U.S. Markets open in 2 hrs 43 mins

Edited Transcript of LVGO.OQ earnings conference call or presentation 5-Sep-19 12:00pm GMT

Q2 2019 Livongo Health Inc Earnings Call

Sep 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Livongo Health Inc earnings conference call or presentation Thursday, September 5, 2019 at 12:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Alex Hughes

Livongo Health, Inc. - VP of IR

* Glen E. Tullman

Livongo Health, Inc. - Founder & Executive Chairman

* Jennifer Schneider

Livongo Health, Inc. - President

* Lee A. Shapiro

Livongo Health, Inc. - CFO

* Zane M. Burke

Livongo Health, Inc. - CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Anne Elizabeth Samuel

JP Morgan Chase & Co, Research Division - Analyst

* Daniel R. Grosslight

SVB Leerink LLC, Research Division - Associate

* Donald Houghton Hooker

KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst

* Jessica Lee Schmerler

Chardan Capital Markets, LLC, Research Division - Senior Research Associate

* Richard Collamer Close

Canaccord Genuity Corp., Research Division - MD & Senior Analyst

* Rivka Regina Goldwasser

Morgan Stanley, Research Division - MD

* Robert Patrick Jones

Goldman Sachs Group Inc., Research Division - VP

* Scott Randolph Berg

Needham & Company, LLC, Research Division - Senior Analyst

* Sean William Wieland

Piper Jaffray Companies, Research Division - MD & Senior Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the Livongo Health Second Quarter 2019 Earnings Conference Call and Webcast. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Mr. Alex Hughes, Vice President of Investor Relations. You may begin.

--------------------------------------------------------------------------------

Alex Hughes, Livongo Health, Inc. - VP of IR [2]

--------------------------------------------------------------------------------

Thank you for joining us this morning for our second quarter 2019 financial results. This call is being broadcast live over the web and can be accessed until we hold our next quarter earnings call in the Investor Relations section of Livongo's website, www.livongo.com.

Joining us this morning to discuss our results are Glen Tullman, our Founder and Executive Chairman; Zane Burke, Chief Executive Officer; Dr. Jennifer Schneider, our President; and Lee Shapiro, our Chief Financial Officer. Our prepared remarks will be followed by a Q&A session.

We would like to remind you that, during the course of this conference call, Livongo's management team will make projections and other forward-looking statements regarding future events or our future financial performance. We wish to caution you that such statements are simply predictions, and actual events may differ materially. We refer you to the documents that we file from time to time with the Securities and Exchange Commission, specifically our filings on Form S-1 and 10-Q. These documents identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.

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.

I would like to now turn the call over to our Chief Executive Officer, Zane Burke.

--------------------------------------------------------------------------------

Zane M. Burke, Livongo Health, Inc. - CEO & Director [3]

--------------------------------------------------------------------------------

Thanks, Alex, and thank you, everyone, for joining us this morning for Livongo's inaugural earnings call as a public company. This is a very exciting time to be at Livongo as we fulfill our mission of empowering people with chronic conditions to live better and healthier lives. By taking a whole person view, we enable members to address multiple chronic conditions in an integrated platform, which drives higher client satisfaction, real clinical outcomes and compelling ROI for the industry.

As we focus on driving continued growth, we have multiple opportunities ahead including driving higher enrollment, cross-selling multiple solutions at existing clients and expanding our client base.

Turning to the second quarter. We're really pleased to report very strong results as we met or exceeded all of our financial and operational objectives. With Livongo's platform in high demand, we continued to experience both rapid member growth and revenue growth.

Enrollment growth in the second quarter for our Livongo for Diabetes service was 140% year-over-year and 18% sequentially, reaching more than 192,000 members.

We also had a great first half of 2019 cross-selling our other solutions, such as Livongo for Hypertension, and we believe this is an indication of the market embracing our whole person strategy.

Second quarter revenue growth was also very strong. We reported Q2 revenue of $40.9 million, up 156% year-over-year and 28% sequentially. Despite our rapid growth, we believe we've barely scratched the surface of our addressable market.

Our efficient go-to-market model enables us to sell directly to large self-insured companies, government entities, labor unions or to sell through health plans, health systems or pharmacy benefit managers. We continued to expand our reach in these areas with the number of clients on our platform growing 92% organically year-over-year and another 120 added through our acquisition of MyStrength, bringing our total to 720 clients. We now reach over 20% of the Fortune 500 companies, 4 of the 7 largest health plans and work closely with the 2 leading pharmacy benefit plan managers in the country.

In the quarter, we also won a sizable contract that we look forward to communicating more on in the future. We believe this further demonstrates the broad interest in our platform and the momentum in our business.

With that, I'd like to ask our Founder and Executive Chairman, Glen Tullman, to share our story and speak to why we're experiencing such great success.

--------------------------------------------------------------------------------

Glen E. Tullman, Livongo Health, Inc. - Founder & Executive Chairman [4]

--------------------------------------------------------------------------------

Thank you, Zane. Good morning, everyone. While some of you have followed us for some time, others are new to the Livongo story. So I wanted to take just a moment to share our vision. Livongo's mission has always been to empower people with chronic conditions to live better and healthier lives. The advancement of technology and data science has transformed nearly every industry except health care to create new consumer-first experiences that are both personalized and empowering. We've seen this with Google in content, Facebook in community and Amazon in commerce. At Livongo, we asked why can't we leverage the same advancements to bring a similar consumer-first experience to the 147 million Americans with one or more chronic conditions.

People with chronic conditions are currently caught between a health care system that is not designed to continually care for them and a plethora of digital health devices that fail to provide actionable, personalized and timely feedback. The result has been greater confusion, complexity and higher costs for everyone including employers, people with chronic conditions and those who pay for their care.

Livongo's platform solves this by combining innovative technology and data science with a human touch to provide an experience that members don't just like but love. This enables us to empower members to make sustainable behavior changes that lead to better outcomes for our members and to lower costs for both our clients and for our members who increasingly pay for more of their care. We've been able to show employers that they can substantially improve member outcomes while achieving average gross medical savings of more than $1,900 per participant per year in diabetes alone.

While we started with diabetes, which impacts more than 30 million Americans and hundreds of millions of people around the world, our vision has always been about the health of the whole person. In fact, over 70% of people with diabetes also suffer from hypertension. And over 40% of Americans have more than one chronic condition. Therefore, Livongo is designed to be a unified platform, one tech stack and one app, where members can manage multiple chronic conditions seamlessly.

In addition to Livongo for Diabetes, we offer Livongo for Hypertension, Livongo for Prediabetes and Weight Management and Livongo for Behavioral Health. In short, Livongo wins because we've built a platform focused on the consumer experience and one that makes a real difference in our members' lives.

I'm excited about the opportunity ahead. We've barely scratched the surface in the diabetes market alone with less than 1% penetration in the U.S.

And I'm even more excited to have such an experienced leadership team to drive execution. Zane brings over 2 decades of health care IT leadership and is the perfect person to take the company to the next level while leading Livongo through this period of rapid expansion. Dr. Jennifer Schneider, our President, adds significant health care experience and broad strategic perspective. And my longtime business partner, Lee Shapiro, contributes unrivaled financial and industry expertise in his role as CFO. This team and the remainder of our talented leadership team frees me up to focus my time and energy on nurturing strategic accounts and relationships, which I love to do.

With that, I would like to now turn the call over to Dr. Jennifer Schneider who is responsible for, among other areas, our product and data science teams, and Dr. Schneider will share more about our platform. Dr. Schneider?

--------------------------------------------------------------------------------

Jennifer Schneider, Livongo Health, Inc. - President [5]

--------------------------------------------------------------------------------

Thank you, Glen, and good morning, everyone. We believe the key differentiator of Livongo is that we put our members at the center of our design. We've designed the entire member experience so that it is less confusing, less complex and less costly. This means making technologies that are intuitive and easy to use but also empathetic so that they fit within the way of our members living their lives. It means empowering members through 24/7 access to monitoring and leveraging our underlying data engine to personalize our service to each member.

All of our solutions at Livongo are powered by our proprietary engine we call AI+AI, which aggregates data from multiple sources; interprets that data to generate actionable, personalized and timely signals; applies those signals to our members at just the right time and on the right surface; and then iterates in order to build improvements based on what we've learned. This 4-step process empowers our members to make sustainable behavior changes that lead to better outcomes and lower costs. The more our members use one of our solutions, the more data they generate for our engine, which allows us to generate more personalized insights for that member but also help inform us on how to improve other members' experiences. And here's the thing, it really works, and we use it across our business.

For example, the average enrollment rate of Livongo for Diabetes at clients who launched in 2018 was 34%. That's up from 29% for those who launched in 2017. And we are seeing it at 47% for optimized clients who began enrollment in 2018. I could give similar examples on retention or driving cost savings, which are all due to our data science.

While others talk about data science, we're actually turning data into actionable, personalized and timely messages that we call nudges that drive behavior change. We believe this creates a competitive advantage for Livongo that will grow over time as more members use our platform.

During the quarter, we also continued to demonstrate the rigor and discipline required to produce academic studies that prove the overall effectiveness of our clinically based programs and our ability to actually drive meaningful behavior change in our member.

Recently, at the American Diabetes Association's annual Scientific Sessions, we presented, in conjunction with Eli Lilly, a study of 957 participants that showed, after 12 months of using the Livongo for Diabetes program, 61% felt more empowered and less distressed and 94% had an improved score in at least one of these 2 metrics. Our vision to empower members is truly working.

We're also excited by the findings encompassing over 10,000 participants published in the Journal of Medical Economics that showed, by using the Livongo for Diabetes program, we were able to reduce medical spending for Livongo members when compared to matched non-Livongo populations. We believe these studies demonstrate the efficacy of our platform.

With that, I'll turn it over to Lee.

--------------------------------------------------------------------------------

Lee A. Shapiro, Livongo Health, Inc. - CFO [6]

--------------------------------------------------------------------------------

Thank you, Dr. Schneider, and good morning. Before I walk through our second quarter financial results and outlook for the year, let me spend a minute discussing our business model. We believe it offers compelling and distinctive value for members, clients and Livongo.

Livongo for Diabetes alone has been shown to save clients an average of $1,908 per member per year in gross medical costs. Members also benefit from reduced expenses and access to 24/7 monitoring and coaching on our platform. And Livongo secures a subscription revenue stream with compelling unit economics. Our model enables us to sell and enroll all year. We are not tied to a benefit cycle. And our dollar-based net expansion rate, which was over 110% in 2018, demonstrates our ability to add members at a client at a rate that surpasses any attrition due to job changes or loss of benefits.

With that, let me turn to our second quarter results. As Zane mentioned, we experienced strong subscription revenue growth with total revenue of $40.9 million, an increase of 156% year-over-year and 27% sequentially. This was driven largely by the continued adoption of our core diabetes solution, while we also made progress bringing new subscription offerings to our growing member base, such as in hypertension, prediabetes, weight management and behavioral health.

On a non-GAAP basis, we recorded -- we reported second quarter gross margin of 69.4%, consistent with Q1 of 2019; operating expense of $37.2 million, which improved 14 points year-over-year as a percentage of revenue. Specifically, research and development was 24% of revenue, sales and marketing costs at 43% of revenue and general and administrative expenses 24% of revenue. We believe we're on a path to improve operating margins over time, though keep in mind operating expenses can fluctuate as a percentage of revenue from quarter-to-quarter and, in the third quarter, will include expenses associated with our recent initial public offering.

In the second quarter, adjusted EBITDA was at a loss of $8.1 million or 20% of revenue compared to a loss of $5.1 million in the same period last year, reflecting a 12 percentage point improvement.

In the second quarter, net loss on a GAAP basis was $14.2 million or $0.76 per diluted share compared to a loss of $6.2 million or $0.38 per diluted share in the same period last year. On a non-GAAP basis, net loss was $8.7 million or $0.46 per diluted share compared to a loss of $5 million or $0.31 per diluted share in the same period last year.

The diluted share count in the second quarter was 18.9 million shares.

Turning now to the balance sheet. Second quarter cash and equivalents was $38.2 million. However, adding the proceeds from our recent IPO, cash and equivalents was $411 million as of July 31.

Now let me turn to providing our outlook for revenue and adjusted EBITDA. We expect 2019 revenue in the range of $159 million and $162 million and adjusted EBITDA loss in the range of $41 million and $39 million.

For the third quarter, we expect revenue in the range of $42 million and $43 million and adjusted EBITDA loss in the range of $13 million and $12 million.

Please note, the third quarter reflects IPO-related expenses and variable costs associated with anticipated growth.

We will offer our outlook for 2020 on our fourth quarter earnings call. While we offered third quarter guidance for 2019 on this call, let me remind you of what I said during our IPO road show. We believe the best way to evaluate our business is on an annual basis, and therefore, continue to plan to guide on a full year basis for both revenue and adjusted EBITDA next year.

Finally, as we start to look at 2020, it is worth noting that we've had sizable new wins which bode well for our future enrollment growth. Total contract value or TCV was $74.2 million in the second quarter, up almost 3x year-over-year. TCV represents contractually committed orders entered into during the period and includes, for example, those entered into with new clients or renewals with existing clients. TCV does not include increases to enrolled members during the original term of the contract.

With TCV, we apply an assumption for the enrollment rate over the period of the contract. Generally, we use conservative assumptions of enrollment for our Livongo for Diabetes and Livongo for Hypertension, Prediabetes, Weight Management and Behavioral Health solutions. In this particular quarter, with reference to one contract that was mentioned in our registration statement and which we believe will add between 20,000 and 30,000 Livongo for Diabetes members in 2020 and 2021, we applied our AI+AI engine that led us to an even more conservative assumption on enrollment due to the nature of the client and the manner in which we will have access to their population.

With that, I'll turn it back over to Zane for closing comments before we take your questions. Zane?

--------------------------------------------------------------------------------

Zane M. Burke, Livongo Health, Inc. - CEO & Director [7]

--------------------------------------------------------------------------------

Thanks, Lee. As I said at the beginning of the call, I'm very pleased with the second quarter results, and we'd like to thank our members and clients as well as the Livongo team for their continued commitment to our mission and to living our values.

As we pursue our mission to empower members to live better and healthier lives, the enormous opportunity we have ahead and the recurring nature of our revenue model give us tremendous confidence in the future.

With that, I'll turn the call over to questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Richard Close with Canaccord.

--------------------------------------------------------------------------------

Richard Collamer Close, Canaccord Genuity Corp., Research Division - MD & Senior Analyst [2]

--------------------------------------------------------------------------------

Great. Congratulations on the IPO and second quarter results. So I was curious, we have received a lot of questions during the road show and following the IPO. Can you guys like walk us through what the differentiation point is of Livongo versus 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 M. Burke, Livongo Health, Inc. - CEO & Director [3]

--------------------------------------------------------------------------------

Richard, first off, thank you very much for your kind words. This is Zane. So we have a number of key differentiators, but it starts first with our members. Our member experience is the first in health care that really creates a great experience. So our focus on creating that great experience, one that members love, not just like but they love it. And then the second piece of that is really our clinical outcomes. So we get true clinical outcomes proven by Milliman and proven by academic journals and the work that we do on a 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 truly the first time in health care that those 3 things have come together where you have that great experience, the great outcomes from a clinical perspective and a financial perspective.

I'll also say what we're doing from an AI+AI platform perspective is unique in our industry and really the Applied Health Signals platform that we have. So we take that data, learn from both from a behavioral perspective, a clinical perspective. We use that data to coach, to improve both the clinical outcomes as well as the financial outcomes but also to create better experience overall. And so 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, meet the member where they are. And so that's why we're so truly unique in that -- those 3 key attributes, and then our Applied Health Signals platform is a key differentiator.

--------------------------------------------------------------------------------

Richard Collamer Close, Canaccord Genuity Corp., Research Division - MD & Senior Analyst [4]

--------------------------------------------------------------------------------

Okay. And as a follow-up question, maybe Jenny, you had mentioned the enrollment rate, 34% last year, and then the optimized rate of 47%. What are the main differences between maybe 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?

--------------------------------------------------------------------------------

Jennifer Schneider, Livongo Health, Inc. - President [5]

--------------------------------------------------------------------------------

Thank you for the question, Richard. The -- a lot of what we've seen in the improvement of enrollment is exactly what we've described from our AI+AI engine. So our engine is learning continuously, so our ability to enroll people is getting continuously smarter. Things such as what message should we give to them to entice people to come into the platform. And so we're learning that by specifying a variety of different cohorts. That, in combination with our Livongo-led marketing efforts and our ability to work closely with our clients to detail what those are and take the lead there have really driven that enrollment rate up.

When we look at optimal enrollment rate, we believe that it's somewhere in the 60% to 70% is a realistic goal for us, and we're working to get there.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

And our next question comes from Robert Jones with Goldman Sachs.

--------------------------------------------------------------------------------

Robert Patrick Jones, Goldman Sachs Group Inc., Research Division - VP [7]

--------------------------------------------------------------------------------

Great. And yes, congrats on the IPO and then the good start. Yes, I guess, Lee, just you made some comments on -- in the prepared remarks that I wanted to go back to around the really strong performance in the total contract value in the quarter. 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. I was just hoping you could go back and maybe help us square the level of wins you saw in the quarter with what's implied in the back half revenue guide. Just wanted to hear a little bit more about what's unique about this level of wins and the expected enrollment time line that you're baking in as you think about the revenue for the back half of the year.

--------------------------------------------------------------------------------

Lee A. Shapiro, Livongo Health, Inc. - CFO [8]

--------------------------------------------------------------------------------

Robert, thank you very much for your question this morning. 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 and 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're able to work with them now and get prepared for that launch. And so 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.

--------------------------------------------------------------------------------

Robert Patrick Jones, Goldman Sachs Group Inc., Research Division - VP [9]

--------------------------------------------------------------------------------

No, that makes sense. That's helpful. I guess maybe just a similar question as we think about the back half related to churn. It looks like, based on the gross wins you disclosed, clearly better than we've seen in several quarters. And then, again, trying to think about the back half, feels like you're projecting that metric will jump back up. Any specific reason or client that you have line of sight into that might help explain that? Or is this perhaps just a more prudent approach to thinking about how churn could play out in the back half?

--------------------------------------------------------------------------------

Lee A. Shapiro, Livongo Health, Inc. - CFO [10]

--------------------------------------------------------------------------------

So with regard to churn, I wouldn't draw any conclusions that there's significant attrition with regard to the numbers that we see going forward. It really is much more about enrollment ramp. So 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're given to information about those members, for example, do they have e-mails or not, they may or may not depending on the nature of the client. Some large retailers, as an example, may not have team members who they have e-mails for, and so we have to reach them in different ways. And so what we do is we leverage all the data that's available about those members, apply our engine to it and then predict enrollment rates. So 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're 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. So it's much more about enrollment than anything to do with churn and loss of members.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

And our next question comes from Sean Wieland with Piper Jaffray.

--------------------------------------------------------------------------------

Sean William Wieland, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [12]

--------------------------------------------------------------------------------

And let me add my congrats to the successful IPO here. My question is around visibility certainly into the second half of the year but as we look out into the growth for 2020. Certainly not asking you to comment about 2020 expectations, but 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?

--------------------------------------------------------------------------------

Lee A. Shapiro, Livongo Health, Inc. - CFO [13]

--------------------------------------------------------------------------------

Sean, thank you for your comments and for your question. With regard to visibility, as we've shared, our contracts are typically 1 to 3 years in length. And so when you think about that, on average, 18 months, that's the time frame 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 is 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 data, to create the launch program, to get all the materials ready, and then we start rolling out. So in the quarter of sale, even if we sold and then we're starting a customer in the same year, a client in the same year, there would normally be about a quarter lag before revenue would start rolling in from that given new contract. And then it builds over time. And we see a relatively rapid build over those first few months that we're enrolling clients. Zane, do you want to add something there?

--------------------------------------------------------------------------------

Zane M. Burke, Livongo Health, Inc. - CEO & Director [14]

--------------------------------------------------------------------------------

And Sean, it typically takes us about 9 months to get to full ramp where we get to that 34% enrollment across our book of business. And as we've mentioned previously, our newest clients are operating at even higher levels and closer to the 47%. We continue to make progress towards that end.

--------------------------------------------------------------------------------

Sean William Wieland, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [15]

--------------------------------------------------------------------------------

And can you call out any trends within the TCV on channel versus direct selling because it's been pretty consistent.

--------------------------------------------------------------------------------

Zane M. Burke, Livongo Health, Inc. - CEO & Director [16]

--------------------------------------------------------------------------------

Yes. Sean, this is Zane. What I can say is our direct business was very strong, so our health services business, both the health plans. So we had a fully-insured client in the quarter, which was fantastic for us, where they went [to] a fully-insured perspective. We had wins in the government space. We had wins across our health system space. Our commercial business remains strong. We added additional clients in the Fortune 500 space. So across the board, we saw great demand for our solutions. And it's just -- it's proof of what's happening in terms of the value proposition that we provide. So those -- that great Net Promoter Score, clinical outcomes coupled with the financial return on investment is being very well received. And so we're seeing expansion across all of our markets overall and we saw performance across those markets this past quarter.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

And our next question comes from Ricky Goldwasser with Morgan Stanley.

--------------------------------------------------------------------------------

Rivka Regina Goldwasser, Morgan Stanley, Research Division - MD [18]

--------------------------------------------------------------------------------

Congratulations on the quarter. My question is on total contract value. When you think about the mix of diabetes versus hypertension in these kind of like new contracts that you're signing, are you starting to see more traction among the employer base of signing contracts that tap into those products?

--------------------------------------------------------------------------------

Zane M. Burke, Livongo Health, Inc. - CEO & Director [19]

--------------------------------------------------------------------------------

Ricky, this is Zane. Great question. What I would -- we are seeing incredible pickup, in my mind, in terms of the hypertension and weight management pieces. And so our -- both our existing clients and, frankly, our new clients. So our existing clients are adding on the solutions. So our cross-sell was very strong in the quarter. But additionally, as we look forward into the pipeline, so not significant -- necessarily significant contributions in Q2 from new clients that were buying across the platform, but as you look forward, our clients are looking at multiple solutions. So the full solution set, hypertension, weight management, DPP and diabetes management along with our behavioral health solutions. So you're seeing -- we're seeing and as we look forward and in the pipeline a great market acceptance of where we're headed from our strategy.

--------------------------------------------------------------------------------

Lee A. Shapiro, Livongo Health, Inc. - CFO [20]

--------------------------------------------------------------------------------

Ricky, just to add, and I think Sean was going here with his question as well, our total contract value in the quarter was still predominantly sales of our Livongo for Diabetes offering. We're 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.

--------------------------------------------------------------------------------

Rivka Regina Goldwasser, Morgan Stanley, Research Division - MD [21]

--------------------------------------------------------------------------------

Understood. And if we think about the seasonality in the business, and obviously, we're heading into open enrollment for employees next month, how should we think about kind of like the progression of the total contract value in the second half of the year versus what you've seen year-to-date?

--------------------------------------------------------------------------------

Zane M. Burke, Livongo Health, Inc. - CEO & Director [22]

--------------------------------------------------------------------------------

Ricky, this is Zane. And we are not beholden to the enrollment period and to the -- 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 bookings. So we do see a stronger bookings trend as we typically look at the back half of the year. So we would anticipate that to continue in the second half of the year.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

Our next question comes from Anne Samuel with JPMorgan.

--------------------------------------------------------------------------------

Anne Elizabeth Samuel, JP Morgan Chase & Co, Research Division - Analyst [24]

--------------------------------------------------------------------------------

You spoke to some sizable new wins that should benefit next year. I was just wondering, has your public offering facilitated any conversations with prospective new clients? Or are you seeing anything kind of improving there just based on the offering?

--------------------------------------------------------------------------------

Zane M. Burke, Livongo Health, Inc. - CEO & Director [25]

--------------------------------------------------------------------------------

Anne, thank you for the question. Obviously, with the public offering, it creates more visibility. It's 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. And we have seen a lot of interest in what Livongo is doing and that's -- that obviously helps elevate the profile of who we are, our clients that are predominantly the Fortune 500 clients like to deal with people that are also public and can be -- look at the transparency of the investment and the dollars and have a sense of where we're headed overall. And so 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 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.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

And our next question comes from Daniel Grosslight with SVB Leerink.

--------------------------------------------------------------------------------

Daniel R. Grosslight, SVB Leerink LLC, Research Division - Associate [27]

--------------------------------------------------------------------------------

And congrats on the pretty stellar results on the revenue side, it's incredible. And again, congrats on that. I wanted to dig in a little bit on the expense side of the equation. It looks like EBITDA guidance was a tad bit lighter than The Street was expecting, and I know you mentioned that you have some IPO expenses in there and some variable client costs. But I was wondering if you could comment on if -- how that is tracking vis-à-vis your model? And in particular, 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 glucometers versus the other equipment.

--------------------------------------------------------------------------------

Lee A. Shapiro, Livongo Health, Inc. - CFO [28]

--------------------------------------------------------------------------------

Daniel, great question and thank you for joining us this morning. And you have touched on an area that is spot on in terms of how we think about it. First, with regard to our guidance with regard to our adjusted EBITDA 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'll 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. And so, associated with those launches, we'll 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, where we're able to demonstrate useful life by our members of the modalities that we're delivering to them to use with our solutions, we do expect that we'll 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. Thank you.

--------------------------------------------------------------------------------

Daniel R. Grosslight, SVB Leerink LLC, Research Division - Associate [29]

--------------------------------------------------------------------------------

Got it. And one more, just a quick follow-up to clarify. The large client win that you mentioned that is in TCV, is that, that 20,000 to 30,000 in potential enrolled members that you disclosed in your IPO prospectus?

--------------------------------------------------------------------------------

Lee A. Shapiro, Livongo Health, Inc. - CFO [30]

--------------------------------------------------------------------------------

Yes, that is. So that is the same client that we described in our registration statement.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from Scott Berg with Needham.

--------------------------------------------------------------------------------

Scott Randolph Berg, Needham & Company, LLC, Research Division - Senior Analyst [32]

--------------------------------------------------------------------------------

Congrats on a great quarter. I have 2 questions. We'll start with effectiveness of the diabetes solution over time. I think Jenny spoke about it a little bit, but the results that you've seen in the platform have been very, very positive, but can you maybe talk about those trends over the last 3 or 4 years? Given that the solution is new, are you seeing that maybe migrate even more positive, the patients that have been on it longer?

--------------------------------------------------------------------------------

Jennifer Schneider, Livongo Health, Inc. - President [33]

--------------------------------------------------------------------------------

Thank you, Scott, for the question. This is Jenny. In fact, we are. So what we've been able to do is demonstrate a sustained Net Promoter Score of -- in the positive 60s throughout year over year over year. We've also been able to demonstrate an improved A1c, and when we look at that, we sustained that A1c improvement out through 3 years for our earliest customers.

And when you look at financial return on investment, and this was in the S-1, you see us improve year 1 to baseline, in general, of about 3.2x return on investment, and those continue to increase to year 2 and year 3.

We are seeing both sustained and improved outcomes across our 3 metrics: Net Promoter Score, clinical outcomes as measured by A1c improvement for diabetes and financial return on investment.

--------------------------------------------------------------------------------

Zane M. Burke, Livongo Health, Inc. - CEO & Director [34]

--------------------------------------------------------------------------------

And if I might, Scott, this is Zane. I mentioned in the Q&A portion around we had our -- 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. And so 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. So I think it's also -- not only are we seeing it in -- with our (inaudible) but also our clients are seeing that result 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 business into the fully-insured book of business. Meaning you go through the actuaries, meaning you have to show those demonstrated, hard financial outcomes and clinical outcomes and do it in a manner that's a great experience for us.

So again, it took us years to get there with that particular client, but it's a great, great validation of what we're doing from an outcome perspective. And unlike disease management, this isn't a onetime thing. This is sustainable results over the year that actually increase in ROI, increase in clinical efficacy over time.

--------------------------------------------------------------------------------

Scott Randolph Berg, Needham & Company, LLC, Research Division - Senior Analyst [35]

--------------------------------------------------------------------------------

Got it. Quite helpful. And then from a follow-up perspective, Lee. Obviously, great growth in your TCV metric. But help us understand how that metric relates to revenue? And I ask the question because TCV of, call it, $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.

--------------------------------------------------------------------------------

Lee A. Shapiro, Livongo Health, Inc. - CFO [36]

--------------------------------------------------------------------------------

Scott, thank you. And as we've stated previously, our TCV is based on contract value, total contract value, over the term of the contract. Many of our clients sign contracts for as long as 3 years. And so you would expect that the time period over which that revenue is recognized is typically over 18 months because contracts will average between 1 to 3 years.

In addition, as I noted earlier, contract starts will vary. So 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. So if you think about a contract, let's say, that we signed in Q2 of this year, it doesn't start producing revenue until Q1 of next year. That will roll itself out over 18 months on average from the time that, that starts producing revenue. So it gives us some time.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

And our next question comes from Donald Hooker with KeyBanc.

--------------------------------------------------------------------------------

Donald Houghton Hooker, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [38]

--------------------------------------------------------------------------------

So a lot of topics have been hit by folks this morning, but I just wanted to maybe look at some of the newer services that you guys are rolling out around prediabetes and weight management, behavioral health. And was curious, I know you're going through a process of transitioning some of -- a couple of the recent acquisitions to the Livongo platform, the Livongo sort of new revenue model for them. Would love to hear maybe a little bit of an update there. I know it's small in revenue but kind of potentially large over time.

--------------------------------------------------------------------------------

Jennifer Schneider, Livongo Health, Inc. - President [39]

--------------------------------------------------------------------------------

So thank you very much for the question. So from a product build-out, what we've done is really invest in the infrastructure to have everything on a single tech stack. So we recently acquired MyStrength at the beginning of 2019 and so we're 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 AI+AI engine. So all of the data that we're able to aggregate across different conditions goes in and feeds the solutions and the recommendations that we're making for individual members independent of what condition they're on.

--------------------------------------------------------------------------------

Lee A. Shapiro, Livongo Health, Inc. - CFO [40]

--------------------------------------------------------------------------------

And Don, thank you for being on this morning. Good morning. 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.

--------------------------------------------------------------------------------

Donald Houghton Hooker, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [41]

--------------------------------------------------------------------------------

Yes, sure. Great. And then maybe just also curious, I mean, 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 be maybe different for some of these newer areas as Livongo expands over time. Again, I'm recognizing these are smaller areas, obviously, very small. But like behavioral health, I imagine you're dealing with more care-avoided populations, and weight management might be a little bit different. Are there different sort of enrollment targets that we should think about with some of these newer services as we think over time?

--------------------------------------------------------------------------------

Jennifer Schneider, Livongo Health, Inc. - President [42]

--------------------------------------------------------------------------------

Thank you so much for the question. What we look about the different products and the different services that we're offering, I would say the underlying principle that unites them all, again, is our AI+AI engine, and so we're continuously improving. Those product offerings with the AI+AI engine are newer, and so we're still in the process of what will be the optimal enrollment for those.

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

Our next question comes from Jessica Schmerler with Chardan.

--------------------------------------------------------------------------------

Jessica Lee Schmerler, Chardan Capital Markets, LLC, Research Division - Senior Research Associate [44]

--------------------------------------------------------------------------------

And congrats on the IPO. Just 2 quick questions. 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's optimized using the AI+AI engine?

--------------------------------------------------------------------------------

Jennifer Schneider, Livongo Health, Inc. - President [45]

--------------------------------------------------------------------------------

Sure. When we look at overall member retention rate, what we see is that we see a small loss over the course of the year, and that is about a 2%. But of all of that, 3/4 of that are turnover from the individual members losing their employment opportunities. So those are people who are employed at a client or were under a payer and they're returned by new people with the same prevalence of the condition. So we're retaining the seats, just kind of slipping in different members. So our engine, again, is really driven at that overall experience. And we believe that, that experience that we're able to deliver, the personalization of the experience, has given us those retention rates and will continue to improve.

--------------------------------------------------------------------------------

Jessica Lee Schmerler, Chardan Capital Markets, LLC, Research Division - Senior Research Associate [46]

--------------------------------------------------------------------------------

Great. And then the second question is in terms of the TCV. Is there any color you can provide around like as a percentage of clients in any of the given categories and any trends you've seen in terms of where the different composition is of that movement?

--------------------------------------------------------------------------------

Lee A. Shapiro, Livongo Health, Inc. - CFO [47]

--------------------------------------------------------------------------------

Jessica, thank you for the question. 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 what it is that we've been doing with regard to our newer 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.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

Okay. And our last question comes from Richard Close with Canaccord.

--------------------------------------------------------------------------------

Richard Collamer Close, Canaccord Genuity Corp., Research Division - MD & Senior Analyst [49]

--------------------------------------------------------------------------------

Yes. I know CVS is a customer on the PBM side, and you've had success there. They just announced about a month ago their next-generation, I guess, Transform Diabetes program. Is there any opportunity for you guys in maybe that book of business with that customer?

--------------------------------------------------------------------------------

Zane M. Burke, Livongo Health, Inc. - CEO & Director [50]

--------------------------------------------------------------------------------

Thanks, Richard, for the question. 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 a part of that project and part of the diabetes management -- 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're aligned in terms of what we're trying to accomplish, which is help the health status of the population that we both serve. And CVS has been very passionate about making a difference in health care overall as evidenced by what they've done around smoking cessation and vaping and those kinds of things. As we move forward, they feel that similar sense of urgency around the 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. So we're very excited about that.

With that, I'd like to close. I want to tell you how much I appreciate everyone's interest in Livongo and the great questions today. And I want to thank our clients and our members for the journey. We have much work to do. This is an incredibly important opportunity for us to get right here in the U.S. and abroad over time and to address this enormous market opportunity. We're excited to have that journey with you. So thank you very much, and have a great day.

--------------------------------------------------------------------------------

Operator [51]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.