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.

Operator: And we will take our next question from Mathew Blackman with Stifel.

Mathew Blackman: Oh, great. Appreciate you taking my question. And maybe for Kevin and Jereme, you obviously mentioned Salesforce and the PCP channel. Can you just remind us at least today what kind of PCP, Salesforce coverage you have? And then more importantly, sort of leaning into your comments, Kevin, about investing incrementally in that channel this year. What does that mean in terms of spend magnitude, spend timing? And how much more coverage you’re expecting to add with these investments or any other way to frame what you’re trying to accomplish? Thank you.

Jereme Sylvain: Yes. So thanks for the question, Matt. So you think about the investment, we are going to expand that Salesforce. And today we have a good amount of coverage. It’s tens of thousands of primary care physicians and predominantly the entirety of the endocrinologist space. But as you start to think about basal coverage expanding, the opportunity ahead of us certainly Stelo out on the horizon. We found there was an opportunity to continue to expand. And as we know, CGM, specifically Dexcom CGM can play a very important role in how folks manage their diabetes. We know that having those call points is helpful. So we are going to expand it. You can take a look at LinkedIn for the amount. There are quite a few openings out there in terms of the size of it.

So we’ll expand our salesforce and we will get more coverage. In terms of the cadence, the LinkedIn wrecks are out there right now. So you’ll see us hire over the course of the first quarter. Obviously, then the fully loaded burden associated with those reps will take place over the back half of the year. So Q2s through Q4. So that’s how to think about the cadence of that. But again, that’s all contemplated in the overall guidance we’ve provided, the 20% operating margin. So expect it as part of typical work that we do around creating leverage in the business and investing where we need to. But if you’re thinking about it for a cadence over the course of the year, expect the hires to be made over the course of the first quarter. And then for folks to ramp up and be part of our run, really Q2 through the balance of the year.

Operator: And we will take our next question from Marie Thibault with BTIG.

Marie Thibault: Thanks. Good evening. Thanks for taking the questions. I wanted to ask a question here on international. I think you’ve reminded us that you’ll be selling a non-CGM business in Australia and also going direct in Japan. I wanted to understand the cadence for Q1 versus the rest of the year. And also any sort of comments you could make on G7 being on the Dexcom ONE platform, just an all-around international question there.

Jereme Sylvain: Sure. Thanks, Marie. And we’ll give you some context. So the non-CGM business, that effectively is gone at this point. So that’s why we’ve been comfortable pulling it out and talking about it to organic. So this quarter you can expect, we talked about the $30-ish million last year. The math on that, you can kind of do the allocation by quarter. That’s out as of this point, for the most part. And so think about that in the quarter. Japan, certainly a similar type thing. We talked about it in Q4 being effectively nil. I’d expect a similar contribution in the first quarter. And then as we start to take that book of business so that business live in the second quarter, I expect it to start to contribute as we build that business back up over the course of the year.

So those are really the international kind of timing. So Q1 will be the heaviest burden in terms of as we transition through that. As it pertains to Dexcom ONE on G7, great news is, I think we press release it a couple days ago, four countries have launched. And so that has come out, it is now out there today. Those four countries are our first foray and we’re getting great feedback from early adopters within those countries. The expectation is we have a cadence of launches of Dexcom ONE on a G7 form factor, really over the course of the year. So I’d expect a lot more press releases around where and when we’re launching that, but expect that to really take place over the course of the year, which gives us a lot of confidence again in Dexcom ONE being a really incredible growth driver for the long term.

Operator: We will take our next question from Jeff Johnson with Baird.

Jeff Johnson: Hey, guys. Good afternoon. Maybe I’ll just keep it on that international point. I think this is the first quarter in a while we’ve seen international growth below the US growth. And if I look back the last few quarters, I think you’ve gone 40, 30, 23 here on the organic growth rate. Just help us understand kind of where that international versus US growth might settle out here in 2024. Would we expect them to be similar to each other? Does international continue to slow for any reason? And as I think about some of the competitive AID approvals that have happened over in Europe, especially with one year with a competitive CGM. Just how are you thinking about the stability of your maybe installed base on the AID side over there versus win rate for new AID systems there? Thank you.

Jereme Sylvain: Okay, thanks, Jeff. So as you think about the cadence, so thanks to the question on international, as you think about the cadence over the course of the year, certainly Q4 was buoyed by a few different or weighed down, I guess, and say by a few different things. We talked a little bit about earlier about the Japan business and really the revenues were effectively nil as we make that transition. And so that’s a negative grower in the quarter. And then, the non-diabetes business is was really a flat. And so when you think about the business being historically a pretty significant grower, those pull you down as you start to exclude those things, we are still growing quite well. In fact, all of the core businesses where we operate today, UK, Germany, Australia, et cetera, all continue to grow relatively consistently between Q2, Q3, Q4.

There are some ebbs and flows, but for the most part, those all should do well. So then you think about what does that mean going forward? We haven’t changed our stance that the o-US business, the international business, as a percentage of revenue by the end of 2025 will be bigger than it is today. And about two thirds, one third, or that split today is more like 70:30 or 72:28. So I think on the whole, expect the international business with all of the opportunity out there with certainly the under penetration we have today to grow faster than that of the US business over the coming. That’s not to say that we’re not incredibly bullish on the U.S. business. Look, if we can outperform on both of those, we’ll do the work on both. But at least that’s in our LRP.

As you think about competitive systems and AID, we are highly confident in what we have to offer. Our product there’s multiple different reasons why we believe our product is special in that space. Kevin alluded to a little bit about it earlier around Bluetooth connectivity as one. I’ll just give you an example there. Someone can be on a pump can talk to their phone and can be on a direct-to-watch application all while on our product. No one else can offer that. We are the only one that can do that. And as you think about this population which really needs and deserves quite frankly the technology to manage their diabetes, we believe that that is a differentiator and a meaningful differentiator going forward. Add to that the many and many of years that we’re compiling on these systems.

We feel highly confident that when we sit in front of a physician, and we sit in front of an endocrinologist and we sit in front of a parent a child that needs an AID system we feel confident that we are the choice. We’ll continue to battle and make sure that that message continues to go out there but as we think about that international book of business, we continue to feel very confident even post-launch of a competitive system we’ll do incredibly well there.

Operator: And we will take our next question from Matt Taylor with Jefferies.

Matt Taylor: Hi, thanks for taking the question. I was hoping you could update us on the cadence of data that we could expect to see this year not only around you mentioned before GLP-1 data that could come from you or from investigators and then also on Stelo. Are we going to see anything on that at upcoming conferences or from you before during or after the launch?

Kevin Sayer: Now this Kevin I’ll take that we don’t really, we don’t need a clinical trial for Stelo as far as getting that product approved. There is a lot of data on use of continuous glucose monitoring, particularly Dexcom systems in this type 2 diabetes world that will be published by investigators over the course of the next several months, and we’ll reference to that and we’ll talk to you about that. We know, we have a very good idea where this data comes out because we’ve seen in all our studies, patients have better outcomes, they’re healthier, we end up saving the system money, and those are the outcomes that we’re hoping to drive with Stelo over time. With respect to GLP-1s, again, the list of studies ongoing is very large, and there are studies where CGM is an element.

Again, we expect those studies when they’re published to demonstrate the same things that we’ve talked about before, that the use of the CGM with the GLP-1 provides a better result than a study without it, and those studies we’ve published over time, we don’t control those investigators, but we expect good data over the course of the year.

Operator: And we will take our next question from Travis Steed with Bank of America.

Travis Steed: Hey, thanks for the question. I just wanted to understand a little bit more, Kevin, that you could give some more clarity on how you think a reimbursement pathway for Stelo to look over the next couple of years, what you think is needed to open reimbursement up for that product, and how you think that would look if it would be done kind of in a more traditional way, or you think it would be done kind of a one -off, like the levels program with UnitedHealthcare.

Kevin Sayer: Our goal is to do this in a more traditional way over time. As we’ve said earlier, we’ll launch the product as a cash pay product and have a cash pay option, a cash pay that people can get into and purchase the product. We will accumulate data from those users over time. We’ll accumulate data, again, from the clinical trials that we see out there, and ultimately build a case for reimbursement for this product. I think over time, we certainly expect to go to CMS and have people with type 2 diabetes who are not insulin-covered at some point in time by that group, because, again, our goal is to spend less money in the healthcare system, and we’re one of the few technologies that enables an outcome of that nature. So we see it being more traditional and working with payers and the various government agencies over time.

The programs we will continue to support, we’re happy to support them and be partners with them. But I think over time, we need a more traditional reimbursement path, and that can be — the partnerships and the relationships can be the only way. On top of that, we’ll continue to develop our tools around Stelo. This first generation that we launch is going to be our first-pass app. We will have numerous iterations over the course of the first 24 months of that product that really make it a much more inviting and engaging product and lead people to better experiences. So stay tuned for what we have to say on that front over the next 12 months. It’s going to be very exciting.

Operator: And we will take our next question from Joanne Wuensch with Citigroup.

Joanne Wuensch: Good afternoon, and nice quarter. A couple of questions, queue are really boring. Can you give us the guidance for tax and how to think about net interest expense? And then the one that strikes me as somewhat more interesting is I think your LRP is for 21% operating margins. And this is the second quarter in a row where you bypassed that number. So why is 21% still the right number to be had? Thank you.

Jereme Sylvain: Sure. Yes, so we’ll start with tax. I think this year we kind of dropped down to closer to that 26% range. Well, we don’t necessarily guide year by year to tax. The goal is over the course of the next three to five years to get down into the low 20s. So I would expect it to continue to come down every year as we grow into the tax structure that we put in place. In terms of net interest income, some of that, it’s one of those, it’s a bit of a difficult one, but just given where interest rate is going to go over time, but it’s pretty straightforward that our cash interest cost is pretty low, just given our converts. And so you can basically take a look at the cash on the balance sheet, multiply it by about 4%. And that gets you to about where you’d be for the year.

Again, we’ll have to keep you updated as interest rates change over time. But that’s the way to think about it. And then from an operating margin perspective, we gave the 2025 LRP, that’s a 21%. Your point is valid. If you take a look at our guide this year at 20% in our gross margin of 63% to 64%, if we hold true to our 65% gross margin in 2025, which is absolutely our belief, you’re already there at a 21% off margin. So I absolutely understand the mathematics. It just means we’re ahead. We’re ahead of our LRP, but we’re not necessarily willing to update it at this point. We’ll come forward and we’ll update it at some point in the future. But I think it’s a good thing. We’ve done a lot of work around this, Joanne, around getting lean and making sure we drive leverage into the business.

And the great news is, is we are ahead. And so that’s a good spot to be in. And we’ll continue to do so. One other maybe caveat is that I think it’s important to note on the year I guess the question a little bit about the year and where we on the year. We’re making some good investments this year in the organization, we’re launching Stelo. And we talked about that being a significant investment in the business. We’re certainly doing a lot of work around our salesforce and if you recall few years ago, we did some work around that we took step back on march, we are going to do all that and still step forward. We’re going to go direct in Japan this year. That’s another thing that we’re making an investment in and then all the work Kevin referenced around the clinical work that we’re doing around continuing to improve our product.

We’re going to make all those investments and still deliver an expansion of operating margin. So I think it just goes to show you we’re building the levers in here that you can see that we’re building and that you can rely on us longer term to continue to drive that through the business.

Operator: And we will take our next question from Matthew O’Brien with Piper Sandler.

Matthew O’Brien: Good afternoon. Thank you for taking my question. Looking at the domestic performance. There’s been a clear acceleration in the back half of ‘23 on a two year stacked basis. And I’m wondering specifically if that’s just basal that’s helping there. It looks like it’s as much as 200, maybe 250 basis points of the acceleration. Is that the primary contributor to the domestic acceleration? What should we think about in terms of basal contribution to the top line this year? And are we inflecting right now as far as basal adoption goes with CGM here in the States? Thanks.

Jereme Sylvain: Yes, that’s a good question. Let me maybe just give some color as to how we’re thinking about the guidance. As you see the performance in the back half of the year, a lot of that has to do with being the most accurate sensor, launching with a G7 form factor, and then of course having the basal coverage there. And so when you think about it, and you can see the share taking when you look at script data, we are taking share and having the sensor, the most advanced sensor on the market is the driver there. So that’s taking share. Now within those spaces, basal is a contributor, no question. As that category expands and we take share within that category, that does contribute to the overall numbers. And so you are right, basal is a contributor, but it has as much to do with us taking share as it does with category expansion.

So think about both of those as contributors. As you think about 2024, we’ve talked a little bit about the adoption rate, basal in total, adopting in the back half of the year around 9% to 10% per year on a per annum basis. The guide assumes about 8% there. And so, I think you can assume that was the case. Our long range plan was more like 6% to 7% per year. So we are seeing basal going faster than what was in our long range plan. And what’s great about that is as we continue to take share and the category grows a little faster than expected, that will help contribute over the longer haul. So hopefully that gives you some context to how we’re seeing basal. It absolutely is a contributor. I don’t want to overstate the fact though that basal because quite frankly, our intensive insulin businesses continue to do really, really well.

And you see us taking share there as well.

Kevin Sayer: Yes, I just add to Jereme’s comments, Matt, if you look at the second half of the year, that’s when G7 rolled out. There’s a direct correlation to G7 launching and the acceleration of our growth. It really was an important event. And the other thing that just as a consequence of what you saw, again, this supports what we’re doing in the U.S. with respect to our field sales expansion. We do need to spend more time with physicians who aren’t as familiar with our technology as they would have been in the past. As I said on the call earlier, where we call on somebody, we win. We do very well. So we need more calls. We needed more feet on the street and more voice, given the acceleration that we saw and the good things that we saw happen over the second half of the year. So it all flows together nicely.

Operator: And we will take our next question from Malgaret Andrew with William Blair.

Malgaret Andrew: Hey, good afternoon, guys. Thanks for taking the question. I wanted to maybe spin back to non-insulin. When we kind of run our market models, non-insulin adoption seems to have meaningfully increased probably for you as well it’s certainly for the market the last couple of years. And again, our numbers probably aren’t perfect, but maybe the market’s not at a million users in the U.S. but could get there this year. That’s a pretty sizable amount. So I guess one, are this meaningful patient adds to Dexcom already in 2023 and what drove that? And going back to the Stelo guidance of $40 million per year, we can obviously throw some assumptions around ASPs or patient adds. But regardless of what those inputs can be, it pretty quickly gets you to $200 million plus sales in 2025, which is a pretty meaningful chunk of the chain.

So I guess, is that correct? Why could it be right or wrong and how much of that could be incremental to the initial LRP that you provided in ‘23. Thanks.

Kevin Sayer: Jereme can probably get into more detail than me. It is a part of our business today, Malgaret. We do have some non-insulin users. Our product, we have some plans that actually cover non-insulin users for CGM, and we’ve seen and had wonderful experiences there. We’ve also have not an aggressive cash pay program, but a cash pay program nonetheless where non-insulin users have access to our product through some very traditional distribution channels outside the pharmacy and outside traditional DME. So some of those individuals have purchased CGM and use it on the non-insulin front as well, and we continue to support programs. But it is not a remarkable chunk of our business. It has not been a tremendous driver of our growth.

It has grown, but it hasn’t been a significant percentage. As we look going forward, certainly again, we gave guidance of 1% for 2024. And we’re committed to that and that certainly is our forecast and what we’ve guided. We’re most committed to learning because what we’re really interested in is a number like $200 million like you’re talking about for 2025 and to be positioned with the right product there. With respect to pricing and how offer that product we’re going to have tremendous flexibility as this is a cash pay program. And it’s not labeled for the current population where we have reimbursement and where we’re reimbursed for our products. So we believe we’ll have again flexibility to grow that and grow it profitably is again we have a 15-day product going into that market.

So we will have lower COGS and we’re developing a lot of things around that that is a roll out as you see we really are changing the business model to serve this type of individual versus those we’ve served up to this point in time. We’re going to offer a different experience that will definitely meet their needs across the board. So we’re bullish on it over time. I mean it could be very big number in 2025. That’s what we’re — that’s what we’re planning on.

Operator: We’ll take our next question from Jayson Bedford with Raymond James.

Jayson Bedford: Good afternoon. Excuse me. Just on gross margin. I think we came in the last year thinking gross margin would be lower in the second half. It wasn’t. I’m guessing revenue levels play a part there. But outside of price and mix what weighs on gross margin in ’24? And then just the related question, you had some encouraging comments on Malaysia and I think you alluded to it. But at what point do we see Malaysia and G7 starting to have a positive impact on gross margin.

Jereme Sylvain: Hey Jayson. Yes, thanks for the question. Last year when we made the assumption on what the margin look like, the assumption was is the G6 to G7 transition. We had a range of assumptions. But the assumption was the G6 to G7 transition would take place perhaps a little bit earlier. And some of that had to do with timing of when the AID systems were available in the market and coverage and how that that goes over time. And so it took a little bit longer. And as a result, we outperformed on margin and it gets back to G6 cost less to make the G7 today. And it’s still majority of our user, our legacy base still sits on the G6 system. With the launch of Tandem and Control-IQ integrated with G7 and obviously the limited launch with the Omnipod 5 coming out here in the back half of Q1, and then obviously a launch sometime later in the year, we do believe that base starts to move over quicker.

And so what you have there is as that takes place, Jayson, you have that shift from a lower cost to a higher cost product weighing in the start of the year. And hence that’s why the margin goes where it goes. Now in the back half of the year, assuming that base transitions and our models show that over the course of the year that should, that equilibrium should balance then tilt in the favor of G7. It puts us in a position exiting the year where G7 should be and we’ll have to give you updates on the base as the year progresses, but it should be lower than G6, but then at that point it should be accretive. And that would be the exit rate leading out of ‘24. And then of course, then bodes well as we move into 2025 and beyond. So that’s the big driver.

It’s just, when does that base transition and when it does, when do we have that cost kind of equilibrium? So again, we thought it was going to happen in the back half in 2023. It didn’t take place. We outperformed there in 2023 as a result, probably going to take place here in the first half of 2024.

Operator: And we will take our next question from Bill Plovanic with Canaccord Genuity.

Bill Plovanic: Great, thanks for taking my question. Congratulations on the quarter. Just kind of a follow-up, just trying to get a color granularity, if possible, on, as you look at the growth in the business and kind of the Matt O’Brien’s question, but the contribution from Basal, Hypo, Intensive and Type 1, just, is it kind of shifting to that order these days where it’s more of the Basal and Hypo and the Intensive Type II is really the new patient growth, and then if so, how should we think about that cadence as you continue to move forward? Thanks.

Jereme Sylvain: Yes. I mean, if you think about 2024, at least, 2024, the main contributor to new patients, or at least revenue from new patients, is still going to sit in the intensive insulin. So the type 1 and the type 2 insulin-intensive patients, and that still is where the combination of those two makes up a majority of the new revenue over the course of the year. Basal is catching up, and Basal doing a nice job of catching up, but those are still part of our core business, and it’s still actually driving the underlying business. Now, over time, we do expect basal, given it’s a larger population, to do very, very well. We’ll have to give you more of an update as we get into 2025 and beyond as we get closer to that. So incredibly bullish on the long-term opportunity there with basal.

But think about at least 2024. Our core business is actually still driving a lot of the growth with obviously longer-term opportunities in basal and then to your point Hypo which is quite frankly still a low contributor and then with Stelo kind of coming online as well. All of those are real opportunities in 2025 and beyond.

Operator: And we will take our next question from Michael Polark with Wolfe Research.

Michael Polark: Good afternoon, thank you. I want to ask a follow-up on Kevin your response to the prior question on 15-day and timing. I heard we won’t provide a lot of color until we’re filed and see a path to approval. There kind of had been, it seemed like there was a thought that Stelo was kind of the appetizer this year for 15-day and maybe a broader rollout in 2025 and I don’t want to, I’m not asking you to pin down timing but is 2025 a year where a broader transition to 15-day could be affected or might all this testing and innovation take a little longer?

Kevin Sayer: We would like to go as fast as possible. If it were on my time frame it’d be it’d be yesterday. Stelo at 15-day is a primer for that so we can learn and gather data from those users as they use it particularly with our current sensor configuration. As we go through the technology changes that we’re making as we dial in on those features that we’re going to put in the final product we’ll get a pivotal trial started and we’ll go but we’re learning each and every day. We are not in a position like we were with G7 where we’re submitting an entire new system with completely new hardware and new features and new manufacturing lines, new suppliers, new everything. This 15-day product we’ve built on the same platform our current G7 has built.

So the time from finishing a pivotal to filing is not going to be near as intense and difficult as it was with the last product being such as security and Bluetooth and stuff. We worked through all those issues already. So right now it’s really refining the science and getting the 15 days and getting that reliability and quality level that our patients expect from us. We don’t view this as an extremely, I think ‘25 is a reasonable assumption, but I’m not going to give you an end date or as to when, because there’s too many variables, but we’re certainly headed down a path along that type of speed, and then we’ll see where we land and give you more updates along the way. I just, filing things or starting things, what’s important to us is getting things done, and those should be your milestones as well.

So we’ll keep you posted, but that’s where we are.

Operator: We will take our next question from Chris Pasquale with Nephron.

Chris Pasquale: Thanks, and congrats on the quarter. I want to ask a couple of questions about Dexcom ONE and the progress there. I think you had said you expected it to account for about 30% of international new patient starts in ‘23. Curious if that’s where you ended up and what portion of new patient starts you expected to be in ‘24.

Jereme Sylvain: Sure, Chris, thanks for the question. Yes, we did, we thought it was going to be about a third of patient starts in 2023 outside the US. It was closer to about a quarter of new patient starts, so a little bit behind there. Some of the tenders took a little bit more time to get on, and so it was still a really good year for us, but a little bit behind, where we had started the year, at least in the expectations. This year, we expect it to be more and a bigger contributor as a percentage. So if you think about last year, that was certainly the case that was on the G6 form factor, very excited about obviously coming out here on the G7 form factor here in 2024 and the four countries that we are to launch in. So our expectation is it’s a bigger percentage while we haven’t necessarily given that number, expect it to be bigger and the team wants it to be bigger as a percentage of new patients outside the US in 2024.

Operator: We’ll take our next question from Josh Jennings with TD Cowen.

Josh Jennings: Hi, good evening. Thanks for taking the questions. I was hoping to just ask a follow-up on the type 2 hypo, not it’s on hypo indication, does have coverage. We didn’t think you would, it would move as fast as type 2 basal, but I think you guys talked about a bigger patient opportunity in the US than the type 2 basal patient opportunity. Anything that’s been a bottleneck in terms of penetrating that indication and just how do you see a deeper penetration going forward ‘24, ‘25, ’26. Thanks a lot.

Jereme Sylvain: Yes, thanks, Josh. It’s an area that in all candor it’s gone and we knew this was going to be a bit of a challenge. It’s a big opportunity, but it’s going to take a little bit more time on awareness and getting in front of physicians and letting folks know that, hey, look, if you’ve had a hypo event, you do qualify. And by the way, here’s how to document it. So it has been certainly slower than basal. It’s not been a real all that material contributor in 2023. What we do know, however, is Teri, our Chief Commercial Officer and her team are very, very focused in getting the word out and making sure that folks understand if they are suffering with hypo events, this technology can help and it can help change that and that they do qualify and there is reimbursement out there.

And so it’s working on that messaging and making sure that we get out there and understand where those events are taking place. That is, believe it or not, it is a challenge in understanding how to identify when those have taken place so that we can get out in front of those folks. But we are working on it. We have good data around that. And then making sure, we’re making those physicians that are then serving those patients aware of what the requirements are for documentation so that they can qualify for reimbursement. So there’s some work to be done, but there’s a team working very, very intently on it and making sure that we do arm our salesforce and then arm the community with the information needed to help it grow faster. I think it’s a big opportunity for us, but I think it’s an opportunity that’s going to take a little bit longer to penetrate.

So to your point, I think it’s a driver a little bit here in 2024, certainly an opportunity in 2024, but I think it’s going to continue to slow roll, but over the longer haul, we do think this is a contributor over time that can be meaningful.

Kevin Sayer: I just add to that it feeds to the salesforce investment we’re making in the States. We need to educate physicians and patients. And once you get a population of people who have positive outcomes in this space and they go back to their doctors and those conversations start taking place, this becomes easier, but there’s a lot of seeding that we have to do to do it and we needed more, more feet on the street to do that.

Operator: We will take our next question from Mike Kratky with Leerink Partners.

Mike Kratky: Hi, everyone. Thanks for taking our questions. One clarifying one on basal. You’ve previously talked about framing the penetration within basal population relative to the trajectory you saw in insulin intensive type 2 patients. How would you characterize that comparison based on where you are today and also as you’re looking out over the next few years?

Jereme Sylvain: Sure, yes. So in our long-term guide, we had talked about basal effectively being about six to seven points of adoption as a percentage of the total population here in the US. And I’ll start with the US because internationally, there’s a coverage as we work through coverage there, there’s opportunities. But we had talked about that in our 2025 LRP. In our first couple of quarters, we saw it mirror that to your question, to your point, I should say, that it was mirroring the type 2 intensive, which was about a 9% to 10% penetration rate. Our guide, at least for 2024, assumes the middle between those two, 8%. We got a couple quarters under our belt. It’s very, very positive. But we also want to make sure we’re prudent when it comes to guidance.

And so that’s why we’ve assumed about an 8% penetration rate over the course of 2024. Obviously, if it mirrors that, which we saw in the back half of 2023, there’s opportunities to outperform. And clearly, we’re tracking ahead of our LRP, which I think is both positive signals, I think, for the business in total. But we, again, our guidance has been 8% as a percent of penetration. Hopefully that helps you.

Operator: We will take our next question from Steve Lichtman with Oppenheimer.

Steve Lichtman: Thank you. Good evening, guys. Kevin, you mentioned, to an earlier question, different business models for Stelo. How should we think what the go-to-market could look like? Does it have a Dexcom ONE more direct-to-patient feel? And do you need to make any significant investments in back office support as the denominator really expands as you go after this large non-insulin group?

Kevin Sayer: That is a great question. And that is a very, very pertinent topic of discussion and meeting here within the walls of our company. We are very much evaluating very efficient ways to serve such a large patient group, had a patient group that may interact differently with us than those who’ve been on insulin over time as we build those models out. So we’re looking at distribution models that appear different than what we’re doing today, so we can most efficiently get that product to people. And again, starting with cash pay gives us some opportunities to do things a little different than we’ve done in the past. And so you’ll have to stay tuned for that. It’s a very thoughtful question and very much in line with everything that’s going on here every day.

Operator: And we will take our final question from Matt Miksic with Barclays.

Matt Miksic: Hi, great. Thanks so much for fitting in. So one follow-up on margins and kind of mix as you drive G7 to be a bigger part of your business. You mentioned before, I think we understand the ramping G7 volumes improving gross, large, and profitability of that product line over time. Just wondering if you could share maybe how we should think about the long term. Like in other words, G7 is more profitable now. I mean G6 more profitable now, rather just maturity of those lines so G7 exceed that. Does Stelo trail G7? Does Dexcom ONE with G7 kind of trail that maybe, just some sense directionally of where those are headed over the intermediate and long term would be super helpful as you drive these volumes up. Thanks so much.

Jereme Sylvain: Yes, so maybe what I’ll talk about is how we’re thinking about the cost of the product. And then I think from there we can kind of make some calls on how we think about margin from that perspective. And I’ll maybe comment a little bit on the on the service model, which I think is also important because that’ll help from the operating margin. So as you think about the G7, just the product itself, as of today, it costs more than G6. And so that’ll eventually we expect over the course of this year flip. And as you kind of get your models kind of bent out into kind of laid out, we expect to get down to a $10 sensor, irrespective of whether it’s 10 or 15 days as we exit the 2025 LRP into early 2026. So that gives you some kind of feel for where we’ll get to the cost of each sensor.

Now, each sensor, the hardware is about the same cost, whether it’s Stelo, whether it’s Dexcom ONE, or whether it’s the G-Series. It’s the support models, the software, the support, the R&D, the investment in it. And then of course the service models that ultimately then change it. And so as you think about all of the work that we put into the G-Series, the G -Series will have the highest reimbursement, but it’ll also have the highest service model and then most investment in software and otherwise. Dexcom ONE is a little bit more of a different service model, and thus we are able to reduce the burden associated with some of the warranty and then the support cost that play into that. And then Stelo is in a 15-day form factor. And so that’s helpful from a gross margin perspective as you think through that over time.

So I think that’s the way to think about the cost profile. We haven’t launched the price of Stelo at this point, so we can’t necessarily give you the specific margin at this point. Otherwise, it’d be pretty obvious how we’re thinking about it. But over time, as that comes out, I think it’ll help align the models. And I think there’s real opportunities here as you think about a 15-day product starting with Stelo, but as that then makes its way through Dexcom ONE and the G-Series over time, again, more levers there where there’s some real opportunities in those product lines to continue to drive profitability. So I think there’s levers across all of these. I hope that gives you some context. I realize I’m not giving you a P&L for each one of them, but at least it gives you some context at the hardware costs, and we differentiate on the OpEx costs and service models, and then, of course, the days of wear on each one.

Operator: And ladies and gentlemen, at this time, I would like to turn the call back to Mr. Kevin Sayer for closing remarks.

Kevin Sayer: Thank you very much. It’s very easy during these earnings calls to talk about percentages and margins and future technologies, financial guidance, competitors, a whole host of important and engaging topics. But as we wrap up today, I really want to focus on 2023, which is truly the most remarkable year in our history. Let’s review these numbers again. $700 million in organic revenue growth, more than a $1 billion in EBITDA, 600, 000 new customers in our active user base, standing up a plant in Asia without missing a beat, and, of course, launching our G7 product all over the world. While best-in-class technology is foundational and fundamental to these types of accomplishment, it doesn’t happen without exceptional people going above and beyond. So as we close out 2023, I want to thank our, I guess we are, we’re now more than 10, 000 Dexcom employees around the world. Incredibly well done. Thanks everybody.

Operator: Ladies and gentlemen, this concludes today’s call and we thank you for your participation. You may now disconnect.