Hims & Hers Health, Inc.

Good afternoon, everyone, and welcome to the HIMSS and HERS third quarter 2022 earnings call. My name is Lisa and I'll be your operator today. At this time, all parties are in a listen-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 Greeney from the Blue Shirt Group to begin. Good afternoon, ladies and gentlemen.

Welcome to the Hims and Hers Health third quarter 2022 earnings call. On the call with me today is Andrew Dudum, co-founder and chief executive officer, as well as Yemi Okupe, chief financial officer. Before I hand you over to Andrew, I need to remind you of legal safe harbor and cautionary declaration. Certain 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 statement after this call, whether as a result of new information, future events, changes in assumptions, or otherwise. please see our most recently filed 10Q and 10K reports for 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 and investor relations website at investors.forhim.com. 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 the third straight quarter, we saw sequential growth in the number of net new subscriptions of 174,000 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 EBITDA guidance we are 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 materialize. The 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 Hems and Hers platform, and record subscription growth. Underpinning these incredible results is our transformational business model and world-class teams who are 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 are building has not only enabled us to drive growth and build scale at unprecedented levels to date, but will 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 tailwinds in the quarters ahead. It is clear there is tremendous white space in front of us as we redefine how individuals 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 have acted 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 22, and in the third quarter specifically, is a testament to that model and focus. Our ability to win in this challenging environment is the 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 were 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 continue to decrease their marketing investments, we have seized a significant opportunity to capture mind share, generate high ROIs, and further deepen the 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. On the him side of the business, we launched campaigns with the NFL during primetime games on Sunday, Monday, and Thursday nights. 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. I'll leave you with just that teaser for now and look forward to sharing details after the launch. Turning now to the progress we were 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 HIMS and 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. Whether it's through our websites or mobile apps, we are proud to be a trusted place for our customers to engage with healthcare providers, become educated about their conditions, and find sustainable solutions that improve their day-to-day well-being. 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 points, we have meaningfully improved the sophistication of our routing technologies. 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. As 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're building the teams and technology that will enable us to expand our product portfolio and leverage compounding capabilities to deliver groundbreaking personalized solutions across our categories. This past quarter, we took possession and fully moved in to our new 25,000 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, the 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 healthcare. There are a number of key factors that attract healthcare providers to HIMSS and HERS. First and foremost, we're providing them with the tools to achieve significant impact with patients, which is incredibly empowering. We do this through a 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 healthcare requires great providers. As such, we will continue to invest in our clinical experiences to empower and attract the best medical talent in market. In short, investments across brand, 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 hands, which requires that we remain incredibly disciplined. 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 couldn't be more appreciative of our teams who have gotten us to this point and will continue to propel us forward. Now I'll turn the call over to Yemi to discuss the financials and provide more details on our outlook.

Thanks, Andrew. Hello, everyone, and thank you for joining us today. I'll start by providing additional color into our third quarter financial performance. talk through the additional transparency pertaining to our cost structure that 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 health and 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. It continues to be driven primarily by the expansion of our subscription base. In the third quarter, subscriptions on our platform increased 174,000 quarter-on-quarter to $991,000, representing an 80% increase from the third quarter of last year. While our traditional longer-tenured core offerings, such as Men's Sexual Health and Him's Hair, continue to drive the majority of our revenue growth, we are seeing the balance shift as 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 through 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 fulfillment 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 10Q 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. Operations and support represents the cost of our operations team, encompassing supply chain management, fulfillment of orders, and customer support services. Second, 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. 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 build 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 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. This 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 toward 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 midterm, we expect investment in this area to expand as we continue to launch new capabilities on our platform, as well as continue to evolve products across each of our categories. General and administrative costs for the third quarter were 18% of revenue. This represents a 17-point improvement to the sitting period last year. While there may be some quarter-to-quarter fluctuation in 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. Adjusted EBITDA 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 and capital expenditures. As a reminder, we expect to pay $13 million in the fourth quarter for earnouts related to M&A activity from last year. We are very excited by 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, an ability to reinvest a portion of those efficiency gains across each of our pillars. For example, long-term development of our brand and 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, an ability to drive long-term growth while capturing unit economic benefits from a greater scale, and the potential for high ROIs on longer-term investments. Our adherence to these rigorous standards enables us to leverage benefits and 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 of 519 to 522 million. This outlook reflects year-over-year growth of 88 to 91% for the fourth quarter and 91 to 92% for the full year. Last quarter, we mentioned that if we continue to successfully scale our investments, we could generate positive adjusted EBITDA as early as the fourth quarter of this year. Despite macroeconomic uncertainty, our strong performance combined with 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 EBITDA outlook. In the fourth quarter, we expect adjusted EBITDA to be between 0 and 2 million, reflecting an adjusted EBITDA margin of 0 to 1%. For the full year, this will result in an adjusted EBITDA loss between 18 and 20 million. That represents a margin of negative 4% at the midpoint, reflecting year-over-year improvement of over 7 points. 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 regular risk-capped allocation framework. However, our expectation is that 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 HIMSS and HERS 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 and attain 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 1 on your telephone keypad. Once again, that is star 1 to ask a question. And we'll go to Daniel Grosslight, Citi.

Hi, guys. Congrats on a strong quarter, and thanks for taking my questions. I know you're not guiding to 2023 just yet, but it would 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, and now you expect to be just EBITDA positive. For 2023, is that positive, EBITDA sustainable, and how much do you have to kind of titrate growth down to sustain positive EBITDA?

Sure. I'll take that question down. This is Yamin. Hitting the second part of the question first, we do expect to remain profitable for the foreseeable future going forward. So this marks a new, or Q4 will mark a new moment in our history where we do expect to generate profitability on a go-forward basis. With that said, we still have an immense growth opportunity ahead of us. And so we're viewing profitability more as an output, meaning that there's 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, you know, we'll see some, you know, natural expansion over time. With that said, we're not giving any additional outlook to 2023 at this moment. We'll provide that on the next call. But we'll just reiterate the commentary that we've given historically in the past where we do expect to, you know, maintain at least a 30% growth rate over the course of the next several years.

Yeah, that's helpful. Okay. And as I look back at your presentation when you first went public, you know that there were future opportunities in sleep, fertility, diabetes, cholesterol. I'm curious if any of these are 2023 opportunities, or are you thinking those are a little bit further out?

Thanks, man. I'll take that. You know, I think those are categories we're really excited by, and we've actually started to see some of those patients trickle in through the mental health platform on hims and hers that we launched in the last year and have been scaling quite dramatically. I think at the moment, from a category standpoint, we have three to four categories that are growing exceptionally robustly, triple digits, mid-triple digits or more. And so I think there's a lot of excitement around deepening our expertise and personalizing the breadth of products within those categories better segmenting those customers, better serving those customers. And I think that's really where a lot of the investment is today. So, you know, we mentioned on the prepared remarks, our new 25,000 square foot pharmacy in Arizona, investments in compounding personalization. And so I think you can expect a lot of those types of initiatives and product innovation to come out in the new year, just because the size of those TAMs 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 Young, Credit Seed.

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 could drive further efficiencies, or is it really just about driving that top-line scale at this point?

Yeah, I can start there. Thanks for the question, Jonathan. I think as we mentioned, we continuously look for opportunities end-to-end to extract additional efficiencies, whether that's negotiating with suppliers or even just looking through various mechanisms for how do we do things better. I think you can expect us to continue to do that. With that said, just given the immense opportunity ahead of us, as mentioned in response to the prior question, Our objective function is not to rapidly necessarily expand margins. There still is an immense opportunity ahead of us, but rather have that be more of an output as we continue to rapidly scale our offering and continue to innovate and make the overall platform better and generate a better customer experience. What we do see is we do see benefits come in the form of whether that's 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 on the next cycle of their end goal.

Okay, great. And then just in terms of, you know, when we're thinking about the 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, you know, say the mental health side accelerating more than you previously anticipated? Any color there would be great. Thanks.

Thanks Jonathan. I think generally speaking what we're seeing is that as other players in the market, both competitors and non-competitors are obviously pulling back and retreating, it creates a really powerful opportunity for us to take a disproportionate amount of share, mind 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 question is the fact that we're focusing on conditions and 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 in your own body, how you feel when you look in the mirror, how you feel with relations to your partner and your household. So I think it's really the emotional nature of them, this high sensitivity nature of these conditions that really impact people's lives. And that's something that even in recessionary times is proving to be incredibly meaningful to people. And so there's really no concerning trends that we've seen across the base of the business. In fact, as the earnings would suggest, you know, traffic to the platform is really an all-time high. And so, you know, we hope that we continue to invest from a place of strength and I think come out of these headwinds in a position where we've taken a disproportionate amount of the share compared to the competitive landscape.

Okay, great. Thanks. Congrats on results. Thank you. Our next question is from Corinne Wolfmeyer, Piper Sandler.

Hey, good afternoon, all. Congrats on the quarter and thanks for taking the questions. So first I'd like to just expand on gross margin a bit. Can you just dive a little bit deeper into the puts and takes of what was exactly driving that sequential growth there that you saw on that line? And then how much of that do you think is expected to continue here into Q4 and then even the early parts of 2023, especially as that wholesale part of the business starts to become a larger mix? Thanks.

Yeah, sure. Thanks for the question, Corrine. 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 and the wholesale channel. Additionally, what we also do see is we're 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 as customers are also opting into longer duration subscriptions, there's the ability to start to bundle the offering and realize gains across those measures as well. And so 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, and Q4 or even next year will provide more clarity around a top and bottom line of 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, drive stickiness, or potentially to push through elements down to the gross margin.

That's very helpful. Thank you. And then just on average order value, we did see a slight, you know, bump up this quarter. Can you just talk about, you know, some of your confidence in this level of value kind of continuing throughout Q4 and then even 2023? I mean, you did mention a part of it is due to, you know, duration of the orders. So how much of that do you think is likely to continue? Thanks.

Yes, I think what I would say is our objective function really is more around the revenue per user, and that is to some degree correlated with the AOV. But really the things that generally drive revenue per user are the duration of the subscription. So the longer duration subscriptions generally will drive more revenue up front per user. The overall engagement of users, how many products are they engaging us with, that won't necessarily show up in AOV. And the product mix is the third element. It's 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 AOV expansion. And so I think as a result of that, we wouldn't necessarily guide to a specific AOV 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 that will enable us to continue to generate and drive more or at least a stable amount of revenue per user.

Thank you. Still interesting from Truist Security. Ties the next question.

Thank you and congrats on a strong quote and thanks for taking my questions. Following up on the last question around AOE, is it possible for you guys to give us a breakdown on the big step up you're seeing sequentially in AOE? Like how much of that is driven by increasing multi-month subscription? How much is product mix is like evenly split? And I'm trying to understand like, you know, you guys have talked about how customer retention rate or churn rate continues to improve and one of the drivers there is this 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?

Yeah, I think I can take the first part of that question, and maybe Andrew, if you want to take the second part on the retention. I think what we do see around it is more and more users are opting for the multi-month duration. I think the last time that we disclosed it 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, the elements are correlated, meaning that as we've also started to expand the offerings within certain product mixes, whether that's rolling out a multi-month offering and mental health or additional options in the hair business, we've 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 is a greater push towards more folks opting to have longer relationships with the platform. And so as a result of that, that is a pretty significant dynamic that is driving the AOV. But I would say the right way to think about it is the two are somewhat correlated in the mix and the duration. We're investing in both of those in unison. And then, Andrew, if you want to take that.

Yeah, I would say thanks, Jalinder, 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 profiles. So we mentioned the launch of the Android application this quarter as well as the iOS applications in Q1. Those are really platforms built essentially to personalize and customize an experience for a patient in a way that really dramatically increases engagement and increases 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 fed and directed to the appropriate person quickly so that any concern is handled with speed and ease. So these investments, I think, are also really starting to pay pre-material 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 the retention dynamics as you scale and as you hit more people top of the funnel. And I think that combination is fairly rare to see.

Thank you. Just a quick follow-up on Jonathan's question around long-term margin profitability. Just wondering if there have been any changes in your long-term margin expectations and the timing to get there. Maybe give us an update there. More important, I'm trying to understand if the path or drivers to get to those profitable targets have changed in any way versus what you thought a couple of years back when you became public. Clearly, you're seeing benefits from internal pharmacy step up in multi-month subscription. Maybe you're willing to invest more in sales and marketing. Just curious if you can spend some time building blocks to get to your long-term margins, how they changed in the past couple of years.

Yes, I think it's something that we're constantly assessing and 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. So the short answer is that the dynamics have evolved. I think the intent and many of the levers that we would pull, we've outlined in prior calls. What we will do is we'll provide further clarity early next year in the Q4 earnings call around specifics, around what our expectations are for 2023, as well as more midterm targets.

Okay. Thanks a lot. Thanks, Shalinder.

Our next question comes from Michael Turney, 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 this celebrity is that you're going to announce in 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 in detail. I apologize if it has, but obviously there's been a lot of fluctuations from an ad rates perspective. And so, you know, relative to the conceptual components, you know, in terms of your go-to-market strategy, you forget the category dynamics. Have you seen anything else in terms of that would make you allocate dollars differently over time?

Yeah, 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's done a lot of great work already. I think the strategy here, and Yemi talked about this briefly in the prepared remarks, is to invest really in the long-term orientation of the brand equity and the brand awareness. 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 of these conditions, awareness of options, education, about solutions and the brand. And so I think you'll 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 impacts of those investments. I think we have a rigorous investment policy here and are constantly evaluating those trade-offs. But I think where where we are from a business perspective and the 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 you'll see us do more of that high impression, high visibility placement work as we did in this quarter with the NFL and with Hulu. They're just really pulling their weight in a really powerful manner. You know, the channels that have gotten us to this point will continue to be a large portion of the mix, but I think you'll 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.

Understood. And, again, not trying to get ahead of anything like category advancement, but clearly you're getting to the point now, too, where within your – neck of the woods, you have scale, so to speak. Do you 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?

Yeah, I think that's 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 and 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 natural consolidator opportunity is even bigger. I also 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. You know, I do think there's an increasing opportunity for us. There's a lot more volume coming across our table. I would imagine, you know, that next year that will only increase. You know, what I would say, though, is, you know, the opportunity in front of us internally is just so robust. As I mentioned, we have three or four categories growing, you know, triple digits. And so there's just a really high bar for us when it comes to opportunistic M&A. And so we'll keep our eyes open. We think there's definitely a lot of great teams and investments out there. But I think we're trying to be as rigorous and disciplined as we can. And so, you know, we'll maintain that focus and maintain that high bar, you know, despite maybe the deal flow that will continue to increase in the coming years.

And your next question is Jack Wallace, Guggenheim Security.

Thanks for taking my questions, and congrats on another really strong quarter. I was wondering if you could just follow up on that last question. It sounds like the CAC dollars are getting to, as you're pointing out, to the scale where awareness is becoming a shift, but it also sounds like there's incremental investments going on to the underlying business, and as we're looking forward into next year, is it fair to say some of the growth dollars are shifting outside of the the CAC bucket to support a larger platform to be able to ingest the higher level of growth we've seen.

Yeah, thanks for the question, Jack. I think as mentioned, we're constantly weighing initiatives across a whole host of variety of factors. This year, as mentioned, one of the reasons behind the step up that you see in marketing throughout the year 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 continuing to pull on that thread. I think even the investment that you will see us make 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 that meets the key elements we're generally looking for, very attractive ROIs as well as reasonable payback periods. And I think with the combination of those things, that's what's propelling the confidence in the path to profitability that you see while also being able to maintain these investments in the long term. But I would say that the shift this year has already really started to happen. you know, towards, you know, a variety of different investments. And we'll continue to look to leverage that. So we'll continue to just, again, realize greater benefits from economies of scale, as well as just the benefits that come from the increasing and expanding footprint that we have relative to others in the marketplace.

Actually, that's helpful. And then you're thinking about the internal fulfillment in R&D capabilities. We're at 55% fulfillment in the quarter. Just thinking about the different structural puts and takes to gross margins going forward. Also, we've got shipping. It didn't look like it was a big impact on the margin this quarter, but the price of energy and transportation has been going up Globally, just thinking about the different puts and takes structurally on that number, not necessarily trying to pin you to an exact percentage, but just trying to think about the impacts of insourcing more production, cost of shipping, and potentially some of the higher human capital categories such as mental health impacting the cost of goods going forward. Thank you.

Yeah, I think it's a great question. I think what we generally are weighing off at this point is mainly 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 is lots around trying to directly extract risk 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, both from retention, and there is an efficiency benefit. I think the other lever, you are 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 operation more efficient, as well as, again, just given the growth of the business, almost doubling year over year, what that provides is the ability to have a lot of negotiation leverage with 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 the conviction and our ability to offset that. With that said, similar to other investment levers, we constantly assess the gross margin levels that we currently have relative to Are there other mechanisms that we might be missing to enhance and improve the overall customer experience that law might place a little bit of near-return 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 trade-off that we're making or we're considering at this point in time versus worrying about the macro factors that we've largely been able to more than offset thus far.

Gotcha. Thank you. Appreciate it. And again, congrats on the quarter. Thank you. George Hill from Deutsche Bank has the next question.

Oh, hi. It's for George. Thanks for taking the question. My question is related to term rate and retention. I know you guys are not disclosing the specific term rate, but you talk 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 the inflationary pressure. Thank you.

Yeah, I think what we see is we're generally seeing consumers, even the newer cohorts, come onto the platform at a very strong pace. What we highlighted earlier in the year is the fact that a critical element of our success would be the ability to maintain long-term retention north of 85%. What you see in the guidance that's showing up in the form of the top line as well as the bottom line is largely our ability to do that. And so 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 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 per user.

We'll take our next question from Joy Zhang, SVB Securities.

Hey, guys. Congrats on the great quarter, and thank you for taking my questions. Just one question from me on the HR side of the business. First of all, I want to say that it's wonderful that you're removing the stigma in women's special health with your 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 and the likes play in. With that in mind, can you comment on what that means for you competitively as you're moving from a pure telehealth company to more of a consumer retail e-commerce. Thank you.

Yeah, thanks, Joyce. Great question. I think the HERS offering is something we're really excited about. And frankly, I think specifically on the mental health side, it 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, the questions that, you know, we collect information that the patient provides, how they provide it, how they engage with their provider. But ultimately the core business, you know, will always maintain itself as a medical relationship with providers, right? We are a marketplace in that way and connecting you to expertise is what we do best. And so that's no different from, you know, what we do on the HERS side or the mental health side. I think in that offering in particular, we've brought something really unique to market that is both destigmatizing and normalizing the fact that depression and anxiety are exceptionally widespread across the nation. But then also giving you, you know, near same day or within a couple of days access to psychiatrists, therapists, right, on an individualized basis in a way that can combine 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. It can cost hundreds of dollars to even schedule that appointment. And so I think that ability to bring expertise from a medical standpoint, both on the psychiatry side as well as the talk therapy side to customers at a price point that is incredibly affordable and is near real time from an access standpoint. It's just a really special offering. And I think despite 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 that's 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 in 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.

Appreciate your time, everybody. Thank you for dialing, and 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.