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Livongo Health Inc (NASDAQ:LVGO)
Q2 2020 Earnings Call
Aug 05, 2020, 8:00 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 second-quarter 2020 earnings conference call and webcast. [Operator instructions] I would now like to hand the conference over to your speaker today, Mr. Jason Plagman, vice president of investor relations. Please go ahead, sir.

Jason Plagman -- Vice President of Investor Relations

Thank you, operator, and thank you, everyone, for joining us today on our second-quarter 2020 earnings call. This call is being broadcast live over the web and will be accessible on the Investor Relations section of Livongo's website, www.livongo.com. Joining me to discuss our results are Zane Burke, our chief executive officer; Dr. Jennifer Schneider, our president; and Lee Shapiro, our financial officer.

During the course of this call, Livongo's management team will make projections and other forward-looking statements regarding future events or our future financial performance, our assumptions underlying that outlook and our expectations regarding achieving profitability in 2021 on an adjusted EBITDA basis. We wish to caution you that such statements are simply predictions based on internal assumptions and are subject to risks and uncertainties that may cause actual events that may differ materially, including risks regarding the proposed merger with Teladoc Health and the extent of the COVID-19 pandemic's continued impact on our business. A discussion of these and additional risks and uncertainties can be found in the earnings press release that we issued today under the section captioned Forward-Looking Statements, as well as in the -- as well as in the documents that we file from time to time with the Securities and Exchange Commission, specifically the Risk Factors section of our upcoming filing on Form 10-Q. I also want to inform our listeners that management will make some reference to non-GAAP financial measures during the call.

You will find supplemental data in our press release, which includes reconciliations of the non-GAAP measures to the comparable GAAP results. In addition, to assist with the financial portion of this earnings call, you'll find supplemental slides on our Investor Relations site. I would now like to turn the call over to our Chief Executive Officer, Zane Burke.

Zane Burke -- Chief Executive Officer

Thank you, Jason, and thank you to everyone for joining us today. I would like to begin by saying how excited I am about the merger with Teladoc we announced today and the opportunity to bring together the two most innovative companies to create a global leader in virtual care. We will discuss the merger further on the joint conference call. Right now, I'd like to discuss Livongo's second-quarter results.

Livongo entered 2020 with significant momentum, and we continue to hit on all cylinders during the quarter. Livongo achieved a number of milestones during the second quarter, including the following: revenue grew 125% to $92 million; we added more than 80,000 new Livongo for Diabetes members on a net basis during the second quarter; on a year-over-year basis, enrolled diabetes members grew by 113% for the first time, exceeding the $100 million level for quarterly EVA, which came in at $109 million; signing new and expanded footprints with four Fortune 100 companies; we delivered adjusted EBITDA of $13.3 million in the second quarter and achieved our target of adjusted EBITDA profitability one year sooner than our plan; and we have captured approximately 750 million data points, which increased by more than 150 million data points during the quarter. Looking at our second-quarter results, our investments in data science produced stronger-than-expected enrollment and member retention. Enrollment in programs that launched in 2020 are ramping faster than expected, including strong performance in the first six months since our launch with the Federal Employee Health Benefits program, or FEP.

We also delivered strong performance in the second quarter in our hypertension, diabetes prevention and weight management programs. Some of the largest, most innovative employers and health plans are choosing Livongo due to our whole-person approach to care and our ability to deliver significant clinical and financial improvements at scale. As the shift to virtual care accelerates, and adoption of remote monitoring technology becomes the new standard of care, Livongo continues to build on its leading position in the virtual health market. We are maintaining great momentum across multiple client segments and sales channels, and Livongo is benefiting from our diverse go-to-market approach and channel partnerships.

We're also seeing continued strength in the health plan market and have added 10 fully insured plans as clients so far in 2020, as well as a significant contract expansion to provide multiple programs to the New Jersey State and School Employee Health Plan. In the commercial employer space, we signed contracts with four companies in the Fortune 100 for new or expanded programs and several direct contracts with large and innovative companies. For example, a Fortune 10 multimedia company selected Livongo's Applied Health Signals platform to empower its employees and their dependents to better manage their chronic conditions. This client will make the Livongo for Diabetes, Livongo for Hypertension, and Livongo for Weight Management solutions available to its eligible U.S.

employees, and they selected Livongo for full deployment after an extensive evaluation. We had other notable contracts in the second quarter, including the following. First, we gained a new footprint with a Fortune 100 company for our diabetes, hypertension and weight management solutions, in conjunction with Express Scripts' Health Connect 360 program. As a reminder, Livongo was named as the only preferred partner for Health Connect 360 when it launched in late 2019 due to our ability to deliver a highly personalized care experience, as well as demonstrable clinical and financial outcomes.

Second, we significantly expanded our relationship with a Fortune 100 aerospace company to offer Livongo for Diabetes to all its eligible employees and their dependents. We believe this demonstrates that even large employers that have seen industries adversely impacted by COVID-19 are investing in employee benefit programs that can deliver a proven clinical and financial ROI at scale. Third, we also signed a contract with a Fortune 100 technology company for our diabetes prevention program, which represents a displacement of a competitor's offering and supports our proven clinical outcomes for our diabetes prevention program. Overall, we remain very confident with Livongo's leading position in the Applied Health Signals space.

We believe that joining with Teladoc will build on the momentum Livongo has demonstrated over the last few years, which allows us to pursue our mission of empowering people with chronic conditions to live better and healthier lives. Our data science capabilities, our whole-person approach and our proven track record of driving positive clinical and financial outcomes while also delivering a great member experience are all clearly resonating in the market as it continues to shift to a virtual care model. I will now turn the call over to Dr. Jennifer Schneider to provide additional details regarding how we are leveraging data science to drive positive clinical and financial ROI for our clients and grow our membership.

Jenny?

Jennifer Schneider -- President

Thank you, Zane. Good morning, everyone. I would also like to state how excited I am about the opportunities created by the merger of Livongo and Teladoc, which will be discussed further on the joint conference call. Through this combination, we will be able to capture a broader set of data from Teladoc's 70 million members and leverage our data science capabilities to empower more people living with chronic conditions to live better and healthier lives.

I would like to discuss two key factors that are driving Livongo's outstanding performance over the last few quarters, and that position us further for success after we join with Teladoc. First, our AI+AI engine and data science capabilities; and second, the proven clinical and financial ROI that we deliver for our clients. Our AI+AI engine and data science capabilities have helped drive our strong enrollment performance in 2020. In the FEP program, we tailored our outreach approach to an older population and emphasized multiple channels for enrollment, resulting in stronger-than-expected performance so far.

Additionally, we are seeing better-than-expected enrollment growth in our legacy clients that launched programs in prior years, which we attribute to our improved outreach methods and heightened awareness of health-related concerns among people living with chronic conditions during the COVID outbreak. Livongo's Applied Health Signals platform is constantly learning and evolving as our AI+AI engine aggregates and interprets clinical data and then applies those iterative insights into the member's lifestyle in order to provide a more personalized care experience. During Q2, Livongo surpassed 100 million total blood glucose checks since Livongo for Diabetes launched, and that number had been growing by 1 million every four days, which illustrates the size and scalability of our platform and the scope of the insights we can derive. We are able to leverage a combination of data science and clinical findings to continue to improve outcomes, reduce costs and empower people to more effectively manage their chronic conditions.

Second, our data science capabilities help us deliver proven, scalable, financial and clinical ROI for our clients. On the clinical side, data captured by the Livongo platform was the foundation of several studies that were presented at the American Diabetes Association scientific sessions in June. One study identified specific predictors of hypoglycemic or hyperglycemic events and found that models carrying blood glucose values with additional tags, such as feeling tags and meal tags captured by Livongo, are more likely to predict those who are at risk of needing costly interventions than models using blood glucose data alone. Additionally, over the past three years, we have completed numerous ROI studies for participating diabetes clients, where 99% of the studies conducted for clients on our platform after year one and demonstrated a positive financial ROI and 100% of studies for clients after years two and three demonstrated positive financial ROI.

Overall, we are confident that the combination of Livongo and Teladoc will allow us to drive improvements in our members' health journeys, including expanding access, reducing cost and empowering our members. With that, I'll turn the call over to Lee.

Lee Shapiro -- Chief Financial Officer

Thank you, Jenny, and good morning, everyone. I would also like to share my enthusiasm regarding today's announcement of the merger and express our collective gratitude to Livongo's members, clients, shareholders and the amazing Livongo team. We had another stellar quarter. Revenue for the second quarter exceeded our prior guidance driven by stronger-than-expected enrollment and member retention, which we view as dividends from the investments we have made in our data science capabilities over the last five-plus years.

Revenue for the second quarter increased 125% year over year to $92 million, up from $41 million last year. This strong performance came principally from growth in our core Livongo for Diabetes solution, as well as meaningful contributions to revenue from our hypertension, weight management and behavioral health offerings. During the second quarter, the company also benefited from nonrecurring revenue that totaled approximately $2.5 million, which consisted of the achievement of certain performance-based milestones and service obligations. Even excluding the nonrecurring revenue, second-quarter revenue increased 119% year over year.

Livongo for Diabetes members increased 113% year over year to over 410,000. This is an increase of over 217,000 members on a net basis from the year-ago period. Strength from our other programs was also evident with more than 20% of clients now utilizing more than one solution from Livongo, up from 18% last quarter, demonstrating our improved product density. Estimated value of agreements, or EVA, in the second quarter was a record $109 million, compared to $74 million in the second quarter of last year, an increase of 46% year over year.

Exceeding the $100 million threshold is a tremendous milestone and demonstrates the strength of our sales organization. As Zane mentioned, we added new footprints with Fortune 100 clients, as well as expansions with existing health plans and self-insured employers. This diversity in our sales motion allows us multiple ways to win as evidenced by what we signed in the second quarter. When we spoke with you regarding the first quarter, we noted that there was an acceleration of deals from future quarters into the first quarter.

These efforts paid off again with similar results as our team successfully pulled forward contracts into the second quarter. Turning to gross margin. We continue to benefit from better economies of scale and the competitive advantages provided by our AI+AI engine. Gross margin in the second quarter was 76.6% on a GAAP basis, up 580 basis points from the second quarter in 2019 and 77.3% on a non-GAAP basis, up 560 basis points over the same period last year, as we continue to gain leverage in our coaching model and experience higher incremental margins from members who stay on our platform for multiple years.

With respect to operating margins, for the second quarter, operating margin was minus 0.3% on a GAAP basis and positive 12.9% on a non-GAAP basis, compared to minus 32% on a GAAP basis and minus 19% on a non-GAAP basis, respectively, in the same period last year. The improved operating margins demonstrate the leverage we are obtaining from prior investments in people and infrastructure. In the second quarter, we experienced a net loss on a GAAP basis of $1.6 million or minus $0.02 per diluted share while attaining net income on a non-GAAP basis of $12.5 million or $0.11 per diluted share. Adjusted EBITDA for the second quarter was $13.3 million, compared to a loss of $7 million in the same period last year, a significant turnaround.

Turning to the balance sheet. We finished the second quarter with approximately $836 million in cash, cash equivalents and short-term investments. For the six months ended June 30, Livongo's net cash flow from operations was negative $3.6 million, compared to negative $40 million in the first half of 2019. This improvement demonstrates that our improving adjusted EBITDA is having a significant positive impact on our cash flows.

With that, I will close today's call and invite you to our joint call with Teladoc, which is coming up shortly on a different line. As well as to thank you for your support, and we look forward to working with you. That will end the call.

Questions & Answers:


Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Jason Plagman -- Vice President of Investor Relations

Zane Burke -- Chief Executive Officer

Jennifer Schneider -- President

Lee Shapiro -- Chief Financial Officer

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