DarioHealth Corp. (NASDAQ:DRIO) Q3 2022 Earnings Call Transcript

DarioHealth Corp. (NASDAQ:DRIO) Q3 2022 Earnings Call Transcript November 15, 2022

DarioHealth Corp. beats earnings expectations. Reported EPS is $-0.64, expectations were $-0.76.

Operator: Good day, everyone, and welcome to the DarioHealth Third Quarter 2022 Results Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Glenn Garmont, Investor Relations. Please go ahead.

Glenn Garmont: Thank you, Joe, and good morning, everybody, and thank you for joining us today for a discussion of DarioHealth’s third quarter 2022 financial results. Leading the call today will be Erez Raphael, Chief Executive Officer of DarioHealth and he’ll be joined by Rick Anderson, President. After the prepared remarks, we’ll 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 and recorded on November 15, 2022. Last evening, we issued a press release announcing our financial results for the third quarter 2022.

A copy of the release can be found on the Investor Relations page of the DarioHealth 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 2021 annual report on Form 10-K as well as the third quarter 2022 Form 10-Q filed last evening.

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 last evening 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 the press release regarding our quarterly and year-to-date results.

With that, I’d like to turn the call over to Erez Raphael, Chief Executive Officer. Erez?

Erez Raphael : Thank you, Glenn. Thanks, everyone, for joining our call this morning. Joining me today, Rick Anderson, the President of the company. So for the last 3 years, we have implemented a multiyear strategy, and now we are bearing fruits in 2 ways. One, we are not only aligned but ahead of the macro digital health market trends of consolidation and consumer centricity. Number two, our current model is better suited to the financial macro environment we are facing. The consolidation of conditions into one integrated platform enables less vendors and more conditions, especially in a market that looks to save money and be more efficient while better managing its patients. Employers and buyers are looking for best of suite solutions backed by clinical evidence.

Also, our data suggests that an integrated model is better than separated single point solution. Number two, the transformation from B2C to B2B improved drastically the financial profile of the company. Significant reduction in the cost per acquisition, creating a more efficient economic model with higher gross margins and more runway to execute on our strategic plan. This model reduced capital market risk for the company as well. More than 50% of the pipeline that we have today is for the full integrated best-of-suite solution that we have. A full suite creates a higher and more stable revenues while creating an incumbency that is hard to this once dependents have been established, i.e., it will take multiple vendors to replace 1 integrated best-of-suite solution once it’s installed.

Let’s take a look at the P&L of the company. In this quarter, we are presenting a real evidence for the improvement in the financial profile of the company. That shows that our model is working and creating a long-term shareholder value as we discussed in the previous quarter. Third quarter of 2022 revenues are $6.6 million, increased by 17.3% from $5.6 million in the third quarter of 2021, driven by growth in B2B revenues. Our B2B growth outstripped the decline in our direct-to-consumer business in which we have shifted both capital and human resources away to focus on the B2B. Everything we are seeing in the market support this decision. In fact, we are witnessing other digital health companies replicating the B2C first model we created many years ago to prove real-world data and only then move into the B2B.

The many years, we operated as a B2C company and the data collection is a real differentiator that creates a moat against our competitors. Another important metric is the percentage of the B2B revenue that grew to 63.5% of the total revenue for the quarter, up from 46% in the previous quarter. Another important metric that contributes to the improvement in our financial profile is the B2B gross margin that is now above 70%. We told the market our B2B business could reach 70% levels and today, we report that we are delivering on that. The company-wide gross margins for the business, for the full business and for the full year is expected to be in the 50% range. This is a very large step-up relative to the 39% that we had last year. We believe that next year, we can be in gross margins of approximately 60%.

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And the year after, we believe that we can reach the 70% for the full business. Another metric is the 30% reduction in our operating expenses for the third quarter of 2022 compared to the third quarter of 2021. This is due to the slowing down of the B2C business and also due to becoming more efficient as we improve our processes and build scale in our business. The final results of all the improvements that I just mentioned is lower — is 30% reduction in the net loss of the company comparing to the third quarter of 2021, 30% reduction. We had also a 13.3% reduction comparing to the previous quarter. We are seeing a 2 operating leverage of the infrastructure that we have built and real economic advantage for the multiproduct line approach. The underlying reason for the economic advantage of the multi condition is the improvement of all the following key parameters.

We have more eligible population per account because we are managing and serving multi-condition, per every user that we have on the platform, we are generating more revenue per month and more revenue per year. And the overall result is that we are generating between 4x to 8x more dollars per every account that we are approaching with the full suite as opposed to companies that are doing a single condition digital health. Let’s take a look on our balance sheet. We ended the third quarter with a strong financial position with cash of $57 million in the bank. And we also keep improving our financial profile in a way that we are reducing the loss and we expect that the loss will continue to reduce into next year. We also have access for another $25 million for OrbiMed demand plus the strategic relationships that we keep building and will continue to develop and collaborate with.

On the commercial side, we signed 85 accounts, and we are on our pace to reach the 100 accounts by the end of the year, which is the guidance that we provided at the beginning of the year. We are making a substantial progress in building our relationship with Sanofi, we believe we can take this relationship to the next level within productions into health plans. Another significant relationship is the national health plan we signed with and recognized revenue for the first time in this quarter. Rick will elaborate about this relationship, but we expect that this relationship will expand and contribute significantly to our revenues moving forward. We’re also working right now on another strategic deal that will help us expand our commercial outreach.

Overall, we have our own direct sales team. But the relationship that we are building with our partners such as Sanofi, Virgin Pulse, Solera and new relationship that we’re building with another company all of them can help us expand our outreach to the market by multiple folds as we keep growing our business in 2023 and 2024. With that, I want to hand over the call to Rick to elaborate on the commercial side.

Rick Anderson : Thanks, Erez. In the third quarter, we continued to make substantial progress towards our strategic goal of building a robust B2B business. We increased the number of B2B contracts to 85 in the third quarter on our way to our goal of 100 by year-end which will represent 100% growth this year. Our current signed contract value is estimated to be approximately $61 million. We have seen growth in both of our primary markets, health plans and employers and both of our primary products, the full suite and our stand-alone behavioral health products. While we have had off-cycle customers that have launched, especially in behavioral health, the majority of the metabolic and full suite contracts that we have recently announced are expected to launch in the first quarter of 2023, as a result, while our performance is improving each quarter, we expect to see significant growth into 2023.

Importantly, these additional agreements also allowed us to generate a growing number of reference customers that are important to growing revenue in a step manner in future quarters and landing an increasing proportion of larger customers as we go forward. The B2B revenue represented an increasing share of total revenue with growth of approximately 32% over the second quarter and is an almost 14x larger than the B2B revenue in Q3 last year. As B2B has become the primary growth engine with the better financial profile that Erez mentioned, we have reduced our marketing expenditures for B2C and have seen an expected decrease in B2C revenue, which was more than offset by strong B2B growth. This has enabled us to maintain the strategic benefits of our B2C business and reduce our operating expense and cash burn substantially quarter-over-quarter.

We entered into a new phase of our relationship with our national health plan customer, Aetna, in the first — in the third quarter. Under this agreement, we are partnering to embed our behavioral health technology into their behavioral health digital platform. We have already recognized revenue related to this agreement in Q3 and but we expected that to increase as they roll the platform out to their customers in 2023. We are just over 2 quarters into our relationship with Sanofi, yet we have seen significant progress and traction. Our copromotion has developed a significant pipeline with some of those moving to late stages, which bodes well even though we expect finalization to still take some time. We are on track to deliver our first set of development projects by year-end and have commenced planning for 2023 projects, and we have had a strong collaboration on evidence generation with the real-world evidence team.

They have completed early study planning and preparation, including validating our engagement outcomes. This is a valuable part of the collaboration as evidence is expected to play an increasingly important role in digital health in the next several years, especially with health plans. We expect that this evidence generation work we are doing with Sanofi will help differentiate Dario from others as we go forward. And of course, we are pleased to have a third-party validate our outcome. Partners are expected to also be an important part of our strategy in 2023 as customers look for the easy button, which is created with for data and billing. We are pleased with the partnerships that we have announced, including Virgin Pulse and Solera. We now have customers through Vitality, Alliant and Virgin Pulse, and we expect our first customer through Solera in the near future with more in the pipeline for all partners.

And we are working on additional partnerships with some expected to close before year-end. Our multi-condition integrated chronic condition platform is resonating in the market. We believe that this is based on having an integrated multi-condition platform, 1 journey, 1 coach, 1 experience versus the modules that our competitors have as they cover the same number of conditions that we have in any event. Having multiple conditions through 1 vendor, which is clearly a benefit in the marketplace. Strong clinical outcomes is demonstrated in a growing body of evidence, including more than 30 studies and excitingly, our latest studies are showing the benefit of managing multiple conditions together rather than in the individual point solutions. Our B2C DNA that enables the delivery of a consumer-centric product and our ability and willingness to integrate within an ecosystem with the member at the middle.

Overall, we believe we are strongly positioned with our product partners and growing momentum to continue to drive accelerating growth as we go into 2023. We With that, I’ll turn it back over to Erez.

Erez Raphael : Thank you, Rick. So despite the macro environment that is expecting recession, we don’t see a slowdown in the market yet. In fact, we may see a tailwind and expect to save money, create efficiencies and leverage, multi-condition platforms that should create a better health profile that will use Dario as a comprehensive solution. We also believe that we have all the building blocks we need in place to keep building a true digital health company that have the potential to reach profitability between $60 million to $80 million in revenue. Dario is very well positioned for success with digital health market consolidation and focus on profitability is desired. With that, I want to open the call for the Q&A session.

Q&A Session

Operator: And our first question here will come from Alex Nowak with Craig-Hallum.

Chase Knickerbocker: This is Chase on for Alex. So a nice quarter here as there have been some starts and stops in onboarding. This quarter was in a nice pace again. Help me unpack the growth in B2B in the quarter? Was it mainly the national health plan at uptick in . Was it the Sanofi contribution that stepped up? How do you see that on the go forward as well for Sanofi? I guess if we could just dig into that B2B line in the growth there, that would be helpful.

Erez Raphael: Yes. Sure, Chase. So number one, the old B2B revenue, as I mentioned, was growing to 63.5% versus 46% from the previous quarter. This is percentage-wise versus B2C. When looking into the few portions of revenue inside the B2B, we have the Sanofi part that was relatively lower than what we have seen in the first quarter. This is something that is happening according to specific milestones and the milestones are related to data delivery, development services and market access. And it’s not always easy to anticipate exactly where we’re going to recognize the specific revenue. So think about Sanofi as something that is contributing almost every quarter, but not in a linear or equal way. The other portion that was new this quarter is the revenue that is coming from Aetna that we started to build the relationship last year, and we managed to see the first revenue getting in.

This one had a nice contribution to the revenue. Other than that, all the other portions of the B2B, we have seen growth, and we are seeing growth quarter-over-quarter the last few quarters, including this quarter in terms of the accounts that are getting into production. So overall, think about some kind of stability or even a lower revenue on the Sanofi side, a new big account that is — that was recognized for the first time, Aetna. And number three, accounts that are keep growing quarter-over-quarter, including this quarter.

Chase Knickerbocker: Got it. That’s helpful. And then I guess one for Rick. The $61 million in pipeline now. Can we dive in there a little bit to — could maybe give us an idea of what the breakdown is between employer or provider health plan customers there that make up that pipeline? Just a look under the hood there would be great.

Rick Anderson : So that contract is not pipeline. And so the majority of that or the largest pieces of that are always going to be health plans relative to employers. But if you look at it on an overall split between them, it’s probably somewhere in the area of 60-40 health plans and other B2B contracts versus employers. But that percentage is going to fluctuate — every quarter is essentially as we move through because health plans will be more periodic and employers, as you’ve seen through the announcements that we made we have off-cycle and on-cycle employers. And so we’ll have more in the third and the fourth quarter on cycle. But during the year, we’re constantly signing contracts associated with that. So it tends to change over time, but that’s more of an estimate.

Chase Knickerbocker: Got it. And then maybe again for Erez, you have nice 13% decline in OpEx sequentially. What does that look like going into Q4 and how are you internally expecting that B2C revenue to wind down now that you’re cutting that spend?

Erez Raphael: Yes. So we are continually making the company more efficient. It’s in multiple places that it’s not just the B2C. It’s also efficiencies that we are running. And you need to remember that we integrated literally 4 companies together. We had the 3 acquisitions along 2021. And we had a lot of elements that related to operation, architecture. And when we are selling an integrated suite, the suite needs to be integrated. So we are spending a lot of money integrating pieces together. We believe that moving forward into next year, we’re going to see additional small reduction in the OpEx. And in a combination of higher revenue and higher gross margins, we’re going to see a significant impact on our ability to reduce the loss.

So this trend is going to continue slightly on OpEx, but mainly in terms of top line and also bottom line improving the financial profile, and you want to see the company losing less — significantly less money into next year. That’s what we’re expecting to happen. Specifically, in Q4, I think that the OpEx spend is kind of stabilized on what we are seeing in Q3. But the additional reduction will start again early next year, and we’re going to see the trend moving along the full year next year.

Operator: Our next question will come from Charles Rhyee with Cowen.