LVGO

[gmcnatt]

Hi all - I’ve seen LVGO mentioned a few times so wanted to see if there was any interest to discuss. The stock has done well recently so I keep coming back to it. It’s up 52% YTD and up 39% since 19 Feb (top of the market for S&P 500)

I started a small position in Feb, and it has grown to about a 5.7% position. A little bigger than I initially wanted but I let it run

From a high-level when I invest, I look for two things … the narrative and the numbers.

The narrative according to them is:

“Livongo empowers people with chronic conditions to live better and healthier lives, beginning with diabetes and now including hypertension, weight management, diabetes prevention, and behavioral health.”

The market seems to believes they are doing this, and that COVID19 is a catalyst and is good for them as the stock has risen during the pandemic scare.

I think what I’m most curious about is if anyone has thoughts or insights on their competitive advantage. Do they have one, or will competition quickly enter?

The numbers are also very good as they grew revenue 137% last quarter and are quickly moving to profitability. It’s currently about a 3.7 bil dollar market cap and looks like about a 20 p/sales.

I was going to post numbers, but stocknovice already did a much better job than I could in his last portfolio roundup (https://discussion.fool.com/stocknovice39s-march-portfolio-revie…) Thank you stocknovice and sorry for stealing your work. For what it is worth, I did double-check my numbers against these

If you look at the adj EBITDA, non-GAAP op income, and non-GAAP net income you can see there is a very large difference between Q4 2018 and Q4 2019, thus showing their quick move to profitability.

Revenue							% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	$4.94	$7.03	$8.72	$10.17	$30.85		2017	 	 	 	 	 
2018	$12.46	$15.98	$18.78	$21.21	$68.43		2018	152.4%	127.5%	115.5%	108.5%	121.8%
2019	$32.06	$40.89	$46.66	$50.36	$170.20		2019	157.3%	155.8%	148.4%	137.5%	148.7%
2020	$62.00	 	 	 	$290.00		2020	93.4%				70.4%
												
non-GAAP Op Expenses (GAAP before 1Q18)		% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	$8.40	$9.32	$10.65	$11.21	$39.58		2017	 	 	 	 	 
2018	$12.77	$16.71	$22.87	$25.07	$77.42		2018	52.0%	79.3%	114.6%	123.7%	95.6%
2019	$32.11	$37.22	$39.75	$39.31	$149.16		2019	151.5%	122.7%	73.8%	56.8%	92.7%
2020	 	 	 	 	 		2020					
												
non-GAAP Gross Margin (target 72%-74%)			Op Ex % Revenues				
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017					73.1%		2017	170.1%	132.6%	122.2%	110.2%	128.3%
2018	75.2%	71.1%	71.0%	68.1%	70.9%		2018	102.5%	104.6%	121.7%	118.2%	113.1%
2019	69.4%	69.4%	75.0%	79.2%	73.9%		2019	100.1%	91.0%	85.2%	78.1%	87.6%
2020							2020					
												
non-GAAP Gross Profit					% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	 	 	 	 	$22.55		2017	 	 	 	 	 
2018	$9.37	$11.36	$13.33	$14.44	$48.50		2018	 	 	 	 	115.1%
2019	$22.25	$28.36	$34.97	$39.89	$125.71		2019	137.6%	149.7%	162.4%	176.1%	159.2%
2020	 	 	 	 	 		2020					
												

These are also stocknovices comments:
Client and customer counts are growing steadily as well. Management noted on the call they’ve already launched 424 new clients in the first two months of 2020 versus 231 in all of 1Q19:

Clients							% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	 	 	 	218	 		2017	 	 	 	 	 
2018	278	319	349	413	 		2018	 	 	 	89.4%	 
2019	679	720	771	804	 		2019	144.2%	125.7%	120.9%	94.7%	 
2020	 	 	 	 	 		2020					 
												
Enrolled Diabetes Members					% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	 	 	 	53,858	 		2017	 	 	 	 	 
2018	68,536	80,368	95,308	113,854	 		2018	 	 	 	111.4%	 
2019	164,168	192,934	207,815	222,700	 		2019	139.5%	140.1%	118.0%	95.6%	 
2020	 	 	 	 	 		2020					 
												

These are also stocknovices comments:
Most notable to me – and what sealed the deal as far as initiating a position – is how quickly LVGO is moving toward profitability. Again, any 2020 numbers are top end guides:

Adjusted EBITDA						% Revenues				
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	 	 	 	 	-$14.10		2017	 	 	 	 	 
2018	-$3.20	-$5.08	-$9.20	-$10.17	-$27.65		2018	-25.7%	-31.8%	-49.0%	-48.0%	-40.4%
2019	-$9.16	-$8.10	-$3.91	$1.59	-$20.12		2019	-28.6%	-19.8%	-8.4%	3.2%	-11.8%
2020	-$4.50	 	 	 	-$20.00		2020	-7.1%				-6.9%
												
non-GAAP Operating Income (Target 20%+)			% Revenues				
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	 	 	 	 	 		2017	 	 	 	 	 
2018	-$3.40	-$5.35	-$9.54	-$10.63	-$28.92		2018	-27.3%	-33.5%	-50.8%	-50.1%	-42.3%
2019	-$9.86	-$8.86	-$4.77	$0.57	-$23.45		2019	-30.7%	-21.7%	-10.2%	1.1%	-13.8%
2020	 	 	 	 	 		2020					
												
non-GAAP Net Income					% Revenues				
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	 	 	 	 	 		2017	 	 	 	 	 
2018	-$3.27	-$5.03	-$9.04	-$9.96	-$27.30		2018	-26.2%	-31.5%	-48.1%	-47.0%	-39.9%
2019	-$9.40	-$8.68	-$3.37	$2.25	-$19.73		2019	-29.3%	-21.2%	-7.2%	4.5%	-11.6%
2020	 	 	 	 	 		2020					

Me again:
One important caveat from the numbers I think is that they are not generating positive cash flow. Their CFFO fell from (33,040) in Q4 2018 to (59,396) in Q4 2019. They are also not FCF positive.

But piggy-backing off those numbers here are some comments that I thought were important from their last earnings call.

• From CEO opening remarks. stocknovice also mentions this in his writeup

We also continue to experience robust new client signings. We had a record Q4 EVA of $76.7 million and finished the year with 804 clients. Perhaps the most important statistic of all, we have experienced a record number of client launches so far in the first quarter with 424 already launched compared to 231 launches in all of Q1 last year. This is a significant statistic for us because early launches in a monthly recurring revenue business gives us more months of revenue in the year.

• Another note from the CEO

I want to stress that even after adjusting for the accounting related items outlined earlier, we have been able to drive meaningful margin improvements throughout this year as we have scaled the business. We expect to drive further margin improvements in 2020, along with rapid revenue growth and continue to invest in the business, as Zane noted earlier, in light of the massive market opportunity in front of us.

• And then one other comment

The great thing is, is that revenue is going to accelerate much faster than those expenses. And so we will see operating margin improvement throughout the year and that will continue in 2021. Profitability is still what we have said is adjusted EBITDA profitable on a sustained basis for 2021.

Me again:
If anyone has any thoughts, they are greatly appreciated. It seems the narrative and the numbers are both good but I would love for anyone to knock holes in it or correct anything above

Just for reference here is my port:

AYX  13%
CRWD 12%
DDOG 12%
ROKU 8%
ZM   7% 
**LVGO 6%** 
STNE 5.5%
OKTA 5.5%
FSLY 5%
SQ   3.5%
MELI 2.5%
WORK 2.5%
TTD  2%

CASH 15%

Best,

[twelge]

I just bought a small position of LVGO after missing out on a 15 point gain while I researched it. I like that it has a high client retention rate. Diabetes is growing in the US population and this seems like a great product to help patients manage their disease.

[mvr3691]

Hi gmcnatt,

Livongo has also caught my eye recently, for the same reasons as you. Their numbers are very attractive, and they tick all the right boxes for a “Saul stock”:
-Revenue is growing around 100% YoY
-Gross margins holding steady at mid-70%
-Rapidly heading towards profitability (operating income and adjusted EPS were positive in Q4 2019)
-Regularly adding large clients with thousands of members such as labor unions, large corporations, and local governments.
-Retention rates look good - they mentioned in the last earnings call that the majority of their churn is from employees leaving their employer (members dropping out of client coverage)
I took a starter position in Livongo at the beginning of April (currently 8% of my portfolio and 1 of 6 stocks I hold).

I wish I had more knowledge of the CGM market, other competitors in the segment, competitive moat etc.
For now, I’m closely tracking Livongo’s financials. As long as they keep up this growth, I’ll continue to hold a small position.

Thanks,
Matt

[Fafar]

Hi Matt,

In the cgm market, the two biggies are Dexcom (DXCM) with it’s most current G6 model and Abbott’s (ABT) Freestyle Libre. There’s also Medtronic’s (MDT) Guardian cgm which I’m not as familiar with. The G6’s claim to fame is “no fingersticks” and user-set alarms, which is the most valuable thing about it from my user perspective. I know the Libre is smaller and cheaper, as of now outsells the G6 and ABT is planning to come out with alarms in the near future. DXCM is planning a new G7 release in early 2021 (pre-covid) that is about Libre’s size, still having alarms.

LVGO has partnerships with both, so they’re receiving a ton of data from their user members on which to build. The only other pretty similar coaching program I’ve seen people on my support board mention is Verity’s Onduo. Sanofi pulled out of their investment in Onduo in 2019 when they decide to refocus their business but I haven’t kept up with them.

https://onduo.com/how-it-works/#ive-tried-many-different-pro…

You might try searching for Diabetes Coaching. There are a ton of phone apps but I don’t know to what degree they have personalized/human coaching.

Fafar

[Fafar]

Sorry, I made a typo. Verily’s Onduo, not Verity.

[Rubenslash]

I am also long LVGO with a 5% position. I keep charts for all my companies including LVGO and they give a very quick and visual overview on some key metrics, which I would like to share: https://imgur.com/a/fwdxZBy

What stands out is the consistently strong triple digit revenue growth and rapidly expanding margins towards profitability. I am considering to increase my holding but probably not right now after a 100% increase in just a couple of weeks.

Concerning the moat, I think there are at least some switching costs as the product offers tangible cost savings to its customers and they probably wouldn’t bother switching unless a competitor offers a considerably better product, which based on my research does not seem to be the case today. Also reviews from the users seem to be very positive, they also have access to doctors via the app which could be a tailwind in the current environment.

[gmcnatt]

thanks - I’m wary of “network effects” or “switching costs” with LVGO because it seems like what they do is a new and untested service. How effective is it I wonder?

LVGO calls their software solution AI+AI. I’m not savvy enough to know with certainty if LVGO is creating IP that is difficult to mimic, and is also effective. I haven’t used the product, but what it does is use “nudges” to alert or remind people to take medicine, control diet, etc.

There is an overview of the software on this page: https://www.livongo.com/applied-health-signals/

But here is the summary

At the heart of Livongo’s Applied Health Signal solution is a core set of technologies and capabilities called AI+AI: Aggregate, Interpret, Apply and Iterate. These are the four pillars of the Applied Health Signals engine. (Only companies who deliver excellence on all 4 pillars are truly AHS companies.)

Today Livongo joins dozens of data sets together and combines them with the signals from our own Livongo devices, coaches, and web assets, to extract the drivers of behavior change. We then deliver actionable, personalized and timely recommendations through a broad set of applications to our members. All this is done in AI+AI.

Where I do see an opportunity for leverage in the business is that their products are paid for not by the users but by 3rd parties … either the user’s employer or by medicare. That could indeed create a switching cost.

Like most others, a 2-3 bil market cap company with 7-10 p/sales valuation growing revenue at triple digits and a NER of 115-120 caught my eye. I’m now just looking to see if it can sustain.

[nilvest]

I am quite bullish on LVGO and its large holding for me.

Moat here is not about technology or network effect. It simply about putting the pieces together in an effective manner be successful with it. If you look deeper, what LVGO has to do to make money, you see this is not easy to replicate.

First - LVGO has put in lot of work with employers and insurers to be willing to pay for this on monthly basis on behalf of their employees / members. This is probably the hardest part to implement, even for an existing health insurance company or healthcare company.

Second - they have built an army of “experts” that are not doctors - mostly nurses and other such health care certified people, train them to handle different scenarios they need to handle with members and get them to offer timely advice to members using toolset that LVGO offers. This may be the second in toughest thing to do.

Third - they offer a combination of services and devices for members to manage their diabetes among challenges of daily life. There are two anchors to this

• first their glucose meter which is connected to their AI engine (or they will connect with Dexcom CGM if patient is using one) and triggers alert if member / patient needs attention from “expert”… setting up this close loop takes investment and time.
• member / patient interaction with expert - both sides of this interaction takes time to hone in and mature such that member / patient gets help / value out of it AND it is not big burden on the expert (for the money he / she gets paid for it)

Then there is business model / attitude - LVGO offers free, unlimited number of test strips by mail… easy to order from your phone… very effortless / painless compared to dealing with doctor / prescription / insurance process that’s painful to deal with.

And in order to get here, LVGO has been investing into those devices… they hand them out to each member much before they get paid… i.e. investing in working capital that looks like negative cashflows for long time…

So all in all - it is hard to successfully build a complimentary, tele-health platform that is of value to large enough market… even someone like TDOC may not try to create LVGO duplicate because its hard to build and tangential to what they do. So I would not really worry about someone trying to replicate it…

What I am looking for is LVGO to deliver +ve FCF for a few quarters in a row… I suspect that may take a bit of time because of investment in growing number of members on their platform.

BTW - if you like LVGO, There is a little brother to LVGO called Catasys (CATS)… it is small cap… it has different focus… has debt on the balance sheet, CEO / founder with interesting background but not comparable to LVGO founder / chairman… do your DD but its interesting company and I have a small position in CATS… and current market is very positive for CATS.

[stocknovice]

gmcnatt -

No problem at all. I’m glad you found the information useful and am doubly glad you started this thread. I believe Livongo deserves every bit of the attention. I tend to keep my notes as I go and do have quite a bit down for LVGO. Here’s what I’ve drafted for April thus far:

LVGO – Livongo has had an impressive month. The stock is up 31%, and the company has seen three significant pieces of news hit the wires. The first was Kaiser Permanente offering LVGO’s myStrength app free of charge to all its members (https://ir.livongo.com/news-releases/news-release-details/me…). Livongo’s behavioral health offering, myStrength is designed to support mental and emotional health in patients with chronic conditions. Kaiser is a major player in health care, so I view this partnership as yet another nice win for Livongo.

The second was an article outlining FDA emergency use approval for Livongo’s remote blood glucose monitors in hospitals (https://www.forbes.com/sites/leahrosenbaum/2020/04/15/exclus…). This action allows healthcare workers who are already rationing personal protection equipment to monitor blood glucose levels of infected COVID-19 patients without being physically present. While the move was clearly necessitated by the virus, it’s not hard to see this use case and other forms of remote monitoring being more prevalent even after the pandemic passes. That bodes well for companies like LVGO.

Finally, Livongo put out its own release preannouncing first quarter revenue above its initial guide (https://ir.livongo.com/news-releases/news-release-details/li…). LVGO now expects $65.5-$66.5M versus $60-$62M. The high end of the new guide would put revenue growth at 107.4% YoY. Management also referenced a record 620 client launches in the quarter and member enrollment that is running ahead of expectations. For context, Livongo launched just 231 clients in 1Q19 which means 168% YoY growth in that metric alone. That’s incredible in the current environment, and I added a few more shares immediately on the news. Official earnings will be released May 6. Needless to say, I’m looking forward to it.

[clydejaz]

I don’t follow or invest in LVGO yet but I follow this board and while reading Abbott Labs earnings call transcript I came across the following that may be of interest to LVGO investors.

From Robert B. Ford, Abbott Laboratories - CEO, President, COO & Director

In Diabetes Care, Freestyle Libre continued to add new users at a strong and steady rate throughout the quarter as reflected by sales growth of more than 60%. We also continue to expand reimbursement coverage for Libre around the world, including recently becoming the only continuous glucose monitoring system to obtain reimbursement in Japan for people with Type 2 diabetes. And just last week, we announced the availability of Freestyle Libre for hospitalized patients with COVID-19. The Libre system allows frontline health care workers and hospitals to remotely monitor glucose levels in patients with diabetes in order to minimize exposure to COVID-19 and preserve the use of personal protective equipment. In partnership with the American Diabetes Association, Abbott has donated 25,000 Freestyle Libre sensors to U.S. hospitals and medical centers in outbreak hotspots to help accelerate access to the technology.

There is other mention of the Libre and new Libre2 product in the earnings transcript if you want to read further:
https://finance.yahoo.com/news/edited-transcript-abt-earning…

[gmcnatt]

thanks for all the notes, fantastic stuff

I’m looking forward to continue to follow the company. The top line revenue is eye-catching but the margin improvement in operations is what really got me. And as nilvest and others have explained it seems they are building something that is difficult to replicate

[Fafar]

Hi Clyde,

Yes, the Libre and Dexcom’s G6, and most likely other cgms, have that emergency approval. They provide the readings data for LVGO’s bluetooth app. LVGO has their own generic fingerprick tester/strips but not their own cgm, so they get that through partnerships.

[nilvest]

Excellent notes Stocknovice. Thanks for sharing. Also thanks for gmcnatt for this thread.

clydejaz - Freestyle Libre is CGM - continuous glucose monitor - it is one of the component that LVGO would use in a holistic service it offers. It does not compete with LVGO directly… See fafar’s notes above on this topic.

If one tries to look at more complete picture - diabetes management is very large market (millions of patients… you can find numbers in one of these companies investor presentations) and managing diabetes is really hard for each and every person, specially for kids and elderly. You hear terms like Type 1 diabetes - that’s most severe form and requires very tight monitoring and control to avoid permanent damage or death. Type 2 diabetes needs active management but its not bad enough to be lethal and so less stringent management is ok. Type 2 diabetes is much larger patient pool vs type 1.

Here are few different ways and tools for people to manage diabetes.

Monitoring blood glucose

• Your doctor can give you self monitoring kit… has blood glucose meter… you can prick yourself and test using that meter and test strip yourself.
  In an unconnected device, one has to record / log all those measures and then send it to doctors. Modern devices with apps on your phone taking the drudgery of logging the results out but you still need to go to your doctor and get replacement of your test strips… typically, insurance provide that per-determined quantity per month.

• LVGO service offers you that kit with unlimited supply of test strips delivered to your doorstep, order directly from your phone. Also LVGO frees up doctors / nurse time in the health care system for routine task of ordering test strips in case patient is managing diabetes well.

Monitoring with CGM
CGM - Continuous glucose monitoring system - These are Dexcom CGM, Abott Libre… tehy are small, cell phone size devices worn on body all the time…
MDT has a product as well - they need to be paid by insurance… cost to insurance is high and therefore, they have criteria on who they fund CGM for.

LVGO service will also work with these CGMs. They have announced partnership with multiple of these.

Addressing / getting insulin in the body
Some people can manage insulin level with food, pills.
For more severe cases, there are couple of more options

• MDI: Multiple injections in a day - patient inject insulin themselves…
  Issue here is monitoring and taking injection at the right time.

• Pumps: Just like CGM, pumps are small device you wear on the body. TNDM, PODD, MDT make those. Instead of administering injection yourself, you let pump do that for you. Problem is you need to let the pump know when and how much insulin to inject.

LVGO service will help you with this. Based on the monitored data and your pattern of insulin related to your day / activity / food etc, their system get smart enough to trigger an alert for you when and how much insulin to get into your system… whether its through MDI or pump…
Also - if you are planning to change your routine, e.g. going to a party or planning certain food or event, you can ask LVGO expert on when to take that injection to manage insulin level despite such change…
This is biggest value LVGO offer to patients.

Now what about combination or CGM and pump - you solve all the monitoring and administering problems. Yes, the challenge here is two devices to be worn all the time on the body and also high cost upfront for the insurance.
So this option is provided / used by a subset of target population, specially young adult with type 1 diabetes as they tend to not follow instruction… even for this group, getting used two devices on the body is hard.

Most adults with type 2 diabetes (largest section of target audience) prefer no device and use pills / diet / injection to manage themselves to allow them live life without hassle. This is the larger subset of population. This is the population that ends up mis-managing and therefore hurting their health which costs lot more to insurance. This is where LVGO makes a case of better monitoring and support system that improves patient’s life and reduces overall cost to insurance. This is why LVGO has large potential market and just starting out.

So all of these markets - CGM, pumps and monitoring service - are in high growth mode. DXCM, PODD and TNDM are also good investments.

However, LVGO at this point is best bet among all of these because

• it addresses largest section of the market, yes has covered only small share so far, so it has long runway to grow
• it has recurring revenue built in for longer time period
• low churn - end customer doesn’t pay for it directly, and insurance knows they are saving cost… so once a member is on-board, there is no apparent reason for anyone in the pay-chain to stop LVGO service… it goes on for years
• has much higher competitive moat because its service and customer sticks to it due to good experience… unlike better mouse-trap phenomena that plays out in devices business like CGM and pump
• and with all the excellent metrics posted above still has low / reasonable valuation relatively to such metrics.
• and with Covid-19 pandemic, value of LVGO services getting more and more apparent, so this will serve as growth catalyst for many years to come.

hope this helps
nilvest

[RafesUserName]

Hi,

Amazing information here. Thank you all!

The aspect I’m struggling to understand most is the cash flow. This is copied from Yahoo Finance:

Breakdown                      TTM  12/31/2019  12/31/2018  12/31/2017
-------------------------  -------  ----------  ----------  ----------
Total Revenue              170,198     170,198      68,431      30,850
Cost of Revenue   	    46,158      46,158      20,269       8,312
Gross Profit	           124,040     124,040      48,162      22,538
Operating Expenses				
Research Development	    49,842      49,842      24,861      12,028
Selling General & Admin    133,736     133,736      59,496      27,552
Total Operating Expenses   184,421     184,421      83,157      39,580
Operating Income or Loss   -60,381     -60,381     -34,995     -17,042

The expenses seem to increase at almost the same rate as revenue. I know this is a summary and there is a lot more to it, but are they really doubling their spend on R&D every year? Did they really more than double the cost of sales and admin? That seems hard to do successfully for any business. Wouldn’t that be either a lot of new people and office space (a very impressive HR and resource management feat) and/or consulting/outsourcing? At some point we want to see revenue get more efficient, not just grow, or they will keep burning to zero.

Also, where did their cash come from? I can’t seem to find reliable outstanding share counts. One site shows an increase from 88.93M to 94.45M in the 3rd quarter last year. Another site shows it go from 80 down to 55 and back up to 95, which seems implausible. With the burn rate doubling each year isn’t there a concern that dilution is needed?

…or is the expectation that expenses have reached a point where the growth will slow, allowing revenuse to outpace them and go black?

I’d love to hear thoughts on this. Everything else looks so good!

[ZoroSGInvesting]

I think the current cash is mainly from last year’s IPO, and at the moment LVGO get negative FCF mainly because the big inventory due to huge participant enroll surge, this shall be acceptable considering the nature of their business and sub-200M revenue size. As long as they are massive improving profitability (50% improvement in one year - this is even more impressive than CRWD!), I am not so worried but still need to keep an eye on FCF in the next couple of quarters.