LVGO Q2 Revenue Modelling

As we approach earnings seasons, I thought it might be fun to do some forensic analysis on what some revenue numbers might look like for a few companies that we follow on this board, to see if they are primed to surprise. Let’s start with LVGO; A reminder of the forecasted revenue numbers are given below


Company	      Latest Q2 Revenue Estimate                        Mean Analyst Consensus
                (from the company) 	
LVGO		    $86M-$87M				                 $86.7M	

To model LVGO’s revenue, let’s look at number of Members in Q1 and average spend per Member and how it affected revenue. If we look at LVGO’s last quarterly, they said they have over 328,000 Livongo for diabetes members, with a dollar-based expansion rate of approximately 110%. For the sake of argument, let’s assume they had that 328k member total right at the end of the quarter, and not for the entire quarter, which makes sense since if they had all these customers throughout the quarter, their Q1 revenue would be closer to $74M, compared to the $69M they reported. The $74M assumes the average spend per member is about $75/month = $225 per quarter; $74M =328k x $225/member/quarter. This average spend data of $75/Member/Month was provided in an SA article, link here: https://seekingalpha.com/article/4358850-livongo-yes-stock-s…. To vet this number myself, I found a study that was published in May 2019 that indicated the average price of the Livongo for Diabetes program was $68 per member per month, including unlimited blood glucose strips (which typically average $30 per member per month, link to that study here: https://hitconsultant.net/2019/05/10/study-livongo-for-diabe…). This suggests the $75/Member/month is reasonable, based on the latest DBNER of 110% and that fact that the study was done about 1 year ago.

So they reported 223k Members in the previous quarter, Q4’19, which also means at the very end of the quarter, 12/31/2019. The 329k Member number reported in Q1’20 equals an overall Member sequential growth 105k, or 47% sequential growth, Q4’19 to Q1’20. Now let’s remember that while LVGO adds Members all year long, Member additions tend to skew to the first quarter of the year as prior period signings begin to launch (recall several company’s benefits signup period happens in October-November of each year.) My sense is that they saw a reasonable percentage of their 105k user growth early in Q1, like by the end of January. So assuming they saw half of their 105k Member growth in January, and then the remaining 50% sequentially in the Feb and Mar months, suggests something like this:

Number of Members at beginning of January 2020 = 223k; Number of Members at end of March = 328k
Total Member growth for Q1’20 = 105k

Q1'20 Model
Timeframe     % of 105k increase     # of Members @ end of month(k) Averagecost/member/month   Mon.Rev ($M)
As of Jan 31	    50%	                        276	                       $75 	        $21M 
As of Feb 28	    25%	                        302	                       $75    	        $23M
As of Mar 31	    25%	                        328	                       $75 	        $25M
totals	 	    n/a	 	                                                                $69M

So this roughly checks out with the reported Q1 revenue of $69M.
Now, importantly, let’s look at Q2, using this simple model.
For Q2’20, let’s make the following assumptions
• Average spend per member per month increases modestly to $77/Member/month = DBNER/4 * previous spend of $75 = 1.03 x $75. For the quarter we multiply by 3 = $231/Member/quarter
• We need to model the number of customers added in Q2. In order to hit the $86.6M Q2 revenue mark the analysts are predicting, LVGO would need to hit a average Member count through the quarter = 375k, (assuming $231/Member/Quarter and linear Member growth throughout the quarter), which would imply an end of quarter Member count = ~398k which implies adding about 70k members to the previous quarter’s 328k Member count at the end of Q1, representing an increase of about 21%. In tabular form, that information looks as follows:

Number of Members at beginning of April 2020 = 328k; Number of Members at end of March = 398k
Total Member growth for Q2'20 = 70k
Timeframe	%of total quarterly increase	#of users at EOM(k) Averagecost/member/month	Mon.Rev.
April 30,2020	          33%	                         351 	             $77	        $27.1M
May 31, 2020	          33%	                         375 	             $77	        $28.8M              
June 30, 2020	          33%	                         398 	             $77	        $30.6M
Totals		          n/a                            n/a                 n/a                $86.5M

Given LVGO has a history of very conservative forecasts suggests there is significant sand in their (and this) assessment. Recall again that LVGO Member adds tend to favor the first quarter of the year. In looking back at previous quarters, LVGO had an average Q1 to Q2 growth of 17%, so the 21% that is assumed in the analysts forecast is modestly more than an average Q1 to Q2 growth but Glenn Tullman, Founder and CEO of Livongo, was on Jim Cramer’s Mad Money recently (7/14/20), and hinted there would be a very large increase in customer in Q2’20. Sometimes a CEO will specifically mention a growing customer base when they are very pleased (even surprised) with that number. He mentioned that LVGO has a large client base (and growing significantly and clients with a large number of members, including but not limited to: Amazon, Kaiser Permanente, Amazon, Target, and the US Federal Government which has over 7M Federal employees (including GEHA)).

Aside: Not all the companies’ employees (Members) have diabetes or hypertension, and not all sign up immediately, rather they sign up over time. But, for example, even if 1% of the Fed employees signed up, it would equal 70k.

Given the fact that the CEO specifically called out the Customer and Member growth suggests they may see a number much larger than their typical Q2 growth number. Below is a table that models some estimates for sequential Member growth and corresponding revenue forecasts.


Q2 member sequ.growth	Incr. to prev. Q’s Member count  Member count @ end of Q2(k) Q2 Rev($M)	% beat
       21%	                    70k	                         398	                $87M	  0%
       25%	                    83k	                         411	                $89M	  1%
       30%	                   100k	                         428	                $91M	  5%
       40%	                   130k	                         455	                $96M	 10%

In summary, LVGO has a history of beating their own forecasts; last quarter’s revenue was a ~10% beat. I wouldn’t be surprised if they beat their revised Q2’20 revenue number materially.

64 Likes

Excellent analysis Gary - thanks.

The one piece of it I would challenge is their history of beating their own forecasts. Yes - this true when talking about forecasts made the prior quarter. In this case the $86M-$87M revised forecast was made on July 7, after the quarter ended. On that date they knew exactly (or almost exactly) what their revenue was. It’s not like they were dealing with an estimate made 3 months prior. That estimate was $73M to $75M and the revised announcement on July 7 suggests they did beat that number by more than 10%, consistent with prior quarters.

Why would they announce a revised estimate after the numbers are already in to something that is materially low? On July 7 it was no longer a guess. Ok - there may be reasons for being conservative but I am not anticipating a large beat on the revised post end of quarter estimate. Surely they will not be below that estimate.

What is of keen interest is their outlook for next quarter. Would be interesting to speculate sequential member count and per member revenue growth next quarter and what that means to the revenue outlook. That would seem to be the information that will drive the stock post earnings call. Using the 398K customers and $87M as the starting point for next quarter (Q3)and continuing with your table:

Q3 member sequ.growth Incr. to prev. Q’s Member count Member count @ end of Q3(k) Q3 Rev($M)
10% 40k 438 $101M
20% 80k 478 $110M
30% 120k 518 $120M
40% 160k 558 $129M

My table is simplistic in that it assumes the new members were there the entire quarter at $231 per member. Sorry in advance if the formatting is bad.

At the high end they are on track for a half billion dollar run rate. Will their focus on new chronic conditions drive them well beyond this ???

ClydeJ

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Excellent points Clyde, and I agree. We have to think that their revised revenue guidance will be closer to the actual. I was intrigued by the CEO’s statements about Member growth and wanted to assess some “what ifs”, just to see what the revenue might look like.

One thing I left out of my analysis was LVGO’s addressable market. If we just focus on people with diabetes, LVGO states there are 31.4M people that have diabetes and have medial coverage (having coverage is an important distinction). The 31.4M is comprised of 13.7M people covered by their employer, 12.7M people covered by Medicare, and 5.0M people covered by Medicaid.

Aside: LVGO’s hypertension business SAM is about $19B = 40M members with hypertension and coverage $39/month x 12 months, but we won’t include this part in this discussion.

So if we just focus on the number of people with diabetes and that have coverage, 31.4M, and multiply by $75/month/Member and multiply by 12 months, we get an annual revenue SAM (Serviceable addressable Market) = $28B. Making some growth predictions, let’s assume LVGO’s current annual revenue run rate is in the neighborhood of $400M/year ($70M in Q1, $90M in Q2, $110, $130M = ~$400M). This represents just a 1% market penetration into their SAM (let alone the TAM!), and that just includes the diabetes side of the business. Those are great numbers!
Thanks for the feedback!
Gary

15 Likes

Nice Thread!!

“…I found a study that was published in May 2019 that indicated the average price of the Livongo for Diabetes program was $68 per member per month… This suggests the $75/Member/month is reasonable, based on the latest DBNER of 110% and that fact that the study was done about 1 year ago. …”
Can you help me understand this part? If users are worth a monthly subscription price, why would the per-customer amount go up without a price-hike? It isn’t usage-based except monthly subscriptions, right?

"…One thing I left out of my analysis was LVGO’s addressable market. If we just focus on people with diabetes, LVGO states there are 31.4M people that have diabetes and have medial coverage (having coverage is an important distinction). The 31.4M is comprised of 13.7M people covered by their employer, 12.7M people covered by Medicare, and 5.0M people covered by Medicaid.

This represents just a 1% market penetration into their SAM…"

I think pragmatism dictates that we reduce this drastically. Not everyone with diabetes needs this product and not every one needs it will use it (or any product). Then there will be some churn in there. Granted the SAM WILL increase over time, sadly, so some of this is countered, BUT… I would be more than happy to cut that by 50%, or more, to create conservative expectations for the actual addressable audience for the product. Say this just means they have penetrated the market by 2% instead. They can never hit 100%. What is a reasonable amount they can actually address while hyper-growing? 10%? Still room, and plenty of time before it matters, but I think more reasonable.

  • Rafe
    Long LVGO @ 9.7% of port, currently.
1 Like