DexCom, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Amounts are in millions of dollars except per-share data. DexCom develops and sells continuous glucose monitoring (CGM) systems for people with diabetes and healthcare providers.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $184.6 | $148.6 | $497.5 | $402.1 |
| Gross profit / margin | $127.0 / 69% | $101.1 / 68% | $338.6 / 68% | $261.7 / 65% |
| Operating expenses | $127.5 | $119.6 | $393.1 | $319.5 |
| Operating loss | $(0.5) | $(18.5) | $(54.5) | $(57.8) |
| Net loss | $(2.0) | $(18.8) | $(40.8) | $(58.2) |
| Diluted net loss per share | $(0.02) | $(0.22) | $(0.47) | $(0.70) |
- Revenue increased 24% for Q3 and 24% for the nine-month period, mainly from higher disposable sensor volume as the installed base grew, along with sales of durable systems. Sensors represented approximately 70% of revenue in both periods.
- Gross margin improved year over year, which management attributed to revenue growth and lower warranty costs. Nine-month R&D rose to $136.7 million and SG&A to $256.4 million, reflecting investment in product development, headcount, marketing, and customer support.
- Q3 operating results approached break-even, but the company remained loss-making for the first nine months. Nine-month net loss improved partly because of a $16.4 million income tax benefit; the benefit was primarily associated with the convertible notes and is not expected to recur in future years.
Cash, liquidity, and debt
- At September 30, 2017, cash and cash equivalents were $402.1 million and short-term marketable securities were $123.7 million, totaling $525.8 million. Working capital was $574.7 million.
- Nine-month operating cash flow was $50.8 million, compared with $42.9 million in 2016. Investing activities used $143.3 million, including $48.4 million of property and equipment purchases and net purchases of marketable securities. Financing activities provided $399.0 million, principally from the convertible-note offering.
- DexCom issued $400.0 million principal amount of 0.75% senior convertible notes due May 2022, receiving net proceeds of approximately $389.0 million. The notes had a $324.0 million net carrying amount and $357.2 million fair value at quarter-end; their effective interest rate was 5.1%. The company may settle conversions in cash, shares, or a combination at its discretion.
- No revolving-credit borrowings were outstanding at quarter-end; the full $200.0 million facility remained available. Management said available resources and expected operating cash contributions should fund anticipated needs through at least September 30, 2018.
Changes, outlook, and notable matters
- Compared with 2016, revenue and gross profit grew, gross margin strengthened, and net loss narrowed. However, operating expenses increased, particularly over the nine-month period, and DexCom continued to report operating losses.
- Management expects continued operating losses while expanding commercialization, R&D, and marketing, manufacturing, and corporate infrastructure. The filing provides no specific revenue or earnings guidance.
- Products shipped to distributors accounted for approximately 74% of Q3 revenue and 75% of nine-month revenue. Byram and Edgepark generated approximately 14% and 12%, respectively, of nine-month revenue, creating distributor concentration exposure.
- The company’s Mesa, Arizona manufacturing facility was under development, with operations not expected before 2018; construction, qualification, and production ramp-up could affect capacity and costs. Purchase commitments totaled $78.4 million, due within one year.
- The 2016 voluntary Class I recall concerning receiver audible alarms and alerts was closed by the FDA on August 11, 2017. Patent litigation with AgaMatrix remained unresolved, with no amounts accrued and outcomes and potential costs not estimable. DexCom’s request for an ITC investigation of its separate patent claims against AgaMatrix was granted on October 18, 2017, after quarter-end.
- Other material risks include reimbursement and coverage uncertainty, regulatory approval and clinical-development risk, manufacturing and single-source supplier constraints, competition, product liability, and data security. The company reported no material interest-rate or foreign-currency exposure at the time, but noted that international growth could increase currency risk.
Important facts for investors to verify
- Whether sensor-driven growth and gross-margin improvement continue, and whether operating expenses grow faster than revenue.
- How much operating cash flow reflects sustainable commercial performance versus noncash items, including $81.3 million of share-based compensation in the first nine months.
- Progress on the Mesa facility, manufacturing capacity, product quality, and any new regulatory or recall developments.
- Continued reimbursement access and distributor relationships, particularly with Byram and Edgepark.
- Convertible-note terms and potential dilution or cash demands if conversion, fundamental-change, or default provisions become relevant; also verify liquidity against the stated runway and purchase commitments.
- Developments in the AgaMatrix proceedings and any resulting financial exposure; the filing states that outcomes and potential fees cannot be assessed clearly.