As Good as it gets and The Sting

Yesterday we had both Dexcom and Livongo reporting and given our fondness for movies we’d title the Dexcom’s results As Good as it gets while Livongo reminds of us of The Sting. Let’s start with Dexcom who noted in their earnings release;

“Revenue grew 49% versus the same quarter of the prior year to $396.3 million

U.S. revenue growth of 53% and international revenue growth of 36%

GAAP operating income of $56.0 million or 14% of revenue, an increase of 890 basis points compared to the third quarter of 2018. Non-GAAP operating income* of $59.1 million or 15% of revenue, an increase of 940 basis points over the third quarter of 2018.

Dexcom updated its revenue, operating margin, and adjusted EBITDA expectations and brought gross profit guidance slightly below the previous range for full fiscal year 2019:

Revenue of $1.425 billion to $1.450 billion (38% – 41% growth) compared to previous expectations of $1.325 billion to $1.375 billion (28% – 33% growth)”

The other day we noted the Insulet was just killing it, with outstanding results like this Dexcom is overkilling it. Listen you know things are going very well when the majority of questions from the analysts are about capacity restraints.

Since Momma Kliff doesn’t like it when we gloat, we won’t say that we aren’t surprised and predicted that no matter what Abbott was doing Dexcom would be just fine but that’s exactly what has happened, sorry Mom. As we state with consistency when it comes to CGM its Dexcom, Abbott with everyone else fighting for table scraps.

And as good as it seems now things will only get better. Not only is the Libre2 languishing at the FDA unlikely to hit the market until the middle of next year, the Control IQ also waiting for the FDA nod will likely hit the market later this quarter both elements driving greater G6 adoption. Again not to gloat here, sorry again Mom, but the perceived pricing differential between Abbott and Dexcom is obviously not negatively impacting user growth. As we have noted Dexcom is well prepared for this price fight and as the results indicate they are doing quite nicely.

The progress of the G7 and the continued delay of the Libre2 also favors Dexcom. Even though the company noted a full rollout of the G7 likely will not happen until 2021, with the Libre2 not launching likely until the second half of next year this limits Abbotts window against the G7 which we see as potential Libre2 killer.

Need we also mention that besides the Control IQ coming, Insulet has the Horizon, Lilly, Novo Nordisk and Companion Medical all will have their versions of Tyler coming all of which work with the Dexcom G6 sensor. Simply put not only is the organic CGM market growing so too is the connected device market.

We understand the concern over capacity, but we heard nothing yesterday to indicate that the company was not aggressively addressing these concerns. Again as we have said for years when it comes to management talent this is something Dexcom has in abundance. The real scary part here is that as good as things are today, they will get even better. CGM is quickly becoming the standard for glucose measurement, interconnected devices both insulin pens and insulin pumps will drive greater usage and we haven’t even talked about non-diabetes usage of CGM technology another huge market opportunity.

All in all Dexcom gets the gold statue for outstanding performance by a diabetes device company. But as good as it is now it’s going to get even better and that boggles the mind, but it is true.

It’s a much different movie for Livongo who we liken to that great Newman and Redford movie, The Sting. From day one we have stated Livongo is all about enrolled patients, patients who actually generate something called revenue. It’s not about how many plans they sign up, how many employees have access to the platform or fancy sounding technology. This is all about getting and keeping patients enrolled in the Livongo platform.

So get a load of this from the Livongo earnings release;

‘Estimated Value of Agreements of $85.5 million, up from $62.3 million in the third quarter of 2018. This represents the estimated value of agreements signed in the quarter and was previously referred to as the Total Contract Value (TCV) in Livongo’s previous filings with the Securities and Exchange Commission. It consists of agreements entered into with new clients or expansion opportunities entered into with existing clients.’

But wait as it gets better check out what was said during the call by CFO Lee Shapiro;

“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 build 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 clients and high client retention rates for Livongo.

In our journey with our 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’re 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 is 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 nine-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 agreement 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 months revenue contributions from EVA coming from that quarter’s estimated gross estimated value agreements.”

Listen we expect gobbledygook when it comes to a company explaining their way cool whiz bang technology, we don’t expect this gobbledygook when it comes to explaining the convoluted way they calculate what may or may not be real revenue. We will tell you right now the street cares little about this and will focus on other factors such as the number of patients Livongo has ACCESS to or that the company has a way cool whiz bang toy. Never mind mundane things like REAL ACTUAL revenue which in turn would lead to REAL ACTUAL profits, nope we can have none of that. Let’s instead focus on the old toy in a shiny new box. Seriously this stuff makes us want to puke.

Livongo reminds us of a cheating husband when the wife discovers lipstick on the collar of his shirt and lace panties in their bed. Confronted with this evidence the husband explains that it was a “friend” at work celebrating a promotion who kissed him with fresh lipstick while celebrating and happened to use their bathroom forgetting to put her panties back on. He goes onto state that the high heels found under the bed were actually a “gift’ for his wife, never mind they were worn and not her size.

We are not saying Livongo is lying, what we are saying is this company with a limited operating history and convoluted accounting methodology has yet to prove they can make REAL money. But just as the wife buys the story told by her cheating husband ignoring the evidence, everyone is buying into the Livongo story. And just as Newman and Redford got away with their con in The Sting, Livongo will likely as well. As some company will come along and fall for all the whiz bang way cool. It’s only after they buy Livongo that they will, like the cheated-on spouse, discover the truth. Folks we’ve seen this movie many times before and know how it ends.