Are the inmates running the asylum?
While Livongo CEO Glen Tullman continues his fireside chat tour, the sharks are smelling blood in the water. The first shareholder lawsuit is underway and the stock after getting an initial boost from the Federal contract win, has begun to fall again. Now we won’t say that this house cards is about to collapse or that anything nefarious/illegal is going on. All we can say based on everything we know they are coming very close to crossing the line.
The recent federal contract win is a perfect example of what we are talking about. In the company’s press release it states;
“Based on this updated expected enrollment, we anticipate this agreement will account for $20-25 million in revenue in 2020 and $30-35 million in revenue for 2021, or a total of $50-60 million including both years.”
The $60 million number was quickly picked up by the media;
“Livongo’s stock soars after awarded FEHBP contract, adding up to $60 million in revenue”- MarketWatch
“Livongo inks deal with Federal Employee Health Benefits Program, stock jump” – MobiHealthNews
“Livongo stock jumps 18% on news of its biggest contract ever” – Silicon Valley Business Journal
Now we hate to point out the obvious, but the $60 million number ASSUMES the company is successful at enrolling patients in the program and keeping them enrolled. It’s this point that’s worthy of closer examination as during the company’s only earnings call Jennifer Schneider the company’s President stated;
“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 to begin enrollment in 2018.”
During the Q&A she expanded a little stating;
“When we look at optimal enrollment rate, we believe that its somewhere in the 60% to 70% is a realistic goal for us. And we are working to get there.”
That sure as hell sounds great but its also pure fiction. To fully appreciate how ludicrous that statement is that’s like believing the Washington Redskins and Miami Dolphins two of the worst teams in the NFL this year will play in the SuperBowl come February 2nd, 2020. No one and we do mean no one that does anything similar to what Livongo does comes even close to enrollment rates that high.
Even the 47% enrollment rate for “optimized clients” whatever that means is meaningless. Livongo in its simplest form is really in the razor/razor blade business. Getting people to try the razor is one thing the real money is made from the continual sale of razors. The company doesn’t bother to explain how they classify an enrolled patient, nor do they mention what their attrition rate, patients who drop out of the program, is.
Frankly with such limited operating history the company can, and we think is playing very fast and very loose with the numbers. Having spoken with several companies who have similar programs to what Livongo offers enrollment rates are much closer to 10% or 15% then they are to the 47% number cited by Livongo. Now is it possible that Livongo is just that much better than everyone else, sure it’s possible and it also possible that the New York Jets currently 0-4 and the Cincinnati Bengals currently 0-5 will face off against each other in an AFC playoff game.
Let’s be very clear here we aren’t saying the company is doing anything illegal, but they are coming damn close. The company can say anything they want about the future knowing full well that most investors will forget what was said when the results actually come in. With the stock falling and needing a boost it’s in their best interest to make the numbers look as attractive as possible. When in reality any number they cite is just one big wild ass guess, pure unadulterated fiction.
So while Glen is out on his media tour basking in the spotlight, the inmates are left to run the asylum. The analysts and mainstream media continue to buy into the digital diabetes story failing to look deeper. They buy the BS put out by the company stating the reason the stock has fallen almost 50% since its IPO is because no one understands their business and doesn’t know how to value the company.
Well we certainly understand their business which so far anyway has produced nothing but huge loses. Folks it’s bad enough that this is just an old idea in shiny new box, that there is no there there. It’s worse when the company is coming close to breaking the law, skirting the truth and going right up to that line between being real and being bold face liars.