DarioHealth Corp. Q2 FY2021 Earnings Call

Greetings and welcome to the DarioHealth Corporation’s Second Quarter 2021 Results Conference Call. All participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chuck Padala. Thank you, Chuck. You may begin.

Thank you, operator, and good morning everybody. Thank you for joining us today for discussion of DarioHealth’s second quarter 2021 financial results. Leading the call today will be Erez Raphael, our CEO of DarioHealth. He will be joined by Zvi Ben-David, the CFO and Rick Anderson, President and General Manager of North America at DarioHealth. After the prepared remarks, we will open the call for Q&A. An audio recording and webcast replay for today’s conference call will also be available online as detailed in the press release invite for this call. For the benefit of those who may be listening to the replay or archived webcast, this call is being held and recorded on August 16, 2021. This morning, we issued a press release announcing our financial results for the second quarter 2021, a copy of the release can be found on the Investor Relations page of DarioHealth’s website. Actual events or results may differ materially from those projected as a result of changing market trends, reduced demand and the competitive nature of DarioHealth’s industry. Such forward-looking statements and their implications involve known and unknown risks, uncertainties and other factors that may cause actual results or performance to differ materially from those projected. The forward-looking statements discussed on this call are subject to other risks and uncertainties, including those discussed in the risk factors section and elsewhere in the company’s 2021 Annual Report and Form 10-K, as well as the second quarter 2021 10-Q filed this morning. Additional information concerning factors that could cause results to differ materially from our forward-looking statements as described in greater detail in the company’s press release issued today and in the company’s filings with the SEC. In addition, certain non-GAAP financial measures may be discussed during this call. These non-GAAP measures are used by management to make strategic decisions, forecast future results and evaluate the company’s current performance. Management believes the presentation of these non-GAAP financial measures is useful for investors’ understanding and assessment of the company’s ongoing core operation and prospects for the future. A reconciliation of these non-GAAP measures of the most comparable GAAP measures is included in today’s press release regarding our quarterly and year-end results. And with that, I would like to introduce Erez Raphael, Chief Executive Officer of DarioHealth. Erez?

Thank you, Chuck, and thanks everyone for joining our call this morning. So we're reporting this morning material advances in each of our three pillars that define our strategy. On the multi-condition front, we believe that we have all the right components in place. Furthermore, we also have very good validation from customers on the acceptance of the idea on both conditions under one platform. On the transition to B2B2C, we see the fruits—we are seeing the bearing fruits in terms of the transformation into a SaaS model with high gross margins; we are showing a significant improvement also in this quarter. Rick and I will discuss today how the strategy that we have is well-timed into today's healthcare market and digital health markets specifically. Given the client feedback we receive, we are super confident that the strategic initiatives we are choosing are putting Dario in a very good position where we can scale and create compounding growth as well as improvement of our financial results moving forward. Looking into our actual results for this quarter, we generated approximately $5.3 million, which is a growth of 46% over the previous quarter sequentially, and it's almost 200%— a 194% year-over-year increase comparing to Quarter 2 of 2020. On the gross margins, we also saw a significant pro forma gross margin expansion and in Q2 reported 49.4%, reflecting a sequential growth from 44.7%. If we look back into the second quarter of 2020, that number was only 34.9%. Here too, we see a very nice improvement, and this is due to the fact that we continue the transformation into the B2B2C model and also launching more membership programs. Overall, as we stated in previous calls, the objective of the business is to go north of 70%. We expect that in the next few quarters, we will see this plan continues. On the multi-condition strategy, we had the vision that when building a digital therapeutics company that deals with chronic conditions, we must address comorbidities. We were always talking about personalization and expanded it into what we are calling hyper-personalization, hence when dealing with a patient that has one disease and comorbidity, we need to create one integrated experience driven by one AI engine. And this is what we did; we integrated things together. We are very excited to report today that it's not just that we are growing our pipeline from $700 million to $900 million; we also report that 66% of the opportunities clients we have in our pipeline are looking to purchase the full suite. Given the overall transformation in the healthcare market and specifically the digital therapeutics market, we’re seeing that choosing this strategy and managing multi-conditions under one platform creates a significant increase in our value proposition and demand for the platform. We see that with very good feedback from our potential clients. In terms of the metabolic and diabetes aspects, that remains the backbone of our pipeline, and we see this when analyzing our pipeline. Overall, behavioral health and physical therapy are components that will improve our win rates in terms of winning accounts moving forward. We’ve gained considerable traction in the self-insured employer market and also in the healthcare provider segment, as demonstrated by market acceptance, with the long way health plans contracting being delayed primarily for logistics reasons. Nonetheless, we remain positive that the agreement is imminent. We also have demand for the full platform, not just for a single condition. We have very strong capabilities for enrolling users to the platform, maintaining over a 40% enrollment rate, and we anticipate an 80% retention rate for users completing the full year, consistent with what we've experienced over many years in our direct-to-consumer space. Given the successful track record we see with employers and providers, alongside the increase in the percentage of clients arranging for multi-condition care under one platform along with our strong implementation capabilities, we feel positive about maintaining momentum throughout the second half of 2021 and into 2022. We believe that looking into the financial profile, more conditions will generate a higher ARPU since, on average, users have more than one condition. We have the potential to reach more users since eligible members under one account can utilize one or more of our products—this has increased from 8% to as high as 40%, under one account, that are now eligible for our product offerings. Moreover, we believe that our win rates among opportunities will increase considerably due to the multi-condition menu we provide. So, with all these improving parameters, under the same sales and marketing investment, we foresee a drastic improvement in the company's financial profile in the next few quarters. With that, I'd like to hand over the call to Rick to elaborate on our commercial strategy.

Thanks, Erez. One of the keys to our success in the strategy of moving to B2B is our ability to generate enrollment and revenue from those accounts. As Erez just said, we've been very pleased with our operational results so far. Enrollment in our enrollment program continues to be over 40% and as previously stated we used 35% in our pipeline calculations and internal models. Current trends suggest that we remain on track to achieve an 80% annual retention rate, consistent with historical patterns, and we have grown our users on the platform to approximately 197,000, seeing growth in average revenue per user. These operational metrics underscore our ability to convert contracts into revenue and continue to expand gross margins. Last quarter we also discussed our partnership with the telehealth firm MediOrbis to provide virtual care offerings directly to patients. MediOrbis is supplying the telehealth services, while we provide the remote patient monitoring and coaching. Now, with a quarter of experience, we’ve proven we can obtain patients, deliver the services, bill for them, and get paid. We've derived learnings and improved the efficiency of our operations, significantly decreasing costs to onboard patients. We’re even more enthused by this partnership offering now than we were a quarter ago and anticipate scaling it in the coming quarters. On the business development side, the pipeline has now exceeded $900 million. We continue to make progress in all three channels, starting with health plans. As most of you know, we anticipated a health plan contract in the second quarter. We acknowledge this deal has taken longer than planned but we feel great about the progress and the prospects despite the delay. In terms of an update, the terms of the deal are agreed upon; we had some unforeseen logistical delays unrelated to any deal points, but we believe signing is now imminent. Our customer has expressed the desire to launch this year. This is just one of several health plan opportunities that we believe could close before the year ends. While we’ve seen a delay in this first health plan contract, we are pleased to be in a position to close it and others within 18 months in a market segment that typically experiences sales cycles of 18 to 24 months or longer. On the employer side, employers represented the largest growth in our pipeline since last quarter, as we are working our way through the sales cycle for launches in early 2022. We are pleased with the traction we are gaining and anticipate finalizing contracts throughout this year. We have progressed to final stages, being selected as the winning vendor in several competitive RFP processes against our strongest competitors. We are demonstrating competitiveness in the mid-market as well as among the largest employers. In remote patient monitoring with providers and health systems, we've recently announced two large provider contracts. Several additional contracts are pending final agreement, and we expect they will contribute to revenue this year. We are seeing increased interest from larger health systems, and more deals are moving through the pipeline faster, meaning they are closer to closing. With the inclusion of MSK and behavioral health in our offerings, we believe we now have one of the industry's most complete integrated solutions. This has given us the ability to meet the growing demand for a single vendor, multi-condition solution. While the metabolic suite remains the backbone of our offering, two-thirds of our pipeline is now focused on the full product suite. Our offerings cover many conditions that are in high demand from employers and health plans, significantly broadening our opportunities to penetrate customers and compete for business otherwise unattainable. As we look back at the first half of this year moving into 2022, we're increasingly confident that we'll see strong growth in the B2B segment. We can see our efforts toward building product and brand awareness translating into contracts; our operational outcomes with our initial customers are building reference cases that are proving beneficial. The first customers we engage are always the hardest to win, but happy reference customers generate momentum for the overall business. We see substantial member growth on the platform from already contracted businesses, alongside deals anticipated this year across segments. We are continuously expanding our commercial teams, many new members coming from competitors and large health plans, which speaks to the quality of our offering and our prospects within the market. We continue to secure wins in competitive RFP processes against the most established players in the space. Most importantly, with the expansion of all of our channels—employers, providers, health plans, and RPM through MediOrbis—we've built multiple growth engines. We are not dependent on any single channel to achieve our growth objectives. In 2021, we expect to close at least a few health plans, several additional employers, some awaiting this year, and many more in 2022, as well as several providers in health systems and a handful of partnerships alongside potentially interesting strategic deals, mostly including more than one condition. With that, I would like to hand it over to Zvi.

Thank you, Rick. Revenues for the second quarter ended June 30, 2021, were $5.26 million, reflecting a 46% sequential increase from the first quarter ended March 31, 2021, and a 194% increase, or $1.8 million, versus the second quarter ended June 30, 2020. Gross profit in the second quarter of 2021 was $1.5 million, an increase of $872,000 or 137% compared to a gross profit of only $636,000 in the second quarter of 2020. Gross profit margin was 28.7% in the second quarter of 2021, compared to 35.6% in the second quarter of 2020. Pro forma gross profit, excluding $1.1 million of amortization of expenses related to the acquisition of Upright Technologies and wayForward, was $2.6 million. Pro forma gross profit margins, excluding amortization of expenses related to those acquisitions, was 49.4% in the second quarter 2021, reflecting a sequential increase from 44.7% in the first quarter of 2021. Operating loss for the second quarter of 2021 was $18 million, an increase of $13.9 million or 337% compared to $4.1 million in the second quarter of 2020. This increase was primarily due to a rise in operating expenses. Net loss was $17.8 million in the second quarter of 2021, an increase of $13.8 million, or 343%, versus the $4 million net loss in the second quarter of 2020. Adjusted non-GAAP net loss, excluding stock-based compensation and acquisition amortizations detailed in the reconciliation attached to our press release issued today, was $10.6 million in the second quarter of 2021, an increase of $7.5 million, or 239%, compared to the $3.1 million loss in the second quarter of 2020. Cash and cash equivalents totaled $63.9 million on June 30, 2021. Back to you, Erez.

Thanks, Zvi. To summarize, I would like to emphasize that in this quarter, we keep validating the company's strategy in terms of wins in our B2B2C transformation; we’ve seen successes with employers and providers, and regarding health plans, as Rick stated, we believe the agreement is imminent and expect it shortly. On the multi-condition front, the market is positively validating our strategy, with 66% of the pipeline representing clients looking to pursue the full platform. In terms of implementation within already signed accounts, we still see very strong enrollment, adoption, and retention numbers. We are confident in converting accounts into revenue. Overall, this positive validation of our strategy indicates we are building momentum this quarter and next year. Concerning our cash position, we ended the quarter with nearly $64 million in cash. When examining our adjusted loss post-stock-based compensation, it was $10.6 million. Overall, we feel well-positioned regarding cash and run rate moving forward and remain cautious to operate under our current plans. With that, I’d like to pause and start the Q&A.

Thank you. We'll now be conducting a question and answer session. One moment, please, while we pull for questions. Thank you. Our first question comes from Alex Nowak with Craig-Hallum Capital Group. Please proceed with your question.

Very good morning, everyone. Rick, I want to start with a question regarding some remarks you made. You mentioned upcoming deals with a few health plans. You also mentioned an interesting strategic deal. So, a two-part question: Can you expand on the health insurance deal that was expected to close in Q2 but was delayed? Additionally, what other health plans do you have in the pipeline? And then second, can you elaborate on this strategic deal you have in the works?

In terms of the health plan contract, several logistical issues arose, the most significant being that the health plan implemented a new IT policy due to a new CIO. We were the first vendor to go through this process, which caused delays as they didn’t anticipate it. The good news is we were first in line; the bad news is that caught us off guard slightly. As you may be aware, going into August brought additional vacations and personal leaves, further contributing to the delay. We believe we've now cleared those hurdles. The agreement terms have remained unchanged, and we believe signing is imminent. Regarding strategic deals, there's not a lot more I can add other than we are speaking to several parties interested in our market achievements.

Understood. You indicated last quarter that the expected number of deals to sign this year was 20 to 30 in 2021. Given the number of agreements so far, what is your updated expectation for that number? And can you share the contracted value of signed deals to add some context to the press releases?

I think we’re still in the same range of 20 to 30 deals by year-end, though some processes are running a little later than anticipated. The contracted deals currently finalized should reflect that number, and we plan to share additional details on contract values as they finalize.

Erez, while you don't provide guidance, your comments about growth acceleration have the Street modeling a significant ramp-up in the second half of the year. Are you comfortable with the projections from the Street and what growth do you believe is achievable in 2022?

Regarding the consensus we see for the full year, we are comfortable with the Street's projections. However, it’s tough to estimate average revenues since contract size varies widely. It may take a couple more quarters for a clearer picture on average revenue per contract, but based on our accounts signed, expecting an overall 20 to 30 deals remains feasible, along with one or two health plans starting this year gives us confidence in the Street's numbers.

Appreciate the update. Thank you.

Thanks, Alex.

Thank you. Our next question comes from Charles Rhyee with Cowen. Please proceed with your question.

Thanks for taking the question. Rick, what's the status of the next couple of health plans you're engaged with? Are you in contracting already, or still selecting vendors? Any details would be appreciated?

The others in late-stage discussions are primarily in contracting; we have a couple further on in terms of actual terms agreed upon. We feel good about being able to close more health plans this year. Regarding the first one coming, more information will be disclosed once we announce it. It is a large regional plan and is under one of their lines of business.

What were the key metrics from your clients that led them to select Dario over competitors?

Key factors driving selections have been the breadth of our platform, our direct-to-consumer experience (which inspires confidence in member engagement), and the flexibility of our arrangements. Growing recognition in the industry is toward billing for engaged members rather than those who are not as engaged, which some competitors have pursued. Our flexible approach to integrate with other solutions also resonates well with clients.

Regarding gross margins, what should we anticipate for the remainder of the year? Do you expect continued improvements as well as any updates on OpEx investments?

The MSK integration will launch by the end of Q3 and behavioral health will follow in Q4, which has increased R&D spending. Regarding gross margins, as we add conditions and our revenue shifts more toward B2B, margins should improve as expected. We may not see a substantial jump in Q3 or Q4, but we do anticipate better margins, indicating progress. This year, we will see improvements, and next year we expect ongoing enhancements, with our goal being above 70% gross margins.

Thanks.

Thank you, Chuck.

Our next question comes from Ben Haynor with Alliance Global Partners. Please proceed with your question.

Good morning, guys. Can you provide a breakdown between consumer products revenue and membership services revenue? I did not see the breakdown in the 10-Q this quarter?

Overall, if we consider total users, which is 197,000 users on the platform, at this moment, I would allocate about 15% to 17% coming from B2B. We still haven't seen the full potential of the accounts that we’ve signed that are in implementation. We expect that in Q3 and Q4, the B2B portion will be much higher.

Are all B2C users product users, or do they also have subscriptions?

Currently, around 50% of B2C users are under subscription. In the B2B model, everyone joining as part of B2B is under subscription, either PMPM or based on engagement for members.

Can you clarify how product revenue is recognized?

We analyze and break down various components; product revenue is recognized upon shipment or delivery while membership revenue is recognized over the membership period.

I noted the increase in users. Can you remind us of the previous user count?

Yes, at the same time last year, we were around 60,000 users; now we are nearing 200,000. We believe revenue growth percentage should outpace user growth going forward, as ARPU on the B2B side is higher than B2C. Increased membership under one account also boosts potential revenue; a health plan could reach as high as $90 per member per month.

Thanks again. I’d like to ask about Upright; can you elaborate on that product?

Regarding MSK, we have two initiatives: one being Upright Go, a more advanced posture product. The second, the value move, offers a full physical therapy approach for multiple MSK conditions and is set to launch for employers by the end of this quarter.

Thank you. Our next question comes from David Grossman with Stifel. Please proceed with your question.

Can you provide a segment breakout among behavioral, MSK, and metabolic conditions?

For behavioral health, we closed the deal late in the quarter, so its revenue contribution is close to zero. MSK is around 35% to 40% of the revenue, with the remainder coming from metabolic.

Can you provide insight into Q3 expectations based on new contracts? What does the run rate look like exiting the quarter?

It's challenging to guide; growth is expected mostly from employers and providers we signed in Q2 and Q3, reflected in Q3 results. In Q4, we expect significant ramp-up, as we’ll likely have additional business including health plans. The consensus from analysts for the full year is around $22.5 million, which we feel comfortable with. Models show a spike in Q4 compared to Q3, and we expect contract sizes to vary widely, from $100,000 to several million.

Can you tell us about demand for multi-condition offerings and the ARPU across various agreements?

For single-condition agreements, the typical ARPU is $60 per member per month. We are creating bundles for clients to encourage purchasing the full suite at a price point above $60, which resonates well with them since it simplifies the process of working with multiple solutions.

Can you elaborate on the relationship with workplace options and how you see it developing?

Workplace Options helps manage behavioral health offerings through our wayForward platform, which assesses clients' needs and can integrate with relevant providers. WPO offers our services in varying jurisdictions globally, enhancing our ability to compete for international RFPs and provide consistent behavioral health services to clients.

What is the current state of your sales force? Will there be any changes to sales expenses through 2022?

Our sales team grew from 3-4 members in 2020 to 16 sales representatives now. We have around 40-45 commercial employees. We anticipate a shift toward more B2B focus, leading to continued sales team growth next year as users are generating higher ARPU.

Can you provide updates on the direct-to-consumer channel and investment outlook?

B2C will continue as it develops user feedback. With the healthcare sector focusing on consumerization, Dario prides itself on a user-centric approach, which we will maintain, balancing B2B growth efforts with consumer-oriented strategies.

Are there any internal metrics that clients are utilizing to measure success from Dario's solutions?

Our clients first look at operational ease and implementation experiences, moving on to usage, engagement, and data delivery patterns. While not extensively focusing on clinical outcomes yet, they see success through our outlined pathways gearing towards predicted outcomes. Thank you so much for joining our call. Looking forward to connecting with you on our next earnings update. Have a great day.

This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.