Q3 2023 Hims & Hers Health Inc Earnings Call
Ladies and gentlemen, thank you for standing by at this time I would like to welcome everyone to the Henderson Harish third quarter 2023 earnings Conference call. Please note that this call is being recorded all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
If you'd like to ask a question. During this time simply press star one on your telephone keypad. If you would like to withdraw your question again press Star one.
Now I'd like to turn today's call over to Alice Lopardo, Vice President of Investor Relations. Please go ahead.
Good afternoon, everyone and welcome to the HIMSS <unk> Health third quarter 2023 earnings call on the call with me today is Andrew <unk>, our co founder and Chief Executive Officer, as well as Yummy O Two Bay, our Chief Financial Officer before I hand, it over to Andrew I need to remind me of.
They partner and cautionary declarations.
Certain statements and projections of future results made in this presentation constitute forward looking statements that are based on among other things our current market competitors and regulatory expectations and are subject to risks and uncertainties that could cause actual results to vary materially.
We take no obligation to update publicly any forward looking statement. After this call whether as a result of new information future events changes in assumptions or otherwise. Please see our most recently filed 10-K and 10-Q reports for a discussion of risk factors as they relate to forward looking statements.
In today's presentation, we have certain non-GAAP financial measures. We refer you to the reconciliation table contained in today's press release available on our Investor Relations website for reconciliations to the most directly comparable GAAP financial measures and related information.
You'll find the link to the webcast in Investor Relations website at investors Dot Hills Dot com.
After the call. This webcast will be archived on the website for 12 months.
And with that I'll now turn the call over to Andrew.
Thank you Alice.
At HIMSS in hers, our mission is to make the world fuel grade through the power of better health. This quarter, we delivered on this mission across the board.
Execution in the third quarter was exceptional our unique offering of personalized solutions at compelling price points resulted in increased market share across categories, such as sexual health care for both men and women and mental health.
Our mental health offerings surpassed 125000 subscribers in the third quarter, while maintaining triple digit growth.
Our execution translated into outstanding financial performance in the third quarter <unk>.
Revenue was up 57% year over year in the third quarter to $226 7 million.
And our brand and expanding offering of personalized solutions continue to resonate with more and more consumers, enabling us to surpass $1 4 million subscribers.
In the third quarter, we generated $12 3 million of adjusted EBITDA up over 18 million relative to the third quarter of last year, while simultaneously delivering strong growth.
Our ability to grow both quickly and efficiently while consistently delivering improved profitability is a testament to the team's outstanding execution and demonstrates the strength of our underlying model and the size of our expanding addressable markets.
Continued progress across strategic initiatives are essential to our long term strategy of delivering unmatched personalized care provides us with conviction in our ability to continue to drive higher market share and robust financial performance in the third quarter, we achieved a number of key milestones.
First per subscribers nearly doubled year over year in the third quarter. The expansion of personalized solutions earlier this year within our women's hair in dermatology offerings combined with continued strength in mental health were key contributors to our success in the third quarter.
With improved economics quarter over quarter. These offerings are pacing towards achieving the highest quality efficiency metrics of our most optimized business lines.
Next we drove meaningful gains from our efforts to vertical is our affiliated pharmacies nearly 80% of orders in the third quarter were filled through our affiliated pharmacies and it is our expectation that nearly all orders will be filled via affiliated facilities by year end.
The successful completion of this effort is years in the making and we have strong conviction that will unlock further differentiation in pharmaceutical capabilities unmatched by the majority of offerings in the market.
Lastly, we neared completion on our weight management offering rolling out in the coming weeks. This offering will deliver a comprehensive portfolio of generic pharmaceutical treatments at mass market pricing.
Leveraging widely study treatment compounds and sophisticated pharmacy capabilities, we believe weight management will deliver exciting treatment efficacy by helping curb cravings reduce binge eating and supporting healthy metabolism. In addition to the ongoing execution across key strategic initiatives innovation in the third quarter.
Brought the exciting expansion of capabilities within our technology stack.
We believe that key to our mission is building a foundation of innovative technologies that deliver unmatched clinical care.
Since our inception, we've invested in our proprietary platform that sits at the center of all provider and consumer interactions and today powers over 14000 visits per day.
Our platform has undergone nearly seven years of development and with the breadth of services personalized solutions and capabilities. We now offer it as meaningfully accelerating the quality of care of the providers on our platform can deliver.
Last quarter, Mark the beta launch of a significant evolution of our technology platform.
Med match.
Med matches, a proprietary service that deploys artificial intelligence and machine learning against the expansive data set at the core of the HIMSS <unk> platform.
Mid matches trained on millions of Anonymised historical clinical visits demographics treatment types and patient outcomes and is being developed to identify the most optimal treatment for a particular person for medication formulary to dosage to form factor.
With med matched clinical decisions and treatment recommendations will be supported and informed by the collective knowledge of thousands of providers and millions of data points.
We believe connecting the right patient with the right personalized treatment will result in better clinical outcomes and greater likelihood of long term patient happiness.
Our expanding portfolio of personalized solutions opens the door to more choices of treatments for consumers.
<unk> provides the ability to leverage thousands of interactions to help providers more quickly identify treatments as well as inspire confidence with consumers that are specific treatment has work for patients like them.
This robust technology is continuously learning, which we believe will result in increased effectiveness with each incremental customer.
All while maintaining the highest standard of safety and privacy.
We are initially deploying med match for customers seeking support for mental health.
Psychiatric conditions result in some of the most frustrating patient experiences with a wide range of pharmaceutical formularies and dosages, along with varying degrees of provider experience and expertise treatment for mental health disorders can be long burdensome full of side effects and often feel like a process oriented around.
While in the air.
With med match, we aimed to alleviate months of trial and error with clinical insights that leverage the collective knowledge of the entire HIMSS in her platform.
In this initial psychiatric beta mid match improved remission rates time to remission and customer satisfaction. Within this initial cohort providers are overwhelmingly utilizing the insights and recommendations med matches, delivering helping providers improve their speed to decision for patients, which we believe will ultimate.
We increased the likelihood of a better patient outcome.
At the heart of our business is patient Trust trust in their provider in their care plan and in their treatment to work.
We believe the application of med match will be transformative for healthcare and will usher in an unprecedented level of patient confidence in the care they receive.
I could not be more excited to bring an innovative solution that has the capability to improve patient outcomes for condition that impacts almost 1 billion people around the globe.
Capabilities like med matched have the ability to amplify the impact of personalized solutions on our platform and as mentioned earlier are a critical component of the transition to a truly personalized centric platform.
As I've long said from the beginning HIMSS and hers is leveraged technology to empower both providers and patients with more accessible and personalized treatments with.
With today's advances in AI and machine learning our technology is accelerating at an unparalleled pace.
As our customer population grows every new customer is helping us to deliver transformative care into the future by enriching and expanding our proprietary data stack and accelerating the impact med match can deliver on better outcomes.
More details around the inner workings of med match are available on our website.
Before I close I wanted to reassert that are outstanding levels of execution give us tremendous confidence in our ability to bring innovation to our customers for the long term.
Today, we're capturing market share at a rapid pace across categories, which will further grow our position as a trusted brand for the overall health and wellness market.
With customers adopting personalized treatments at rapid levels and our ability to leverage our affiliated pharmacies to bring innovative products at mass market pricing our market leadership position will only get stronger and we are excited to see increased value per customer already as a results and.
And as we enter a new age in which AI will become more widespread or ability to bring technology breakthroughs like med matched the market brings us closer to recognizing our vision of providing quality clinical care well beyond traditional approaches.
These accomplishments have enabled us to their high revenue growth and healthy cash flows strengthening an already stellar balance sheet.
In light of our performance and our conviction for the strong trajectory. We have ahead, we will be taking on the opportunity to repurchase our shares well below what we consider to be their intrinsic value to.
To give ourselves the flexibility to act opportunistically, we're implementing a program that allows us to purchase up to $50 million of stock over the next two years.
The durability of our business and solid balance sheet will allow us to act on this opportunity without the need to sacrifice on either the current momentum of innovation or wealth of growth prospects in front of us.
With that I'd like to thank our team for the exceptional execution and focus our shareholders and partners for their trust and we'll turn the conversation over to Jamie to discuss further financials.
Thank you Andrew.
Hi, everyone and thank you for joining us today.
I will start by providing additional details regarding our third quarter performance and subsequently delve into our expectations for the remainder of the year.
Momentum in the third quarter remained incredibly strong as we continued to successfully execute across our strategy of enabling access to unique and personalized solutions through our world class technology platform backed by a trusted brands.
Performance remains robust across our longest tenured offerings, such as <unk> and sexual health and we are excited to see newer offerings, such as mental health cardiovascular health and personalized solutions across horsehair in dermatology continue to rapidly scale.
We have high conviction that equipping our world class provider team with the ability to offer unique and personalized solutions to consumers at attractive price points is driving significant market share gains.
Revenue increased 57% year over year in the third quarter to $226 $7 million with continued strength coming out of our online channel.
Online revenue was $219 7 million up 57% from the third quarter of 2022.
Expansion of our online subscriber base continues to remain the primary driver of strong growth across the platform.
Our subscriber base grew by over 125000, net subscribers quarter over quarter to north of $1 4 million subscribers.
Monthly online revenue per average subscriber increased slightly quarter over quarter to $54 as we saw greater adoption of personalized and longer duration subscriptions as a result of acoustic pricing actions taken in the second quarter.
Our strategy centers around enabling providers to provide high quality care as well as offer unique and effective products at compelling prices.
And for personalized products continues to be robust across the platform with over 45% of online revenue from customers acquired in the third quarter coming from personalized treatments.
As previously mentioned our expectation is that this number will continue to increase over time as we continue to expand the breadth of personalized offerings across the platform.
This strategy is underpinned by the technology engine that Andrew walked through the strength of the HIMSS <unk> brands and the ever evolving capabilities of our affiliated facilities over 80% of orders in September were fulfilled via affiliated facilities, which was our target for the end of the year.
This accomplishment is a significant milestone and that enables greater leverage across our ecosystem, bringing a level of efficiency that we believe fee when the market can match.
At the conclusion of 2023, we expect to fulfill nearly all of our orders that are affiliated facilities with third party, Switzerland, only a small percentage of orders for redundancy.
Our gross margin performance in the third quarter is a reflection of our ability to capture economies of scale and harnessed the power of our operational model and the <unk>.
Third quarter gross margins expanded over 70 basis points quarter over quarter to 83%.
Efficiency gains were seen across areas, such as product cost and shipping expenses as.
As we have previously stated our long term adjusted EBITDA margin target of 20, or 30% assumes that we pass a portion of these gains back to consumers over time.
This can come in the form of product add ons value added services and targeted price reductions all informed by extensive experimentation similar to what was done in the second quarter.
We are confident that this will enable us to continue to extend our market leadership position across each of the conditions that we provide solutions for.
Shifting gears toward our cost structure.
Marketing as a percentage of revenue excluding stock based compensation was flat quarter over quarter at 51% and down 300 basis points from the third quarter of last year.
We saw solid momentum exiting the second quarter, which continued throughout the third quarter across our subscriber base.
The third and fourth quarters are increasingly becoming moments when brand investment elevates as a result of our desire to educate users on our brand and capabilities. During some of the most culturally relevant moments across society.
Increasing lifetime value per customer and the breadth of our multi condition offering provides us the flexibility to invest in longer duration channels, such as TV sporting events reality TV in stream media, all while successfully still maintaining a payback period of less than 12 months.
We have high conviction that we will get leverage on this investment over the mid to long term as the awareness of our brands and platform capabilities continues to increase across a broader set of consumers and revenue begins to scale faster than investment levels.
Operations and support as a percentage of revenue excluding stock based compensation was flat quarter over quarter at 13%.
Staffing levels were increased in this area to accommodate increased volume through our affiliated facilities as well as to accommodate expected volume increases in the fourth quarter.
Technology and product development costs as a percentage of revenue excluding stock based compensation was flat quarter over quarter at 5% in the third quarter.
We expect continued investment in this area and investment will be concentrated in two key areas.
First talent required to continue to evolve our personalized offerings and second expanding our machine learning and data science organizations, who are focused on enhancing tools, but equipped providers with the ability to efficiently acquire consumers with the right personalized offerings.
G&A as a percentage of sales was 16% in the third quarter, including stock based compensation and 10% excluding stock based compensation.
While G&A cost may fluctuate quarter to quarter. This is an area, where we expect to see continued leverage over time.
Efficiency gains and disciplined growth contributor towards our ability to generate $12 3 million of adjusted EBITDA in the third quarter.
We are pleased with our ability to continue to drive meaningful growth in a profitable fashion, which has further strengthened our balance sheet unlocking substantial opportunities to invest in growth areas, including the acceleration of our personalization strategy.
As a result of our ability to drive strong and profitable growth, we increased our cash and short term investments position 19 million quarter over quarter, so over $212 million in the third quarter.
Cash flow from operations was over $25 million in the third quarter well in excess of a $3 $3 million spent on the purchase of property equipment and intangibles and the third quarter.
We believe we are rapidly approaching a level of scale that unlocks potential for further efficiency gains through automation and.
Our ability to consistently drive strong cash flow enables us to take advantage of these automation opportunities, while also extending our personalization capabilities, which we believe will further strengthen our moat and provide a path to even greater market share.
We'll provide additional clarity on our investment strategy as we lay out our 2024 priorities on next quarter's earnings call.
2023 is shaping up to be an exceptional year, we are rapidly transforming towards a platform oriented around unique and personalized offerings underpinned by world class technology, and a brand that consumers increasingly love and trust.
We believe that our differentiated offering brand and operational capabilities places us at the forefront of the consumer inflation of health care.
We are raising our outlook for 2023 to reflect these dynamics.
In the fourth quarter, we are expecting revenue of between $243 million to $248 million, representing a year over year increase of 45% to 48% from the fourth quarter of 2022.
Adjusted EBIT is expected to be between 14 and $17 million, representing an adjusted EBITDA margin of 6% at the midpoint of both ranges.
For the full year of 2023, we're expecting revenue of between 868 to 873 million, representing a year over year increase of $65 to 66% from 2022.
And adjusted EBITDA is expected to be between <unk>, 43, and $46 million, representing an adjusted EBITDA margin of 5% at the midpoint of both ranges.
In the third quarter, we saw benefit from a greater share of users switching towards more premium skus and sexual help them here.
Kris conversion across premium skus, and the switching of existing users to longer duration and personalized products.
These dynamics almost completely offset the pricing headwinds, we expected in the third quarter and provide us with a resounding conviction with the strategic pricing actions taken in the second quarter will be net accretive well within a 12 month period.
<unk> in this area was the result of rigorous experimentation and diligence over the course of several months before the implementation of strategic pricing actions.
Embedded in our guidance is the assumption that these dynamics sustained in the fourth quarter.
Financial performance continues to be exceptional across all measures and momentum remains solid.
As a result of these trends, we expect to generate our first quarter of positive net income within the first half of 2024.
Accelerated momentum could bring attainment of this milestone as early as the fourth quarter of 2023.
While this is an exceptional milestone achieved so early in our company's lifecycle, our focus remains firstly on extending our market leadership position through elevating value provided on our platform, which we expect will drive the acquisition of more customers and stronger retention.
And secondarily on the continued strengthening of our balance sheet through cash flow generation.
Attainment of positive net income will be an output of the strategic priorities as opposed to an input following our approach with generating positive adjusted EBITDA.
Our ability to drive such exceptional performance is the culmination of the efforts of hundreds of employees across HIMSS in hers that work hard each day to help the world feel great through the power of better health.
Like to thank them as well as all of our customers and partners that support us in our mission.
We appreciate the support of our shareholders and look forward to keeping you updated on our progress with that I will now turn it over to the operator for questions.
Thank you if you have a question. Please press star one on your telephone keypad, if you wish to remove remove yourself from the queue simply press star one again one moment. Please for your first question.
Yes.
Your first question comes from the line of Glenn <unk> of Jefferies. Your line is open.
Yes, Thanks for taking my question just a couple.
Andrew Let me, let me start out with last quarter, I mean, essentially when the company announced that it was making some investments on price obviously investors got very concerned about the longer the longer term impact on the operating margin leverage and you saw obviously the stock the way it traded intra quarter.
<unk> all talked a lot on this call about.
<unk> personalized solutions and I think in <unk> prepared remarks, he said, 45% of the revenues are now coming from these personalized treatments could you give us some maybe some specific examples of which products you're personalizing, the most and the impact that's having on your pricing and your gross margin. So we can assess.
Defense ability of the pricing and gross margin and <unk>.
Then I just have a follow up question for Jeremy.
Yes, I mean, you'll take the first part and let me hit the back Glenn.
We're really rolling out the personalized positive cost category and I think what we're seeing generally is.
Patients are coming to us being able to tailor the treatment either in form factor in dosage in composition and different supplements are ingredients or in some situations treating multiple categories like we talked about last quarter with the.
The erectile dysfunction treatment that also treat men predisposed of material risk for cardiovascular disease.
We're systematically doing that because what we're seeing is that the ability to custom make those treatments is actually just making people.
Get to remission will get to a steady state of happiness much faster.
This is happening across the board. So for example, we launched in the last couple of quarters, the women's hair blends, which are custom combinations of pharmaceutical ingredients as well as really highly in demand supplement that are great for her strength in hair regrowth for women in situations such as menopause opposed part of the <unk>.
Same thing is.
Happening across some of our newer categories on the men sexual health dive on the manpower side, which even just last week really new sterile and topical as.
As well as new oil compound.
What we're seeing is just choi in of itself and that flexibility for customization is really unique in market and being able to deliver that in those situations the same price.
Or even better than just a generic.
It's really overwhelmingly valuable to customers right. Because these are combination therapies that would usually cost two or three times what is the base generic cost and so our strategy is to bundled much value as we can into these treatments as much flexibility deliver great personalized care all ultimately focused on.
Unmatched quality of care on our platform that you can get somewhere else and I think overwhelmingly we saw in this quarter that the demand for those products is quite high but more importantly, really changing the underlying dynamics of the model given the stickiness of those products.
And then the second part of the blend with before many of the personalized product where it started to rapidly scale.
Our margin structure, it's pretty comparable to that of the products that we had before and the way to think around that.
As we start to gain additional learnings from greater scale as well as now the efficiency.
Maybe north of 80% of the orders from the affiliated pharmacies that gives us a cost structure that as we start to continue to rapidly scale those personalized product.
We get more and more et cetera, and so effectively what we're doing is we're profitable postpone.
Other gains and you're back to containers really with the eye towards before the Andrew mentioned earlier April period, those price points at market levels.
The efficiency of our leadership cost structure, it's very hard for others, you can create those products or maybe they try to match those capabilities with nutritional generics.
Hey, guys, a result of that you're able to see us.
Passenger value back to consumers, but also concurrently expand gross margins just because what they can do if we are realizing more and more efficiencies from the affiliated pharmacy set.
Setup.
I appreciate all those details give me if I could just ask one quick follow up on that so it sounds like through the strategy by reducing the cost with the personalized products that maybe you will be able to continue to expand gross margin, but what about on the adjusted EBITDA line. If you look at for example, your marketing expenses as a percentage of <unk>.
Revenues, they've been just over 50% for six quarters in a row and I think in your prepared remarks, you said those investments have a payback period of less than a year and you expect to get leverage over the mid to long term what exactly does that mean and when should we start to get better leverage on that on the marketing line and then I'll stop there. Thank you.
Yes, so great question, one so I think that the way that we are currently starting to just.
Think around the marketing strategy is increasingly we're putting more and more investment in Q building, our brand to capture consumers at earlier stages in their lifecycle journey.
So we kind of started that journey really in the midpoint of last year as we've gotten more efficient in what we got more learning. We started to you continue to scale those as.
As we start to think around.
What's required to continue to generate that that awareness, we're starting to hit levels, where it's been.
When you look at this point of last year, we were able to get 300 points of leverage year over year. This year.
As a result, but you don't necessarily need to spend the same degree as near each year on brand and so I think that we're going to still continue to be very aggressive.
With how we choose to invest for growth, but over the mid to long term would you expect to start to really get leverage on that on that marketing line.
Over the midterm just a result of not needing to put the same amount of dollars in each year to year to generate the same value.
From making consumers aware of our brand and capabilities.
Okay. Thank you.
Okay.
Your next question comes from the line of Daniel gross slate of Citi. Your line is open.
Hi, guys. Thanks for taking the question and congrats on another strong quarter here I'll take on the on the marketing question.
I'm curious if you can provide some more details around the marketing strategy on the weight loss program, specifically I assume that's going to ramp up in the December January timeframe, and it's a very crowded market, especially with the GW. One so I assume that tax are going to be.
Maybe a bit high so I guess the question is how has your marketing strategy different for weight loss versus.
Some of your more.
Correct, Nathan casual categories and when do you think that will begin to impact your financials.
Thanks, Daniel let me take maybe the first half so yeah as we mentioned in the prepared remarks were.
Hoping to get that first version of weight management now in the next couple of weeks, which we're really excited by we think it's going to have a.
Pretty compelling offering at a very massive market price point with really consist been resolved, which is fantastic from a marketing standpoint, I would say it's fairly similar to the approach we've had across all of the category expansions, we've had weather that mental health or women's dermatology.
Last couple of years.
At this stage gate it right we have a ruthless focus on what we think gold standard unit economics are we have a lot of legacy category that are driving really robust growth at scale at the unit economics.
While we like to do for the first three to six months of launching a category is to test into the category to understand the levers of the business.
The optimizations to the customer experience that we need to improve in order to ultimately see the trend line towards what that what that gold standard looks like.
Yes, when you talked about kind of a.
Payback period on marketing, we obviously look at that but we also look long term.
As kind of a lifetime value over cap type ratio and so.
I would expect in the first three to six months.
Fairly small amounts of spend as we stage gate and understand the current ecosystem, we've built and the optimizations that need to be met and then as we unlock those different unit economic profile more capital will come.
Yes, the second part.
Got it okay take the second part of your button that around just like the the time that it takes two years typically.
The financial impact I think the default assumption new category launches.
Typically what we expect is around 12 to 18 months to Shiloh.
Significant impact, but the result of being able to stage gating process, what Andrew mentioned, sometimes you know for some categories, we've seen in our portfolio and accelerate but generally the state default assumption probably 18 months.
Okay makes sense and then maybe another one for you on the strategic pricing.
<unk> headwind I think last quarter, you said $12 million to $18 million in the second half.
What was the headwind this quarter do you still expect that to be $12 million to $18 million and how should we think about kind of the run rate of that headwind heading into 2024.
Yes, so great question I think that we run.
And as a result of acute behavioral patterns across the user base.
Software only minimal headwinds and so that was one of the reasons behind why we were able to raise the guidance in the outlook for the rest of the year.
So I think that when we had provided the guidance that was the key factor would also equate into this quarter some of which we anticipated but not to the degree that they occurred one thing that we felt we saw lot of existing users. They were on less premium SKU Arctic rich to your personalized product.
Walt longer duration.
Subscriptions and so as a result of that.
But you look more premium Skus, we did see a benefit from that.
Latest or the new users are starting to opt in for what the puts my product, but again they'll carry premiums to the generic given the price points that we put those out.
And then lastly, the renewal rates for some of the cohorts the legacy cohort.
Many of them are actually renewing at greater rates until the combination of those three factors largely offset the pricing headwinds that we're expecting in Q3.
Although we would be embedded in our guidance is that that dynamic with gains in here into Q4, as well and typically actually hit the second half of 2024.
Very likely to be a tailwind that you start to get the full benefit longer term retention and then just lapping the.
The monthly average revenue per subscriber dynamics.
Got it thank you.
Your next question comes from the line of Jack Wallace of Guggenheim. Your line is open.
Hey, congrats on the quarter. Thanks for taking my questions just wanted to.
Dive down a little bit more to the marketing strategy. It sounds like there was a ton of.
Testing and development of different channels and messages.
Across all the different categories I was wondering if you had.
Aside from just the pricing.
The changes we saw in the second quarter, if there was any additional.
Your benefits you saw there that are implied in the fourth quarter guide thinking in terms of.
Do you have whether its yield on on spend whether its debt.
<unk>.
New subscribers coming through the pipeline through the channel.
Our retention rates anything there that would be indicative of better.
Better messaging and reaching customers where they are thank you.
Yeah, Jack I think maybe I can start with some of the question around the pricing dynamics and just the broader marketing strategy.
Profit over to Andrew I think one of the things that we are seeing is just the mix of products that users are selecting.
Mentally that's.
Change in fair.
With the pricing changes around longer duration as well as.
Putting the quickbooks product at more attractive price point more and more users are going towards plugged up.
That over the course several months include about one of the reasons behind why we have conviction in.
While the price points are lower than what they historically were more users just lucky amendment or the average revenue per user.
Inherently going up and so as a result of this change because we do think that.
The benefits of about what were thinking for the fourth quarter and beyond and then I've mentioned on the prior question.
Let me hit the back half of 2024.
<unk>.
Maybe to start to really benefit from this.
Longer longer retention patterns and the course that we are there.
Yeah. The other thing I mentioned, Jack from a marketing efficiency standpoint.
Yes.
Sure.
Remarks, 40% of new orders in the quarter coming from personalized product, which is up quite substantially from last quarter, we expect.
A large chunk large majority of the business to be these types of products in the coming year.
And what we see also from a marketing efficiency standpoint, it's just the demand and interest and intrigue and these types of products.
And the ability to personalize and how a conversation with the provider, but know that there are capabilities that.
Can unlock and deliver more value than you would otherwise get somewhere else.
Actually really does have a pretty meaningful impact in the efficiency of spend.
And you can imagine.
The visualization in television commercial the story and the trust that has built when you see under the hood with the capabilities that are allowing this level of flexibility and customization and cross category compounding into single treatment doses and form factors that are more interesting are intriguing to us.
The visuals and so that is something we've definitely.
We definitely noticed in addition to the customer happiness customer retention and stickiness.
We think.
The kind of incremental tailwind into the spend as we continue in the next couple of quarters.
That's helpful and then just to follow up on that.
Have you seen any meaningful amount of prior customers returning.
Specifically for these personalized products.
Or even aside from that.
Maybe different demographics being interested in products that maybe werent your explicit target demo a.
A couple of years ago. Thank you.
Yes, I think.
Youre hitting around Jack I think is both a great recapture mechanism for individuals that meda churned off.
As the collection of kind of cross category compounds grows. It also has a really attractive mechanism because one category might catch the eye of an individual over another.
I also think in combination with.
The strategic price reduction those two together is really quite powerful.
And I think we've seen that pretty substantially in the last couple of quarters, we track market share capture across each of our categories across the top three or four competitors and we've seen really big mix shifts right. As we've continued to accelerate and capture more share and I think this combination of mass market pricing and a wide portfolio of personalized capability.
Is that our really bread and butter kind of like made in our facilities right really only in our facility.
Are delivering I think.
A pretty unique and compelling value prop to customers that's getting the mine to.
To come for the first time or to come back and consider for the second time.
Got it that's helpful. Thanks, so much and again congrats on the quarter.
Thank you.
Your next question comes from the line of Allen Lutz of Bank of America. Your line is open.
Thanks for taking the question and congrats on a nice quarter.
Andrew one one for you you just mentioned.
We're taking market share among some of your top competitors I guess as we look at what's going on September October November what is your gauge of what's going on with the consumer as we're heading into November now is things like student loans interest rates are those things impacting the consumer in any observable way on the platform do you think.
That's impacting your competitors, maybe more than you just curious if youre seeing any month over month or quarter over quarter changes in consumer behavior on the platform. Thanks.
Great question.
The short answer is we have not.
The last several quarters have been fairly consistent with historical behavior. It does not seem that there's any type of market shock or market behavioral dynamics that are influencing in any material way.
Can't speak to the rest of the competitive landscape, but to my knowledge there hasnt been anything unique that's been caused disruption.
Got it and then one for you I mean I know the.
The gross margin has already been touched on a bit but I wanted to come at it from a different angle.
Just curious as we think about these investments in price.
Even offsetting the benefits you're getting from the move to affiliated pharmacies and longer duration subscriptions I'm just curious about as.
As you think about balancing growth with the gross margin.
Is there any opportunity to invest further in price given the stability in gross margins that we've seen or are you comfortable with the balance that you guys have here heading into 2024.
Yes, it's a great question. Thanks for the question.
I think we will continue to explore various ways to give value back to consumers and things that are.
The approach that was very thoughtful and deliberate and thorough.
Typically when we do take the decision.
What are you can make pricing adjustments or take other strategies big value to consumers.
Is there typically backpack that happen over the course of several months.
I think we're going to be very thoughtful around how.
How we think around how to get value back to consumers in the form of that.
Consequently, we are experimenting on receiving feedback from consumers around various offerings that we do put into the market.
I think over the mid to long term.
Our gross margin target has been in the mid <unk>.
The reality is that we are hitting a level of scale, I've mentioned, where theres likely to be further efficiency unlock mutual aid and pharmacies.
More than likely probably likely going to be a multiyear period.
For us to identify the most accretive ways to give value back to consumers.
Due to hit kind of the target in the mid Seventy's that we've predicted.
Great. Thank you.
Again, if you would like to ask a question. Please press star one on your telephone Keypad. Your next question comes from the line of.
<unk> Singh of true Securities. Your line is open.
Thank you and congrats on a strong quarter I wanted to follow up on the REIT management offering discussion. This Austin slightly differently. How would you describe this offering in context of your 2025 goal of $1 2 billion plus in revenues would you say that this offering represents incremental to your long term outlook is it more like supporting.
Loan growth for the long term outlook or is it just too early to say and kind of related to that.
I mean, clearly we have seen several employers launching programs and all things in this area for 24 and expectations are that it will pick up in 2025, considering that can you update update on update us on your thinking of long term opportunities in this area for our DTC space.
Yes. Thanks for the question Gunther, maybe I can start with the first part around just impact two to 2045 targets and then Andrew can handle.
Product, which is your question around weight management.
Sure.
The short of it is I think we're very confident in our ability to.
It hit the 2025 targets those are given us, Florida at the time that we thought.
But what we're seeing with the strong performance even in the current category.
President.
With him from the categories of loans, such as women's hair dermatology men's men.
Eric.
As well as sexual health, we're just at the start with even on even on those categories alone and so.
And we provided those targets.
Embedded in our ability to hit those is primarily around continuing to execute across many that I mentioned, but we spoke around earlier this shift to personalized products continuing to make a broader set of consumers aware of our capabilities and product.
And so I think at this moment in time, if we have a lot of conviction in our ability to certainly Ted if not even surpassed the 2025 target.
Even in the absence of.
The launch of new categories with the equation.
Weight management, and so that would be accretive accretive to those targets.
Sorry about that.
Yes, Thanks, John for your question regarding the weight management category.
We think it's going to be an extraordinarily valuable category. It affect a very large chunk of the population I think what the GLC ones have done in the last year.
I have really educated the population.
There are pharmaceutical treatments that are highly effective.
And more of them are coming.
As the reality right there might be 15% to 20 different medications currently under clinical reviews that are showing an incredibly good data profiles and safety profiles that.
In the next couple of years will be live in the market and so we believe this is going to be a really big category for you at this point this will be accretive on top of anything we put forward for 2025.
So what we're starting with I think is a very.
Safe math to market well studied approach that directly goes after some of the underlying dynamics such as.
What kind of appetite Curt craving insulin resistance and tableau and dynamic that all effect.
The gaining of weight, but the platform is being built in such manner, so that in the coming years.
As this portfolio of <unk> and others.
Come to market, we will be equipped to bring those to market. When we can hit those thresholds.
Safety of supply chain consistency of reimbursement inconsistency and so we're really on top of this category. We're really excited by this category I believe this will be a very large tailwind for the business in the coming years.
But I think we are as we've talked about in the past.
Feel like it's prudent that we maintain trust with the consumer and now we are only bringing to market, where we believe we can deliver consistently and safely and at this point, what we're launching really is representative of that.
Okay. Thanks for that and my follow up is more around some technical details on your mental health business I think this new disclosures for the first time 125000 subscriber count my understanding is some of these members might be on the platform for counseling and therapy sessions, how does that get captured in there.
And net Argos calculation help me understand that.
The overwhelming subscribers within the 125000 are.
Getting treated holistically with provider for psychiatric care that included.
Ongoing care with with a provider for things like depression or anxiety, the chronic treatment of that adjusting of those medications.
And so I think overwhelmingly just for a little bit of color and context.
The source of those subscribers fits into the more traditional psychiatric medication management.
Got it thank you.
Your next question comes from the line of John Kim of TD Cowen Your line is open.
Hi, there this is Katie on for China.
I was just wondering if you could provide any sort of update on how is it sounds like thats, a very successful platform so far.
How do you think about the key catalysts over the next year to two years for that platform and any any learnings so far.
Q3, thank you.
Yes, thanks for the question.
<unk> business is probably one of the more exciting parts for all of us it doubled.
Year over year, the number of subscribers in the third quarter and.
Any expansion is really coming from the investments in a lot of the personalized products that we've rolled out across dermatology across women's hair care as well as a lot of the underlying efficiency and customer improvements in the mental health businesses. So the mental health cat.
Category for women as well as those dermatology categories.
Some of the fastest growing categories in the company and as I was mentioning earlier are approaching the point, where they're really delivering kind of.
Close to kind of gold standard standard unit economics, and Thats been six to 12 months of optimization I think we are still on the cusp of.
So more to go but very clearly approaching what we believe to be excellent.
I think theres diversity within there, which is exciting there's also quite a lot of personalization adoption in the last couple of quarters that has been very exciting and quite a bit more to come and.
And we think coming into the New York, New year Theres going to be.
Some powerful additions to the portfolio of offerings not only within weight management, but also within mental health that are taking advantage of some of the more.
Sophisticated pharmacy capabilities, we have at our affiliated pharmacies.
Can bring really unique treatment compounds and experiences to customers. So a lot of high conviction, there and I think the unit economics are shaping up to be what we believe they are capable of.
And so I hope to be able to continue to lean in there and stage gate more capital and continuing to scale those more aggressively.
Okay, great. Thank you so much and then just as a follow up it sounds like there is a slight implied deceleration in that Q4 revenue guidance is there any chance you can provide some color on the those assumptions and sort of what are the puts and takes to that Q4 revenue number. Thank you.
Yes, I think it's a great great question I think really that we are assuming that the momentum that we've seen with more and more subscriber adds coming onto the <unk>.
To the platform.
Continue throughout Q4, I think Ive mentioned earlier also embedded in the.
The guidance of our ability to.
So hospitals or are there thing mitigate any headwinds from the pricing changes that we made in the second quarter.
Through having a greater share of media has come onto the platform and select the personalized product.
As well as starting to see the benefits from <unk>.
Stronger retention start.
Start to emerge in the fourth quarter, but really I think that those will continue to perpetuate throughout 2024.
And on Thursday that much of what we see in the fourth quarter as continued momentum I think that theres very few headwinds that we're anticipating in the fourth quarter.
Your next question comes from the line of George Hill of Deutsche Bank. Your line is open.
Hey, good evening, guys and thanks for taking the questions two quick ones for me I got on a little bit later I don't know if I missed this comment did you guys discuss churn at all and to what degree kind of a changing economic environment is having having on membership churn and then yes, I mean I wouldn't expect you to get formal 24 guidance, yet, but just as we think about the ramp towards 25 was just wondering if theres any meaningful <unk>.
<unk> as we think about next year that you guys would want to call out in advance.
Thanks George.
The first one we didn't explicitly speak through any new disclosures on churn, but we did speak to the fact that there's been really no material changes in customer behavior from a market dynamic.
Structurally that we've seen even even with their kind of difficulties.
And outside our walls, we haven't seen those come in and cause issues internally so fairly consistent.
We did speak to the fact that.
The business is now seeing quite rapid adoption of personalized products with north of 45%.
As disclosed of new customers adopting personalized products.
In the quarter.
And those those customers and those products, we have seen indications of increased stickiness and retention and believe underlying that is just a customer's ability to.
Personalized and adjust and tweak and.
And have conversations with their provider to deliver something truly unique to them ultimately is resulting in happier customers.
And improved clinical efficacy. So those are really the two things that we touched on prior.
Yes.
Part of your question.
Too early to give our outlook for 2024 at this time.
Really are energized by what we are seeing pick up in 2023 and really how we're seeing.
At the end of the year start to culminate and so I think that we talked in many of the.
Trends that Andrew mentioned around personalized product adoption.
More than likely it will start to continue to roll out a broader set of those capabilities across more and more categories.
Continuing to see efficiency gains in our affiliated pharmacies.
Complete the migration of that later this year and then also just the learnings that we're starting to get.
Many of the brand investments in marketing all of those are committed into a lot of positive tailwind that we see continuing through 2024 and so that's one of the reasons why we have the conviction.
And our ability to generate positive net income within the first half of 2024, just as a result of really all of these things starting to come together.
That's helpful. Thank you guys.
And we have a follow up question from the line of Jack Wallace of Guggenheim. Your line is open.
Hey, Thanks for letting me get back in here just.
Wanted to put the quarter's results in context.
I believe in the third quarter of.
Last year through the first quarter of this year, you talked about there being an unusually favorable advertising environment and in the second quarter that was maybe more normal one of you could just comment on the AD spend environment.
Competitive.
Any competitive pressures there and then how you would.
Yes, I can handicap, the fourth quarter relative to kind of the prior let's call it six quarters.
The advertising environment. Thank you.
Yes. Thanks for the question Jack I think that we still see.
Normal environment I don't think its Richard.
Really.
Onerous or favorable.
Much of what we saw in Q3.
What's consistent with the environment in Q2, I think the differences given that we're rolling out meaning strategic pricing actions in the second quarter as well as also the expanding the.
Set of personalized capabilities across many lines.
Such as the move in the hearse dermatologist based on the <unk> space.
The investment in marketing was choppy and it was more skewed towards the back half of Q2.
We don't foresee any of those dynamics.
In the fourth quarter, and so I think that the spend levels will be more normalized in the fourth quarter, but we're still very excited by the efficiency that we're seeing over the course of.
Really the back half of the year and so I would say that our expectation is that the environment will continue to be normalized and what we've seen in Q2.
What's embedded in our guidance.
Got it. Thank you appreciate it.
There are no further questions at this time. This concludes today's conference call you may now disconnect.
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