Livongo held its first call as a public company today, announcing 2Q19 revenue of $41 million – rising from $16 million YOY, up 156% YOY and 28% sequentially. The company reported 192,934 enrolled Livongo for Diabetes Members, a ~140% YOY gain and driving the vast majority of company sales and growth (~$68 per month for the cellular-enabled BGM, coaching, unlimited strips, and an app).
Livongo has 720 clients, a 92% YOY gain (organic), including “over 20%” of the Fortune 500, four of the seven largest US health plans, and two of the largest PBMs in US (including CVS). Average member enrollment at Livongo’s “optimized clients” has risen to 47%, up from 34% in 2018 among all clients. Management believes it can ultimately reach an enrollment rate in the “60%-70%” range.
Livongo is positioning itself as a “whole person” chronic care, and data science company, offering one platform to manage multiple chronic conditions. The newer programs – hypertension (cellular-enabled BP monitor), weight management and prediabetes (Retrofit acquisition – few details here), and behavioral health (myStrength acquisition) – are still early but seeing “incredible pickup” among new and existing clients (no numbers shared; we estimate they are ~5% of revenue).
There were no product or pipeline updates today, including anything on the FreeStyle Libre Pro partnership announced one year ago. We have high hopes for greater use of intermittent CGM; a strong ROI would reflect good engagement between patients and HCPs and we’re not sure if coaches are trained on this.
Livongo reported 2Q19 financial results Thursday morning, its first call since the enthusiastic July IPO on the NASDAQ – ~$350 million was raised in an initial valuation of over $4 billion. The stock peaked at $44 after an open of about $30 after the IPO and was down to ~$26 today at a very healthy market cap of ~$2.3 billion.
Today’s call was led by new CEO Zane Burke (22 years at Cerner), CFO Lee Shapiro, President Dr. Jennifer Schneider, and several remarks from Executive Chairman Glen Tullman. There were 19 minutes of prepared remarks and 32 minutes of analyst questions – a lot of “congrats” peppered with questions on modeling the future of the business. Revenue and member growth were very strong in 2Q19, though today’s call shared very little in terms of new updates on the vision, strategy, or products. Remarks tended to digress into digital health jargon around “AIAI,” “applied health signals,” “platform,” etc., and we look forward to future calls sharing more specifics on the insights, what the company’s BGM and CGM strategies are in a world of declining fingersticks, and plans on insulin dosing advice.
See our top highlights below!
- Financial and Membership Highlights
- 1. Sales of $41 million rise from $16 million a year ago (up 156% YOY and 28% sequentially), driven by Diabetes program uptake
- 2. Diabetes now has 192,934 Enrolled Members, up 140% YOY and 18% sequentially; 720 clients, up 92% YOY (organically)
- 3. 2019 Sales Guidance: $159-$162 million, More Than Doubling YOY
- 4. Gross Margin of ~69%; $38 Million in Cash Before $300+ million in IPO proceeds; Net Loss of $14 Million
- Program and Pipeline Highlights
- Questions and Answers
Financial and Membership Highlights
Livongo reported strong sales of $41 million, a 156% YOY gain and 28% sequential rise from 1Q19. Growth was driven by continued adoption of the Diabetes program among new and existing clients (cellular BGM, unlimited strips, human coaching), with very early sales for the new offerings: hypertension, prediabetes/weight management, and behavioral health. Assuming pricing for Livongo for Diabetes is still ~$68 per member per month, Diabetes is generating ~95% of company revenue (~$39 million in 2Q19). As of March 31, 2019, Livongo for Hypertension had been available for nearly one year, but was only used by 5% (~37) clients; an updated metric was not shared today.
Management emphasized the subscription revenue business model, which is not tied to an employee’s benefit cycle – i.e., there should be good predictability and less seasonality in the business. We expect Livongo could be a lot like Insulet’s US Omnipod business, delivering steady subscription-like growth; the biggest drivers will be securing new clients, expanding in existing clients, keeping attrition low (it’s at just 2%), and the health of the overall economy.
There are now 192,934 enrolled Livongo for Diabetes Members, a ~140% YOY gain and an 18% sequential rise – adding over 38,000 new members in 2Q19 and over 88,000 members in 1H19. “We’ve barely scratched the surface in diabetes alone, with <1% penetration in the US,” noted Executive Chairman Glenn Tullman on today’s call. (That assumes an addressable market of the entire US diagnosed population, which is probably not realistic.) Management repeatedly highlighted the three stats it focuses on: (i) member experience – Net Promotor Score is +64 according to the website; (ii) improved A1c out to three years for the earliest customers (the website reports a ~0.8% A1c reduction from a fairly low baseline of 7.7%); and (iii) financial ROI for clients (see below).
Livongo now has 720 clients, a 92% YOY gain (organic) and up 6% sequentially from 1Q19. Clients include over 20% of the Fortune 500, four of the seven largest US health plans, and two of the largest PBMs in US (including CVS). Management added that a “sizeable” contract was won during the quarter, which will be shared in the future and is expected to contribute 20,000-30,000 additional members. Livongo has added an additional 120 clients through the acquisition of myStrength (behavioral health) after the acquisition in February.
During Q&A, there was a little more color on Linvongo’s perception of CVS: “CVS is a great partner, and we love working with them. They’ve been fantastic in the journey that we've had. And we are part of that project and part of the total diabetes management program that they have. And there are opportunities for us to continue to grow that relationship as we move forward and we're anxious to do that. We are aligned in terms of what we're trying to accomplish which is help the health status of the population….”
“Livongo for Diabetes saves clients an average of $1,908 per member per year in gross medical costs.” Management repeated this stat several times, which translates to $159 per month in “gross medical savings”; we note it is slightly different from the $129 per month in medical savings that was shared in the IPO filing. Subtracting out the ~$68 per month for the cost of Livongo’s program shows a powerful ROI for clients – somewhere between ~$61 per month (IPO filing stat) and ~$91 per month saved (today’s stat). In a Journal of Medical Economics publication, the company reported a lower $88 per member per month in savings, which nets out to just ~$20 per month after subtracting the program cost.
In Q&A, management called CVS “a great partner” and noted Livongo is part of the new CVS Payor Solutions’ “Transform Diabetes Care” program. This is the first we’re hearing of this CVS initiative, which appears to have been announced in July. It is targeted at payers and offers a comprehensive management program for those with diabetes and prediabetes. Livongo is not mentioned by name, but the use of “connected meter,” “connected digital scale,” and “connected blood pressure cuff” implies Livongo’s suite of programs will be used.
3. 2019 Sales Guidance: $159-$162 million, More Than Doubling YOY
Livongo guided for 2019 revenue of $159-$162 million, rising 132%-136% YOY - a strong ramp from $68 million in 2018 sales. For 3Q19, Livongo expects revenue of $42-$43 million – a 4% sequential gain from 2Q19. We assume the tight guidance range stems from clear visibility on the business, the known pacing of client contract starts, good estimates on enrollment, the steady subscription revenue model, and the fact that the year is almost over. Continued growth opportunities include driving higher enrollment at existing clients, cross-selling the new programs to existing clients, and expanding to reach new clients. Management emphasized that “the best way” to evaluate Livongo’s business is on an annual basis, rather than quarterly; we assume this stems from the B2B2C nature of the business and the lag time between signing a contract and starting it. Outlook for 2020 will provided on the Q4 call in early 2020.
Livongo reported “Total Contract Value” (TCV) of $74 million in 2Q19, nearly tripling from $25 million in the 2Q18 and up 54% from 1Q19. This is essentially a measure of future revenue expected over the coming years – “contractually committed orders entered into during the period.” Livongo’s client contracts are typically 1-3 years in length (~18 months on average), which is the time frame to expect a given quarter’s TCV to roll out. There is a ramp period of at least 10-12 weeks between the contract being signed and revenue starting, so the $74 million in TCV for 2Q19 has at least a quarter of lagtime until revenue flows in, and many contracts won’t begin until 2020. This metric does not include adding enrolled members over a previously signed and ongoing contract, meaning it’s a good measure of future revenue. With TCV, Livongo applies an expected enrollment rate with “conservative” assumptions for Diabetes, Hypertension, Prediabetes/Weight Management, and Behavioral Health. As noted above, one large contract is expected to add 20,000-30,000 Livongo for Diabetes in “2020 and 2021” (it was not clear if that was members per year or total over two years).
Total Contract Value (official definition): “We define total contract value as contractually committed orders to be invoiced under agreements initially entered into during the relevant period. Agreements are only counted in total contract value in the period in which they are entered into, and for purposes of this calculation, we assume an average member enrollment rate. While some of our agreements include clauses providing for termination at the convenience of the client, when evaluating total contract value, we assume an agreement will be serviced for the full term. Until such time as these amounts are invoiced, which occurs at the end of each month of service, they are not recorded in revenue, deferred revenue, or elsewhere in our consolidated financial statements. Total contract value only includes agreements entered into with new clients or renewals entered into with existing clients; it does not include increases to enrolled members during the original term of the contract.”
Gross margin in 2Q19 was an impressive ~69%, about even with levels from a year ago (~71%) and 1Q19 (~68%). This shows the business model already has strong margins and scalability, assuming retention; CFO Lee Shapiro highlighted the “compelling unit economics.” Whether Livongo can maintain this pricing in a world of lower-cost CGM remains to be seen. As the non-diabetes programs expand, we will be interested to see if gross margins improve – these don’t have the more expensive logistics of sending consumable supplies (strips), meaning they should (theoretically) be lower cost to deliver.
Livongo ended 2Q19 with $38 million in cash, which rose to $411 million as of July 31 following the ~$350 million raised (before expenses) in the IPO. The burn rate in 2Q19 backs out to just ~$17 million, meaning Livongo now has many of cash on hand. Might we see more acquisitions? A bigger push into CGM + coaching? What about international expansion? How will the company balance growth vs. profitability?
Net loss in the quarter was $14 million, slightly improved from a loss of $15 million in 1Q19 – no doubt the company was working to show declining losses, as a metric. Net loss was ~$6 million in 2Q18 on much lower revenue. Operating expenses totaled ~$42 million in 2Q19, rising 138% YOY. As a percentage of revenue, however, operating expenses improved slightly from 111% in 2Q18 to 104% this quarter – showing improved leverage. Adjusted EBITDA was -$8 million, essentially flat with -$9 million in 1Q19. Expenses associated with Livongo’s July IPO will be included in the company’s third quarter financial results.
Program and Pipeline Highlights
1. Enrollment Rates in Livongo’s “Optimized Clients” Rises to 47% from 34% in 2018
Livongo President Dr. Jennifer Schneider shared that average enrollment of the eligible population within Livongo’s “optimized clients” has risen to 47% in 2019 – up from overall average enrollment of 34% in 2018 and 29% in 2017. Livongo did not share the average enrollment rate across all of its 2019 clients (i.e. “optimized” and non-“optimized”), though it seems certain that enrollment rates are increasing. Ultimately, the company aims for “somewhere in the 60%-70%” range enrollment.
Management repeatedly touted its “AIAI” (Aggregate, Interpret, Apply, and Iterate) engine, which uses data science across the business – the more data Livongo collects, the better it can personalize the experience. According to Dr. Schneider, the engine continuously learns from member data, allowing the team to improve messaging and ways to enroll more members from existing clients. In essence, this is the Silicon Valley playbook of Google, Facebook, and Amazon – collect data; use that data to improve the product; add more users, who contribute more data; and repeat in a positive feedback loop. The engine has even helped Livongo better reach out to members who do not have emails, such as employees of large retail clients.
Livongo tends to use a range of marketing phrases – “AIAI,” “Applied Health Signals,” “timely nudges that drive behavior change” – but the call gave few examples of what these look and feel like. What kinds of data sets does Livongo combine, especially given users have pretty infrequent fingerstick data? How many variables does Livongo actually use? What is Livongo’s best examples of actionable alerts? How personalized are the nudges, and how many different types of nudges are there? Livongo’s data science was positioned as a “competitive advantage,” though time will tell if that is true – particularly in the world of CGM, where the volume of data is at least 50-100-fold higher than with fingersticks and the ability to drive behavior change is much higher than with BGM. In its IPO filing, members with diabetes interacted with Livongo “over 250 times a year.” We’re not sure if “interact” encompasses each fingerstick, engaging with coaches, opening the app, or all of them. Whatever it is, that means the average Livongo member is engaging with the program five times per week – strong if it does not include fingersticks, but very weak utilization if it does include them. For context, the average FreeStyle Libre user globally scans 12 times per day (i.e., 84 times per week) – 16x as much engagement.
2. “Incredible Pickup” in Hypertension and Weight Management Programs; Sales Still Early, No Numbers Shared
Throughout prepared remarks, management highlighted the focus on multiple chronic conditions, positioning Livongo as a “whole-person” company – of which diabetes is just one component (though still the vast majority of the business). CEO Mr. Zane Burke stated that the company was seeing “incredible pickup” of its newer hypertension (cellular-enabled BP cuff) and prediabetes/weight management programs (acquired from Retrofit, with a connected scale) with both existing clients and new clients. Executive Chairman Glen Tullman was more measured, stating that pickup was for Livongo’s non-diabetes programs was “nice” and “accelerating.” Given the revenue estimates above, these still appear to be only ~5% of sales. In Q&A, Dr. Schneider shared that Livongo is currently in the process of bringing its Behavioral Health program (part of the myStrength acquisition earlier this year) into the same “tech stack” as its other programs, which will allow the data generated across programs to be aggregated.
“While we started with diabetes, which affects hundreds of millions of people around the world, our vision has always been about the health of the whole person. Over 70% of people with diabetes also suffer from hypertension, and over 40% of Americans have more than one chronic condition. We provide one app and one platform to manage multiple chronic conditions seamlessly.” – Mr. Tullman
3. No Updates on Voluntis, FreeStyle Libre Pro Partnerships; CGM Strategy
We didn’t hear any updates on Livongo’s partnership with Abbott to offer FreeStyle Libre Pro to member, or the partnership with Voluntis on basal insulin titration.
The Voluntis partnership was announced back in February 2017 and a pilot study (n=60 adults with type 2 diabetes) is currently recruiting. The single-arm, 12-week trial will evaluate A1c change from baseline as participants: (i) check pre-breakfast blood glucose with a Livongo meter; (ii) open the Livongo-Insulia study app and accept the uploaded blood glucose values from the Livongo BGM; and (iii) confirm that they have taken the dose suggested by the app. Livongo CDE coaching will be offered to some participants “depending on their blood glucose.” According to ClinicalTrials.gov, the study is expected to wrap up in November 2019.
There were no mentions of any potential CGM play for Livongo. The partnership with Abbott to use FreeStyle Libre Pro on eligible participants was announced one year ago, but we haven’t heard updates about this. Of note, the Livongo website does show someone wearing FreeStyle Libre (see below) – a potential sign of more to come on this. Real-time CGM is unquestionably more valuable for behavior change, and we wonder if Livongo will choose to do “CGM sprints” as Onduo has seen some success with Dexcom CGM. As pricing goes down, reimbursement grows, form factor improves, and more type 2s (and eventually people with prediabetes) have access to CGM, we believe should have a meaningful strategy here. Fortunately, the company has diversified nicely and its data science, coaching, and platform should be able to meaningfully integrate real-time CGM.
Questions and Answers
Richard Close (Canaccord Genuity): Can you guys walk us through the differentiation point of Livongo vs. the plethora of other companies in the chronic care area? What really makes you guys win as you go out there and compete for new customers?
Zane Burke (CEO): We have a number of key differentiators, but it starts first with our members. Our member experience is the first in healthcare that really creates a great experience. Our focus is on creating that great experience, one that members not just like but they love. And then the second piece of that is really our clinical outcomes. We get true clinical outcomes proven by Milliman, proven by academic journals, and the work that we do on the statistical perspective. And then finally we get a hard ROI and that financial return on investment is exactly what our clients are looking for and it’s true they’ve been first time in healthcare that those three things have come together. We have that great experience -- the great outcomes from a clinical perspective and a financial perspective. I will also say what we're doing from an AIAI platform perspective is unique in our industry and really the applied health signals platform that we have. We take that data, learn from a behavioral perspective, a clinical perspective, and we use that data to coach – to improve both the clinical outcomes as well as the financial outcomes and to create a better experience overall. We know we highly personalize the information we're providing back to the person and let them live their life the way they want to – to meet the member where they are. And so that's why we're so truly unique and those three key attributes and that our applied health signals platform is a key differentiator. (Editor’s note – meeting the member “where they are” should increase engagement – we assume that the personalized information should also lead to understandings for patients about long-term outcomes.)
Mr. Close: As a follow-up question, maybe, Jenny, you had mentioned the enrollment rates 34% last year, and then the optimized rate of 47%. What are the main differences between the average enrollment rate versus the optimized? How do you get that 34% up to the 47%? And then you guys have talked about a much higher long-term target. What really drives the improvement?
Dr. Jennifer Schneider (President): A lot of what we’ve seen in the improvement of enrollment is exactly what we’ve described from our AIAI engine. Our engine is learning continuously, so our ability to enroll people is gaining continuously smarter. Things such as what message should we give to them to entice people to come into the platform. So, we’re learning that by specifying a variety of different cohorts. That, in combination with our Livongo-led marketing effort and our ability to work closely with our clients to detail what those are and take the lead there; that has really driven that enrollment rate up. When we look at optimal enrollment rate, we believe that its somewhere in the 60% to 70% [range] is a realistic goal for us. And we are working to get there.
Robert Jones (Goldman Sachs): It looks like you basically tripled your total contract value in the quarter year-over-year. I know you referenced a particularly large win that might have impacted that. Could you go back and maybe help us square the level of wins you saw in the quarter with what’s implied in the back half of the revenue guide. I just wanted to hear a little bit more about what's unique about the level of wins and the expected enrollment timeline that you’re baking in as you think about the revenue for the back half of the year?
Lee Shapiro (CFO): One thing to comment on is that our total contract value, which is an indication of the success that our sales force is having in the market, has continued to grow. And we’ve seen acceleration in our market presence in the wins that we're getting across our offerings, including some sales of our new solutions including Livongo for Hypertension, Livongo for Weight Management, Behavioral Health, and Diabetes Prevention. One of the things that I'd like to mention though is that when you think about our revenue guide for the balance of this year, you have to note that many of our clients that we're selling will start their Livongo program at different times of the year. The great thing about our model is that we’re able to sell all year long and we're also not necessarily tied to a benefit cycle. But, with regard to some of those sales, we know that the client won't start until January 1 of next year. We are able to work with them now and get prepared for that launch. The revenue guide is based on our expectation of when those new sales will launch based on the timing that’s been set in our work with those clients.
Mr. Jones: A similar question as we think about the back half related to churn. It feels like you’re projecting that metric will jump up. Any specific reason or client that you have line of sight into that might help explain that? Or is this perhaps a more prudent approach to thinking about how churn could play out in the back half?
Mr. Shapiro: With regard to churn, I wouldn’t draw any conclusions that there is significant attrition with regard to the numbers that we see going forward. It really is much more about enrollment ramp. One of the great things about our AI+AI engine is that we're able to look at our potential members and understand how we're going to be able to best reach them, engage them and get them enrolled. And depending on the access that we were given to information about those numbers, for example – do they have emails or not? They may or may not, depending on the nature of the client. Some large retailers are an example – team members they may not have emails for, and so we have to reach them in different ways. What we do is we leverage all the data that's available about those members and then predict enrollment rates. What you're seeing is much more an impact of how we think enrollment will occur over time back to the answer that Dr. Schneider gave earlier. When we think about enrollment, we are looking at ways that we can continue to optimize it. But for total contract value, as I mentioned in our comments today, we use some relatively conservative assumptions with regard to how enrollment will take place. It's much more about enrollment than anything to do with churn and loss of members.
Sean Wieland (Piper Jaffray): My question is around visibility into the second half of the year. But as we look out into the growth for 2020 – I’m certainly not asking to comment about 2020 expectations – how long does it take that $74.2 million in TCV to convert to revenue? And as you stand here today and looking out over the next 12 to 18 months, where in your model or in your business are you seeing the greatest amount of visibility over the next 12 to 18 months on revenues?
Mr. Shapiro: With regard to visibility, as we’ve shared, our contracts are typically one to three years in length. And so when you think about that on average 18 months, that’s the timeframe over which we think about revenue rolling out. In addition, as you think about our revenue rollout, we’ve stated in the past that there's a ramp period. In other words, when we sign a contract, we typically have somewhere in the neighborhood of 10 to 12 weeks that we work with that client to get paid to create the launch program, to get all the materials ready, and then we start rolling out. In the quarter of sale, even if we sold and then we’re starting a customer in the same year, our client in the same year, they would normally be about a quarter lag before revenue would start rolling in from that given new contract. It then it builds over time. We see a relatively rapid build over those first few months that we're enrolling clients.
Mr. Burke: It typically takes us about nine months to get to full ramp where we get to that 34% enrollment across our book of business, and as we mentioned previously, our newest clients are operating at even higher levels and closer to the 47%. We continue to make progress towards that end.
Mr. Wieland: And can you call out any trends within the TCV on channel versus direct selling?
Mr. Burke: What I can say is our direct business was very strong. Our health services business, both the health plans that we had are fully insured client in the quarter which was fantastic for us. We had wins in the government space, we had wins across our health system space. Our commercial business remain strong. We added additional clients in the Fortune 500 space. Across the board, we saw great demand for our solutions and it's just proof of what’s happening in terms of the value proposition that we provide. That great net promoter score, clinical outcomes coupled with the financial return on investment is being very well received. We are seeing expansion across all of our markets. Overall, we saw performance across those markets this past quarter.
Ricky Goldwasser (Morgan Stanley): When you think about the mix of diabetes versus hypertension in these kinds of contracts that you’re signing, are you starting to see more traction among the employer base of signing contracts that tap into those products?
Mr. Burke: We are seeing incredible pickup in my mind in terms of the hypertension and weight management pieces for both our existing clients and frankly our new clients. So our existing clients are adding on the solutions. Our cross-sell was very strong in the quarter. But additionally, as we look forward into the pipeline, so not necessarily significant contributions in Q2 from new clients that we're buying across the platform. But as you look forward, our clients are looking at multiple solutions at hypertension, weight management, DPP and diabetes management along with our behavioral health solutions. We look forward in the pipeline to a great market acceptance of where we're headed from our strategy.
Mr. Shapiro: Our total contract value in the quarter was still predominantly sales of our Livongo for Diabetes offering. We are starting to see nice pickup and acceleration in the sales of our hypertension and other offerings. But as you think about our business and the way in which the revenue will be recognized, predominantly it's still coming from the diabetes offering.
Mr. Goldwasser: If we think about the seasonality in the business, and honestly, we’re heading into open enrollment for employees next month. How should we think about the progression of the total contract value into the second half of the year versus what you’ve seen here to date?
Mr. Burke: We’re not beholden to the enrollment period and to that space. In fact, obviously, our clients are buying year-round as evidenced by the fantastic results in the second quarter. But we do see a pickup in the second half of the year in booking. We do see a stronger bookings trend as we typically look at the back half for the year. We'd anticipate that to continue in the second half of the year.
Anne Samuel (JP Morgan): You spoke to some sizable new wins that you should benefit next year. How has your public offering facilitated any conversations with prospective new clients, or are you seeing anything improving there just moved on the offering?
Mr. Burke: Obviously with the public offering it creates more visibility. This is really about serving our members and clients in the long run. And, so giving us the capabilities to do that, but obviously there are some branding events around that. We have seen a lot of interest in what Livongo is doing and that obviously helps elevate the profile of who we are, our clients that are predominantly in the Fortune 500 clients like to deal with people that are also public and can be look at the transparency of the investment into the dollars and have a sense of where we're headed overall. What I would tell you is we have great momentum. The IPO itself also creates additional momentum for us and we were back to work the very next day. It was a great activity, but I will tell you this team was right back at it and excited to get after that opportunity and capitalize on a huge need in this country and around the world.
Daniel Grosslight (SVB Leerink): I wanted to dig in a little bit on the expense side of the equation. It looks like EBITDA guidance was a tad bit later than The Street was expecting. And I know you mentioned you’ve some IPO expenses in there and some variable client costs. But I was wondering if you could comment on how that is tracking vis-à-vis your model. And are you seeing any gross margin degradation as hypertension and weight management begins to ramp? I know there's a bit of a difference in how you amortize the glucometer versus the other equipment?
Mr. Burke: First, with regard to our guidance, with regard to our adjusted EBITDA, and expected loss for the balance of the year, as I noted in my comments, we do see expenses that will occur in the third quarter associated with our IPO expense. And as we are launching new clients as well as variable costs associated with sales that we expect to be quite strong for the back half of the year, we will see expenses that are triggering associated with those transactions. And so that's why we guided in the manner that we did. In addition, with regard to our gross margin profile, there is a difference as you noted in terms of how we recognize expense associated with our Livongo for Hypertension and Livongo for Weight Management offerings. And we do take those costs into expense in the month that we launch those clients. Associated with those launches, we will see more expenses and that will occur not only in the back half of this year, but also early next year. As we gain more experience similar to our diabetes offering, we do expect that we will be able to amortize the cost of those devices that we’re sharing with our members over time. But we're not at that juncture yet.
Mr. Grosslight: Just a quick follow-up to clarify the large client win that you mentioned that is in TCV. Is that 20,000 to 30,000 in potential enrolled members that you disclosed in your IPO prospectus?
Mr. Shapiro: Yes, that is. That is the same client that we described in our registrations.
Scott Berg (Needham): We will start with effectiveness of the diabetes solution over time. I think, Jenny, spoke about it a little bit, but the result that you’re seeing with the platform have been very, very positive. But can you maybe talk about those trends over the last three or four years, given that the solution is new? Are you seeing that may migrate even more positive with patients?
Dr. Schneider: In fact, we are. What we’ve been able to do is demonstrate a sustained net promoter score in the positive 60s year-over-year-over-year. (Editor’s note – this is very favorable – see more background here on this metric.) We’ve also been able to demonstrate an improved A1C. And when we look at that, we sustain that A1C improvement out through three years for our earlier customers. And when you look at financial return on investment, you see improved year one to baseline in general about 3.2x return on investment. Those continue to increase to year two and year three.
Mr. Burke: I mentioned we had an additional fully insured health plan join the Livongo family. You don't get to a fully insured book of business without proving long-term sustainable clinical and experiential results. It’s that long-term nature that allows us to get into the fully insured book of business and that's where you’re continuing to see us have growth as we move forward. I think it's also not only are we seeing it, but also our clients are seeing that results overall. It would take years for somebody else to kind of match that type of experience overall, because you have to grow from the ASO [administrative services only] business into the fully insured book of business, meaning you go through the actuaries, meaning you have to show those demonstrated hard financial outcomes, the clinical outcomes and do it in a manner that's a great experience for us. Again, it takes several years to get that with that particular client, but it's a great validation of what we’re doing from an outcome perspective. And unlike disease management, this isn’t a one-time thing. This is sustainable results over the year that actually increase in ROI, increase in clinical efficacy over time.
Scott Berg: Obviously great growth in your TCV metric. But help us understand how that metric relates to revenue? And I ask the question because TCV costs $74 million versus an annual run rate of $160 million. There's kind of a big delta on that and I usually look at TCV as revenue potential over the next year. And obviously the revenue potential is more than $74 million, but maybe help us evaluate how we should look at that metric.
Mr. Shapiro: As we've stated previously, our TCV is based on total contract value over the term of the contract. Many of our clients sign contracts for as long as three years. And so you would expect that the time period over that revenue is recognized is typically over 18 months because contracts will average between one to three years. In addition, as I noted earlier, contract starts will vary. Some of the contracts that are included in our TCV for this year won't start producing revenue until 2020. And so that also creates a little bit of a delay. If you think about a contract, let's say that we signed in Q2 of this year. That doesn't start producing revenue until Q1 of next year and will roll itself out over 18 months on average from the time that starts producing revenue. It gives us some time.
Donald Hooker (KeyBanc): I just wanted to maybe look at some of the newer services that you guys are rolling out around pre-diabetes, weight management, and behavioral health. I was curious, I know you're going through a process of transitioning some of the recent acquisitions to the Livongo platform, the Livongo sort of new revenue model for them. I would love to hear maybe a little bit of an update there.
Dr. Schneider: From a product build out, what we’ve done is really invest in the infrastructure to have everything. We recently acquired myStrength since the beginning of 2019. We are in the process of converting that to the same tech stack as our other solutions. With that said, everything within Livongo runs off of that same proprietary AIAI engine. All of the data that we’re able to aggregate across different conditions goes and exceed the solutions and the recommendations that we’re making for individual members with independent on what our condition that are on.
Mr. Burke: With regard to revenue, the revenue contributions from the new offerings are still relatively small. Predominantly, our revenue is associated with our Livongo for Diabetes offering.
Mr. Hooker: You have a great enrollment success with diabetes and engagement there. I'd just love to hear your opinions in terms of how that’s going to may be different for some of these new areas as Livongo expands over time? Again, recognizing these are smaller areas, obviously very small, but behavioral health and weight management might be a little different? Are there different sort of enrollment targets that we should think about?
Dr. Schneider: When we look at the different products and the different services that we are offering, I would say the underlying principal that unites them all are the AIAI engine and so we are continuously improving those product offerings with the AIAI engine. We’re still in the process of what will be the optimal enrollment for those.
Jessica Schmerler (Chardan): Jennifer, you mentioned a little bit earlier the retention rate as one of the metrics that you’re looking at. Is there any color you can provide around how that optimizes in the AIAI engine?
Dr. Schneider: When we look at overall member retention rate, what we see is a small loss over the course of the year and that is about a 2%. But three-fourths of that is turned over from the individual members losing their employment opportunities. Those are people who are employed or clients under a payer, and they’re returned by new people with the same prevalence of the condition. We are retaining the seats just kind of slipping in different members. Our engine, again is really driven at that overall experience and we believe that experience that we’re able to deliver, the personalization of experience has given us those retention rates and we will continue to improve.
Mr. Schmerler: And then the second question is in terms of TCV. Is there any color you can provide around the percentage of clients in any of the given categories in terms of where the different composition is?
Glen Tullman (Executive Chairman): If I understand it correctly, with regard to the prevalence, the predominant amount of our bookings, our total contract value is associated with our Livongo for Diabetes offerings. As Zane mentioned earlier, we’ve seen great pickup and strength in terms of our new offerings like Livongo for Hypertension. But near-term I still expect that most of our bookings will be coming from our Livongo for Diabetes offerings.
Mr. Close: On the CVS customer on the PBM side, you've had success there. They just announced about a month ago their next-generation Transform Diabetes program. Is there any opportunity for you guys in that book of business?
Mr. Burke: CVS is a great partner, and we love working with them. They’ve been fantastic in the journey that we've had. And we are part of that project and part of the total diabetes management program that they have. And there are opportunities for us to continue to grow that relationship as we move forward and we're anxious to do that. We are aligned in terms of what we're trying to accomplish which is help the health status of the population, at least that we both serve and CVS's has been very passionate about making a difference in healthcare overall is evidenced by what they've done around smoking cessation and those kinds of things as moving forward. They feel that similar sense of urgency around a chronic condition management space and that allows us to really engage and we are that platform for what they're doing around diabetes management and we have opportunities to grow that in that space. We’re very excited about that.
--by Ani Gururaj, Albert Cai, Adam Brown, and Kelly Close