DexCom, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. DexCom develops and sells continuous glucose monitoring (CGM) systems, including G4 PLATINUM, G5 Mobile and G6. Unless stated otherwise, amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $266.7m | $184.6m | $693.6m | $497.5m |
| Gross profit / margin | $168.6m / 63% | $127.0m / 69% | $441.1m / 64% | $338.6m / 68% |
| Operating income (loss) | $13.9m | $(0.5)m | $(21.7)m | $(54.5)m |
| Net income (loss) | $46.6m | $(2.0)m | $52.6m | $(40.8)m |
| Diluted EPS | $0.52 | $(0.02) | $0.59 | $(0.47) |
| Cash provided by operating activities | — | $89.5m | $50.8m |
- Revenue increased 44% in Q3 and 39% for the nine-month period, primarily on higher sensor volumes as the installed customer base grew, along with sales of durable systems. Sensors and durable systems each represented approximately 70% and 30% of revenue, respectively.
- Gross margin declined year over year. Management attributed the decrease primarily to channel and product mix associated with launches and international expansion. Nine-month cost of sales also included $6.1m of excess and obsolete inventory charges, mainly related to G6 launch and product changes.
- Q3 operating profit followed a small operating loss in the prior-year quarter. The company remained in an operating loss for the first nine months, despite reporting net income.
- Nine-month net income includes $85.0m of income from the Tandem Diabetes Care equity investment; Q3 includes $34.9m. The nine-month figure included $40.8m of unrealized gains on shares still held and $44.2m of gains on shares sold. Accordingly, reported net income does not represent operating earnings alone.
Liquidity, cash flow and debt
- At September 30, 2018, cash and cash equivalents were $367.4m and short-term marketable securities were $301.3m, totaling $668.7m. Working capital was $720.2m; the company reported that resources should fund operations for at least the next 12 months.
- Nine-month operating cash flow was $89.5m. Investing cash outflow was $170.7m, including $49.4m of property and equipment purchases and $11.3m for an acquisition. Cash, cash equivalents and restricted cash decreased $73.8m to $367.7m.
- Convertible notes due 2022 have $400.0m principal and a $338.8m carrying value; their reported fair value was $618.8m. The notes carry a 0.75% coupon, with a 5.1% effective interest rate. They became holder-convertible from October 1 through December 31, 2018 after a share-price conversion condition was met.
- No revolving-credit borrowings were outstanding; $195.6m remained available under the $200m facility. The company reported compliance with credit covenants.
Material changes, outlook and risks
- Q3 revenue rose $82.1m from the prior-year quarter. Distributor revenue was $154.6m, or 58% of total, down from 74% of revenue a year earlier; direct-channel revenue was $112.1m. U.S. revenue was $202.4m and revenue outside the U.S. was $64.3m.
- Operating expenses increased: Q3 research and development was $50.1m and selling, general and administrative expense was $104.6m. Management cited compensation, staffing, facilities, consulting and marketing costs supporting growth and commercialization.
- Management gave no specific numerical revenue or earnings guidance in the supplied filing text. It said it expects to continue spending on commercialization, research and development, clinical trials, and infrastructure, and cautioned that operating losses may continue. It also said available liquidity should cover anticipated needs through at least the next 12 months.
- Execution risks include scaling manufacturing and qualifying the Mesa, Arizona facility, which began operations in Q2; the filing said expanded capacity might not be fully available until the end of 2018. Other key risks include reimbursement access, competition, reliance on certain distributors and single-source suppliers, regulatory requirements, product quality, and international expansion.
- Patent disputes with WaveForm/AgaMatrix and Arbmetrics remained unresolved; potential outcomes and costs could not be assessed, and no amounts were accrued. The company also disclosed $126.0m in vendor purchase commitments due within one year.
- Management said disclosure controls and procedures were effective and reported no material change in internal control over financial reporting during the quarter. The filing describes seasonally lower first-quarter sales, associated with insurance deductible resets and flexible-spending-account balances.
Important facts for investors to verify
- How much of reported earnings is recurring operating performance versus Tandem investment gains, and whether DexCom can sustain operating profitability.
- Whether gross margins stabilize as product mix, channel strategy, international expansion and G6-related inventory effects evolve.
- Whether Mesa manufacturing capacity is completed and qualified on schedule and can meet demand without supply or quality disruptions.
- The status and potential financial or operational consequences of patent litigation, including any changes since the filing.
- The effects of note conversion eligibility on potential dilution, cash needs and debt classification, and the company’s remaining liquidity after investment and capital spending.