brand the continued execution in our traditional channels continue to materialize in our results.
Innovation in our technology platform and products combined with a delightful experience are attracting new customers and driving platform stickiness.
Each investment is assessed against a rigorous capital allocation framework. As a reminder, this includes strong payback periods of less than one year and ability to drive long term growth, while capturing and unit economic benefits from greater scale and the potential for high rois on longer term investments.
Our adherence to these rigorous standards enables us to leverage benefits key learnings to enable a self reinforcing loop.
With that context, I'll walk through our outlook for the remainder of the year.
As a result of strong momentum from the third quarter, we are increasing our outlook for both revenue and adjusted EBITDA for the remainder of 2022.
Starting with revenue, we anticipate revenue in the fourth quarter to be between 159 and $162 million, which would result in full year revenue for 2022 $519 million to $522 million.
This outlook reflects a year over year growth of 88% to 91% for the fourth quarter and 91%, 92% for the full year.
Last quarter, we mentioned that if we continue to successfully scale our investments we can generate positive adjusted EBITDA as early as the fourth quarter of this year.
Despite macroeconomic uncertainty our strong performance combined with the learnings obtained throughout the year have resulted in one of the highest levels of momentum that we have seen in our history.
Shifting to our EBIT outlook in the fourth quarter, we expect adjusted EBITDA to be between zero and $2 million, reflecting an adjusted EBIT margin of zero to 1%.
For the full year, resulting in an adjusted EBITDA loss between 18% and $20 million that.
That represents a margin of negative 4% at the midpoint, reflecting year over year improvement of over seven points were.
We are pleased that strong execution throughout the year has placed us on a path to generate positive adjusted EBITDA in the fourth quarter of 2022.
Given the immense opportunity ahead of US we expect to continue to lean into strategic investments that meet the standards of our rigorous capital allocation framework.
However, our expectation because we can do so while maintaining profitability as the benefits from our investments and efficiency initiatives continue to compound.
We are entering an incredibly exciting period in the history of <unk> as we see a clear path to continue scaling our platform in a profitable and sustainable way.
I'd like to thank our customers partners and employees for helping US deliver these outstanding results in the same line of sight to such an important milestone with that I will now turn it over to the operator for the Q&A portion of the call.
Thank you and everyone. If you would like to ask a question. Please press star one on your telephone keypad. Once again that is star one to ask a question and we'll go to Daniel gross flight.
Hi, guys congrats on a strong quarter and thanks for taking my questions I know youre not guiding to 2023, just yet, but it would be it'd be great to get your thoughts on how you intend to balance growth and profitability next year, obviously, you've had a tremendous amount of top line growth. This year now you expect to be adjusted EBITDA positive.
For 2023 is that positive EBITDA sustainable and how much do you have to kind of titrate growth down.
<unk> sustained positive EBITDA.
Sure I'll take that question Dan This is Jamie.
In the second part of your question first we do expect to remain profitable for the foreseeable future going forward. So this marks a new Q4 will mark a new moment in our history.
Are you do you expect to generate profitability on a go forward basis.
That said, we still have an immense growth opportunity ahead of us and severity and profitability more as an output meaning that there is no objective function to get to a certain margin percentage, but really what we expect to do as we continue to scale is to continue to receive benefits from greater efficiency.
Greater economies of scale and as a result of that we.
We will see some natural expansion over time.
With that said, we're not giving any additional outlook to deploy.
23 at this moment, we will provide that on the next call but.
I would just reiterate the commentary that with David historically in the past or do you expect to maintain at least a 30% growth for the course of the next several years.
Yeah, that's helpful. Okay, and as I look back at your <unk>.
Presentation, when you first of all public.
There were future opportunities in sleep fertility diabetes cholesterol I'm curious if any of these are 2023 opportunities or do you think those are a little bit further out.
Thanks, Dan I'll take that.
I think those are categories were really excited by and we've actually started to see some of those patients trickle in through the mental health platform on <unk> that we launched in the last year and have been scaling quite dramatically.
I think at the moment from a from a category standpoint, we have three to four categories that are growing exceptionally robustly triple digit mid triple digits or more.
And so I think theres a lot of excitement around deepening our expertise and personalizing the breath of products within those categories better segmenting those customers that are serving those customers.
And I think that's really where a lot of the investment is today and so we mentioned on the prepared remarks.
Our new 25000 square foot pharmacy in Arizona investments in compounding personalization and.
And so I think you can expect a lot of those types of initiatives and product innovation to come out in the new year, new year, just because the size of those teams and the speed at which those markets are growing within our business are really where we're placing our focus.
Yeah makes sense congrats again guys.
Thanks, Jonathan.
Next we'll hear from Jonathan Wang credit.
Hey, Thanks for taking my question I guess, just given the strong revenue growth and the margin expansion here do you guys see any other areas, where you can drive further efficiencies or is it really just about driving that top line scale at this point.
Yes, I can start thanks for the question Jonathan.
I think as we mentioned we continuously look for opportunities to extract additional efficiencies, whether that's negotiation negotiating with suppliers.
Or even just looking through various mechanisms or how do we do things better I think you can expect us continue to do that.
With that said just given the immense opportunity ahead of US as mentioned in the response to the prior question. Our objective function is not too rapidly necessarily expand margins. There still is an immense opportunity ahead of us.
But rather how would that be more of an output as we continue to.
Rapidly scale, our offerings and continue to innovate and make the overall platform better and generate a better customer experience. We do see is we do see benefits come in the form of whether thats higher retention or faster customer acquisition.
Over time, it will happen as we expect margins to expand and we'll provide additional clarity around what we expect in 2023 as well as more in the midterm.
The next cycle of earnings call.
Okay, Great and then just in terms of.
When we're thinking about the possible possibility of a recession you guys are obviously performing very well against that macro backdrop.
Is this actually benefiting you to some extent in terms of say the mental health side accelerated more than you previously anticipated any color there would be great. Thanks.
Thanks, Allen I think generally speaking what we're seeing is that as.
As other other players in the market both competitors and our competitors are obviously pulling back and retreating it creates a really powerful opportunity for us to take a disproportionate amount of share.
<unk> share message voice in the market about the differentiated offering that we have and so I think we're really investing from a place of strength. Despite the macro headwinds and I think a big part of the acceleration.
To your to your question is the fact that we're focusing on conditions in categories and services that are highly emotional right. These really impact People's lives on a daily basis, when they wake up in the morning like things like mental health, how you feel in your own mind, how you feel on your own body. How you feel when you look in the mirror, how you feel with it.
Relations to your partner in your household.
So I think it's really the emotional nature of them the high sensitivity nature of these conditions.
<unk> really impact People's lives and Thats something that even in recessionary times is proving to be incredibly meaningful to people and so theres really no concerning trends that we've seen across the base of the business. In fact is the earnings would suggest.
Traffic to the platform is really at an all time high and so we hope that we continue to invest from a place of strength and I think come out of these headwinds and.
In a position where we've taken a disproportionate amount of the share compared to the competitive landscape.
Okay, great. Thanks, Congrats on a results.
Thank you.
Our next question is from Corinne Wolf Meyers Piper Sandler.
Hey, good afternoon, congrats on the quarter and thanks for taking the questions. So first I would like to just expand on gross margin in that can you just dive a little bit deeper into the puts and takes of what exactly driving.
So question on growth there that you saw on that line item and then how much of that do you think is expected to continue here into Q4, and then even that really parts of Keith at 2023, especially as that wholesale part of the business started to become larger mix. Thanks.
Yes sure. Thanks for the question Craig.
There's a few factors that are driving the gross margin expansion as you mentioned a portion of it is just related to the overall mix between the online business on the wholesale channel.
Additionally, like what we also do you see is we are receiving a benefit from a couple of things.
One is just as we continue to scale whether we.
Opt to fulfill through our own affiliated pharmacies.
Or is customers are also opting into longer duration subscriptions. There is the ability to start to.
Bundle bundle the off Raymond relies.
James across those measures as well.
I would say that.
A portion of it is definitely related to mix, but a substantial chunk of the gross margin gains are related to more of just the operational and product dynamics that are going on underneath the business.
We're not necessarily guiding to.
Specifics around gross margin in Q4, or even next year, we'll provide more clarity around talking about them on what we expect.
But largely we have seen these trends continue over the last couple of quarters.
As a result, we're constantly assessing whether.
There are opportunities to make the customer experience potentially even better Mr drive stickiness or potentially to come.
Through elements down to Mark talk to the gross margin.
That's very helpful. Thank you and then just on average order value. We did see a slight bump up this quarter can you just talk about some of your confidence in this level of value kind of continuing throughout Q4, and then even 2023.
You did mention a part of it is due to.
The duration of the orders so how much of that do you think is likely to continue.
Yes, so I think what I would say is our objective function really is more around the revenue per user and that is to some degree it correlated with the <unk>, but really the things that generally drive revenue per user or the duration of our subscription to the longer duration subscription strategy will drive more more revenue upfront per user.
Overall engagement of users how many products are they engaging us with that won't necessarily show up in <unk> and the product mix is the third element I would say really.
What we've seen is we have seen.
Substantial success as we've invested in our brand.
And also just the overall experience on the platform.
We started to see the revenue per user expand and as a result of that what comes with.
Two of those elements the product mix and the duration is also.
The extension and so I think as a result of that.
We weren't necessarily guide to a specific threshold in 2023, but we are confident that these dynamics that are in the business given the focus on the consumer and the consumer centricity of the platform that will enable us to continue to generate and drive more or.
Or at least a stable set of amount of revenue per user.
Thank you.
Joe and Jeff Wang from tourists Securities has the next question.
Thank you and congrats on the strong quarter and thanks for taking my questions. Just following up on the last question at all.
Is it possible for you guys to give us a big down on the big step up you're seeing sequentially in <unk> like how much of that is driven by increasing my time on subscription how much is product mix is like evenly split and I'm trying to understand that.
Yeah.
You guys have talked about how customer retention rate of churn rate continues to improve and one of the dry wouldn't there is multi month subscription increases just give us an update like what kind of improvement have you seen over the past 12 months on retention because of this trend.
Yes, I can take the first part first of all of that question and then maybe Andrew if you want to take the second part on the retention.
I think what we do see around us.
More and more users are opting for the multi month duration I think the last time that we disclose that.
Is roughly around 35% or 36% towards the tail end of last year, we have seen sequential gains since then and I think to some degree.
Key elements are.
Correlated meaning that as we have also started to expand the offerings within certain product mixes whether that's rolling out a multi month offer in mental health or additional options in the hair business.
<unk> seen with the investments alongside our brand more and more consumers opting to take that and as you mentioned that drives both the higher retention, but also what it drives us a greater touch towards.
More folks opt into have longer relationships with our platform and as a result of that.
That is a pretty significant dynamic that is driving the AAV, but I would say that the right way to think about it is that you are somewhat correlated in that.
<unk> <unk> and the duration.
We're investing in both of those and.
And then Andrew if unitek.
Thanks cylinder for the question.
I think the other side of it is there's just a tremendous amount of investment internally around core engagement and retention dynamics within each of the customer profile. So we've mentioned.
The launch of the Android application this quarter as well as the iOS applications. In Q1, those are really platform built essentially to personalize and customize and experience for a patient in a way that really dramatically increases engagement and.
And increase adherence to their treatment protocol in a way that means they actually feel better at the end of it. So this I think is an area. We're spending a lot of time. It involves member benefits such as original content more catered content throughout your lifecycle easier access to your provider we talked about.
Intelligent routing so that patients can be said.
And directed to the appropriate person quickly so that any concern is handled with with speed and ease.
So these investments I think are also really starting to pay pretty materially dividends in regard to high engagement dynamics and I think we'll continue to see that and so I think there's a lot of enthusiasm that.
Despite the accelerated.
Growth, we are also maintaining and increasing and improving our retention dynamics as you scale and as you hit more people top of the funnel and I think that combination is is fairly rare to see.
Yes. Thank you just a quick follow up on Jonathan's question around long term margin profitability. Just wondering if there had been any changes in your long term margin expectations and timing to get there maybe you can give us an update there.
More important I'm trying to understand the path or drivers to get to those profitability targets have changed in any way as well because you had what I'd call. It a couple of years back when you came public.
Youre seeing benefits from internal pharmacy step up in multi month subscription.
So maybe you are willing to invest.
Invest more in sales and marketing skewed us if you can spend some time the building blocks to get to your long term guidance have they changed the past couple of years.
Yes, I think.
It's something that we're constantly assessing and evolve in an evolving our thinking on.
We're in the process right now of a pretty robust multi year journey and doing a complete refresh of that.
Short answer is I think the dynamics.
<unk> evolved.
Tact.
And many of the levers that we would pull we've outlined in prior calls.
We will do is we will provide further clarity early next year and the Q4 earnings call around.
Specifics around what our expectations are for 2023 as well as more midterm mid term targets.
Okay. Thanks, a lot.
Thank you Linda.
Our next question comes from Michael Cherny Bank of America.
Good afternoon, and thanks for taking the question congrats on a nice quarter.
Andrew I'm not going to get ahead of myself in terms of trying to figure out who the celebrity is hey, you got announcements.
23, however relative to some of the other questions I would love to know, especially how you think about the dynamics on targeting celebrities like that versus some of the other areas. I don't think it's been touched on detail I apologize if it has but obviously there's been a lot of fluctuations from an AD rates perspective, and so rare.
Relative to the conceptual components.
In terms of your go to market strategy, you forgot the category dynamics.
Have you seen anything else in terms of that would make you allocate dollars differently over time.
Yes, that's a great question, Michael and I won't give you any hints on who it is.
We're really excited and the team has done a lot of great work already.
I think the strategy here.
And let me talk about this briefly in the prepared remarks.
Is to invest really in the long term orientation of the brand equity in our brand awareness and I think we're at a scale at this point, where the dollars are actually able to meaningfully move the needle with regard to.
Stigma these conditions awareness of options education.
About solutions in the brand.
So I think youll see us continue to lean heavily into what is considered I think more traditional brand awareness and I think a big part of that is because we are actually seeing the real economic impact of those investments.
We have our rigorous investment policy here and are constantly evaluating those trade offs, but I think we're where we are from a business perspective, and a brand perspective is one that warrants a long term orientation on those dollars and I think we're seeing the tactical benefits of them and so I think youll see us do more of that high impression high visibility play.
<unk> work as we did in this quarter with the NFL with Hulu.
They're just really they're really pulling their weight and a really powerful manner and so.
The channels that have gotten us to this point, we will continue to be a large portion of the mix.
But I think youll see us flex some new muscles in the coming quarters as we prioritize the long term equity of the brand and high intent consideration and brand awareness across different geos in the country.
I understood and again, that's going to get ahead of anything like category advancement, but clearly youre getting to the point now to where with him.
Your.
Neck of the Woods, you have scale so to speak.
Become a more attractive consolidator to other entities that may have an idea, but just haven't been able to scale. It anywhere close to the point that you have similar to some of the other acquisitions you've already done.
Yes, I think thats definitely a reality and we're seeing that show up in the type of opportunities that come across our desk.
I think the brand and the way we've operated in the team that we've built has always been.
One that has.
Been a natural consolidator in the industry and I think we're now getting to that scale, where maybe that debt.
Natural consolidator opportunity is even bigger.
I think obviously with the recessionary dynamics and the headwinds a lot of companies had great ideas and have great technology, and great strategies, but have yet to get them off the ground and scale them. So I do think there is an increasing opportunity for us there is a lot more volume coming across our table I would I would imagine that next year that will only.
<unk>.
What I would say, though is the opportunity in front of US internally is just so robust as I mentioned, we have three or four categories growing triple digits.
And so there's just there's a really high bar for us when it comes to opportunistic M&A and so we'll keep our eyes open and we think there is definitely a lot of great teams and investments out there.
But I think we're trying to be rigorous and disciplined as folk as we can and so we will maintain that focus and maintain that high bar.
Despite maybe the deal flow that will continue to increase in the coming years.
And your next question is Jack Wallets, Google home security.
Thanks for taking my questions and congrats on another really strong quarter.
I'm wondering if you could.
Just a follow up on that last question.
It sounds like the the CAC dollars youre getting to them.
As youre pointing out to the scale where awareness.
It's becoming a shift and it also sounds like there is incremental investments going on to the.
So the underlying business and as we're looking forward into next year is it fair to say some of the gross dollars are shifting outside of the the CAC bucket.
To support AIDS.
More.
A larger.
Platform to be able to ingest the the higher level of growth we've seen.
Yes. Thanks for the question Jack I think I've mentioned.
Constantly weigh and initiatives.
Across.
A whole host of variety of factors. This year as mentioned one of the reasons behind the step up that youll see in marketing throw out there that we called out was the fact that we really wanted to experiment with new channels and dimensions and as we started to see success.
Namely as Andrew mentioned in the long term development of our brand.
Really continue into to pull on that thread I think even the investment.
<unk> will go outside of the marketing bucket.
We spent some time talking around some of the product innovation that we're expecting to do.
Some of the work on fulfillment and so really what we do is we put all of these different investments across our capital allocation framework.
<unk>.
Key elements, where we're kind of looking for.
Very attractive rois as well as reasonable payback periods, and I think with the combination of those things.
Propelling the confidence in the path to profitability that Youll see while also being able to maintain these investments in the long term, but I would say that the shift this year is already really started to happen.
Towards.
Alrighty of different investments and we'll continue to look to leverage that so.
But we'll continue to again realize.
Greater benefits from economies of scale as well as.
Just the benefits that come from increasing and expanding footprint that we have relative to others in the marketplace.
Okay. That's helpful and then.
Youre thinking about the internal.
Fulfillment and R&D capabilities, we're at 55% and fulfillment in.
In the quarter.
Just thinking about the different structural puts and takes to gross margins going forward.
We're also we've got.
Shipping.
It didn't look like it was it.
A big impact on on the margin this quarter, but prices energy and transportation has been going up globally.
Just thinking about the different puts and takes structurally on that number not necessarily trying to.
Your opinion to his exact percentage, but just trying to think about.
The impacts of in sourcing more production cost of shipping and potentially some of the higher human human capital.
<unk> such as mental health.
Impacting the cost of goods going forward. Thank you.
Yes, I think it's a great question I think what we generally are weighing off at this point it is namely around improvements that we can continuously make to the customer experience.
Just to get that stickier and so the rationale behind investing in things such as our affiliated pharmacies as lost around trying to directly extract gross margin expansion, but really more around just taking greater control around the customer experience, which will lead to long term benefits as well as gross margin expansion growth and retention and there is no.
Specialty benefit.
The other lever you're right I think that there has been some degree of inflationary costs that have come into the ecosystem. The reality is we've been able to offset many of those through continuously conducting assessments for how do we get the overall operations more efficient as well as again, just given the growth of the business.
Almost doubling.
Year over year, what that provides us the ability to have a lot of negotiation leverage.
Suppliers as well as start to pull other levers to offset that and so I would say that we're less concerned around cost creep.
Just because we have a conviction in our ability to offset that with that said.
Similar to other investment levers nearly constantly assess.
Gross margin levels that we currently have relatives here are there other mechanisms that we might be missing to enhance and improve the overall customer experience while might place a little bit of near term pressure on gross margins will come in the form of benefit of longer retention as well as just an overall better customer experience and so that's usually the tradeoff that we're making are considering at this point in time.
Versus worrying about.
The macro factors that we've largely been able to more than offset thus far.
Got you. Thank you I appreciate it and again congrats on the quarter.
Thank you.
George Hill from Deutsche Bank has our next question.
Oh, hi, its Matt Yeah, So George Thanks for taking the question.
My question is related to charter rate and retention.
I know you guys are not disclosing the specific churn rate that you talked about it being in the mid single digits last year.
Can you give us an update on where it is trending now.
I'm just curious if you started seeing any changes in consumer behavior, given inflationary pressure. Thank you.
Yes, I think what we see if we are generally seeing consumers, even the newer cohorts come onto the platform.
At a very strong pace like we highlighted earlier in the year is the fact that a critical element of our success.
It was the ability to or what would be the ability to maintain long term retention north of 85%.
What you see in the guidance.
Showing up in the form of the top line as well as the bottom line is largely our ability to do that and so.
No.
In addition to focusing on retention and through a variety of factors such as improving the customer experience.
As well as investing in the product you start to see revenue per customer expand actually quarter on quarter. This is one of our most our one of our significant gains quarter on quarter and so as a result of these investments. We are just seeing the platform overall become stickier and as a result, we're starting to generate more revenue revenue per user.
We will take our next question from Julien Zhang SDB Securities.
Hey, guys congrats on the great quarter and thank you for taking my question.
Just one question from me on the her side of the business first of all I want to say that is a wonderful thing youre, removing the stigma and women's sexual health like a recent launch on the let's call it small devices side.
But at the same time, it's also a fairly crowded adjacent market that I see a lot of women's clothing brands like play.
That in nine can you comment on what that means for you competitively as you're moving from a pure Telehealth company tomorrow, Okay in our retail E Commerce start yes. Thank you.
Yes, Thanks, George Great question, I think the hers offering.
It's something we're really excited about and frankly, I think specifically on the mental health side.
He has a lot of similarities across the categories that we've operated in from the beginning which is.
Bringing forward a consumer centric access point for great health and wellness services. So it's consumer oriented in every way possible right and so that's us reevaluating the entry point to questions.
We collect information that the patient provides how they provided how they engage with their provider, but ultimately the core business.
We will always maintain itself.
Medical relationship with providers right, we are a marketplace in that way and connecting you'd expertise is what we do best.
And so that's no different from what we do on the <unk> side or the mental health side.
And that offering in particular, we've brought something really unique to market that has both the stigmatizing in normalizing. The fact that depression and anxiety are exceptionally widespread across the nation, but then also giving you.
Near same day or within a couple of days access to psychiatrists.
Our tests on an individualized basis.
Way that can combined.
Things like talk therapy, and actual medications that are ideal for your specific circumstance and so those are things that on average take patients months.
To get access to months to make appointments most don't take insurance that can cost hundreds of dollars to even schedule that appointment and so I think that that ability to bring expertise from a medical standpoint, both on the psychiatry side as well as the <unk>.
<unk> therapy side.
Two customers at a price point that is incredibly affordable and as near real time.
From a from an access standpoint, it's just a really special offering and I think despite the.
All the good work, that's being done frankly on mental health and wellness across the landscape I think we're still one of the few that are delivering I think real medical experiences with expert providers across the spectrum of care and I think thats really why the business is scaling right. That's one of the categories that as we've talked about has seen robust growth.
And I think that differentiation and market is a really big part of why that's taking place.
Super helpful. Congratulations on the quarter again.
Thank you so much.
A final reminder, it is star one if you have a question.
At this time there are no further questions I'll hand, the conference back to management for any additional or closing remarks.
I appreciate your time everybody. Thank you for dialing in we look forward to chatting with the next quarter's results, everyone be well and happy holidays coming up soon.
And again that does conclude today's conference. Thank you all for your participation you may now disconnect.
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