DarioHealth - Q1 2024

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to the DarioHealth Q1 2024 Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a Q&A session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, May 15th, 2024. I would now like to turn the conference over to Kat Perella, Investor Relations Manager at Dario. Please go ahead.

Kat Perell (Investor Relations Manager)

Thank you, operator, and good morning, everybody. Thank you for joining us today for a discussion of DarioHealth's Q1 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 fifteenth, 2024. This morning, we issued a press release announcing our financial results for the Q1 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 Q1 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.

Erez Raphael (CEO)

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 happy 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 this scale and due to the high SaaS-like gross margins of this revenue stream, that is about 75%, it should exceed 80%, and 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 and are adding to our confidence in our ability to scale and reach profitability. First, B2B2C recurring revenue scale. The organic value of revenues this quarter continued to grow alongside the additional revenues from the Twill acquisition, which were added since February fifteenth. Pro forma for Q1 were at an annual run rate of $31 million for all three channels together, with approximately $22 million of this being our core B2B2Cbusiness. The legacy value portion of the B2B2C channel revenue grew sequentially over the Q4 of 2023, organically by more than 30%. This growth can be attributed to the Aetna platform, expansions of our existing contract, and new customer launches.

We'll see this growth progress throughout the year with the continuation of our revenue growth from recently launched accounts and multiple new contracts in Q2, and further execution of our pipeline, which currently holds more opportunities than it's ever had. This revenue stream is growing for both value channels and Twill channels. We have confidence 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, as well as big-name national employers such as Amazon, Google, and Microsoft. We believe we will achieve significant revenue growth, mainly in our core B2B2C business on a combined basis for 2024, and even greater growth in 2025, including cross-sell opportunities that we are currently executing on.

This should enable us to achieve our goal of 80% gross margins, as this monthly recurring revenue stream already has margins that are above 75% as it stands today. Another factor that contributes to our confidence reaching cash flow positive next year is the Twill Dario merger and synergies we are leveraging on. Efficiencies are progressing faster than we initially anticipated. When we announced the acquisition, we communicated an estimated 30% efficiencies over two years. But after recently executed cost reduction, we are on track to achieve efficiencies that are higher than 30% by the end of this year, a year ahead of schedule. With the revenue growth I mentioned before, and the faster than anticipated cost synergies and high gross margins of 80%, we believe we are on track to break even in the H2 of 2025.

We believe that the coming quarters will show continued improvement in all elements of our financial profile, from top line to OpEx, gross margins, and reduction in losses. Looking into the other revenue streams, in the Q1, our B2C business generated approximately $2 million, which is consistent with the channel expected of $8 million annual revenue run rate. This channel is already profitable. The third revenue stream we call commercial strategic, which 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. We expect an annual run rate of $6 million from this channel to continue through 2024 per our original $30 million deal with Sanofi.

But this excludes any additional revenues we are hopeful to see materialized from increased demand from pharma following the Twill acquisition. Above all else, we are the most excited by the demand for our product offering. We are now three months into the acquisition, and we are seeing the effect that the expanded product offering has on our pipeline, both from the B2B2C to employers, health plans, and pharma, with few complete opportunities with our existing clients. On the GLP-1 offering that we have, we already signed six new contracts, and we see growing demand from employers. We believe this is something that will accelerate moving forward, as it's clear that adoption of the GLP-1 should be companion with behavioral change that will make the weight loss sustainable. Another aspect of our business that has always been attractive to our partners is our data.

With the large number of conditions that we cover and billions of data points collected from millions of users by Dario and Twill, our collection of data is not only deeper, but far more comprehensive on a level that is unique to Dario. This is useful for us as we continue to refine our product to deliver the best clinical outcomes possible. Generative AI microservices are being implemented in multiple industries. In healthcare, it is clear it will promote drug discovery and consumer engagement and personalization. Over time, proprietary data sets will be monetized, either internally through the creation and augmentation of services, or externally through IP licensing and/or strategic transactions. We believe that the consumer-centric data set we have, and the scale of this data set, is an asset that will be valuable for running such models, and will position us well to be part of this big revolution.

With that, I want to hand over the call to Rick Anderson.

Rick Anderson (President)

Thanks, Erez. Our B2B2C revenue grew substantially from the Q4 of last year to the Q1 of this year, as we saw the impact of new customer launches, customer expansions, and the impact of the Twill acquisition. We have more than 15 customers launching 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 Mind Companion platform in Q1 and Q2, a trend we expect to continue 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 an additional health plan and a handful of off-cycle self-insured employers throughout the year. The acquisition of Twill also brought a broader opportunity to enable pharmaceutical customers through Twill's patient acquisition and adherence platform. This platform leverages the core Twill platform used by their employer and health plan customers, making the delivery highly efficient and high margin. Twill has a proven track record of its ability to activate patients and increase adherence with 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 bring ARR revenue starting in 2024 from a couple of large pharma companies that are already piloting the solution.

We believe, based on early interest and traction, that we'll be able to expand this to add a significant additional revenue in our recurring ARR B2B2C business by the end of 2024 and into 2025. We are very pleased with the Q1 of 2024 employer sales season, with significantly increased activity and opportunities through benefit consultants compared to the Q1 of 2023. We are seeing more opportunities, and the opportunities we are seeing are at least 200% larger in the Q1 of 2024 compared to the Q1 of 2023.

We believe this is a product of the efforts that we have put into developing relationships with employee benefit consultants, and the increasing number of reference customers that we have built over the last couple of years. As I have mentioned in the past, selling to employers and health plans is a step function business that, done correctly, allows you to build trust and confidence through execution, resulting in step function increases in revenue each year. Benefit consultants are a significant source of employer opportunities, and this increased volume speaks also to the scalability of our sales infrastructure. As most self-insured employers are on a 1/1 to 12/31 sales cycle, we believe the vast majority of the accounts that we close between now and the end of 2024 will launch in 2025.

We are also expecting significant growth in our health plan business in 2025 based on opportunities currently in our pipeline. We expect to add at least one additional national health plan later this year, which will launch in 2025, and we expect an additional 2025 expansions from at least two of our other current health plans. Our acquisition of Twill enables us to offer a broader array of conditions and product functionality to our customers. This builds on our promise of more conditions through one integrated consumer-centric platform, which the market continues to evolve towards. We see this in our pipeline, with over 80% of our opportunities being for more than one condition. Our configurability allows customers to buy the full platform or parts of it, with the ability to consolidate other conditions at a later date.

We find that this message is resonating well in the market. Product integration is well underway, and we expect to have the first product with integrated Dario and Twill capabilities launched in the Q4 of this year. Early customer response to the combined company has been strong, with almost a dozen of our customers expressing interest in a cross-sold product. With the combined product, we can compete in more RFP customer opportunities, and we believe the combined capability will enable us to increase our win rate and our revenue per customer. In summary, we are confident in our revenue growth in 2024, and we are excited about the customer traction we are already seeing in the 2024 sales cycle for 2025 revenue.

We believe we will dramatically accelerate our revenue in 2024 and 2025 across our B2B2C and strategic B2B channels. With that, I would like to turn it back over to Erez.

Erez Raphael (CEO)

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 acceleration towards profitability. Today, the Dario platform is the most consumer-centric, the most comprehensive in terms of conditions covered, and has the most proven track record in terms of clinical performance and proven cost savings in the space. Today, Dario has massive client base and book of business, including 3 out of the top 8 national health plans, such as Cigna, Elevance, and Aetna, as well as big-name national employers such as Amazon, Google, Microsoft, and key pharma companies such as Sanofi, Merck, and Eli Lilly. All of which are contributing to our B2B2C revenue, which is growing intensively on a Dario Twill integrated basis.

Another factor that contributes to our confidence reaching cash flow positive next year is the Twill-Dario merger and synergies we are leveraging on. With efficiencies that we mentioned and are progressing about a year ahead of our original schedule, on track to hit even about 30% by the end of the year, we believe that the B2B2C recurring revenue channel, alongside those efficiencies, will be the main driver of our acceleration to profitability H2 of 2025 at $54 million in revenue. With that, I want to open the call for Q&A session.

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the Q&A session. If you would like to ask a question, simply press star followed by 1 on your telephone keypad. If you would like to withdraw your question, please press star followed by 2. One moment, please, for your first question. Your first question comes from the line of Charles Rhyee from TD Cowen. Your line is open.

Adam Lent (Analyst)

Thanks. Hi, this is Adam on for Charles. Thanks for taking our questions. 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 timing of the payments in 2024. Looking at the Q1 strategic payments here, understand that there's lumpiness quarter to quarter, and we should be looking at the full year, but just wanted to come back to that and wonder what Sanofi looks like over the course of this year, if you can share.

Erez Raphael (CEO)

Sure. So good morning, Adam, and 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 is gonna create opportunities with Sanofi. So overall, the deal exists, the $30 million deal exists. And yes, it's gonna still stay lumpy. But overall, as I stated on the earnings, we are looking on somewhere between $6 million-$8 million in revenue yearly from the strategic that is coming from Sanofi or other sources of revenues.

So overall, we believe that, later this year, we're gonna balance the revenue in a way that we're gonna be able to to save $6 million-$8 million. Ideally, we will be in a position that we will- do maybe even more than that by having the Twill platform also adopted, and we are having specific discussions about that, not only with Sanofi, but also with other clients that are looking into the addition of Twill into our product offering.

Adam Lent (Analyst)

That's helpful. Thank you. And with regard to the Aetna ramp, obviously good to see the contribution there this quarter. I'm wondering if you can share, are you 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?

Rick Anderson (President)

In terms of what we're seeing with Aetna, as I mentioned on the call, is that we've launched both products actually, and, you know, the utilization is about what we would expect. From that, we expect that they will continue to add customers to the platform throughout the year. As a matter of fact, we're seeing them add essentially every month more people onto the platform. And, you know, they are selling through the ASO employer sales cycle. So, you know, we'll expect another group of customers come on midyear and then end of the year, but they're adding every month right now, basically, to the platform.

The revenue from both of those products is on a PEPM basis, so we are getting paid for everybody who has access to the platform. It's not a utilization-based contract, but the underlying utilization is more or less what we would have anticipated. You know, obviously, we're early in the year from that launch, but from what we're seeing so far.

Adam Lent (Analyst)

Thanks. And last question would be, with regard to the $60 million in signed contract value that you guys have previously talked about, how should we be thinking about that phasing in over the course of this year, maybe next year as well? Are these things that can see maybe in the coming quarters, or are these opportunities that really phase in over time?

Erez Raphael (CEO)

Yes. So thanks for this question. So overall, we believe that, it's gonna materialize, this year and into the H1 of next year. We think that we're gonna see that, and we'll keep building the. We keep getting signed contracts, and it's being added to the $60 million. So overall, we look at it as, something that will be materialized by summer, like mid of next year.

Adam Lent (Analyst)

That's very helpful. Thank you.

Operator (participant)

Thank you. Once again, if you would like to ask a question, you press star, followed by the number one on your telephone keypad. There are no further questions at this time. I would like to turn it back to Erez Raphael for closing remarks.

Erez Raphael (CEO)

I would like to thank everyone, and I'm looking forward to see you in the next quarters, where we're gonna continue to report on our progress on all the parameters, top line, gross margins, OpEx, and bottom line, toward our path to profitability. Thanks, everyone.