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Livongo Health Inc (NASDAQ:LVGO)
Q3 2019 Earnings Call
Nov 06, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Livongo Health third-quarter 2019 earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your speaker today, Alex Hughes. Thank you.

Please go ahead, sir.

Jenny Schneider -- Chief Medical Officer

Thank you, Zane. Good afternoon, everyone. As you know, our mission is to empower the millions of people with chronic conditions to live better and healthier lives. While we started in diabetes, which affects over 30 million Americans, we have since expanded Livongo's platform to serve the whole person so that members can address multiple chronic conditions in one seamless experience.

The current healthcare system is not designed to help people effectively manage chronic conditions, which has led to an increasingly expensive system for individuals as well as those responsible for the cost of care, such as employers and payers. Livongo began by asking, what if we built a platform that put the member first? What if we made our technology easy and intuitive to use, and at the same time, we collected more and better data for members? What if we harness this data along with the data we are able to gather from health claim trackers and drug prescriptions to give each member personalized actionable feedback? And what if we provided access to 24/7 real-time experts to provide a human touch? When we combined all of these elements together, we found that we were able to empower members to make sustainable behavior changes, leading to better outcomes. Our members are people you know and interact with every day, people like you and me. In fact, I'm a Livongo user and so are about 20% of our employees.

So if you want to understand our driving passion, that's where it comes from. And while we improve care, we also deliver lower cost for clients, and they love that. In fact, we show employers that they can substantially improve member outcomes while achieving average growth medical savings of more than $1,900 per participant per year in diabetes alone. 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. Hypertension is now fully integrated into the Livongo platform, and we see the recently expanded adoption of our solution by CVS Health as a major validation of our approach. In behavioral health, we will complete the first phase of our myStrength integration at the end of the year, effective for clients in January 2020.

This will enable an end-to-end client experience from implementation through reporting and billing and will give eligible members with other chronic conditions direct access to myStrength's full suite of digital behavioral health resources supplemented with expert coaching. In addition, we have teamed with MDLIVE and Doctor On Demand to enable access to virtual acute and primary care services, and we will enable access to telehealth services for eligible Livongo members beginning with Livongo for Behavioral Health effective Q1 2020 and soon expanding to Livongo's Diabetes and Hypertension offerings. All of our solutions at Livongo are powered by our underlying AI+AI data engine, which we believe is a significant competitive advantage. As we add more members and offer more solutions on our platform, we are better able to aggregate data from multiple sources, including continuous glucose monitors, for example, from the relationship we announced with Abbott Libre over a year ago, from watches like Apple, Samsung and from Fitbit.

Essentially, we take this aggregated data and interpret the data to generate actionable, personalized and timely signals. We then apply those signals to our members at just the right time and on the right purpose, by meeting our member where they are and integrating into their life flow. We then iterate in order to build improvements based on what we learn. This four-step process empowers our members to make sustainable behavior changes that lead to better outcomes and lower costs.

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 co-pays for diabetes and hypertension medications, but only if the employee joins Livongo and engages with the platform. This, in turn, helps improve our enrollment rates and lowers the members' costs of managing their chronic conditions. As Zane mentioned, our progress in the fully insured payer market and in government has been driven by our validation of the overall effectiveness of our clinically based programs and by our growing ability to drive meaningful behavior change across our chronic solutions.

To date, we have presented or published 34 abstracts in peer-reviewed articles across our various chronic condition programs and have 16 papers and abstracts in the pipeline. Further, we have conducted 48 client return on investment studies, with over 90% of those showing a positive ROI its first year. We believe such extensive validation of our platform is a major reason we've seen the success that Zane highlighted and the financial results that we will now discuss.

Lee Shapiro -- Chief Financial Officer

Thank you, Dr. Schneider, and good afternoon, everyone. We had a very strong third quarter. Revenue increased 148% year over year from $18.8 million to $46.7 million, driven primarily by growth in our core Livongo for Diabetes solution.

Livongo for Diabetes members increased 118% year over year to 207,815. This was an increase of 112,507 members from the third quarter of 2018. In the third quarter, we added 14,881 Livongo for Diabetes members sequentially on a net basis. In addition, third quarter estimated value of agreements, which Zane explained earlier, was a record $88.5 million.

Over 20% of this was from solutions other than diabetes, which we see as an important validation of our whole person strategy. Our clients and their members tell us they want one integrated experience to address their chronic conditions, and we're the only solution in the market who can deliver that at scale today. In a moment, I'll speak more on how we see third quarter EVA contributing to revenue in the remainder of this year and over the next 12 months. Turning to margins.

Gross margin was 73.9% on a GAAP basis and 75% on a non-GAAP basis, representing approximately a 6-point improvement sequentially and four points year over year. The improvement in gross margin was primarily driven by the following: first, leverage from investment in our AI+AI engine, which has improved the capacity of our member support and coaching teams to operate more efficiently; and second, higher incremental gross margins from members added in prior periods. To provide more color for those members added in the second quarter on our hypertension and weight management solutions, we expensed device costs upfront, which was reflected in margins in that quarter. This turned around in Q3 as it did for those members using Livongo for Diabetes, where we have fully amortized their device costs over the preceding 24 months.

We expect gross margin to remain consistent with that of the third quarter for the balance of the year. Note that we report using ASC 605. As we move to ASC 606, the margins will be less variable. Operating margin was negative 45.3% on a GAAP basis and negative 8.4% on a non-GAAP basis compared to negative 58.6% and negative 49%, respectively, in the same period last year.

Third-quarter adjusted EBITDA was a loss of $3.9 million compared to a loss of $9.2 million in the same period last year, an improvement of more than 2x. The improvement in operating margin and adjusted EBITDA resulted from higher gross margin in the quarter, as noted earlier; more efficient customer acquisition costs as deal sizes were larger; and lower-than-expected hiring, which will filter into future quarters. We also expect fourth-quarter sales commissions to increase. At the end of the third quarter, our full-time employee headcount was 576 compared to 385 coming into the year.

On a GAAP basis, net loss was $19.7 million or $0.27 per diluted share compared to a loss of $10.5 million or negative $0.64 per diluted share in the same period last year. On a non-GAAP basis, net loss was $3.4 million or negative $0.05 per diluted share compared to a net loss of $9 million or negative $0.55 per diluted share in the same period last year, demonstrating strong improvement in our performance. And this is consistent with our long-term plan to achieve profitability in 2021. Stock-based compensation in the third quarter of 2019 was $15.6 million.

The increase in stock-based compensation resulted from those shares vesting in connection with our initial public offering and new grants during the third quarter. Turning to the balance sheet. We finished the third quarter with approximately $400 million in cash, cash equivalents and investments, up $362 million from the second quarter as a result of our recent IPO. Inventory increased in the quarter as we get prepared for the large number of clients that will go live in the first quarter of 2020.

Additionally, accounts receivable increased with the growth of our business and as a function of large clients we have signed that have longer than historically experienced payment terms. We remain comfortable in how we're tracking here. With that, let me turn to providing our full year and fourth-quarter outlook but, first, provide a little context on our revenue model. Livongo's business is based on a per participant per month subscription model.

We bill clients on a monthly basis for each employee enrolled in Livongo, which clients love because they only pay for those who would like to use our platform. We have found this model to be mutually beneficial because it ensures better return on investment for the client and high client retention rates for Livongo. In our journey with a client, there are three important phases to keep in mind. The first phase is when we sign a client contract.

At this point, we do not recognize revenue but record the estimated contract value in our quarterly EVA metric, which includes only new client agreements and expansions from existing clients in that given quarter. I note that this is an estimate since we still must enroll members in future periods. This is why we've changed the name of the metric from total contract value while still calculating it in the same manner since it provides insight into the progress we are making in the market, engaging health plans, self-insured employers and others at risk for the cost of care. The second phase is the enrollment period.

This is when we begin enrolling members from a client and is when we start recognizing revenue on those new members. The enrollment period can vary across clients. For commercial clients, it's typically two to three months after signing or in January of the following year if the contract is signed in the latter half of a given year. For health plans, the time to enrollment could begin six to nine months after signing, with a majority of them starting in either January or July.

The final phase is the enrollment ramp. This is the 9-month period after launch when we see new members ramp on our platform. During this period, we have seen commercial clients of Livongo for Diabetes at 34% enrollment and some gradually increasing thereafter. For health plan and government clients, the enrollment percentages could be lower.

In light of these variations and recognizing that the mix of agreements sold by segment, that is commercial, health plan or government, will change quarter-to-quarter, we will share our expectations on the conversion of EVA to near-term revenue to help you better understand our business. Therefore, each quarter, we will report the estimated 12-month revenue contribution from EVA coming from that quarter's estimated -- gross estimated value of agreements. Before I turn to outlook, one last element of our business to understand is our business profile. While we sell all year long and are not tied to the benefits season per se, we tend to see signings higher in the second half of the year and more member adds in the first half of the following year.

This is because many companies will decide on what benefits to add ahead of open enrollment season. By contrast, we see higher member adds in the first half of the year subsequent to signing as clients launch, which provides great predictability for that is revenue we recognize all year long. Of the $85.5 million in third quarter EVA, which again reflects only new client agreements and expansions in the quarter, we expect approximately 40% to convert into revenue over the next four quarters, the vast majority of which will convert in 2020. Year-to-date, I want to highlight that our EVA is up 111%.

For 2019, we now expect revenue in the range of $168.5 million to $169 million, an increase of $7 million to $9.5 million from our previously disclosed range, and this is based on our robust performance and high visibility for the balance of the year. This implies fourth-quarter revenue in the range of $49 million to $49.5 million and which is 131% to 133% growth year over year. We now expect 2019 adjusted EBITDA loss in the range of $26.7 million and $26.1 million. This implies a fourth-quarter adjusted EBITDA loss of between $5.5 million and $5 million, again, ahead of what we shared with you in our last earnings call and strong progress.

We estimate that adjusted EBITDA losses will be higher in the fourth quarter as a result of commissions associated with increased sales and enrollment marketing for new launches of clients that will occur in the first quarter of 2020. Note that under ASC 606, commissions will be spread to the periods that benefit from them. With this in mind, 2019 adjusted EBITDA margin for the year is expected to be in the range of negative 15.9% to negative 15.5%, an improvement of 24.5 points to 24.9 points compared to 2018, something we are quite proud of. While we have some variability quarter-to-quarter, our focus is on the year-over-year progress we are making in our business.

Finally, with respect to 2020, as we've said previously, we will share our perspective for 2020 on our fourth-quarter earnings call. However, on a preliminary basis, based on our strong performance to date, we are comfortable with 2020 analyst revenue consensus, which currently shows a midpoint of $276 million. With that, I'll turn it back over to Zane for closing comments before we take your questions.

Zane Burke -- Chief Executive Officer

Thanks, Lee. It was a great quarter. The team is making great progress on a number of important fronts. In addition to our strong revenue and year-to-date member growth, we are pleased with our traction in important new markets, including fully insured and government as well as our whole person strategy.

With 255 new contracts signed and 150 scheduled launches, we feel good about the business as we approach 2020.And finally, this business is about truly improving health and care. Our members love us and we're delivering results that have not been previously seen. We are a new and different kind of company. Applied Health Signals is all about truly using data to change the way people experience their health and care, and Livongo is leading the way.

To our members, our clients and our investors, thank you for your support and confidence in us. With that, let's turn it over for questions.

Questions & Answers:


Operator

[Operator instructions] Our first question is from Richard Close with Canaccord Genuity. Your line is open.

Richard Close -- Canaccord Genuity -- Analyst

Great. Thanks for the question. Congratulations. Lee, I guess, on the estimated value of agreements, a little surprised with the magnitude of the sequential increase from the strong second quarter.

Just curious, first of all, was CVS or VSP included in the third-quarter numbers? Or if there's anything else to call out there?

Lee Shapiro -- Chief Financial Officer

Thanks for the call, Richard. And we do not break out kind of which clients are included in which quarter. We did share in our press release announcing the relationship with FEP, that, that was included both in the second and partially, again, with the expansion of the third quarter. But we haven't shared any perspective with regard to the rest of the makeup there.

Zane Burke -- Chief Executive Officer

Richard, this is Zane. I'll just add to that. I'm sorry. So the CVS and the VSP portions are really more of a hunting license as we move forward.

So they wouldn't have represented additional EVA in the quarter. Those are items by which gives us an opportunity to sell those additional solutions to those clients in the future.

Lee Shapiro -- Chief Financial Officer

As channel partners.

Zane Burke -- Chief Executive Officer

As channel partners. So they'll have an impact on future quarters than having an impact in the third quarter. Does that make sense?

Richard Close -- Canaccord Genuity -- Analyst

OK. Yes, that's very helpful. And then I thought it was interesting calling out the 20%-plus of EVA from the nondiabetes offerings. I'm curious if you backed that out and then may back it out of the second quarter, did the diabetes EVA increase sequentially?

Zane Burke -- Chief Executive Officer

Absolutely. We had a great quarter in diabetes. So we're feeling really good about all pieces of the business. And so yes, we did see good, strong growth in diabetes in both of those quarters.

Richard Close -- Canaccord Genuity -- Analyst

OK. Great. I'll jump back in the queue. Thanks.

Operator

Our next question comes from Robert Jones with Goldman Sachs. Your line is open.

Robert Jones -- Goldman Sachs -- Analyst

Great. Great. Thanks for the questions. I guess, Lee, maybe just to start on the revenue guide increase.

I know you touched on some of the drivers there, but I was hoping you could go back and just walk us through what changed sequentially to get you guys more comfortable with the higher revenue range. Was it lower churn? Was it better enrollment with legacy customers? Just any more detail you guys are willing to share there would be helpful. And then, I guess, since you did open the door to the 2020 conversation, I wasn't going to ask on that, but just if I think about the revenue growth that, that would indicate, is there any major pushes and pulls that you would -- you want to highlight as far as how you might end up above or below that current Street estimate for 2020?

Lee Shapiro -- Chief Financial Officer

Well, let me first start with the revenue guide for the rest of this year. And we have a very predictable business model. The nature of the agreements that we have in place with our billing is based on a per participant per month basis. And when we take into account the number of net members that we see in the balance of the year, we looked at that and saw that we had the opportunity to achieve the level of revenue with that increase of $7 million to $9.5 million from our previously shared range.

What I would also add is that part of this growth comes from the seeds that we planted in prior quarters with great partners, channel partners that Zane referred to, with some of the other significant growth that we've had with health plans and large self-insured employers. And as we shared when we were out on the road for our initial public offering, we continue to enroll at current clients. So we see growth, what we called our dollar-based net expansion rate, and that's also providing us with the ability to see forward in terms of number of members that we'll be able to serve. Zane, I don't know if you wanted to add any additional color with regard to that.

Zane Burke -- Chief Executive Officer

No, I think we're feeling very confident about both the enrollment rates and our continued satisfaction and retention of our clients and the low churn that we see overall on where we are.

Lee Shapiro -- Chief Financial Officer

And let me turn, Robert, to your question with regard to 2020. We'll share more perspective on 2020 in our Q4 earnings call. What I can say is that we're not slowing down the bus, so to speak, with regard to our selling efforts here for the balance of the quarter. And so hopefully, we'll continue to make great progress in the market.

We think that Q4 is one that is a meaningfully strong quarter for us. And so in terms of what I'd say our tailwinds coming into the year, if we outperformed what we're currently expecting, that could give us some more confidence going into 2020.

Robert Jones -- Goldman Sachs -- Analyst

No, that's helpful. And then if I could just sneak one more in around the TCV or the EVA, I guess, we should be calling it now. If I think about -- we're all getting used to kind of the cadence of these metrics still. I'm just wondering, as you think about the growth you saw in the quarter of that metric, how did that compare to what your expectations were internally? And then anything within the average pricing so the PPPM within this quarter's EVA metric worth highlighting are pretty in line with what you have been seeing within that quarterly metric.

Zane Burke -- Chief Executive Officer

This is Zane. I'll start with the first -- second part of the question. The pricing has remained consistent. And so we have not seen any changes there.

So it's in line and has been consistent really throughout the existence of Livongo. And if anything, the continued high ROI continues to provide us opportunities to sell these other solutions into our client base as well. So as you think about this, this is really about that strong ROI hitting. From a bookings perspective, we're pleased...

Lee Shapiro -- Chief Financial Officer

Signings. Signings perspective.

Zane Burke -- Chief Executive Officer

Sorry. From a signings perspective of EVA, that piece -- we're feeling really good about the progress we made in Q3. And as I've mentioned previously, the second half of the year is very strong, and we're expecting a very strong second half of the year. So we're very -- we're pleased with the progress, and we're really excited about what the rest of the year looks like.

Robert Jones -- Goldman Sachs -- Analyst

Great. Thanks so much.

Operator

Our next question comes from Sean Wieland with Piper Jaffray. Your line is open.

Sean Wieland -- Piper Jaffray -- Analyst

Hi. Thank you. So on CVS' call this morning, they mentioned expanded services into chronic disease management in a more coordinated way. Wanted to know if this -- how you guys are working with MinuteClinic to maybe help enable this or help them in their efforts.

Glen Tullman -- Founder and Executive Chairman

Yes, I'll go ahead and take that. I think you're safe to assume that the expanded services that we're talking about are reflection of the expanded offering to our whole person platform that we've talked about and that we mentioned, that Zane mentioned in the call, without -- I don't think at this point, we'd go into more detail, but I expect those to show up in a variety of areas across CVS.

Sean Wieland -- Piper Jaffray -- Analyst

OK. Thanks. And then, Lee, you mentioned the EVA, expect 40% will convert to revenue over the next four quarters. Can you just help me better understand what you mean by that?

Lee Shapiro -- Chief Financial Officer

Sure, Sean. So what we're trying to do is give a perspective of revenue conversion from the signings that are reflected in our estimated value of agreements, 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, as I shared in my prepared comments as well as the supplemental slides that we provided, 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, and that's why over the course of the next four quarters or basically the next 12 months, that we'll see that start to occur.

Sean Wieland -- Piper Jaffray -- Analyst

OK. So if I understand this correctly, 40% of the $85.5 million should be in incremental revenue in Q3 of '20? And I don't want to take -- we can take this offline if we need to.

Lee Shapiro -- Chief Financial Officer

So by the time we would conclude the third quarter of '20, we should be in the range of that 40% estimate that we're giving you. Recognize that EVA is, itself, an estimate. And this conversion that we're talking about into revenue is also an estimate based on enrollment. But what we're trying to do is give a perspective based on the assumptions that we're using in terms of calculating both EVA, as we've shared in the materials that we filed and the footnote on the slides that we've prepared, as well as kind of give you this conversion.

We want to give perspective in terms of how rapidly we see some of that signing turn into revenue coming over the next four quarters. So Q4 and then into the first three quarters of next year.

Sean Wieland -- Piper Jaffray -- Analyst

Thank you.

Operator

Our next question comes from Ricky Goldwasser with Morgan Stanley. Your line is open.

Raymond Xu -- Morgan Stanley -- Analyst

This is Raymond on for Ricky. My first question is regarding the FEHBP contract that you signed. Just did some back of the envelope math, and it sounds like the implied enrollment rate for that is very low compared to what you guys see for the ASO clients. Just wondering if you could talk about the assumptions you're making on calculating that and if there's an opportunity to increase that enrollment rate.

Thanks.

Zane Burke -- Chief Executive Officer

Sure. Thanks for the question, Raymond. And as you think about it, based on our experience from FEP and the members, which happens to be a bit older population base with a lower number of emails and other things that we traditionally would have in our commercial business that would allow for higher populations, we have great access to a broad number of members, so the entire membership, but -- which is really fantastic, and we're excited about that portion. It does allow us to grow, but we're -- based on our expectations and what we've seen from the historical perspective, we're anticipating a lower enrollment rate just based on access to some of those pieces.

Raymond Xu -- Morgan Stanley -- Analyst

Got it. OK. And then is there any -- like any initiative that you can take in order to increase that enrollment ramp? Or is this sort of -- like is this sort of a conservative estimate at this point?

Zane Burke -- Chief Executive Officer

Obviously, we're looking at it from an appropriate perspective, and we want to be -- put the appropriate guidance out there. And based on what we know and how we run our models, we're modeling that, and that's what we've provided to you. It does have the ability for us to improve our enrollment rates because we have access to the full population. And so to the extent that we can continue to learn and are -- and we get better signals from both the membership as well as how we learn more about this population, we have the opportunity to increase the enrollment rates over time.

Raymond Xu -- Morgan Stanley -- Analyst

Thank you.

Operator

Our next question comes from Anne Samuel with JP Morgan. Your line is open.

Anne Samuel -- J.P. Morgan -- Analyst

Congrats on the quarter. You spoke to over 20% of EVA from solutions outside of diabetes. I was hoping maybe you could provide some color on what you're seeing in terms of growth within the nondiabetes segment? And which areas are seeing the strongest cross-sell?

Zane Burke -- Chief Executive Officer

So this is Zane. I highlighted hypertension as being particularly strong. We're seeing that -- a good pickup in that space and the adoption -- early returns are very strong as well. So the whole person platform strategy is resonating with our client base.

And so it isn't about being a particular disease state, it's being -- about being a person and managing all those pieces. And so it's really much more about the whole person strategy and the belief that the conditions that we are attacking on behalf of our members and our clients will deliver significant results to the clients. And so that's -- we're seeing good progress across all those conditions and, really, that whole person mentality. Jenny, anything you'd like to add to that?

Jenny Schneider -- Chief Medical Officer

No, I think that's it.

Anne Samuel -- J.P. Morgan -- Analyst

Great. Thanks. And then I was hoping maybe you could speak a little bit to the partnerships at the telehealth services, how that's going to work and what the rollout across the different segments look like.

Jenny Schneider -- Chief Medical Officer

Yes, this is Jenny. I'll take that. And so we're really excited as we think about the escalation care pathways within our suite of services for people with chronic conditions. And as we announced in our announcement -- as we shared in our announcement, we'll be continuing -- starting in behavioral health, and so 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.

And then you'll start to see that expansion throughout the rest of our product solution over the coming year.

Anne Samuel -- J.P. Morgan -- Analyst

Great. Thanks very much.

Operator

Our next question comes from Daniel Grosslight with SVB Leerink.

Daniel Grosslight -- SVB Leerink -- Analyst

Hi. Thanks for taking the question and congrats on the raise here. I just want to focus on the expansion with CVS and the new VSP partnership that you guys announced. I think historically, about half of your sales came from channel partners.

I was just curious how you think that dynamic will change going forward as you kind of expand with CVS and VSP. And if there's any difference in margin profile or profitability when it comes from -- when a member comes from a channel partner like CVS or VSP versus you selling directly.

Zane Burke -- Chief Executive Officer

Well, thanks for the question, and thanks for the congratulations piece. What I would say is what the biggest point here is that in CVS case, it's the totality of what they're doing. So they're embracing our whole person strategy and embedding that as a reseller. So that's really significant in the scheme of things.

So it makes the opportunity much bigger. They're kind of matching our total addressable market elements, which is massive. And so that just -- that will create some additional scale for us. I think what you'll see is not really a change so much in the percentage of channel partner sales as much as you'll just see the pie continue to get bigger.

And it's just recognition of our partners also see that it's important to do the whole person and the value that Livongo specifically brings to that place. As we've discussed before, we give up single points of top line revenue in exchange for speed and access in those channel partner mixes, and we have a great set of channel partners, and we're excited to continue that with CVS. And with VSP, it's a combination of things. It's an additional channel partner.

They also became a client, so a small footprint from a client perspective. But the really important part here is the ecosystem for their members and really creating a better experience for their members and our members at the same time. And that's really what Livongo's about, which is how do we make it as simple as possible to keep it between the lines, empower our members to live their best and healthiest life. So we're excited about both those relationships.

From an economic perspective, obviously, the CVS piece will be a great growth driver for us as we move forward.

Daniel Grosslight -- SVB Leerink -- Analyst

Got it. Thanks. And then just one more, if I could, on your expectations for EVA going forward. You mentioned that 20% right now is from chronic conditions other than diabetes.

If you were to sit here one year from now, what do you think the percent would be from outside of diabetes? And how do you think that's going to impact your profitability?

Lee Shapiro -- Chief Financial Officer

So this is Lee. I'll take it, but I'll also ask Dr. Schneider to comment on our whole person strategy. My perspective is that we have a unique position in the marketplace as our clients are asking us to think about their members, their team members as individuals and not as a given disease state or condition.

And so we're starting to sell through more multiple condition agreements as part of the signings that we have. And the benefit is that as we go forward and increase the size of the overall booking, what we've done is we've taken some of that selling cost out. We're not selling different clients kind of individually. We're able to get leverage in the sales process, even if the margins vary based on condition.

And so it -- basically, as it nets itself out, I think that we'll be fine from a margin standpoint. But I'd also like to think that when you look at Livongo, we have a unique competitive advantage because we have a single experience that our clients want to work with. Today, we're the only solution in the market that can do this at scale and provide a whole person's experience. But Dr.

Schneider?

Jenny Schneider -- Chief Medical Officer

Yes, I would just underscore what Lee mentioned is that what we see is the overlap of the suite of conditions that we offer is very large. So we know that 70% of people with diabetes also have hypertension, and our clients are buying the "bundled package" to take care of the whole person. So we're delivering that experience to the member and selling it to our clients across multiple conditions.

Daniel Grosslight -- SVB Leerink -- Analyst

Great. Thank you.

Operator

Our next question comes from Donald Hooker with KeyBanc. Your line is open.

Donald Hooker -- KeyBanc Capital Markets -- Analyst

Great. So maybe a quick question on the gross margins. There is a coaching element to that. Does the coaching -- how big is the coaching sort of expense? I'm just roughly framing the -- when I look at cost of services, what proportion of that is coaching? And do you find that sort of the more mature diabetes members use less coaching? I mean is that a source also of margin expansion on the gross margin line?

Lee Shapiro -- Chief Financial Officer

So Don, let me just comment quickly on margin, and then I'll turn to the benefits of our AI+AI engine, I mean, what it's doing for coaching to Dr. Schneider. We haven't broken out the pieces of our cost of sales between device costs and coaching costs, the data services and the telecommunication costs. Those are all part of that cost of goods sold/cost to services that we provide.

But in terms of coaching, we're getting much more efficient using our tools to provide health nudges that don't require human interaction. And now having delivered millions of those nudges, it allows us to be much more efficient. But let me ask Jenny to comment on that as well.

Jenny Schneider -- Chief Medical Officer

Yes, keep in mind that every one of our members gets digitally coached every time they interact with us. And we've invested in a number of different features, including, most recently, food logging, which allows us then to really give that deep dive sort of telephonic coaching to the people that really need it to drive the maximal outcome. So all of that is built on our AI+AI platform, and it's really the reason that we're able to scale efficiently, go faster and drive deeper and deeper clinical outcomes.

Donald Hooker -- KeyBanc Capital Markets -- Analyst

OK. Super. I mean do you -- just -- again, just sort of thinking in my mind, is there sort of a ratio of coaches to members? Or do you grow that group of coaches with the members as the numbers grow?

Lee Shapiro -- Chief Financial Officer

So Don, from a coaching standpoint, we've become very efficient because of our use of technology based on the number of members that our coaches are able to serve, and we continue to see improvement in that regard. But we haven't shared either the number of coaches or what that ratio is. But I will tell you that as the business has grown from where we were in 2016 and 2017 to where we are today, the technology has really enabled us, again, a very competitive differentiation for Livongo to be able to use the information that we have in our Applied Health Signals, AI+AI engine to drive better member engagement.

Operator

Our next question comes from Scott Berg with Needham & Company. Your line is open.

Scott Berg -- Needham and Company -- Analyst

Thanks for taking my questions and congrats on a great quarter. I have one and a follow-up. I guess I wanted to follow up on the question earlier about the penetration into the Federal deal or at least the assumptions there is, but I want to ask it a different way. If you look at different age sets, whether it's 10 to 15, 15 to 20, 20 to 40, let alone 65 or above, is -- do adoption rates change across different age populations, assuming your ability to reach them is constant? Thanks.

Jenny Schneider -- Chief Medical Officer

Thanks, Scott, for the question. This is Jenny. So the answer is a slightly nuance, which is to say we have multiple channels by which we are able to enroll and encourage our members to continue on the platform. And the channels -- the adoption rates change by channel given the age bracket.

So for example, some people are -- certain age brackets are more facile with email, others are more facile with sort of hard copy mail. So there's nuances around the channels and the cohort.

Scott Berg -- Needham and Company -- Analyst

Got it. Helpful. And then my follow-up question is for Lee. On the estimated contract value metric, you mentioned that 40% will convert over the next 12-month period, and I think I can appreciate and understand how that works.

But any color on that conversion metric relative to either the Q2 results or maybe how that metric trended from the year-ago period?

Lee Shapiro -- Chief Financial Officer

No, thank you for the question. It's a great question. We're providing that conversion figure going forward. We haven't gone back and now said, what would it have been for Q2 or for Q1 of this year? But it's something that depending on when an agreement is signed, for example, those agreements that are signed in Q1, we would have expected more near-term conversion because they'd launch in Q2 and you'd see closer in conversion.

We shared a little bit in some of the supplemental materials about the timing for how we see revenue generated from when clients launch with us. And when we sign an agreement, let's say, Q3, Q4, many of those agreements don't launch until Q1. So that's why we expect, for example, in this quarter, very little of that to convert in Q4. Many of those launches occur in Q1 of next year.

So to give you some generalized guidance, I'd say, Q1, you start to see revenue conversion toward the tail end of Q2 from those agreements and then Q2 sales toward the end of Q3. But then as you get into Q3, you see more of it going into the following year. I hope that's helpful.

Scott Berg -- Needham and Company -- Analyst

Very much so. Thanks for taking my questions.

Operator

Our last question comes from Richard Close with Canaccord Genuity. Your line is open.

Richard Close -- Canaccord Genuity -- Analyst

Great. Thanks for the follow up. Lee, just on the 40% conversion. And you made some comments on enrollment rates on health plan and government versus commercial.

So does the -- how do you think about -- if you get a lot of health plan and conversion EVA, would you alert us to that? Because I would assume that would have a lower conversion over the next four quarters.

Lee Shapiro -- Chief Financial Officer

Richard, it's a great point. And part of the reason why we've moved to the providing you with some sense of what to estimate coming out of a given quarter's estimated value of agreements, because of the variables, both mix in terms of clients, mix in terms of products, mix in terms of timing of when those clients will launch, it's very hard for us to be prescriptive in terms of saying, "Any given agreement that we signed when we reported under the old metric, contract value, when would that occur?" And so we felt that providing our investors with insights into what we see coming out of any given quarter's EVA will allow us to give you our perspective based on what we see that mix is as opposed to, "I'm giving you all the ingredients of the soup, so to speak, because there's just too many variables there," as we noted in terms of how we create those estimates.

Richard Close -- Canaccord Genuity -- Analyst

OK. And then just as a follow-up. You mentioned ASC 606 and just -- can you -- I'm sure you're working with your auditors on that as we speak, but can you just give us any thoughts in terms of how you're thinking that's going to impact the financials going forward and how we should think about that?

Lee Shapiro -- Chief Financial Officer

I'll reiterate what we -- yes, I'll reiterate what we said in the S-1, which is we don't believe that it will have a material impact. From a revenue standpoint, we believe that it is going to be immaterial in terms of how it is that we recognize revenue because we have -- so much of our revenue is based on per participant per month, which allows us to have a very predictable business model. From an expense standpoint, there'll be some smoothing, as I referred to in my comments. We have commissions that will be attributed to the periods that the commissions relate to.

We'll have certain expenses that are associated with our cost of sale, that today, we were recognizing in a quarter that we deployed a solution that will be spread to the quarters that are benefited by that investment in our members in future periods. So I think you'll see some smoothing of margins. But on balance, we feel as though 606 will not cause a meaningful distortion in terms of our financial metrics.

Richard Close -- Canaccord Genuity -- Analyst

OK. Thank you.

Zane Burke -- Chief Executive Officer

Thank you very much for your calls today and for your questions today and for listening to the call. I'm pleased with the quarterly results but, more importantly, pleased with the long-term progress that we're making, attacking this significant opportunity. Thank you, all, and have a great day.

Operator

[Operator signoff]

Duration: 57 minutes

Call participants:

Jenny Schneider -- Chief Medical Officer

Lee Shapiro -- Chief Financial Officer

Zane Burke -- Chief Executive Officer

Richard Close -- Canaccord Genuity -- Analyst

Robert Jones -- Goldman Sachs -- Analyst

Sean Wieland -- Piper Jaffray -- Analyst

Glen Tullman -- Founder and Executive Chairman

Raymond Xu -- Morgan Stanley -- Analyst

Anne Samuel -- J.P. Morgan -- Analyst

Daniel Grosslight -- SVB Leerink -- Analyst

Donald Hooker -- KeyBanc Capital Markets -- Analyst

Scott Berg -- Needham and Company -- Analyst

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