Why I took a position in Livingo this week

Why I took a position in Livingo

I became after Tchalla’s excellent introduction of the company to the board in September, and I looked through some back earnings reports, and may even have taken a tiny look-see position for a few days, but I was concerned about buying a medical device company, even if you were actually buying it for the SaaS component. So much depends on reimbursement and any changes to the medical system in the US could also change everything. So why did I take a position on Monday?

Well all it took was one thing: the March Quarter Earnings Report and Conference Call. You’ll find my very shortened and paraphrased version below, with my comments mixed in. That earnings report and conference call was all it took for me to take a position. Granted, it was just a 4.8% position at yesterday’s close, but that’s pretty big for a starter position for me.

Best,

Saul

May 2020 – March Quarter results

Livongo for Diabetes Members, over 328,000 enrolled, up 100%

We can provide assistance to some of the most vulnerable populations during the pandemic - people with chronic conditions - and our remote monitoring, digitally powered and real-time personal coaching capabilities, and access to telehealth services, are well suited maintain the health of our members. The pandemic has accelerated the need for our virtual care delivery model.

We are pleased to announce our relationship with the Government Employees Health Association (GEHA) , to provide the our Diabetes, Hypertension, and Diabetes Prevention solutions for federal employees, retirees, and their dependents that receive GEHA medical coverage.

Financial Highlights:

Revenue of $69 million, up 115%

Adj Gross Margin of 74.4% (up from 69.2%, but down from 79.2% sequentially). (We expect 2020 full year gross margins to be slightly higher than our 2019 gross margins).

Adj Op Margins of 4%, up from a LOSS of 29% a year ago.

Adj net income of $3.9 million, and EPS of 3 cents, up from a LOSS of 24 cents a year ago, but only up 1 cent sequentially.

Adj EBITDA of $3.8 million, up from a LOSS of $9.2 million. We expect 2021 profitability on an Adj EBITDA basis.

Livongo Clients: 1,252 Clients, up 44% sequentially [but the first quarter is when they start enrolling newly signed clients].

Cash - $368 million

Estimated Value of Agreements (EVA) : $89 million, up from $48 a year ago.

EVA is the estimated value of agreements signed in the quarter with new clients or expansions entered into with existing clients. About 35% of the first quarter’s EVA is expected to convert into revenue over the next 4 quarters.

To support the needs due to the increased stress on our members during this time of crisis, we quickly launched new COVID-19 modules within the Behavioral Health solution and made them available to all clients and members to support their needs. In the past month, we’ve seen increased utilization of all of our Livongo programs.

Caution and conservatism: We started strong in 2020, with results driven by a record number of client and program launches. We continue to closely monitor the situation due to the pandemic for impacts on our business, as many of our clients and members have undergone economic challenges. We are well positioned to deliver remote care at a time when our clients need to ensure the health of their team members.

Conference Call

This pandemic has accelerated a more extensive virtual care delivery model. Remote monitoring is here to stay, and we expect it to become the standard of care for the most vulnerable and expensive populations. Livongo improves care, saves money and provides a great member experience. What the pandemic has done is really accelerated that rate of change dramatically on the reimbursement side and the acceptance, and really the requirement, for both telehealth service and remote patient monitoring.

We have gotten approval for inpatient use of Livongo [so that staff can have fewer exposures to contagious patients, and less demand on their time in general.]

We have also gotten approval for Medicare.

Over 1/3 of our people, including all of our health coaches and diabetes educators, already worked remotely.

We were already ahead on limiting disruption of our supply chain, with multi-sourcing production for our connected devices.

We’re being asked to accelerate launches to help clients who want their most vulnerable populations protected sooner.

After a highly competitive process lasting most of 2019, Livongo was selected by the Govt Employee Health Assn (GEHA) , a not-for-profit provider of medical and dental plans for federal employees covering over 2 million employees, retirees and their families. GEHA was one of the largest contracts in our history and is our second major government contract signing in a year. This is a very big deal for us.

We are hearing just how important the cost savings associated with the use of Livongo are for our clients.

We partnered with with a leading Continuous Glucose Monitoring (CGM) maker, Dexcom, where at the request of our members, we can now stream data from their monitor to our data engine. We had previously partnered with Abbott.

We also partnered with Prognos Health to aggregate clinical laboratory data. Our members can now share their test results from leading laboratories with Livongo on an opt-in basis. Prognos has the largest source of clinical diagnostics information for over 50 conditions, with billions of medical records for hundreds of millions of people.

in April, after an extensive evaluation process, Kaiser Permanente, one of the largest integrated care delivery networks in the country, selected Livongo for Behavioral Health for their entire population, which we just launched. This is the largest behavioral health contract in our history, which will roll out over the next 5 years, of our contract with them. Only Livongo provides that kind of safe choice that you feel comfortable signing multiple years with.

The FDA, at the request of a number of health systems, granted an emergency period waiver to allow any inpatient facility in the country to use our diabetes meter, for people with COVID-19.

Going forward, we will include employers who enroll in our platform through a health plan as separate clients.

With regard to our guidance, at the midpoint, we’re growing 75% over 2019. And we feel very good about our prospects for the long term, but we also are being conservative, recognizing some of the near-term headwinds that might come to our clients and some of our members due to the pandemic.

We will invest in areas like S&M. In addition, we think about our R&D efforts, and working on additional solutions that we can continue to enhance in our current portfolio, as well as bringing new solutions to market. And so we’re also actively hiring engineers in our R&D group.

Typically, we talk about higher launches in the first part of the year and higher bookings in the second half.

Competition? I was talking with one HR Benefits Director, and he said, “You don’t get fired for buying Livongo.” We are the dominant player, and where some competitors are laying people off, we’re going to invest in more and more people because the opportunity, the total addressable market, is massive, the need is so great, and the future is so bright.

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Hi Saul - I took a position in LVGO in Feb based on things I learned from you and this board

Specifically, I saw a massive difference between adj numbers and GAAP numbers in their Q3 2019 ER. The adj margins were showing drastic improvements in profitability.

What I have taken away is that they were showing operational leverage early on and it was showing up under the radar so to speak

https://discussion.fool.com/lvgo-question-for-saul-or-anyone-els…

I also took another lesson from you and have bought on the way up. So that initial ~2.5% position is now a 10% position. My ego wants a low cost basis so I can have a “multi-bagger”. But I’ve learned it’s not about multi-baggers it’s about growing the overall portfolio.

These 2 lessons are things I learned from this board

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I’m excited to see LVGO getting more attention on this board. One thing to add - I’ve been closely tracking average revenue per member each quarter to try to gain some insight into Livongo’s billing model as they expand rapidly.
If that metric stays steady or grows, with a market of over 100 million “customers” in the US, they have a direct path to scale revenue 10x, 20x or even 50x. If that metric falls off as they add members, I have serious concerns about their long-term revenue model.

The good news: average revenue has stayed consistently around $200/member for the last two years. They aren’t losing any revenue as they grow their customer base 100% YoY!

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I’m excited to see LVGO getting more attention on this board. One thing to add - I’ve been closely tracking average revenue per member each quarter to try to gain some insight into Livongo’s billing model as they expand rapidly.
If that metric stays steady or grows, with a market of over 100 million “customers” in the US, they have a direct path to scale revenue 10x, 20x or even 50x. If that metric falls off as they add members, I have serious concerns about their long-term revenue model.

The good news: average revenue has stayed consistently around $200/member for the last two years. They aren’t losing any revenue as they grow their customer base 100% YoY!

That’s a great observation. I can see how they might innovate and leverage their platform with additional uses over time. As they increase members, their revenue per member might increase as well.

While they seem to be at an inflection point in terms of growth, we will need to keep an eye on these metrics. And while they are the dominant player right now, we will have to watch for competition.

Dave

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What exactly is livongo’s competitive advantage?

Yeah the revenue growth numbers look great, but what differentiates their diabetic device over others? I listened to reviews and all I seen were people saying it helped them figure out when they needed to order strips. I live with a diabetic who the hell needs a coach to tell them when they are running out of strips?

Why are they only offering the device through employers? I know why, nobody is going to pay the ridiculous prices from livongo without the employer subsidy that is why!!!

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Well after reading my post it may come off as off putting.

Trying to look at this from perspective of possibly avoiding a doctor visit.

Livongo doesnt offer a way to test a1c from home do they? Otherwise, you have to see your provider regardless to get your a1c every 4 months.

First off, Saul, thanks for great write ups and all LVGO fans on this board are thrilled to see you jump in this ship.

I have been LVGO holder since late 2019… and gradually increasing…
With yesterday’s pop, LVGO is my largest position at 20%, right up with CRWD.

@mvr3691 - I am not so sure that revenue per member is that sacrosanct to LVGO growth. The reason I say that is they have big base of diabetes patients… however, they are also expanding in other areas like behavioral health and multiple more… and per member price is different if I remember right, behavioral health is almost half that of diabetes)… and they may end up signing up more of one or the other in a given period depending on state of society… so what I care about is revenue and gross margin… and EVA as leading indicator…

@projectchris - LVGO competitive moat is a combination of

  • network of care supporters / guide who are available on text / phone for patient anytime they need
  • connected monitor with data engine that triggers action / advise
  • having proven RoI for insurers
  • having established re-reimbursements

may be I am missing some like early mover’s advantage which becomes near impossible to catch up when you bring AI into picture (because early mover has more collected data and therefore better product by definition of AI)

So, there is a lot here… and Covid-19 crisis just accelerates their success.

Good luck… let the LVGO ride go on!

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“What exactly is livongo’s competitive advantage? Yeah the revenue growth numbers look great, but what differentiates their diabetic device over others? I listened to reviews and all I seen were people saying it helped them figure out when they needed to order strips. I live with a diabetic who the hell needs a coach to tell them when they are running out of strips? Why are they only offering the device through employers?”

Their competitive advantage is size/scale and published medical studies demonstrating that their “system” saves money for corporations and insurance companies who buy the Livongo package.

I recently read in a SA article that 1 out of every 7 dollars in the US is spent on diabetes related care and complications. That is a lot of potential money to save. Livongo has demonstrated to enough companies that they actually save the company money by reducing the amount that their employees have to spend on diabetes issues. Livongo helps their members achieve better, more consistent diabetes management through use of artificial intelligence connected to an app. So, there is a strong ROI for the companies that provide Livongo to their employees.

Members like Livongo because they provide a convenient way of tracking daily blood sugar results through an app and connected glucose monitor that is free to the member. They also provide glucose strips free of charge to the member. This may seem like a small item, but I think the strips are around $.50 each and most diabetics use at least 3 per day - so the cost can add up. I believe the Livongo app is interactive - it takes in a lot of different health related data and provides “Health Nudges” to the member to guide them in making healthy choices. I think there is on-demand access to diabetes coaches to help answer questions. There may be more, but that is a high level outline.

I own Livongo and right now it is my largest position. My cost basis is $25. I recently sold covered calls at $50 strike on half my shares - so I will probably be cut in half soon on my position size. The reason I decided to sell half is that I do struggle with the question of - what is the moat for LVGO. The only thing I come up with is that they are the first mover in this area. They also have similar services for weight management, high blood pressure, and mental health. But honestly, it does not seem like it would be that hard for anyone else to copy what they have done. I don’t think they have anything that is truly proprietary or novel. I do not see why someone like Teledoc, an insurance company, or even Amazon could not just copy what they have done. I believe that anyone that wants to break into this space would have to repeat some of the studies LVGO has done to prove their system is as good, but even that I’m not really positive about. The market is huge, so there is room for more competition, but I’m not super confident in the sustainability of their advantage for the long term. I plan to keep the half of my shares that I still have, but that is the reason I decided to trim my cost basis - concern about long-term sustainable competitive advantage.

I would love feedback if someone sees something I am missing.

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I think it has value as an investment because the insurance companies are supporting it. They see benefits to their bottom line, so they pay for it. I’m sure the service does help as well as it offers continual glucose monitoring. The only thing I wonder about is if their numbers will retain customers once they get used to the products. Seems like after spending a couple of months on it people would become less dependent on the service. One to watch closely. It could be an ease of use thing too. If they handle all ordering and supply shipments it would remove one burden from the patient.

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Livongo doesnt offer a way to test a1c from home do they?

You don’t need Livongo for that. You can buy an A1C test kit from any CVS.

https://www.cvs.com/shop/cvs-health-at-home-a1c-test-kit-pro…

Yeah the revenue growth numbers look great, but what differentiates their diabetic device over others? I listened to reviews and all I seen were people saying it helped them figure out when they needed to order strips. I live with a diabetic who the hell needs a coach to tell them when they are running out of strips?

ProjectChris,

You’re right, you don’t need a coach to tell you you’re out of strips; CVS does that for me.
BUT, I’m paying for those strips (.60 each) and only get 50 per month…many months, before getting a Dexcom G6 cgm, I ran out. If you’re really trying hard to lower your A1c or trying to stay in the normal-person range, down in the 5s, you need way more strips than 3 a day. More like 6-10, especially right after diagnosis. Three a day is not enough info to make good decisions on. And MOST people (2/3) don’t have a cgm like G6 or a pump, so it’s no wonder that most diabetics are way out of control. A lot of people can’t even afford their insulin much less extra strips. Diabetics with high A1cs have many health issues over time and lots of hospitalizations. Living with a diabetic, you probably already know that though.

With Livongo,they supply as many strips as you need per month and you get reminders and other guidance. That’s a pretty huge reason for a diabetic who learns all the nasty things that can happen to them and wants to be in control to stick with it.

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https://www.scientificamerican.com/article/how-blood-sugar-c…

One more thing that I think might be propelling the growth of Livongo in the short term is the higher risk that people with diabetes have of a severe reaction to COVID. The link above is to an article on this topic.

I think this is probably making some people take their diabetes more seriously and sign up for Livongo. Just because your company or insurance offers Livongo does not mean you are automatically enrolled. People have to sign up and join - some do and some don’t, just like any other program your employer offers. I think more people are joining right now because of COVID fears. Three of the biggest risk factors for severe COVID cases are diabetes, obesity, and high blood pressure - Livongo has services for ALL THREE of these. So, if you have access to Livongo, and you are stuck at home with nothing to do anyway, and you have those conditions, you are probably going to sign up. Once you are signed up Livongo is getting a fee every month for your membership. Once you sign up, you are not likely to stop - even if you don’t find great value from it - because it does not cost you anything - your company is paying the membership fee.

If anyone on this board has used Livongo please let us know your feedback on it.

My company offers it but I don’t have diabetes so I have no experience. I will say that Livongo recently gave out a free access to a COVID related mental health section on their mental health platform, and I was not very impressed. It was extremely basic stuff. I’m hoping their normal content is better than that.

Long LVGO (largest position - up 100%+), but trimming lately.

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