DexCom, Inc. — Q3 2019 Form 10-Q
Business context and period. DexCom develops and sells continuous glucose monitoring systems and disposable sensors. This unaudited report covers the quarter and nine months ended September 30, 2019; amounts are in millions of dollars except per-share data. DexCom reports one operating segment.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $396.3 | $266.7 | $1,013.2 | $693.6 |
| Gross profit / margin | $246.9 / 62% | $168.6 / 63% | $622.2 / 61% | $441.1 / 64% |
| Operating income (loss) | $56.0 | $13.9 | $40.8 | $(21.7) |
| Net income | $45.8 | $46.6 | $8.4 | $52.6 |
| Diluted earnings per share | $0.50 | $0.52 | $0.09 | $0.59 |
| Cash from operations | — | $170.8 | $89.5 |
- Q3 revenue rose 49%, primarily on higher sales volume and customer growth. Management cited pricing pressure associated with channel strategy and product mix.
- Distributor-channel revenue was 68% of Q3 sales, up from 58%; direct-channel share declined to 32% from 42%. U.S. revenue represented 78% of Q3 sales.
- Q3 gross margin eased one percentage point. For the first nine months, the decline reflected channel and product mix, higher warranty and freight charges, inventory write-downs, and investment in production capacity.
- R&D and SG&A for the first nine months were $194.7 and $386.7, respectively, up 37% and 21%. Operating expenses grew more slowly than revenue.
- Net income comparisons were affected by investment gains: 2018 included gains on DexCom’s Tandem Diabetes Care investment ($34.9 in Q3 and $85.0 for nine months); DexCom sold its remaining stake in Q1 2019 and recorded a $4.2 loss for the nine-month period. Higher interest expense from the 2023 convertible notes also reduced 2019 earnings.
Cash, liquidity and debt
- At September 30, cash and cash equivalents were $395.6 and short-term marketable securities were $1,034.3, totaling approximately $1.430 billion. The company reported $1.430 billion at period-end, up $44.3 from December 31, 2018.
- Nine-month operating cash flow was $170.8; capital expenditures were $135.9. Investing cash outflow of $920.9 largely reflected net purchases of marketable securities and capital spending. Cash, cash equivalents and restricted cash fell by $741.0, chiefly reflecting the shift into marketable securities.
- Convertible notes had a $1.047 billion net carrying amount and $1.25 billion aggregate principal ($400 million due 2022 and $850 million due 2023). The notes carry 0.75% coupons; amortization of discounts and issuance costs contributed to reported interest expense. No principal payments are due before maturity.
- The $200 million revolving credit facility was undrawn; $195.6 remained available after letters of credit. DexCom reported compliance with covenants. Total current assets were $1,815.7 and current liabilities $322.4.
Outlook, risks and notable items
- No specific revenue or earnings guidance is provided in the filing. Management expects cash, securities, operating cash generation and available credit to cover anticipated needs for at least the next 12 months.
- Management describes continued investment in CGM product development, international expansion, production capacity and automation. Its stated longer-term priorities include connected devices and software, predictive insights, and potential expansion into additional patient populations and settings.
- Seasonality typically results in lower first-quarter sales than fourth-quarter sales. Results may also be affected by reimbursement, pricing, product mix, manufacturing scale-up and customer/channel dynamics. Three distributors each accounted for at least 10% of Q3 revenue; together they represented 40%.
- A restructuring plan will transition certain operations to the Philippines and affect approximately 350 employees. Estimated pre-tax charges and costs were about $8 million; most had been incurred in the first half, with completion expected by year-end 2019.
- WaveForm Technologies appealed a judgment in DexCom’s favor in a patent case. Other patent disputes were also on appeal; DexCom stated that outcomes and potential losses could not be assessed. The filing reports no material accrued loss for these matters.
- DexCom adopted the new lease standard in 2019, recognizing operating lease right-of-use assets and liabilities. It reported no material impact on operating results from adoption.
Most important facts for investors to verify
- Whether rapid revenue growth can continue while channel mix, pricing pressure and international expansion weigh on gross margin.
- How inventory, warranty and freight costs evolve as manufacturing capacity expands; inventory obsolescence charges were $10.1 for the first nine months.
- Whether operating cash generation remains strong after capital expenditures and working-capital needs.
- The dilution and potential cash-settlement implications of the convertible notes, note hedge and warrants, including conversion eligibility.
- Whether distributor and customer concentration, reimbursement conditions, and the pending patent appeals change materially.
- Progress and final costs of the Philippines restructuring, and any changes to management’s liquidity assessment or outlook.