01—Abstract
Summary
Summary of the 10-K filed February 21, 2019. Cited figures are marked; the original filing is the authoritative source.
DexCom's FY2018 10-K shows a company in rapid commercial ramp but still deeply unprofitable on a GAAP basis.
Total revenue rose 44% to $1,031.6 milliona (from $718.5 million), driven by growth in the installed base of G6 and G5 Mobile users and in disposable sensor sales. Gross margin slipped to 64% from 68%, reflecting channel mix (distributors were 63% of revenue), product launch costs, and international expansion. Operating loss widened to $186.3 million, largely because of a one-time $217.7 million non-cash collaborative R&D charge tied to the Verily restated collaboration, which was settled with 1.84 million shares.
Net loss was $127.1 millionb, or $1.44 per share, versus $50.2 million in 2017. Partly offsetting this, $80.1 million of income came from the Tandem Diabetes equity stake. The balance sheet was transformed by $1.25 billion of 0.75% convertible notes issued in 2017 and 2018, plus $1.39 billion of cash and short-term securities at year end.
Cash rose sharply after the November 2018 notes offering, net of a $218.9 millionc convertible note hedge and $183.8 million in warrant proceeds. Management states that existing cash and a $200 million revolver are sufficient for at least the next 12 months. The company also repurchased $100 million of stock.
Operating cash flow turned positive at $123.2 milliond, though this was helped by non-cash add-backs. Key investor watch items include the G6's March 2018 de novo authorization and the reimbursement path under Medicare Part B's Therapeutic CGM classification, which remains dependent on local coverage rules. Also important are concentrated distributor exposure (Distributor A 15%, Distributor B 12% of revenue), ongoing AgaMatrix/WaveForm patent litigation, dilution risk from the convertible notes and hedges, and the company's history of operating losses since 1999 with an accumulated deficit of $798.9 million.
02—Key points
Key Highlights
- Revenue grew 44% to $1,031.6M in 2018, with disposable sensors about 75% of revenue and distributors 63%.
- Gross margin declined to 64% from 68%, pressured by channel mix, G6 launch excess inventory charges ($7.3M), and international expansion.
- A $217.7M non-cash collaborative R&D charge from the Verily agreement drove the operating loss to $186.3M; net loss was $127.1M ($1.44/share).
- The G6 received FDA de novo Class II (iCGM) authorization in March 2018 and is now the flagship product, with the G4 and G5 Mobile gradually displaced.
- Cash and short-term securities reached $1.39B after $1.25B of 0.75% convertible notes (2022 and 2023 maturities), offset by a $218.9M note hedge and $183.8M warrant sale.
- Operating cash flow was positive at $123.2M, but this included $291.2M of non-cash add-backs, so underlying cash generation remains limited.
- Key risks include Medicare reimbursement dependence, concentrated distributor relationships, AgaMatrix/WaveForm patent litigation (trial expected February 2020), and convertible note dilution.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2018, Dexcom Inc lost $0.12.
- Revenue$1.03B100.0%
- Cost of revenue−$367.7M35.6%
- Gross profit$663.9M64.4%
- Operating costs−$850.2M82.4%
- Operating income−$186.3M18.1%
- Interest, other & tax$59.2M5.7%
- Net income−$127.1M12.3%
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 21, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $1.03B$718.50M | +43.6% |
| Cost of Revenue | $367.70M$226.40M | +62.4% |
| Gross Profit | $663.90M$492.10M | +34.9% |
| R&D Expenses | $199.70M$185.40M | +7.7% |
| SG&A Expenses | $432.80M$349.20M | +23.9% |
| Operating Expenses | $850.20M$534.60M | +59.0% |
| Operating Income | -$186.30M-$42.50M | −338.4% |
| Interest Expense | $22.70M$12.80M | +77.3% |
| Net Income | -$127.10M-$50.20M | −153.2% |
| EPS (Basic) | $-0.36$-0.14 | −148.3% |
| EPS (Diluted) | $-0.36$-0.14 | −148.3% |
| Shares Outstanding (Basic) | 352.80M345.20M | +2.2% |
| Shares Outstanding (Diluted) | 352.80M345.20M | +2.2% |
05—Questions
Frequently Asked Questions
Why did DexCom report a larger net loss in 2018 despite strong revenue growth?
The net loss of $127.1M was driven mainly by a one-time, non-cash $217.7M collaborative R&D charge recorded when DexCom issued 1.84M shares to Verily and Onduo under the restated collaboration agreement. Excluding this charge, the company would have been much closer to break-even at the operating line, although SG&A grew 24% to $432.8M as commercialization expanded. The $80.1M gain on its Tandem Diabetes stake partially offset these costs.
How is DexCom funding its operations and what is the debt exposure?
The company has $1.39B in cash and short-term securities against $1.25B in principal of 0.75% convertible senior notes (the $400M 2022 Notes and $850M 2023 Notes). It also has an undrawn $200M revolving credit facility, with $195.6M available. Management says these sources are sufficient for at least 12 months. Investors should note that notes could require cash settlement on conversion, and that the company may need additional capital to fund next-generation product development and manufacturing expansion.
What is the main reimbursement risk for DexCom's products?
Medicare classified Therapeutic CGMs as durable medical equipment under Part B in January 2017, enabled by the G5 Mobile's non-adjunctive FDA indication. Coverage still depends on local Medicare contractor policies and claim-by-claim adjudication, and the G4 PLATINUM is not eligible for the Medicare benefit. Seven largest private payors have issued coverage policies with negotiated rates, but many policies are restrictive and require documentation. Any adverse coverage decisions, pricing pressure, or payor consolidation could materially affect demand and pricing.
How concentrated is DexCom's distribution and customer base?
Distribution is significant: distributor sales were $652.9M, or 63% of 2018 revenue. Two distributors accounted for 15% (Distributor A, Byram/Cardinal affiliates) and 12% (Distributor B) of revenue, respectively. Loss or renegotiation of these relationships could materially affect results. The company is also building a direct sales force in the U.S., Canada and parts of Europe, which carries execution and cost risk.
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