Hims & Hers Health, Inc.

Good afternoon and thank you for joining us on today's conference call to discuss Kim's and Hers Health, Inc. Second Quarter 2021 Financial Results. Joining me on the call are Andrew Dudum, our Chief Executive Officer, and Spencer Lee, our Chief Financial Officer. On this call, we'll be making forward-looking statements, including financial guidance and expectations for our third quarter and fiscal year 2021 growth, expansion into new categories, strategies, customer demand, and products. These statements reflect our best judgment based on factors currently known to us, and actual events or results may differ materially. Please refer to documents that we file with the SEC, including the Form 8-K filed with today's press release. Those documents contain risk and other factors that may cause our actual results to differ from those contained in our forward-looking statements. These forward-looking statements are being made as of today, and we will disclaim any obligation to update or revise these statements. If this call is reviewed after today, the information presented during this call may not be current or accurate. We will also discuss NANGAP financial measures, which are not prepared in accordance with generally accepted accounting principles. For historical periods, a reconciliation with CAP and NANGAP results is provided in the press release filed today with the SEC on an AK and also available on our website. And with that, I'll now turn it over to Andrew Dudum.

Welcome and thank you all for joining our Q2 earnings call. We are proud to share that we've continued our outperformance on both the top line and bottom line of our guidance range this quarter, with a revenue of $60 million plus and adjusted EBITDA coming in at a loss of $5 million. With the team's steadfast focus on growth and efficiency, we've expanded gross margins to an all-time high of 78%. while adding nearly 200,000 subscriptions over the last 12 months. The results this quarter are a continued validation of our innovative consumer-oriented business model, and we believe we are leading a secular trend that will transform healthcare as we know it. As a newly public company, Hims and Hers is in the earliest chapters of our story, and as such, we're excited with each quarter to share more insights into our vision for the years ahead. We have built a management team of both industry veterans and technology innovators who are combined capable of making big bets on the future of digital health. I am confident our unique growth mindset, our commitment to a multi-year time horizon, and our proven, diligent execution will continue to be the engine for our success. Our vision for the future is simple. We're building hims and hers into the new front door to healthcare. A new front door that will span dozens of medical specialties, welcoming customers of all demographics into a unified consumer platform that looks and feels and talks to them in a way that gives them confidence they're in the right hands. I strongly believe that the great unlock in telemedicine will be the power of personal. The winners in this emerging category will be providers who offer a level of service, familiarity, and quality on par or above that of the relationship you have with your primary care physician. That's why we're putting personal on our strategic agenda as a key pillar of success. For the first time in history, we believe the infrastructure and capabilities exist to deliver care made for each patient uniquely different. This is a new frontier to medicine, not a nice-to-have, but a strategic driver of the business. For these reasons, I believe the majority of healthcare delivery will begin on a platform like ours in the future. No waiting in lines or jumping through hoops to find clinics, specialists, pharmacies, or in-network care. I also believe the new front door will have an international entrance. shaped by the US's innovation in telemedicine, but quickly followed in dozens of major international markets. International is an area we made important progress during this quarter, which I'll touch on later in my remarks. The opportunity to digitize and consumerize the healthcare system on behalf of everyday people is one of the largest transformations in technology and innovation globally over the next decade. And while many industry veterans have yet to realize this new model will be the primary way in which people engage with healthcare, we are quickly moving ahead, investing in the brand, the experiences, the technology, and the capabilities for the future. Given this opportunity, our strategy is long-term oriented. Everything we do is in service of an opportunity that will continue to accelerate and grow over years, both in the U.S. and overseas. Our investments in infrastructure, differentiated technology and capabilities, and our continued excellence in building long-term equity in our brands will be how we win. I've often spoken about our plans for continued specialty expansion, international ambitions, and strategic technologies and defensible infrastructure. I'm proud to say this quarter was one where we took large strides in the foundation across all three of these areas. Our investments here are at the crux of our strategy to build a differentiated healthcare platform for consumers. Let me share a little bit about each. As of this quarter, HEMS is fully rolled out in four major specialty categories, sexual health, dermatology, primary care, and most recently, behavioral health. Each specialty is growing quickly, layering diversity into our business as we scale. And while early categories such as sexual health continue to scale, our newest categories such as psychiatric services, therapy, and broad behavioral health are growing the fastest. Our behavioral health specialty has the potential to be a meaningful pillar for him and hers, offering a differentiated service relative to other providers as we combine psychiatry, live group sessions, and individualized therapy within a unified platform. This quarter, we launched our Behavioral Health Dashboard, allowing customers a centralized hub for flexible and affordable mental health services. Within their dashboard, patients can coordinate care, select providers, schedule therapy appointments, track their progress, message their psychiatrist, and manage their medications, all from one mobile-first system. From the consumer demand we've seen to date and the early acceleration of that business, we believe this specialty to be a foundational pillar of the company in the future. Differentiated by a comprehensive set of services and offerings, from psychiatry and live group sessions to individualized psychotherapy, we believe the HIMS and HERS mental health platform offers something truly unique to patients in need. With nearly 80% of our patients leveraging our psychiatric services, reporting improvements to their mental health, our team is more motivated than ever to double down on these initiatives. This new category, only fully released this quarter, is just another data point proving our consumer-first business model can and will scale as we continue to introduce more offerings and categories. We expect the future of the company to progress like its past. rapid expansion into new specialties, likely doubling the number of core categories we're in by 2025. The same approach, the same model, getting more efficient and delivering more value along the way. As I've mentioned before, we believe HIMSS and HERS has a unique opportunity to become a consolidator and ultimately the leader in this digital transformation of consumer health. Every month, we see dozens of opportunities to acquire teams, technologies, and brands to help accelerate the reality of our vision. The Hims and Hers brand is an attractive strategic partner for many innovators in the space, providing us ongoing access to deal opportunities. We've looked at hundreds of these companies over the last few years, with few generating excitement for management. This quarter, I was thrilled to share that we announced two transactions that not only fit squarely into our long-term vision, but accelerate our ongoing initiatives, specifically relating to our international ambitions and investments in differentiated technologies and capabilities. Let me take a moment to provide some color for both of these acquisitions. First, we acquired Honest Health. which accelerates our geographic expansion with operational capabilities to support our long-term plans for the UK and Western Europe. Led by Sam and Pablo, Honest Health has demonstrated a powerful combination of leadership, passion, and innovation in digital health that will further elevate our ability to provide the hims and hers experience to a new segment of consumers in the UK and beyond. Similar to our commitment to expand into more specialty categories in the coming years, we too have the same ambition in key international markets. I believe the new front door to healthcare will be open to a worldwide audience. And as such, we will continue to find opportunities to invest both organically and inorganically in teams and infrastructure for that global future. In our second announced acquisition this quarter, we acquired Apostrophe. a leading teledermatology platform and compounding pharmacy in the U.S. As I've shared before, clinical dermatology today stands at a staggering $44 billion market. However, what is even more staggering is the retail dermatology market, think Sephora, stands at a whopping $150 billion market. It is my belief, shared with the founders of Apostrophe, that over the next five years, innovative platforms such as HIMS and HERS and Apostrophe will continue to move market share from retail to clinical. Why pay $50 for an over-the-counter cream with no studied clinical efficacy when a personalized, bespoke prescription treatment can be compounded for your specific needs and delivered to your door within days for the same price? My long-term belief in this market transformation is at the core of why we acquired Apostrophe. Built upon their Arizona-based compounding pharmacy, Apostrophe has garnered deep love from their consumers with revenue growing at 120% CAGR over the last four years and building one of the most loyal and diverse patient populations in dermatology. This acquisition was a no-brainer for management. The dermatology market is so large and growing so quickly that the front door, as I've spoken about, needs to be broad. Apostrophe widens that door with a new brand entrance for a new segment of consumers. Dermatology was the second fastest year-over-year category last quarter. The acquisition increases both the volume and variety of our dermatology consumers. And even more importantly, this investment in infrastructure is second to none, accelerating many of our existing initiatives. Ben Holberg, founder and CEO of Apostrophe, has built a company capable of delivering a range of bespoke clinical compounds for dermatology conditions ranging from melasma to hormonal acne. These custom formulations provide patients with a degree of personalization rarely found in even the most high-end dermatology offices. Furthermore, potential for leveraging this compounding infrastructure in new avenues, not only in dermatology, but for future personalized experiences, are vast and exciting. These types of capabilities change the game for clinical optionality, patient personalization, and ultimately customer delight. With Apostrophe, hims and hers strengthens our competitive capabilities in dermatology, unlocking our ability to accelerate the expansion of treatments and categories on behalf of customers across the United States. At the core of our success and quick scale is a differentiated platform for both consumers and physicians and an integrated pharmacy system and medical fulfillment center capable of delivering a seamless end-to-end experience for the customer. As a technologist for the last 15 years, I have a deep belief that defensible infrastructure and software is a significant advantage to our company. A pillar of our long-term competitive strategy is differentiated capabilities through proprietary infrastructure and medical capabilities. I believe it streamlines efficiency of the legacy healthcare system and unlocks uniquely seamless consumer experiences. As such, Our investments this past quarter are reflective of a modern approach to building a defensible healthcare company. Last year, nearly all of our pharmaceutical delivery, over-the-counter fulfillment, and topical compounding capabilities were outsourced to third parties. Today, just one year later, I can report that nearly 50% of our order volume is now being fulfilled out of our Ohio pharmacy and fulfillment center. This 300,000 square foot centralized hub has been a large investment in technology, software, and infrastructure with a vision towards non-reliance on third parties and a platform suited with unique capabilities. I'm excited to share by year end 2022, we believe nearly 100% of our services and treatments will be filled via our verticalized infrastructure, further unlocking efficiencies and capabilities consumers are looking for. In addition to the purchase of Honest in the UK, the strategic acquisition and integration of Apostrophe and their compounding capabilities, and the quick rollout of our Ohio-based pharmacy and fulfillment services, we also have been investing deeply this quarter in our anticipated mobile platform and insurance offering. Every day, consumers search for hims and hers across the iOS and Android app stores. Our brand and consumer awareness drives people to find us across all of their devices, and we're working hard to build what we believe will be an exceptionally unique experience for them. One should look for exciting announcements regarding our mobile platform in the coming quarters. Our teams are hard at work designing and building what I believe to be the future home for HIMS and HERS members, a home that helps drive deeper engagement and ultimately healthier lives. In addition, our team continues the integration of insurance reimbursement as part of the HIMS and HERS platform. This is a key component to affordability for certain types of care and patient populations, which is core to our mission of expanding access for everyone. Expect to hear more about this rollout in the second half of this year. While early in our company's life, the road ahead is as clear as day. more specialty conditions that consumers love, like our newest offerings in psychiatry, more investments in personalization and bespoke treatment capabilities, like Apostrophe, and more laying the global groundwork to take this model, so clearly the healthcare model of the future, to more markets overseas, all in service of delivering personalized healthcare at scale that people love. I've said this before, but our organization is made up of people passionate about building the future of healthcare, who pride ourselves on being visionary in our sector, sustaining consistent execution and delivering growth, and I feel this quarter is again highly reflective of our ability to be the leader in this transformation. With that, I want to thank everyone on our team who's continued unwavering focus on our vision as driving such outperformance. and welcome the teams at Apostrophe and Honest Health to the family. We couldn't be more excited about our future together. I'll now turn the time over to Spencer, who can share more about this past quarter's results.

Thank you, Andrew. I'm pleased to report another incredibly strong financial quarter for Q2. I'll walk through the details behind our performance for the quarter, provide some high-level details on our recent acquisitions, and discuss our revised upwards guidance for Q3 and the full year. First, let's jump into the Q2 results. From my perspective, Q2 was another three months of the continued long-term secular trend that we've been describing to investors and the public. that there is a set of really personal medical conditions that people deeply care about, where there has always been deep consumer demand for treatments, but numerous barriers in market, including accessibility, price, stigma, trust, and especially experience, have prevented or deterred consumers from actually seeking the treatment they want. In the last 12 months, we've met with numerous investors, and we often get the question, won't consumers just go get your products and services for cheaper somewhere else? Our results, especially in Q2, provide a definitive answer, absolutely not. These types of questions fundamentally assume that experience doesn't matter to people, which is ironic to assume or expect that in healthcare, experience doesn't matter. At Hins and Hers, we understand that in healthcare, experience matters a lot to consumers, as much and often more than for any other industry. This attitude in healthcare that ignores consumer experience is why so many are frustrated with the healthcare system and is why it's one of the lowest NPS industries in the country. And this has been our opportunity. We are laser focused on building and constantly improving a set of experiences that consumers love, that motivate and inspire people to seek the treatment they need. We have demonstrated that subtle improvements in experience can drive meaningful increases in conversion and retention, demonstrating that for healthcare consumers, experience truly matters. We've also built and heavily invested in a brand that people trust and love. We have unlocked and mobilized an audience that is clearly seeking an alternative to the traditional healthcare system. When we survey our customers who purchase medication on our platform, 80% tell us they are purchasing the medication for the first time. The combination of a world-class experience aimed at a shockingly underserved audience wrapped in a beloved and trusted brand, this has allowed us to harness the deep underserved demand that lives in the market. Consumers are voting with their wallets, and they are clearly voting for hims and hers. As a result, in Q2, we added nearly 200,000 subscriptions to the platform versus Q2 of last year, up 76% year-over-year to 453,000 subscriptions. In our most recent investor presentation that we filed in June, we showed that within our oldest subscriber cohort, we are driving 88% long-term revenue retention in year three as compared to year two. The combination of continuing to capture deep consumer demand, driving strong new customer growth and stronger tension resulted in Q2 revenues of $60.7 million, an increase of 69% year-over-year, exceeding the high end of our Q2 revenue guidance of $57 million. In Q2, we generated 786,000 net orders, which accelerated to 37% year-over-year growth. Growth in net orders was primarily driven by growth in subscriptions and strong retention of existing customers. Average order value, or AOV, in Q2 was $74, which increased 28% year-over-year. AOV was in line with Q1, which was expected as we are now well into our second year of uptake into bigger bundles and multi-month subscriptions, as we discussed on our previous earnings call. In Q2, we generated a 78% gross margin, up 700 basis points versus 71% in Q2 of 2020. The combination of strong revenue growth and expanding gross margins compounded to generate even faster gross profit growth, up 84% year-over-year. Our focus over the last two years on expanding unit economics and increasing subscriber lifetime values has not only driven rapid revenue growth, but also year-over-year gross margin expansion at the same time. In our most recent investor presentation, filed in June, on page 13, we showed the incredible impact our execution has had on our subscriber unit economics. In our 2020 subscriber cohort, we meaningfully improved retention as evidenced by the increasing slope of the cohort curve compared to prior cohorts. We also increased monetization through larger product bundles and multi-month subscriptions, which increased AOVs, such that the average subscriber acquired in 2020 generated $363 in revenue in their first 12 months, compared to $191 for the average subscriber in 2018. That's a 90% improvement. In fact, the average subscriber in 2020 generated nearly the same amount of revenue in their first 12 months as the average subscriber in 2018 generated over the course of three years, $363 compared to $384, respectively, all while also delivering on long-term revenue retention of 88% in our oldest subscriber cohort. All of our hard work, improving and expanding our product offerings, enhancing the user experience, and developing marketing campaigns and brand assets that connect with our audience, all have served to increase retention, increase AOVs, expand LTVs, drive broader awareness, increase traffic, and improve conversion. Higher LTVs effectively make our marketing more efficient, which has allowed us to drive incredibly efficient growth. In Q2, our adjusted EBITDA loss was $4.7 million, meaningfully outperforming our Q2 loss guidance of $10 to $12 million. In Q2, our marketing expenses increased by less than $1 million quarter over quarter, while revenues increased by $8.4 million over the same period. This level of growth efficiency further highlights the impact that improving the fundamental customer experience that drive higher engagement, conversion, and LTVs can have on both growth and efficiency. I want to note that in Q2, we expensed $2.9 million in costs related to the acquisitions of Honest Health and Apostrophe and SG&A, which we've added back to adjusted EBITDA. I also want to note that Honest Health closed on June 11th and had an immaterial impact on our Q2 financial results, contributing less than $100,000 in revenue for the period. Speaking of Honest Health, in June, we acquired Honest Health for $10 million, primarily in stock, with over half of the purchase consideration deferred and to be paid out over time. There's also an additional $10 million earn-out component to be paid primarily in cash upon the achievement of certain future revenue targets. We also completed the acquisition of Apostrophe in July for $150 million, of which approximately $50 million was paid in cash in July. Apostrophe also includes an additional earn-out component of $50 million to be paid in cash upon achievement of certain future revenue targets. Had the Apostrophe transaction closed in Q2, pro forma for the cash used in the transaction, we would have had $269 million in cash in short-term investments as of June 30th. In Q3, we expect Honest Health and Apostrophe to generate between $4 to $5 million in revenue. We also expect our consolidated gross margins to be between 74% and 76% in Q3, which is driven by continued sped margins from HIMS and HERS and the weighted average impact of lower margins from Apostrophe. We also expect AOVs to decrease slightly in Q3 to $72 to $73 as a result of the acquisitions. Overall, as Andrew mentioned, we are incredibly excited about the tremendous opportunity both of these acquisitions represent. They provide key assets and leadership to take more share, address massive markets, and accelerate growth in important strategic areas. It's early days for both Honest Health and Apostrophe, and we see the same opportunities to enhance unit economics, expand margins, and drive efficient growth that we saw at hims and hers not too long ago. Now, moving on to financial guidance. For Q3 2021, we are raising our revenue range to $69 to $71 million and are guiding to an adjusted EBITDA loss of $9 to $11 million. I want to note for Q3, we expect to expense approximately $4 to $5 million in additional costs associated with the honest health and apostrophe acquisitions, which will be expensed through SG&A and added back to adjusted EBITDA. We also expect marketing expenses to increase by $9 to $11 million quarter-over-quarter, driven by, one, inheriting the ongoing marketing expenses of Honest Health and Apostrophe, and two, costs associated with celebrity endorsement agreements, including Miley Cyrus, which will include approximately $2 to $3 million in stock-based compensation expenses within marketing expense, in addition to other cash-based expenses. We expect total stock-based compensation expenses for Q3 to be between $12 to $14 million. For the full year 2021, we are raising our revenue guidance to a range of $251 to $255 million, an increase of $29 million at the midpoint versus our previous guidance. We are narrowing the range for just EBITDA losses to $35 to $40 million for the year. Similar to last quarter's guidance, our current internal financial forecast has Q4 revenues roughly in line with Q3. Our Q4 revenue guidance can be implied from our full year guidance as $69 to $71 million. As I mentioned on our last call, as a young and newly public company, we intend to provide guidance that we are confident in our ability to achieve based on the current data points we see in the business. Given the data points we have from last year, we feel like it is appropriate to keep our Q4 revenue guidance in line with Q3. Finally, I wanted to provide a brief update on our share count, given that both our announced warrant redemption and the apostrophe acquisition happened after quarter end. As of 6-30, we had approximately 193 million common shares outstanding. 8 million warrants, 17 million options, and 4 million RSUs for a gross total of 222 million shares. The warrants and options include a weighted average strike price of $10.89 and $3.28, respectively. We expect warrant redemptions to eliminate 7.6 million warrants and to issue approximately 2 million shares of common stock through the redemption. We issued 8.1 million shares and 700,000 RSUs in July in connection with the apostrophe acquisition. Pro forma for these two transactions, we would have had approximately 203 million common shares outstanding, 600,000 warrants, 17 million options, and 4.6 million RSUs for a total gross count of approximately 225 million shares. We are exceptionally pleased with the results we were able to deliver in Q2. The strength of our financial performance in the first half of the year and the strong guidance for the second half really highlight the power of our core differentiation across audience, brand, and experience. We are absolutely resonating with and delivering on all fronts for a generation of technology-first and experience-oriented buyers who are seeking help for deeply personal medical conditions. We continue to see strong investment opportunities ahead, including our partnerships with Jennifer Lopez and now Miley Cyrus, which all further validate the quality and power of the brand that we've built and our ability to uniquely reach an audience of brand savvy consumers. Our full-year revenue guidance now represents year-over-year growth rates of 69 to 71% for 2021. In fact, the midpoint of $253 million in revenue is now substantially ahead of the 2022 revenue guidance of $233 million we provided last year. It feels pretty good to deliver over two years worth of growth in just 12 months. I look forward to a strong second half of the year. With that, we can open the call to questions. Operator?