DexCom, Inc. (NASDAQ:DXCM) Q4 2023 Earnings Call Transcript

DexCom, Inc. (NASDAQ:DXCM) Q4 2023 Earnings Call Transcript February 8, 2024

DexCom, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, welcome to the Dexcom Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. My name is Abby 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-and a-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. You may begin.

Sean Christensen: Thank you, Aby, and welcome to Dexcom’s fourth quarter and fiscal year 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 fourth quarter and fiscal year 2023 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 fourth quarter and fiscal year earnings presentation for 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. 2023 was an incredible year for Dexcom, and I’d like to start by reviewing some of our key accomplishments. Total revenue grew by 24% on an organic basis, driven by another year of record customer starts. This translates into more than $700 million of organic revenue growth compared to last year as we built strong commercial momentum through recent coverage expansion and the performance of Dexcom’s CGM systems. In 2023, we added over 600, 000 Dexcom users to our base and ended the year with approximately 2.3 million customers globally. Importantly, we delivered this level of growth again while enhancing scale and efficiency of our operations. The key milestone here was the opening of our Malaysia manufacturing facility around mid-year.

Production at this site is ramping quickly, and the team is already delivering yields on par with our more established US facilities. This facility will help support our growth and cost ambitions for years to come. As a measure of our success for 2023, we not only generated $1 billion in Q4 revenue, we also delivered $1 billion in adjusted EBITDA for the year and generated record levels of free cash flow, which is up nearly 70% compared to 2022. By establishing a disciplined cost culture that focuses years in advance, we are striking the right balance of margin progression while still investing strategically in pathways to support our significant growth opportunities. From a strategic perspective, 2023 will go down as one of the most transformational years in our company’s history.

We launched G7 and Dexcom 1 into multiple new markets, significantly expanding our global access and advancing key technical and clinical work that will provide the foundation for the future of Dexcom. This started with the rollout of G7 in the US in February. G7 is the most accurate CGM ever launched, and the market’s reception to G7 has been exceptional. Customers and clinicians have been thrilled with the new form factor, product performance, and ease of use, and payers wasted no time establishing coverage as they recognized the clear value proposition that G7 provides. We immediately started to see a change in prescribing patterns once this product reached the market, and this trend became even more pronounced as we completed the largest expansion of coverage in our company’s history.

In mid-April, Medicare coverage went live for people with type 2 diabetes using basal insulin only, as well as certain non-insulin using individuals with hypoglycemia risk. Between this decision and the broad commercial coverage that quickly followed for the basal markets, we have effectively doubled our reimbursed population in the US. This has completely changed the market landscape in the US. With broader coverage available and a new product that greatly simplifies the prescribing process, we have attracted a sizable new cohort of clinicians to our ecosystem. In fact, in 2023, we expanded our prescriber base by approximately 40%. And we’re not stopping there. We have always known that the primary care channel would become increasingly important as our business evolves.

Much of the work our commercial team has done in recent years has been tailored to this market. And we are now seeing the direct result of that effort as more than 70% of our new scripts are being written by primary care physicians. These relationships are not only critical to help us reach the millions of insulin-using individuals who have not yet started on CGM, but also the tens of millions with broader type 2 diabetes, pre-diabetes, and beyond. Based on the success of our team in 2023 and the magnitude of these future opportunities, we are excited to continue our investment in our U.S. salesforce this year. When we have a presence with prescribers, we win. Now it is up to us to continue to expand that prescriber pool. We are already seeing more clinicians want to incorporate Dexcom CGM earlier into patients’ care plans as they recognize our unique ability to drive behavior change, sustainable outcomes, and greater accountability.

This is why we are thrilled to be introducing our newest product, Stelo, later this summer. Stelo will be the first CGM designed specifically for people with type 2 diabetes who are not on insulin. Leveraging our leading sensor platform, we have built a custom software experience that is tailored to the needs of this population. Stelo will feature a 15-day wear time and launch as a cash paid product while we build our case with payers for broader coverage. With several trials currently underway, we will continue to add to the growing body of evidence demonstrating Dexcom’s unique ability to drive greater health and economic outcomes for all people with diabetes. The launch of Stelo also presents a great opportunity to bolster our evidence with a large collection of real world data as we see the impact this product is having on our customers.

We filed Stelo with the FDA in the fourth quarter of 2023, leaving us well on track for our highly anticipated launch this summer. As our product portfolio continues to grow, it provides a greater glimpse into the future potential of our company. We have built a platform technology that we can customize to provide creative solutions for different populations. Our redesigned software infrastructure is a key component to this as it enables much quicker iteration and greater connectivity. Connectivity has always been a distinct advantage for Dexcom and with our recent filing of direct to watch with the FDA and new G7 pump integrations, we are further advancing this leadership position. We will also continue innovating on our hardware technology with our current efforts focused on launching an extended wear sensor across all of our product offerings.

As we look at this significant opportunity ahead of us, we are as excited as we’ve ever been. As I said at our Investor Day this past summer, we are just getting started. With that, I will now turn it over to Jereme for a view of the fourth 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 to GAAP can be found in today’s earnings release, as well as on our IR website. For the fourth quarter of 2023, we reported worldwide revenue of $1.035 billion compared to $815 million for the fourth 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. U.S. revenue totaled $769 million for the fourth quarter compared to $606 million in the fourth quarter of 2022, representing growth of 27%.

Between the ongoing success of G7 and our significantly improved access in recent months, the momentum in our U.S. business continues to grow. In fact, we delivered our fastest quarterly U.S. growth rate since the beginning of 2021 as our revenue accelerated for the third quarter in a row. International revenue grew 27%, totaling $265 million in the fourth quarter. International organic revenue growth was 23% for the fourth quarter. We continued to execute very well across our international footprint and again took share in Q4 as our global access work and product portfolio strategy have helped broaden our reach in many markets. Our fourth quarter gross profit was $664 million or 64.2% of revenue compared to 66.7% of revenue in the fourth quarter of 2022.

This year-over-year decline in gross margin was expected as G7 was a much larger percent of our product and customer mix in Q4 compared to a year ago. As a reminder, G7 has a higher cost profile than G6 today, but we expect this to change in the coming quarters as we drive greater volume through our G7 lines. As it reaches scale, we continue to expect G7’s margin profile to improve upon that of our G6 platform. Operating expenses were $421 million for Q4 2023 compared to $372 million in Q4 of 2022. This quarter was another demonstration of our commitment to being disciplined and thoughtful with our spend. Our operating expenses grew at half the rate of revenue this quarter and we delivered nearly 500 basis points of operating expense leverage compared to last year.

This extended our streak to eight straight quarters of at least 250 basis points of year over year OpEx leverage. Operating income was $242.7 million or 23.5% of revenue in the fourth quarter of 2023 compared to $172.1 million or 21.1% of revenue in the same quarter of 2022. Adjusted EBITDA was $321.5 million or 31.1% of revenue for the fourth quarter compared to $237.1 million or 29.1% of revenue for the fourth quarter of 2022. Net income for the third quarter was $202.8 million or $0.50 per share. We remain in a great financial position, closing the year with greater than $2.7 billion of cash and cash equivalents. Having financial flexibility allows the organization to take advantage of opportunities. Case in point, we executed the $500 million accelerated share repurchase program mentioned on our Q3 results.

Through this transaction, we were able to offset the remaining dilution related to our maturing 2023 converts while purchasing our stock at what we viewed as an attractive price. As Kevin mentioned earlier, our free cash flow grew by 70% in 2023 as our business continues to scale and become more efficient. As our cash flow profile continues to grow, it only adds to our significant financial flexibility. This allows us to continue to invest behind our meaningful organic growth opportunity while assessing strategic uses of capital on an ongoing basis. Turning to 2024 guidance, as we stated last month, we anticipate total revenue to be in the range of $4.15 billion to 4.35 billion, representing organic growth of 16% to 21% for the year. This guidance assumed continued momentum in the type 2 basal only population in the US, the expansion of Dexcom ONE on the G7 platform into new geographies, and the launch of Stelo in the summer of 2024.

It also assumes the divestiture of our non-diabetes distribution business in Australia and New Zealand this quarter, which represented around $30 million of revenue in 2023. From a margin perspective, we expect full year non-GAAP gross profit margin to be in a range of 63% to 64%, operating profit margin to be approximately 20%, and adjusted EBITDA of approximately 29%. Our gross margin guidance reflects the ongoing conversion from G6 to G7 within our customer base and the associated scale that comes with that process. Below gross margin, we’ll continue to be very diligent with our spend in 2024 while investing strategically behind multiple growth opportunities. 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. 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. Abby, please provide the Q &A instructions.

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Q&A Session

Operator: [Operator Instructions] And we will take our first question from Robbie Marcus with JPMorgan.

Robbie Marcus: Oh, great. I’ll offer up for the second time. Congrats on a really good quarter. I wanted to tie two ideas together. The first is the great operating margins we saw in the fourth quarter. It came in well above the street. In the slide deck presentation, you have the slide about making progress on the 15-day sensor. The question here is really, one, any updates on the timeframe of when that G-Series 15-day sensor will be approved, and how to really think about where that could take the good operating margins you put up here and what you’ve guided for next year and where that could really take it in the future. Thanks.

Kevin Sayer: Thanks, Robbie. This is Kevin. I’ll take the 15-day sensor timing, and then Jereme can talk about the numbers and the effect on operating margins going forward. As we said earlier this year, we’re in the middle of clinical testing and scientific evaluation of some fundamental science changes to the sensor that will make it more reliable for that 15-day period. One of the reasons that we’ve done so well, two things, the accuracy of our sensor and the performance of our sensor over time. But combined with the fact, people expect to get a certain amount of days from a sensor and we deliver what we tell them we’re going to do. And we want to make sure that 15-day experience is every bit as good as the 10-day experience that we offer now.

So we’re making a few slight changes on a science basis. We’ll run a clinical study, file that, and we certainly would expect you to prove. But right now, we’re still evaluating some of the technologies. And we really won’t provide a lot of color until we’re filed and we see we’re on a path towards approval.

Jereme Sylvain: Yes, and then to your question, longer term on operating margins. We’ve done a really nice job to date, creating leverage and opportunities within our operating margin profile. And despite some of the moves and the channel mix changes we’ve made on the top line; we’ve been able to maintain a gross margin based on a lot of the work we’ve done around design to value and a lot of the scale that we’ve been able to achieve. But when you think about 15-day, it provides a real big opportunity for us to think about, both leverage from a gross margin and then operating margin profile, but also opportunities to grow the business in areas profitably that maybe would be a little bit more of a challenge with the 10-day product.

So it is absolutely the number one effort going on in the organization. It does provide us lots of flexibility to either a, continue to grow the business or b, deliver operating margins that can be world-class over time. So I think longer term there’s a lot of opportunities there, we are not ready to particularly lay what that is. We’ve obviously given our 2025 LRP and we’ll execute to that, but I do think it provides real long-term opportunities for this company to deliver back to shareholders and take advantage of opportunities globally.

Operator: And we will take our next question from Danielle Antalffy with UBS.

Danielle Antalffy: Hey, good afternoon, everyone. Thanks so much for taking the question. Congrats on a really strong end to the year. It’s great to see. I’m going to ask this question about; we’re hearing more about potential competition coming to market. And I would just love, Kevin, if maybe you could highlight for us the competitive modes that Dexcom has built. Obviously, we don’t know much about what this competitor is planning to bring to market. So, but maybe if you could just highlight where you think Dexcom is from a competition perspective and how defensible your share is here? Thanks so much.

Kevin Sayer: No, I appreciate that question. First and foremost, we can start with the core technology and then the fundamental beliefs we’ve had here as a company. The performance of our sensors has been unparalleled. We’ve got over many years, for example, and AID systems with great outcomes and patients who have done very well there. We built our platforms on connectivity. One of the features that I’ve talked with the engineers about and kind of complained about because it took a lot of time to engineer, we can connect up to three devices at the same time. This is the type of connectivity that our competitors have not put into their platforms, and is a feature that’s very important to our patients, which is the reason, for example, why we just filed our direct-to-watch features with the FDA.

One of the other things our competition thinks about as they look at us today, and they think this is where we’re going to stay, we’re not. We certainly have new pipeline efforts across all fronts on the technology side, better connectivity, communications, software investments. We’ve had to evolve from being literally a medical device software company to being a world-class software organization over the past couple of years, and it has been an evolution for us, and it’s been a big investment. So we’ve looked at the areas to invest to make ourselves stronger and made investments there. Now that’s on the technology side. Here’s the other piece of this. We’ve spent hundreds of millions of dollars over the past three years getting fully automated factories up and running both here in the United States and our new factory in Malaysia that opened mid-year, and that is a tremendous facility.

But we built out those automated lines there, and we’ve just turned ground on what will be our next world-class factory over in Ireland that would open in 2026. There’s a huge investment that has to be made to play in the CGM business going forward, particularly at the scale and the performance that we see now. And we’ve made those investments and done those things and evolved as a company. So we think we’re very well positioned, and we’ll see where everybody else comes. But we’re comfortable. Well, let me phrase that. We’re never comfortable, but we believe we’ve done all the right things.

Operator: And we will take our next question from Larry Biegelsen with Wells Fargo.

Larry Biegelsen: Good afternoon. Thanks for taking the question. I wanted to focus on Stelo. You expect this product to add approximately, I think, 100 basis points to your growth in ‘24, which is almost $40 million in six months. So that’s a pretty healthy number for only half a year. Kevin, what’s informing your confidence in the launch? How big could this product be over time and what are the margin implications? Thank you.

Kevin Sayer: Larry, thanks for the question and we have guided at 1%. The purpose of this launch is to get this product out here and learn. And as we look at that 1% of revenue number, we certainly have models to build and support that and we believe in designing this product for the type 2 non-insulin user and others that we’re targeting the right segment to go after that. Our most important experience with Stelo is learning and getting it out there and starting to develop and grow this new market. We’re confident that this product over time can become a very, very large portion of our business and this can be a very large segment within our markets. This year’s launch is all about learning more than anything else and we have a model for that 1%.

I would love to exceed it, but if we learn all the lessons that we need to learn, this is not a backbreaker for our company and our guidance either. So the most important thing is to get the product out there and to learn more than anything else.

Jereme Sylvain: Yes, and then to your question on margin, we’re not necessarily talking about it from a gross margin perspective. That’ll come in time when we start to release more details around it, Larry. From an operating margin, yes, this is something we’re going to invest in. And so when you think about it from an overall company margin, certainly as we invest in this and we invest in launching it, there will be some sales and marketing, but it’s an investment we’re going to make this year. And we’re going to make that investment in this product because we believe in the future and we’re going to do so and still expand operating margins as a company. So you can be safe that we’re going to be very, very careful and measured about how we invest our dollars, but know that this is part of the investments we’ve set aside as an organization while still again improving profitability.