DexCom Inc. (DXCM) reported fourth-quarter 2014 EPS of 2 cents per share, which compares favorably with the Zacks Consensus Estimate of a loss of 3 cents and year-ago loss of 4 cents per share.
The impressive result was driven by a 64.3% surge in revenues, which totaled $84.3 million, much ahead of the Zacks Consensus Estimate of $79 million. The upside was driven by an impressive 63.1% jump in product revenues.
Quarter Details
Gross margin expanded 400 basis points (bps) year over year to 70.5%, primarily on the back of improving product mix, which was roughly 30% durable and 70% consumable in the quarter.
Average selling price (ASP) for sensors remained constant at approximately $73 per sensor and the ASP for Dexcom’s hardware stayed at approximately at $850 to $900 per starter kit.
Both selling, general and administrative (SG&A) and research and development (R&D) expenses rose 52.1% and 71.4% year over year, respectively, owing to increased marketing expenses, higher sales commissions, additional payroll related costs and expenses related to work on near-term product pipeline as well as advanced product suite.
Despite the increase in both R&D and SG&A expenses, DexCom reported operating income of $1.6 million compared with the year-ago loss of $2.3 million, riding on strong revenue growth and higher gross margin base.
DexCom had cash and cash equivalents of $71.8 million as of Dec 31, 2014, higher than $63.2 million as of Sep 30, 2014. Total long-term debt went down to $4.6 million from $5.2 million at the end of the fourth quarter of 2013.
Product Update
DexCom launched a total of five new products in 2014, compared to three worldwide product launches in the previous two years combined. Management plans at least five more launches in 2015. Depending upon execution and regulatory time frame, DexCom expects the count to increase to as many as ten products in 2015.
In January, DexCom received the FDA approval for its G4 PLATINUM Continuous Glucose Monitoring System with Share. The Dexcom Share receiver uses Bluetooth Low Energy (BLE) to connect patient’s receiver and an app on the patient’s smartphone. With this, the receiver will be able to transfer glucose information to apps on the mobile devices of up to five recipients.
The recipients, or followers, can then supervise a patient’s glucose information and receive alert notifications from anywhere via their Apple (AAPL) iPhone, iPad or iPod touch. The company plans to extend this service to the Android platform as well.
DexCom also announced that the Share Receiver will be compatible with the G5 mobile system. Most recently, the company submitted its G5 mobile PMA supplement to the FDA. The company expects an approval by the end of 2015.
Outlook
DexCom expects product revenues to be in the range of $340 million to $360 million. Approximately 40% to 45% of this revenue is expected to be generated in the first half, while the remaining is likely to come in the back half, much similar to the 2014 trend.
First-quarter 2015 revenues are expected to be approximately 20% of full-year revenues. However, first-quarter results are expected to be negatively impacted by seasonality as well as the financial impact of the launch of Share Receiver upgrade program. DexCom expects product gross margin to be down sequentially in the first quarter, but margins are likely to return to normal over the course of 2015.
For 2015, R&D expenses are expected to jump almost 25% on a reported basis, owing to higher overhead and share-based compensation expenses.
Our Take
DexCom reported profits for the first time in its history in the fourth quarter. The company’s revenue beat is also encouraging. The company boasts a robust product pipeline with the recent launch of DexCom SHARE – the first FDA-approved mobile remote monitoring system – and the new software for its G4 Platinum CGM System.
DexCom is riding high on the back of a number of FDA approvals received over the past few months. In Nov 2014, the FDA approved a new algorithm designed for DexCom’s G4 Platinum Continuous Glucose Monitoring system.
We feel these approvals will benefit DexCom’s long-term prospects. Once the approved products are launched in the market, these will help drive significant top-line growth. However, intensifying competition and a tepid first-quarter outlook will remain overhangs on the stock.
Zacks Rank and Other Stocks to Consider
Currently, DexCom carries a Zacks Rank #3 (Hold). Better-ranked stocks in the medical instruments industry include Abiomed (ABMD) and Luminex (LMNX). Both the companies sport a Zacks Rank #1 (Strong Buy).
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