DexCom, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. DexCom develops and sells continuous glucose monitoring systems. Figures are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $595.1 | $451.8 | $1,100.1 | $856.9 |
| Gross profit / margin | $417.1 / 70.1% | $284.1 / 62.9% | $761.0 / 69.2% | $540.6 / 63.1% |
| Operating expenses | $316.1 | $216.3 | $614.1 | $439.2 |
| Operating income | $101.0 | $67.8 | $146.9 | $101.4 |
| Net income | $62.9 | $46.3 | $103.2 | $66.2 |
| Diluted EPS | $0.63 | $0.48 | $1.04 | $0.69 |
- Q2 revenue increased 32%; six-month revenue increased 28%. Management attributed growth mainly to higher disposable-sensor sales as the worldwide customer base expanded, partly offset by pricing pressure from channel strategy changes and product mix.
- Gross margin improved, which management attributed to revenue growth, manufacturing efficiencies and, for the six-month period, product-design improvements. Operating expenses rose faster than revenue: Q2 R&D increased 62% and SG&A 37%, reflecting higher personnel, software-related third-party and consulting costs, clinical trials, and advertising and marketing.
- Cash flow: Net cash from operations was $89.4 for the first half, versus $156.0 in 2020; the filing’s highlights report Q2 operating cash flow of $61.6, down 67% year over year. First-half investing activities provided $251.0, mainly from net sales/maturities of marketable securities, while capital expenditures were $200.9. Financing activities provided $0.4.
- Liquidity: At June 30, cash and cash equivalents were $1,158.8 and short-term marketable securities were $1,426.1, totaling approximately $2.58 billion. The combined balance was down $122.8 from year-end 2020. Current assets were $3,474.2 and current liabilities $600.7.
- Debt: Convertible-note principal totaled $2,057.5: $850.0 due 2023 and $1,207.5 due 2025. The balance-sheet carrying amount was $1,710.7, net of unamortized discounts and issuance costs. No revolver borrowings were outstanding; $193.6 remained available after letters of credit. DexCom reported compliance with credit-agreement covenants.
Material changes and business mix
- Distributor sales increased to 83% of Q2 revenue from 73% a year earlier; direct sales fell to 17% from 27%. For the first half, distributor share rose to 81% from 72%. DexCom noted that the evolving channel strategy and product mix contributed to pricing pressure.
- Outside-U.S. revenue was 22% of Q2 sales, up from 19%; it was 23% of first-half sales in both years.
- First-half accounts receivable rose to $483.5 from $428.5 at year-end, and inventory rose to $319.3 from $234.7. Property and equipment increased to $676.0 from $515.3, alongside higher capital spending.
- Operating expenses included increased investment in research and development and commercial activity. Share-based compensation was $59.6 for the first half, versus $54.6 in 2020.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management said existing liquidity, projected operating cash generation and available credit should cover anticipated needs for at least the next 12 months. It expects product revenue to fluctuate seasonally, with sales typically lower in Q1 than the preceding Q4.
- Management estimated a 27.1% full-year 2021 effective tax rate from normal recurring operations. The six-month tax benefit included excess tax benefits from employee share-based compensation and a one-time U.K. deferred-tax benefit from the enacted increase in the U.K. corporate tax rate. Q2 included $13.8 of tax expense; the first half recorded a $5.3 tax benefit.
- COVID-19 created operating costs and moderate global disruptions. DexCom reported supply-chain disruption affecting development of its next-generation CGM and delays in certain pivotal clinical trials; the ultimate effects on operations, financial results and guidance remained uncertain.
- DexCom and Abbott entities filed patent-infringement complaints against one another in multiple jurisdictions after their prior settlement and license agreement expired March 31, 2021. The company said it would vigorously pursue its claims and defenses; the filing does not quantify a potential financial effect.
- Other key risks include reimbursement and pricing pressure, dependence on distributors and third-party suppliers, manufacturing capacity and product quality, competition, regulatory and clinical-development uncertainty, data privacy and cybersecurity, and the $2.06 billion principal amount of convertible notes. The company reported no significant off-balance-sheet arrangements.
- Unusual comparability items include a $5.4 debt-extinguishment loss in first-half 2020, related to repurchase and conversion of 2022 notes; none was recorded in first-half 2021. Interest expense rose in 2021, primarily due to the 2025 notes issued in May 2020.
Important facts for investors to verify
- Whether sensor-volume growth and gross-margin improvement continue, and how pricing, product mix and manufacturing costs affect margins.
- Whether the shift toward distributors supports growth without weakening customer experience or increasing concentration risk; four major distributors each generated at least 10% of first-half revenue.
- Progress and timing of next-generation CGM development, clinical trials, regulatory clearances and supply-chain readiness.
- Developments and potential costs or business implications from the Abbott patent litigation.
- Cash conversion and working-capital trends, particularly receivables, inventory and capital expenditures, alongside debt-service and conversion obligations.
- Actual full-year tax rate and the extent to which COVID-19, reimbursement changes and supply constraints affect demand and operations.