DarioHealth Corp. (NASDAQ:DRIO) Q1 2023 Earnings Call Transcript

DarioHealth Corp. (NASDAQ:DRIO) Q1 2023 Earnings Call Transcript May 11, 2023

DarioHealth Corp. beats earnings expectations. Reported EPS is $0.45, expectations were $-0.5.

Operator: Good morning, and welcome to the DarioHealth First Quarter 2023 Results Call. All participants are in a listen only mode [Operator Instructions] After today’s presentation, there will be opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chuck Padala. Please go ahead.

Chuck Padala: Thank you, operator, and good morning everyone. Thank you for joining us today for a discussion of DarioHealth’s First Quarter 2023 Financial results. Leading the call today will be Erez Raphael, CEO of DarioHealth and he’ll be joined by Rick Anderson, President. After the prepared remarks, we will open the call to 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 a archived webcast this call is being held on May 11, 2023. This morning, we issued a press release announcing our financial results for the first 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 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 2023 quarterly report 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 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, CEO of DarioHealth. Erez?

Erez Raphael: Thank you, Chuck, and thanks to all of you for joining this morning call. Q1 financial results continue to demonstrate the success of the multiyear strategy we implemented in the last few years. We continue to see the trend of financial profile improvement that we saw in Q3 and Q4 of 2022. We moved our business from direct-to-consumer to B2B and from single point solution to an integrated multi-chronic condition platform. Let’s reexamine the strategy, the market trends against the strategy and the indications for success in the financial results we are reporting today. First, our transformation from direct-to-consumer to B2B, we have succeeded and continue to succeed in making significant advances in the financial profile of the company.

This is because of the significant reduction in the cost per member acquisition, the ability to scale, and more efficient economic model for member on the platform. Key indicators for financial results for the success of this strategy is evident in that 70% of revenues came from B2B. Also, the continuation of the sequential improvement in our gross margins, and a significant reduction in the company burn rate. Second is the multi-condition strategy in our B2B business, where we manage five different conditions on one integrated platform. This strategy is not only aligned with the market, but also ahead of the macro digital health market trends of consolidation and consumer centricity. In fact, our current model is better suited to the global financial macro environment, we are all facing today.

The market trends of customers looking for an innovative digital solution, with more conditions and from smaller number of vendors and adopting solutions for partners continues. The majority of our new contracts continue to be multi-conditions. We generate more revenue per customer than a single chronic condition point solution. We believe our platform has strategic advantage, because it not only covers a large number of conditions, but does so through an integrated user experience with high member engagement. We’re also seeing a real-world evidence in our voice of customer data, which focuses on ROI a trend which will certainly position us as a value differentiator to benefit from, as recently demonstrated in the clinical data published by Sanofi earlier this week.

Another strategy is accelerating penetration through partnership, which is an approach we have been executing on for the last few quarters to accelerate both the sales cycle and the accounts implementation. We have collected a meaningful list of partners, including Solera, Virgin Pulse, Alliant, Sanofi and Aetna that are looking to accelerate our footprint further. This quarter we added significant new partners and secured new customers through these partners. We announced a very significant new partnership with Amwell, one of the largest telehealth companies in the country, with 90 million people having access to their platform. Rick will elaborate about this significant deal for us. In addition to that, we announced our first customer through the co-promotion efforts under, our strategic partnership with Sanofi.

This is a multi-condition agreement, with a pharmacy benefit manager. Third, we demonstrated tight collaboration on real-world data and clinical evidence with Sanofi, through the presentation of the first Sanofi conducted study earlier this week. We are very excited about this study, and what this represents not only for Dario, but with the digital health industry as a whole. We believe our partnership strategy including the traction, we saw in the first quarter, will drive accelerating revenue in the second half of 2023 and even more in 2024. Let’s take a deep dive into the financial results. Q1 shows continued improvement of the company financial profile, a trend we demonstrated in Q3 and Q4 of 2022. We are presenting, a real evidence that shows that the model is working and creating a long-term shareholder value.

Photo by JESHOOTS.COM on Unsplash

Let’s start by looking into the revenues and its components. First quarter 2023 revenue, was $7.07 million a sequential increase of 3.8% compared to the Q4 of 2022. This is 12.3% decrease compared to the revenues of $8.06 million in the first quarter of 2022. This decrease resulted mainly from lower B2C revenues in Q1 2023, which is part of our previously discussed strategy to manage the B2C business, to a breakeven to a decreased investment in B2C customer acquisition cost. We believe we will see revenue acceleration as we continue to get signed accounts launched. Another important metric, is the gross margins. This is where results are even more exciting as we are showing a true software-driven business, with SaaS Software-as-a-Service-oriented characteristics.

Pro forma gross margins was above 60% for the first quarter of 2023, up from 58% of revenues in the fourth quarter of 2022. As I mentioned, in the last few calls, we are targeting an average gross margins of above 60% for 2023 and above 70% for 2024. Looking at operating loss, we are seeing a true operating leverage on the infrastructure that we have built, and real economic advantage for multi-condition approach. We continue to reduce the cash used in operating activities in the first quarter with only $4.76 million, used further reduced net loss excluding stock-based compensation acquisition-related expenses and depreciation, for the first quarter of 2023 to $6.8 million compared to $10 million for the first quarter of 2022 and $9.6 million in the fourth quarter of 2022.

Looking into the balance sheet. We also have a strong cash position. Pro forma cash balance as of the end of Q1, inclusive of the private placement funds and the loan refinancing, was $61 million which leaves us with a significant runway to execute on our strategies. With that, I want to hand over the call to Rick to elaborate on the commercial aspect.

Rick Anderson: Thanks, Erez. In the first quarter, we continued our revenue growth trend, with increasing year-over-year and sequential quarterly growth. As expected, we are maintaining our B2C revenues at levels consistent with the fourth quarter of last year and it remains, a self-funding strategic innovation platform. We expect to maintain the B2C business at these levels throughout 2023. On the other hand, we continue to see growth in our B2B revenue in the first quarter, with the B2B revenue now accounting for approximately 70% of total revenue. While we continue to release the number — increase the number of B2B contracts in the first quarter consistent, with the normal self-insured employer benefit cycle, the number of contracts signed was less than the fourth quarter of 2022.

More than 70% of self-insured employers are on a January to December benefit cycle, with the majority of employer contracts signed in the late third and fourth quarters, though we are currently in the early stages of the annual employer buying cycle. Our overall, contract value is approximately $67 million, a modest increase over the end of last year. However, this does not include any value for distribution partnerships, unless we have visibility to the distributors in customer contract value. For example, we have not reflected any value related to the Amwell contract despite the fact that Amwell is already in discussions, with some of their downstream customers about adding Dario to their offering. The market trends of customers looking for more conditions from a smaller number of vendors, and accessing care management solutions through partners continues.

The majority of our new contracts continue to be multi-condition, which generates more revenue per customer than single condition contracts. We believe our platform has a strategic advantage because it not only covers a large number of conditions that are high priorities for customers, but does so through an integrated user experience with high member engagement. We are also seeing increasing focus from customers on ROI, a trend that we believe we are well positioned to benefit from. Our solution delivers significant clinical and cost improvements for our customers on some of the most costly chronic conditions. This was validated in the first Sanofi conducted study that was released earlier this week. We are very excited about the results of this study and what it represents not only to Dario, but the digital health industry as a whole.

The study was conducted by Sanofi and their third-party data partner, which makes it one of the only independent digital health studies and it was conducted with a much higher level of rigor than most of our competitor studies, including the use of a propensity match comparison group. And the results demonstrate that Dario does impact healthcare costs. The study showed with a high level of statistical significance, the Dario members had a 9.3% reduction in healthcare utilization and a 23.5% decrease in hospital admissions. In this environment of increasing focus on cost and ROI and with increasing demand for evidence from customers and prospective customers, we believe this study will accelerate adoption of our solutions. Distribution and strategic partners are an important part of our strategy to accelerate sales and make implementation and management as easy as possible for our customers.

We had two significant partnership developments in the first quarter. We announced our first customer through our Sanofi co-promotion efforts. This multi-condition agreement with the Pharmacy Benefit Manager or PBM is one of the two health plan type customers that we discussed last quarter. And we anticipate that it has the potential to generate multiple millions of revenue once fully implemented. And implementation is underway and we expect to launch this customer in the second quarter of this year. We are very excited to see our first customers through our collaboration with Sanofi and look forward to more developments from the growing pipeline with them. Second, we announced the partnership with Amwell, one of the largest telehealth companies in the country with an installed base of approximately 2,000 health plans and health systems that reach over 90 million people.

Amwell is integrating our cardiometabolic solution into their platform and will distribute it to their current and prospective customers. Given Amwell’s past success distributing another digital health solution through their platform, we have high expectations of this partnership and believe that it could represent high tens of millions or perhaps more in revenue, as the relationship ramps up over the next several quarters. While we know that Amwell is actively selling the Dario solution, we have not yet included any contract value in our 2023 forecast or reported contract value. We will adjust the contract value as we gain more visibility to the initial customer size and timing. We have one additional health plan that we continue to anticipate launching through a partner in the near-term.

We have seen several delays with this customer that are occurring between our partner and the health plan, but we continue to anticipate the launch in the second or early third quarter. Encouragingly, this partner has asked us to expand the number of conditions that they can distribute to their customers, which are all health plans and we are currently in contracting on that expansion. As previously reported, we also expect Aetna will launch their new digital platform, which they are selling through to their employer, customers on July 1. We earn revenue for members that are contracted to have access to the platform which we expect to grow over several quarters post initial launch. Throughout 2023, we will continue to invest resources in our existing partnerships to assist with customer pull-through and we will seek to expand our partner roster to a select number of additional partners that we believe can accelerate our revenue and service specific subsets of customers.

We have demonstrated that we can convert contracts into revenue by expanding the number of contracts that are multi-condition, achieving an average enrollment rate of 30% or better and significant levels of engagement. Over the last year we have more than doubled the number of records account, which based on experience is the basis to accelerate growth of customers on the platform, especially as we continue the 2023 selling season for 2024 employer launches, and we believe our partnership strategy including the traction we saw in the first quarter will drive accelerating revenue in the second half of 2023 and 2024. With that I would like to turn it back over to Erez.

Erez Raphael: Thank you, Rick. So to summarize, we believe that further into 2023 and 2024, we’ll continue to strengthen our financial profile. The losses will continue to decline. Gross margins will improve with a target of about 60% for 2023 and above 70% for 2024. And despite macroeconomic factors and a possibility for recession, we don’t see a slowdown in the digital health market. In fact, we continue to see tailwinds, as sales and employers seek to better manage their patients and reduce healthcare costs. The market trends of customers looking for digital health solutions with more conditions from a smaller number of vendors and adopting to partners continues. Further, our commercial capabilities matured considerably in the past few years with a larger sales team and more strategic partnerships, which we expect to accelerate not just more contract wins but more meaningful contract wins, such as Aetna and other large accounts.

We are seeing a trend of big traditional healthcare players in large pharma such as Sanofi and other big medical devices companies looking to tap into digital health space by partnering with companies like Dario so they too can extend their footprint in healthcare transformation. We expect to make more large and strategic partnerships like those. We have made and continue to make substantial progress in building our relationships with Sanofi, which we believe can take us to the next level in terms of our relationship with Sanofi as a big pharma. Our relationship with Aetna is forming, and we recognized revenue this quarter in the last few quarters, and we are anticipating that revenues will accelerate throughout 2023 and beyond. We believe that we are positioned to accelerate growth in 2023 and 2024 as the overall foundation for client wins is improving with larger sales team, and meaningful partnerships that should give us significant larger access to clients.

With that, I want to hand over the call to the operator for a Q&A session.

See also 30 Most Polluted Cities in the U.S. and 10 Best Gold Royalty Stocks to Buy Now.

Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Alex Nowak with Craig-Hallum Capital Group. Please go ahead.

Operator: Our next question comes from Charles Rhyee with Cowen. Please go ahead.

Operator: Our next question comes from Rahul Rakhit with LifeSci Capital. Please go ahead.

Operator: Our next question comes from Benjamin Haynor with Alliance Global Partners. Please go ahead.

Operator: Our next question comes from David Grossman with Stifel Financial. Please go ahead.

Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Erez Raphael, CEO. Please go ahead.

Erez Raphael: Thank you. I would like to thank everyone for joining our call and for following the company. I wish you all a nice day. Thank you.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.