Memorandum

Livongo 3Q19 – Sales of $47 Million Rise 149% YOY, 14% Sequentially; Over 200,000 Diabetes Members, Up 118% YOY – November 12, 2019

Executive Highlights

  • In its second call as a public company, Livongo reported revenue of $47 million, rising 149% YOY and 14% sequentially. Livongo for Diabetes continues to drive most of revenue and growth, with 207,815 enrolled members (+118% YOY). However, management expressed excitement for the newer beyond-diabetes offerings, particularly Hypertension, which delivered “over 20%” of new contract adds in 3Q19.

  • Livongo now has 771 clients, more than doubling from 349 a year ago. 3Q19 saw Livongo’s biggest contract win in its history, sealing a deal with BCBS’s Federal Employee Health Benefit Plan that is expected to add ~45,000 Diabetes members over the next two years. Notably, Livongo has conducted studies with 48 of its clients and “over 90%” showed a positive return on investment in the first year – wow!

  • Livongo will integrate telehealth services into its platform starting in January 2020. These telehealth partnerships with Doctor on Demand and MDLive were announced last month and will bring live video calls first to Livongo’s behavioral health program before expanding to hypertension and diabetes. We did not hear anything on the Abbott FreeStyle Libre Pro partnership announced one year ago. We are curious on the Doc on Demand and MDLive what percent of the coaching will ultimately be focused on diabetes – the more diabetes work they do, the more likely coaches are to be valuable.

Livongo reported 3Q19 financial results in a call led by CEO Zane Burke, President Jennifer Schneider, CFO Lee Shapiro, and Executive Chairman Glen Tullman. This was the second call as a public company, following September’s 2Q19 call and the July IPO on the NASDAQ.

Financial and Membership Highlights

1. Sales of $47 Million Rise 149% YOY, 14% Sequentially, Driven by Diabetes Program

Livongo reported 3Q19 revenue of $47 million, rising 149% YOY and 14% sequentially from 2Q19. Most of the revenue growth continues to be driven by Livongo for Diabetes, which offers the cellular-enabled BGM, unlimited strips, and digital and human coaching. Management noted new and existing clients. CEO Zane Burke did share that “over 20%” of “estimated value of agreements” (i.e., future revenue committed over the coming years) came from Livongo’s newer offerings: hypertension, prediabetes/weight management, and behavioral health. Assuming pricing for Livongo for Diabetes is still ~$68 per member per month (“pricing has remained consistent”), Diabetes generated ~89% of Livongo’s overall revenue in 3Q19 (~$42 million). We estimated Diabetes revenue at ~95% of overall company revenue in 2Q19 (~$39 million in 2Q19), so it seems that Livongo’s other offerings are growing faster than Diabetes (albeit from a much, much lower base).

  • Livongo continues to enjoy the benefits of its subscription-based revenue model, which creates better revenue predictability. Livongo has seen strong momentum in signing clients during the back half of this year, most notably with Blue Cross Blue Shield’s Federal Employees Health Benefits Program (FEHBP), as many companies and payers decide on their benefits for the upcoming year. Mr. Burke commented that these new signings would translate into additional Livongo members as the companies launch in the new year.

2. Livongo for Diabetes has 207,815 Enrolled Members, Rising 118% YOY and 8% Sequentially; 771 Clients, Rising 121% YOY


At the end of 3Q19, Livongo reported 207,815 enrolled Livongo for Diabetes members, more than doubling (+118%) YOY and up sequentially from 192,934 in 2Q19. Year-to-date, Livongo has added ~94,000 new members – almost doubling the 113,854 it had enrolled at the end of 4Q18.

  • Livongo now has 771 clients, more than doubling from 349 a year ago and up 7% from 2Q19. Livongo continues to state that “over 20%” of Fortune 500 companies, four of the seven largest US Health plans, and two of the largest PBMs in the US are clients. In the September call, management alluded to a “sizeable” contract win, which ended up being Blue Cross Blue Shield’s FEHBP (announced in October); this marked the largest contract in Livongo’s history, expected to bring in 25,000 new Diabetes members in 2020 and 20,000 more in 2021. The ~45,000 anticipated member adds is even higher than the original estimate (20,000-30,000) mentioned on the 2Q19 call. Mr. Burke expressed particular excitement about the FEHBP deal as helping Livongo to penetrate the over 65 year-old market, though later on he noted that the older population may see slower uptake, given potentially lower rates of technology use. 

  • President Dr. Jennifer Schneider noted that Livongo has conducted studies with 48 of its clients and “over 90%” showed a positive return on investment in the first year. Clients are saving “more than $1,900 per participant per year” from Livongo for Diabetes; this number is the identical to the one we heard on Livongo’s previous call (“$1,908 per member per year”), though it is slightly more than the $129 per month (~$1,548/year) that was shared in Livongo’s IPO filing. A study published in May this year calculated an average $88 reduction in medical spending. We’re elated to hear Livongo clients are consistently saving money near-term, as this is a huge challenge in diabetes – cost savings from better management often accrue over a longer-term payback (e.g., retinopathy, neuropathy, nephropathy), which can take decades to develop and be perceived as “Medicare’s problem.” At ~$68 per member per month, payers are currently paying ~$816 per year for Livongo’s Diabetes program.

    • “As clients see the results that the Livongo platform is able to deliver, they are building powerful incentives for their employees to join Livongo. For example, we now have clients who are reducing or totally covering the cost of copays for diabetes and hypertension medication, but only if the employee joins Livongo and engages with the platform. This in turn helps improve our enrollment rates and lowers the member's cost of managing their chronic condition.” – Dr. Schneider

  • During prepared remarks CFO Lee Shapiro shared that Livongo has seen Diabetes member enrollment at “34%” for commercial clients nine months after launching. In other words, out of every three employees that have access to Livongo, one choose to enroll. While he noted that rates for “some” clients “gradually” increase after nine months, the 34% rate is well short of the company’s aim for enrollment “somewhere in the 60%-70%” range. The average enrollment was 34% in 2018 and 29% in 2017, so things are improving. On the 2Q19 call, Dr. Schneider shared that average enrollment in “optimized clients” was 47%.

3. Full Year Sales Guidance Raised by ~$8 Million to ~$169 Million (+149% YOY)

Livongo raised full-year revenue guidance to $168.5 to $169 million, an increase of $7 million at the low end and $9.5 million at the high end from 2Q19 guidance. Full-year revenue of $169 million would represent a 149% jump from $68 million in revenue in 2018 – a very strong start as a public company. 4Q19 revenue is guided for $49 million to $49.5 million, which would represent a 4%-5% sequential increase. The very tight guidance range likely stems from clear visibility on the business (recurring subscription model), the known pacing of client contract starts, good estimates on enrollment, and just seven weeks left in the year. Continued growth opportunities include driving higher enrollment at existing clients, cross-selling the new programs to existing clients, and expanding to reach new clients. Outlook for 2020 will be shared on the 4Q19 call.

  • Livongo’s Expected Value of Agreements (EVA) totaled ~$86 million in 3Q19. EVA, formerly called “Total Contract Value (TCV)” on the 2Q19 call, is essentially a measure of future revenue expected over the coming years, as it totals the “contractually committed orders entered into during the period.” The EVA of ~$86 million reflects only new client agreements and expansions in the quarter, with “approximately 40%” expected to convert into revenue over the next four quarters. The typical contract length for Livongo is 1-3 years in length, and there is a ramp phase before a contract begins converting into revenue for Livongo. EVA of $86 million is a 53% increase over 3Q18 and a 16% increase over 2Q19 – a good sign Livongo is signing larger contracts and/or more contracts. Over 20% of EVA in the quarter came from Livongo’s non-Diabetes offerings.

  • “What we’re trying to do [with EVA] is give a perspective on revenue conversion from the signings that are reflected in our EVA, the $85.5 million that we had in the quarter. As you know, our contracts are typically one to three years in length. In addition, based on when those contracts start performing, depending on when the launch of that particular client occurs, the revenue will then follow a number of weeks after the time that we start launching enrollment. So, you can safely assume that very little of that revenue will convert this year and that the balance will convert as we start rolling out those client launches at the beginning of next year. Over the course of the next four quarters or basically the next 12 months, we'll see that start to occur.” – Mr. Shapiro

4. Gross Margin of 74% (!); $400 Million in Cash and Investments; Net Loss of $20 Million

Gross margin in 3Q19 was an impressive ~74%, up meaningfully from ~69% in 2Q19 and ~70% in 3Q18. Mr. Shapiro attributed the margin improvement to investment in its “AI+AI” (Aggregate, Interpret, Apply, and Iterate) engine, which improved coaching efficiency, and higher incremental margins from members added in prior periods, as the upfront device costs (e.g., cellular BGM) from previously added members were accounted for in the quarter they were added. Going into 4Q19, Livongo is expecting to maintain gross margins “consistent” with 3Q19.

  • Livongo ended 3Q19 with $400 million in cash and investments, up from $38 million in 2Q19. Of course, the increase in cash comes from Livongo’s blockbuster July IPO, which raised ~$350 million for the company, roughly $100 million more than the IPO was expected to raise.

  • Net loss for 3Q19 was $20 million, nearly double the ~$10 million loss seen in 3Q18. Operating expenses were ~$56 million in 3Q19, rising 129% YOY from 3Q18, but slightly slower than the 149% YOY revenue growth. Expenses from 3Q19 also included the costs associated with Livongo’s IPO. Adjusted EBITDA was -$4 million, improved from -$9 million in 3Q18 and -$8 million in 2Q19.

Program and Pipeline Highlights

1. Hypertension Program Now Fully Integrated into Livongo; CVS Health Now Includes Hypertension and Diabetes Prevention Programs

Livongo saw more momentum for its non-diabetes programs: hypertension, prediabetes/weight management, and behavioral health. Livongo for Hypertension has now been fully integrated into Livongo’s platform and the “first phase” of Behavioral Health integration will complete by the end of this year, following Livongo’s myStrength acquisition in February. Integration into Livongo’s platform will mean a smoother experience for members, and easier reporting and billing for members across multiple programs. Livongo for Hypertension (cellular-enabled BP cuff) saw “particularly strong” pickup in 3Q19, and CVS Health, one of the largest PBMs in the country, expanded its contract with Livongo to include the hypertension and diabetes prevention programs. According to Mr. Burke, Livongo saw a “more than 500% year-over-year increase in recruitable people with hypertension” in 3Q19. Whether Livongo can actually convert these into members is an open question, but its strength in Diabetes should help drive uptake as a large share of its users with type 2 diabetes also have hypertension.

  • “As we look forward, we are focused on delivering a seamless whole-person platform for members. This is important given the comorbidity rates across conditions and the fact that data from any one chronic condition can help inform how you address another. In addition to diabetes, we now offer solutions for hypertension, prediabetes, weight management and behavioral health.” – Dr. Schneider

2. Telehealth Integrations Will Begin with Behavioral Health in January 2020, “Soon Expanding” to Diabetes and Hypertension

Late last month, Livongo announced partnerships with telehealth companies MDLive and Doctor on Demand to integrate telehealth into Livongo’s platform. “Virtual acute and primary care services” will be available through Livongo’s platform starting in January 2020, initially rolling out to Livongo for Behavioral Health and “soon expanding” to diabetes and hypertension. Live video calls add another layer of personal touch to Livongo’s care model, which includes cellular-enabled devices (BGM, BP Monitor), insights and “nudges,” the Livongo app, and remote 1:1 coaching. Management didn’t share any additional details on the partnerships in today’s call, but did express excitement about continuing to build out various care formats for members. See our report for a list of questions we have about the integration.

  • “We’re really excited as we think about the escalation of care pathways within our suite of services for people with chronic conditions. As we shared in our announcement, we’ll be starting in behavioral health. We’re really giving our members an opportunity to receive expert coaching and then a step therapy, if you will, to access the providers when that's available and when that's necessary for them. You'll start to see that expansion throughout the rest of our product solutions over the coming year.” – Dr. Schneider

3. New Data Integrations with Apple, Samsung, and Fitbit; No Updates on Voluntis, FreeStyle Libre Pro Partnerships

Also announced last month and briefly mentioned on today’s call, Livongo will now integrate data from wearable trackers from Apple, Fitbit, and Samsung. There weren’t any details on the data that is shared, but presumably it will start with steps, heart rate, and sleep. (An electrocardiogram (ECG) would also be possible with newer Apple Watches.) This data will be valuable for Livongo coaches, who will have more context to offer advice.

  • The Voluntis partnership was announced back in February 2017, but went unmentioned today. 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 this month.

  • While remarks briefly referenced “Abbott Libre” as a source of data, there were no updates on the FreeStyle Libre Pro partnership announced one year ago. Last month, Livongo competitor Omada announced a major partnership with Abbott to bring FreeStyle Libre (real-time) to its members with type 2 diabetes, both insulin- and non-insulin-using. We are eager to learn more about Livongo’s CGM strategy, especially as pricing goes down, reimbursement grows, form factor improves, and more people with type 2 (and eventually those with prediabetes) have access to CGM. We continue to see high potential in intermittent real-time CGM data “sprints,” as Onduo has been using – i.e., select 24/7 data at key points in the diabetes journey.

 

--by Albert Cai, Adam Brown, and Kelly Close