DarioHealth Corp. Q1 FY2022 Earnings Call

Thank you, Nick. Good morning everybody and thank you for joining us today for a discussion of DarioHealth's first quarter 2022 financial results. Leading the call today will be Erez Raphael, CEO DarioHealth who'll be joined by Rick Anderson, President and General Manager of North America at DarioHealth. After prepared remarks, we'll open the call for Q&A. An audio recording and webcast replay for today's 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 May 12th, 2022. This morning we issued a press release announcing our financial results for the first quarter 2022. A copy of the press 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, or the competitive nature of DarioHealth's industry. Such forward-looking statements and their implications may 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 on Form 10-K as well as the first quarter 2022 Form 10-Q filed this morning. Additional information concerning factors that could cause results to differ materially from the company's forward-looking statements are described in greater detail in the company's press release issued this morning and in the company's other 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 operations and prospects for the future. A reconciliation of these non-GAAP measures to the most comparable GAAP measures is included in today's press release regarding our quarterly results. With that, I'd like to introduce Erez Raphael, Chief Executive Officer. Erez?

Thank you, Glenn and thanks everyone for joining us this morning. For those of you who know the story, you know that we have remained very consistent with our narrative over the last few years. We've talked about several pillars, including our multi-condition direction stemming from acquisitions we've made to develop the best digital therapeutics company in the world supporting multiple conditions. We've also discussed our transition from direct-to-consumer to B2B, as well as our super user-centric business model with SaaS style recurring revenue, yielding high gross margins which is crucial for a software company like Dario. In Q1, we are beginning to see how all these strategic decisions are reflected in our operations and financial profile. As management, we anticipated how the market would evolve, recognizing that healthcare would become more consumer-centric and digital. We made decisions accordingly, and this quarter offers insight into our trajectory. Reflecting on our financial profile, we've improved nearly all parameters starting with our topline. The merger of direct-to-consumer with B2B has yielded significant profitability and gross margin improvements. We recorded a notable decrease in operating expenses primarily because of our transition to B2B, resulting in reduced spending on digital ads. Importantly, we have seen a significant reduction in our losses for the quarter as well. I'll delve into the numbers shortly, but first, I want to highlight several fundamental developments this quarter. We signed 14 new accounts, including two health plans which are highly valuable to our business due to their potential for higher revenue per account. We currently have 61 accounts, with 80% of them in the launch phase, contributing to an annual recurring revenue (ARR) of $40 million upon full implementation. A key strategic highlight was our agreement with Sanofi. Our collaborative efforts involve not only financial aspects – a $30 million payment from Sanofi will be made this year – but also substantial development opportunities between our R&D teams which will enhance our platform significantly. Importantly, the multi-condition strategy has proven beneficial, as we expect many new accounts this year to leverage our complete offering. We're maintaining over a 35% enrollment rate for accounts launched, a strong baseline. Financially, we concluded the quarter with over $8 million in revenue, representing a 124% year-over-year increase from Q1 2021 and approximately a 34% sequential increase from Q4 of 2021. This growth reflects a key transition, as for the first time B2B revenue has surpassed B2C revenue. Additionally, Sanofi will contribute $8 million this year, part of a multiyear contract that boosts our financial outlook. When we assess expenses, we've successfully lowered our overall expenses to $14.8 million this quarter compared to $16.4 million in Q4 2021, which we expect will continue as we reduce direct-to-consumer investments, redirecting them toward B2B. Our non-GAAP gross margins are currently 61%, aligning with our target of achieving above 70%-75% in the future. We've made significant progress on reducing our operating loss, down from $14.9 million to $9.72 million this quarter. We acknowledge some temporary pressures on our burn rate, based partially on our higher inventory buildup due to numerous account launches during a challenging supply chain environment. We needed this inventory to support our business effectively. Moreover, payments expected from Sanofi and others are anticipated to show up in Q2 instead of Q1, contributing to our burn rate. However, we remain optimistic about our cash position, having raised an additional $40 million this quarter, adding to the $36 million carried over from last year. We feel confident we have the resources to execute our plans and sustain operations through 2024. Now, I'll turn the call over to Rick for further insights on our commercial activities.

Thanks Erez. Q1 represented a milestone quarter for Dario. We saw substantial increases in revenue both sequentially from last quarter and over 100% from last year, as Erez mentioned. This growth is driven by the launch of accounts signed in 2021 and early 2022, and we are experiencing expected increases in B2B revenues at improved gross margins. Notably, for the first time, our B2B revenues exceeded B2C revenues, marking a significant milestone for us. We signed two health plan accounts in the quarter; one has launched, while the other is expected to launch in Q2. Both are projected to contribute revenue in the second quarter and beyond. Additionally, we entered into a $30 million strategic agreement with Sanofi during the quarter, validating our strategy to concentrate on the B2B market. As of now, we’ve secured 61 contracts on our trajectory toward 100 total contracts by the end of 2022. A notable number of the agreements announced are off-cycle employer health plan and provider agreements, set to generate revenue in 2022. Typically, it takes us about 60 to 90 days to implement these customers, barring any specific targeted launch dates from clients. Due to the additional contracts signed in 2022, our contract value is presently around $42 million. Furthermore, we have recorded strong operational metrics from our launched accounts, with enrollments around 40%, translating to increased revenue expectations throughout the year. Our integrated multi-condition platform strategy continues to receive interest in both employer and health plan markets, as customers recognize the value in having fewer vendors and a unified journey for their employees or members, compared to competitors offering only modular solutions. Generally, 75% of our pipeline consists of multi-condition offerings, which deliver four to five times higher revenue for Dario compared to single-condition solutions. We are advancing in all three B2B sales channels and among strategic partners. With employers, we are in the earlier stages of the sales cycle for self-insured businesses operating on a January to December cycle, which comprises about 70% of all employers. Requests for proposals generally peak during Q2 and Q3 and subside in Q3 and Q4 for accounts that will be initiated in early 2023. What we observe in Q1 and Q2 are mostly off-cycle health plan and provider accounts. Outside of this main employer cycle, we continue to experience robust demand for our standalone behavioral health offering and other off-cycle clients as well, which we expect to yield additional contracts and revenue throughout 2022. Most of our recent contract announcements relate to these types of off-cycle customers. Regarding health plans, we anticipated securing another one or two plans in the upcoming quarters, following the additional plan we've recently announced. Furthermore, we expect to finalize an expanded agreement with our existing national plan in Q2, accelerating our originally projected timeline. This agreement could bring over 10 million members onto our platform over the coming years, leading to millions in anticipated revenues in 2022. The implementation of the Sanofi agreement is on track, with Sanofi beginning to promote the Dario suite to health plans this quarter, significantly bolstering our health plan sales resources and enhancing our sales team's capabilities. Revenue earned through this co-promotion will supplement the $30 million overall contract value. Over the past months, we've collaborated with Sanofi to define enhanced solutions to be developed on the Dario platform, and we are pleased with the rapid progress made on the Sanofi agreement. Sanofi utilizes its internal data and real-world evidence to conduct studies on the Dario solutions, adding increasing value as the market evolves to demand more robust evidence from digital health providers moving forward. With Sanofi gaining momentum, we are in discussions for additional strategic relationships, believed to substantially contribute to revenue in late 2022 and into 2023. As for our remote patient monitoring offering, we are experiencing contracts with providers in Q1 and expect this trend to continue in Q2. Given our success across health plans, employers, and strategic markets, we have strategically decided to reallocate sales resources away from the provider market toward markets presenting higher near-term opportunities, which should improve our operating margin.

Thank you, Rick. In light of the recent macro environment, I must say that we are incredibly excited about our positioning as a chronic management company revolutionizing a significant industry. Our business model is both super user-centric and driven by recurring revenue from technology. We notice other healthcare players are endeavoring to replicate DarioHealth's model. We are committed to focusing on user-centric chronic condition management, diverging from the traditional episodic physician-patient relationships. Our approach is to scale chronic condition management based on user needs, making a substantial difference in our operations. We recognize that traditional healthcare players are becoming stronger advocates for digital health and digital therapeutics, realizing the value it creates. Therefore, we expect to see more strategic agreements with established healthcare companies this year. We are also optimistic about continued improvements in our financial profile, including growth. We are achieving our SaaS model objectives, targeting 70%-75% gross margins with 50%-60% non-GAAP gross margins in 2022. With respect to capital expenditure, we will maintain a cautious approach to our spending. We will reduce investments in direct-to-consumer advertising and focus on growing our B2B business. This strategic shift is set to enhance our financial profile and lower our overall expenses. We are also comfortable with our current cash position and operations extending into 2024. Should additional capital requirements emerge, we are confident we can secure non-dilutive sources. We are continuously monitoring market conditions, as we believe that a forward-thinking and successful business can thrive and create substantial value for our investors. We will persist in executing our core principles. With that, I want to open the session for Q&A.

Thank you. We will now begin the question-and-answer session. The first question comes from Alex Nowak at Craig-Hallum. Please go ahead.

Good morning, everyone. This is Chase on for Alex. First of all, congrats on the quarter. Thanks for the questions. So first from me, revenue in the quarter from B2B now exceeding consumer is great to see. Any additional granularity, you can give, as far as the breakdown you saw this quarter? Maybe, how it compares to sequentially or year-over-year? And then maybe what kind of growth rates you're seeing from the two franchises would be helpful for us. Thanks.

I appreciate the question. A lot of what we're seeing is a culmination of efforts that have been underway for the past year or two. We experienced significant launches in the first quarter, as expected. While we don't provide breakdowns on an individual customer basis, I can say we observed improvements across all our market channels in terms of revenue, and we anticipate continued growth. The smallest relative contribution this quarter came from health plans, but we expect that number to increase rapidly in Q2 and Q3 as new health plans come online, including one already launched and another set to launch soon.

That's helpful. Thanks. And then, you had previously mentioned additional phases you expect with your large national plan customer. You indicated that those phases might come in Q2. Any further clarity on that? What kind of ARR does that translate to?

Yes, we expect those to materialize in Q2. When finalized, it will indeed reflect in our ARR, and once fully implemented, could approach eight figures.

Awesome to hear. As for gross margins, you provided guidance of 50%-60% last quarter and we're clearly on track. Can you elaborate on your expectations for the remainder of the year and whether you envision any fluctuations, or should we expect stability?

I expect there will be some fluctuations, particularly as we ramp up operations and revenue contributions from various channels. Typically, in the first few months after launching an account, the gross margin may initially be low due to hardware shipping costs. However, within four to eight months of operation, we transition to higher-margin software revenue. Therefore, the overall gross margin can stabilize between 60% figures for the coming quarters, with the anticipation of improvements to above 70%. So, monitor the intensity of our account launches, as it can greatly affect our margin mix.

Got it. Thank you for that insight. If I could ask one final question about how the ramp is looking against your internal projections. Are accounts ramping as expected or maybe slightly better? What are your thoughts on the remainder of the year?

Overall, they are ramping as anticipated, perhaps a touch better. However, I'm cautious about raising our internal projections until we achieve further proof points. Overall, we are maintaining our historically established ramp metrics.

That's helpful. Thanks again and congrats on a strong quarter.

Thank you.

I want to reiterate that our strategic agreement with Sanofi will also bolster our gross margins. We're expecting fluctuations as each component of our revenue stream varies, but we're confident the overall trend will lead to higher margins than we've seen in the past two years.

Thanks for that update.

Next question.

Thank you. Our next question comes from Charles Rhyee of Cowen. Please go ahead.

Yes. Hey, thanks for taking the question, guys. Congrats on the quarter. Just a follow-up. For Sanofi, the first $8 million payment comes in Q2. What does this mean for accounting? How will it reflect in our financial models?

Hi, Charles, it's Rick. In Q2, we wouldn’t expect the entire $8 million to be recognized as revenue right away. Revenue recognition is contingent on the delivery timing of components of the agreement. Thus some of that will be recognized in Q2, while other parts will appear across Q2, Q3, and Q4, depending on when elements are delivered.

Understood. Should we expect an increase in receivables? How should we factor that in?

You will notice either receivables or deferred revenue depending on the timing.

It's worth noting that we recognized some revenue from Sanofi in Q1 as well, contributing positively. There will be multiple revenue streams flowing through this agreement over the next few years.

Okay, perfect. Thanks for the clarity. You mentioned B2B revenues exceeded B2C revenues this quarter; the Sanofi revenue is included as B2B. That aligns with the previous remark regarding health plans contributing less overall, correct?

Correct. Revenue recognition from the Sanofi agreement was included within our B2B figures. Health plans will ramp up as we continue to onboard new clients as planned.

You discussed $42 million in contract value. Should we infer that the run rate at year-end would be about $12 million, taking into account the Sanofi contract?

Yes, based on our earlier forecasts around the time for implementation, we are targeting that run rate towards the end of the year and early next year once substantial implementations are completed with a goal of a 35%-40% enrollment rate.

To clarify, implementation takes approximately 30 to 60 days, but achieving full revenue run rates could take a few more quarters, depending on customer contracts and requirements.

Thank you for the details. On the expanded agreement with the national health plan, you mentioned it wouldn't impact ARR currently, but it could represent an eight-figure deal at full run rates. Is that only for the second phase?

Yes, those figures refer specifically to the second phase.

Thanks for that insight.

You're welcome.

Hey, guys. Thanks for taking my questions. Rick, can you provide clarity on the customer addition rates you're seeing in Q2 and Q3 compared to Q4?

Regarding health plans, the sales cycles typically last 12 to 18 months. We're actively engaging with plans, and we anticipate securing an additional one or two health plans this year, maybe slightly more. For providers, we expect only a small handful of additions, as we are reorienting sales resources toward segments that provide higher near-term opportunities.

That sounds good, thanks. Also, have you seen any similar trends to those reported by Teladoc regarding competition and elongated sales cycles in the health plan market?

We haven't observed any slowdown in health plan interest. Rather, we're seeing increased engagement with digital health solutions. It's essential to understand that different players might have unique product mixes and experiences but in our respective 12 to 18-month cycles, we're continuing to see activity and movement.

Understood. Lastly, can you share your M&A strategy for 2022? What kind of companies are you looking at?

We're keen on building a comprehensive user-centric platform. While market valuations pose some challenges, we remain actively engaged with partners like Sanofi to explore strategic growth opportunities. Our strategy is well-defined, and even though we face hurdles, we are optimistic about market domination in the coming years.

Hey, good morning, Erez, Rick, and the DarioHealth team. Thanks for taking my question. Congrats on another strong quarter with revenue exceeding expectations. I just have one follow-up regarding behavioral health. What trends are you seeing with wayForward in customer engagement and use patterns?

On the customer side, our behavioral health offering is integrated within our broader solutions, and it's been met with strong demand, particularly among multi-condition accounts. As for standalone sales, off-cycle sales often include behavioral health offerings; demand remains high. Engagement tends to be episodic, but we're seeing promising interaction and screening rates among members during engagement.

Got it. Thank you, Rick.

Regarding the Colorado Medicaid plan, are there specific considerations in this field? Also, does it give you access to other Medicaid plans?

We've witnessed strong interest from Medicaid plans overall. Chronic condition management is in high demand due to the significant number of individuals dealing with chronic conditions within Medicaid. That said, Medicaid operational considerations vary by state, impacting which services are covered and how our outreach efforts can be structured.

Does having this agreement facilitate future negotiations for access in other states?

Yes, having established Medicaid plans under our belt enhances our credibility in future negotiations. However, we understand that states have distinct methodologies tailored to their needs.

Thank you. I joined a bit late, but could we revisit your ARR comments? I want to confirm what's encapsulated in the $42 million figure and how much of that pertains to Sanofi and the national health plan?

Indeed, while the Sanofi revenues lie outside the immediate $42 million, many of our other agreements contribute significantly to that. The health plans will account for a sizable portion as we finalize implementations.

So, the first phase of the national health plan is embedded in that figure, while the second phase remains to be recognized, correct?

Exactly.

Any perspective on cash burn cadence as we move further into the year? Should we anticipate a decline?

Absolutely, we expect to see a decline in burn rate as we proceed into Q2 and beyond. We’re optimizing our expenses, particularly in reducing direct-to-consumer investments while enhancing B2B operations which should lessen overall burn. The elevated burn we noted in Q1 was largely due to one-time inventory buildup and delayed payments, which won't be recurrent.

Okay, understood, thank you. I’ll take the rest offline.

Thank you very much.

This concludes our question-and-answer session. Now I'd like to turn the call back over to Mr. Erez Raphael for closing remarks. Please go ahead.

Thank you so much for joining us today. We look forward to continuing to execute on our strategy. As always, feel free to reach out to Rick or me via email. Thank you and have a great day.

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