DexCom, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. DexCom develops and sells continuous glucose monitoring (CGM) systems. Financial figures are unaudited and in U.S. dollars; 2021 comparisons were adjusted for convertible-debt accounting and the four-for-one stock split.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Revenue | $769.6 million | $650.2 million | +18% |
| Gross profit / margin | $494.2 million / 64.2% | $446.9 million / 68.7% | Profit +11%; margin down 4.5 percentage points |
| Operating income / margin | $147.5 million / 19% | $118.3 million / 18% | +25% |
| Net income | $101.2 million | $87.3 million | +16% |
| Diluted EPS | $0.24 | $0.21 | +14% |
| Operating cash flow | $293.2 million | $246.5 million | +19% |
For the nine months, revenue was $2.095 billion (+20%), gross profit $1.342 billion (margin 64.1%, versus 69.0%), operating income $265.8 million (approximately flat), net income $249.4 million (+12%), diluted EPS $0.60 (versus $0.54), and operating cash flow $537.0 million (versus $336.7 million).
Liquidity, debt and capital allocation
- Cash, cash equivalents and short-term marketable securities totaled $2.37 billion at September 30, down $359.3 million from year-end 2021. Cash and cash equivalents alone were $698.1 million; short-term marketable securities were $1.674 billion.
- Current assets were $3.399 billion and current liabilities $900.5 million; management reported a 3.77 working-capital ratio and 3.26 quick ratio.
- Senior convertible notes had a $1.982 billion principal balance ($1.969 billion carrying value): $774.8 million due 2023 and $1.208 billion due 2025. No revolving-credit borrowings were outstanding; $192.7 million remained available. The company reported compliance with credit covenants.
- Property and equipment purchases were $301.3 million in the first nine months. Management expects significant further capital spending on Malaysia manufacturing and capacity expansion in Mesa, Arizona.
- The company repurchased approximately 6.6 million shares for $557.7 million under an accelerated repurchase agreement; $142.3 million of the $700 million authorization remained available at quarter-end.
Material changes and management commentary
- Revenue growth primarily reflected higher disposable-sensor sales as the worldwide customer base expanded. Pricing and product/channel mix partly offset volume growth. Sensors and other revenue were about 87% of Q3 revenue, up from 84% a year earlier.
- Gross margin contracted, which management attributed mainly to price, product and channel mix and foreign-currency pressure.
- Q3 R&D expense fell 14%, mainly on lower third-party software-development, equipment-validation and clinical-trial costs. Nine-month R&D was essentially flat. SG&A rose 18% in Q3 and 23% for nine months, reflecting higher headcount, marketing, litigation, travel and depreciation costs.
- Nine-month income tax expense was $8.2 million, a 3.2% effective rate, primarily reflecting share-based compensation and Verily-milestone tax benefits and R&D credits. Management estimated a 31.1% full-year 2022 effective tax rate; the unusually low nine-month rate should not be assumed to recur.
- Management stated existing liquidity and expected operating cash flows should cover anticipated requirements for at least 12 months. The filing provides no clear numerical revenue or earnings guidance.
Risks, contingencies and unusual items
- COVID-19-related operating and supply-chain disruption remained uncertain; DexCom reported some disruption affecting development of its next-generation CGM. Management also identified manufacturing scale-up, supplier concentration, regulatory approval and reimbursement as important execution risks.
- Abbott and DexCom have brought patent-related actions against each other in multiple jurisdictions. DexCom said it intends to pursue its claims and defenses; outcomes and potential financial impact are uncertain.
- Additional Verily sales-based milestones equivalent to up to 5,154,640 shares could become payable upon future revenue targets. Achievement was not considered probable at quarter-end, so no cost was recognized; DexCom expects to pay in shares.
- Available-for-sale securities had $10.9 million of unrealized losses at quarter-end, attributed primarily to higher interest rates; the company recorded no credit-loss allowance and said it did not expect to be required to sell before recovery.
- Other stated risks include pricing and reimbursement pressure, competition, product quality/liability, privacy and cybersecurity, foreign-exchange exposure, inflation, and the possibility that convertible-note conversions or maturities could affect liquidity or dilute shareholders.
Important facts for investors to verify
- Whether sensor volume growth can continue while pricing and channel mix pressure gross margins.
- Progress, timing and supply readiness for the next-generation G7 system, including regulatory and clinical milestones.
- Execution and cost of Malaysia and Mesa manufacturing expansion, and any subsequent supply constraints.
- Cash-flow and liquidity needs relative to capital spending, the 2023 note maturity/conversion terms, and future share repurchases.
- Developments in Abbott patent litigation, reimbursement coverage, and the tax benefits that materially reduced the nine-month effective tax rate.