DexCom, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. DexCom develops and sells continuous glucose monitoring systems for people with diabetes and healthcare providers. Figures are in U.S. dollars; financial-statement amounts are in millions except per-share data.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $242.5 | $170.6 | $426.9 | $312.9 |
| Gross profit | $153.6 | $117.5 | $272.5 | $211.6 |
| Gross margin | 63% | 69% | 64% | 68% |
| Operating loss | $(4.9) | $(13.6) | $(35.6) | $(54.0) |
| Net income (loss) | $30.2 | $2.9 | $6.0 | $(38.8) |
| Diluted EPS | $0.34 | $0.03 | $0.07 | $(0.45) |
| Operating cash flow | Not separately reported for quarter | $32.7 | $14.6 |
- Revenue rose 42% in Q2 and 36% in the first half, primarily from higher sensor volumes as the installed base grew, plus durable-system sales. Sensors were approximately 70% of revenue and durable systems 30% in both comparative periods.
- Q2 revenue by channel was $158.4 distributor and $84.1 direct; U.S. revenue was $189.6 and international revenue $52.9. Distributor share fell to 65% from 74% in Q2 2017.
- Gross margin declined year over year, despite higher revenue and lower warranty costs. Management cited scrap and royalty-related costs and G6-related excess and obsolete inventory charges of $3.5 in Q2 and $5.5 in the first half.
- Operating expenses were $158.5 in Q2, including R&D of $47.2 and SG&A of $111.3. SG&A growth reflected higher headcount, marketing, sales incentives, legal and other commercialization costs. First-half SG&A was $216.1, up from $172.2.
- Reported Q2 net income included a $42.7 unrealized gain on DexCom’s Tandem Diabetes Care equity investment; the first-half gain was $50.1. Thus, net income was not equivalent to operating profitability. The company reported operating losses in both periods.
Balance sheet, cash flow and liquidity
- At June 30, cash and cash equivalents were $300.2; short-term marketable securities were $305.9, totaling $606.1. Working capital was $665.2. Total assets were $1,007.5.
- First-half operating cash flow was $32.7. Investing cash outflow was $175.3, including $224.1 of marketable-security purchases, partly offset by maturities, and $25.6 of capital expenditures. Financing cash inflow was $3.4. Cash, cash equivalents and restricted cash declined $141.0 to $300.5.
- Senior convertible notes had $400.0 principal, a $335.0 carrying amount and a $465.8 fair value; they bear 0.75% stated interest and mature in May 2022. There were no revolving-credit borrowings; $195.6 of the $200.0 facility remained available, net of letters of credit.
- Management said available working capital resources were expected to fund operations through at least August 1, 2019. The company nevertheless reported a $665.8 accumulated deficit and expected continuing operating losses.
Outlook, risks and notable items
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expects continued spending on commercialization, R&D, clinical trials, and manufacturing and corporate infrastructure, and says profitability depends on revenue sufficient to support the cost structure.
- The Mesa, Arizona manufacturing facility began operations in Q2; expanded capacity might not be fully available until the end of 2018. The filing identifies facility qualification, production scaling, supplier availability and product quality as risks.
- Key business risks include reimbursement and coverage limitations, competition, regulatory approvals, manufacturing and single-source supply constraints, product liability and cybersecurity. The filing also notes seasonally lower first-quarter sales associated with insurance deductible resets and flexible spending accounts.
- Patent disputes involving WaveForm and Arbmetrics were unresolved; outcomes and potential costs could not be assessed, and no amounts were accrued. DexCom also had $87.2 of vendor purchase commitments due within one year.
- The company maintained a full valuation allowance on net deferred tax assets. It adopted ASC 606 in 2018 with no material cumulative adjustment. Adoption of lease accounting guidance was planned for Q1 2019 and expected to increase reported assets and liabilities.
Most important facts for investors to verify
- Whether sensor-led revenue growth continues and whether direct-channel growth offsets reliance on distributors.
- Whether gross margins recover from 2018 levels and how much G6 launch-related inventory, scrap and royalty costs persist.
- How operating performance looks apart from the non-cash Tandem investment gain, and whether operating cash generation can support expansion.
- Progress and timing of Mesa facility qualification and capacity ramp, plus any supply or product-quality constraints.
- Reimbursement developments, unresolved patent litigation, and the company’s ability to meet obligations under its convertible notes and credit facility.