Dexcom, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Dexcom develops and markets continuous glucose monitoring (CGM) systems for diabetes management. The filing reports one global operating segment. Results are unaudited; first-quarter results may be affected by typical seasonal softness following the fourth quarter.
Key financial results
Amounts in millions of U.S. dollars, except per-share data.
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $741.5 | $628.8 | +18% |
| Gross profit / margin | $462.6 / 62.4% | $398.1 / 63.3% | Profit +16%; margin down 0.9 percentage points |
| Operating income / margin | $47.2 / 6.4% | $41.3 / 6.6% | Income +14% |
| Net income | $48.6 | $97.3 | Down 50% |
| Diluted EPS | $0.12 | $0.23 | Down 48% |
| Cash from operations | $155.4 | $71.0 | +119% |
| Capital expenditures | $74.7 | $101.6 | Down $26.9 |
- Revenue mix: U.S. revenue was $526.0 million (71% of total) and international revenue was $215.5 million (29%). Distributor sales were $618.9 million (83%); direct sales were $122.6 million (17%). Disposable sensor and other revenue was approximately 88% of total.
- Profitability drivers: Revenue growth primarily reflected higher disposable sensor sales and a larger worldwide customer base. Gross margin declined due mainly to price, product and channel mix, intangible amortization, and foreign-currency effects. SG&A rose 35% to $294.6 million, including higher advertising and marketing, compensation, and patent-litigation costs. R&D fell 12% to $119.0 million, partly due to lower equipment validation and third-party development costs.
- Net income comparison: Q1 2022 included a $61.2 million income tax benefit, primarily from discrete share-based compensation tax benefits and a Verily milestone. Q1 2023 recorded $15.9 million of tax expense. Q1 2023 interest and other income was $21.9 million, largely reflecting higher interest income on investments.
- Cash flow and liquidity: Operating cash flow increased to $155.4 million, supported by working-capital movements, including collections of receivables and growth in accounts payable and accrued liabilities. Investing cash flow was negative $186.7 million, including net purchases of marketable securities and $74.7 million of capital spending. Financing cash flow was positive $11.2 million. Cash, cash equivalents and short-term marketable securities totaled $2.57 billion at quarter-end.
- Debt and access to capital: Senior convertible notes had $1.982 billion of principal and a $1.972 billion carrying amount. The 2023 Notes ($774.8 million principal outstanding) mature in December 2023; the 2025 Notes ($1.208 billion) mature in November 2025. The 2023 Notes were convertible at holders’ option during Q1 and remained convertible for April–June 2023 under the stated stock-price conditions. The $200 million revolving facility had no borrowings, $7.3 million of letters of credit and $192.7 million available. Dexcom reported compliance with credit covenants.
- Working capital: The reported working-capital ratio was 2.02 and quick ratio 1.72. Current liabilities included $773.2 million of current convertible notes. Inventory was $366.0 million, up from $306.7 million at year-end.
Changes, outlook and notable items
- Revenue grew 18%, but gross margin declined year over year. Net income fell despite higher operating income, principally reflecting the prior-year tax benefit and the current-year tax expense.
- Management estimated a 30.9% effective tax rate for full-year 2023; the Q1 effective rate was 24.7%, partly reduced by discrete share-based compensation tax benefits.
- Management expects existing cash, investments and operating cash flows to fund ongoing operations and anticipated requirements for at least the next 12 months. It expects significant capital expenditures over the next year for the Malaysia manufacturing facility and capacity expansion in Mesa, Arizona. No specific revenue or earnings guidance is provided in the filing text.
- Management cited continued product development, international expansion and scaling manufacturing as priorities. The Dexcom G7 received FDA marketing clearance in December 2022. The filing also describes opportunities to expand CGM use, including in additional patient groups and care settings.
- CMS issued a Medicare coverage determination in April 2023, after quarter-end, extending CGM coverage to patients using insulin at least once daily and certain patients not taking insulin who have a history of problematic hypoglycemia. Coverage, reimbursement and pricing remain important uncertainties.
- Litigation: Dexcom and Abbott are involved in patent disputes in the U.S. and Europe, as well as Abbott’s U.S. breach-of-contract suit. A jury trial on the contract claims was scheduled for July 10, 2023; Abbott’s U.S. patent case was scheduled for November 5, 2023. Dexcom said it could not reasonably estimate the outcomes. Q1 SG&A included increased legal expense related primarily to patent litigation.
- Other risks and contingencies: The filing highlights competition, reimbursement and price pressure, reliance on key distributors and suppliers, product quality and regulatory requirements, cybersecurity and privacy, foreign-currency and international operating risks, and potential manufacturing or construction delays. Three distributors each generated at least 10% of Q1 revenue, increasing channel concentration risk.
- Approximately $142.3 million remained available under the share-repurchase authorization, which was due to end no later than June 30, 2023; no shares were repurchased in Q1. Open purchase orders and ordinary-course contractual obligations were approximately $314.7 million, mostly due within one year.
Investor verification priorities
- Track revenue growth, pricing and product/channel mix, and whether gross margin stabilizes as manufacturing scales.
- Verify G7 adoption and the timing, cost and output of the Malaysia and Mesa capacity expansions.
- Monitor Medicare and commercial-payor coverage, reimbursement terms, and the commercial impact of competitor products.
- Follow Abbott litigation milestones and any resulting financial, operating or intellectual-property effects.
- Assess how the December 2023 convertible-note maturity is settled, including cash needs, share issuance and potential dilution.
- Reconcile operating cash generation with planned capital spending, inventory growth and the company’s liquidity outlook.