DexCom, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. DexCom develops and sells continuous glucose monitoring (CGM) systems, including the G6. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
- Revenue: $405.1, up 44% from $280.5 in Q1 2019. Growth was primarily driven by higher disposable sensor sales and worldwide customer growth, partly offset by pricing pressure and product mix. U.S. revenue was $292.3 (72%); international revenue was $112.8 (28%).
- Gross profit and margin: $256.5 and 63%, compared with $168.8 and 60% a year earlier. Management cited revenue growth, product cost reductions, and manufacturing efficiencies; higher excess and obsolete inventory charges partly offset improvement.
- Operating results: Operating income was $33.6 versus an operating loss of $14.4. Operating expenses rose 22% to $222.9; R&D increased 24% to $73.1 and SG&A increased 21% to $149.8.
- Net income and EPS: Net income was $19.9 versus a net loss of $26.9. Diluted EPS was $0.21 versus a loss of $0.30 per share. Income tax expense was $2.5; the company maintained a full valuation allowance on net deferred tax assets.
- Cash flow: Operating cash flow was $1.9, down from $11.8. Capital expenditures were $33.2. Cash, cash equivalents and restricted cash ended at $584.9, including $0.3 restricted cash.
- Liquidity: Cash, cash equivalents and short-term marketable securities totaled $1,510.5 at quarter-end, down $22.8 from year-end 2019. Current assets were $1,995.7 and current liabilities $342.8.
- Debt: Convertible notes had $1,250.0 principal outstanding ($400.0 due 2022 and $850.0 due 2023); their balance-sheet carrying amount was $1,072.4. No revolver borrowings were outstanding; $194.6 of the $200.0 facility was available after letters of credit. DexCom reported compliance with credit-facility covenants.
Material changes versus Q1 2019
- Revenue rose $124.6, with sensor and other revenue increasing to approximately 80% of total revenue from 75%; reusable hardware declined to approximately 20% from 25%.
- Gross margin improved by 3 percentage points, and the company moved from operating and net losses to profits.
- Operating cash flow declined by $9.9. Inventory increased to $141.9 from $119.8 at year-end 2019, including a $5.1 excess and obsolete inventory charge in Q1 2020 versus $1.6 in Q1 2019.
- SG&A included $7.3 more litigation costs year over year; R&D growth was mainly associated with higher payroll, consulting, and supplies costs.
Outlook, commentary, risks and unusual items
- COVID-19: DexCom reported added costs for payroll, consulting, IT and facilities, and said the full effect on operations and financial performance was uncertain. Potential risks included customer demand and sales-cycle disruption, supply-chain and manufacturing constraints, and delays to clinical trials or regulatory reviews. No clear quantified full-year guidance is provided in the filing text.
- Management outlook: Management expected existing liquidity and operating cash flows to generally fund ongoing core business needs and believed available liquidity was sufficient for anticipated requirements for at least 12 months. It also noted the customary first-quarter seasonality associated with U.S. insurance deductible resets and flexible-spending accounts.
- Convertible-note feature: Share-price conversion conditions were met for both note issues during Q1, making the notes convertible at holders’ option from April 1 through June 30, 2020. DexCom continued to classify the liability components as long-term at March 31.
- Legal settlement: DexCom reached a confidential global settlement with AgaMatrix and WaveForm on March 9, 2020, paid a one-time amount, and received licenses to certain intellectual property. The payment amount is not stated clearly in the filing text; no contingent-loss accrual was reported for the suits at quarter-end.
- Other risks: The filing highlights pricing and reimbursement pressure, reliance on key distributors and suppliers, manufacturing scale and quality, competition, regulatory and product-liability exposure, cybersecurity and foreign-exchange risks. The three largest distributors each accounted for more than 10% of Q1 revenue.
Important facts for investors to verify
- How COVID-19 affected subsequent-quarter demand, manufacturing capacity, supply continuity, and sales activity.
- Whether the improved gross margin is sustainable given pricing, product mix, and inventory charges.
- Operating cash conversion and working-capital trends, especially accounts receivable, inventory, and accrued payroll.
- The cash cost and continuing effects of the confidential AgaMatrix/WaveForm settlement.
- Potential cash-settlement, liquidity, and dilution implications if convertible notes are converted; note principal totals $1.25 billion.
- Revenue concentration in major distributors and the durability of reimbursement coverage and pricing.