DexCom, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. DexCom designs and sells continuous glucose monitoring systems and sensors. Comparisons are with Q1 2018 unless otherwise noted. Amounts are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Revenue | $280.5 million | $184.4 million | Up 52% |
| Gross profit / margin | $168.8 million / 60% | $118.9 million / 64% | Profit up 42%; margin down 4 percentage points |
| Operating expenses | $183.2 million | $149.6 million | Up 22% |
| Operating loss | $14.4 million | $30.7 million | Loss narrowed $16.3 million |
| Net loss / diluted loss per share | $26.9 million / $0.30 | $24.2 million / $0.28 | Net loss increased $2.7 million |
| Operating cash flow | $11.8 million | $(8.7) million | Improved $20.5 million |
| Capital expenditures | $39.3 million | $15.3 million | Higher investment in production capacity |
Revenue growth was attributed primarily to higher sensor and durable-system sales and growth in the installed customer base, in the U.S. and internationally. Distributor revenue was $187.8 million (67% of total), versus $118.3 million (64%) a year earlier. U.S. revenue was $210.5 million (75%); revenue outside the U.S. was $70.0 million (25%).
Gross margin pressure reflected higher freight and warranty costs, channel strategy and product mix as new products and international markets expanded, and investment to scale production capacity. Operating expenses rose with higher R&D staffing and facilities costs, and sales, marketing and commercialization costs. SG&A included $3.2 million of restructuring charges.
Cash, cash equivalents and short-term marketable securities totaled $1.358 billion at March 31, 2019, compared with $1.386 billion at year-end. Cash and cash equivalents alone were $1.285 billion. Current assets were $1.691 billion and current liabilities $235.4 million. Net cash provided by investing activities was $131.3 million, mainly reflecting net proceeds from sales of marketable securities, partly offset by capital expenditures.
Senior convertible notes had a $1.022 billion net carrying amount and $1.25 billion aggregate principal amount. The company had no revolver borrowings, $4.4 million of letters of credit and $195.6 million available under its $200 million credit facility. It reported compliance with facility covenants. Management said available liquidity, expected operating cash flows and the facility should meet needs for at least 12 months.
Material changes and notable items
- Interest expense rose to $14.9 million from $4.8 million, primarily because of the $850 million 2023 convertible notes issued in November 2018. The 2023 notes carry a 0.75% coupon, but discount accretion and issuance-cost amortization increase their effective interest rate to 5.6%.
- Equity-investment results shifted from $7.4 million income to a $4.2 million loss, reflecting the Tandem Diabetes Care investment; DexCom sold its remaining investment during Q1 2019.
- Adoption of lease accounting standard ASC 842 added operating lease right-of-use assets and liabilities. A $2.1 million cumulative-effect adjustment increased opening retained earnings. The filing reports $41.8 million of operating lease liabilities at quarter-end.
- Inventory increased to $101.1 million from $70.7 million; the company recorded $1.6 million of excess and obsolete inventory charges.
- A February restructuring plan moves certain operations to the Philippines and is expected to affect approximately 350 employees, about 13% of the year-end workforce. Estimated pre-tax charges are approximately $9 million, primarily severance; completion is expected by year-end 2019.
Outlook, risks and contingencies
No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management noted typical seasonality, with Q1 sales generally below Q4 due in part to U.S. insurance deductible resets and flexible-spending-account timing. It described plans to expand production capacity, develop future CGM technologies and broaden potential applications and connectivity.
Key risks include execution of capacity expansion and international growth, reimbursement and product demand, competition and technology development, foreign-exchange exposure as overseas business grows, and dependence on two distributors that each represented more than 10% of Q1 revenue. Management stated that cash flows may fluctuate with operating results, working capital and capital deployment.
Patent litigation involving WaveForm/AgaMatrix remained ongoing, with a trial estimated for February 2020; DexCom said it believes the infringement claims lack merit. Other patent proceedings included an ITC finding of non-infringement against DexCom’s claims, and an appeal concerning attorneys’ fees. The company said potential outcomes and losses could not be assessed; apart from an immaterial fee accrual, it recorded no contingent-loss accrual for these suits. Management did not expect ordinary-course claims to materially affect results, but noted no assurance about future proceedings.
The 2022 notes became convertible at holders’ option from April 1 through June 30, 2019 under the applicable stock-price test. DexCom classified their liability as long-term at March 31. The 2023 notes were not then eligible for holder conversion based on disclosed conditions. Potential dilution from convertible notes and warrants remains relevant; the 2023 note hedge is intended to offset some dilution or excess conversion cash payments.
Most important facts for investors to verify
- Whether revenue growth can be sustained while gross margin recovers from 60%, given product mix, international expansion and capacity investment.
- How operating cash generation, capital spending and working-capital needs evolve; Q1 cash-flow improvement includes substantial non-cash expenses and marketable-security transactions.
- The timing and cost of the Philippines restructuring and whether expected savings offset severance and transition costs.
- Convertible-note conversion, settlement and potential dilution terms, including the 2022 notes’ temporary conversion window and the 2023 warrants.
- Developments in patent litigation and the concentration of revenue and receivables among two major distributors.