管理層發言
Ladies and gentlemen, thank you for joining us, and welcome to the Hinge Health Third Quarter 2025 Earnings Call. I will now hand the conference over to Bianca Buck, Head of Investor Relations. Bianca, please go ahead.
Good afternoon, and welcome to Hinge Health's Third Quarter 2025 Earnings Call. I'm Bianca Buck, Head of Investor Relations. With me on the call are Daniel Perez, our Co-Founder and CEO; Jim Pursley, our President; and James Budge, our CFO. I want to thank everyone for joining us today. We'll be walking you through our Q3 performance and sharing key updates on our product innovations and commercial momentum. As a reminder, this conference call is being recorded. All relevant materials are available on the Investor Relations section of our website. Today's discussion will include forward-looking statements, which are subject to various risks, uncertainties and assumptions. These statements reflect our current views and expectations regarding future events, including expected performance of our business, future financial results and growth strategies. While these statements represent our good faith judgment and beliefs, actual results may differ materially from those projected or implied. We undertake no obligation to update any forward-looking statements, except as required by law. For a detailed discussion of the risks, please refer to our SEC filings, including our most recent quarterly report on Form 10-Q. All income statement financial measures discussed today are non-GAAP, except for revenue, which is GAAP. These measures should be viewed in addition to and not as a substitute for our GAAP results. Reconciliations to the most comparable GAAP measures are included in our earnings release appendix. With that, I'll turn it over to Dan.
Thanks, Bianca, and good afternoon, everyone. Q3 showed what our strategy is built to do: automate care delivery to improve outcomes, experience and reduce costs, all while underpinning a strong business. We'll cover five topics today. Firstly, our results. I'll give you a high-level view of the quarter and the momentum in our core metrics. Second, I'll share key product updates, particularly our AI initiatives transforming how we deliver care to our members. This includes our AI care assistant, Robin, our new movement analysis capability and how we're using AI to drive efficiency across our entire organization. Third, Jim will cover sales season progress and updates on HingeSelect, our high-performance provider network. From there, James will walk you through the detailed financials and our updated guidance for the remainder of the year. And lastly, I'll wrap up with thoughts on why we're so confident about the path ahead before we open it up for your questions. Let's dive in. First, let me start with the numbers that really tell the story of our momentum in automating care delivery. We delivered $154 million in revenue for Q3, representing 53% year-over-year growth. Our last 12 months calculated billings reached $624 million, up 50% compared to the same period last year. These results demonstrate the strength of our current execution and highlight the incredible opportunity ahead in automating the largest services industry in the United States, health care. Our operational efficiency improved substantially year-over-year. Gross margin was 83% this quarter, up from 79% in Q3 of last year, reflecting the scalability of our technology-driven care model. Operating margin reached 20%, a significant improvement from negative 4% in Q3 last year, showing how quickly our investments in automation and AI are driving meaningful leverage across our growing business. And notably, we generated $81 million in free cash flow this quarter compared to $28 million in Q3 of 2024. This represents a free cash flow margin of 53%, highlighting the strength of our business model and operational efficiency. Now before I dive into our product updates, I want to remind everyone of our core mission. We're building technology to automate the delivery of health care, starting with musculoskeletal conditions. This quarter, we reached an important milestone, surpassing 1.5 million lifetime members who have trusted us with their care. Everything we do is centered around the triple aim, using technology to transform outcomes, experience and costs in health care. To that end, I'm excited to share three key product areas where we've made significant progress this quarter. First, our always-on AI care assistant, Robin, that's transforming how we support our members. Think of Robin as a smart and increasingly capable companion that's available 24/7 to help members navigate their care. Now a typical care journey for back or joint pain isn't linear. People will have good days and bad. When someone experiences a pain flare-up, Robin recognizes this through member-reported data and immediately gathers important details, shares helpful resources and alerts their physical therapists so care can be delivered faster. Beyond pain events, Robin will soon provide instant support, answer common questions and proactively check in with members to keep them on track with their recovery. This isn't just convenience for our members, it's technology that delivers immediate support at the exact moment people need it most while laying the infrastructure for an AI agent that doesn't just answer, it acts. For our clients, this allows us to drive higher member engagement, improved health outcomes and therefore, cost savings, which directly benefit Hinge Health through improved client retention, demonstrable ROI and higher member enrollment yields. Secondly, we've built the ability to perform an automated movement analysis using our TrueMotion Computer Vision technology. There are many measurement tools to track outcomes in MSK care. While valuable, almost all rely on subjective questions and are therefore, self-report only. Our new movement analysis uses our advanced Computer Vision technology to capture joint angles, symmetry and endurance across a short battery of movements to produce Hinge scores that are objective and comparable over time. Pairing these objective measurements with a few targeted questions gives clinicians and members a fuller and more actionable picture of their joint health. Members simply use the front-facing camera on their phone and our technology does the rest. Finally, we're continuing to weave AI throughout our entire organization to drive efficiency and innovation. One example I'd love to highlight is how we've used AI to transform how we build our product. Gabriel, my co-founder, has been personally threading AI throughout our engineering team. I'm proud to say that we've, one, increased code output by 120% and pushed new features live three times faster in Q3 2025 compared to Q3 2024. Two, we've increased AI adoption among our engineers from around 20% in Q1 to close to 100% today. And finally, three, we've also seen a 32% improvement in developer experience scores from April through October. Our engineering team is not only more productive, they're happier, too. These improvements are already impacting our operating margin, and we're just getting started. With that, let me turn it over to our President, Jim, to discuss our market momentum.
Thank you, Dan. As highlighted, our continued product innovation allows us to measurably improve health outcomes, delight members and lower medical costs, directly translating to client retention, which is the foundation for our commercial success. Before diving into our Q3 performance, I'd like to remind everyone about our sales cycle and seasonality. The majority of our clients signed contracts with us in the second half of the calendar year, aligning with the typical employee benefit enrollment period. Most of these clients then launch in the first half of the following year, which creates a predictable rhythm to our business. I am pleased to report that our sales season is progressing very well, and we're ahead of where we were at this point last year. We ended Q3 with a strong base of 2,560 contracted clients, up 25% year-over-year, and we expect that number to grow substantially in Q4 as we finalize contracts with clients who gave us verbal commitments during Q3. What's nice about our model is that even when contracts aren't finalized yet, clients still promote Hinge Health during their benefits fairs and open enrollment periods. Additionally, since most of our clients are contracted through our health plan partnerships, there's limited negotiation or legal complexity in contracting because the terms are pre-agreed and standardized. Year-to-date, our head-to-head win rate is up year-over-year, which speaks to the strength of our value proposition and our widening lead. We're seeing strong performance in several key markets. First, we're winning with jumbo clients, those large, self-insured groups with over 100,000 lives. Second, we're seeing great traction in the federal space, including having our best year ever with federal employee programs. Third, our fully insured segment continues to perform well, which is particularly validating since health plans themselves are the purchasers in this segment. And as actuaries by profession, their adoption validates the real cost savings we're able to deliver. We look forward to sharing more detailed metrics on these wins in our full-year earnings report next quarter after the completion of our sales season. Now let me provide an update on HingeSelect, our high-performance provider network that creates a unified experience by combining our digital platform with high-quality in-person care when needed. This quarter, we went live with our first clients. And while it's still in the early days, the initial feedback and learnings are very positive. This gives us confidence as we prepare for a broader market rollout. Our provider network is coming together nicely. At the end of Q3, we had contracted with over 3,300 high-quality provider locations across all 50 states, creating comprehensive coverage for our members, and we expect to significantly increase our footprint over the next 12 months. Currently, 86% of our lives live within the HingeSelect network footprint, which positions us well for our continued rollout. On the client adoption front, we have clients representing hundreds of thousands of eligible lives who have already committed to HingeSelect. These clients are either launching the program now or planning to launch next year. And importantly, all of them are existing clients of our core digital program, which validates HingeSelect as a natural extension of our offering. Beyond these committed clients, we have clients representing millions of lives in our pipeline where we have active discussions. This includes both new prospects who see HingeSelect as a differentiator and existing clients looking to expand their relationship with us. Moreover, we're in advanced discussions with multiple health plans and PBM partners to streamline HingeSelect adoption with our mutual clients. With that commercial update, let me turn over to James to walk through our detailed financial results and outlook.
Thanks, Jim. Let's break down our third-quarter financial performance a bit. As a reminder, our billings model is built on three key drivers: lives, yield and average price. Lives represents the number of people eligible for our program. Yield is the percentage of those eligible lives who actually enroll and engage with us as members, and price is what we charge per engaged member. When you multiply these three factors together, the result is our calculated billings, which is the foundation of our revenue model. For the third quarter, our LTM calculated billings reached $624 million, representing 50% year-over-year growth compared to $417 million in Q3 2024. Revenue came in at $154 million, up 53% year-over-year from $101 million in Q3 last year. This revenue performance exceeded the high end of our guidance range of $141 million to $143 million due to strong billings performance stemming from the continued strength of our underlying fundamentals. We saw solid performance across all three drivers of our billings formula. Eligible lives came in as expected, reflecting the healthy growth in our client base and the successful launches of new clients throughout the year. Yield was also a strong contributor to Q3 billings. Our targeted enrollment initiatives are particularly noteworthy. We saw enrollees from our targeted enrollment activities this quarter more than double compared to Q3 2024. Targeted enrollment is where we use data from our HingeConnect platform to reach members at their highest point of need. We also rolled out member challenges this summer to encourage movement during seasonally slower months where members could earn rewards and badges for meeting their goals. These initiatives contributed to strong engagement and overall excellent yield performance. On the pricing side, our new engagement-based pricing model continues to perform as expected, with our average selling price remaining essentially flat for the year. As of the end of Q3, about 48% of our eligible lives had opted for the new pricing model. Moving to our operating efficiency. Our gross margin reached 83% in the third quarter, up from 79% in Q3 last year. This 400-plus basis point improvement was driven by continued enhancements in care team efficiency, largely enabled by the initiatives Dan mentioned, like our AI-powered tools that help our clinicians work more effectively and handle more members without compromising quality care. We also saw strong operating leverage across all expense categories. Total operating expenses were 63% of revenue in Q3, down from 83% in the same quarter last year, demonstrating our continued focus on operational efficiency, even though we made deliberate investments to fund more long-term growth opportunities such as new products, improved enrollment and our go-to-market functions. This operating leverage translated into strong profitability. We generated $30 million in income from operations, significantly ahead of our guidance range of $17 million to $21 million and with a 20% operating margin, a substantial improvement from negative 4% operating margin in Q3 2024. As we continue to grow and evolve, we are consistently looking for ways to become more efficient. And one of the many areas where we have seen improvements is in collections. Improved collections, combined with the billings overperformance and overall cost discipline drove our all-time high free cash flow margin of 53% this quarter, generating $81 million in free cash flow. Through the first three quarters of 2025, we've generated $118 million in free cash flow, which represents approximately $1.25 of free cash flow per share using our Q3 fully diluted shares outstanding of 94.5 million. We ended the quarter with $497 million in cash, up from $415 million in cash at the end of Q2. Looking ahead, I'm pleased to provide our updated guidance for both the fourth quarter and full year 2025, which reflects the strength we're seeing across our business. For the fourth quarter of 2025, we expect revenue to be in the range of $155 million to $157 million, representing 33% year-over-year growth at the midpoint. For non-GAAP income from operations, we're projecting $34 million to $36 million in Q4 or a 22% margin at the midpoint. For the full year 2025, we're raising our revenue guidance to a range of $572 million to $574 million, which represents 47% year-over-year growth at the midpoint. This is a meaningful increase from the $548 million to $552 million range we provided last quarter. For full-year non-GAAP income from operations, we now expect $106 million to $108 million, a 19% margin at the midpoint and also a significant raise from our prior guidance of $77 million to $83 million. Several factors are driving this improved outlook. First, we're seeing continued strength in our core business fundamentals with solid performance across lives, yield and pricing. Second, our strong Q3 and year-to-date billings performance gives us confidence to raise our full-year revenue targets. Third, the operational efficiency gains we're achieving through AI initiatives are flowing through to the bottom line faster than we previously expected. Given this overperformance and the strong cash position we have, we are prioritizing investments in growth and expanding our market reach as we continue building the future of health care. Indeed, we already have promising preliminary data on our next product. Moreover, we'll continue to take a disciplined approach to capital allocation, investing in growth while remaining focused on expanding margins and driving sustainable returns. From a share count perspective, we expect our fully diluted shares outstanding to be around 95 million by the end of this year. We recognize the importance of balancing investment in growth while maintaining an efficient capital structure, and we'll continue to be thoughtful in how we manage dilution over time. Finally, I want to remind everyone that our lockup expires at the end of the day on November 17, with shares free to trade on November 18. This represents a natural milestone in our journey as a public company. Of the 94.5 million fully diluted shares outstanding at the end of Q3, 17 million are already free to trade from the IPO and early lockup release, and the remaining 77 million are being unlocked. 41 million of those shares, however, are either unvested and ineligible to trade or owned by directors, officers and Board represented pre-IPO investors. The combination of our strong financial performance, robust cash generation and strategic investments positions us well for continued growth and market leadership, and we look forward to sharing more with you in the coming quarters. With that, let me turn it back over to Dan for some closing thoughts.
Thanks, James. I'd like to emphasize a point James made on our capital allocation strategy. Our team has shown that we can execute to not only grow the top line but grow it efficiently. Our strong free cash flow allows us to continue investing in organic growth while giving us the optionality to evaluate and execute targeted M&A opportunities and return capital to our stockholders. You should all expect we'll continue driving both revenue growth and profitability. We are committed to managing this business to strong GAAP profitability. That means we see stock-based compensation as a real expense. And just like any other expense, we're going to manage it closely. Indeed, we've brought dilution down for three straight years, and we'll continue to be thoughtful in this domain. As I reflect on this quarter's results and look ahead, I'm incredibly confident about our business. Firstly, from a product perspective, there's a vast opportunity ahead in automating health care delivery. Physical therapy is only 1.2% of total health care spend, yet is a $60 billion-plus market in the United States. As we automate other aspects of care outside of PT, even a similarly sized slice can represent tens of billions of dollars in total addressable market. Secondly, our commercial momentum is also exciting. We're trusted by our clients and partners to build products that don't just automate care but deliver improved outcomes, better experiences and lower costs. That performance is evident in our higher win rates year-over-year. Thanks for your time and continued support of our mission. With that, I'll turn it back to Bianca to open up the call for your questions.
Thank you, Dan. Operator, we're now ready to open the line for questions.
分析師問答
Your first question comes from Rishi Jaluria from RBC Capital Markets.
Wonderful. Nice to see continued strength in the business and outperformance just really across the board. I wanted to start, Dan, by digging into the recent AI announcements you made and really exciting to see the innovation there and a lot of excitement, I think, around Robin. Maybe can you help us understand, as we're simultaneously hearing headlines of enterprises, maybe a little bit risk-averse around AI, especially when it comes to data, how you're balancing the kind of desire to drive innovation here, bring AI into the product and ultimately drive better customer success and better patient outcomes and work with especially your partners in alleviating some of those concerns and driving up kind of higher AI adoption over time? And then I've got a quick follow-up.
Great question. Thanks for that. And you're absolutely right. There's concern and rightful concern and caution from health plan partners, employers, etc., about AI in health care. The stakes are simply much higher in health care than in your average industry where AI is being adopted. And so at Hinge Health, we're really focused on some bread-and-butter applications of AI that could make the member experience more convenient, more personalized, make our care team more efficient so we can increase throughput and then our investments in our core AI threaded throughout the rest of our organization to make the business more efficient as well. So I'd like to start by saying we actually published our AI care principles a few weeks ago, which actually guide our development of AI across our platform. And I think this is really important. And we feel responsible AI development is foundational to our approach, and our commitments include AI that is thoughtfully designed, built responsibly and complements human care. Underpinning those commitments are principles that prioritize ethical use, privacy, security, transparency and continuous improvement. So we've built a good reputation with our clients that they trust us when we build something new. We bring them along with particularly our health plan partners, sharing with them our roadmap, sharing with them our thinking, and sharing with them our outcomes. Our movement analysis is a phenomenal step forward in how outcomes should be within musculoskeletal orthopedic care. Typically, outcomes in orthopedic care can be tracked by particularly patient-reported outcomes and are very subjective. It's how has your pain been? How has your stiffness been? And there's fewer objective measurements. With our movement analysis, we're able to use Computer Vision to bring objective measurements such as endurance, speed, etc., in terms of how somebody's joint health is trending. With Robin, it allows us to substantially increase the throughput of our care team by allowing a member to interact and provide background information to our AI care assistant, who then helps bring the care team up to date. So if there are any adjustments to the care plan, it reduces the back and forth and shortens the time for the member. To sum up, we agree that there are more challenges in health care. We've approached it with that level of humility and really focus on the bread-and-butter application, and that's the patient-facing aspects. I haven't mentioned the company-facing aspects of AI, which you've seen are driving a lot of our operational efficiencies.
Awesome. No, that's super helpful and really appreciate that color. And then Dan, you talked a little bit about open enrollment at the very beginning of your statement. Maybe can you walk us through kind of what set of assumptions you're thinking in terms of this open enrollment season as we think about the Q4 guide and how you're thinking about it relative to prior years? Now that you have in your arsenal greater Enso traction, you've got HingeSelect out there. Just how should we be thinking about that? And just to complicate things further, I'll toss in some of the uncertainty with government tax credits as a result of the current government shutdown going on.
Great question. So in terms of open enrollment, a lot of our new clients that have decided to buy us, they actually go live on around January 1 or throughout Q1. We have a pretty predictable sales cycle and implementation cycle for new clients, and they typically go live with the new plan starting January 1. Over the course of Q1, we'll have clients going live on January 1, February 1, and several days of that quarter. Open enrollment is another opportunity for our existing clients to highlight their existing benefits to their members, and some do highlight and make available pre-sign-ups for upcoming benefits. They mentioned, hey, coming up in Q1, you're going to have a new mental health benefit, a new musculoskeletal benefit, a new PPO plan. They lay the groundwork for members to understand, but they're typically not eligible to sign up and therefore become a billable member until Q1. That's how it works in health care benefits. In terms of the federal government shutdown, maybe Jim could take that in terms of its impact on us. The short answer is not much impact so far.
Yes, that's right. The short answer is there has not been any impact. We haven't seen any impact. In fact, our federal business is performing as strong as it's ever been. It is the best year ever in the federal space, and we expect that trend to continue. Yes, no impact from the shutdown on the business to date.
And I'd just clarify that while salaries, unfortunately, are paused, health benefits, dental benefits and vision are not paused. Those continue to be paid for throughout the government shutdown. If this extends into January 1, I don't have an answer for you of how health benefits would be affected after January 1. But throughout the end of the year, they are absolutely funded.
Your next question comes from the line of Jess Tassan with Piper Sandler.
Congrats on the quarter. I'm hoping you can maybe explain some of the seasonal and comp year-over-year dynamics behind your Q4 '25 yield assumptions. I wonder if the guide implies that active members actually decline sequentially? If so, why would that occur?
Yes. Thanks, Jess. I'll cover some of that, and then my colleagues want to add. I want to remind everyone what we said in the second quarter, which I'll repeat here again, which is that typically, our fourth quarter is slower than our third quarter, and it has been with the exception of 2024. That means our billings are lower in the fourth quarter than the third quarter. There's just less activity in the fourth quarter than the third quarter. Our cash flows are lower in the fourth quarter versus the third quarter. With the exception of 2024, that's always been the case. So we expect that again this year. We do expect a really strong fourth quarter, but it's coming off of a really difficult comp last year, where in 2024, we had a ton of pent-up marketing demand going into the back half of the year, specifically into Q4 that drove a ton of engagement. This year looks more like our normal seasonality that we typically have.
Great. And then hoping you can maybe describe some of the targeted enrollment initiatives that supported the Q3 yield outperformance. Was this the expanded Enso deployment? Should we expect Hinge to perpetually introduce these targeted enrollment initiatives that support yield?
Great question. So this is Dan. With regards to our yield improvements overall, we have evergreen investments in this area. It’s not just a single home run that’s driving improvements, but a series of singles and doubles, and we like it that way, because this portfolio approach ensures resilience in the system. We could swing for the fences on a few key experiments, but we never want to be dependent on a home run to achieve our yearly goals. Specifically, regarding targeted enrollment, this has been going great. Our team has spent a lot of time and effort, not just building partnerships with health plans, but also the piping to ingest the data in as real-time as possible. Notably, building these pipes requires effort from a health plans tech team. Those tech teams are typically small and mighty tech teams at the health plans who have a lot of demands on their time. Part of the increase is due to our years-long collaboration and simply standing up these bidirectional data transfers, cleaning up and standardizing the data, and then using it to effectively identify and enroll high-risk members. That has a big impact on ROI that we can deliver to our clients. I suspect we are far ahead of most everyone else with regard to the sheer amount of data we receive and therefore, the target enrollment we're able to drive with our business. As mentioned in our earlier remarks, we're up about 2x year-over-year in terms of absolute members enrolled via our targeted enrollment.
Your next question comes from the line of Saket Kalia from Barclays.
Absolutely. Dan and Jim, maybe for you. It was great to hear about the strength this selling season here in the second half. Maybe just a high-level question. I'm curious, how many of your wins anecdotally, of course, are kind of greenfield versus displacing a competitor?
Yes, Saket, thank you for the question. I would say the vast majority of our wins are still greenfield today. Although I will note that a greater percentage of our wins are competitive displacements, although relative to the overall win rate, most of them are still greenfield wins.
Got it. Got it. That makes sense. And then maybe my follow-up for you, James. I think the number that surprised us most was the operating cash flow this quarter. I think you said it was $81 million or $82 million. Can you just touch a little bit on the better collections there and whether the move to the new engagement-based model is impacting billings or collections at all? Just trying to kind of put that outperformance into perspective a little bit.
Yes. Thanks. And you're right. It was a pretty extraordinary performance there in the third quarter on cash collections. I would remind everyone that's our sixth straight quarter of cash profitability. Being positive is not a new thing, but being $81 million positive is pretty awesome. Yes, we went into the new engagement model, and we took advantage like everything we do in our business, always looking for efficiencies, and that gave us an opportunity to look at everything we do in our collection process from how quickly we bill to when we make calls. We deploy AI, and when something might be going awry and we engage more people to get after that. We've always been good at collections, but we took the opportunity to try to become great at collections. Some of that came through in the third quarter. While we will have less cash collected in the fourth quarter just because that's the seasonal trend, we will still have a very strong fourth quarter in cash collections.
Yes. And as an executive team, we are very committed to managing this business to be reliably free cash flow positive.
Your next question comes from the line of Jailendra Singh with Truist Securities.
So I want to follow up on the selling season commentary. My question is more around the rollout timing. Are you guys seeing any late 2025 clients slipping into 2026 or maybe on the flip side, or 2026 plans being pulled forward? What are driving those types of shifts? And also, can you share any data around what percentage of your 2026 new logos pipeline are in contracting versus late stage? And how confident you are with respect to the conversion?
Jailendra, thank you very much for the question. No, I would say this year looks fairly traditional from a rhythm perspective, as we've touched on. The bulk of our clients are making commitments in the second half of the year, using open enrollment to plan for the launch. As Dan mentioned, launching around January 1 in the first quarter of the year. That operating rhythm has largely played out in a traditional way this year. Specific to the shape and velocity of our pipeline, we don't give specifics on that. I appreciate the question, but we're not prepared to share data, although the overall size of the pipeline continues to grow and is every bit as big as it needs to be to deliver on what we're hoping to do. So thank you for the question.
Okay. Makes sense. And then my quick follow-up. Just curious at this point, do you have a view on how many care team FTEs you're going to require for 2026? Just trying to better understand how some of the recent AI tools you have launched are helping you to further improve your member to FTE ratio.
Great question. Thanks, Jailendra. This is Dan. We're in the middle of our 2026 planning, and our approach remains disciplined and targeted. Most of our headcount additions will be in R&D and some go-to-market because we want to invest in growth, organic growth to capture this opportunity. But it's important to note that we are building our product much more efficiently, thanks to AI. As mentioned in our earlier prepared remarks, our code output per engineer is up about 2x year-over-year, and we're just getting started there. You asked specifically about our care team. We anticipate care team headcount to be roughly flat to down. That is, despite increasing revenue in 2026, our care team will be at worst flat. To be conservative, you should model flat. Any gross margin tailwind from those efficiencies will likely be reinvested into the product infrastructure. We like where our gross margin is right now, but we want to continue to invest in the product. We are still in this growth stage of the business, and we want to invest in growth, invest in that member experience, including initiatives like Enso to sustain our differentiation and our growth, and we'll share more details as plans are finalized.
Our next question comes from the line of Scott Schoenhaus with KeyBanc.
Sorry about that. I just wanted to touch more on your new product offerings, Robin AI and movement analysis. It seems like it also could drive increased yields, but also as you move to a more utilization-based model, which is, I think you said, 48% of lives currently probably tracking ahead of everyone's expectations here could also drive ARPU, which I think, Jim, you said it was flat. So maybe walk us through the dynamics of these two AI product offerings on the yield side and potentially on the ARPU side.
Great question. Improving our core member experience is something we're always focused on, allowing us to just better retain the triple aim of improved outcomes, experience and costs. We are at near all-time highs on member engagement and satisfaction scores, and we expect that to continue as we roll out new things like our movement analysis and Robin. As I mentioned, our ASP is trending to flat this year, which is where we expected, because we modeled that into our contractual commitments for our new billing model. We knew that even increased engagement would keep it flat because we wanted to commit to that to our clients. We have now had several years running of improving our per-user engagement, not just improving the enrollment to the program, but improving the engagement of those who enroll, and we want to continue to do that at Hinge Health. It’s going to be similar to our yield improvements, a portfolio approach of singles and doubles. I actually don't see a movement analysis as a home run. I see this like a double, might be a triple actually, but a double. And same thing with Robin, and we want to continue to roll out new capabilities that our members see value in and bring them back, but also, of course, is improving their health, improving their experience and lowering costs for our enterprise customers.
Yes. Between the improvements in gross margin over a year ago and the improvements in operating margin, that's about 2,600 basis points of improvement. So lots of goodness there. I would say probably a good half of that came from AI advances. We've gotten more efficient in process as a result of AI. We've gotten more efficient with deploying AI versus humans. So a whole bunch of advances from AI initiatives. But the people around that have also gotten more efficient as a result.
Yes. And as a business, we've also just run the business with constraints. I think when it comes to solving problems, particularly when you're cash-rich like us, it's easy to solve problems with new headcount. When you put constraints on the business and say, "Hey, we're not adding new headcount to this department. Hey, we're not adding it to this department. Because we have a pretty predictable business on how it grows, we could plan months ahead, saying, hey, when January 1 comes around, we know the business is going to grow quite substantially with new clients. So be ready that you're not going to get all the headcount you planned for. You need to start investing in AI tools now. We've been laying that groundwork with our team months ahead of time, and that's caused a lot of teams to encourage a lot of teams to experiment with new AI tools, new processes, and just problem-solve in new ways such that we could solve problems with technology and brainpower instead of having to solve problems by adding new heads.
And maybe, Scott, just one thing I'd add. I think maybe implicit in your question also is that we're probably by anyone's standards, we're well ahead of our march towards our target model of 25% EBIT and 30% free cash flow margin. So maybe implicit in the question is, hey, are you looking to adjust that anytime soon. I would say stay tuned on that. We're going to give our 2026 guidance in the February call that we'll have, and we'll talk about concepts like long-term margins and progress towards that when we get to our very first Analyst and Investor Day, which will be wrapped around our Movement conference in June of next year. So that will come in 2026. But today, as of today, no change to our target models that we have.
Your next question comes from the line of David Grossman with Stifel.
It sounds like you've had some really good success in the large enterprise segment of the market during the current selling cycle. So with the mix perhaps skewing to larger clients next year, are there any considerations for yield or pricing that we should be thinking about as these clients go live next year?
Thanks, David, for the question. No, I wouldn't say that the size of the client should influence the way we think about ASP or yield. I think we have a very diverse client base, actually, both from an industry perspective. We’re serving almost every consumable industry around the globe as well as client type and size. So I think we've optimized our enrollment, our yields, our target enrollment kind of independent of size. The short answer is I would not anticipate any variation.
Great. And then if I heard you right in your prepared remarks, you have some promising preliminary data on your next product. Can you provide any incremental context of how we should be thinking about what that may be?
Great question. A lot of our R&D is focused on enhancing our core product of digital physical therapy. About 40% of people have musculoskeletal pain in a given year, 9% see physical therapists. We think it should be closer to like 12% or 15%. Last year, we enrolled 3.4%. This year, we're trending closer to 3.6% as we continue to chip away and gather more enrollment from people seeking in-person PT. But our overall vision is to use technology to automate the delivery of care. We want to continue to use technology to peel away the aspects of in-person care and automate provider interactions. We think if we peeled off an area of health care even half the size of physical therapy, that segment is 1.2% of health care spend, so it's about $60-plus billion. If we peeled off an area of health care even half the size of PT, it would represent tens of billions of dollars of TAM, and we're working on a new product right now. We'll only enter spaces where we have confidence that we will be either #1 or #2—preferably #1.
Your next question comes from the line of Brad Sills from Bank of America.
I wanted to ask about the effort to go after the fully insured segment here. Was that a key contributor to the growth in clients here? I know that going after some of those smaller firms has been more of a focus.
Yes. Thanks, Brad. The way we think about fully insured might be a little bit different than others. We count a fully insured client as one client with the health plan. The health plans' fully insured book of business, even though there are thousands of clients, small employers that typically constitute that health plan. So no, fully insured was not a meaningful contributor from a number of logos perspective. But it is a meaningful contributor to our business growth. Again, as we mentioned in our prepared remarks, the actuarial rigor that fully insured organizations use to evaluate solutions like Hinge is tremendously validating when you pass those hurdles and become the adopted solution of choice. So that continues to affirm the impact we're having both on clinical outcomes and member experience, and importantly, the full insured also on cost savings.
Wonderful. Great. I wanted to ask a question on the yield. I think, James, you said you gave some directional commentary on how that trended. Any more color on just the yield, where that is trending? What are some of the key initiatives driving that? I know that there's the customer success organization that's been working hard on promotions within the member base.
Yes, yes. It's been a great year. I think you'll recall, if I take you back through some of the evolution here, that we started out the year assuming that we would be roughly flat in yields. That’s kind of the conservative nature we like to go through in the year until we see the evidence supporting an uptick. By the time we got to the second quarter call three months ago, we were talking about it moving north of 3.5, up to closer to 3.55-ish in that range. Now, clearly, the improvement that we're seeing in the Q3 results suggests it's trending even higher than that. We're pretty comfortable that it will end the year at least at 3.65, with an opportunity to improve even above that as we finish out the year here.
Your next question comes from the line of Elizabeth Anderson from Evercore ISI.
Congrats on a really nice quarter. I wanted to talk a little bit more about the HingeSelect provider network. Can you talk a little bit about sort of how you're developing that network? How do you see the need to continue to ramp that? How do you evaluate what makes somebody a high-quality provider for that type of network? How do you see the interaction between initial visits and follow-up virtually develop over the next 12 months as you're getting more people on it?
Sure. Thanks for your question. A couple of pieces to that. First, on the provider quality front, that is one of the most important elements of HingeSelect: assessing provider quality as well as cost, by the way. Overall value includes cost and quality. Different providers are evaluated for quality in different ways. We look at both the consumer experience, and this is particularly relevant for physical therapy, where we know that the general practice of physical therapy is shown to reduce costs. If you get somebody to conservative management orthopedic care for their back pain, knee pain, or hip pain, you have a good shot at reducing downstream costs. The challenge of physical therapy is access. It could be member costs or time constraints for needing to take time off work. So we're really focused on expanding our physical therapy network and making sure that we can improve adherence by ensuring that the consumer experience with these in-person physical therapists is really high. For other provider types, it helps to look at claims data. For surgeons, we can look at the claims history for individual providers and see if they first exhaust conservative management care before operating on a patient. So there are various ways to assess quality depending on provider type. Just giving an example of surgeons, we don't need the top 1%—if you eliminate the bottom 25% for particular orthopedic surgeons or even by the top quartile, you'll have really good orthopedic surgeons who are not over-operating and achieving good downstream outcomes. We don't require network density; we're not trying to have 100 surgeons in Atlanta. We want five. We can shop for the highest quality at a price point that works for us and our customers while ensuring it's complementary to a health plan's overall network as we build ours. For physical therapists, of course, we want a lot more density than five in Atlanta. We want several dozen. Yes. It’s a two-sided marketplace, and they can be difficult to build up. We firmly believe that solving this problem will create one of the most enduring moats and competitive advantages at Hinge Health. Solving a two-sided marketplace is a difficult problem to solve. We've made good progress by adding thousands of clinics, particularly focusing on orthopedic care overall, and building a tech platform that allows us to process claims. Our tech platform is quite a bit more advanced than I think many realize initially.
Your next question comes from the line of Craig Hettenbach with Morgan Stanley.
Question for Jim on the selling season and really in the context of rising employer costs. Looking for context on just how much ROI engagement on the platform is kind of working to your advantage and how that's resonating with the customer base.
Yes, Craig, thank you for the question. Employer health care costs are rising at an all-time high, low double digits in a lot of cases, which is forcing benefits leaders and employers to get serious about tackling their top cost drivers. Fortunately, musculoskeletal care continues to be a top cost driver. We're seeing interest in our business grow as a result. Employers scrutinize the impact of solution providers on costs. The demonstrated and repeatedly validated ROI we've been able to show is an important part of our story. In these environments where you're seeing costs rising, and benefits leaders have a mandate to address them, Hinge benefits from that dynamic, and we believe that trend will continue for the foreseeable future.
Got it. And then as my follow-up question on Enso, just looking for how adoption is trending with that product. Do you have any anecdotes in terms of that potentially helping to extend engagement beyond a year on the platform?
Yes. Let me just give some numbers here, Craig, and then Dan might have some commentary as well. A couple of years ago, our Enso adoption rate was around 5%. Last year, it was around 15%. We expect it to be north of 25% this year, and we're on that trajectory. Nothing meaningfully different in the numbers. Despite increasing costs of goods sold around Enso, we're still producing fantastic gross margins. We're managing that through all the AI improvements we have in the care team. Beyond that, I'll let Dan talk about how that impacts engagement.
At a high level, we think software is going to automate all non-touch aspects of health care: tenting symptoms, formulating a diagnosis, creating a care plan, even telemedicine visits. However, the touch aspects of health care will require hardware. We are committed to automating health care and will need to invest in connected hardware. Enso is one of the most beloved aspects of our program. We actually don't charge anyone to receive it and are thoughtful in sending it out to beneficiaries. Members who get escalated to Enso tend to see their activity sessions improve, not only from Enso usage but also from their exercise therapy sessions. Their satisfaction scores are substantially higher with Enso. If it ever falters, it’s one of the first things they will reach out to our tech team to have us replace. It's a beloved aspect of the program and a big differentiator for us in the market.
Your next question comes from the line of Brian Peterson with Raymond James.
I'll echo my congrats on the quarter. Just following up on some prior commentary on HingeSelect. As we think about your right to win for a customer looking at a digital MSK solution for the first time, how much will HingeSelect and kind of that more comprehensive view of your care offering? How much is that influencing that decision for a new customer? And maybe I'll just ask my follow-up now. James, as we think about the ramp trajectory of that business, anything that you can share for us there?
Brian, thank you for the question. There is something credible about the elegant unification of digital and in-person care. As we think about automating care, but recognizing that in-person physical care will be required in some minority of cases. Historically, digital health companies have been unable to elegantly integrate that in-person experience into something that members or patients love and are willing to engage in. When we sit down with clients evaluating solutions, they are going to, one, first hold us accountable to having a best-in-class digital solution. We will continue to invest in innovation there and have the best digital solution in the market. But they're also looking beyond digital at how to tackle costs. That elegant unification of in-person and digital provides a strong competitive advantage for us and enhances our right to win.
On the second point, Brian, kind of numbers trajectory, I'll just reiterate some points we made on the second quarter call, and nothing has really changed in the commentary. We'll have some increased costs at the outset as we create a team to put the provider network together. That's already embedded in the numbers in Q3. We've also added costs in the engineering team to create the product experience for our members eventually. We have been out selling it this season, as Dan mentioned, and we'll have a few hundred thousand sign ups for it. The big selling season is probably going to be late 2026 when we add a number of eligible lives and the clients that come with it, which will translate into billings and revenue not meaningfully until we get into 2027. So short answer there is a few added costs between now and the end of '26, which are more than embedded in any forecast we give. You'll start seeing some billings and revenue impact in a meaningful way in 2027.
By added costs, we're talking about two dozen people or so right now, maybe a bit more.
Your next question comes from the line of Richard Close with Canaccord Genuity.
Congratulations on the success here. James, maybe for you. First, how should we think about any near-term investments, other than H hinge Select? Is there anything big to be aware of over the next several quarters? My follow-up would be on the new service expansion product roadmap that you're talking about; how are you thinking about not diluting the stellar margin profile that you guys are setting right now?
Yes. I'd mention the near-term investments we have are probably similar to what we shared on the second call. We had some near-term investments in HingeSelect specifically that will continue over the next several quarters. We've also invested more in our go-to-market function, adding more capacity into the system in an area where we see lots of opportunity for growth going forward. Those are the two I'd identify in addition to products overall.
Yes, we are absolutely committed to organic growth. While we don't like to talk about all of our new products until we're ready to launch them, rest assured, we have a robust R&D team, and most of our new headcount from 2026 will go towards R&D to both enhance our core product, which is growing robustly, as you see in our numbers. We want to start planting seeds. We are planting seeds. Some are visible within Select, some are not quite visible publicly yet. We want to plant seeds while our core business is still strong, knowing that it will take time for some of these seeds to grow into big, strong trees.
Your next question comes from the line of Scott Berg with Needham & Co.
Really nice quarter here. A couple for us. Dan, I wanted to start on Medicare Advantage. These plans really struggled with cost containment over the last 12 months. I guess this has resulted in some cases in national insurers cutting some of their supplemental benefits offered as part of these Medicare Advantage plans. What impacts are you seeing from these cost challenges? Does this actually create an opportunity for Hinge perhaps over the next year or two?
Sure. I'll turn it over to Jim, who runs this part of our business.
Scott, thanks for the question. You're absolutely right. We've seen in the news over the last year about Medicare Advantage plans being under cost pressure regarding MLR. We see it as an opportunity. Musculoskeletal spend is a significant cost driver. Looking at whether it's reducing medical spend or improving star ratings, I think we have the ability to have a big impact on our MA clients and prospective clients. We've added MA clients this year and haven't lost a single one as a result of some of the headwinds they're facing. We look at this as an opportunity, again, with validated ROI and the innovation dedicated to MA that we're investing in. We think it's a big opportunity and will expect MA to be a contributor to our growth in the years ahead.
Understood. Helpful. And then for my follow-up question, I know that the selling season commentary you talked about some strong winning with jumbo clients, particularly federal. But I wanted to focus on the federal side. Does the federal government shutdown impede your ability to sign any new federal clients here in the interim?
No. The short answer is no; it does not impede our ability at all. The evaluation and procurement of solutions like ours continue unabated. We had our best year ever in that space and have really, I think, got a lot of momentum that we expect to continue into 2026.
Again, I would emphasize, while salaries are unfortunately paused, health benefits, dental benefits, and vision are not paused. Those continue to be paid throughout the government shutdown. If this extends into January 1, all bets are off. I don't know what will happen to health benefits after January 1, but throughout the end of the year, they are absolutely funded.
There are no further questions at this time. I will now turn the call back over to Daniel Perez for closing remarks.
First of all, thank you, everybody, for tuning in and seeing these results. We are absolutely committed to continuing to apply technology to automate the delivery of care. I hope you see in our results that we are just in the early innings of this transformation of health care. It is the largest services industry in our economy, and you can see from these results that we're making good progress in just a small corner of health care, which is physical therapy, and we're going to continue to invest our R&D dollars to chip away at the opportunity. Thanks again, and we'll see you in a couple of months.
This concludes today's call. Thank you for attending. You may now disconnect.