DexCom, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. DexCom develops and commercializes continuous glucose monitoring (CGM) systems for people with diabetes and healthcare providers. Results are unaudited and in millions of dollars, except per-share data.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $336.4 | $242.5 | $616.9 | $426.9 |
| Gross profit / margin | $206.5 / 61% | $153.6 / 63% | $375.3 / 61% | $272.5 / 64% |
| Operating loss | $(0.8) | $(4.9) | $(15.2) | $(35.6) |
| Net income (loss) | $(10.5) | $30.2 | $(37.4) | $6.0 |
| Diluted EPS | $(0.12) | $0.34 | $(0.41) | $0.07 |
| Cash from operations | Not separately presented by quarter | $76.3 | $32.7 |
Q2 revenue grew 39% year over year; first-half revenue grew 45%. Management attributed growth mainly to higher sales volume and a growing worldwide customer base, partly offset by pricing pressure from channel strategy and product mix. Disposable sensors and other revenue represented about 77% of revenue in Q2, versus 74% a year earlier. Distributor sales accounted for 66% of Q2 revenue; U.S. sales were 79%.
Gross margin declined as channel mix and international expansion evolved, and as the company incurred higher freight and warranty costs and investments to expand production capacity. Operating expenses rose 31% in Q2 to $207.3 million, including R&D of $69.0 million and SG&A of $138.3 million. Operating loss narrowed, but net results weakened: Q2 2018 included $42.7 million of income from the Tandem Diabetes Care investment; DexCom sold its remaining Tandem holding in Q1 2019. Interest expense also increased following issuance of the 2023 convertible notes.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $709.2 million and short-term marketable securities were $668.3 million, totaling $1.378 billion. Combined cash and securities were $8.1 million lower than at year-end 2018, as funds were shifted into marketable securities.
- First-half operating cash flow was $76.3 million. Investing cash outflow was $508.1 million, primarily net purchases of marketable securities ($421.9 million) and capital expenditures ($86.2 million). Cash, cash equivalents and restricted cash decreased $427.3 million.
- Convertible notes had $1.25 billion aggregate principal outstanding: $400 million due 2022 and $850 million due 2023. Their combined carrying amount was $1.035 billion. Both carry a 0.75% coupon; the accounting effective interest rates were 5.1% and 5.6%, respectively.
- The $200 million revolving credit facility had no borrowings and $195.6 million available after $4.4 million of letters of credit. DexCom reported compliance with its covenants. Current assets were $1.744 billion and current liabilities $288.2 million.
Changes, outlook and notable items
- The company said existing cash, marketable securities, expected operating cash flows and available credit should meet anticipated needs for at least the next 12 months. No specific full-year revenue, earnings or margin guidance is provided in the filing.
- Management described ongoing investment in production capacity and automation, continued U.S. and European commercialization, international expansion, and development of future CGM technologies and connected data offerings. The filing notes typical seasonality, with lower first-quarter sales than the prior fourth quarter.
- A restructuring plan will transition certain operations to the Philippines and affect approximately 350 employees, or about 13% of the workforce at year-end 2018. Estimated pre-tax costs are about $9 million, with activities expected to be substantially complete by year-end 2019.
- Two distributors each contributed more than 10% of revenue: together they represented 30% of Q2 revenue and 28% for the first half. They also represented 32% of accounts receivable at June 30.
- Patent litigation involving WaveForm/AgaMatrix remains ongoing; the remaining claims in the Oregon case were expected to proceed to trial in February 2020. The company said the outcome and potential loss could not be assessed. Other ordinary-course claims were also disclosed.
- DexCom adopted the new lease accounting standard in Q1, recording operating lease right-of-use assets and liabilities; the transition included a $2.1 million retained-earnings adjustment. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether rapid revenue growth can be sustained while gross margin recovers from channel, product-mix and capacity-investment pressures.
- How customer growth, reimbursement and pricing trends affect recurring sensor sales and distributor concentration.
- Production expansion, capital spending and restructuring execution, including whether expected cost savings materialize.
- Convertible-note terms, potential conversion/dilution and the company’s ability to generate cash while servicing obligations.
- Developments in the WaveForm/AgaMatrix litigation and any resulting financial exposure.