My Take on Teladoc / Livongo

While at first glance I, as a Livongo shareholder like many on this board, was disappointed in the Livongo Teladoc merger, I believe that in the long-term this was inevitable and ultimately will create a more successful company and lead to better outcomes for patients.

The system needs one digital platform to own the entire end-to-end patient journey, thus reducing costs by eliminating redundancies, enabling data to be shared more freely to deliver more contextual care, and creating a more intuitive, consumer-focused experience. Teladoc’s merger with Livongo allows them to do exactly that.

This is also the perfect time to do so given the telemedicine landscape has been totally changed due to regulatory and societal shifts as a result of COVID-19. Now, instead of having to travel to an actual site of care to receive telehealth services, the patient can do it right in their homes. Previously, providers also needed to obtain some form of licensure in each state that they wish to practice in and that has been relaxed as well. New patients can now also access telehealth for a wider range of services without having to have a history with a specific provider.

All this leads Teladoc to have a good chance of sustaining strong growth well past their historical rates in my opinion, but more importantly, with the Livongo merger, they offer a better, truly patient-centric solution versus the traditional healthcare system, which will struggle to compete given how disjointed the value chain is. I recently read this excellent article by a16z that encapsulates my thought process exactly: https://a16z.com/2020/08/07/healthcare-technology-great-unlo…

I shared my thoughts on the Teladoc and Livongo merger on my blog: https://richardchu97.substack.com/p/teladoc-and-livongo-a-me…

37 Likes

I haven’t seen anyone explain how these pieces fit together or why Livongo leadership isn’t being kept in place. To me this still just looks like competition being taken out. A grab at proprietary data and relationships that both would be very expensive and time consuming to create from scratch or displace. In other words it looks like Livongo was purchased for its parts, not as a business whole.

The original post here seems like surface-level reasoning to me; almost spin. I agree allowing a remote doctor to also monitor a patient remotely is obviously awesome. That isn’t Livongo’s value though. That part really could be created in-house from scratch without spending billions.

The point about not being international is because they work with healthcare networks (public and corporate sponsored). They are B2B. The users are in-network and the customer owns the network. They don’t have a model where they work directly with consumers. I have to assume it would take significant effort to enter a new country with their regulatory and structural nuances and perhaps the business model wouldn’t work at all. I always assumed Livongo’s TAM was limited because of this.

It will be interesting to see how this plays out. If Teledoc does something cool with what they bought, I could see being interested in investing in the future. I just want some clarity, track record, proof, etc.

5 Likes

RE: LVGO management not being kept in place

Its easier said than done. Look at it from LVGO’s management perspective. Usually their stock fully vests at the closing of the transaction. And if they get let go, which they commonly do, they get double or triple their annual compensation in severance. That probably amounts to millions at anyone at the VP level or higher. For the C-level people it would be in the tens of millions.

Thats just the money side of things. If you stay, you have the pleasure of getting to report to people who you probably don’t consider your equal, who know a lot less about your business than you do.

So these kind of things typically create a lot of executive turnover in the acquired company. Its possible to avoid it (give big time options in the new company to the acquired management team AND put a few of the acquired company executives into key positions for the combined co, really act like it is a merger of equals versus an acquisition, etc), but it just isn’t all that common nor easy.

The natural way of things is for LVGO’s management team to view this as “an exit”, and indeed it is for them. They did a great job. I salute them all and I hope they enjoy their spoils…

Thanks,
Rob

6 Likes

RafesUserName,

In the article, I explain that Livongo’s value doesn’t come from their technology: “Livongo’s primary moat was its distribution channels and partnerships. It wasn’t the technology or product, which is not too complex and easily replicable by competitors like Omada. But Livongo was first-to-scale, which compounded their moat by allowing them to have demonstrated ROI and improved patient outcomes earlier and sign up blue-chip clients, thus giving them lots of data to iterate the AI+AI platform. That moat was vulnerable if someone like Teladoc with an existing large distribution network came in.” This merger compounds that moat, Livongo already made clear their intention to build out a DTC channel through their Higi partnership and also to expand internationally eventually. It also gives them the opportunity to expand into adjacent chronic conditions faster, after the merger they said they were open to more acquisitions if there are new “capabilities that we want to add to our platform that are time-sensitive.”

Teladoc will now serve as a massive funnel for Livongo’s programs, it is much easier for Teladoc to acquire new customers than Livongo. This, in turn, gives Livongo more data points than ever to improve their AI+AI engine and deliver more personalized recommendations. Considering that they were both going to expand into each other’s markets eventually, I think that this merger is the best outcome.

The combined company’s board of directors will include eight members of the Teladoc board and five from Livongo’s so I wouldn’t say that they are being removed.

This Forbes interview also gives a good example of how their solutions will fit together which supports the examples I gave in my article: “There are a number of examples of how Teladoc’s one-to-one solution can provide benefit to Livongo’s one-to-many solution. If there is a Livongo patient who has not yet gotten their Hemoglobin A1c down to a level that meets a patient’s goal, a patient could set up a Teladoc appointment with an endocrinologist that day to see how the patient’s medication regimen can be improved. When you put Livongo and Teladoc together, there are some powerful things you can do more quickly, which before we might have done through a partnership more slowly”

https://www.forbes.com/sites/chasefeiger/2020/08/05/say-hell…

26 Likes

I think you are right on that Livingo’s moat is not the technology. I sold my entire LVGO position in the 130’s following the merger announcement(after enjoying a 400% gain) as I figured this could drop even lower, but I am watching this closely and fully intend on buying back into a decent sized position. Has the thesis for either company really changed due to the merger? I don’t really think so. Both companies reported great numbers and are growing at crazy rates.

LVGO has 410,000 Livongo for Diabetes members and was focused in the US.

TDOC has 70M members in the US and a worldwide network of 55,000 clinicians in 175 countries. Think about those numbers.

With cross-selling how fast do you think the LVGO diabetes member numbers will grow in the next year not to mention growth of their hypertension, behavioral health, and weight management products.

What if on average one new member were added per clinician per month. That alone would add another 660,000 members more than doubling LVGO diabetes members. What if on average they added 1 per week - that comes out to 2,860,000 new members.

If you liked LVGO member growth numbers prior to the merger you are going to love them after the merger.

Same for cross selling of large clients where there is only a 25% overlap between their businesses. Think of the acceleration just added to LVGO client acquisition.

I know many on the board are concerned that the merger will slow down LVGO hyper growth but I see the opposite effect. The only problem is that it is now done as part of a larger company and there is risk in the culture match between the companies and with the CEO.

Data acquisition for the LVGO AI platform will also be accelerated. Data acquisition is costly and time consuming but is necessary to further improve their care algorithms. Presumably the merger will make it easier for the massive TDOC client base to provide new data points for the LVGO AI engine. Similar to the Crowdstrike model, data growth will be massive and this further improves care ultimately benefiting all members (and shareholders).

ClydeJ - long LVGO

34 Likes

ClydeJ… I agree… there is a reason why Jason Gorevic went after LVGO… he sees ability to turbo-charge TDOC shares with LVGO in TDOC umbrella…

people miss basics in this merger… if LVGO was being sold to CVS Pharmacy or UnitedHealth, I would agree that the big company culture would kill the LVGO momentum… here TDOC itself is on hyper-growth with such a massive scale under its belt, getting LVGO services under TDOC umbrella looks like a real winner to me…

this is not a time to sell either of this stocks, it is a time to buy into this emerging digital healthcare giant…

14 Likes

I think this cross-selling opportunity is a bit overblown. In my experience, cross selling works when you have two products that serve the same customer that can be sold by the same sales channel. LVGO’s customers are businesses and insurance companies. TDOC’s customers are end consumers.

I’m not saying that there won’t be cross selling over time. I just think that is a long term play as LVGO develops a model that works for end-user customers.

I’ve seen many a deals pitched on revenue synergy involving cross selling. Its just not clear to me that exists here at present, but I could be wrong.

Rob

11 Likes

I think this cross-selling opportunity is a bit overblown…LVGO’s customers are businesses and insurance companies. TDOC’s customers are end consumers.

Hi Rob - I agree that the claim of synergies can be and often is overblown in these types of deals.

I do want to point out that TDOC also works with employers, health plans, insurance companies, and hospitals.

  • they work with 50 US health plans to accelerate member adoption
  • more than 70 global insurance and financial services firms partner with Teladoc Health to extend high-quality virtual care services to members

For 3Q TDOC estimates total U.S. paid membership to be approximately 50 million to 51 million members and visit-fee-only access to be available to approximately 21 to 22 million individuals, including 2 to 3 million members on a temporary basis.

I don’t think is all from directly selling to the consumer - this is from selling to/thru insurance companies, employers, health plans, and hospitals which seems similar to how LVGO markets their products.

On the other side, LVGO was just starting to focus directly on the consumer.

Perhaps someone on the board understands this better and can shed further light on how synergistic the cross-selling is.

ClydeJ

6 Likes

LVGO’s customers are businesses and insurance companies. TDOC’s customers are end consumers.

Hi Rob,

fair to skeptical on cross-selling… however, I dont believe you are looking at full picture… TDOC has a large membership and access subscription which comes from insurance and employers… huge chunk of 51M comes from this cohort…
what is quite possible and certainly seems to be the case tome is that there is less overlap between the two companies customer base… i.e. LVGO clients aren’t necessarily TDOC clients…

so there is cross-selling opportunity at client level (insurance / employers) and at member level…

I think TDOC has done amazingly well integrating and leveraging multiple acquisitions so far and I see them putting LVGO on super steroid…

thats just my opinion (and my money is on it)

6 Likes

The system needs one digital platform to own the entire end-to-end patient journey, thus reducing costs by eliminating redundancies, enabling data to be shared more freely to deliver more contextual care, and creating a more intuitive, consumer-focused experience. Teladoc’s merger with Livongo allows them to do exactly that.

This is also the perfect time to do so given the telemedicine landscape has been totally changed due to regulatory and societal shifts as a result of COVID-19. Now, instead of having to travel to an actual site of care to receive telehealth services, the patient can do it right in their homes. Previously, providers also needed to obtain some form of licensure in each state that they wish to practice in and that has been relaxed as well. New patients can now also access telehealth for a wider range of services without having to have a history with a specific provider.

All this leads Teladoc to have a good chance of sustaining strong growth well past their historical rates in my opinion, but more importantly, with the Livongo merger, they offer a better, truly patient-centric solution versus the traditional healthcare system, which will struggle to compete given how disjointed the value chain is. I recently read this excellent article by a16z that encapsulates my thought process exactly: https://a16z.com/2020/08/07/healthcare-technology-great-unlo……

I appreciate your overall perspective. After taking some time to digest this news and obtain different expert opinions, I arrive at the same conclusion. While LVGO seemed to have greater hyper growth possibilities as a standalone company, I now see the significant positives in this merger. All of your points have merit. This is a transformative time in health care and Teladoc/Livongo is at the forefront of this transformation. Both companies have been in hypergrowth mode with LVGO at a triple digit growth level and TDOC at greater than 80% annual growth. The combined company will have synergies that could supercharge growth in some ways and also better ensure more sustainable growth.

The combined company meets my main criteria - top dog, upper echelon top line company growth, a rapidly growing niche and a large/massive TAM.

I remain long TDOC/LVGO.

Dave

21 Likes

I’ve mentioned before that LVGO was my largest holding, by 30% more than #2 and #3 (CRWD and ZM). Not that large compared to many here, as it’s “only” over 15% with the next ones being 10% holdings. After the surprise announcement last week, I was considering reducing my LVGO down to around the 10% range (never considered selling out), but after some reflection over the weekend regarding the merger/acquisition with TDOC, I’ve decided not to sell a single share (may even add!). LVGO was, and the new company will also be, the right company, with the right product, in the right place, at the right time. Don’t know that they’ll be an ultimate winner, but they’re currently doing better than anyone else, at attempting to transform an absolutely massive industry that is ripe for disruption!

Some napkin math…

The most recent YOY growth and current P/S of the 2 companies, and then what the combined company would be based on today’s numbers, followed by my estimate of the combined company’s numbers in a year (with no market cap increase):


                      Growth    P/S

Current        LVGO     119%     51
QTR #s         TDOC      85%     24

Combined       TD/LV     99%     31

**My next yr     TD/LV     60%     21**
**estimate**

For the combined company growth (per the release, combined company would be 42% LVGO, 58% TDOC), so I took 42% growing at 119% (remember, there was a one-time $2.5M benefit that reduced their announced 125% growth to 119%) and 58% growing at 85%, gives a combined company growing at 99% currently.

For the P/S, I added their current market caps to get $30.4B, divided by their combined TTM rev to get $974M, gives a combined P/S of 31. Taking a page out of the way Bert looks at things, a growth cohort of 100% should have a higher P/S than 31 (even with a slightly lower gross margin than our software companies). Definitely room to expand it’s valuation once the market gets over it’s distaste of this deal.

For my next year estimate of the combined company, I assumed the LVGO rev would be up 80% a year from now (more on that later), and the TDOC rev would be up 40% (giving a combined growth rate of 60%). That nets total rev of $1.47B, on current combined market cap of $30.4B is a forward P/S of 21. Based on today’s P/S ratios of companies growing 60%, this should be around 35-40, not 20, so I can see a near double here, just from multiple expansion (yes, I’ve left out dilution, and countless other things, but after all, this is just ballpark napkin math).

Why do I think LVGO could almost double it’s rev in a year? For those that haven’t seen them, here are the numbers for LVGO (bold are my estimates):


	Revs	Seq Rev	  YOY Rev       TTM Rev    TTM YOY
                 Growth    Growth                  Rev Growth
1Q18	$12				
2Q18	$16	28.2%			
3Q18	$19	17.5%			
4Q18	$21	12.9%	        	 $68	
1Q19	$32	51.2%	  157.3%	 $88	
2Q19	$41	27.5%	  155.8%	$113	
3Q19	$47	14.1%	  148.4%	$141	
4Q19	$50	 7.9%	  137.5%	$170        148.4%
1Q20	$69	37.0%	  115.2%	$207        135.0%
2Q20	$90	30.4%	  120.1%	$256        126.7%
**3Q20	$99	10.0%	  112.2%	$308        119.0%**
**4Q20   $104	 5.1%	  106.5%	$362        113.0%**

Triple digit growth every quarter for the past 2 years. I got my estimates for Q3 and Q4 by reducing last years sequential increase QoQ from 14% to 10% for Q3 from Q2, and from 8% to 5% for Q4 from Q3. If they hit those estimates they will still show triple digit growth on their own for the rest of this year. I’m trying to be conservative here, as I actually think they could increase those QoQ numbers, as they did during Q2, from 27% to 30% with the Covid tailwinds they’re seeing (Covid effects are going to be here for awhile), and thus end up around 120% growth for both of the remaining quarters of this year.

And don’t forget their non-GAAP EPS improvement, here are the last 2 years:


3Q18	   -0.55
4Q18	   -0.58
1Q19	   -0.27
2Q19	   -0.09
3Q19	   -0.05
4Q19	    0.02
1Q20	    0.03
2Q20	    0.11

Short term, I would have preferred LVGO stayed independent, I think their stock price would have continued to increase with the growth they’ve been showing and will continue to show. But as I’ve thought about it, long term, I think this is going to be a very good thing for them because of the available cross selling opportunities (as others have pointed out), and also, as it opens up the international markets for them, which will be huge, long term (look what that did for Netflix).

I don’t care about the LVGO stock price being tied to the TDOC price for the next 2 quarters (or however long until the deal is completed), because if the companies keep operating at the high level they have been, then the TDOC price will be going up, too.

44 Likes

I too, dipped my toes into TDOC today for the first time. I had previously had a very small LVGO stake and sold the last of it two days before the merger was announced.

I always liked the idea of TDOC, and despite current and future competition, I feel like they are ahead of what should continue to be a long term trend of virtual healthcare services, that has been accelerated by the pandemic and lockdowns this year.

To me, simply the idea that TDOC has gone from $250/share down to $175/share in a few days, after adding what we all believe to be a great company in LVGO, it just felt like a good entry point for a company that I want to be along for the ride on.

Yes, they may have challenges in combining the businesses, yes they diluted themselves quite a bit by the acquisition, but still, I like my chances buying and holding them for the next few years.

I also added to my GH this morning, given that the stock price didn’t move too much after getting Guardant360’s FDA approval at the end of last week. And I added just a little bit more DDOG.

To fund these, I sold a some of my MDB, TTD, and my first AMZN sale in a very long time, finally willing to pay some taxes on a portion of those gains to shift funds into the above.

-mekong

16 Likes

“RE: LVGO management not being kept in place”

My view on this is that these kinds of deals are often driven in large part by top leadership preferences and that is likely the case here.

Glen Tullman 60, a leader with capability to burn in context of the size and complexity of Livongo, meaning he could easily get his arms around a much larger company if he valued the executive role. But while Tullman is proud of what he has created at Livongo and very interested in the future potential of LVGO, his public statements of late indicate a desire on his part to move out of the executive role and focus more time on larger humanitarian matters.

Problem with that was LVGO size and complexity was on the cusp of growing beyond the point that CEO Burke can handle at this point. Then like a gift from heaven, up steps enormously capable TDOC CEO Jason Gorevic, who relishes the executive role and has the goods to run an S&P 100 level online health care behemoth and is very determined to do so.

Tullman remains on the BOD of TDOC to provide vision and weigh in on important strategic initiatives, right where he is needed.

Love this deal and for the first time ever, i added to my previously #1 position on the decline. Very high conviction on this marriage. A match made in heaven.

12 Likes