Business context and reporting period
DexCom, Inc. develops and sells continuous glucose monitoring (CGM) systems for diabetes management. This unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021. Dexcom reports one global business segment. Results are subject to first-quarter seasonality, including U.S. insurance-deductible resets.
Key financial results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $628.8 million | $505.0 million | +25% |
| Gross profit / margin | $398.1 million / 63.3% | $343.9 million / 68.1% | Profit +16%; margin down 4.8 percentage points |
| Operating income / margin | $41.3 million / 6.6% | $45.9 million / 9.1% | −10% |
| Net income | $97.3 million | $56.5 million | +72% |
| Diluted EPS | $0.93 | $0.56 | +66% |
| Operating cash flow | $71.0 million | $27.8 million | +$43.2 million |
| Capital expenditures | $101.6 million | $99.7 million | Net operating cash flow less capex: approximately −$30.6 million |
| Cash, cash equivalents and short-term marketable securities | $2.69 billion | $2.73 billion at Dec. 31, 2021 | Down approximately $43 million |
Material changes and financial position
- Revenue growth was primarily driven by higher disposable-sensor sales and continued worldwide customer growth. U.S. revenue rose to $451.2 million from $381.2 million; revenue outside the U.S. rose to $177.6 million from $123.8 million.
- Distributor-channel revenue increased to $527.1 million, or 84% of revenue, from $390.7 million, or 77%. Direct-channel revenue declined to $101.7 million from $114.3 million. Management cited channel-strategy evolution and mix as factors affecting revenue and margins.
- Gross margin fell mainly because of pricing and channel mix and higher excess-and-obsolescence reserves as older CGM generations were phased out. Operating expenses increased 20%, to $356.8 million, including higher R&D staffing and product-development costs.
- Net income growth was amplified by a $61.2 million income-tax benefit. The benefit primarily reflected discrete excess tax benefits related to employee share-based compensation and the Verily milestone; Dexcom estimated a 30.2% annual effective tax rate for 2022.
- At March 31, current assets were $3.75 billion and current liabilities $711.4 million; the company reported a 5.27 working-capital ratio and 4.54 quick ratio. Cash and cash equivalents were $716.0 million, and short-term marketable securities were $1.97 billion.
- Convertible notes had a $1.966 billion carrying amount ($1.982 billion principal): $774.8 million principal due 2023 and $1.208 billion due 2025. No revolver borrowings were outstanding; $192.7 million was available under the $200 million facility after letters of credit. Dexcom said it complied with facility covenants.
Outlook, commentary, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management expected continued positive operating cash flows and said cash, investments, operating cash generation and available borrowing capacity should fund expected needs for at least 12 months.
- Significant capital spending was expected for the Malaysia manufacturing facility and capacity expansion in Mesa, Arizona. The company reported approximately $503.6 million of ordinary-course open purchase orders and contractual obligations, most due within one year.
- Dexcom highlighted development and commercialization of its next-generation G7 CGM system, manufacturing scale-up, reimbursement access and product innovation as important business drivers. COVID-19-related supply-chain disruption had affected G7 manufacturing and clinical-trial timelines; the overall financial impact remained uncertain.
- In Q1, Dexcom issued 736,377 common shares for achievement of a Verily regulatory-approval milestone. Up to 1,288,660 additional shares may be due for future sales milestones; achievement was not considered probable at quarter-end, and Dexcom said it intended to pay in shares.
- Key risks include pricing and reimbursement pressure, dependence on suppliers and manufacturing capacity, competition, regulatory and product-quality requirements, cybersecurity and privacy exposure, and patent litigation. Dexcom and Abbott entities had filed patent-related actions against each other in multiple jurisdictions; Dexcom said it intended to pursue its claims and defenses. Management did not believe pending proceedings were expected to have a material adverse effect, while cautioning that outcomes cannot be assured.
Investor facts to verify
- Whether revenue growth and the shift toward distributor sales can continue without further pressure on gross margin or direct-channel performance.
- How much of reported net-income growth reflects sustainable operations versus discrete tax benefits; the quarter’s effective tax rate was unusually negative.
- Progress, regulatory timing and supply readiness for G7, alongside manufacturing expansion and planned capital spending.
- Convertible-note conversion, cash-settlement and potential dilution exposure, especially for the 2023 notes that were convertible at holders’ option through June 30, 2022.
- Developments in Abbott patent litigation, reimbursement coverage, and COVID-19 or other supply-chain disruptions.