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Edited by Brian Birnbaum.
This is an update of my Hims re-deep-dive.
1.0 The Hims Machine
In Q4 Hims got more efficient, while sharing economies of scale with consumers.
Hims’s moat will grow much stronger with continued customer personalization. Each degree of personalization proliferates the company’s operational complexity and consumer satisfaction. The company ended FY2023 with 30% of revenue through personalized offerings, up from 15% just a year ago.
The company has also seen increased demand for personalization for its newer healthcare categories. 75% of Hers dermatology subscribers are opting for personalized solutions, while all weight loss customers are opting in. These customers are receiving custom-made pills at their doorstep.
Scaling new categories will likely act as a tailwind for personalization.
Personalization matters for healthcare customers. It increases convenience and improves outcomes, which ultimately leads to lower costs of acquisition and higher lifetime value. In a nutshell, personalization improves unit economics.
Should personalization continue advancing at this pace, Hims’s operation will further fortify in the years to come. Compounded over a decade or two, this dynamic, coupled with increased scale, may manifest as an excellent business with practically insurmountable barriers of entry.
But, this requires continued reinvestment.
As I note in my deep dive, Hims management remains highly focused on reinvesting cash into the business. As the top line grows, management continues to increase the level of investment, with CapEx reaching new highs in Q4.
With each dollar reinvested, Hims enhances the breadth, convenience, and price competitiveness of its services. Management’s track record with scaled economies shared is excellent.
Additionally, Q4 financials presented further compelling evidence of Hims’s focus on sharing economies of scale with customers, enhancing its competitive position further by constantly lowering prices for consumers relative to inflation over time.
In the graph below you will notice that ARPU (average revenue per user) has ticked down QoQ because Hims reduced prices for consumers that opt into long-duration services. What’s interesting is that, simultaneously, gross margin is ticking up, coming in at 82.74% in Q4 versus 82.62% in Q3.
In other words, efficiency more than offsets price reductions, setting the company on a path toward inexorably giving consumers more for less. Furthermore, increased scale makes it increasingly harder to imitate such a dynamic.
You may notice that this is very similar to Amazon’s modus operandi. Just the sort of business that can outperform over time.
2.0 Proprietary Pharmacies
In Q3 management said that in Q4 all orders would be processed via proprietary pharmacies. The company seemingly came short of this target.
In Q4 Hims processed “over 85%” of all orders via proprietary pharmacies, which per Andrew’s comments in Q3 is a miss.
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.
-Andrew Dudum, Hims CEO during the Q3 2023 earnings call.
In the Q&A section of the call an analyst asked management to clarify. CFO Yemi Okupe explained that the company now intends to maintain the share of orders going through third party pharmacies in the “high single-digit to low double-digit levels” for redundancy purposes - to make sure they have some fulfillment capacity in case their infrastructure fails.
When management says “nearly all orders” and “above 85%”, there is indeed quite a bit of margin for interpretation. But it is strange that management did not disclose in Q3 that they intended to pursue the above configuration.
The above can perhaps be viewed as a communication error, but I am concerned that they in fact missed and did not address it.
As explored in the previous section, however, the company is growing sharper. The financials show no signs of dysfunction as related to the deployment of proprietary pharmacies.
I am therefore willing to give management some leeway.
3.0 Rising Operating Leverage
As OpEx gets leaner, the company’s bottom line continues fattening. However, this may be negatively impacting culture.
Q4 QoQ operating margin delta is larger than that of the gross margin, which are up 4.83% and 0.12% respectively. Naturally, lower prices for longer duration customers “dampen” gross margin growth, but the point is that Hims is also leaning out operationally.
Other notable deltas: marketing costs as a percentage of revenue improved by one point; operations and support costs as a percentage of revenue improved by one point; and G&A costs as a percentage of revenue improving by three points.
As a result of this leverage, Hims’s bottom line is converging upwards, with the most recent being the first profitable quarter in company history.
In my recent deep dive, I explain why Hims hasn’t reached the stage at which profitability becomes one of the important gauges of company health. A company that prints cash from operations and has a negative net income does not necessarily lose money. In fact, the best companies most certainly do not.
The best (growth) companies focus on increasing free cash flow per share over time.
Nonetheless, it is excellent to see Hims gaining leverage on its OpEx buckets as it gives customers more for less. Over time, increasing free cash flow yield will coincide with compounding efficiency at the gross margin level.
Leveraging scale and actively capturing efficiencies is a core trait that extends beyond operations and is embedded in the DNA of Hims & Hers.
-Yemi Okupe, Hims CFO during the Q3 2023 earnings call.
However, management does not disclose the source of this increase in operating leverage. Having reviewed the company’s ratings on Glassdoor, there seems to simultaneously be some degree of internal discomfort among employees.
The declining curve below coincides with the decreasing OpEx as a percentage of revenue since the high of 124.6% in FY2020. Most of the negative comments on Glassdoor allude to a management team that does not reward employees that are highly committed to the business.
In turn, it seems that most of the negative reviews come from employees in customer service, while most of the positive ones come from seemingly higher skill positions, such as engineers.
Similarly, most of the bad reviews on the customer end allude to poor customer service, which makes me think that growth has perhaps stretched the operation.
My concern nonetheless is that the above may be indicative of a generally declining or toxic culture. However, my fundamental observation is that a company with a toxic culture (or at least one that is undesirable for long term value creation) cannot do what Hims does.
Getting an enterprise of this complexity to print cash from operations, the result of a long sequence of near-impossible feats, requires a high-performing organization. Such organizations don’t thrive long without, at the very least, compromising with employees, so let’s see how worker satisfaction metrics evolve from here.
In this tweet, Andrew Dudum said that he is currently “all over” this issue and it will be interesting to see if he/they can resolve it. I suspect that the same organizational properties that have allowed their iOS app to rank #16 in the US App Store just a year after its launch will also enable them to fix this problem.
I will definitely be keeping an eye on this development.
4.0 Financials
The balance sheet continues growing stronger.
Setting the foundation beneath its income and cash flow statements, Hims’s balance sheet continues growing stronger by the quarter. Hims ended Q4 with $221 million of cash and short-term investments, up over $41 million from the end of 2022, and no debt.
With increasing personalization, I believe Hims’s ability to produce cash will be strengthened going forward, Together with rising efficiency and leanness, Hims’s balance sheet should also grow stronger over time.
Hims solves a big pain for its customers, which suffer stigmatized conditions. Its balance sheet is fortified by the gradually increasing breadth, convenience, and price competitiveness of its services.
So long as Hims continues to advance these three differentiating pillars at scale on a quarterly basis, the company should have more cash to reinvest over time.
5.0 Conclusion
I am most concerned about the negative employee reviews on the company. I certainly do not want to invest in a company with a toxic culture for the long term.
However, all other aspects of the company point to a high-performing organization. In July 2021, for instance, the reviews on Glassdoor were much more indicative of a company with the level of performance that Hims has exhibited to date:
As with 2021’s (shown above), the latest reviews represent a small sample and, as mentioned, come mostly from employees on the customer service side.
Such datapoints need to be weighed accordingly. Since FY2021, the company has grown its top line by 3.2X and has cut OpEx from 114.55% of revenue to 84.97%. I wouldn’t be surprised if this has indeed caused a customer service bottleneck.
I continue to evaluate a potential long term investment in the company.
Until next time!
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Bear case for HIMS (would be great if you'd address, b/c I do like your analysis and was thinking about investing in it) - The company is selling a generic product in a generic way and the ultimate competitor (Amazon) has already invested in building a competing product (Amazon Clinic), already has a nation-wide distribution channel to plug these generic products into... seems like there's an argument that HIMS has no cost advantage over amazon on the actual products, is at a disadvantage when it comes to the cost of marketing, is at a disadvantage when it comes to delivery times and shipping costs, and amazon has already essentially done the work to set it up (all perhaps but for the in house pharma which wouldn't be difficult).