DEXCOM Earningcall Transcript Of Q2 of 2024
Kevin Ronald Sayer -- Chairman, President, and Chief Executive Officer Thank you, Sean, and thank you, everyone, for joining us. Before we begin discussing Q2 results, let me state that overall category demand remained strong, and awareness of the value of CGM across the metabolic health spectrum continues to accelerate. This trend was evident at the recent American Diabetes Association Conference, which featured DexCom's largest evidence to date in the non-insulin type 2 space. DexCom research demonstrated significant A1c reduction in multiple studies, as well as real-world evidence showing a time and range increase of greater than 4 hours per day for nearly 4,000 customers using DexCom CGM at one year. We are leveraging several pathways of evidence generation to ensure that we are maximizing our market opportunity into the future as our CGM systems become increasingly tailored to the unique needs of each customer. Despite the positive progress on these fronts, we saw 3 near-term trends emerge over the course of the second quarter that drove results below our expectations. First, as we've worked through our U.S. sales force realignment expansion, we have seen our share of new customers fall short of our expectations despite still strong absolute customer additions. Second, our U.S. revenue per customer has stepped down faster than expected based on 2 primary drivers: rebate eligibility and channel mix. With G7 coverage emerging faster than expected, we realized greater rebate eligibility relative to initial expectations and compared to 2023 levels. While we believe this enhanced G7 coverage has helped facilitate new customer starts, as mentioned above, the pace of these starts did not allow us to offset the temporary impact from this rebate eligibility. We expect the impact of this rebate eligibility dynamic will reach its peak in the third quarter, and Jereme will provide specific color on the Q3 expectations shortly. Beyond the transitory G7 eligibility dynamic, we also saw revenue per customer impacted by U.S. channel mix dynamics. U.S. customer growth has remained strong in our pharmacy business as we expand our reach into primary care and type 2 diabetes more broadly. However, our growth in the DME channel has trailed our plan. The DME distributors remain important partners for us in our business, and we've not executed well this quarter against these partnerships. We need to refocus on those relationships. Finally, our international performance was also lighter than expectations in the quarter. While we delivered strong performance in some of our core markets such as the U.K. and France, we saw category growth soften in certain geographies as type 1 penetration advances in these regions. We continue to see a significant runway ahead across our international footprint, particularly as we drive greater access for people with type 2 diabetes. To account for these trends and appropriately reflect our base assumption, we've lowered our full-year revenue guidance to 11% to 13% organic growth. We have higher expectations for our business than what we experienced this quarter. We believe we have an incredible product and incredible future pipeline and an unparalleled market opportunity. We also have a great team capable of leading this market, but I expect more for myself and more from my team going forward. So what are we doing to enhance our competitive position and reestablish momentum? It starts with our product portfolio, which we continue to strengthen to put our field sales team in a great position with clinicians. In the second quarter, we expanded our direct-to-Apple Watch connectivity with G7, launching in the U.S. and several additional international markets with this feature that has been among our most requested for several years. We expanded the international launch of the DexCom ONE+ system now reaching 18 international markets with our smaller G7 form factor for our DexCom one users. We've built on the performance of G7, making it even better. This includes a continuation of our monthly cadence of software updates, which included the second quarter additions of medication logging and the ability to ingest activity data into our G7 app. We've introduced a stronger adhesive to support our customers into the summer months, and we expanded the G7 Bluetooth connectivity range by more than 65%. We advanced DexCom's CGM leadership in the ID space with the launches of G7 integrations with Tandem's Mobi System and Insulet's Omnipod 5. We've strengthened our existing products while preparing for the most expansive product launch in our company's history with the upcoming August launch of Stelo. We are seeing the demand for CGM build in the non-insulin space and consumer use and believe that we've created a unique and engaging system to drive people to better metabolic health outcomes. Our team has worked hard to build a scalable service model for Stelo that will be great for our customers, including the e-commerce experience, seamless delivery through Amazon fulfillment, insightful product features, digital support options and much more to come. We'll offer both single purchase opportunities as well as discounted subscriptions that bring the monthly cost below $100. Stelo will be a full launch on stelo.com, and we continue to expect approximately 1% of revenue contribution in 2024. We are committed to personalized approaches to metabolic health management through updates like these. This is what will enable us to capture greater share and maintain high rates of retention and utilization across our customer base. We feel that our expanded U.S. sales force positions us very well to reignite our growth opportunity now and well into the future. We have the ability to dive deep into the technological leadership that DexCom provides for diabetes specialty practices. We have also expanded our reach and ability to highlight the simplicity of our platform and how it fits into a busy primary care practice. We have the advantage of better coverage and the lowest out-of-pocket cost for the insulin population and soon to be enhanced by the simplicity of the Stelo OTC platform. As we take significant steps to broaden our addressable market well into the future with Stelo and our expanded U.S. sales force, we are also working hard to ensure simplified access to our systems in the markets we serve. In the second quarter, our team worked with the CDC to create new ICD-10 diagnostic codes for problematic hypoglycemia. These codes, which were published in May and go into effect in October, can simplify the process of documenting hypoglycemic events that qualify non-insulin users for CGM coverage. Our international market expansion efforts also progressed into the second quarter as we received coverage in France for people with type 2 diabetes on basal insulin and began serving these customers in June. We also transitioned to direct sales in Japan at the outset of the quarter and look forward to taking control of our commercial efforts in that crucial market. To summarize, our second-quarter performance and 2024 outlook are not up to our standards, and we look forward to better capitalizing on our opportunity as we move forward. With that, I'll turn it over to Jereme. Jereme M. Sylvain -- Executive Vice President, Chief Financial Officer Thank you, Kevin. As a reminder, unless otherwise noted, the financial metrics presented today will be discussed on a non-GAAP basis. Reconciliations to GAAP can be found in today's earnings release as well as the slide deck on our IR website. For the second quarter of 2024, we reported worldwide revenue of $1.004 billion compared to $871.3 million in the second quarter of 2023, representing growth of 15% on a reported basis and 16% on an organic basis. As a reminder, our definition of organic revenue excludes the impact of foreign exchange in addition to non-CGM revenue acquired or divested in the trailing 12 months. U.S. revenue totaled $732 million for the second quarter compared to $617 million in the second quarter of 2023, representing growth of 19%. As Kevin mentioned, we experienced lower-than-expected new customer starts in conjunction with our sales force expansion and realignment, particularly in the DME channel, as well as the near-term impact from pharmacy eligibility changes, which lowered our revenue per customer relative to our expectation. Together, these dynamics adversely impacted our revenue this quarter by approximately $40 million as compared to our internal estimate. Based on the compounding effect of these lower second quarter new customer starts, we also expect our growth rate in the back half of the year to be impacted. To offset this, our team is working aggressively to improve our execution and deliver the higher market share levels that we believe our product deserves. International revenue grew 7%, totaling $272 million in the second quarter. International organic revenue growth was 10% for the second quarter. While we anticipated our international growth to slow this quarter as we lapped our very strong performance from Q2 2023, our results came in lighter than expected. Our miss on new customers impacted us by approximately $10 million on the quarter. Our international performance can often ebb and flow based on coverage decision and distributor purchases. But as Kevin mentioned, there remains a long runway ahead for DexCom CGM globally. We continue to invest in infrastructure to expand our geographical presence, provide compelling evidence to expand market access in new segments of key markets and leverage our product portfolio to meet the unique needs of various customers and health systems. Our second-quarter gross profit was $638.1 million or 63.5% of revenue, which was in line with the 63.5% of revenue we delivered in the second quarter of 2023. We continue to see further migration of our customer base from G6 to G7 in the second quarter as we finalize new pump integrations and transition DexCom 1 to the G7 form factor. Between this ongoing customer transition and continued ramp-up of our high-volume manufacturing facilities in Mesa and Malaysia, we are making steady progress toward our long-term cost targets. Operating expenses were $442.7 million for Q2 of 2024 compared to $395.1 million in Q2 of 2023. Operating income was $195.4 million or 19.5% of revenue in the second quarter of 2024 compared to $158.4 million or 18.2% of revenue in the same quarter of 2023. Adjusted EBITDA was $283.9 million or 28.3% of revenue for the second quarter compared to $232.6 million or 26.7% of revenue for the second quarter of 2023. Net income for the second quarter was $174.3 million or $0.43 per share. We remain in a great financial position, closing the quarter with greater than $3.1 billion of cash and cash equivalents. And based on our strong cash position, consistent free cash flow generation and ongoing growth opportunities, we are announcing an authorization for a share repurchase program of up to $750 million. Turning to guidance. Starting with full-year 2024, we are decreasing our revenue guidance to a range of $4.00 billion to $4.05 billion, representing organic growth of 11% to 13% for the year. As mentioned earlier, the compounding effect of our slower-than-expected new customer growth in the U.S. DME channel and international business as well as increased pharmacy eligibility resulted in the need to recalibrate the guide. Our updated guidance reflects these dynamics and assumes a longer ramp in productivity in our U.S. sales force. For margins, we are reducing our non-GAAP gross profit margin guidance to approximately 63%, while maintaining our prior guidance on non-GAAP operating margin and adjusted EBITDA at approximately 20% and 29%, respectively. In addition to our annual guidance, we are providing 2 additional data points to help investors and analysts understand some of the unique elements impacting our revised guidance in 2024. First, the impact to new patients from our sales force initiative combined with our revenue per customer trends that Kevin detailed will change the historical seasonality pattern that we have typically experienced. These impacts are expected to reach their peak in the third quarter, with total revenue expected to be between $975 million and $1 billion. In conjunction with this revenue outlook, we thought it would be helpful to provide a midyear update on our global active customer base, which we now estimate to be between 2.5 million and 2.6 million. This represents strong growth over where we finished 2023, though the growth percentage has decelerated slightly. Our hope is these updates will provide additional visibility as our team works to implement several of the areas of focus that we have aligned on over the past month and as our sales force continues to ramp their efficiency. With that, we can open up the call for Q&A. Sean? Sean Christensen -- Vice President, Finance and Investor Relations Thank you, Jereme. As a reminder, we ask our audience to limit themselves to only one question at a time and then reenter the queue if necessary. Abby, please provide the Q&A instructions. Operator Questions & Answers: |
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