01—Abstract
Summary
Summary of the 10-K filed February 11, 2021. Cited figures are marked; the original filing is the authoritative source.
DexCom (DXCM) closed fiscal 2020 with a strong year: total revenue rose 31% to $1,926.7 milliona, gross margin expanded to 66% from 63%, and operating income reached $299.5 million versus $142.3 million in 2019.
Net income of $493.6 millionb was inflated by a $285.5 million non-cash tax benefit from releasing most of the valuation allowance on deferred tax assets, so investors should focus on operating income and cash flow rather than headline EPS of $5.06 diluted. Operating cash flow rose to $475.6 million, and cash, equivalents and short-term securities reached $2.71 billion, though this was funded partly by a $1.21 billion 0.25% convertible note offering in May 2020. Growth was driven by disposable sensor volume from the G6 system, which now accounts for about 81% of revenue, and by distributor channels, which rose to 75% of revenue.
Management is preparing the G7 system, which is smaller and fully disposable, and is building a manufacturing facility in Malaysia. Key risks include pricing pressure from private payors, CMS proposals that could expand Medicare CGM coverage starting April 2021 and possibly lower prices, concentration among four large distributors (each at 10% or more of revenue), COVID-19 supply and trial disruptions, and dilution and refinancing exposure from roughly $2.06 billionc in convertible notes.
The company has no stock buybacks or dividends planned, and it has $2.06 billiond in convertible debt outstanding. Overall, the filing shows a company transitioning from a loss-making growth stage toward sustained profitability, while its valuation depends heavily on continued sensor growth, next-generation product timing, and the outcome of Medicare reimbursement reform.
02—Key points
Key Highlights
- Revenue grew 31% to $1.93 billion in 2020, with disposable sensors and other revenue at about 81% of total revenue.
- Gross margin improved to 66% from 63%, driven by volume growth and manufacturing efficiencies.
- Operating income more than doubled to $299.5 million, but net income of $493.6 million includes a $285.5 million non-cash tax benefit from releasing the deferred tax valuation allowance.
- Operating cash flow reached $475.6 million, up from $314.5 million, and cash plus short-term securities stood at $2.71 billion at year-end.
- Total convertible senior notes principal stands at $2.06 billion, including the new $1.21 billion 0.25% notes due 2025, creating meaningful dilution and refinancing considerations.
- Distributors accounted for 75% of revenue, and four distributors each represented at least 10% of revenue, creating concentration risk.
- The G7 sensor (60% smaller, fully disposable, shorter warm-up) is pending regulatory approval, and CMS proposed Medicare coverage changes that could expand competition from April 2021.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2020, Dexcom Inc kept $0.29.
- Revenue$1.93B100.0%
- Cost of revenue−$646.6M33.6%
- Gross profit$1.28B66.4%
- Operating costs−$980.6M50.9%
- Operating income$299.5M15.5%
- Interest, other & tax$250.2M13.0%
- Net income$549.7M28.5%
Where FY2020 revenue went
$1.93B- Cost of revenue: $646.6M, 34% of revenue
- SG&A: $618.2M, 32% of revenue
- R&D: $359.9M, 19% of revenue
- Operating income: $299.5M, 16% of revenue
Kept 16% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2020filed February 11, 2021Financial Statements
FY2020 against FY2019
| Line item | FY2020FY2019 | Change |
|---|---|---|
| Revenue | $1.93B$1.48B | +30.5% |
| Cost of Revenue | $646.60M$544.50M | +18.8% |
| Gross Profit | $1.28B$931.50M | +37.4% |
| R&D Expenses | $359.90M$273.50M | +31.6% |
| SG&A Expenses | $618.20M$515.70M | +19.9% |
| Operating Expenses | $980.60M$789.20M | +24.3% |
| Operating Income | $299.50M$142.30M | +110.5% |
| Interest Expense | $17.70M$60.30M | −70.6% |
| Net Income | $549.70M$101.10M | +443.7% |
| EPS (Basic) | $1.46$0.28 | +426.1% |
| EPS (Diluted) | $1.33$0.28 | +383.6% |
| Shares Outstanding (Basic) | 377.50M364.40M | +3.6% |
| Shares Outstanding (Diluted) | 420.40M369.20M | +13.9% |
05—Questions
Frequently Asked Questions
Is DexCom now consistently profitable, and how much of 2020 net income is operating versus tax-driven?
Operating income of $299.5 million is a much more reliable indicator than net income of $493.6 million. About $285.5 million of the net income reflects a one-time, non-cash tax benefit from releasing the valuation allowance on deferred tax assets after the company achieved three years of cumulative income. Pre-tax income was $225.0 million, so the tax release, not operations alone, drove the headline result. Future tax expense will likely be higher as the company recognizes taxes at normal rates.
What are the main revenue drivers and how sustainable are they?
Revenue growth came mainly from higher disposable sensor volume as the installed base of G6 users expanded, partly offset by pricing pressure from the shift in channel strategy and product mix. Because sensors are replaced roughly every 10 days, recurring sensor sales create a durable revenue base. However, the company is exposed to continued downward pricing pressure from managed care and government payors, and it expects its newer G7 system to migrate patients onto a new product, which could temporarily affect purchasing patterns before launch.
How much debt does DexCom carry and what are the key refinancing risks?
DexCom had $2.06 billion in principal of convertible senior notes at year-end 2020, comprising $850 million of 0.75% notes due December 2023 and $1.21 billion of 0.25% notes due November 2025. It also has a $200 million undrawn revolving credit facility. The 2023 notes are convertible at the holder's option during early 2021, and conversion can require cash settlement, which could affect liquidity. Balance sheet current liabilities are modest, but the 2023 maturity will need to be addressed within about three years, and the notes could be settled in shares, creating dilution.
What regulatory or reimbursement developments could affect future revenue?
CMS proposed in October 2020 to classify all CGMs as durable medical equipment and set payment amounts, which if finalized starting April 2021 would allow additional manufacturers to sell into Medicare and could lower prices. The company also faces Stark Law and Anti-Kickback scrutiny, and it moved its Medicare billing to distributors in fall 2020 to limit exposure. Its G6 is a Class II device, and the FDA could require new submissions for future changes, so timing of G7 approval and hospital-use permissions are important watch items.
What are the biggest operational risks in the business?
The company depends heavily on a single product family (G6) and a small number of single-source components, including the application-specific integrated circuit used in transmitters. Manufacturing capacity has been difficult to scale in the past, and the company has experienced backorders. Its manufacturing sites are concentrated in San Diego and Mesa, Arizona, with earthquake exposure in California. COVID-19 has disrupted supply chains and clinical trials for the next-generation product, and the company faces competition from Abbott, Medtronic, and well-funded technology entrants.
06—Continue