DexCom, Inc. (NASDAQ:DXCM) Q3 2023 Earnings Call Transcript

DexCom, Inc. (NASDAQ:DXCM) Q3 2023 Earnings Call Transcript October 26, 2023

DexCom, Inc. beats earnings expectations. Reported EPS is $0.5, expectations were $0.34.

Operator: Welcome to the Dexcom Third Quarter 2023 Earnings Release Conference Call. My name is Montieth [Ph] and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later we will conduct a question answer session. [Operator Instructions] As a reminder, the conference is being recorded. I will now turn the call over to Sean Christensen, Vice President of Finance and Investor Relations. Mr. Christensen, you may begin.

Sean Christensen: Thank you, operator and welcome to Dexcom’s third quarter 2023 earnings call. Our agenda begins with Kevin Sayer, Dexcom’s Chairman, President and CEO, who will summarize our recent highlights and ongoing strategic initiatives, followed by a financial review and outlook from Jereme Sylvain, our Chief Financial Officer. Following our prepared remarks, we will open the call up for your questions. At that time, we ask analysts to limit themselves to one question so we can provide an opportunity for everyone participating today. Please note that there are also slides available related to our third quarter performance on the Dexcom Investor Relations website on the Events and Presentations page. With that, let’s review our Safe Harbor statement.

Some of the statements we will make in today’s call may constitute forward-looking statements. These statements reflect management’s intentions, beliefs and expectations about future events, strategies, competition, products, operating plans and performance. All forward-looking statements included in this presentation are made as of the date hereof based on information currently available to Dexcom are subject to various risks and uncertainties and actual results could differ materially from those anticipated in the forward-looking statements. The factors that could cause actual results to differ materially from those expressed or implied by any of these forward-looking statements are detailed in Dexcom’s annual report on Form 10-K, most recent quarterly report on Form 10-Q and other filings with the Securities and Exchange Commission.

Except as required by law, we assume no obligation to update any such forward-looking statements after the date of this presentation or to conform these forward-looking statements to actual results. Additionally, during the call, we will discuss certain financial measures that have not been prepared in accordance with GAAP with respect to our non-GAAP and cash-based results. Unless otherwise noted, all references to financial metrics are presented on a non-GAAP basis. The presentation of this additional information should not be considered in isolation or as a substitute for results or superior to results prepared in accordance with GAAP. Please refer to the tables in our earnings release and the slides accompanying our third quarter earnings presentation for a reconciliation of these measures to their most directly comparable GAAP financial measure.

Now I will turn it over to Kevin.

Kevin Sayer: Thank you, Sean, and thank you, everyone, for joining us. Today we reported another great quarter for Dexcom with third quarter organic revenue growth of 26% compared to the third quarter of 2022. This year is proving to be one of the most exciting periods in our company’s history. Access is expanding faster than ever before and we are seeing new levels of enthusiasm for our differentiated products. This can be seen firsthand in our broader rollout of G7 in the US. Building upon our legacy of being the most accurate sensor G7’s focus on simplicity and affordability continues to attract new customers and prescribers to our platform. Similar to last quarter, the majority of G7 customers continue to be new to Dexcom and we took yet another step forward in expanding our prescribing base.

There are now nearly 18,000 physicians writing scripts for Dexcom, they were not prescribing our products before the G7 launch. This represents a notable increase in our prescribing community in only a short period of time as more clinicians recognize G7’s unique feature set, ease of use and market-leading levels of coverage. This combination has made it incredibly easy for physicians to prescribe Dexcom CGM and drive greater levels of engagement within their patient populations. Additionally, our new G7 software platform is enhancing our value proposition across all patient types. We’ve implemented new software updates almost monthly since launch with improvements to features like connectivity and alarm personalization. As one example, we have established new lines of communication in our app to simplify the process of engaging with our customers.

We are constantly working behind the scenes to improve the customer experience. And we will continue to operate with this type of focus to ensure that we have the most user-friendly and engaging products on the market. Our customers know that when you join the Dexcom ecosystem, you get all the benefits today and tomorrow associated with our leading innovation. Our latest product cycle has also coincided with the largest expansion of coverage in our company’s history. With significant reimbursement now established beyond intensive insulin use, there are more people with covered access to Dexcom CGM than ever before. As a reminder, Medicare coverage went live in mid-April for people with type 2 diabetes using basal insulin only, as well as certain non-insulin individuals that experience hypoglycemia.

Collectively, these two populations represent nearly seven million people on the US with approximately half being at Medicare age. Encouragingly, commercial coverage continues to build for this group. We’ve established market-leading levels of basal-only reimbursement as payers clearly recognize the potential for better outcomes driven by Dexcom. This further supports our industry low out-of-pocket cost for our customers. With a full quarter of broad coverage now under our belt, we continue to be very encouraged by early prescribing trends for this cohort. We know that last quarter that we experienced an immediate uptick in new patient starts once coverage went live and we have seen a clear continuation of this trend since that time. In fact, we delivered another record Medicare new patient start quarter in Q3 as physicians have quickly adjusted their prescribing patterns to match the new reimbursement landscape.

While early basal adoption trends look very similar to those we previously experienced, once broad coverage became available for intensely managed type 2 diabetes. We view this as a very positive sign of things to come. Importantly, when you combine this broader coverage with our leading center technology, we feel incredibly confident in our market position. Since the launch of G7 we have gained share across all reimburse channels and patient segments in the US and that trend continued this quarter. Even among non-reimburse channels we are seeing more and more interest in Dexcom CGM. We are also seeing similar dynamics across our international footprint. We have never been better positioned to compete globally from a product, access or capacity perspective and we once again, took international share this quarter as a result.

Our product portfolio continues to be a key contributor to this success. By having multiple products available, we can tailor our offerings to meet the unique needs of individual geographies and reimbursement structures. A great example of this was seen in Francis past quarter where DexCom ONE secured reimbursement for all people on intensive insulin therapy, which represents around half a million people and we have submitted our evidence to extend ad coverage to the basal population. In addition to advancing our product offerings, we’ve been continuously working to build greater commercial scale and flexibility to serve each market more effectively. As we discussed at our Investor Day, one way to drive scale is through the conversion of key international markets from distributor to direct operations.

Historically, these conversions have been followed by a notable uptick in performance, as we provide greater levels of support and focus to these markets once we oversee all facets of sales and distribution. Along those lines, we recently made the strategic decision to go direct in Japan. As a reminder, Japan became one of the first countries to establish broad reimbursement for anyone taking insulin late last year, representing more than one million lives. Despite this the market remains in its very early stages, and we will continue to work to drive much greater CGM adoption over time as we initiate direct sales in the second quarter of next year. Finally, at EASD this month, we added to our substantial base of distinctive clinical evidence with new data around long term Dexcom CGM outcomes and inheritance the impact of Dexcom ONE for type two, diabetes and performance within the pregnancy setting.

Study after study, we continue to demonstrate Dexcom’s position as a cornerstone within the evolving diabetes care, and metabolic help landscape. Across a wide range of customers and care settings our product plays a unique role in providing real-time information that can drive behavior change, greater patient accountability, and more informed therapy decisions. Like everyone else, we have also been interested to see the latest data behind new drug therapies. We believe these drugs playing important role in the care continuum and it is encouraging to see new solutions emerging and a growing appreciation around the need for better and earlier care. Data continues to demonstrate that clinicians prefer to use CGM together with these drugs to drive the best possible outcomes.

In fact, we shared claims data this quarter that showed prescribing trends for CGM increase once someone is initiated GLP-1 therapy as clinicians favor Dexcom for both its protective features and ability to support lifestyle management. As an update, we looked at trailing 12 month data through August 2023 would suggest this dynamic is even more pronounced among the newest generation of these drugs. The data clearly showed that CGM usage grows faster and GLP-1users, then those who are not on therapy. This further demonstrates the complementary nature of Dexcom CGM across all therapy regimes in diabetes. As we look forward, we continue to ensure that we advance our unique role within the ecosystem of care as we progress, our mission of empowering people to take control of health.

This will include launching new products such as our non-insulin product coming next summer, as well as advancing our ongoing clinical work across much broader populations. We are still very early in our story in terms of potential impact and the number of lives we can ultimately touch. Our future is incredibly bright. With that, I will turn it over to Jereme for a review of the third quarter financials. Jereme?

Jereme Sylvain: Thank you, Kevin. As a reminder, unless otherwise noted, the financial metrics presented today will be discussed on a non-GAAP basis. Reconciliation is to GAAP can be found in today’s earnings release as well as on our IR website. For the third quarter of 2023, we reported worldwide revenue of $975 million compared to $770 million for the third quarter of 2022, representing growth of 27% on a reported basis and 26% on an organic basis. As a reminder, our definition of organic revenue excludes currency, in addition to non-CGM revenue acquired or divested in the trailing, 12 months. US revenue totaled $714 million for the third quarter, compared to $573 million in the third quarter of 2022, representing growth of 24%.

Between the ongoing success of our G7 launch and significant expansion of coverage for Dexcom this year, our US business is really hitting its stride. This is particularly noticeable when looking at our new customer start trends which again outpaced our expectations for this quarter. This dynamic has now played out for several quarters in a row and we are seeing the direct result of that continued momentum. In the third quarter, we saw revenue growth accelerate compared to last quarter and we delivered our fastest quarterly growth rate in over two years. International revenue grew 33% totaling $261 million in the third quarter. International organic revenue growth was 30% for the third quarter. We continued to execute incredibly well in our international markets.

Our product portfolio strategy, ongoing access work and growing commercial traction helped us again gain share this quarter. We had a particularly strong quarter across our European footprint as we saw growth remained similar to the accelerated level we saw in the second quarter. An item of note is we did have slower growth coming from our non-CGM business as well as relatively flat performance in Japan, as we worked with our distributor partner to start the process of transitioning to direct sales. As a reminder, when we made our distributor acquisition in 2021, we also inherited a business that distributed products outside of the diabetes space. We recently made the decision to spin off this unit to focus entirely on our CGM and diabetes technologies in this region which we think will enhance our execution in the market.

We expect the deal to close in early 2024 and we want to thank our employees for their continued strong work through the transition in the space. Our third quarter gross profit was $630 million or 64.7% of revenue, compared to 64.2% of revenue in the third quarter of 2022. We are very proud of our gross margin performance in the quarter. This is another testament to the top tier work our operations team continues to deliver this year. Despite managing through a new product launch, we have improved yields on both the G6 and G7 platforms. In addition, Q3 gross margins benefited from a stronger than expected mix of G6 customers as our pump users eagerly await G7AID integration. When this transition starts in the coming weeks, we expect an acceleration in our base shift to G7.

While G7 currently has a higher unit cost profile than G6 and will over the near term, we expect this to become our highest margin product as we drive greater volumes and economies of scale over the course of 2024 and beyond. Operating expenses were $392 million for Q3 of 2023, compared to $333 million in Q3 of 2022. Our focus on cost management again stood out this quarter as we delivered over 300 basis points of operating expense leverage. This now marks the seventh straight quarter that we have generated at least 250 basis points of year-over-year operating expense leverage. We will continue to invest in the growth of the business while finding ways to be even more efficient. Operating income was $238.9, million or 24.5% of revenue in the third quarter of 2023, compared to $160.8 million or 20.9% of revenue in the same quarter of 2022.

This margin represents a new quarterly record for Dexcom. Adjusted EBITDA was $314.5 million or 32.3% of revenue for the third quarter, compared to $226.6 million or 29.4% of revenue for the third quarter of 2022. This margin also represents a new quarterly record for Dexcom. Net income in the third quarter was $203 million or $0.50 per share. We remain in a very strong financial position as we closed out the quarter with greater than $3.2 billion of cash and cash equivalents. Our ability to generate consistent and growing free cash flow is becoming more apparent every quarter and we delivered the highest free cash flow quarter in our company’s history in Q3. This provides us a lot of flexibility to be thoughtful and opportunistic in our capital allocation decisions.

Along those lines, we are excited to announce a $500 million share repurchase program today. Given our very strong underlying fundamentals and outlook, we see, this is a great time step into the market and buyback our stock. This program also provides the added benefit of more than offsetting any remaining dilution related to our 2023 convertible notes as the remainder of these are reaching maturity in the coming weeks. Turning to guidance, we are raising our full year 2023 revenue guidance to a range of $3.575 billion to $3.6 billion representing growth of 23% to 24% for the year. Our updated revenue guidance reflects an increase of over $60 million at the midpoint, compared to our previous guidance. It is more than $165 million higher than where we guided to start the year.

From a margin perspective, we are raising our full year non-GAAP gross margin guidance to approximately 64%. We are also increasing our non-GAAP operating and adjusted EBITDA margin guidance for the year to approximately 19% and 28% respectively. With that, I will pass it back to Kevin.

Kevin Sayer: Thanks Jereme. I would now like to open up the call for Q&A. We also have Jake Leach, our Chief Operating Officer and Terry Lauver, our Chief Commercial Officer joining us for our question, answer session. Sean?

Sean Christensen : Thank you, Kevin. As a reminder, we ask our audience to limit themselves to only one question at this time and then re-enter the queue if necessary. Operator, please provide the Q&A instructions.

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Q&A Session

Operator: Thank you. [Operator Instructions] We will take our first question from, Robbie Marcus with JP Morgan. Please go ahead.

Robert Marcus: Oh, great. Thanks for taking the question and congrats on an absolutely fantastic quarter. There is a lot to talk about here but just keeping it to one question. What really showed just so much upside was the US number this quarter along with the profitability. So question really is, one, how much of that do we ascribe to the new basal indication with growth from both Medicare and commercial patients. And we started to see this in France and Japan and I hear that a lot of European countries might over the course of ‘24 start covering for basal. So the question is really how much is basal contributing today? And how big can it be over the coming years if all of Europe starts to bring on enhanced reimbursemen something that would have been unimaginable just 12 months ago. Thanks a lot.

Jereme Sylvain: Hey, thanks, Robbie. This is Jereme. Appreciate the comments. I can take that one and we address it from there. In terms of what the contribution was this quarter from basal, obviously we had a really strong quarter this quarter, record new patients once again and obviously raised the guide on the year. Now some of that does come from basal. There’s no question there as we continue to open up reimbursement. The new patients are coming along and Kevin mentioned it. We’re starting to see basal follow similar patterns to type two intensive, which, when you think about coming into this year, it’s about 40% to 45% adoption, but really the curve is starting to follow that. So we’re very excited about the opportunity there.

And so that’s in the US and certainly clearly that’s playing out here. In terms of OUS, it’s a great opportunity. One of the things we’ve seen outside the US is as access is created creates significant opportunities for growth. And you’ve seen our actions over the course of the past few years. We’ve created a lot of access for our products, and in turn our international markets have grown incredibly well and there’s a large population outside the US that that this would ultimately apply it to once you have basal coverage. So it could be an absolute – an absolute tailwind for us for years and years to come. It’s something obviously we’re very excited about. We don’t get ahead of ourselves, right? We have to get that coverage in place. But the bullishness you hear about the US experience is what we would expect to see as more and more coverage comes and so we leave very excited about the future holds.

Robert Marcus: Thanks a lot.

Operator: Our next question comes from Margaret Kaczor Andrew with William Blair. Please go ahead.

Margaret Kaczor : Hey, good afternoon, guys. Thanks for taking the question. Obviously a lot of talk in the quarter and I’m sure a lot of people get through that. But one of the things that I wanted to share, was any dialogue you may be having with clinical societies around where CGM fits within the treatment paradigm. Specifically focused on non-insulin users and I ask obviously there could be a change in guidelines with GLP’s right now. And so, can you use some of those discussions to pull forward CGM use as well? And again, if it’s not now when – it doesn’t even matter. Thanks.

Kevin Sayer: Margaret, it’s Kevin, I’ll take that. We have had discussions with the societies on expanding coverage for people with type 2 diabetes not on insulin. And those discussions continue. We’ve seen a gradual uptick for lack of a better word in the guidelines as CGM use from all professionals societies over the last several years. And as we gather more data, as we see more data come in from studies we’re aware of over the next 12 months, we believe we can continue to build a better case. Every time we run a study or look at a study from this population in this group, people on CGM do better. It’s just simple. They have better outcomes. They’re more adherent to their meds. They have a feedback loop that they don’t have any other way.

We’re very excited about this opportunity. That’s why we’re going with the product where we’ve talked about filing before the end of the year and launching next year, our product is designed for people not on insulin. And we think it’s going to be a great product offering on this front going forward. So we’re looking forward to it, and I think we’ll be able to write this script the same way we’ve written the script in our industry so far.

Operator: Our next question comes from Larry Biegelsen with Wells Fargo. Please go ahead.

Larry Biegelsen: Good afternoon. Thanks for taking the question and reiterate my congratulations on a really strong quarter here. Jereme, I wanted to ask about the guidance and any comments on next year, the math if I’m doing it correctly it implies Q4 growth slows by about 400 basis points. You don’t get the same quarter-over-quarter of lift you typically see. And so, why is that in any – any reason why the, momentum for sales growth would slow next year and any -anything we should think about on the margins that should be implications from Japan. Thank you.

Jereme Sylvain: Yeah, so thanks for the question, Larry. So, in terms of where the guide goes, I think you’re right, it does imply a tad of a d-cell. Most of that I would say is related to really comps historically over time. And Larry you’ve tracked us for a while. So as we move more out of commercial, DME and into pharmacy, typically we have enough uptick into Q4 in those DME environments. As more and more of our of our folks go through the retail channel, you kind of lose some of that. So really you’re playing about it’s really about seasonality within the course of a year. So we’re not trying to imply anything. Really what we’re trying to say is, this is the trajectory we see it going with seasonality. This is our – again, our base case, as we start to look at guidance over the course of the year.

And so the trends – underlying trends if there’s nothing to say there. I mean the underlying trends in this business remains strong. I don’t think we’re trying to imply anything other than that. We do expect you kind of referenced Japan. There could be around the fringes until we go direct a little bit of a stable as opposed to necessarily growing story around Japan. And so that is around the fringe, but that represents a really small piece of the business on the international side. Really what you’re seeing is just us being mindful about seasonality in our base case and then certainly if we can outperform, we’ll do what we traditionally do, which is tried to do so.

Larry Biegelsen: Thank you.

Operator: Our next question comes from Danielle Antalffy with UBS. Please go ahead.

Danielle Antalffy: Hey, good afternoon guys. Thanks so much for taking the question. And I will also say, congrats on a really great quarter. I was just curious, so Jereme, you alluded to the fact that basal seems to be starting to ramp similar to how the influenza census. Type 2 did when you got coverage there. What about from a utilization perspective? Any color you can give on how these basal patients are adopting technology? Is it similar to what you saw in the novel study. I know it’s early, but we should have had some reorders right now. So just curious what you’re seeing. Thanks so much.

Jereme Sylvain: Yeah, really appreciate the congrats. Thanks. What we see is and Terry is here. So what I can do is, I can give you kind of what we’re seeing maybe numbers wise, but maybe Terry can kind of take you into the day-to-day interaction with patients. Numbers wise, we haven’t seen much of a change at this point. The population does has reorders relatively in the same capacity as in the past. And so that’s a good early indicator, but maybe Terry can take you through what she’s hearing and seeing in the field around the excitement around basal and who wants to use it.