DarioHealth Corp. Q1 FY2024 Earnings Call

Good morning, ladies and gentlemen, and welcome to the DarioHealth First Quarter 2024 Results Conference Call. This call is being recorded on Wednesday, May 15, 2024. I would now like to turn the conference over to Kat Parrella, Investor Relations Manager at Dario. Please go ahead.

Thank you, operator, and good morning, everybody. Thank you for joining us today for a discussion of DarioHealth's First Quarter 2024 Financial Results. Leading the call today will be Erez Raphael, CEO of DarioHealth. He'll be joined by Rick Anderson, President at DarioHealth. After the prepared remarks, we will 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 on Wednesday, May 15, 2024. This morning, we issued a press release announcing our financial results for the first quarter of 2024. 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 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 first quarter 2024 quarterly report on Form 10-K. 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. 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 this morning's press release. With that, I'd like to introduce Erez Raphael, Chief Executive Officer at DarioHealth.

Thank you, Kat, and thanks to all of you for joining our call this morning. Q1 2024 represents a major turning point in the scaling of our business and the acceleration of our path to profitability. We are pleased to announce that our core B2B2C business channel, which represents recurring revenues mainly from health plans and employers, is continuing to scale up and is now the largest of our three revenue channels, accounting for about 71% of our pro forma revenues for the quarter. This is a milestone that we have been working toward for some time. Due to the scale and the high SaaS-like gross margins of this revenue stream, which are above 75% and should exceed 80%, along with the faster-than-expected achievement in operational efficiencies post-Twill acquisition, we have never been better positioned to reach profitability. I would like to share more information on the clear trends that we see in the business, which enhances our confidence in our ability to scale and achieve profitability. First, B2B2C recurring revenue continues to grow alongside the additional revenues from the Twill acquisition, which were added since February 15. Pro forma for Q1, we are at an annual run rate of $31 million for all three channels together, with approximately $22 million being our core B2B2C business. The legacy value portion of the B2B2C channel revenue grew sequentially over the fourth quarter of 2023 organically by more than 30%. This growth can be attributed to the Aetna platform, expansions of existing contracts, and new customer launches. We anticipate this growth to continue throughout the year with the ongoing revenue growth from recently launched accounts and multiple new contracts in Q2, along with further execution of our pipeline, which currently holds more opportunities than ever. We are confident that this stream of revenue will accelerate in 2024 and 2025 as both Dario and Twill have a strong client base, including three out of the top eight national health plans such as Cigna, Elevance and Aetna, alongside significant national employers such as Amazon, Google, and Microsoft. We believe we will achieve substantial revenue growth primarily in our core B2B2C business on a combined basis for 2024 and even greater growth in 2025, including cross-sell opportunities that we are actively pursuing. This should enable us to reach our target of 80% gross margins, as this monthly recurring revenue already has margins above 75%. Another factor contributing to our confidence in reaching cash flow positive next year is the Twill-Dario merger and the synergies we are leveraging. Efficiencies are advancing faster than we initially anticipated. When we announced the acquisition, we estimated 30% efficiencies over three years. However, after recently implemented cost reductions, we are on track to achieve efficiencies greater than 30% by the end of this year, a year ahead of schedule. The revenue growth I mentioned earlier, combined with the faster-than-anticipated cost synergies and high gross margins of 80%, leads us to believe we are on track to breakeven in the second half of 2025. The coming quarters will reveal continued improvement in all aspects of our financial profile from top line through operational expenses, gross margins, and reduced losses. Looking at the other revenue streams, in the first quarter, our B2C business generated approximately $2 million, which aligns with the expected channel run rate of $8 million annually. This channel is already profitable. The third revenue stream, which we call commercial strategy, comes mainly from pharma partners and is milestone-based rather than monthly recurring revenues, and therefore, should be viewed on an annual basis. This quarter, we recorded approximately $500,000 in revenues, and we anticipate an annual run rate of $6 million from this channel continuing until 2024, contributing to our regional $30 million business with Sanofi. This does not factor in any additional revenues we hope to see from increased demand from pharma following the Twill acquisition. Above all else, we are most excited about the demand for our product offering. We are now three months into the acquisition, and we are witnessing the effect that the expanded product offering has on our pipeline, both from B2B2C to employers, health plans, and pharma, with several complete opportunities with our existing clients. Regarding our GLP-1 offering, we have already signed six new contracts, and we see growing demand from employers. We believe this is something that will accelerate moving forward as it is clear that the adoption of GLP-1 should be embraced with the overall change that should be sustainable. Another attractive aspect of our business to our partners is our data collection. With a vast number of conditions covered and billions of data points collected from millions of users by both Dario and Twill, our data collection is not only distinct but far more comprehensive at a scale unique to Dario. This empowers us to continue refining our products to deliver the best clinical outcomes possible. Generative AI microservices are being implemented across numerous industries. In healthcare, it is evident that they will enhance drug discovery and consumer engagement and personalization. Over time, proprietary datasets will be monetized either internally through the creation and enhancement of services or externally through intellectual property licensing and/or strategic transactions. We believe that our consumer-centric dataset and its scale are valuable assets for running such models and will position us well to participate in this significant evolution. With that, I want to hand over the call to Rick Anderson.

Thanks, Erez. Our B2B2C revenue grew substantially from the fourth quarter of last year to the first quarter of this year as we saw the impact of new customer launches, customer expansions, and the effect of the Twill acquisition. We have more than 15 customers launching in Q1 and Q2 of this year, and we have customers from last year's sales cycle continuing to sign contracts into Q2. Both products on the private labeled Aetna platform have launched, and we have seen Aetna continue to add customers to the platform in Q1 and Q2, a trend we expect to maintain with related increases in revenue for the next several quarters. We have signed an agreement to expand with one of our health plan customers through a partner, and we expect to launch that expansion later this year. In addition, we expect to add another health plan and a handful of off-cycle self-insured employers throughout the year. The acquisition of Twill has also brought a broader opportunity to enable pharmaceutical customers through Twill's patient acquisition and adherence platform. This platform leverages the core Twill platform utilized by their employer and health plan customers, allowing for highly efficient, high-margin deliveries. Twill has a proven track record in activating patients and enhancing adherence for several of the largest pharmaceutical companies in the world. Over the last year, they have refined this platform into a licensing model that we expect to yield annual recurring revenue starting in 2024 from a couple of large pharma companies already piloting the solution. Based on early interest and traction, we believe we will be able to expand this to add significant additional revenue in our recurring B2B2C business by the end of 2024 and into 2025. We are very pleased with the first quarter of 2024 employer sales season, experiencing significantly increased activity and opportunities through benefit consultants compared to the first quarter of 2023. We are encountering more opportunities, and these opportunities are at least 200% larger in the first quarter of 2024 compared to the analogous period in 2023. We attribute this to the efforts we have put into developing relationships with employee benefit consultants as well as the increasing number of reference customers we’ve built over the last few years. As I have mentioned in the past, selling to employers and health plans requires a step function approach that, if executed correctly, builds trust and confidence through execution, leading to significant revenue increases each year. Benefit consultants are a key source of employer opportunities, and this increase in volume also reflects the scalability of our sales infrastructure. Since most self-insured employers operate on a January 1 to December 31 sales cycle, we believe that the majority of accounts we close between now and the end of 2024 will launch in 2025. We also anticipate considerable growth in our health plan business in 2025 based on the opportunities currently in our pipeline. We expect to add at least one additional national health plan later this year, which will launch in 2025, along with expansions from at least two of our other existing health plans. The Twill acquisition enables us to provide a broader array of conditions and product functionality to our customers, which aligns with our promise of offering more conditions through one integrated consumer-centric platform that the market continues to trend towards. We see this reflected in our pipeline, where over 80% of our opportunities are for more than one condition. Our configurability allows customers to choose between the full platform or parts of it, with the capability to consolidate additional conditions at a later stage. This message resonates well within the market. Product integration is well underway, with the expectation of launching the first product featuring integrated Dario and Twill capabilities in the fourth quarter of this year. Early customer responses to our combined company have been strong, with nearly a dozen customers expressing interest in a cross-sold product. With the unified product, we can compete more effectively in more requests for proposals, and we believe this combined capability will improve our win rate and revenue per customer. In summary, we are confident in our revenue growth for 2024, and we are excited about the customer traction we are seeing in the 2024 sales cycle that will contribute to 2025 revenue. We believe we will significantly accelerate our revenue generation in 2024 and 2025 across our B2B2C and strategic B2B channels. With that, I would like to turn it back over to Erez.

Thank you, Rick. All the strategic decisions that we have made over the last few years are reaching a turning point in the scaling of our business and the acceleration toward profitability. Today, the Dario platform is the most consumer-centric, comprehensive in terms of conditions covered, and has the most proven track record in terms of clinical performance, improving cost savings in this space. Today, Dario has a vast client base and extensive book of business, including three out of the top eight national health plans such as Cigna, Elevance, and Aetna, as well as significant national employers like Amazon, Google, Microsoft, and key pharmaceutical companies such as Sanofi, Merck, and Eli Lilly, all of which contribute to our B2B2C revenue, which is growing extensively on a Dario-Twill integrated basis. Another factor contributing to our confidence in achieving cash flow positive next year is the Twill-Dario merger and the synergies we're leveraging. With efficiencies progressing about a year ahead of our original schedule, and on track to exceed even 30% by the end of the year, we believe that our B2B2C recurring revenue channel, alongside these efficiencies, will drive our acceleration toward profitability in the second half of 2025, with anticipated revenue around $54 million. With that, I want to open the call for the Q&A session.

Your first question comes from the line of Charles Rhyee of TD Cowen.

This is Adam, on for Charles. Wondering to begin with, has anything changed in the agreement with Sanofi that could affect milestone payments from them over the course of this year? I'm wondering how we should think about the timing of the payments in 2024. Looking at the first quarter strategic payments here, I understand that there's lumpiness quarter-to-quarter, and we should be looking at the full year. But I just wanted to revisit that and I wonder what Sanofi looks like over the course of this year, if you can share.

Yes, sure. So Adam, thanks for the question. There is no fundamental change in the way that we are executing on the agreement with Sanofi. We do see some additional opportunities with the addition of Twill into our product offering, and we do expect that the addition of Twill will create opportunities with Sanofi. So overall, the deal remains intact. The $30 million deal exists. And yes, they are still going to be lumpy. But overall, as I stated in the earnings, we are looking at somewhere between $6 million to $8 million in revenue yearly from the strategic channel that is coming from Sanofi or other revenue sources. Overall, we believe that later this year, we're going to balance the revenue and be able to see the $6 million to $8 million. Ideally, we hope to exceed that by having the Twill platform also adopted. We are engaged in specific discussions about that, not only with Sanofi but also with other clients that are considering the addition of Twill into our product offering.

That's helpful. And with regard to the Aetna ramp, obviously, good to see the contribution there this quarter. I'm wondering if you can share whether you are seeing utilization volumes there as you'd expected to see so far? And how should we be thinking about that over the course of this year and maybe contributing to revenue through the course of this year?

In terms of what we're seeing, as I mentioned on the call, we have launched both products, and the utilization is about what we would expect from that. We anticipate they'll continue to add customers to the platform throughout the year. In fact, we're seeing them adding essentially every month, which means more people are coming onto the platform. They are selling through the ASO employer sales cycle. So we expect another group of customers to join mid-year and then again at the end of the year. The revenue from both of those products is on a per-employee-per-month basis. Thus, we are getting paid for everyone who has access to the platform. It is not a utilization-based contract, but the underlying utilization is roughly as we had anticipated. While we are early in the year since that launch, we feel positive about what we are seeing so far.

Last question would be regarding the $60 million in signed contract value that you have previously discussed. How should we think about that phasing in over the course of this year, maybe next year as well? Are these things that can materialize in the coming quarters? Or are these opportunities that will really phase in over time?

Yes, thanks for this question. Overall, we believe this will materialize this year and into the first half of next year. We think we're going to see that happen. We will keep building on this, as we continue signing contracts that will be added to the $60 million. We see it as something that will materialize by around mid-next year.

And there are no further questions at this time. I would like to turn it back to Erez Raphael for closing remarks.

I would like to thank everyone, and I'm looking forward to connecting with you in the upcoming quarters as we continue to report on our progress in all parameters: top line, gross margins, operational expenses, and bottom line toward achieving profitability. Thanks, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.