$HIMS 2Q24 Earnings Breakdown
Hims is the perfect application of the DTC business model, serving as a critical distribution node for modern advancements in medicine.
HIMS stock is down slightly after reporting Q2 earnings - but this company is on fire.
Quick look (YoY):
Revenue: +52%
Subscribers: +43%
Free Cash Flow: + 376%
HIMS continues to be the perfect application of the DTC business model, expanding margins at a bonkers rate - let’s dive into the report.
As always, here is the folder with the materials I used to breakdown the hims report
1) Revenue
Revenue was up 43% YoY to ~$316MM in 2Q24. This was driven by an increase of active subscribers of 43% to 1.864M - a crazy number. On average these subscribers are spending $57 per month on Hims - up 8% from $53 a year ago. Additionally, AOV was up to $121 from $95, or +27% YoY.
If you read the shareholder letter closely, you could actually ascertain how much GLP-1 launch contributed to revenue growth. In the letter, the company said this:
So we can actually back into $15mm of revenue contributed by GLP-1. THis feels small, but is also pretty incredible when you think about going from 0-15m in 3 months.
What’s more, the company specifically called out their wholesale revenue growth as effectively an advertisement. Hims has essentially no desire to continue to gain scale through wholesale, and why would they? This child is not like the others, and wholesale distribution is really just a damper on their margins.
For now, DTC online for Hims is still the obvious play - even though the company has seen some gross margin deterioration over the last couple of quarters. Good segue.
2) Gross Margins
Gross margin has always been a strength of Hims' - in many ways, its what's responsible for most of their successes. Most businesses spending 50% of their revenue on marketing couldn’t dream of pulling off contribution margins of 35%, much less net income profitability. It was interesting to see a 4th consecutive quarter of flat to down gross margins:
The company called out GM compression due to the cost structure of new offerings, somewhat offset from benefits from economies of scale partially driven by increased volume at affiliated pharmacies.
To me, this gross margin compression trend is obviously not ideal, but it's indicative of the business expanding - expanding its distribution as well as its product line. At 83% gross margin, this thing has a bit of room to play around and give a few points of gross margin away if it translates into more robust revenue growth or bottom line earnings. Think of all the DTC brands who would give away 30 points on their blended gross margin to get into Wal-mart or Target - its all about the bottom line and Hims has world class margins that I am not afraid of losing even another couple points.
3) Marketing Expenses
There were some people in the comments of my thread on twitter saying that Hims spends too much money on marketing. This is blasphemy because the company is growing literally 50% PROFITABLY while pulling off massive margin expansion.
Year over year, Hims expanded contribution margin ratio 5 full points from 30.27% to 35.38% - this was largely a result of MER going from 1.94 to 2.18 YoY, or marketing as a percentage of revenue going down from 51% of revenue to 46%:
The company cited ‘efficiencies related to new product launches as well as improving customer acquisition trends’ for the improvement in marketing expense. Candidly, I don’t buy it. In 2Q23, Hims grew 83% YoY and generated a loss of $7.3m with marketing at 51% of revenue. This quarter, they showed a huge slowdown in YoY revenue growth from that 83% to 53% - and marketing as a percentage of sales went down by 5 points, which caused contribution margin ratio to go up 5 points:
What really happened here was that the company just pulled back a bit and saw massive efficiency gains. Being a public company CEO is basically like being a politician, and so they would rather say that it came from them leveraging their new products than admitting that they were probably just over spending before.
All in all, the company’s unit economics have always been pretty intact. Below is the waterfall chart showing the contribution margin per order.
Really healthy stuff. Hims is a masterclass at marketing efficiency with a strong gross margin. Anyone who thinks they are over spending on marketing I just don’t know where else you want them to spend. Reality is, they are still a small cap name, and I do believe Hims is potentially a 10x company from here, so as a growth investor I actually love to see that the company continues to invest in its brand and customer acquisition - while also generating profits. They are doing both.
4) Other Expenses
With regards to other expenses after marketing, the company breaks the down into a few buckets: Technology & Development, Operations & Support, and G&A. I generally would roll all of these up and just call it “SG&A.” I am going to focus on the ‘Non-GAAP’ accounting disclosures - the main difference here is that this does not include stock based compensation. SBC is certainly an expense to shareholders, but since you all are not running public companies lets just focus on the cash expenses in the graphic at the bottom here:
All of the companies non COGS and non marketing expenses (non-gaap) add up to about 27% of revenue. I think there is most definitely a bit of room here, especially when you look at the profits in focus benchmarking report I wrote by Iris in collaboration with wayflyer for ‘best in class’ wellness operating expenses as a % of revenue at 16%:
The bloat is most likely in technology and development. Over time I will look for that line to decrease as a percentage of revenue as growth slows.
5) Profits and Cash Flow
Sometimes I wonder if anyone makes it this far. There’s probably an equilibrium for how long I should make these but hey I’m having fun. Reach out if you want me to do a breakdown on your biz
Ok sorry - cash flow. Hims pulled in adjusted EBITDA margin of 12.5% for the quarter, more than double YoY and up almost a full point sequentially (QoQ).
However, check out the chart for actual cash flow. A HUGE sequential boost:
Additionally, we need to really find a way to pay attention to the fine print regarding the company’s buy back program:
Hims is buying back its own stock for shareholders, while increasing cash flow massively. This is a double whammy for free cash flow per share as FCF goes up and shares go down. My point is that its great the company is increasing cash flow margins, but also great to see an effort to return capital to shareholders.
6) Valuation - I think $HIMS is officially priced perfectly. Im more than happy to Approximately 20x FCF (3x sales) for this high of growth and upside. The stock ran up a ton, and grew into its valuation perfectly after the GLP-1 announcement. The consequence of growing into your valuation is that momentum traders will sell off as their thesis has played out. This represents a decent buying opportunity for longer term holders as the stock sells off - 'buy the rumor, sell the news' they call it. This does not mean the company has zero upside, however I do think given all that the market knows to be true right now, this is where the stock will sit. It will go up steadily with revenue and earnings if the team can continue to exit, and has breakout potential if significant announcements continue to be made.
Until next time my fellow nerds
I love this breakdown. I think HIMS has found the perfect product/channel fit for DTC.