DarioHealth Corp. (NASDAQ:DRIO) Q4 2023 Earnings Call Transcript

DarioHealth Corp. (NASDAQ:DRIO) Q4 2023 Earnings Call Transcript March 28, 2024

DarioHealth Corp. beats earnings expectations. Reported EPS is $-0.41, expectations were $-0.54. DRIO isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to the DarioHealth Fourth Quarter 2023 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kat Parrella, Investor Relations Manager.

Kat Parrella: Thank you, operator and good morning, everybody. Thank you for joining us today for a discussion of DarioHealth’s fourth quarter and full year 2023 financial results. Leading the call today will be Erez Raphael, CEO of DarioHealth. He’ll be joined by Rick Anderson, President. After the prepared remarks, we will open the call for Q&A, where we will be joined by Twill co-founders, Tomer Ben-Kiki and Ofer Leidner. An audio recording and webcast replay for this 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, March 28, 2024. This morning, we issued a press release announcing our financial results for the fourth quarter and full year 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 full year 2023 annual 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 on 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 of DarioHealth. Erez?

Erez Raphael: Thank you, Kat and thanks to all of you for joining our call this morning. 2023 financial results are a continuation of our multiyear strategy and the evolution of our financial profile that is now being accelerated with the Q1 accounts that are launching and accelerated further with the Twill acquisition. Before analyzing the potential contribution of Aetna and other accounts that we launched in Q1 and that we continue to launch in Q2, I would like to first remind you of the 3 revenue streams which remain the same post the Twill acquisition as we operate in the same channels. First is our historical direct-to-consumer or B2C business. Second is our core business, the recurring revenue from health plans and employers or what we call commercial B2B2C with clients like Blue Shields, California, Aetna CVS, in Twill’s case, it’s clients like Cigna, Elevance, Amazon, Google and others.

The third revenue stream that we call commercial strategy which is milestone-based rather than [indiscernible] clients like Merck, Eli Lilly and others. In the fourth quarter, our B2C business generated approximately $2 million which is consistent with the channel expected $8 million to $9 million annual revenue run rate. This number has been managed down to a cash flow natural or slightly positive run rate which has proved accretive to our strategy of allocating resources to growing our B2B2C channel, reducing OpEx and improving gross margins. On the commercial strategic side, while our commercial strategic revenue remains on track for annual run rate of approximately $6 million to $8 million a year, in the fourth quarter, we recorded $582,000 in revenue which is less than the average quarterly strategic revenue for the first half of the year.

This is due to simply the milestone-based timing of revenues from our strategic channel. We want to reiterate that this partnership’s revenue should be viewed on a yearly basis and not on a quarterly basis. And the economic value for us on a yearly basis has not changed. We expect our commercial strategic revenue to continue at an annual run rate of $6 million to $8 million on a Dario stand-alone basis. Due to the demand we have already seen from pharma for the integrated Dario-Twill offering since the acquisition was announced, we expect to be able to grow this commercial strategic revenue stream along 2024 and 2025. The fundamentals of our core B2B2C ARR business with employers and health plans continues to grow and is also accelerating in Q1 2024 with the launch of Aetna and multiple employer accounts.

For year, 2023, B2B2C channel revenue grew by 39% year-over-year. This Dario’s stand-alone B2B2C revenue stream shows an adjusted gross margins of above 70%. Going forward, with Twill, historic B2B2C margins that are above 90%, we anticipate the combined gross margin for the company to reach above 80%. The vast majority of both the immediate and expected future revenues from the Twill acquisition will appear in the B2B2C channel, pushing us much further ahead in our objective to grow our core business. We anticipate that with the launch of Aetna and other employers accounts in 2024 and combined with the Twill B2B2C revenues, the B2B2C recurring revenue channel will be a majority of the total revenue for the full year of 2024 amongst the 3 revenue streams that we have.

We also saw a significant interest in multiple employers’ adoption of the Dario GLP-1 Behavioral Change program as well as expansions of current customer relationships on the metabolic side. Our product is already fundamentally complement of the new GLP-1 market opportunity. We have seen solid growth in our core B2B2C business in 2023 and see that accelerating in 2024 on a stand-alone basis. We anticipate larger growth and scale with the transformational acquisition of Twill that we announced last month, an acquisition that we believe will accelerate the time line to cash flow positive. This acquisition creates the most disruptive digital health platform, displacing the thing. It provides the ability to leverage Twill’s innovative approach to engagement and navigation and breadth of offering to increase sales opportunities, revenue per customer, our enrollment rate and the lifetime value of our members.

The combined company will tackle 6 conditions; diabetes, hypertension, prediabetes, musculoskeletal MSK, behavioral health, mental well-being and pregnancy support, as well as redesigning the top of the funnel to increase enrollment pace through innovative member navigation. The acquisition nearly doubles our pro forma revenues. It creates immediate scale across big name clients in the health plans and pharma space with clients like Cigna, Elevance, Amazon, Google, Microsoft, Merck, Eli Lilly and others. Though the companies are very synergetic, also on the operational side, we expect to achieve 30% annualized cost synergies within 2 years. Most importantly, we expect an accelerated pace to profitability in 2025 to revenue scale, increased gross margins and cost synergies.

We believe our new cash flow positive point is approximately $62 million in revenue. We ended the year with $37 million in cash. And on top of that, we raised an additional $22.4 million alongside the acquisition. This puts us in a great position to execute on our strategy. With that, I would like to hand the call over to Rick to elaborate on the commercial side. Rick?

Rick Anderson: Thanks, Erez. We were pleased to complete the 2023 employer sales cycle last quarter and have launched or will launch more than 15 new customers on the platform in the first quarter of 2024 or within the next couple of months. In addition, we launched the first members on the private label Aetna platform in January and have seen Aetna continue to add customers throughout the first quarter. We expect that our revenue from Aetna will continue to grow over the next several quarters as they continue to sell the solution to their customers. Last quarter, we announced that we have been selected by Aetna to replace one of their existing vendors in digital cognitive behavioral therapy. This separate piece of business we anticipate will launch with more than 5 million members within the second quarter.

Please keep in mind that our behavioral health business is priced on a per employee per month basis at a much lower price than our whole suite product. In aggregate, these launches are expected to significantly increase our revenue in the first quarter of 2024 with further increases into the second quarter. As Erez noted, our core B2B2C revenue increased 39% in 2023 over 2024 which reflects our investments in building the Dario brand and reputation in the self-insured employer and health plans space over the last several years. As I have discussed in the past, the B2B2C market yield step growth in a reinforcing cycle that requires a significant amount of work at the beginning to build reputation, benefit consultant relationships and reference customers.

When successful, this cycle builds on itself each year. We are seeing the continued fruits of our efforts in early 2024 which is off to our best start ever as measured by number and size of opportunities in the pipeline at this point of the year. Currently, our average size of employer in the pipeline is more than 200% larger this year than the average in our current book of business. And this does not reflect the Twill stand-alone pipeline. The building of reference customers is also reflected in existing customers expanding, including a self-insured financial services customer that expanded in the first quarter and both of our Medicaid customers seen in the process of expanding which is anticipated to impact 2024 and 2025 revenue. We have further expanded our relationship with Blue Shield California through our partner, Solera and we expect to launch a second condition within a month.

In addition, we expect to add to our list of health plan customers during 2024 including at least one additional large health plan. Of course, the most significant recent development commercially is the acquisition of Twill Health. We believe this will enable us to provide a comprehensive and differentiated platform to our customers that will increase our win rate, revenue per customer, lifetime value per member and gross margins. It gives us significantly more B2B2C scale by approximately tripling our B2B2C revenue adding marquee employer customers, including 3 of the largest technology companies and 2 additional health plans. The fact that both companies are selling into the same channels with no customer overlap provides significant opportunities for cross-selling, especially since Twill customers have historically expressed interest in chronic conditions.

This has been validated in the last month through discussions with our largest customers and partners who have expressed an interest in understanding how they can access a larger array of our services from the combined entity. We are very pleased to have such affirmation so soon after the acquisition. And like Dario, Twill has several large opportunities in the pipeline for 2024 and 2025. Twill also has significant relationships with pharmaceutical companies that we believe will enhance the strategies that we have been pursuing with B2B strategic as well as platform licensing opportunities. We expect this to result in more opportunities to leverage our combined platform, including relationships already in the pipeline that we expect to come to fruition in 2024.

In summary, between the stand-alone and combined opportunities, we expect to increase B2B2C revenues in the first quarter 2024. And we see the ability to 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: Thank you, Rick. As we look back on the strategic changes we have made to the company in the past few years, such as moving from single to multi-condition and from B2C to B2B2C, we see how impactful they were on the financial profile and path to growth and to profitability. The expansion of our product offering, especially post Twill, has delivered the most comprehensive platform in the industry, validated by clinical results among members as well as billions of deeply analyzed data points. Our plan of expanding our B2B2C core business has been progressing with a good pace and will accelerate more in 2024. With Twill, this channel of this recurring revenue becomes even larger and will be larger than the other 2 channels combined when we are looking on the full 2024 revenues.

This will be the main driver for the acceleration to profitability, a $62 million in revenue. Today, Dario has a 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 a big name national employers such as Amazon, Google and Microsoft and key pharma companies such as Sanofi, Merck and Eli Lilly and we are very encouraged by the interest of Dario and Twill clients to expand the contract into the full offering of the acquisition. The domestic jump start we are starting for 2024 with, we believe that our path to profitability is clear and direct and we plan to continue our upward trajectory for this goal on a quarterly basis. With that, I want to hand over the call to the operator for a Q&A session.

Operator: [Operator Instructions] Our first question comes from the line of Charles Rhyee of TD Cowen.

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Q&A Session

Unidentified Analyst: This is Adam [ph], on for Charles. It’s great to see many new customers have launched in the platform already in 2024, both on the white label Aetna solution and the core Dario platform. At the Investor Day, you talked about how the average customer in terms of units was larger in terms of employees versus the average customer size in 2023. So it’s good to hear the prepared remarks that the average size employer pipeline is 200% larger versus the existing book of business. Can you talk about from the new customers that launched so far in 2024, what the average customer is like that Dario is winning, both in terms of the number of employees and also their size and from a prior experience with digital health such as…

Rick Anderson: Thanks for the question on that. I think that really what I mentioned in the remarks as well, the fact that what you see in the business is really a step function of that. So I would say that the average size of customer is, what we would call, large middle market to smaller enterprise-sized customers would be the average, although there are some that are sprinkling in there that are bigger in 2023 and we see, as I mentioned, a big step-up of that in 2024. And most of those are employers. I don’t think there’s really a standard in terms of type of business, etcetera. We have had good traction actually in labor as well as in transportation companies. So what one may think of not necessarily as traditional high technology adopting companies, we’re actually seeing good traction.

I think that, that really speaks to the fact that diabetes, hypertension and pre-diabetes are sort of universal concepts and that those are challenging employers across the spectrum. Geographically, they’re also fairly well distributed across the U.S. So there’s not really a typical industry or type of customer, I think, from that perspective.

Unidentified Analyst: That’s very helpful. And another question on adjusted OpEx, it looks like it decreased sequentially in the fourth quarter, driven by what looks like lower digital marketing expense. Can you talk about what drove this lower digital marketing spend, whether it is a function of CAC trends or something else in the quarter? And a follow-up to that would be with Twill, can you remind us how you’re thinking about OpEx trending in 2024 for the combined entity?

Erez Raphael: So the strategy that we had in the transformation from B2C to B2B, we deliberately or intentionally decided to slow down the B2C to improve our financial profile. So you clearly can see in the last 6 quarters that we quarter by quarter reduced the OpEx, improved the gross margins. while taking the B2C down. And the way that we think about the B2C is that it’s on an average of $2 million a quarter, $8 million a year and that’s the cash flow positive point. And I think that relatively between Q3 to Q4, we have seen more or less the same number. So we don’t see a real decline on the B2C. That’s the stable run rate looking into this kind of channel. Regarding Twill, generally speaking, Twill are not generating a B2C revenue.

So this is only a Dario channel. Twill do generate what we are calling B2B2C which means health employers and health plans which is our second channel. And the third channel that Dario have is strategic that is coming mainly from pharma. And on that channel, Twill is also active. So the way to look into the evolution into 2024, 2025 with Twill, I think that the second channel which is the B2B2C has employers and health plans that drives ARR have an annual recurring revenue and monthly recurring revenue. That’s going to be the majority of the revenue of the company in 2024 and going to account for more than 50% of the revenues of the company which is something that will also contribute to the continuous improvement in the gross margins that will improve potentially to more than 80% on an integrated base.

And this channel is going to be the main driver that will help us push the company to the cash flow positive point that we are targeting for the second half of 2025 according to our plans.

Unidentified Analyst: That’s very helpful. And the last question for us is how should we think about growth expectations for 2024, whether for the stand-alone businesses, is it still right to think about 100% to 170% B2B2C revenue growth? And for the integrated business with Twill, what’s the right way to think about the outlook for potential growth for B2B2C in 2024?

Erez Raphael: So on the B2C, we disclosed that we’re going to keep it stable in the range of $8 million. On a stand-alone basis, Dario was talking about 100% for the second channel. On an integrated basis, given the revenue is much larger, we’re not going to see this level of growth on the B2B2C. It’s going to be less than 100% on an integrated basis for now even Twill. And for the third channel which is strategic, we expect that the company will be able to close more deals because we already see interest on the integrated platform and we got very concrete discussions with a few clients. So the average of $6 million to $8 million have the potential to grow between 2024 to 2025. So overall, we do think that we’re going to see a growth for the second and the third channels, B2B2C and the strategic on an integrated way, both Dario and Twill.