Earnings Call Transcript
Hims & Hers Health, Inc. (HIMS)
Earnings Call Transcript - HIMS Q2 2021
Operator, Operator
Good afternoon and thank you for joining us on today's conference call to discuss Hims & Hers Health, Inc. Second Quarter 2021 Financial Results. Joining me on the call are Andrew Dudum, our Chief Executive Officer; and Spencer Lee, our Chief Financial Officer. On this call we will be making forward-looking statements, including financial guidance and expectations for our third quarter and fiscal year 2021 growth, expansion into new categories, strategies, customer demand and products. These statements reflect our best judgment based on factors currently known to us and actual events or results may differ materially. Please refer to documents that we file with the SEC including the Form 8-K filed with today's press release. Those documents contain risks and other factors that may cause our actual results to differ from those contained in our forward-looking statements. These forward-looking statements are being made as of today and we will disclaim any obligation to update or revise these statements. If this call is reviewed after today, the information presented during this call may not be current or accurate. We will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. For historical periods, a reconciliation with GAAP and non-GAAP results is provided in the press release filed today with the SEC on an 8-K and also available on our website. And with that, I'll now turn it over to Andrew Dudum.
Andrew Dudum, CEO
Welcome and thank you all for joining our Q2 earnings call. We are proud to share that we've continued our outperformance on both the top line and bottom line of our guidance range this quarter with revenue of $60 million plus and adjusted EBITDA coming in at a loss of $5 million. With the team's steadfast focus on growth and efficiency, we've expanded gross margins to an all-time high of 78% while adding nearly 200,000 subscriptions over the last 12 months. The results this quarter are a continued validation of our innovative consumer-oriented business model and we believe we are leading a secular trend that will transform healthcare as we know it. As a newly public company, Hims & Hers is in the earliest chapters of our story. And as such we are excited with each quarter to share more insights into our vision for the years ahead. We have built the management team of both industry veterans and technology innovators, who are combined, capable of making big bets on the future of digital health. I am confident our unique growth mindset, our commitment to a multiyear time horizon and our proven diligent execution will continue to be the engine for our success. Our vision for the future is simple. We are building Hims & Hers into the new front door to healthcare, a new front door that will span dozens of medical specialties, welcoming customers of all demographics into a unified consumer platform that looks and feels and talks to them in a way that gives them confidence they're in the right hands. I strongly believe that the great unlock in telemedicine will be the power of personal. The winners in this emerging category will be providers who offer a level of service, familiarity and quality on par or above that of the relationship you have with your primary care physician. That's why we're putting personal on our strategic agenda as a key pillar of success. For the first time in history, we believe the infrastructure and capabilities exist to deliver care made for each patient uniquely. This is a new frontier to medicine, not a nice to have for the strategic driver of the business. For these reasons I believe the majority of healthcare delivery will begin on a platform like ours in the future. No waiting in lines or jumping through hoops to find clinics, specialists, pharmacies or in-network care. I also believe the new front door will have an international entrant, shipped by the US's innovation in telemedicine but quickly followed in dozens of major international markets. International is an area we made important progress during this quarter, which I'll touch on later in my remarks. The opportunity to digitize and consumerize the healthcare system on behalf of everyday people is one of the largest transformations in technology and innovation globally over the next decade. And while many industry veterans have yet to realize this new model will be the primary way in which people engage with healthcare, we are quickly moving ahead, investing in the brand, the experiences, the technology and the capabilities for the future. Given this opportunity, our strategy is long-term oriented. Everything we do is in service of an opportunity that will continue to accelerate and grow over years, both in the US and overseas. Our investments in infrastructure, differentiated technology and capabilities and our continued excellence in building long-term equity in our brand will be how we win. I've often spoken about our plans for continued specialty expansion, international ambitions and strategic technologies and defensible infrastructure. I'm proud to say this quarter was one where we took large strides in laying foundation, across all three of these areas. Our investments here are at the crux of our strategy to build a differentiated healthcare platform for consumers. Let me share a little bit about each. As of this quarter, Hims is fully rolled out in four major specialty categories, sexual health, dermatology, primary care and most recently behavioral health. Each specialty is growing quickly, layering diversity into our business as we scale. And while early categories such as sexual health continue to scale, our newest categories such as psychiatric services, therapy and broad behavioral health are growing the fastest. Our behavioral health specialty has the potential to be a meaningful pillar for Hims & Hers, offering a differentiated service relative to other providers, as we combine psychiatry, live group sessions and individualized therapy within a unified platform. This quarter, we launched our behavioral health dashboard, allowing customers a centralized hub for flexible and affordable mental health services. Within their dashboard, patients can coordinate care, select providers, schedule therapy appointments, track their progress, message their psychiatrists and manage the medication, all from one mobile-first system. From the consumer demand we've seen to date and the early acceleration of that business, we believe this specialty to be a foundational pillar of the company in the future, differentiated by a comprehensive set of services and offerings from psychiatry and live group sessions to individualized psychotherapy, we believe the Hims & Hers mental health platform offers something truly unique to patients in need. With nearly 80% of our patients leveraging our psychiatric services, reporting improvements to their mental health, our team is more motivated than ever to double down on these initiatives. This new category only fully released this quarter is just another data point proving our consumer-first business model can and will scale, as we continue to introduce more offerings and categories. We expect the future of the company to progress like its past, rapid expansion into new specialties likely doubling the number of core categories we're in by 2025, the same approach, the same model, getting more efficient and delivering more value along the way. As I've mentioned before, we believe Hims & Hers has a unique opportunity to become a consolidator and ultimately the leader in this digital transformation of consumer health. Every month, we see dozens of opportunities to acquire teams, technologies and brands, helping accelerate the reality of our vision. The Hims & Hers brand is an attractive strategic partner for many innovators in the space, providing us ongoing access to deal opportunities. We've looked at hundreds of these companies over the last few years with few generating excitement for management. This quarter, I was thrilled to share that we announced two transactions that not only fit squarely into our long-term vision, but accelerate our ongoing initiatives, specifically relating to our international ambitions and investments in differentiated technologies and capabilities. Let me take a moment to provide some color for both of these acquisitions. First, we acquired Honest Health, which accelerates our geographic expansion with operational capabilities to support our long-term plans for the UK and Western Europe. Led by Sam and Pablo, Honest Health has demonstrated a powerful combination of leadership, passion and innovation in digital health that will further elevate our ability to provide the Hims & Hers experience to a new segment of consumers in the UK and beyond. Similar to our commitment to expand into more specialty categories in the coming years, we do have the same ambition in key international markets. I believe the new front door to healthcare will be open to a worldwide audience. And as such, we will continue to find opportunities to invest both organically and inorganically in teams and infrastructure for that global future. In our second announced acquisition this quarter, we acquired Apostrophe, a leading teledermatology platform and compounding pharmacy in the US. As I've shared before, clinical dermatology today stands at a staggering $44 billion market. However, what is even more staggering is the retail dermatology market, think Sephora, stands at a whopping $150 billion market. It is my belief shared with the founders of Apostrophe that over the next five years innovative platforms such as Hims & Hers and Apostrophe will continue to move market share from retail to clinical. Why pay $50 for an over-the-counter cream with no studied clinical efficacy when a personalized bespoke prescription treatment can be compounded for a specific need and delivered to your door within days for the same price? My long-term belief in this market transformation is at the core of why we acquired Apostrophe. Built upon their Arizona-based compounding pharmacy, Apostrophe has garnered deep love from their consumers with revenue growing at 120% CAGR over the last four years and building one of the most loyal and diverse patient populations in dermatology. This acquisition was a no-brainer for management. The dermatology market is so large and growing so quickly that the front door as I've spoken about needs to be broad. Apostrophe widens that door with a new brand entrant for a new segment of consumers. Dermatology was the second fastest year-over-year category last quarter. The acquisition increases both the volume and variety of our dermatology consumers. And even more importantly this investment in infrastructure is second to none accelerating many of our existing initiatives. Ben Holber, Founder and CEO of Apostrophe has built a company capable of delivering a range of bespoke cynical compounds for dermatology conditions ranging from melasma to hormonal acne. These custom formulations provide patients with a degree of personalization rarely found in even the most high-end dermatology offices. Furthermore, the potential for leveraging this compounding infrastructure in new avenues not only in dermatology, but for future personalized experiences are vast and exciting. These types of capabilities change the game for clinical optionality, patient personalization and ultimately customer delight. With Apostrophe, Hims & Hers strengthens our competitive capabilities in dermatology, unlocking our ability to accelerate the expansion of treatments in categories on behalf of customers across the United States. At the core of our success and quick scale is a differentiated platform for both consumers and physicians and an integrated pharmacy system and medical fulfillment center capable of delivering a seamless end-to-end experience for the customer. As a technologist for the last 15 years, I have a deep belief that defensible infrastructure and software is a significant advantage to our company. A pillar of our long-term competitive strategy is differentiated capabilities through proprietary infrastructure and medical capabilities. I believe it streamlines efficiency of the legacy healthcare system and unlocks uniquely seamless consumer experiences. As such, our investments this past quarter are reflective of a modern approach to building a dispensable healthcare company. Last year nearly all of our pharmaceutical delivery over-the-counter fulfillment and topical compounding capabilities were outsourced to third parties. Today, just one year later, I can report that nearly 50% of our order volume is now being fulfilled out of our Ohio pharmacy and fulfillment center. This 300,000 square foot centralized hub has been a large investment in technology, software and infrastructure with a vision towards non-reliance on third parties and a platform suited with unique capabilities. I'm excited to share that by year-end 2022, we believe nearly 100% of our services and treatments will be filled via our verticalized infrastructure, further unlocking efficiencies and capabilities consumers are looking for. In addition to the purchase of Honest Health in the UK, the strategic acquisition and integration of Apostrophe and their compounding capabilities, and the quick rollout of our Ohio-based pharmacy and fulfillment services, we also have been investing deeply this quarter in our anticipated mobile platform and insurance offering. Every day consumers search for his and hers across the iOS and Android app stores. Our brands and consumer awareness drive people to find this across all of their devices and we're working hard to build what we believe will be an exceptionally unique experience for them. One should look for exciting announcements regarding our mobile platform in the coming quarters. Our teams are hard at work designing and building what I believe to be the future home for Hims & Hers members, a home that helps drive deeper engagement and ultimately healthier lives. In addition, our team continues the integration of insurance reimbursement as part of the Hims & Hers platform. This is a key component to affordability for certain types of care and patient populations, which is core to our mission of expanding access for everyone. Expect to hear more about this rollout in the second half of this year. While early in our company's life, the road ahead is as clear as day, more specialty conditions that consumers love like our newest offerings in psychiatry, more investments in personalization and bespoke treatment capabilities like Apostrophe and more laying the global groundwork to take this model. So clearly, the healthcare model of the future to more markets overseas all in service of delivering personalized healthcare and scale that people love. I've said this before, but our organization is made up of people passionate about building the future of healthcare. We pride ourselves on being visionary in our sector and standing consistent execution and delivering growth, and I feel this quarter is again highly reflective of our ability to be the leader in this transformation. With that, I want to thank everyone on our team who've continued unwavering focus on our vision is driving such outperformance and welcome the teams at Apostrophe and Honest Health to the family. We couldn't be more excited about our future together. I'll now turn the time over to Spencer who can share more about this past quarter's results.
Spencer Lee, CFO
Thank you, Andrew. I'm pleased to report another incredibly strong financial quarter for Q2. I'll walk through the details behind our performance for the quarter, provide some high-level details on our recent acquisitions and discuss our revised upward guidance for Q3 and the full year. First, let's jump into the Q2 results. From my perspective, Q2 was another three months of the continued long-term secular trend that we've been describing to investors and the public that there is a set of really personal medical conditions that people deeply care about where there has always been deep consumer demand for treatments with numerous barriers in market including accessibility, price, stigma, trust and specialty experience have prevented or deterred consumers from actually seeking the treatment they want. In the last 12 months, we've met with numerous investors and we often get the question won't consumers just go get your products and services for cheaper somewhere else. Our results especially in Q2 provide a definitive answer, absolutely not. These types of questions fundamentally assume that experience doesn't matter to people, which is ironic to assume or expect that in healthcare experience doesn't matter. At Hims & Hers, we understand that in healthcare experience matters a lot to consumers as much and often more than for any other industry. This attitude in healthcare that ignores consumer experience is why so many are frustrated with the healthcare system and is why it's one of the lowest NPS industries in the country and this has been our opportunity. We are laser-focused on building and constantly improving a set of experiences that consumers love that motivate and inspire people to seek the treatment they need. We have demonstrated that subtle improvements in experience can drive meaningful increases in conversion and retention demonstrating that for healthcare consumers experience truly matters. We've also built and heavily invested in a brand that people trust and love. We have unlocked and mobilized an audience that is clearly seeking an alternative to the traditional healthcare system. When we survey our customers who purchase medication on our platform, 80% tell us they are purchasing the medication for the first time. The combination of a world-class experience, aimed at attracting the underserved audience, wrapped in a beloved and trusted brand. This has allowed us to harness the deep underserved demand that lives in the market. Consumers are voting with their wallets and they are clearly voting for Hims & Hers. As a result, in Q2, we added nearly 200,000 subscriptions for the platform versus Q2 of last year, up 76% year-over-year to 453,000 subscriptions. In our most recent investor presentation that we filed in June, we showed that within our oldest subscriber cohort we are driving 88% long-term revenue retention in year three as compared to year two. The combination of continuing to capture deep consumer demand, driving strong new customer growth and strong retention resulted in Q2 revenues of $60.7 million, an increase of 69% year-over-year exceeding the high end of our Q2 revenue guidance of $57 million. In Q2, we generated 786,000 net orders, which accelerated to 37% year-over-year growth. Growth in net orders was primarily driven by growth in subscriptions and strong retention of existing customers. Average order value or AOV in Q2 was $74, which increased 28% year-over-year. AOV was in line with Q1 which was expected as we are now well into our second year of uptake into bigger bundles and multi-month subscriptions as we discussed on our previous earnings call. In Q2, we generated a 78% gross margin, up 700 basis points versus 71% in Q2 of 2020. The combination of strong revenue growth and expanding gross margins compounded to generate even faster gross profit growth, up 84% year-over-year. Our focus over the last two years on expanding unit economics and increasing subscriber lifetime values has not only driven rapid revenue growth but also year-over-year gross margin expansion at the same time. In our most recent investor presentation filed in June, on page 13, we showed the incredible impact our execution has had on our subscriber unit economics. In our 2020 subscriber cohort, we meaningfully improved retention as evidenced by the increasing slope of the cohort curve compared to prior cohorts. We also increased monetization through larger product bundles and multi-month subscriptions which increased AOVs such that the average subscriber acquired in 2020 generated $363 in revenue in their first 12 months compared to $191 for the average subscriber in 2018. That's a 90% improvement. In fact, the average subscriber in 2020 generated nearly the same amount of revenue in their first 12 months as the average subscriber in 2018 generated over the course of three years, $363 compared to $384 respectively, all while also delivering on long-term revenue retention of 88% in our oldest subscriber cohort. All of our hard work improving and expanding our product offerings, enhancing the user experience, and developing marketing campaigns and brand assets that connect with our audience, all have served to increase retention, increase AOVs, expand LTVs, drive broader awareness, increased traffic, and improve conversion. Higher LTVs effectively make our marketing more efficient which has allowed us to drive incredibly efficient growth. In Q2, our adjusted EBITDA loss was $4.7 million, meaningfully outperforming our Q2 loss guidance of $10 million to $12 million. In Q2, our marketing expenses increased by less than $1 million quarter-over-quarter, while revenues increased by $8.4 million over the same period. This level of growth efficiency further highlights the impact that improving the fundamental customer experience that drives higher engagement conversion and LTVs can have on both growth and efficiency. I want to note that in Q2 we expensed $2.9 million in costs related to the acquisitions of Honest Health and Apostrophe and SG&A which we've added back to adjusted EBITDA. I also want to note that Honest Health closed on June 11th and had an immaterial impact on our Q2 financial results contributing less than $100,000 in revenue for the period. Speaking of Honest Health, in June, we acquired Honest Health for $10 million, primarily in stock with over half of the purchase consideration deferred and to be paid out over time. There's also an additional $10 million earn-out component to be paid primarily in cash upon the achievement of certain future revenue targets. We also completed the acquisition of Apostrophe in July for $150 million, of which approximately $50 million was paid in cash in July. Apostrophe also includes an additional earn-out component of $50 million to be paid in cash upon achievement of certain future revenue targets. Had the Apostrophe transaction closed in Q2, pro forma for the cash used in the transaction, we would have had $269 million in cash and short-term investments as of June 30. In Q3, we expect Honest Health and Apostrophe to generate between $4 million to $5 million in revenue. We also expect our consolidated gross margins to be between 74% and 76% in Q3, which is driven by continued steady margins from Hims & Hers and the weighted average impact of lower margins from Apostrophe. We also expect AOVs to decrease slightly in Q3 to $72 to $73 as a result of the acquisitions. Overall, as Andrew mentioned, we are incredibly excited about the tremendous opportunity both of these acquisitions represent. They provide key assets and leadership to take more shares, address massive markets and accelerate growth in important strategic areas. It's early days for both Honest Health and Apostrophe and we see the same opportunities to enhance unit economics, expand margins and drive efficient growth that we saw at Hims & Hers not too long ago. Now moving on to financial guidance. For Q3 2021, we are raising our revenue range to $69 million to $71 million and are guiding to an adjusted EBITDA loss of $9 million to $11 million. I want to note for Q3, we expect to expense approximately $4 million to $5 million in additional costs associated with the Honest Health and Apostrophe acquisitions, which will be expensed through SG&A and added back to adjusted EBITDA. We also expect marketing expenses to increase by $9 million to $11 million quarter-over-quarter driven by: one, inheriting the ongoing marketing expenses of Honest Health and Apostrophe; and two, costs associated with celebrity endorsement agreements including Miley Cyrus, which will include approximately $2 million to $3 million in stock-based compensation expenses within marketing expense in addition to other cash-based expenses. We expect total stock-based compensation expenses for Q3 to be between $12 million to $14 million. For the full year 2021, we are raising our revenue guidance to a range of $251 million to $255 million, an increase of $29 million at the midpoint versus our previous guidance. We are narrowing the range for adjusted EBITDA losses to $35 million to $40 million for the year. Similar to last quarter's guidance, our current internal financial forecast has Q4 revenues roughly in line with Q3. Our Q4 revenue guidance can be implied from our full year guidance as $69 million to $71 million. As I mentioned on our last call, as a young and newly public company, we intend to provide guidance that we are confident in our ability to achieve based on the current data points we see in the business. Given the data points we have from last year, we feel like it is appropriate to keep our Q4 revenue guidance in line with Q3. Finally, I wanted to provide a brief update on our share count given that both are announced warrant redemption and the Apostrophe acquisition happened after quarter end. As of 6/30, we had approximately 193 million common shares outstanding, eight million warrants, 17 million options and four million RSUs for a gross total of 222 million shares. The warrants and options include a weighted average strike price of $10.89 and $3.28, respectively. We expect warrant redemptions to eliminate 7.6 million warrants and to issue approximately two million shares of common stock through the redemption. We issued 8.1 million shares and 700,000 RSUs in July in connection with the Apostrophe acquisition. Pro forma for these two transactions, we would have had approximately 203 million common shares outstanding, 600,000 warrants, 17 million options and 4.6 million RSUs for a total gross count of approximately 225 million shares. We are exceptionally pleased with the results we were able to deliver in Q2. The strength of our financial performance in the first half of the year and the strong guidance for the second half really highlight the power of our core differentiation across audience, brand and experience. We are absolutely resonating with and delivering on all fronts for a generation of technology first and experience-oriented buyers who are seeking help for deeply personal medical conditions. We continue to see strong investment opportunities ahead including our partnerships with Jennifer Lopez and now Miley Cyrus which all further validate the quality and power of the brand that we fill and our ability to uniquely reach an audience of brand-savvy consumers. Our full year revenue guidance now represents a year-over-year growth rate of 69% to 71% for 2021. In fact, the midpoint of $253 million in revenue is now substantially ahead of the 2022 revenue guidance of $233 million we provided last year. It feels pretty good to deliver over two years' worth of growth in just 12 months. I look forward to a strong second half of the year. With that, we can open the call to questions.
Operator, Operator
Thank you. We have your first question from Jailendra Singh with Credit Suisse. Your line is open.
Adam Heussner, Analyst
Hi. This is actually Adam on for Jailendra today. Thanks for taking the question. Congrats on the quarter and two acquisitions you guys have now closed. I wanted to step back and just ask about some other developments in the marketplace, but specifically around Optum. So curious, if you take on solutions that Optum is rolling out in the Optum store, I know it's early since their launch plus they have some more solutions coming out. But I guess, just how do you think about a large-scale player such as Optum entering the market and making the market more competitive at this point?
Andrew Dudum, CEO
Thanks, Adam. It's a great question. I think, we look at what they've done and I think there's a number of players that are starting to think about moving towards this type of an operation. I think where really we think of ourselves as different is this ability to build truly a beginning to end experience for the consumer that people love, right? And this is not a traditional healthcare talk. This is traditional consumer Internet talk actually right at its core. And so from the moment people come to us, and get educated about a specific condition to that comfort in knowing, they're meeting with a specialist, and then all the way down funnel when they're getting a personalized treatment delivered to their door that was actually made exactly for them right, and built for them by their provider and their physician groups that is really special. And I think it's really unique. And so I'm excited that, there are investment dollars moving into the space, because frankly a lot of people need help in this country. But I think the reality is, is you've got a $4 trillion market, of which I think about 80% of healthcare delivery is going to be moving towards essentially a delivery service that looks like Hims & Hers in the next 5 or 10 years. And so this market is massive. I think one of the things that is practically a reality is that, there have been a tremendous number of investments in this space in the last couple of years, especially going into COVID. And none of these external factors have frankly impacted our core business at all, right? We've got increasing revenue growth accelerating 70% upwards guidance this year, subscriptions growing incredibly, gross margins growing to an all-time high, as we expand and innovate into new categories and new services. And so I haven't seen these external factors affect us to date nor do I expect frankly for any of these elements to affect us in the future. I think we have a ridiculously focused vision of delivering a world-class consumer experience from start to finish. And I think that's really different frankly than most things in market.
Adam Heussner, Analyst
Got it. And then as a follow-up, I just wanted to go back to the mix of growth coming from AOVs and net orders. So with Apostrophe and Honest Health coming on board, how should we be thinking about the opportunity there for AOVs to accelerate once you're able to refine their existing pricing, subscription types and alongside any launch of new products? Thanks.
Spencer Lee, CFO
Yeah. So I think for both acquisitions in the near term for Q3, I mean, we've guided to a little margin compression and slightly lower AOVs in Q3. And frankly, that opportunity that you're describing is – was one of the main strategic reasons why we were so excited about these acquisition opportunities. It's early days for Honest Health and Apostrophe and their businesses are in a fairly similar place, where we were a couple of years ago. And we have executed on that playbook, have unlocked a ton of value in terms of expanding margins, growing AOVs, improving unit economics, growing LTVs. And we see that exact same opportunity with these two assets and know that playbook well. So, I think you can expect us to work really hard and capture this opportunity, and unlock this value here in the near-term.
Operator, Operator
We have your next question from Daniel Grosslight with Citi. Your line is open.
Daniel Grosslight, Analyst
Hi guys. Thanks for taking my question and congrats on another strong quarter here. Some of your competitors have seen pretty dramatic increases in CAC, particularly on the mental health side of the business. It doesn't appear that you've seen quite as a dramatic increase. I'm just curious, how you shifted your business or marketing campaigns to offset some persistently high direct response ad rates? And you think kind of in relation to mental health in particular would be very helpful.
Andrew Dudum, CEO
Yes. That's a great question, Daniel. And I think the ability to maintain efficiency on the acquisition side is a part of the engine and expertise that I think we've built in the last few years. Specifically on mental health, what I think is very unique about that category for us and it's similar to all the other categories in the business is close to 100% of those patients coming to us are first-time buyers right? These are people who are being activated by the brand, who are being activated by our destigmatization campaigns, by the fact that we're partnering with celebrities to talk authentically about different issues they're struggling with. And then they're coming to us getting educated on our blog, they're talking to the psychiatrist and they're learning about options and then down funnel converting. And I think that's a really different experience from traditional players in mental health. So I think it's worth mentioning because I think that's really where an expertise exists within this company, which is targeting customers who we know could need help leveraging a bridge to give them a trusted place to be exposed and to be vulnerable connect them with education that makes them feel like they're in the right place and then ultimately help them downstream. And I think that's been a really big part across all of our categories, how we've been able, this year to frankly spend tremendous amounts of marketing at a more efficient rate. Usually, it's the opposite, right? You're spending more and it's going in the wrong direction. And I think that capability, that engine and that expertise we spend a lot of time on. And I think mental health in particular it's a extra focus. The other thing I would add there that, I think has been a huge advantage to ours is the comprehensive services provided within our mental health offering. This is not just simple group therapy conversations. It's not just simple text-based chat with a therapist, it's not just psychiatric. It's all of that it's live group sessions for core topics such as brief management or anxiety and depression or parenting during COVID, you have all of these services together in one place creates an incredible amount of efficiency and leverage at the front door right? If you think about it, you can message and market a unified home and hub for all of these offerings and then downstream convert appropriately into the right selection. And so I think that differentiated, I think more comprehensive set of offerings compared to what the market has also created a tremendous amount of leverage when you think about efficiency and driving acquisition on the direct response side of the house. And Spencer, I'll let you add anything else there.
Spencer Lee, CFO
Yes. To emphasize our Q2 performance, it was an extremely efficient quarter. Our strategies in Q2 were similar to those in Q1. While others in the market may be experiencing upward pressure, we have been able to maintain our position. Q1 was already a very efficient quarter in terms of customer acquisition costs for us. This is evident in Q2, where our marketing expenses rose by less than $1 million quarter-over-quarter, while revenue increased by $8.4 million in the same timeframe. The efficiency we have achieved through strategic investments in brand building, driving organic traffic, and maintaining a diverse marketing mix is becoming apparent in the overall efficiency we've generated year-to-date.
Daniel Grosslight, Analyst
Got it. Very helpful. And as we look at implied adjusted EBITDA guidance for 4Q, looks like you're assuming at the midpoint around $4 million of sequential EBITDA degradation. What's driving that degradation in 4Q? Should we think about gross margins kind of stabilizing in that mid-70s range and you're just making some more investment in the back half of the year?
Spencer Lee, CFO
Yes. The adjusted EBITDA for the quarter illustrates the level of efficiency and leverage in the business. In Q2, our monthly EBITDA loss was approximately $1.5 million. This indicates a clear path to profitability based on our Q2 performance. For the rest of the year, we are excited about investment opportunities and the potential for efficient growth. We are focusing on significant markets like the UK with Honest Health, targeting a $40 billion category while expanding our presence in the dermatology segment with the Apostrophe brand, and investing in behavioral health, which is currently our fastest-growing line of business. There are substantial opportunities in the second half of the year for continued growth and efficient investment, which is our focus going forward.
Unidentified Analyst, Analyst
Hi, this is Charlotte on for Mike. I was just wondering if you could provide some more color on how you're thinking about category expansion.
Andrew Dudum, CEO
Hi, thank you for the question. At a high level, the way to think about category expansion is similar to what we've experienced in the past. We expect the future to involve systematic growth in the specialty categories that our patients truly need. When we launched the business, we focused on hair care and men's sexual health, and then we introduced dermatology and psychiatric services. These four areas, along with primary care, form the core of our business today, three to four years after our founding. We anticipate that the number of categories will likely double by 2025. We have developed strong connections and relationships with our patients, which helps us determine our next steps. This understanding played a significant role in the introduction of our psychiatric services, which is now one of our fastest-growing areas. Our daily interactions with these patients enable us to understand their needs. Therefore, you should expect the same systematic expansion moving forward. We are not a team that randomly tries a lot of things without thought; instead, we focus on understanding the fundamentals of each category, the frictions present, why patients may not be seeking care, and how to eliminate barriers like cost and stigma. We then launch thoughtfully to ensure a positive reception. This approach has been evident in both our dermatology and psychiatric services, and it's what you can expect in the coming years.
Unidentified Analyst, Analyst
Great. Thank you.
Operator, Operator
We have your next question from Jessica Tassan with Piper Sandler.
Jessica Tassan, Analyst
Hi, thank you for taking the question and congratulations on the quarter. So I guess maybe just building off the question just prior, how are you thinking about maybe the trade-off between expanding into new specialties and then just building kind of density of providers in your existing specialties? And then further to that how are you employing the providers within each of your specialties today? Are they independent contractors or employees how just that work?
Andrew Dudum, CEO
Awesome. That's a great question. I think I kind of touched on this in the last question but we believe that each of the core categories we're in today sexual health, dermatology, psychiatric services, primary care these are deep categories. Let's take dermatology as an example and it's related to Apostrophe, an acquisition, we made this quarter. That's a $40 billion clinical dermatology market. I think what's most interesting about this market. And it's similar to a lot of the other markets, we're talking about, there's a $150 billion retail dermatology market think Sephora. I think in the next five years there's going to be rapid dollars shifting from retail to clinical dermatology, because if you can get an affordable prescription that's compounded and bespoke exactly for your skin, that works with clinical efficacy, why would you then spend the same amount of money on something that really doesn't have that clinical efficacy? So I think all of these categories that we're in today are going to continue to be rapidly expanding. I think that's why, as Spencer put forward in guidance, raised 70% year-over-year. We believe, there's very robust growth within them. And then, when you look at the pharmaceutical side of the house essentially the percentage of these patients suffering in the U.S. were actually getting treated in each of these conditions, it's 1% to 2% penetration. These are massive markets, very underpenetrated. And so we think there's years of continued robust growth within them. And so for that reason, the expansion is systematic, right? We are introducing new categories that we believe are capable of being pillars in the company in the next five and 10 years. And so a lot of focus internally, a lot of strategic focus on maybe one or two new categories every single year, but it's weighted just for some color context, it's weighted in that type of demand or because of the robust amount of opportunity we see in the core experiences that we have today.
Spencer Lee, CFO
And with respect to, how our providers are employed the vast, vast majority, are 1,099 contractors and paid on an hourly basis.
Jessica Tassan, Analyst
Thank you. That's helpful. If I could just follow-up with one quick one, so just on the ramp of the pharmacy and fulfillment center in Ohio, what are kind of the incremental ongoing cost of operating that facility? And where would we find those in the P&L?
Spencer Lee, CFO
Yeah. So all of the costs to run the facility are run through SG&A effectively. And a lot of the fixed costs are already in place. So the biggest chunks of this are things like rent expense, the CapEx that we've already spent to build out the facility, and install all machinery, which is flowing through the P&L, through depreciation expense in SG&A. The primary variable expense that exists going forward, as we ramp this up is essentially labor, right? So, staffing up the warehouse staff, staffing up the pharmacist, as we increase volume through the facility, but the fixed costs already exist in the P&L today. And as we ramp-up volume, we're just going to wind up amortizing all of these fixed costs over a larger order base, essentially getting operating leverage out of SG&A, as we increase volume over time. And over time, I think we've shared this in a few calls at this point. But we expect in the long run that we'll be able to get an additional one to two points of operating margin, as we scale this and sort of fully utilize the facility.
Jessica Tassan, Analyst
Got it. Thank you.
Operator, Operator
We have your next question from Ivan Feinseth with Tigress Financial Partners. Your line is open.
Ivan Feinseth, Analyst
Hi. Thanks for taking my call, and congratulations on another great quarter and the ongoing progress. Can you guys…
Spencer Lee, CFO
Thanks Ivan.
Ivan Feinseth, Analyst
…give a little bit more detail of your M&A strategy and your product development like, where do you see the opportunity to acquire? Or how do you measure the opportunity to acquire versus develop your own line of products like, you did with the Apostrophe as an example?
Andrew Dudum, CEO
Yes, that's a great question. Thank you for it. At a high level, I want to reiterate that the core business of Hims & Hers is experiencing rapid growth. Our main focus is internal. We see significant potential in those categories, and we believe they are gaining momentum with increasing adoption rates. We anticipate they will capture a larger market share, and we have a unique ability to engage with these patients effectively. Most of our efforts are directed internally. We have also realized that Hims & Hers is a highly strategic partner for many innovators who are eager to collaborate with us. They view us as a valuable opportunity to enhance their business. As Spencer mentioned regarding Apostrophe, we possess operational capabilities that can help improve their efficiency. Each year, we receive countless opportunities—literally hundreds—but very few meet the criteria that truly excite management. The rare opportunities we pursue typically involve exceptional talent or unique infrastructure that can deliver top-notch customer experiences. For instance, teams behind Apostrophe and Honest Health have established infrastructures capable of providing personalized treatments that are hard to find, even in high-end dermatology or hair care clinics, often at exorbitant prices. They have built a scalable model for delivering these services. We remain vigilant for such opportunities. We have a clear vision for the next five to ten years, aiming to transition most healthcare delivery onto a platform like Hims & Hers. I firmly believe this will materialize. There will be chances to enhance our capabilities, expand our brand presence, and create diverse entry points into the healthcare system that cater to different customer segments. This strategic approach will enable us to integrate differentiated capabilities and infrastructures, offering more personalized and effective treatments in the market.
Ivan Feinseth, Analyst
Very good. And you said earlier that you're kind of going to let your client base guide where you're going to want to go with new products. What kind of feedback or guidance so far you experienced and where whether your customers want to see additional services or products?
Andrew Dudum, CEO
Where we see demand is fairly straightforward, when you understand this patient population, right? And we have a very unique patient population, its first-time buyers. These are not patients that have been treated by chronic care specialists for a decade and are trying to fill a prescription, fill a prescription cheaply online. That's not our customer. Our customer is a first-time buyer, they're young, they're millennial in their 20s or early 30s and they're concerned about something. And they come to us, I think, with that anxiety, right? They come to us concerned and self-conscious and looking for somebody to tell them they're in the right place and tell them that we can help them navigate to feeling better. And so, the psychiatric services, that was something we heard loud and clear for a very, very long time. So tremendous amount of investment in the past and in the future in that category. More behavioral health-related items, burn out, sleep deeper types of depression. These are also exceptionally common. And so I think you should expect us to get more invested in that category. What you also see frankly is people concerned about more chronic condition, but not necessarily sure how to go and get treated or establish baseline. So you have a lot of patients that are in their 30s, they kind of coming of age into their 40s and they're concerned about weight management. They're 30, 40 pounds overweight or they're concerned about diabetes, because it's in their family or they're concerns because the last blood test of their annual was a high cholesterol, high lipids profile, right? So you're starting to identify patients, I think, that are at that crux in life when they're becoming aware of the more chronic nature condition. But they're looking at a platform like ours who can seamlessly onboard them and educate them and take care of it. And so, I think those are also categories we really believe are widespread within our customer base, and is an opportunity for us to grow with these patients and increase the lifetime value with these patients in the next five and 10 years.
Ivan Feinseth, Analyst
And then regarding geographic expansion, like your entry into Europe with the acquisition of Honest, what other regions do you believe offer the best opportunities for you? How do you plan to enter those markets? Do you think it will be through acquisition, or what kinds of barriers to entry do you anticipate for international expansion?
Andrew Dudum, CEO
We're very enthusiastic about Honest and believe it exemplifies the kind of international growth we aim for, whether through organic or inorganic means. We see potential in markets like the UK and Western Europe where consumer behaviors and frustrations with healthcare are similar, such as high costs and long wait times for appointments. We're looking for markets with comparable consumer dynamics as well as regulatory considerations. Over the past few years, the US has started to embrace both synchronous and asynchronous telemedicine, a shift that COVID accelerated by raising awareness of their benefits. International markets are also progressing; places like the UK, Australia, Germany, and Canada are starting to reach a point where our expansion makes sense. Additionally, prior to COVID, we invested time in Asia and the Middle East engaging with health systems and government regulations there. These regions are keen to adopt U.S. innovations, although they may follow a few years behind the initial markets we've discussed.
Ivan Feinseth, Analyst
Thank you and congratulations on the great results again.
Andrew Dudum, CEO
Thank you, Ivan.
Operator, Operator
I'm showing no further questions at this time. I would now like to turn it back to Mr. Andrew Dudum for any closing remarks.
Andrew Dudum, CEO
Thank you. Thank you all for joining today, and thank you for the great questions. I want to send a special thank you to our team to Apostrophe to Honest. We're exceptionally excited and proud of everything that you guys have accomplished today, and then looking forward to sharing more with you all very soon. So, everyone, please have a great day.
Operator, Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.