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.