DRIO - NASDAQ

Good morning, ladies and gentlemen, and welcome to the DarioHealth Third Quarter 2024 Results Call. [Operator Instructions] This call is being recorded on November 7, 2024. I would now like to turn the conference over to Kat Parrella, Investor Relations Manager at Dario. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining us today for a discussion of DarioHealth's Third Quarter 2024 Financial Results. Leading the call today will be Erez Raphael, CEO of DarioHealth. He'll be joined by Steven 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. For the benefit of those who may be listening to the replay or archived webcast, this call is being held on Thursday, November 7, 2024. This morning, we issued a press release announcing our financial results for the third quarter 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 third quarter 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 were 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.

Thank you, Kat. Good morning, everyone, and thank you for joining us today for DarioHealth's third quarter earnings call. Over the past few quarters, we have made the bold strategic moves to establish Dario as one of the leading forces in the digital health space, even in a challenging market environment. Dario now offers one of the most comprehensive digital health platforms in the industry, supporting 6 different chronic conditions, including diabetes, hypertension, weight management, musculoskeletal pain, behavioral health and maternity support. Our offering expansion in metabolic health has been organic, while we expanded into other areas through strategic acquisitions. The recent acquisition of Twill exemplifies this strategy, adding robust behavioral health capabilities and advanced navigation tools to guide clients in matching patients to appropriate therapeutic areas. With Twill now integrated, Dario provides unmatched consumer-centric, personalized health solutions, making it the most comprehensive platform in the market. This quarter represents a crucial step towards positioning Dario as a Software-as-a-Service like business with high gross margins targeting over 80% and a strong recurring revenue model. Today, we are excited to share how the strategic initiatives are delivering tangible results with a significant improvement across all financial metrics, including growth in our top line, a reduction in operating expenses and a substantial decrease in net loss. Additionally, Q3 marks a period of robust business momentum with 10 new client wins this quarter alone. We are also in a process of securing approximately 5 more clients before the end of the year, which would bring our total client wins for the second half of the year to something between 17 to 20 new clients. This strong business momentum highlights the increasing demand for our comprehensive platform and our ability to deliver value to growing [indiscernible] clients. For Q3, we reported $7.42 million in revenue, representing 18.7% increase over Q2 of 2024 and an impressive 111% year-over-year growth. This growth is largely fueled by our core B2B2C business, which has become the engine of the revenue base. Through continued optimization of revenue channels and shift towards recurring revenue models, gross margins for the B2B2C business rose to 83%, with full business gross margins reaching 70% on a non-GAAP basis. This improvement reflects our commitment to enhancing the quality and the predictability of our revenues. Following the recent merger with Twill, Dario implemented focused cost management strategies, reducing non-GAAP operating expenses to $12.3 million, a 15.9% sequential decline from Q2 2024. This disciplined approach to cost management has been essential in driving margin expansion and operational efficiency. Looking ahead, we are confident that the improvement in our financial profile will continue into the next few quarters. The cost reduction initiatives we initiated earlier this year are not fully reflected in our current numbers yet. As these efforts mature, we expect to see even a greater reduction in Q4 2024 and Q1 2025 with projected [69%] reduction in non-GAAP operating losses from Q1 2024 to Q1 2025. This progress keeps us firmly on track to reach a cash flow breakeven run rate by the end of 2025. Now I would like to turn it over to our Chief Commercial Officer, Steven Nelson, who joined us earlier this year. Steven has been instrumental in refining our commercial strategy and strengthening our client operations, which is key to sustaining the strong business momentum we are experiencing. We acknowledge that in the past, while we had successfully won clients, it was challenging to fully realize revenues from this partnership through our improved client operations. We are now focused on converting new client logos into meaningful revenues more efficiently. Steven will share how these strategic enhancements are helping to drive growth, both by deepening relationships with existing clients and partners and by expanding our reach into new client segments.

Thank you, Erez, and good morning, everyone. I'm excited to share our commercial momentum continues to build. Over the past quarter, we've signed 10 new contracts, positioning us well for sustained growth as we head into 2025. This momentum isn't just about adding clients, it's about deepening our engagement to align with clients' evolving needs and creating a more sustainable, diversified revenue mix that will facilitate more predictable and stable growth going forward. By the end of this year, we expect to reach an estimated total of 25 new client signings in 2024 to be implemented and secured for revenue growth in 2025. This represents approximately 35% growth in our client base, a milestone that serves as a core indicator of our profitability timeline. Our B2B2C channel continues to show substantial progress and significant potential, and we're determined to unlock its full value. While we've established a strong foundation, there is much more we can achieve, particularly with clients in the employer and health plan channels. For example, major employers like Amazon and Google are open to exploring additional ways our platform can address their health needs, and we're confident that we can expand these relationships. We continue to expand on commercial opportunities with our GLP-1 product, which continues to gain traction in our client base. We will soon be partnering with a prescribing partner to further our GLP-1 offering, reinforcing our commitment to comprehensive client solutions in metabolic health. We have now successfully implemented our operating model and accountability internally to expand on the following channels: health plans. We're continuing to strengthen our position in the health plan space. This quarter, we've signed our fourth contract with a national payer, this time in the Medicare Advantage market with Centene, aimed at promoting healthy aging. This partnership introduces a digital mental health benefit for seniors and expands our footprint to over 1 million eligible members beginning 2025. Additionally, we launched a large-scale cardiometabolic program in the Medicaid space, further showcasing the value of our integrated multi-condition platform. We're also seeing incremental growth in our relationship with Aetna, and we anticipate this steady trajectory to continue into 2025, supporting our ongoing expansion in the health plan channel. In parallel, we are in the process of reestablishing our relationship with Elevance to transitioning from an initial Medicaid pilot in behavioral health to a potential commercial partnership focused on cardiometabolic solutions. Employers. In our employer channel, we have added 7 new contracts, particularly for cardiometabolic solutions, and signed our first health system as an employer client. This targeted segment of unique employers allows us to bring our solutions to individuals that deliver care by profession and to those who have a unique understanding of our clinical importance of our care modalities on the Dario platform. Pharma and medical device. Our pharma channel is a standout area of progress. Last quarter, we outlined an opportunity to enter the pharma direct space with our pharma partnerships. Through this opportunity, we recently closed 2 new deals, including a top 6 global pharmaceutical company, executing our strategy to build long-term predictable revenue streams. These deals are structured under our platform services subscription fee model, transitioning our pharma business from a milestone-based to recurring revenue. This shift aligns with industry trends, making our pharma channel a more stable and predictable revenue contributor. We have also made progress in reestablishing our collaboration with Sanofi, working closely with their commercial business units and global Digital Healthcare division to reframe our core engagement. With this expanded offering, not only are we enabling pharma companies to better reach and/or retain patients, but we're also empowering them with a more effective means to monitor outcomes and personalize care. These significant strides in the past 3 months of redefining our pharma partnerships, pivoting toward a subscription-based model that is transforming our revenue profile from this segment into a stable reoccurring stream. This transition aligns our pharma business with our broader strategy of building predictable long-term revenue sources. This shift in our model has already started to contribute to near-term revenue, and we expect it to become a core growth driver as we continue expanding in this space. With this expanded offering, not only are we enabling pharma companies to better reach and retain patients, we are also empowering them with a more effective means to monitor outcomes and personalize care. Strategic partners. We also announced a significant partnership with AARP, giving us access to 38 million members, aged 50 and older, with program activation beginning in January 2025. We look forward to providing more color on the benefits of this partnership once it is formally live in the members in January. In addition to these client wins, I remain focused on refining our commercial strategy and operational processes. Dario's unique value proposition rooted in direct-to-consumer engagement and our multi-condition platform gives us a strong foundation. We recently completed a detailed product market fit analysis, enabling us to target the right segments more effectively. With this redefined strategy, we're not only winning new clients, but also deepening relationships with existing ones, unlocking new revenue opportunities and strengthening our reoccurring revenue base. We have an incredible amount of opportunity to grow across our existing and prospective book of business, and I am confident that we have redirected ourselves to achieve that growth as a fully integrated comprehensive solution. This integral step has been made official by the rebranding of our product suite to fit into one unified brand. This unification strengthens our market reach and data-driven approach to optimizing outcomes across all client segments. With each client engagement, we are also gathering valuable insights that fuel our AI capabilities, enhancing both client experiences and clinical outcomes. As we look ahead, I am excited to build on our momentum, executing with precision and a relentless focus on sustainable long-term growth. Our road map is clear, and we are fully committed to driving transformative impact across the health care landscape, delivering enduring value for our clients and realizing our vision of a healthier, more connected world. Erez, back to you.

Thank you, Steven. Steven's insights underscore the tremendous progress we are making across all channels. Our strategic focus on expanding our client base and deepening client relationships have been creating a robust foundation for growth. With one of the most comprehensive platforms on the market covering conditions from diabetes to behavioral health, we are leveraging billions of data points to drive best-in-class outcomes and real-world evidence of reduced cost for our clients. Looking ahead, we are also keep investing in AI and data-driven personalization. Our proprietary data enable us to drive innovation in areas like drug discovery, consumer engagement and targeted interventions. By integrating generative AI and micro services, we are creating a new revenue opportunity, further strengthening our ability to activate and engage members effectively and offering unparalleled value to our clients. In conclusion, we are very pleased with our progress this quarter and the momentum we have built for the quarters ahead. The continuity of our strategy is evident in our financial achievements and operational milestones. With the continued execution of our commercial and cost management initiatives, we are on track to achieve cash flow breakeven run rate by the end of 2025. Thank you to our team, clients and shareholders for their growing support. We are excited about the road ahead.

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

This is Adam on for Charles. First, wondering as we approach 2025 and following the company adding many new clients in 2024, if you can provide some guardrails around how we should start to think about the 2025 growth range for B2B2C revenue.

Yes. Thanks, Adam, for the question. As we stated in the call, we have around 25 new clients this year, which is something that represents more than 30% in the client base. Overall, we are looking into increasing the average revenue that we are getting from clients. Plus, because we are landing and expanding, we think that eventually, we should grow more than what we are going in terms of the total number of clients. So while we are not providing a very precise guidance, we did also communicated as part of this press release that by the end of next year, we should get to a run rate of $50 million, which will put the company in an operational cash flow-positive point.

That's very helpful color. And also looking at the B2C revenue, it stepped up sequentially in the quarter. Wondering if there was anything that stood out as a driver there? Or is it right to continue thinking about the annual range of $8 million to $9 million roughly as being the continued range going forward?

So on the B2C side, we are looking into $8 million range, which is something that should stay stable there. Just to remind everyone, the B2C is a P&L that is on a stand-alone, is not losing money. It's cash flow positive. That's on the B2C. On the B2B, if we are looking into Dario as a stand-alone, we are seeing for this year, a growth of between 50% to 70% in the revenues of the B2B2C. On the Twill side, I mean, if we are looking on an integrated base, the entire revenue was growing 111%, all the channels together.

Understood. And congrats on the 2 wins in the pharma channel. It looks like you started to gain traction of the new platform services subscription fee model in that channel. I wonder if you can share what you estimate each of these new customers can contribute there, maybe in particular, the large pharma customer? And maybe also, what drove those wins and what the pipeline looks like here?

Yes. So we -- this is Steven speaking. We've had 2 clients that we brought in, in that channel specifically, and we're working with our existing book of business to kind of expand upon that. I think there's two things that we look at with those businesses. One is how we bring them onboard to our platform. That would be configuration fees. And we work with all of our clients in that in terms of how do they onboard into our environment, how do we work, setting them up, et cetera. And then we're moving them to platform fees. And the platform is really dependent on what is the goal, how big are they trying to drive their business, et cetera. So it does vary based on what their goals, et cetera are. I'd say anywhere between -- you look at these accounts as we have them anywhere between $500,000 up to, say, 2, 2, 3. We have some clients that I'd say full scale could get up to 5 million. So technically speaking, we have a range in there. Again, we got to bring them onboard, then we have to establish platform fees. The platform fees are mutual. So we don't really just kind of -- we don't jump in and be like, "Hey, this is what it costs to use this." We kind of work with them on what are your goals, what are your patient drivers, what are you trying to do in your direct channel. All pharmaceutical companies and products within those companies are different. They have different goals, different expectations, client targets, pre-prescription, post-prescription engagement. They're all a little bit different. But I think right now, we're seeing them fall anywhere between, I'd say, 0.5 million to 1 million on the front end. And then on the back end, as platform fees evolve, we see those contracts as we begin to rescale, which will take us some time, but we're working on that; anywhere between, I'd say, $1 million, $2 million, upwards of $4 million to $5 million, again, depending on the product set and per client, what their goals are, either pre-prescription or post-prescription on the platform.

Understood. Is it right to think that prior pharma partners, the ones that were paying milestone payments under the legacy model here, do those remain on track going forward?

Yes, we need to eliminate those. We need to be really intentional on trying to convert the contracts that we have and convert them as partners and work with them to kind of move it to a new area. It's lumpy, it creates lumps in our revenue. It's hard to project. I kind of noted that in what I said earlier. It's hard to project where our revenue will fall. We're trying to get to stable, confident, credible revenue that's predictable, and we're trying to get out of the lumpiness of our business. So it's a crosswalk of kind of bringing in new revenue that is exactly the revenue we're looking for versus letting revenue go and trying to bring them on to the platform in a unique way. And hopefully, we can cross that bridge with them. So we're trying to be really intentional about the longevity of the company and our goals of profitability, and that includes our revenue mix by segment, by product, by client. And so we're trying to be thoughtful in that. Obviously, not degrade our revenue, but at the same token, we need it to be healthier, more confident, more predictable.

That's very helpful. And last for me is around OpEx improvement. I know that you guys are targeting still improvement in OpEx over the next few quarters and into the end of 2025. But wondering if you can share what between R&D, sales and marketing, et cetera, would be the key levers there to continue reducing OpEx or maybe all those. And then from there also, once you reach a stable -- more stable OpEx base, kind of growing on that more stable OpEx base, if that's the base case going forward?

Yes. Thanks, Adam. So on the OpEx, we keep the transformation, as we communicated in the previous quarter. We did 2 reefs, and we are reducing the integrated OpEx. If you look into Q3 2023 where Dario was a stand-alone versus Q3 2024 where Dario is also embedding Twill, we are almost in the same OpEx, which means that we managed in like literally 6 months to absorb an entire organization that used to have a $28 million OpEx and embedded into Dario almost with the same OpEx like Dario as a stand-alone, which is a very, very good achievement that we are very proud in. The actions that we took is going to keep taking the OpEx down, and we expect that we're going to get to a run rate of $41 million by Q1 of 2025 on a non-GAAP base for the full year. So it should be somewhere in the ranges of 10.5 a quarter. We believe that, that's going to be the new baseline that will be the run rate for the entire next year. And we believe that the cash flow positive point will be also in these ranges in terms of the OpEx. Very important -- I mean, Steven mentioned the transformation of the revenues from milestone to platform fee recurring revenue. On the B2B2C as a stand-alone, we generated 83% gross margin. So we have the confidence that at $50 million run rate with the new baseline of OpEx post all the integration, we will get to cash flow positive. We achieved this OpEx reduction by a combination of reduction in the overall expenses, merging the organization and also a very strategic offshore activities where the organization is mainly in the U.S., but also have a large team in India for R&D support and a smaller team in Israel. As part of the overall change and the reduction, we also rotated budget from R&D to sales and marketing. So the company not just reduced the budget, we also changed the [merge]. And in terms of percentage of the revenues, we rotated budget from R&D to the commercial side because we do believe that the company did a lot building these products. We know that we have a very, very mature product. And we are all about growing the revenue with the existing assets that we have. Still, we have some R&D projects that require budget, but the budget is like more than 35% lower than what we used to have when we acquired Twill. So overall, we're going to see the platforms integrated. We already communicated that everything is going to operate under one integrated brand, one user journey, and everything is being done by the end of this year. So I think that investors shouldn't expect like huge expenses of R&D that are going to go up, I think that we have everything that we need. And now we only need to score in terms of the revenue, which is something that we have a very high confidence that we're going to achieve in the next few quarters, based on the accounts that we have signed on and also those that we are getting expanded. Steven, do you want to say something?

I was just going to add that we really refocused on -- our product leader. We've really refocused on what was going to be good to go to market -- there's a feedback there. We really refocused our approach on what we're going to do from a go-to-market perspective. I mentioned that product market fit both in the last Q and in this Q. And that's in collaboration with our product leader. She's wonderful, really kind of leading us to a very specific approach on what we're trying to execute. And again, Erez mentioned how we're doing our R&D. That's in India. It's also worth noting those are our people, our offices. That's not an offshore activity. That's our people. It's our company. So I think we have a lot of leverage on how we approach our R&D and what we bring to the market, getting the market feedback the way that we have in commercial, also the way that we've consistently got voice of customer loop coming back to our product teams, allows us to refocus in a way to get really what we need to bring to market to market. So I think there's been a conscious effort to not just reduce cost, but as I've said a couple of times now in the queue, it's literally getting refocused on the product market fit and what we need to bring to market in a very, very operational, executional way. So worth noting that I think there's an intentional effort there, for sure, as we build. That's all.