We have to admit that it’s very difficult for us to read the Livongo earnings call transcript and review the slides they used without wanting to puke. We have seen this movie before, and we know how it will end. Yet there are so many how haven’t seen this show, who believe that Livongo has found the magic bullet which is why they continue to drink the kool aid and go back for more.
Just to be clear here shares of Livongo will move higher today as the results they announced yesterday on the surface looked very good. Which in essence is the problem we have with Livongo because everything looks good on the surface and it’s not until you get below the surface you discover this really is a house of cards combined with a race against time. What Livongo and their entire team is counting on is the company is acquired before everyone discovers that they really aren’t making money and competition will hurt future earnings.
I encourage everyone to look at the Livongo slide deck from yesterday (https://ir.livongo.com/static-files/cec8aee7-b498-44ce-aaff-fb110d442ad2) – then count how many times you see the phrase Estimated Value – then just for grins and giggles Google the word Estimated and read the definition. And when was the last time any company used two slides to explain what they say is insignificant change in their accounting methods. Since we are not experts in accounting, we have no idea if this change matters or it doesn’t, we just find it somewhat odd they spent time talking about it. Like so many things with Livongo it just seems suspect.
Next check out this statement from Jennifer Schneider the company’s President;
“And finally, we continue to demonstrate real financial return on investment for clients. For the past three years, we have completed numerous ROI studies for certain participating diabetes clients, where 99% of the study is conducted for clients on our platform after year one demonstrated a positive financial ROI and 100% of study for client after year two and year three demonstrated positive financial ROI. This gives us tremendous confidence in the value we are delivering to both members and clients.”
Never mind that these studies have never been published or that the studies have been conducted by Livongo themselves nope we are supposed to believe all this hype is on the up and up just because the company says it is. Keep in mind this is the same person who once said Livongo would have enrollment rates of 80%+ when in actuality they are closer to 30-35%. We haven’t seen this type of bluster since the late Al Mann was hyping Afrezza and that my friends is saying something as Al was the ultimate master at hype.
But wait it gets better check this out from Lee Shaprio the company’s CFO;
“Let me spend a minute giving you an update on our lockup. In December, we conducted a secondary offering that resulted in the orderly sale of 2.8 million shares ahead of the IPO lockup release and also resulted in the extending the lockup of a number of our larger shareholders into March. After the secondary, effectively 32 million shares came off the IPO lockup on January 21 and another 45 million shares will come off on March 11. Please note that our largest holders are very supportive of the company and has been previously disclosed were buyers in the IPO.
As it relates to members of our executive leadership team, we expect a small percentage of holdings to come to market for personal or tax reasons through standard 10b5-1 plans. We do limit annual sales by our executive leadership team.”
Consider this an advanced warning as these holders may be supportive but they also want to make money. As for the executive team they too want to make money therefore expect to see some selling from both. If the company was not concerned why mention it?
Quite honestly to us all this hype all this “interesting” accounting sounds like a carnival barker hyping the breaded lady or sword swallowing man. Yet we have no doubt that just as unsuspecting carnival goers bought tickets for these side shows investors will continue to believe the hype and buy more shares. This happened with all the disease management companies and will happen here with Livongo. As it has been said often history is destined to repeat itself.
To us this is reminiscent of a scene from the movie Guys and Dolls when Marlon Brando says
“One of these days in your travels, a guy is going to show you a brand-new deck of cards on which the seal is not yet broken. Then this guy is going to offer to bet you that he can make the jack of spades jump out of this brand-new deck of cards and squirt cider in your ear. But, son, do not accept this bet, because as sure as you stand there, you’re going to wind up with an ear full of cider.”
We hope we are wrong here, that Livongo isn’t a house of cards but our many years in this wacky world tell us that lots of investors will have an ear full of cider.