Hims & Hers Health, Inc. (NYSE:HIMS) Q3 2023 Earnings Conference Call November 6, 2023 5:00 PM ET
Alice Lopatto – VP, IR
Andrew Dudum – Co-Founder, Chairman & CEO
Yemi Okupe – CFO
Conference Call Participants
Glen Santangelo – Jefferies
Daniel Grosslight – Citigroup
Jack Wallace – Guggenheim Securities
Jailendra Singh – Truist Securities
Allen Lutz – Bank of America Merrill Lynch
George Hill – Deutsche Bank
Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the Hims & Hers Third Quarter 2023 Earnings Conference Call. Please note that this call is being recorded. [Operator Instructions]. I would now like to turn today’s call over to Alice Lopatto, Vice President of Investor Relations. Please go ahead.
Good afternoon, everyone, and welcome to the Hims & Hers Health Third Quarter 2023 Earnings Call. On the call with me today is Andrew Dudum, our Co-Founder and Chief Executive Officer; as well as Yemi Okupe, our Chief Financial Officer.
Before I hand it over to Andrew, I need to remind you of legal safe harbor 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 and 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 a link to the webcast and Investor Relations website at investors.hims.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 Hims & Hers, our mission is to make the world feel great to 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 offering surpassed 125,000 subscribers in the third quarter, while maintaining triple-digit growth. Our execution translated into outstanding financial performance in the third quarter. 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 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 and dermatology offering, 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 high-quality efficiency metrics of our most optimized business lines. Next, we drove meaningful gains from our efforts to verticalize 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 it 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 studied treatment compounds and sophisticated pharmacy capabilities, we believe wave 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 14,000 visits per day. Our platform has undergone nearly 7 years of development. And with the breadth of services, personalized solutions and capabilities we now offer, it is meaningfully accelerating the quality of care the providers on our platform can deliver.
Last quarter marked the beta launch of a significant evolution of our technology platform, MedMatch. MedMatch is a proprietary service that deploys artificial intelligence and machine learning against the expansive dataset at the core of the Hims & Hers platform. MedMatch is trained on millions of anonymized historical clinical visits, demographics, treatment types and patient outcomes and is being developed to identify the most optimal treatment for a particular person from medication formulary to dosage to form factor. With MedMatch 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. MedMatch provides the ability to leverage thousands of interactions to help providers more quickly identify treatments as well as inspired confidence with consumers that a specific treatment has worked 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 MedMatch 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 trial and error.
With MedMatch, we aim to alleviate months of trial and error with clinical insights that leverage the collective knowledge of the entire Hims & Hers platform. In this initial psychiatric beta, MedMatch improved remission rates, time to remission and customer satisfaction. Within this initial cohort, providers are overwhelmingly utilizing the insights and recommendations MedMatch is delivering, helping providers improve their speed to decision for patients, which we believe will ultimately increase 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 MedMatch will be transformative for health care 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 a condition that impacts almost 1 billion people around the globe. Capabilities like MedMatch 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, Hims & Hers has leveraged technology to empower both providers and patients with more accessible and personalized treatments. 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 and accelerating the impact MedMatch can deliver on better outcomes. More details around the inner workings of MedMatch are available on our website.
Before I close, I wanted to reassert that our 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 result.
And as we enter a new age in which AI will become more widespread, our ability to bring technology breakthroughs like MedMatch to market brings us closer to recognizing our vision of providing quality clinical care well beyond traditional approaches. These accomplishments have enabled us to deliver 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 give ourselves the flexibility to act opportunistically, we are implementing a program that allows us to purchase up to $50 million of stock over the next 2 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 will turn the conversation over to Yemi 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 continue to successfully execute across our strategy of enabling access to unique and personalized solutions through a world-class technology platform backed by a trusted brand. Performance remains robust across our longest tenured offerings, such as Hims & Hers and sexual health, and we are excited to see newer offerings such as mental health, cardiovascular health and personalized solutions across Hers Hair and dermatology continue to rapidly scale.
We have high conviction that equipping our world top 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 125,000 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 the strategic 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. Demand 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 Hims & Hers 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 in that it enables greater leverage across our ecosystem, bringing a level of efficiency that we believe few in the market can match.
At the conclusion of 2023, we expect to fulfill nearly all of our orders through affiliated facilities with third-party 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 harness the power of our operational model. In the 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 we have previously stated, our long-term adjusted EBITDA margin target of 20% to 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 and 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. Investment will be concentrated in 2 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 that equip providers with the ability to efficiently pair 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 costs may fluctuate quarter-to-quarter, this is an area where we expect to see continued leverage over time. Efficiency gains and disciplined growth contributed toward 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 to over $212 million in the third quarter. Cash flow from operations was over $25 million in the third quarter, well in excess of the $3.3 million spent on the purchase of property, equipment and intangibles in the third quarter. We believe we are rapidly approaching a level of scale that unlocks potential for further efficiency gains through automation. 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 will 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 toward 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 consumerization of health care. We are raising our outlook for 2023 to reflect these dynamics. In the fourth quarter, we are expecting revenue 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 million and $17 million, representing an adjusted EBITDA margin of 6% at the midpoint of both ranges.
For the full year of 2023, we are expecting revenue of between $868 million to $873 million, representing a year-over-year increase of 65% to 66% from 2022. And adjusted EBITDA is expected to be between $43 million and $46 million, representing an adjusted EBITDA margin of 5% at the midpoint of both ranges. In the third quarter, we saw a benefit from a greater share of users switching toward more premium SKUs in sexual health and hair, increased 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 that the strategic pricing actions taken in the second quarter will be net accretive well within a 12-month period.
Strength in this area was the result of rigorous experimentation and diligence over the course of several months before the implementation of the strategic pricing actions. Embedded in our guidance is the assumption that these dynamics sustain 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. Accelerating momentum could bring attainment of this milestone as early as the fourth quarter of 2023. While this is an exceptional milestone to achieve so early in our company’s life cycle, 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 these strategic priorities as opposed to an input following our approach of generating positive adjusted EBITDA. Our ability to drive such exceptional performance is the culmination of the efforts of hundreds of employees across Hims & Hers that work hard each day to help the world feel great for the power of better health. I’d 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.
[Operator Instructions]. Your first question comes from the line of Glen Santangelo of Jefferies.
Just a couple. Andrew, 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-term impact on the operating margin leverage. And you saw obviously the stock the way it traded intra quarter. Now you’ve all talked a lot on this call about these personalized solutions. And I think in Yemi’s 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 the defensibility of the pricing and gross margin? And then I just have a follow-up question for Yemi.
Yes, I’ll take the first part and let Yemi at the back, Glen. We’re really rolling out the personalized product across 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 in different supplements or ingredients or in some situations, treating multiple categories like we talked about last quarter with the erectile dysfunction treatment that also treat men predispose of a material risk for cardiovascular disease. So we’re systematically doing this because what we’re seeing is that the ability to custom make those treatments is actually just making people get to remission or get to a steady state of happening as 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 supplements that are great for hair strength and hair regrowth for women in situations such as menopause or postpartum. The same thing is happening across some of our newer categories on the men’s sexual health side or the men’s hair side, which even just last week, we released new serums and topical as well as an oral compound. So what we’re seeing is just choice in and of itself and that flexibility for customization is really unique in market and being able to deliver that at in most situations, the same price or even better than just a base generic is really overwhelmingly valuable to customers, right? Because these are combination therapies that would usually cost 2 or 3x what is the base generic cost.
And so our strategy is to bundle as much value as we can into these treatments, as much flexibility, deliver great personalized care, all ultimately focused on an 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 it’s more importantly, really changing the underlying dynamics of the model given the stickiness of those products.
Yes. And then I’ll hit the second part of your Glen. And we see for many of the personalized products that have started to rapidly scale, the margin structure that’s pretty comparable to that of the products that we had before. And the way to think around that is as we start to gain additional learnings from greater scale as well as now the efficiency moving north of 80% of the orders in the affiliated pharmacies, that gives us a cost structure that as we start to continue to rapidly scale those personalized product, we certainly get more and more efficient.
And so effectively, what we are doing is the cost in enforcement of those games and go back to consumers, really got the eye towards the — and mentioned earlier, able to put those price points at mass market levels given the efficiency of our leadership cost structure, it’s very hard for others to even create those products that I won’t even try to match those capabilities with the traditional generics. And as a result of that, you’re able to see us pass through value back to consumers, but also concurrently expand gross margins just because we’re continuously realizing more and more efficiencies from the affiliated pharmacy setup.
I appreciate all those details. Yemi, if I could just ask you 1 quick follow-up on that. So it sounds like though the strategy by reducing the cost with the personalized products that maybe you’ll 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 revenues, they’ve been just over 50% for 6 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.
Yes, a good question, Glen. So I think that the way that we currently started to just think around the marketing strategies, increasingly, we’re putting more and more investment into building our brand to capture consumers at earlier stages in their life cycle journey. And so we kind of started that journey really in the midpoint of last year, as we’ve gotten more efficient and as we’ve gotten more learning and started to continue to scale those.
As we start to think around what’s required to continue to generate that awareness, we’re starting to hit levels where similar like when you look at the point of last year, we were able to get 300 points of leverage year-over-year this year just as a result that you don’t necessarily need to spend the same degree 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, we do expect to start to really get leverage on that marketing line over the midterm, just some result of not needing [indiscernible] amount of dollars in each year to generate the same value from making consumers aware of our branded capabilities.
Your next question comes from the line of Daniel Grosslight of Citi.
Congrats on another strong quarter here. I’ll stick 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 time frame. And it’s a very crowded market, especially with the [indiscernible]. So I assume that tax are going to be maybe a bit high. So I guess the question is, how is your marketing strategy different for weight loss versus some of your more current nascent categories? And when do you think that will begin to impact your financials?
Let me take maybe the first half. So yes, as we mentioned in the prepared remarks, we’re hoping to get that first version of weight management out in the next couple of weeks, which we’re really excited to buy. We think it’s going to have a pretty compelling offering at a very mass market price point with really consistent results, 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, whether that’s mental health or women’s dermatology in the last couple of years, which is to stage gate it, right? We have a ruthless focus on what we think gold standard unit economics are. We have a lot of legacy categories that are driving really robust growth at scale at those unit economics. And what we like to do for the first 3 to 6 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 gold standard looks like.
Yemi 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 3 to 6 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.
To the second part of the question just likely the time that it takes to typically the financial impact. I think the default assumption for the new category launches typically that we expect is around 12 to 18 months to show a significant impact. That’s the result of the stage gating process that Andrew mentioned, sometimes for some categories we’ve seen that pull forward and accelerate but generally the safety assumption is 12 to 18 months.
Okay. Makes sense. And then, Yemi, maybe another 1 for you on the strategic pricing adjustment 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, it’s a great question. I think that we run just a result of a few different behavioral patterns across the user base saw fairly minimal headwinds. And so that was one of the reasons behind why we were able to raise the guidance and the outlook for the rest of the year. And so I think that when we had provided guidance, there was a few factors that also played into this quarter, some of which we anticipated but not to the degree that they occurred.
One thing that we thought we saw a lot of existing users that were on less premium skewed actually switched to a personalized product as well as longer duration subscriptions. And as a result of that, the subscription for more premium SKUs, we just see a benefit from that a greater share of the users are starting to opt and select the personalized product, but again, still carry premiums to the generics given the price points that we put those at.
And then lastly, the renewal rates for some of the cohorts, the legacy cohort, many of them are actually renewing at greater rates. And so the combination of those 3 factors largely offset the pricing headwinds that we’re expecting in Q3 that we see embedded in our guidance is that, that dynamic sustains into Q4 as well. And I think on after the hit, the second half of 2024, it’s very likely to be a tailwind that you start to get the full benefit of longer-term retention and then just lapping the monthly average revenue per subscriber dynamic.
Your next question comes from the line of Jack Wallace of Guggenheim.
Congrats on the quarter. Just wanted to dive in 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, aside from just the pricing changes that we saw in the second quarter, if there was any additional benefits you saw there that are implied in the fourth quarter guide, thinking in terms of whether it’s yield on spend, whether it’s new subscribers are coming through the channel and higher retention rates. Anything there that would be indicative of better messaging and reaching customers where they are.
Yes, Jack, I think maybe I can start with some of the question around the type dynamics and then just the broader marketing strategy. I’ll pass it over to Andrew. I think one of the things that we are seeing is just the mix of products that users are selecting fundamentally has changed. And so we with the pricing changes around longer duration as well as putting the personalized product at more attractive price point, more and more users are going towards that. We’ve seen that over the course of several months so that’s one of the reasons behind with conviction. And while the price points are lower than what they historically were, more users are selected them for the average revenue per user inherently is going up.
And so as a result of those changes, we do think that the benefits of that will sustain to the fourth quarter and beyond. And then I’ve mentioned in the prior question, when we hit the back half of 2024, we view the ability to start to really benefit from just longer retention patterns in the course that we do.
The other thing I mentioned, Jack, from a marketing efficiency standpoint, we’re — I think Yemi shared in the remarks for new orders quarter coming from personalized products, which is up quite substantially from last quarter. We expect a large chunk — a 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, is just the demand and interest and intrigue in these types of products and the ability to personalize and have 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 on the efficiency of spend.
And you can imagine just the visualization in TV commercial, the story and the trust that is built when you see under the hood of 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 or intriguing to individuals. And so that is something we’ve definitely noticed in addition to customer happiness, customer retention and stickiness that we think adds a kind of incremental tailwind into the spend as we continue in the next couple of quarters.
Excellent. That’s helpful. And then just a follow up on that. Have you seen any meaningful amount of prior customers returning specifically for these personalized products and or even aside from that, maybe different demographics being interested in products that maybe weren’t your explicit target demo a couple of years ago.
Yes. I think you’re hitting it right on the head, Jack. I think it is both a great recapture mechanism for individuals that may have churned off. As the selection of kind of cross-category compounds grows, it also is a really attractive mechanism because 1 category might catch the eye as an individual over another. I also think in combination with the strategic price reduction, those 2 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 3 or 4 competitors. We’ve seen really big mix shift, 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 capabilities that are 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 getting them either to come for the first time or to come back and consider for the second time.
Your next question comes from the line of of Bank of America.
Congrats on a nice quarter. I guess Andrew, 1 for you. You just mentioned you’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 you’re seeing any month-over-month or quarter-over-quarter changes in consumer behavior on the platform.
Great question, Allen. The short answer is we’ve not. The last couple of 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 us in any material way. I can’t speak to the rest of the competitive landscape. But to my knowledge, there hasn’t been anything unique that’s been thought of a disruption.
Got it. And then 1 for Yemi. I know that the gross margin has already been touched on a bit, but I want to come at it from a different angle. Just curious, as we think about these investments in price, it’s not even offsetting the benefits you’re getting from the move to affiliated pharmacies and longer-duration subscriptions. I’m just curious about 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, great question. Thanks for the question, Allen. I think that we will continue to explore various ways to give value back to consumers. I think that our approach there is very thoughtful and deliberate. And so typically, when we do take the decision to whether it’s going to make pricing adjustments or take other strategies to value back to consumers, those are typically backed by experience that happen over the course of several months. And so I think we’re going to be very thoughtful around how we think around how to get value back to consumers in the form of that.
Constantly, we are experimenting 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-70s. I think the reality is that we’re hitting a level of scale as mentioned, where there’s likely to be further efficiency unlocked from affiliated pharmacies and so more than likely probably likely going to be a multiyear period for us to identify the most accretive way to give value back to consumers to hit kind of the target on the mid-70s that we’ve predicted.
[Operator Instructions]. Your next question comes from the line of Jailendra Singh of Truist Securities.
Congrats on a strong quarter. I want to follow up on the weight management offering discussion. Just asking 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 your growth to the long-term outlook? Or is it just too early to say?
And kind of related to that, I mean, clearly, we’ve seen several employers launching programs and offerings in this area for ’24 and expectations are that it will pick up in 2025. Considering that, can you update us on your thinking of long-term opportunities in this area for DTC space?
Yes. Thanks for the question. Maybe I can start with the first part around just impact to 2025 targets, and then Andrew can handle the product issued a question around weight management. I think the short of it is, I think we’re very confident in our ability to hit the 2025 targets. Those were given a floor at the time that we set on. I think what we’re seeing with the strong performance even in the current categories that we were present in, the chance on these new categories alone, such as women’s hair, dermatology, men’s hair as well as sexual health, we just has to start with even on those categories alone.
And so we provided those targets embedded in our ability to hit those is primarily around continuing to execute across the dimensions that we’ve spoken around earlier. The shift to personalized products continuing to make a broader set of consumers aware of our capabilities and products. And I think at this moment in time that we have a lot of conviction in our ability to at least hit, if not even surpass the 2025 target, even in the absence of the launch of new categories with the inclusion of weight management. And so that would be accretive to those targets. And Andrew, if you want to take the second part of that.
Yes. Thanks, Jailendra, for the question. Regarding the weight management category, to be honest, we think it’s going to be an extraordinarily valuable category, right? It affects a very large chunk of the population. I think what the GLP-1s have done in the last year have really educated the population that there are pharmaceutical treatments that are highly effective, and more of them are coming is the reality, right? There might be 15 to 20 different medications currently under clinical review that are showing 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. To Yemi’s 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 mass market, well-studied approach that directly goes after some of the underlying dynamics, such as kind of appetite curve craving, insulin resistance metabolism dynamics that all affect the gaining of weight. But the platform is being built in such a manner so that in the coming years, as this portfolio of GLP-1 and others come to market, we will be equipped to bring those to market when we can hit those thresholds of safety of supply chain consistency of reimbursement consistency. So we’re really on top of this category, 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 that we’re 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. And my follow-up is more around some technical details on your mental health business. I think this is — you disclosed this for the first time, 125,000 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 your AOV and net orders calculation? Help me understand that.
The overwhelming subscribers within the 125,000 are getting treated holistically with provider for psychiatric care. So that includes ongoing care with a provider for things like depression or anxiety the chronic treatment of that, adjusting of these 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.
Your next question comes from the line of Jonna Kim of TD Cowen.
This is Katie on for Jonna. I was just wondering if you could provide any sort of update on Hers, it sounds like that’s a very successful platform so far. How do you think about the key catalysts over the next year to 2 years for that platform? And any learnings so far from Q3?
Yes. Thanks for the question. The Hers business is probably one of the more exciting parts for all of us. It’s doubled year-over-year, the number of subscribers in the third quarter. And the expansion is really coming from the investment 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 categories 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 unit economics.
And so it’s been 6 to 12 months of optimization. I think we are still on the cusp of some more to go, but very clearly approaching what we took to be excellent. So I think there’s 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 we think coming into the new year, there’s 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 comparing 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 we hope to be able to continue to lean in there and stage gate more capital and continue to scale those more aggressively.
Okay. Great. 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 those assumptions and sort of what are the puts and takes to that Q4 revenue number?
Yes. I think that’s a great question. I think really that we are assuming that the momentum that we’ve seen with more and more subscriber ads coming on to the platform will continue throughout Q4. I think as mentioned earlier, also embedded in the guidance is our ability to pass or basically mitigate any headwinds from the pricing changes that we made in the second quarter through having a greater share of new users come on to the platform to the personalized product as well as starting to see the benefit from stronger retention start to emerge. In the fourth quarter but really I think will continue to perpetuate throughout 2024.
And so I would say that much of what we’ve seen in the fourth quarter is continued momentum. I think there are very few headwinds that we’re anticipating in the fourth quarter.
Your next question comes from the line of George Hill of Deutsche Bank.
Two quick ones for me. I got in a little bit late. I don’t know if I missed this comment. Did you guys discuss churn at all? And to what degree kind of the changing economic environment is having on membership churn? And then, Yemi, I wouldn’t expect you to give formal ’24 guidance yet. But just as we think about the ramp towards 25, I was just wondering if there’s any meaningful headwinds or tailwinds as we think about next year that you guys would want to call out in advance.
I’ll talk about 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 with the kind of difficulties outside our walls. We haven’t seen those come and cause issues internally, so we’re fairly consistent. We did speak to the fact that the business is now seeing quite rapid adoption of personalized products with north of , I believe, as disclosed of new customers adopting personalized products in the quarter. And 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 personalize and adjust and tweak 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 2 things that we touched on prior.
Yes. And the second part of your question, it is too early to give an outlook for 2024 at this time. But we really are energized what we’re seeing pick up in 2023 and really how we’re seeing the end of the year start to culminate. And so I think that we do see the trends that Andrew mentioned around personalized product adoption more than likely, we’ll start to continue to roll out a broader set of those capabilities across 1 more category, continuing to see efficiency gains in our affiliated pharmacies as we complete the migration of that later this year. And then also just the learnings that we’re starting to get from many of the brand investments in marketing.
All of those are culminating into a lot of positive tailwinds that we see continuing through 2024. And so that’s one of the reasons why we have the conviction in 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.
And we have a follow-up question from the line of Jack Wallace of Guggenheim.
Just you wanted to put the quarter’s results in context. I believe in the third quarter through the 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, it was maybe more normal. I was wondering if you could just comment on the ad spend environment, competitive — any competitive pressures there? And then how you would handicap the fourth quarter relative to kind of the prior, let’s call it, 6 quarters worth of advertising environment.
Yes. Thanks on the question, Jack. I think that we — just a normal environment, I don’t think it’s particularly onerous or favorable. I think that much of what we saw in Q3 was consistent with the environment in Q2. I think the difference is given that we’re rolling out many strategic pricing act in the second quarter as well as also expanding the set of personalized capabilities across many lines such as been the Hers dermatology space and the Hers hair space, the investment in marketing was choppier 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 — in the back half of the year. And so I would say that our expectation is this environment will continue to be normalized from what we’ve seen in Q2 and what’s embedded in our guidance.
There are no further questions at this time. This concludes today’s conference call. You may now disconnect.