DarioHealth Q2 2024 Earnings Call Transcript

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August 8, 2024

There are 5 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the DarioHealth Second Quarter 2024 Results Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Thursday, August 8, 2024. I would now like to turn the conference over to Kat Perella, Investor Relations Manager at Dario.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. Thank you for joining us today for a discussion of DarioHealth's Q2 2024 Financial Results. Leading the call today will be Erez Raphael, CEO of DarioHealth. He'll be joined by Stephen 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.

Speaker 1

For the benefit of those who may be listening to the replay or archived webcast, this call is being held on Thursday, August 8, 2024. This morning, we issued a press release announcing our financial results for the Q2 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.

Speaker 1

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 Q2 2024 Quarterly Report on Form 10 ks. 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.

Speaker 1

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.

Speaker 2

Thank you, Kath, and thanks to all of you for joining our call this morning. Q2 2024 marked another step forward in our journey to profitability. Our core B2B2C business, the engine driving our recurring revenue from health plans and employers, has demonstrated continuous growth with 60% sequential growth between Q1 to Q2. This represents 28% organic growth before factoring in the positive impact of the Twilio acquisition. This channel remains our primary revenue driver, contributing approximately 75% of our total revenue with an annual run rate of $21,600,000 This high margin business with SaaS like characteristics is gaining traction demonstrated 82% non GAAP gross margins in this quarter.

Speaker 2

Capped with the aggressive cost reduction initiative implemented post fuel merger, we are confident in our ability to achieve substantial 40% reduction in non GAAP operating expenses from Q1 2024 to Q1 2025. On a pro form a base, we have already seen a reduction in OpEx from Q1 to Q2 of this year of approximately 10%. This financial discipline will be evident in our results over the next three quarters in a more intensive way. Our gross margins continue its upward trajectory towards 80% target by early next year. As mentioned, our B2B2C has already reached 82 2024 and Q1 of 2025.

Speaker 2

This progress aligns perfectly with our roadmap to profitability by the end of 2025. In the last few quarters, we made a series of strategic decisions in a very challenging market environment. We believe that test decisions positioned us as one of the strongest players in the digital health space with a stronger financial profile. We have built one of the most comprehensive platforms in the market covering 6 different conditions from diabetes to hypertension, prediabetes, musculoskeletal, well-being and behavioral health. Billions of data points collected for years of direct to consumer engagement have created substantial competitive advantage.

Speaker 2

This data centric approach has produced a best in class solution validated by real world evidence of improved health outcomes and reduced costs for employers and health plans. Beyond the financial results, we see a compelling evidence of our growth trajectory. Our combined product offering following the Twil acquisition is driving core selling success already with 10 of Dario clients already adopting the Twil platform. Our GLP-one product has seen an rapid adoption with 9 clients already on on board. While GLP-one is proven weight loss medication, its potential is maximized when coupled with the overall support.

Speaker 2

By integrating DIAL's real Edra Health capability, we have created a comprehensive solution to support GLP-one adoption among employers and health Our offering provides a streamlined approach to delivering GLP-one therapy and driving optimal patient outcomes. On the pharma channel side, we see that the pharmaceutical industry is undergoing a significant transformation with many leading companies seeking direct to consumer member engagement solutions. We see a substantial opportunity to leverage our integrated offering to meet this growing demand. While past partnerships with Dario and Twil clients like Novartis, Silavily, Merit and Sanofi generated mainly milestone based revenues. We are focused on redefining our integrated offering to leverage on this market opportunity for direct patient engagement and transition our pharma business to a more stable and more recurring revenue base.

Speaker 2

To accelerate this shift, we made a strategic decision to issue a $1,100,000 price concession, impacting our top line for this quarter only, but position us for a long term growth. We anticipate return to a normal revenue pattern on the pharma channel toward the end of this year. While our product offering are strong and we boast impressive client base including top S and P five hundred companies, our revenue growth has not fully materialized to our expectations. To address this, we have undergone a strategic organizational transformation, including tightening our structure and appointing a seasoned Chief Commercial Officer. Our goal is to create a commercial organization focused on 2 key areas.

Speaker 2

1st, keep focusing on acquiring new clients and second, maximizing the growth of our existing customer base, where we see an opportunity to do much better. We believe this dual approach will accelerate revenue generation and better leverage our strong market position. I'm pleased to introduce Steven Nelson, our new Chief Commercial Officer. Steven will provide more details on our commercial strategy and steps we're taking to drive top line growth. I'll turn the call now to Stephen.

Speaker 3

Thank you, Rez. Good morning, everyone. I'm Stephen Nelson. As many of you are aware, I started in June 2024 as Chief Commercial Officer at Dario. I have had the privilege of spending over 20 years in the payer industry with Elavance and Highmark Blue Cross Blue Shield and most recently led a direct employer company for 5 years named Contigo Health.

Speaker 3

Early in my career, I honed my B2C skills through experiences in packaged goods and retail. Today, I'm excited to share some context around my 4 key focus areas since my arrival and discuss some details on our Q2 2024 financial results. 1st, refining our strategy and operational processes, Our roots in B2C companies as well as the comprehensive multi chronic condition product offering have built a solid and unique value proposition that most of our competitors lack, especially in this market environment where we see a consolidation of vendors. Dario has an impressive client base that is very unique in the market, and it is my belief that with a refined strategy and well designed commercial operation, we can accelerate revenue growth. We have recently completed a detailed product market fit strategy, providing us with focused insights to drive more credible revenue across all segments.

Speaker 3

With these insights, I have collaborated closely with our commercial team as well as others in key cross functional roles throughout the company to implement a focused scalable operating model within the commercial department. This model is meticulously designed to enhance operational efficiencies, streamline processes and to Erez's point strengthen both our pipeline for new clients, but even more important, ensure we accelerate revenues from existing clients. By understanding and anticipating our customers' needs and their mode of operation, we can focus on what we do best, enroll and engage with more members for every account that we serve. 2nd, we have and will continue to accelerate B2B2C growth. Our B2B2C channel is a powerhouse of potential, and we are determined to unlock its full value.

Speaker 3

While we have established a solid foundation, we recognize that there is much more to achieve, especially on how to extract revenues from our clients' base on a faster and larger scale. My goal is to accelerate growth in this channel by having specific focus and accountable resources allocated to existing clients as well as deepening existing strategic partnerships with the right strategy, leading to higher utilization of existing contracts in terms of member enrollment, as well as expansion of our customer contracts with both expanded offering, as well as access to a larger population. This will help us solidify a robust reoccurring revenue base that is crucial for long term sustainability. We are leveraging our existing relationships and assets to drive more value from our B2B2C channel. This includes actively pursuing cross selling and upselling opportunities with our current partnerships, targeting both employers and large health plan channels.

Speaker 3

Our GLP-one product, for example, is gaining significant traction already implemented by 9 clients with several more in the pipeline. This product represents a rapidly growing segment that we are prioritizing in our client contracts. In the Q2, our B2BTC channel was the primary driver of growth with a 3 15% year over year increase and a 60% sequential rise from Q1. Looking forward, we see a sizable opportunity among specific client segments and I am confident in our ability to expand these relationships. For instance, health plans like Aetna are making timely progress and with our focused approach to product fit, they are poised for much higher growth given the potential size of business.

Speaker 3

We are initiating collaborative strategies for them to use our newly combined behavioral health platform to compete in a differentiated way with the market. Our large employers, including Amazon, Microsoft and Google and others have been very supportive in our current products and are open to exploring how our assets can further solve health problems. We must lead health plans through effective activation, engagement and reducing their costs to deliver healthcare with our SaaS based digital health technologies and expert experience journeys. Worth noting, our cross selling efforts are gaining momentum with at least 10 initial clients targeted for Twill platform or vice versa. 3rd, enhanced pharma collaborations.

Speaker 3

The pharma market is undergoing a significant transformation with companies increasingly seeking ways to engage consumers directly. This shift presents a huge opportunity for DarioHealth, one that is currently underutilized. Our integrated DarioTwil top of funnel and navigation capabilities offer exactly what pharma companies need as demonstrated by successful projects with clients like Sanofi, Novartis, Merck and others. To capitalize on this opportunity, we are driving an innovative change in our business model, moving away from milestone driven revenues to a more sustainable reoccurring revenue model. Our commercial pharma channel is a critical pillar of our growth strategy, but we believe this redesign is integral to maximizing its potential.

Speaker 3

This shift will lead to a temporary slowdown in revenues for this channel this year as we transition to a more stable and predictable revenue stream, an adjustment that is essential for creating long term value and ensuring that we remain aligned with the pharma industry trends and positioned as a premier partner for companies considering or already executing direct to consumer models. The recent integration of DarioTwil platform significantly enhances our offering, making it more attractive to pharma clients. We are engaged in promising discussions with key clients like Merck and Sanofi who are interested in how our SaaS based consumer engagement capabilities can bolster their efforts. This technology, which has historically supported our pharma channels, can now go further with our newly formed consumer hub model. Our decision to grant a one time price concession of $1,100,000 to a strategic partner underscores our commitment to balancing short term adjustments with long term growth prospects.

Speaker 3

This price concession accelerates the timeline of this shift to a higher quality revenue supporting our highest objective of reaching profitability by the end of 2025. The future of our pharma collaborations is bright and we are excited about the potential for growth in this area. 4th, our comprehensive integrated product offering. We believe the combination of Twilio's behavioral health expertise and Dario's cardiometabolic foundation creates a powerful platform that delivers exceptional value to employers and health plans. By integrating AI driven navigation tools, we enable clients to optimize care delivery, improve member outcomes and achieve significant return on investment.

Speaker 3

Our platform's ability to match members with the right programs at the right time sets us apart. Behavioral health is a foundational component of managing any chronic condition, including metabolic disorders. Our platform seamlessly integrates behavioral health interventions with other therapeutic areas, providing a comprehensive and holistic approach to care. Finally, leverage our AI capabilities. We believe AI will be a meaningful change for DarioHealth as we proceed with our focused product and technology roadmap.

Speaker 3

Integrating and updating aspects of AI that have already been deployed in the past and accelerating generative AI and microservices in a targeted way within product and or technology can further revolutionize our industry leading content activation, engagement and personalization capabilities. Our proprietary data sets, especially within the B2C segment, provide us with a unique advantage enabling both internal and external monetization in this rapidly evolving market. The future of AI in healthcare is incredibly promising and we are at the forefront of this exciting transformation. Our AI capabilities will enable us to offer unparalleled value to our clients and drive our growth in new and innovative ways. In conclusion, DarioHealth is on a transformative journey, and I am incredibly optimistic about our future.

Speaker 3

The strategy we have developed underscores our commitment to sustainable growth and innovation. We are well positioned to continue our momentum with greater stride and deliver exceptional value to our stakeholders. Thank you for your trust and support as we embark on this exciting journey together. Erez, back to you.

Speaker 2

Thank you, Steven. We have identified the 3 key strategic areas that will help us accelerate growth and drive business to profitability. 1st, we will optimize our operations to increase revenue generation from existing employer and health plan clients. Expanding the adoption of GLP-one offering is also a priority for us. 2nd, we will capitalize on the pharmaceutical industry shift toward direct to consumer models by leveraging our unique Swill Darius solution.

Speaker 2

Our focus is transitioning from a milestone base to a recurring revenue stream in this specific sector. Lastly, we remain committed to rigorous cost management by aggressively controlling operating expenses. We expect to deliver tangible results in the coming quarters. As mentioned, we see our operating loss reducing by at least 70% by Q1 of 2025 on our way to our profitability by the end of 2025.

Operator

Your first question comes from the line of Charles Rhyee from TD Cowen. Your line is now open. Please ask your question.

Speaker 4

Hey, this is Lucas on for Charles. Thanks for taking the questions. I was wondering if I could ask about how your cross selling efforts are progressing since the Twill acquisition as well as obviously some restructuring in your guys' commercial operations and how that's just early reads on how it's translating the bookings. It appears that maybe ex-twelve B2B2C growth was up mid single digits in 2Q. Can you remind us what the target for B2B2C growth is for 2024 and kind of what your expectations are now for the second half?

Speaker 2

Yes, absolutely. So far, just to answer your specific question the cross sell, as Steve and I mentioned on the call, we already have 10 of our clients that we cross sell and we sold them the Twil platform. This is relatively small clients and we have a specific few other specific opportunities for larger clients that are looking either Twil clients that are looking into Dario or Dario clients that are looking into Twil. As we mentioned on the call, the sequential growth, the organic part of the B2B2C between Q1 to Q2, just the organic was approximately 30 percent between Q1 to Q2. On an integrated base with Twilio, it was 60%.

Speaker 2

That's the numbers that we have at the moment. We anticipated that the overall growth of our revenues for B2B2C for the entire year is going to be larger year over year. It's going to be larger than 30%. It should be in the ranges of above the 50%. That's the expectations.

Speaker 2

The other area where we see a cross sell and opportunity is the pharma. On the pharma side, both Dario and Twil had a business model that was very milestone driven, which created a lot of issues in the revenue recognition. Some of it we saw now in the quarter when we had to provide a concession and we did some changes. So we are trying to streamline this revenue stream in a way that it's going to be a recurring revenue also. We can do that because there is a specific opportunity in the market now when pharma are transforming to be much more direct to consumer, and we have the platform to help them go directly to patients.

Speaker 2

These capabilities is a result of the combination of the Twil platform, the TwilCare, which is the top of final capabilities with what Dario have. And this is why we see an opportunity also to do a transformation there. On the trail side, the B2B2C, the employers and health plans was not going between Q4 to Q1 to Q2. This is due to the financial situation that we experienced before we acquired them. And we anticipate that this is something that will be changed in the next 2 quarters and we are going to go back to growth once we are stabilizing the situation there.

Speaker 2

So that's on the revenue side. On the OpEx side and the operations side, as we mentioned on the script, we had 2 large rigs, 1 in the beginning of May, the other one at the beginning of August, where overall we reduced the headcount and we reduced expenses that are also related to non headcount. In this quarter, we have seen 10% reduction in the OpEx pro form a between Q1 to Q2. And we're going to see in Q3, Q4 and Q1, a significant reduction in the OpEx. So overall, the companies are managing much faster than what we anticipated in day 1 when we made the acquisition.

Speaker 2

We were thinking about 30% of the 8 quarters. It's going to be something that is more like 40%, even more than 40% over 3 to 4 quarters. So that's from a merge standpoint. From an operation, we see a lot of synergies between the companies that are more synergies than what we anticipated from the first place. And this is the good news because we think that we can retain revenue, grow revenue and in parallel take the OpEx down.

Speaker 2

And this is why we are positive about our ability to reach cash flow positive by the end of next year.

Speaker 4

Got you. Thank you for all the color. I guess, I want to dig in on the price concession that you provide to your preferred partner. In your 10 ks, it says it's maybe related to dispute. I guess, in terms of, one, I guess, what brought about this price concession, if I can ask?

Speaker 4

And then, does it have any impact on the expected $6,000,000 to $8,000,000 in expected payments that we were expecting from this partner? I understand that you're talking about this converting maybe to more recurring revenue stream. Can you kind of give us more details on what kind of came about of this price concession?

Speaker 2

Yes. So I'll start from the end. We're not going to see this kind of concession or something like that in the future. So this is one time that appears in this quarter. It's related to recognition that we had in previous quarter.

Speaker 2

So it's a one time. It's not going to repeat again. That's number 1. Number 2, I don't want to mention the name of the client, but we had a discussion with them about the transformation from one business model to another business model. One of the things that we want to that we are trying to do is to transform from Dario only or Twil only to something that is more combined.

Speaker 2

That's number 1. And number 2, we are trying to move into a recognition that is more recurring or a revenue that is more recurring. As part of the conversations, we made a change to a walk that or milestones that were already delivered. And eventually, we negotiated something in order to be able to look into the future and giving up something small in order to get something big in the future. So that's the way that we're thinking about it.

Speaker 2

It's more like balancing future growth versus the presence of the revenues that we have. I hope that I gave you enough color on that one.

Speaker 4

Yes, that's helpful.

Speaker 2

Lucas, I lost you. Okay. I think that we lost Lucas. Let's give it another 30 seconds to see if he's calling back.

Operator

We're not hearing any response from him as of the moment, but I'm seeing his

Speaker 2

Do we have other questions in the queue?

Operator

We don't have any questions right now. Okay. Thank you. We don't have any questions right now. This concludes today's conference call.

Operator

Thank you for your participation and you may now disconnect.

Speaker 2

Thank you.

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DarioHealth Q2 2024
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