DXCM

DexCom, Inc. (DXCM)

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DexCom (DXCM)

Q3 2010 Earnings Call

November 4, 2010, 4:30 p.m. ET

Executives

Terry Gregg - President and CEO

Steve Pacelli - COO

Jess Roper - VP and CFO

Analysts

Thom [Gunderson] - Piper Jaffray

Bill [Plovanic] - Canaccord Genuity

Matt - William Blair

Richard - Wedbush

Mimi [Pham Schoenholtz] - Weeden & Co.

Jonathan - SunTrust Robinson

John [Putnam] - Capstone Investments

Greg - [Inaudible]

Vivian - Federated Kauffman

Bill [Plovanic] - Cannacord Genuity

Presentation

Operator

Welcome to the DexCom third quarter earnings conference call. [Operator Instructions.]I would now like to turn the call over to Terry Gregg. Mr. Gregg, you may begin.

Terry Gregg

Thank you and thank you for joining us today for our third quarter earnings conference call. Joining me today is Steve Pacelli, our chief operating officer, and Jess Roper, chief financial officer. I'm going to have Steve lead it off and give our Safe Harbors.

Steve Pacelli

Thanks Terry. Some of the statements that we will make in today's call may constitute forward-looking statements. These statements reflect management's expectations about future events, operating plans, and performance and speak only as of the date hereof. These forward-looking statements involve a number of risks and uncertainties. A list of factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is detailed under risk factors and elsewhere in our annual repost on Form 10-K, our quarterly report on our Form 10-Q, and our other reports filed at SEC, we undertake no obligation to update publicly or revive these forward-looking statements for any reason. Thanks Terry.

Terry Gregg

Thanks Steve. Jess is going to start us off today with a financial review of the third quarter. Then I will follow up with a commercial update. Then we'll spend some time talking about the clinical and regulatory environment, including the Food and Drug Administration, our standalone technologies, and our partnerships, and then we can move to your questions. Jess?

Jess Roper

Great, thank you Terry. DexCom recorded product revenue of approximately $10.8 million for the third quarter of 2010, compared to $4.6 million for the same quarter in 2009, an increase of 133%. Sequentially, product revenue for Q3 increased 19% from the prior quarter. During Q3 we sold over 3,900 systems, and sequentially, sensor revenues were up 23% from the prior quarter.

Total revenue for the third quarter of 2010 was $11.7 million, compared to $7.3 million for the same quarter of 2009 and included a $0.9 million development grant and other revenue from our development and collaboration agreements with Edward Lifesciences and Animas Corporation.

Sequentially, development grant revenue declined from $2.7 million to $0.9 million as we re-forecasted the timeframe for recognition of the balance of our development grant revenue from the end of 2010 to the end of 2011.

Our decision to re-forecast the recognition of our development grant revenue was based on longer than expected development and regulatory review timelines under our development and collaboration agreements with Edwards and Animas. Terry will elaborate on this during his prepared remarks.

We will recognize the same aggregate amount of development grant revenue, but going forward, the amount recognized per quarter will drop from approximately $2.6 million to $0.9 million and will now be recognized over a longer period of time, through the end of 2011.

These quarterly amounts exclude any milestone based payments that we may also earn. The impact of our change in the recognition of our development grant revenue to our net loss in the third quarter was an increased loss of approximately? $1.7 million.

Cost of sales including both product and non-product totaled $8.2 million for the quarter. Product cost of sales totaled $7.0 million for Q3 of 2010, compared to $4.6 million for the same quarter of 2009. Sequentially, product cost of sales increased by $0.7 million from Q2 to Q3 of 2010 due to the increased number of starter kits and sensors sold during the quarter. The corresponding improved gross margin totaling $3.8 million, or 35% in Q3, compared to $2.7 million, or 30% in Q2 in the prior quarter, was mainly due to additional product revenue.

During the third quarter we increased inventory, primarily hardware components, by $2.3 million from the prior quarter in anticipation of Flextronics', our contract manufacturer, relocating our production line and in anticipation of increased sales volumes. Flextronics is in the process of relocating our production line from California to China.

We expect the new production line to be validated and subsequently improved by the FDA in Q1 of 2011 and for production to start immediately thereafter. We also expect to add some additional hardware inventory in Q4 of this year in anticipation of the move, and then to manage this inventory down beginning Q1 of 2011.

In addition, we expect to increase our sensor inventories in Q4 to account for a shutdown of our internal sensor manufacturing lines for approximately two weeks during Q1 of 2011 to perform upgrades and maintenance. This may lead to a small improvement in gross margins in Q4 due to an increase in manufacturing overhead absorption. Conversely, during Q1 of 2011 we anticipate a slight softening of our product margin as we manage our inventory levels down.

Development and other costs of sales totaled $1.2 million for the third quarter of 2010 compared to $1.8 million during the same quarter of 2009. The decline was primarily due to lower expenditures related to the development of our hospital-based system.

Sequentially, development and other cost of sales increased slightly quarter to quarter. Research and development expense totaled $6.2 million for Q3, compared to $3.5 million in Q3 of 2009. The increase in R&D costs was attributed to additional efforts associated with our next-generation ambulatory products. Sequentially, R&D costs increased by approximately $0.7 million from the prior quarter.

Selling, general, and administrative expense totaled $10.4 million in Q3 of 2010, compared to $8.9 million in Q3 of 2009. The increase was primarily due to additional selling, customer service, and information technology costs to support revenue growth.

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