DarioHealth Corp. Q2 FY2023 Earnings Call

Greetings and welcome to the DarioHealth Second Quarter 2023 Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chuck Padala. Please go ahead.

Thank you, operator, and good morning, everybody. Thank you for joining us today for a discussion of DarioHealth's second quarter 2023 financial results. Leading the call today will be Erez Raphael, CEO of DarioHealth. I will be joined by Rick Anderson, President. After the prepared remarks, we will open the call for Q&A. An audio recording and webcast replay of today's call will be available online as detailed in the press release invite for this call. For those who may be listening to the replay or archived webcast, this call is being held on August 10, 2023. This morning, we issued a press release announcing our financial results for the second quarter of 2023. 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 due to 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. 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 second quarter 2023 quarterly report on Form 10-Q filed this morning. Additional information concerning factors that could cause results to differ materially from our 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. Additionally, 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 the morning's press release. With that, I'd like to introduce Erez Raphael, Chief Executive Officer of DarioHealth. Erez?

Thank you, Chuck, and thanks to all of you for joining our call this morning. Q2 financial results continue to demonstrate the advancement of our multiyear strategy. Our financial profile continues to evolve towards a multi-tenant Software-as-a-Service technology solution for the healthcare industry. I'm not aware of any other digital health platform that has gained our level of consumer traction proven and backed by real-world data evidence, especially studies that are conducted by third parties such as the studies that Sanofi has conducted on Dario's outcomes. We continue to see the alignment of the strategy with our financial results and the market trends. While we are lagging on the top line scale, we are still confident that the model and the market fit are achieved. First, on our transformation from direct-to-consumer to B2B. We generated sequential B2B2C ARR growth for the 10th consecutive quarter. We are demonstrating that the fundamentals of the B2B business and selling into the self-insured employer and healthcare market positively impact Dario as a true Software-as-a-Service-type digital health business with high gross margins and stable year-over-year recurring revenues. The combination of significant reduction in the cost of member acquisition, the ability to scale, and more revenue per member per month on the platform is already evident in the results. In terms of penetration strategy, we believe we are on the right path to accelerate our velocity as we focus on the partnerships that we have executed in the last few quarters, including significant and meaningful relationships with partners such as Solera. We recently announced a large regional Blues plan, Belgian pulp, Alliance, American Well, Sanofi, and Aetna. While it is early, we have already seen new customer progress from our strategic partnerships, including most recently Sanofi and a large regional business plan for Solera. We also see top relationships strengthening. Regarding Sanofi, I would like to disclose that two weeks ago, we signed an enhancement to the original agreement that we signed 14 months ago with the main objective of strengthening the strategic alignment between the companies and accelerating funds to speed up features of our joint development program and revenue share. We also see significant financial and personnel resources dedicated to Dario by Sanofi in marketing the solution and conducting and disseminating the recent clinical study. On Aetna, despite a delay in the launch of the platform, we believe that the partnership is only getting stronger. The opportunity size is larger than we originally anticipated, as the announced Q2 represents a significant opportunity with 90 million people having access to the platform into which our solution is integrated. Both companies' teams are already engaged in selling the Dario solution through the customers with concrete health plan opportunities. Pivoting now to the product market fit with a unique integrated consumer-first multi-chronic condition platform that is clinically validated with real-world data evidence. The strategy aligns with and leads the macro digital health market trend of consolidation of conditions under one platform, emphasizing a consumer-first approach and third-party real-world studies validating clinical and cost reduction outcomes. Our current model for transforming healthcare into a more consumer-centric, whole-person care approach is better suited to the current macro financial environment that seeks real proven cost-saving solutions given economic conditions. We have seen and will continue to see attempts in the market to build and launch digital therapeutic solutions that have run into market penetration and macroeconomic challenges. We believe that the true consumer-first approach with validated real-world evidence is the only way to successfully penetrate the market. Given the capital, time, and sustained effort it took to build our consumer-first proven solution, we believe we have created a real differentiator and a genuine moat with a unique market fit. We have proven time and again that the platform performs in the real world with actual users and real-world evidence, as opposed to a predesigned controlled clinical study environment. The studies presented by Sanofi recently demonstrated that Dario's solution has shown statistically significant and highly relevant improvements in clinical outcomes and reductions in costs. We are very excited about the study and what it represents, not only for Dario but for the entire digital health industry. Let's dive into the financial results. Q2 shows continued improvement in the company's financial profile. Our results continue to demonstrate that our model is working, even though we need to continue to scale up our revenue. Let's start by looking at the revenues and their components. As we preannounced, revenues for the second quarter were $6.15 million compared to $6.8 million in the second quarter of 2022. This flat growth resulted from the timing of anticipated strategic revenue delays with one of the strategic partners. Our partnership strategy continues to mature and yield significant long-term growth opportunities. Our recurring B2C revenue has now increased for 10 consecutive quarters in a row, which we believe speaks to the value that members place on our highly engaging digital health offering. We expect to see revenue acceleration as we continue to secure signed accounts. Another important metric is gross margin. We continue to show that we have developed a true software-driven business with SaaS-oriented characteristics. Pro forma gross margin was 51.5% for the second quarter of 2023, up from 36.1% of revenues in the second quarter of 2022, primarily resulting from the shift in revenues from B2C to B2B. As mentioned in the last few calls, we are targeting an average gross margin of 70% by 2024. Looking at the operating loss; we are seeing operating leverage on the infrastructure we have built and the real economic advantage of a multi-condition approach. The non-GAAP operating loss, excluding stock-based compensation, amortization of acquisition-related expenses, and depreciation for the second quarter of 2023 was reduced to $7.5 million compared to $11.1 million for the second quarter of 2022 and $6.3 million in the first quarter of 2023. Looking at the balance sheet, we also have a strong cash position of $52.6 million, which provides runway through 2025. With that, I want to hand over the call to Rick to elaborate on the commercial status. Rick?

Thanks, Erez. Our revenue comes from two segments, B2C and B2B. Within the B2B segment, we have two components: first, annual recurring revenue from self-insured employers and health plans (ARR); and second, revenue from our large strategic partners. In the second quarter, our B2B revenue represented approximately 63% of our total revenue. This mix reflects our strategic move to the B2B market and, as Erez pointed out, resulted in higher gross margins in the quarter compared to the same quarter last year. The decrease in revenue in the second quarter was due to a reduction in our strategic partner revenue, which is milestone-driven. We expected to recognize revenue from work with Sanofi that was delayed due to internal organizational shifts by Sanofi, which were unrelated to Dario. I want to be clear that none of this has impacted our partnership or agreement with Sanofi. In fact, the amended agreement referenced by Erez further aligns the interests of the two companies and provides mechanisms for accelerating some of the contemplated collaboration. Sanofi continues to invest in sales, marketing, and studies in support of the Dario solution. We believe that the disruption from these internal changes is largely behind us. We delivered the private label behavioral health platform to Aetna and recognized strategic revenue based on this milestone in the second quarter. This is a new digital platform that they are selling to their self-insured customers. We anticipated that they would begin enrolling members onto the platform in the third quarter. However, due to a change in strategy by Aetna, we now expect they will not begin enrolling members on the platform until the first quarter of 2024. With this shift in strategy, the platform is moving to the behavioral health population, which actually increases the total opportunity to approximately 30 million lives, up from the previous 10 million. We anticipate that this rollout will happen over several quarters once launched, and we have better visibility on platform additions in 2024 than we previously did. We maintain a strong relationship with Aetna and believe we may have additional strategic opportunities with them in the second half of 2023 and beyond. In the second quarter, we continued to maintain B2C revenues at levels consistent with the last two quarters, which allows us to maintain a self-funded innovation platform. For example, the development work completed last year with Sanofi was launched into the market for users' response and testing prior to launching into the B2B market. In the second quarter, we achieved our 10th quarter of sequential B2B2C revenue growth. We launched MEDI, our first customer obtained through our Sanofi collaboration. In July, we launched a large regional Blues plan with approximately 3 million members, which is our first health plan through our partner, Solera. As discussed on our first quarter call, this health plan faced several delays at Solera, but the health plan finalized their agreement and launch plan. These delays are frustrating as we have limited ability to impact them. We are pleased that the plan is launching on the timeline we communicated on the first quarter call. Excitingly, almost concurrent with the launch of this health plan, we expanded our contract to include diet, further validating the value of our multi-condition strategy. We expect that this regional Blues plan and MEDI will ramp up over the next several quarters, adding to our ARR growth in the back half of 2023 and into 2024. As we have discussed, partnerships are a major part of our strategy in both the self-insured employer and health plan markets. Along with what we have announced, we continue to see traction in the pipelines of our partners, including AML, which we recently signed. AML, Solera, Sanofi, Vitality, Alliant, and Virgin Pulse all have significant installed customer bases that are pre-integrated and require little customer lift to access Dario. We believe this is especially attractive to customers in this macroeconomic environment where there is an increasing focus on the cost of evaluating and managing vendors such as Dario. We remain especially excited about our AML relationship, where we are the only cardiometabolic solution integrated into their platform. With an installed base of approximately 2,000 customers, including 55 health plans, we believe this represents an extremely large opportunity. Their health plan customers include several Blues plans, including the largest Blues plan in the country. They are actively selling to their customer base, and we anticipate we may see customers through this partnership as early as the fourth quarter of this year or early 2024. Additionally, we believe there is potential to see additional health plans through Solera and our other partners late this year. We added several contracts in the second quarter, most of which will contribute to revenue beginning in the fourth quarter of 2023. We remain in the normal annual sales cycle for self-insured employers, most of whom are on a January to December benefit cycle, with most employer contracts signed in the late third and fourth quarters. Based on our current pipeline, we anticipate announcing a larger number of contracts towards the end of this year and realizing significant growth in our B2B2C ARR revenue starting in 2024. Given the current macroeconomic environment and health care cost trends at levels not seen in years, customers are showing increasing focus on cost and ROI. We believe we are well-positioned to benefit from this trend, given the depth of our data and pricing. Sanofi recently presented their second study demonstrating a statistically significant clinical improvement in Dario users compared to a matched control group. They also released additional data from a healthcare utilization study presented in the first quarter. This additional cost data indicated that Dario's users' costs were reduced by approximately $5,000 more per year than a matched group that did not use Dario, given that the full suite solution costs less than $1,100 a year. You can see the significant potential ROI. It is important to note that these studies were conducted independently of Dario, which is unusual for digital health companies, and they are among the most rigorous studies conducted in this space. This high level of rigor is another differentiating factor for the Dario platform that we believe will hold significant value in the health plan market as the demand for high-quality studies increases. As we look toward the rest of 2023, we expect B2C revenue to grow throughout the remainder of the year, although at a slower rate than originally anticipated with the Aetna platform enrollment pushed back to the beginning of 2024. We expect B2C revenue will remain relatively constant with past levels following the Aetna platform delivery and, due to the delays with Sanofi, we expect to continue to see volatility in our strategic milestone-driven revenue through the end of this year. However, we believe that our multi-condition strategy, partner focus, and demonstrated ability to convert contracts into revenue have positioned us to experience significant growth throughout 2024. A few things to consider; we have created a growing base of B2B2C revenue carrying into 2024 with strong retention rates. As noted above, we are seeing expansion opportunities in both the self-insured employer and health plan segments of our business, with growth in additional populations and customers. We expect the Aetna platform to launch in the first quarter of 2024. We have a growing pipeline of additional B2B2C self-insured employers that we anticipate adding in Q1 of 2024 based on our current sales efforts. We also have a significant pipeline of health plans that could contribute to revenue late this year and in 2024. Finally, we have established several quality partnerships, and those partners are starting to generate Dario customers from their growing pipeline, which we anticipate will contribute significantly to revenue in 2024. With that, I would like to turn it back over to Erez.

Thank you, Rick. Despite slower-than-anticipated launch by Aetna, in the big picture, we believe we have all components and are showing all the evidence to be successful and demonstrate significant growth in 2024. We also believe that we have evidence that the core B2B2C model is functioning as we generated sequential recurring revenue growth for the 10th consecutive quarter. We have created a growing base of B2C revenue that will carry into 2024 with strong retention. We see existing clients, mainly health plans, expanding the platform to larger populations and adopting additional chronic conditions. Our pipeline for both health plans and employers is growing through our relationships with strategic players like Sanofi and Aetna, which are strengthening. In the last two weeks, we enhanced the existing agreement with Sanofi to reflect a tighter alignment of strategy between the two companies. We believe that our relationship with Sanofi will expand in the future and should exceed the $30 million contract we already signed. We have a unique opportunity as well as a product market fit, with a genuine competitive moat and third-party validated scientific evidence. The Sanofi studies demonstrate a real win-win through improved member health and lower costs for payers in exceptionally rigorous real-world studies; the holy grail of digital health and healthcare in general. We are observing a trend of major traditional healthcare players, including large pharmaceutical and medical device companies such as Sanofi, looking to partner with companies like Dario to gain a foothold in healthcare transformation. We expect to form more large strategic partnerships. Based on the foundation we have built, we believe we are positioned to accelerate our multiyear strategy to drive revenue and profitability substantially higher with our partners, health plans, and employers. With that, I want to hand the call back to the operator for the Q&A session.

Our first question comes from Rahul Rakhit with LifeSci Capital.

I was just wondering if you could help quantify the potential impact on the top line from the expanded partnership with the large regional health plan. I mean, how should we think about where the potential revenue opportunity was and what it could be now?

Ladies and gentlemen, please hold on. The event will resume shortly. Thank you. Please go ahead with your question.

Sure. I was just wondering if you could help us understand the increase in potential revenue from the large regional health plan now that you guys are expanding beyond hypertension to include diabetes. You're talking about the expansion of the membership beyond the 3 million members?

It's the same population we're discussing, but it is likely to increase the revenue opportunity by about 20%, give or take a bit.

Got it.

It's the smallest prevalence of the conditions that we're covering. Typically, it's about 8% of the commercial population, whereas hypertension is about 30% to 35%.

Got it. Okay, that makes sense. I appreciate that clarity. Could you provide more detail on the process that led to the plan's decision to expand the partnership? How actively were you pursuing expansion or did that come organically? And what is the potential for expansion for other existing plans as we look to the back end of the year?

I think the expansion typically takes two forms: One is expanding conditions like we saw with that health plan. The other is expanding, especially in a health plan from one population to another. We have active opportunities in our pipeline right now for existing customers expanding in both ways: both population and lines of business, such as moving from Medicaid to commercial or Medicare populations within plans. So we're having ongoing conversations. Frankly, we were surprised by the timing of this expansion. We are always pursuing these discussions. This situation highlights the value of a multi-condition platform, as the customer expressed satisfaction with our current offering related to hypertension and sought to expand it further on the same platform. This reflects our ability to provide access to a broader population through a multi-condition strategy.

Got it. Okay, that's helpful. I appreciate the insight there. Just wondering, as we think about the back half of the year, should we expect any more changes to the operating expenses?

Yes. We continue to optimize our operating expenses with the objective of building a viable business in digital health that reaches cash flow positive around $80 million in revenue. We are consolidating activities and have done more offshoring. In the second half of the year, we expect to see a 3% to 5% reduction in overall operating expenses. Despite revenue growth in 2024, we expect operating expenses to be lower by 5% to 7% compared to what we experience in overall 2023. This is due to various activities, including offshoring, optimizing acquisitions made in 2021, consolidation of activities, and investments made over the past few years in integrating the platform. We now have multiple health plans in production. To Rick's earlier point, we have those already seeing results and requesting the opening of the platform for additional populations. We believe we can optimize our investment, resulting in a slight decline in operating expenses.

Got it. Yes. It's great to see improvements based on those activities. Thank you.

Our next question comes from Charles Rhyee with TD Colin.

This is Lucas on for Charles. I wanted to ask about the Aetna partnership. I understand that you now have a one-to-one start in 2024 and that you're selling into a larger population compared to the original EAP population of 10 million. In your press release, you noted that this could present a larger revenue opportunity. Is there anything else to consider in selling into the behavioral health side of Aetna versus the EAP population that would warrant a higher revenue opportunity? Is there?

Yes. They are related sides of the business, but different populations are sold differently. Behavioral health can sell independently, but they also sell a lot alongside their medical benefit counterparts. That is one difference. There's a different group of people, and the way it gets packaged is a bit different. Just for clarity, they're selling this solution to their customers. This isn't just because they purchased the platform; this is their new behavioral health platform that they will sell to their end customers using their sales force. This will involve a different sales force that is already in process. As I noted during the call, we have a bit more visibility than we previously did regarding status. But they are selling into significantly larger opportunities within a broader context, which primarily increases due to the population's different size.

Cool. Additionally, thinking about the employer market, based on recent announcements, most of your recent wins have been with health plans. Can you provide an update on what you're seeing in the employer market? Are there signs of pressure on employers currently, and could we see a turnaround?

Yes. The economy is not the same for all companies. We're seeing significant differences between organizations still struggling for talent compared to those facing pressure due to results in the current economic environment, and they are responding differently. Another big trend is medical renewals; the trend rates for costs of delivering basic medical care are much higher than they've been in a decade, impacting decisions as organizations try to find ways to reduce costs. Some are reporting trend rates as high as 20%, which is extraordinarily high in context, impacting some decisions and delaying things. Benefit consultants continuously mention these trends. That said, we continue to gain traction in terms of market sales. This is influenced by the fact that Dario is a relatively newer player, so our increases may differentiate from the overall market experience. Additionally, there's increased focus on reducing the number of vendors and expanding the number of conditions managed by fewer vendors, aiming to lower overall costs. Our strong ROI story, based on the Sanofi studies will provide validation in both health plan and self-insured employer markets.

Okay, great. Lastly, regarding artificial intelligence, at a recent conference, you mentioned using generative AI for some elements in the business, particularly around personalizing recommendations for members on the platform. Can you provide more details about how users are responding to these capabilities? Is it an attractive feature for health plans and employers? Additionally, how has this affected your business?

Absolutely. One of Dario's unique aspects is our consumer-first approach. We collect data and learn from users' behavior, which is a significant differentiator. We are aware of the positive noise in the market regarding AI, and we've been doing this for years. Our data-driven approach allows us to improve user engagement continuously. The best way to assess whether we are achieving our goals is by looking at real-world studies and data, like the two Sanofi studies that show our capacity to engage users and save costs. With AI and generative AI, our ability to iterate and enhance the platform is accelerated, improving month after month due to our growing learning capabilities. Tools and capabilities now available facilitate a much quicker iterative process compared to several years ago. For health plans and employers, user engagement improvement leads to better outcomes, which is reflected in the studies we've presented with Sanofi demonstrating platform performance. This is a substantial differentiator that supports our market presence in these channels.

That's really helpful. I'll jump back in queue.

Thank you, Lucas.

Just wanted to hit on a couple of items. On the recurring B2B revenue, congratulations on achieving 10 consecutive quarters of growth there. Can you provide a sense of what that sequential growth looked like in the quarter? Was it around 5%? Or was it closer to 50%? What kind of growth did you have there?

Overall, if you look at our total revenues, B2B comprises around 63% of total revenues, with a 50-50 breakdown between strategic and membership, but I won’t categorize it entirely as ARR, and I’ll explain why. Looking at pure membership, it’s roughly around 50% of the B2B. In terms of strategic revenue, some of that is considered an ARR because it's milestone-based. On a yearly basis, it's recurring too. I want to emphasize that when investors think about gross margins and recurring revenue, we are counting both members on the platform and strategic elements that relate to data as they are also recurring. I believe this is significant for an understanding of our SaaS-oriented model with high gross margins and an expectation that at least 80% of this year's revenue should roll into next year due to user retention and ability to generate revenue from data monetization.

Okay. So, the components of data plus continuing retention comprise the recurring B2B2C. Is that correct?

Yes. Just to clarify: for these results, you've seen approximately 63% as B2B, with the rest being B2C. Inside the B2B segment, around 50% are membership revenues, with additional components from strategic data contributions. I would estimate around 75% of what constitutes B2B is recurring revenue that you can depend on rolling into next year.

Do you have a sense of the kind of growth there? I would assume it’s probably more on the order of 10% than 30%?

It's in the range of more than 10% and less than 30%. Overall, year-over-year, we are experiencing growth rates of around 70% to 100% for pure ARR. One point to consider is that these growth rates are not linear as they are significantly impacted by customer additions and when we secure new customers on the platforms. Health plans can bring new growth at various times throughout the year, typically being large, impactful additions. Most employers come on board in the first quarter, which boosts growth early in the year. So you would typically see higher growth rates early on, followed by slower growth rates in the latter half of the year without the introduction of new customers until the first quarter again. If a new health plan is brought on, it can certainly accelerate growth during periods. So, it's not meant to be linear.

That makes sense. Also, on the B2C front, you've mentioned maintaining levels, but it has actually ticked up a little in the past couple of quarters. What is driving that? Are more people finding and utilizing the B2C platform? Or are you adjusting prices a bit?

The increase can largely be attributed to a couple of factors. Some aspects are cyclical regarding the quarter due to consumer spending on such devices. We've also observed a reduction in acquisition costs as we balance our approach depending on market conditions and demand. Depending on this, we may contribute additional marketing behind that if we determine it can generate further profit. What you're witnessing is really optimization between those factors.

Okay, got it. Excellent. Well, that’s all I had, thanks guys.

Thank you so much.

There are no further questions at this time. I would like to turn the floor back over to Erez Raphael for closing comments. Please go ahead.

Thank you so much. I'd like to thank all of you for joining our call this morning and look forward to continuing to follow our story. Thank you.

This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation, and have a good day.