Hims Q2 2022 ER Notes
After my original Hims deep dive and following popular request, I have decided to send a quick note summarizing my latest thoughts on the company, after its Q2 2022 earnings.
Just to recap, HIMS 0.00%↑ is effectively a new front door for medicine in the making, which makes the access to therapies for stigmatized conditions convenient and affordable, in the face of what is otherwise a pretty dysfunctional healthcare system (see the deep dive). The bull thesis is that, as the company acquires more users and broadens the range conditions it addresses, it will go from being a niche player to a mainstream one.
To do this, the company is focusing on three fundamental drivers:
Constantly improving the concierge experience for patients.
Vertically integrating, to seamless embed the fulfillment of medicines in the concierge experience.
Compound the value of its brand.
At a valuation of $1.15B today, the company has a long way to go in the $4T US healthcare market and if you recall my deep dive, the one thing I am looking for here is signs organic / viral user growth picking up - it is really the only thing that the company is missing right now.
The company´s growth so far is fueled predominantly by paid marketing and although it is succeeding at integrating vertically and thus operating more efficiently per quarter, it needs to go beyond performance marketing for the numbers to really get good.
I make the following key observations about Q2:
Stigmatized conditions, no word-of-mouth: I see no signs of the company moving beyond paid marketing yet. This is strange, because it seems that users are pleased with the service and the company is able to retain them well - this does not look like a leaky bucket at all. However, it is no surprise to me that people are not too loud about an app that enables them to deal with a largely stigmatized condition. I wonder if, despite the company´s content strategy, this basically de-activates word of mouth.
Excellent capital allocation: the more time I dedicate to capital allocation in my life, the more I realize it involves a sort of 6th sense to a large extent - at a given point in time, some have it and some do not. Hims is currently leaning into its marketing efforts, as others are pulling back, whilst not too long ago it was the inverse. Management has the 6th sense.
“… we feel really well positioned not only to thrive in a kind of recessionary dynamic but also to really take meaningful share I think this quarter is a great example, right? We leaned-in aggressively to efficient marketing where it was working as others were pulling back.” - Andrew Dudum, CEO Q2 `22 ER
“Marketing as a percentage of revenue increased 580 basis points quarter-over-quarter to 53% in the second quarter.” - Yemi Okupe, CFO Q2 `22 ER
Operating leverage is up: the reason I say that organic / viral growth will yield very healthy numbers is that the company clearly has the ability to drive operational leverage forward QoQ. Management now sees the path to adj. EBITDA profitability and so user growth (at a marginal cost, organic) will likely begin to be highly accretive to the bottom line in the near to mid term.
“Adjusted EBITDA for the quarter was negative $7.5 million. Despite a significant increase quarter-over-quarter in marketing investment, adjusted EBITDA margins declined modestly to negative 7%” - Yemi Okupe, CFO Q2 `22 ER
“ … we continue to make investments in operational excellence at our Ohio and Arizona facilities. I'm happy to report that the majority of our shipments are now filled and shipped via these centers.” - Andrew Dudum, CEO Q2 `22 ER
“Importantly, our ability to capture operational efficiency improvements while scaling the business is expected to result in adjusted EBITDA profitability within the next four quarters.” - Andrew Dudum, CEO Q2 `22 ER
Inventories shot up: in my deep dive I discussed how now that the company is running its own fulfillment infrastructure, inventory is something to watch. In Q2 it shot up to $19.7m from $13.6m.
The balance sheet is still looking healthy, with $55m in cash and still no debt at the end of Q2.
Good progress in retail: to strengthen its brand, the company continues to expand its retail footprint.
“In Q2, we gained traction with 2 marquee retail partners, CVS and Walgreens. We launched 6 new women's essential supplements and probiotics, both on our own platform and exclusively in CVS locations nationwide. In addition, we expanded our presence in Walgreens with the rollout of both Hims & Hers hair care lines in over 7,000 stores throughout the country.” - Andrew Dudum, CEO Q2 `22 ER
My overall take: I see great execution and management. The company is advancing well on all 3 fundamental drivers, but I still do not have enough visibility into growth and how this can really take off. I am concerned about the virality ceiling that is likely implicit in stigmatized conditions. However, if management unlocks organic growth this can be a remarkable long term hold - I continue to watch for this.
Let me know your thoughts below.
Until next time!
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