DarioHealth Corp. Q3 FY2024 Earnings Call

Good morning, ladies and gentlemen, and welcome to the DarioHealth Third Quarter 2024 Results Call. This call is being recorded on November 7, 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, everyone. Thank you for joining us today for a discussion of DarioHealth's Third Quarter 2024 Financial Results. Leading the call today will be Erez Raphael, CEO of DarioHealth. He'll be joined by Steven Nelson, Chief Commercial Officer. 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 Thursday, November 7, 2024. This morning, we issued a press release announcing our financial results for the third 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 third 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 were 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, CEO of DarioHealth.

Thank you, Kat. Good morning, everyone, and thank you for joining us today for DarioHealth's third quarter earnings call. Over the past few quarters, we have made bold strategic moves to establish Dario as one of the leading forces in the digital health space, even in a challenging market environment. Dario now offers one of the most comprehensive digital health platforms in the industry, supporting six different chronic conditions, including diabetes, hypertension, weight management, musculoskeletal pain, behavioral health, and maternity support. Our offering expansion in metabolic health has been organic, while we have expanded into other areas through strategic acquisitions. The recent acquisition of Twill exemplifies this strategy, adding robust behavioral health capabilities and advanced navigation tools to guide clients in matching patients to appropriate therapeutic areas. With Twill now integrated, Dario provides unmatched consumer-centric, personalized health solutions, making it the most comprehensive platform in the market. This quarter represents a crucial step towards positioning Dario as a Software-as-a-Service-like business with high gross margins targeting over 80% and a strong recurring revenue model. Today, we are excited to share how the strategic initiatives are delivering tangible results with a significant improvement across all financial metrics, including growth in our top line, a reduction in operating expenses, and a substantial decrease in net loss. Additionally, Q3 marks a period of robust business momentum with 10 new client wins this quarter alone. We are also in the process of securing approximately five more clients before the end of the year, which would bring our total client wins for the second half of the year to something between 17 to 20 new clients. This strong business momentum highlights the increasing demand for our comprehensive platform and our ability to deliver value to growing strategic clients. For Q3, we reported $7.42 million in revenue, representing an 18.7% increase over Q2 of 2024 and an impressive 111% year-over-year growth. This growth is largely fueled by our core B2B2C business, which has become the engine of the revenue base. Through continued optimization of revenue channels and a shift towards recurring revenue models, gross margins for the B2B2C business rose to 83%, with full business gross margins reaching 70% on a non-GAAP basis. This improvement reflects our commitment to enhancing the quality and predictability of our revenues. Following the recent merger with Twill, Dario implemented focused cost management strategies, reducing non-GAAP operating expenses to $12.3 million, a 15.9% sequential decline from Q2 2024. This disciplined approach to cost management has been essential in driving margin expansion and operational efficiency. Looking ahead, we are confident that the improvement in our financial profile will continue into the next few quarters. The cost reduction initiatives we initiated earlier this year are not fully reflected in our current numbers yet. As these efforts mature, we expect to see an even greater reduction in Q4 2024 and Q1 2025, with projected 69% reduction in non-GAAP operating losses from Q1 2024 to Q1 2025. This progress keeps us firmly on track to reach a cash flow breakeven run rate by the end of 2025. Now I would like to turn it over to our Chief Commercial Officer, Steven Nelson, who joined us earlier this year. Steven has been instrumental in refining our commercial strategy and strengthening our client operations, which is key to sustaining the strong business momentum we are experiencing. We acknowledge that in the past, while we had successfully won clients, it was challenging to fully realize revenues from this partnership through our improved client operations. We are now focused on converting new client logos into meaningful revenues more efficiently. Steven will share how these strategic enhancements are helping to drive growth, both by deepening relationships with existing clients and partners and by expanding our reach into new client segments.

Thank you, Erez, and good morning, everyone. I'm excited to share our commercial momentum continues to build. Over the past quarter, we've signed 10 new contracts, positioning us well for sustained growth as we head into 2025. This momentum isn't just about adding clients; it's about deepening our engagement to align with clients' evolving needs and creating a more sustainable, diversified revenue mix that will facilitate more predictable and stable growth going forward. By the end of this year, we expect to reach an estimated total of 25 new client signings in 2024 to be implemented and secured for revenue growth in 2025. This represents approximately 35% growth in our client base, a milestone that serves as a core indicator of our profitability timeline. Our B2B2C channel continues to show substantial progress and significant potential, and we're determined to unlock its full value. While we've established a strong foundation, there is much more we can achieve, particularly with clients in the employer and health plan channels. For example, major employers like Amazon and Google are open to exploring additional ways our platform can address their health needs, and we're confident that we can expand these relationships. We continue to expand on commercial opportunities with our GLP-1 product, which continues to gain traction in our client base. We will soon be partnering with a prescribing partner to further our GLP-1 offering, reinforcing our commitment to comprehensive client solutions in metabolic health. We have now successfully implemented our operating model and accountability internally to expand on the following channels: health plans. We're continuing to strengthen our position in the health plan space. This quarter, we've signed our fourth contract with a national payer, this time in the Medicare Advantage market with Centene, aimed at promoting healthy aging. This partnership introduces a digital mental health benefit for seniors and expands our footprint to over 1 million eligible members beginning 2025. Additionally, we launched a large-scale cardiometabolic program in the Medicaid space, further showcasing the value of our integrated multi-condition platform. We're also seeing incremental growth in our relationship with Aetna, and we anticipate this steady trajectory to continue into 2025, supporting our ongoing expansion in the health plan channel. In parallel, we are in the process of reestablishing our relationship with Elevance by transitioning from an initial Medicaid pilot in behavioral health to a potential commercial partnership focused on cardiometabolic solutions. Employers. In our employer channel, we have added seven new contracts, particularly for cardiometabolic solutions, and signed our first health system as an employer client. This targeted segment of unique employers allows us to bring our solutions to individuals that deliver care by profession and to those who have a unique understanding of the clinical importance of our care modalities on the Dario platform. Pharma and medical device. Our pharma channel is a standout area of progress. Last quarter, we outlined an opportunity to enter the pharma direct space with our pharma partnerships. Through this opportunity, we recently closed two new deals, including a top six global pharmaceutical company, executing our strategy to build long-term predictable revenue streams. These deals are structured under our platform services subscription fee model, transitioning our pharma business from a milestone-based to recurring revenue. This shift aligns with industry trends, making our pharma channel a more stable and predictable revenue contributor. We have also made progress in reestablishing our collaboration with Sanofi, working closely with their commercial business units and global Digital Healthcare division to reframe our core engagement. With this expanded offering, not only are we enabling pharma companies to better reach and retain patients, but we're also empowering them with a more effective means to monitor outcomes and personalize care. These significant strides in the past three months of redefining our pharma partnerships, pivoting toward a subscription-based model that is transforming our revenue profile from this segment into a stable recurring stream. This transition aligns our pharma business with our broader strategy of building predictable long-term revenue sources. This shift in our model has already started to contribute to near-term revenue, and we expect it to become a core growth driver as we continue expanding in this space. With this expanded offering, we are not only enabling pharma companies to better reach and retain patients, we are also empowering them with a more effective means to monitor outcomes and personalize care. Strategic partners. We also announced a significant partnership with AARP, giving us access to 38 million members aged 50 and older, with program activation beginning in January 2025. We look forward to providing more color on the benefits of this partnership once it is formally live for members in January. In addition to these client wins, I remain focused on refining our commercial strategy and operational processes. Dario's unique value proposition rooted in direct-to-consumer engagement and our multi-condition platform gives us a strong foundation. We recently completed a detailed product market fit analysis, enabling us to target the right segments more effectively. With this redefined strategy, we're not only winning new clients but also deepening relationships with existing ones, unlocking new revenue opportunities and strengthening our recurring revenue base. We have an incredible amount of opportunity to grow across our existing and prospective book of business, and I am confident that we have redirected ourselves to achieve that growth as a fully integrated comprehensive solution. This integral step has been made official by the rebranding of our product suite to fit into one unified brand. This unification strengthens our market reach and data-driven approach to optimizing outcomes across all client segments. With each client engagement, we are also gathering valuable insights that fuel our AI capabilities, enhancing both client experiences and clinical outcomes. As we look ahead, I am excited to build on our momentum, executing with precision and a relentless focus on sustainable long-term growth. Our roadmap is clear, and we are fully committed to driving transformative impact across the healthcare landscape, delivering enduring value for our clients and realizing our vision of a healthier, more connected world. Erez, back to you.

Thank you, Steven. Steven's insights underscore the tremendous progress we are making across all channels. Our strategic focus on expanding our client base and deepening client relationships has been creating a robust foundation for growth. With one of the most comprehensive platforms on the market covering conditions from diabetes to behavioral health, we are leveraging billions of data points to drive best-in-class outcomes and real-world evidence of reduced cost for our clients. Looking ahead, we are also investing in AI and data-driven personalization. Our proprietary data enables us to drive innovation in areas like drug discovery, consumer engagement, and targeted interventions. By integrating generative AI and microservices, we are creating a new revenue opportunity, further strengthening our ability to activate and engage members effectively and offering unparalleled value to our clients. In conclusion, we are very pleased with our progress this quarter and the momentum we have built for the quarters ahead. The continuity of our strategy is evident in our financial achievements and operational milestones. With the continued execution of our commercial and cost management initiatives, we are on track to achieve a cash flow breakeven run rate by the end of 2025. Thank you to our team, clients, and shareholders for their growing support. We are excited about the road ahead.

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

This is Adam on for Charles. First, wondering as we approach 2025 and following the company adding many new clients in 2024, if you can provide some guardrails around how we should start to think about the 2025 growth range for B2B2C revenue.

Yes. Thanks, Adam, for the question. As we stated in the call, we have around 25 new clients this year, which represents more than 30% of the client base. Overall, we are looking to increase the average revenue that we are obtaining from clients. Furthermore, because we are landing and expanding, we think that eventually, we should grow more than what we are forecasting in terms of the total number of clients. While we are not providing very precise guidance, we did communicate as part of this press release that by the end of next year, we should achieve a run rate of $50 million, which will put the company at an operational cash flow-positive point.

That's very helpful color. And also looking at the B2C revenue, it stepped up sequentially in the quarter. Wondering if there was anything that stood out as a driver there? Or is it right to continue thinking about the annual range of $8 million to $9 million roughly as being the continued range going forward?

On the B2C side, we are looking into the $8 million range, which should remain stable. Just to remind everyone, the B2C is a P&L that, on a stand-alone basis, is not losing money; it's cash flow positive. That's on the B2C. For the B2B, if we look at Dario as a stand-alone, we are seeing for this year a growth of between 50% to 70% in the revenues of the B2B2C. On the Twill side, if we look at an integrated basis, the entire revenue was growing 111%, across all channels combined.

Understood. And congrats on the two wins in the pharma channel. It looks like you started to gain traction on the new platform services subscription fee model in that channel. I wonder if you can share what you estimate each of these new customers can contribute there, maybe particularly the large pharma customer? And maybe also, what drove those wins and what the pipeline looks like here?

Yes. This is Steven speaking. We've had two clients that we brought in, in that channel specifically, and we're working with our existing book of business to expand upon that. I think there are two things that we look at with those businesses. One is how we bring them onboard to our platform, which would involve configuration fees. We work with all of our clients in that respect—how they onboard into our environment, how we set them up, etc. Then we move them to platform fees. The platform fees really depend on their goals and how big they are looking to grow their business. It varies based on their targets and expectations, whether it’s client targets, pre-prescription, or post-prescription engagement. I'd say anywhere from about $500,000 to $2.5 million is what we are estimating. Full-scale clients could potentially reach $5 million. So we're seeing a range in there. Again, we need to bring them onboard, then establish platform fees. The platform fees are mutual; we don’t just set a flat rate without discussing goals with them. All pharmaceutical companies and products within those companies have different goals and different expectations.

Understood. Is it right to think that prior pharma partners, the ones that were paying milestone payments under the legacy model, do those remain on track going forward?

Yes, we need to eliminate those. We need to be really intentional about converting the contracts we have and working with them to transition to a new model. It's lumpy; it creates fluctuations in our revenue. It's hard to project. I noted that in what I said earlier. We're trying to achieve stable, credible revenue that is predictable, and we want to eliminate the lumpiness in our business. So it's a careful process of balancing the new revenue we're bringing in with the old revenue we're phasing out and bringing those clients onto our platform in a unique way. We need to be thoughtful about the longevity of the company and our goals for profitability, which includes our revenue mix by segment, product, and client. We're aiming for a healthier, more confident, and predictable revenue stream.

That's very helpful. And last for me is around OpEx improvement. I know that you guys are still targeting improvements in OpEx over the next few quarters and into the end of 2025. But I was wondering if you can share what key levers there will be for reducing OpEx—maybe in R&D, sales, and marketing, etc. And then once you reach a more stable OpEx base, should we expect growth on that stable base going forward?

Yes. Thanks, Adam. So on the OpEx, we are continuing the transformation, as we communicated in the previous quarter. We did two rounds of restructuring, and we are reducing integrated OpEx. If you look at Q3 2023 where Dario was a stand-alone versus Q3 2024 where Dario is also embedding Twill, we are almost at the same OpEx, which means that we managed to absorb an entire organization that previously had a $28 million OpEx into Dario with almost the same OpEx as Dario was as a stand-alone, which is a commendable achievement. The actions we took will continue driving OpEx down, and we expect to achieve a run rate of $41 million by Q1 of 2025 on a non-GAAP basis for the full year. So it should be around 10.5 a quarter. We believe that this will be the new baseline run rate for the entire next year. And we are confident that the cash flow positive point will also align in these ranges in terms of our OpEx. It's very important—Steven mentioned the transformation in revenues from milestone payments to platform fee recurring revenue. On the B2B2C side, we generated an 83% gross margin. So we are confident that at a $50 million run rate with the new baseline of OpEx post-integration, we will reach cash flow positive. We achieved this OpEx reduction through a combination of lowering overall expenses, merging organizations, and also very strategic offshore activities where the organization is mainly in the U.S. but also includes a large team in India for R&D support and a smaller team in Israel. As part of the change and reduction, we also rotated budget from R&D to sales and marketing. The company didn't just reduce the budget; we also re-aligned resources. In terms of the percentage of revenues, we rotated the budget from R&D to the commercial side because we believe we have mature products and we are focused on maximizing revenue with our existing assets. We still have some R&D projects requiring budget, but this budget is more than 35% lower than when we acquired Twill. Overall, we are integrating the platforms, and we have communicated that everything will operate under one integrated brand, one user journey, by the end of this year. Investors shouldn’t expect significant increases in R&D expenditures; we have what we need and are now focused on achieving revenue growth with existing capabilities. Steven, do you want to add something?

I just wanted to emphasize that we've really refocused on our product leadership and our go-to-market approach. It's important that we aim for product market fit, and that's in collaboration with our product leader, who has steered us towards a very specific execution plan. Erez mentioned that our R&D team is in India. They are our people, and it’s our company. We have a significant leverage point on how we manage R&D and what we bring to market. The feedback mechanics we've established allows us to remain agile in our commercial efforts and ensures that our product teams have consistent voice-of-customer input, allowing us to refine our approach. Thus, there's a conscious effort not only to reduce costs but also to enhance our focus on what we deliver to the market operationally. So, I believe this is a pivotal part of our overall strategy moving forward.

Ladies and gentlemen, there are no further questions. This concludes today's conference call. Thank you very much for your participation. You may now disconnect.