Lede
On 8-5-2020, prior number four Spotlight Top Pick Livongo (LVGO) announced that it would be acquired by Teledoc (TDOC).

We dropped LVGO for the closing price on 8-5-2020 of $128.06.

We added LVGO to Top Picks on March 3, 2020 for $24.29.

We closed for $128.06, up 427.2% in five months.

Preface
Following the acquisition we spoke one-on-one with Livongo's CEO Zane Burke.

Please find the transcription below.

As usual, our conversation with Zane was illuminating.

Let us take the time to appreciate the remarkable job he did leading a company that went from unloved IPO to easily one of the top five stories of the year with respect to individual stocks.

You can also read some compelling information about this combined entity.

One-on-One with Livongo's CEO

Ophir Gottlieb: I think at this point even before the announcement, very quickly the investing world had gone from one that was evaluating Livongo's product market fit and execution to one that had shifted revolutionarily toward recognizing that the product and market fit and execution was excellent. And it was now time to evaluate the sustainability of the moat.

So, I saw Livongo's moat in three pillars, and I'm just curious without really even going into them, do you think this is a good view of the moat? And this is in no particular order. So first was the AI + AI component, right, which creates network effects.

Second is the really clearly stated and proven ROI, the proposition for the payers and the patients.

And finally, the whole person approach, which taken to an extreme virtually renders all other competitors that go condition by condition as inferior.

So, before I kind of go piece by piece, just in general, is that how you view Livongo's moat or is there a piece I'm missing?

Zane Burke: There's a couple of others. I agree with what you said as part of that.
So those are all big pieces that I would... And AI+AI is where I would have started and ROI is another one of those areas. Kind of a connected whole person approach is very meaningful.

The other pieces I would probably put in there is a great consumer experience.

So one where when you think about the rest of healthcare, nobody actually really wants to use healthcare. We all want to be as healthy as we can be and as close to home as possible.

And there really hadn't been anything stated that created that great experience.

So that's kind of a key element that I think is really undervalued as you think about who, particularly anybody that can... Sometimes I read, oh, there's not a lot of barriers to entry here. I'm like, "Guess what? Nobody's ever created a great healthcare experience until now."

And so it's one of those things, which I think is super underappreciated and I always kind of liked it just because it means that people would miss the mark if all they try to do is think they're going to recreate the technology pieces and some of the things we were doing is part of that.

So I think that's a really big point. And then the other one I would add is we have a really unique go to market strategy where we have a great front line sales team, but then we've also created all these other channels by which you can procure our solutions through.

And so really kind of creating a different kind of a selling motion that added a lot of speed and velocity to what we're doing. Also hard to replicate that on an overnight basis.

Those are kind of a couple of other areas that I would highlight, but your three pillars will be hard to say. I'd put those right in there. Those would be the kind of the five things I would talk about.

OG: Okay, excellent. So now dive into that.
So, a part of the moat then relies on what the company refers to as AI + AI, ostensibly network effects.

I've gotten this question from investors a lot. Can you discuss that piece of the software and the data engine and how it ties back to a stronger competitive position?

So that is to say like, "What is AI + AI exactly?"

ZB: Sure. So first off, there's lots of people that can aggregate information, but it's really the whole circular notion of meeting the member in their life flow.

When you aggregate information, you aggregate data, then you interpret that information so then you're running that through algorithms, both clinical algorithm as well as consumer and behavioral algorithms to apply it back into the work into the life flow of the member.

And so what's so powerful about our engine is that it's actually not just aggregating data. It's not just interpreting, it's how you apply it and integrate it and apply it back into the life flow of the member.

So that's what's unique and different about what we do is really is that key portion. Because you've got to do it in the life flow.

You've got to make it, the artificial intelligence, come to life on a person by person basis and be able to kind of what I would say is do the one to many, but make it feel like it's a highly personal experience.

And I like to say we coached every single interaction because of that AI AI engine, and so digitally coaching each and every time, sometimes coaching, but having the coaching available for those places where it goes somebody is too high or too low or they've done a scheduled session. It feels like somebody is with you 24 by seven on this journey.

And that's what truly makes Livongo unique is that data science. And then we use that data science as part of our business overall. So, it's how we enroll our members.

It's in everything we do as kind of just it's fundamental and foundational to the company. And it's quite significant.

We really 750 million data points today within the engine itself and growing at over 150 million data points per quarter.

So the more people we bring on the deeper the technology gets, the better our engines get, the more personalized we can make it and the better the clinical information is as well. So the moat gets bigger and bigger over time because of the amount of data points and the capabilities that we've grown over time.

OG: Okay. That was very helpful. Now I want to talk about whole person.

So, the reality of course is that as the company has shown, as research has shown is that diabetes, hypertension, weight management, behavioral health, a lot of other chronic conditions, they just don't exist in isolation. The overlap is substantial.

I think you shared a slide, 74% of people with diabetes also have hypertension just as an example.

And Livongo was just going gangbusters and it started in the diabetes realm then hypertension, but what's so hard to extract is how much of an impact the whole person approach has been having on the sales success.

The question is, it seems like an obvious advantage for Livongo's offering, but obvious doesn't always mean it strikes the commercial chord.

So, has the whole person portion directly impacted sales or are people just not quite there yet? It's just you're growing so fast in other areas that you'll get to that soon.

ZB: It absolutely was impacting sales.

So, what we saw in particularly in the second quarter, which just on a personal note, because of how the transaction came together and because of all those elements, obviously our second quarter results were overshadowed by the merger news itself.

But man, our second quarter results were awesome.

OG: They were gangbusters. Unbelievable quarter. So overshadowed.

ZB: Overshadowed, but buried in there were four significant wins and actually there's kind of five, but five significant wins. And we talked about four of them being Fortune 100 wins and one of them being a state government win.

And so in there we have the state of New Jersey, which went whole person across their population. So they had gotten diabetes management for us I believe at the end of the fourth quarter of 2019.

They liked the early returns on what they're seeing from a diabetes management perspective. And then they came back and said, "Let's go whole person approach for us so it's the entire solution set." So major expansion and major buying into the program.

I'll do this without naming the name but we had a Fortune 10 when a very large telecommunications company, selected us across from a whole person perspective as well.

And so from a platform, this winning business and it's showing the integrated capabilities across those different solution sets is making a difference.

And kind of the other one major global technology company based in the Northwest, and they kicked out one of our competitors who started in pre-diabetes because of the whole person approach. And so it's I would say competitively, we're really pulling away.

And the merger is going to accelerate the difference in the capabilities as we move forward on a competitive basis.

So, I think the whole person was really kicking in.

We still haven't provided a lot of context to what's occurring in our enrollment base and what's really happening along some of those spaces.

And we were grappling with how to best talk about that as we move forward. It's one of those things that kind of tele-health will have to figure out just the what to figure out as part of that what the communication is.

And as part of the cadence and we move forward, but it was one of those things we really just hadn't figured out the best way to discuss this publicly yet.

So we kept it at diabetes management and reporting our numbers, but I just tell you the underlying numbers are really fantastic.

OG: All right. One more question before the Teladoc merger and you probably know what my first question will be anyway, but let's just finish off with Livongo.

Last time we spoke, you said it, you saw it, a lot of other CEOs I spoke to said it.

The impact of COVID-19 has meant relaxed regulations surrounding a lot of things, but in particular here, remote healthcare or greater physician acceptance, clear patient preference, the last piece is payers and a large part of Livongo's value proposition is not just patient care, but also ROI for insurers.

So, without celebrating this pandemic, obviously, this all seems like a perfect storm for Livongo. Is that still how you see it now that you've seen a full quarter of the impact?

And what does this mean for the speed at which the company can grow into its total adjustable market? Because it feels accelerated and it feels accelerated permanently.

ZB: Yeah. So I think the last part of that statement is 100% true. This is an accelerated permanently conversation.

I think it's kind of one of the fascinating parts of this, and this is me riffing on your question, which is before the COVID, we had a ton of momentum coming into COVID-19.

So, we really weren't accelerated as part of that, but we were able to continue to accelerate through this time period. And what occurred here is really everybody recognized first, the value of tele-health, right.

And so you see that in what's happened with Teladoc and some of those pieces and people recognize the value of that.

The second part of this is remote patient monitoring became really meaningful, both from a regulatory and reimbursement perspective, as well as sort of people waking up to hey, the future of healthcare is going to be consumer directed virtual care.

And I saw that as the future, but I saw that as the future before the COVID-19, I saw that as the future in a four or five year time period of which I think in that scenario, we would have kind of continued to grow significantly and probably even, it's hard to turn back time and really recreate it, but probably be an independent company on a go forward basis in that perspective.

Because it wouldn't have been so obvious to all.

And I think that's one of the things that really led into Teladoc approaching us as part of this as many people see that digital health is the future. And the combination of the two entities just creates capabilities beyond any other scale in the world.

And that's really the lead you into the Teladoc and Livongo merger pieces together, which really creates market meeting capabilities and really gives what I call it, just a massive, massive head start in terms of creating the capabilities of a true consumer directed virtual care health system.

OG: Okay. That was a great segue. So now we'll turn to the acquisition.

Remote monitoring partnered with telemedicine seems like an obvious fit.

And now the two largest and fastest growing companies in each area are one.

Can you talk about how the company previously known as Teladoc, so that individual entity, and its telemedicine platform could mean more sales and adoption for Livongo as remote monitoring in a whole person platform?

I ask because it's easier in my mind, my cognition, to see how Livongo's platform could help Teladoc grow, but I want to discuss the other side. How does Teladoc help the Livongo portion of the business growth?

ZB: Yeah, there's multiple pieces to that.

So I'll start with some kind of pieces outside of the US first off.

It's an international massive opportunity where Teladoc has made a lot of progress outside of the US and selling directly into commercial insurers that are outside the US and they've established a base there where we were planting the seeds, and those were some of the investments spaces that we were making as well.

Huge opportunity, huge revenue appreciation consideration.

So those are pretty straightforward and simple to think through in that regard.

Some things that may be a little bit more nuanced are I was kind of take them down in nuance.

The next one is really overlapping companies. And so when we looked at the overlap in companies, I actually expected to see that we would have similar client lists because it kind of makes sense, right.

A client that has made a decision to go invest on virtual in terms of the tele-health visits would also go into the remote monitoring side of this and the chronic condition side of that. The client overlap was virtually very small.

So only 25% of our clients overlapped. And so the cross sell is pretty impressive.

And as you think about building out an integrated member experience, because our members are going to go into... They're going to have the [inaudible].

Pay more of the care side, the interaction with the physicians as part of that.

That makes sense that we can create a much better experience. And when our members asked, they were starting to become more and more than routine, which our members would start to say, "Hey, I've got a sinus infection. How can you help me?"

Because we're here 24 by seven. So there's an easy connect as part of that, part of those kind of process.

The flip side of that is if you are, so this now get a little more nuanced, if you are a Teladoc user, they have 70 million members.

70 million, just massive.

And so if they have eligibility for Livongo as part of when they engage, one of their members engaged and the physician can immediately see if this person is eligible for a Livongo solution, you can easily enroll that member when you see that they are hypertensive or they have hypertension or that they're a person with diabetes, or they could benefit from our behavioral health or weight management solutions as part of their engagement in the care model.

And so that's just a massive opportunity given their scale to do some of those kind of enrollment pieces along the way and create more demand, even as it relates to the people that can create something. Can basically say, "Hey, you could benefit from this sort of service."

So just the revenues' appreciation portions of this are just in my mind making it a no brainer in the short and mid range piece.

And it really allows for a theorist moonshot to create that consumer directed virtual healthcare model and really your business models can evolve from there. So that to me, is kind of the crux of why this just makes such immense sense and kind of obvious sense.

And every time I turn the page in terms of more due diligence, more pieces as part of this, because I started with the notion of, hey, I really like our company. I like our position. I like our growth. I like what we're doing. We're having a really great quarter. I'd love to talk about that, but the more I got into this, every time I turned the page, there was just more and more reasons to get together and to create that different kind of a scale.

OG: Okay. That makes sense and eases probably some shareholders that felt like you first did. When this all started, it was like, "Ohhh." We want to stick with Livongo.

ZB: Yeah. And I'm sure that the reverse is true as well.

The Teladoc shareholders, I can understand.

There's a lot of growth and when you put it together, you now have one point three billion in revenue growing at 80%. I mean, it's kind of pretty staggering.

OG: Yeah. Those are some compelling numbers. Thanks for your time today and hopefully we can speak in the future as this merger moves forward.

ZB: Thank you.

Conclusion

Thanks for reading, friends.

The author is long shares of Livongo at the time of this writing and is short put options.

Please read the legal disclaimers below and as always, remember, we are not making a recommendation or soliciting a sale or purchase of any security ever. We are not licensed to do so, and we wouldn’t do it even if we were. We’re sharing my opinions, and provide you the power to be knowledgeable to make your own decisions.

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