Q3 2022 Dexcom Inc Earnings Call
Hello, and welcome to the decks Com third quarter 2022 earnings release Conference call.
My name is Michelle what that will be your operator for today's conference.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and during the question and answer session. If you have a question. Please press zero one on your Touchtone phone.
As a reminder, today's conference is being recorded.
I will now turn the call over to Mr. Sean Christensen, Sir you may begin.
Thank you operator, and welcome to <unk> third quarter 2022 earnings call. Our agenda begins with Kevin Sayer, <unk>, Chairman, President and CEO , who will summarize our recent highlights and ongoing strategic initiatives, followed by a financial review and outlook from Jeremy Sylvain, Our Chief Financial Officer.
During 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 third quarter performance on the <unk> Com Investor Relations website on the events and presentations page with that let's review our safe Harbor statements.
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.
Forward looking statements included in this presentation are made as of the date hereof based on information currently available to <unk> com and are subject to various risks and uncertainties and actual results could differ materially from those anticipated in the forward looking statements.
Factors that could cause actual results to differ materially from those expressed or implied by any of these forward looking statements are detailed in <unk> 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.
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.
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 third quarter earnings presentation for a reconciliation of these measures to their most directly comparable GAAP financial measure now I will turn it over to Kevin.
Thank you Sean and thank you everyone for joining us today.
Today, we reported another strong quarter for <unk> com with third quarter organic revenue growth of 20% compared to the third quarter of 2021 hour.
Our teams executed incredibly well as we work to advance our strategic initiatives, while preparing for the largest product launch in our company's history.
In the U S. We saw a continued momentum after a strong second quarter, new customer starts with ongoing loyalty among endocrinologists and growing traction with primary care physicians. We're finding these physicians eager to engage with our teams as I learn more about the clinical benefits and superior outcomes of the <unk> CGM can provide their patients while we <unk>.
These primary care relationships to be critical to our long term customer aspirations. They also help us better serve the intensive insulin using population in the U S. Today, the domestic car market still has a long runway of growth ahead as we expect the vast majority of the population to adopt CGM to help them better manage their health.
Outside the U S. Our team continued to deliver customer access wins. This quarter. One example in August the NHS announced the inclusion of <unk> one on prescription via the England Wales, Scotland, and Northern Ireland drug tariff for everyone with type one diabetes and type two intensively managed diabetes.
This announcement meaningfully expanded access to <unk> within these markets as our previous reimbursement was generally limited to a smaller population of high risk individuals.
Importantly, this is a clear example of how we can leverage our portfolio strategy to reach many more people with diabetes across the globe.
Whether we use decks com wanted to enter new geographies or to improve access within existing markets. There is a large opportunity to expand our reach in many cases. These are segments of the market that have lacked product choice for customers. So providing decks comes leading real time CGM solution is being welcomed enthusiastically from customers and <unk>.
Systems alike.
As many of you have seen we were also very excited to initiate our full U S launch of <unk> seven following a successful limited launch <unk> is now available in the United Kingdom, Ireland, Germany, Austria, and Hong Kong.
We have been looking forward to this day for a long time as we view <unk> as not only a major step forward for <unk> for the entire diabetes technology market. This is a game changing launch as we often say <unk> everything about gcs and makes it better.
Is it 60% smaller form factor 30 minute warm up time 12 hour Grace period to allow customers to choose a convenient time to change sensors and improved app experience and more.
All of this while building upon the product performance and accuracy that has earned the trust of our customers and clinicians. These.
These advancements were specifically designed to improve the lives of our customers.
And that is being recognized by our earliest seven users the feedback from our launch has been incredibly positive which adds to our confidence that this product will take decks com to the next level.
We are moving quickly to make this life changing technology available broadly around the world and.
And we'll be rolling out <unk> seven across a steady cadence of additional geographies over the next several months and.
In the U S. We have responded to the FDA NRG seven regulatory pathway is tracking in line with the expectations. We shared last quarter, we completed the necessary software changes in response to the feedback we received from the agency and subsequently validated the data to ensure the software is operating as designed these efforts position us well to receive <unk> seven.
Clearance before the end of the year.
This is a very exciting time for us. We believe this is the product of the future for <unk> Com and we are working diligently to make that product accessible to a much broader population not only the intensive insulin using population, but moving into people with type two diabetes on basal insulin only non insulin using type twos gestation of hospital metabolic health <unk>.
Beyond along those lines there is a growing body of evidence demonstrating outcomes beyond the intensive insulin using population, including a recently published study in diabetes technology in therapies. This study assess the benefits of <unk> CGM for a population are predominantly non insulin using type two individuals.
Similar to our mobile study demonstrating meaningful reductions in <unk> levels and improvements in timing range across the study group.
Notably the largest improvements in time and range came from Nicole arent being treated with one or less medications per day.
This suggests that a sizeable opportunity exists to help individuals earlier in their diabetes journey.
Potentially preventing escalation of the disease. This has meaningful long term health implications for those starting on CGM.
And also holds promise to reduce the economic burden on our health system associated with progression of diabetes.
<unk> clearly recognize this potential in 2017, when they became one of the first global payers to cover CGM for people with intensively managed type two diabetes and they appear ready to lead yet again in customer care.
In early October CMS published a proposed local coverage determination that would again meaningfully expand CGM for the Medicare population. Once finalized this proposal would expand Medicare coverage to include the base only population as well as non insulin using individuals that have experienced hypoglycemia.
This proposal is in direct response to the clinical outcomes demonstrated in our modal trial, where <unk> com proved to meaningfully improved time and range for this population.
Since publishing that data, we have been expecting a reimbursement decision and applaud CMS for taking the lead.
Coverage for the basal only population alone will allow us to help significantly more people in the U S. As we size that population of approximately $3 million individuals'.
This will be the first major reimbursement expansion beyond the intensively managed space and one that we expect to be the first of many historically CMS has often led commercial payers on coverage decisions and we anticipate the same dynamic to occur here. However, we're not stopping there we will continue to advocate for the millions of additional individuals that could bear.
<unk> from access to real time CGM.
There is a massive opportunity ahead for <unk> com with that I'll turn it over to Jeremy for a review of the third quarter financials Jeremy.
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 on today's earnings release as well as on our IR website.
For the third quarter of 2022, we reported worldwide revenue of $770 million compared to $650 million for the third quarter of 2021, representing growth of 20% on an organic basis. As a reminder, our definition of organic revenue excludes currency. In addition to non CGM revenue acquired in the trailing 12.
Months.
U S revenue totaled $573 million for the third quarter compared to $490 million in the third quarter of 2021, representing growth of 17% momentum.
Continues to grow in our U S business. We saw initial signs of an inflection in late Q1 and have been encouraged to see those positive customer trends continue in the months that followed this resulted in a re acceleration in revenue growth in the third quarter.
The investments we have made in our sales force over the past year are starting to pay off we instituted new salesforce tools earlier this year to make calls more efficient.
And today, our team is yielding productivity metrics in line with our high expectations.
We have also taken steps recently to simplify access for people in the United States by creating multiple cash pay options, we are seeing growing demand coming from outside our current reimbursement landscape.
The type two non intensive space. So we establish these programs to help serve these customers as we work to broaden access.
International revenue grew 22% totaling $196 million in the third quarter International organic revenue growth was 28% for the third quarter.
Our international business continues to deliver impressive results as access initiatives completed over the past year are helping us gain market share for example in Australia. We are seeing very positive response to the recently expanded reimbursement for <unk> six within weeks, we saw an uptick in demand and currently our new customers are trending around three <unk>.
<unk> higher than prior to this expanded access we have seen this dynamic play out again and again, our broader access conserve has an almost immediate catalysts to demand as a result, we will continue to prioritize our efforts to make <unk> com CGM accessible to many more people across the globe.
Our third quarter gross profit was $494 2 million or 64, 2% of revenue compared to 68, 7% of revenue in the third quarter of 2021.
Similar to last quarter, the launch of <unk> seven creates a difficult year over year comparison on gross margin as G. Seven development costs are now included in Cogs. This dynamic accounts for some of the expected step down compared to 2021.
Additionally, there were 70 basis point negative impact on gross margin from currency absent. This gross margin would have been approximately 65%.
Operating expenses were $333 million to the third quarter of 2022 compared to $320 million in the third quarter of 2021, our focus on cost management was on full display this quarter as we generated over 600 basis points of operating expense leverage despite ongoing investment to support our growth.
We drove leverage in every category of spend this quarter, while simultaneously offsetting inflationary pressures our focus will continue to be on generating leverage non variable expenses, while reinvesting those savings into our global commercial infrastructure.
Operating income was $160 8 million or 29% of revenue in the third quarter of 2022 compared to $123 8 million or 19% of revenue in the same quarter of 2021 has our significant operating expense leverage more than offset gross margin declines in the quarter.
Adjusted EBITDA was $226 6 million or 29, 4% of revenue for the third quarter compared to $173 5 million or 26, 7% of revenue for the third quarter of 2021.
Net income for the third quarter was $111 9 million or <unk> 28 per share.
We remain in a great financial position closing the quarter with approximately $2 $4 billion worth of cash and cash equivalents, we reached a new high watermark in terms of free cash flow this quarter generating over $180 million of free cash. This provides us the flexibility to support our ongoing growth opportunity while also assessing EB.
Strategic uses of capital on an ongoing basis, our largest use of capital continues to be the buildup of our Malaysia manufacturing plant construction continues to progress on schedule and we expect this facility to producing commercial product by mid next year.
This facility will provide us the necessary scale and manufacturing efficiency to support our long term cost targets during.
During the third quarter, we also executed our previously announced accelerated share repurchase program purchasing over $550 million of outstanding shares.
This allowed us to reduce the dilution associated with our 2023 convertible notes, while buying back our shares at what we viewed as an attractive price point.
Turning to guidance, we are updating our full year 2022 revenue guidance to a range of $2 88 to $2 91 billion.
For margins, we are updating our full year guidance to the following.
We are reducing our gross profit margin guidance to approximately 64% down from 65% previously and.
And we are maintaining our previous operating margin and adjusted EBITDA margin guidance at 16% and 25% respectively.
This guidance factors in another sizable uptick in currency headwinds relative to expectations, we shared a quarter ago. We now expect approximately $55 million of foreign currency headwinds for the full year relative to our prior estimate of around $40 million.
This currency impact is the primary reason, we found it prudent to reduce our gross margin guidance for 2022. However, we reiterated our operating margin guidance as we expect to offset the additional foreign exchange pressure through ongoing operating expense leverage.
We have been able to navigate through shifting economic environment well to date, but we are certainly not immune to macro pressure, leading economic indicators continue to point to additional uncertainty in the coming quarters. So where we are working proactively to offset these impacts where we can all these dynamics could create incremental challenges to work through in the near term we are as bullish.
As ever about our underlying business and the opportunity ahead for <unk> com with that I will pass it back to Kevin.
Thanks, Jeremy <unk>.
Our third quarter was characterized by sharp execution and delivering results in line with what we said we were going to do.
We are committed to launching <unk> internationally in the third quarter and now we have 75 different countries with more following closely behind we said that our growth rate in the U S would reaccelerate as the underlying trends in the business remains strong and we delivered on an acceleration in the growth rate.
We are committed to advancing our <unk> seven regulatory process in the U S and our efforts this quarter leaves us on track for a clearance before the end of the year.
We said that the basal only coverage would be a matter of when not if now we have more clarity around when.
We will continue to operate with this type of focus on execution going forward.
Finally, as we move into Q&A, we have Jake Leach with US, we recently announced the promotion of <unk> to the role of Chief operating officer, providing him with the end to end responsibility for product with almost two decades of experience index common serving most recently as our Chief Technology Officer, Nobody knows G. Seven in our product roadmap better than Jake I would now like to open.
The call for Q&A Sean.
Kevin as a reminder, we ask our audience to limit themselves to only one question at this time and then reenter the queue if necessary operator, please provide the Q&A instructions.
Thank you Sir we will now begin the question and answer session. If you have a question. Please press zero one on your Touchtone phone if you wish to be removed from the queue you May press zero.
If youre using your speaker phone you may need to pick up on your handset.
First question the numbers.
Once again to ask a question. Please press star zero one on your phone at this time.
Okay, Sir we do have questions in the queue. The first question comes from Jeff Johnson with Baird. Your line is open. Please proceed.
Thank you good afternoon, guys, Kevin I thought I'd start with a question on your international business you guys have been benefiting in the last few quarters from recent access wins you talked about those on in the prepared remarks, one of your competitors. This quarter was dealing with some company specific issues. So it's kind of hard to get a good feel for what's going on maybe underlying demand trends outside the U S. So.
The question is are you seeing anything tied to macro uncertainties in your international markets and with a lot of your international markets paid for through nationalized health care systems do you consider international to be more or less I guess macro sensitive compared to your U S business. Thanks.
You know, Jeff I May ask Jeremy to help me on that I'll take it take a first pass we have learned in our O U S markets getting access and getting reimbursement through these government.
Agencies is absolutely critical and a key to driving growth.
As we've had wins in the UK, we have headwinds in Spain, we continue to have wins in Germany as we've.
Shifted price to create more access that's what's driving our growth we're getting access to more people, who can use our technology in use use our better product for right now we haven't seen any macro trends that would make us feel that this isn't going to continue as we get more access we will continue to grow and do well.
<unk> is going to be a homerun for us <unk> seven is doing very well out of the gate.
Look very much forward to a great year internationally in 2003, I know Jeremy if you want to add to that Jeff outside the U S. Historically theres been a cost sensitive approach towards care health care, and that's where <unk> has really played.
A major role for us of winning some additional access outside the U S. So we do believe that providing these opportunities around multiple systems to address the need both more acute and less acute it provides us really a differentiation. So we continue to expect to do well there and we'll keep you posted if we start to see anything change in terms of macroeconomic demand starting to damper.
Individual access but for now what we see as a great opportunity and an opportunity given our product portfolio to do very very well there.
Thank you Sir the next question in the queue comes from Robbie Marcus with JP Morgan.
Great. Thanks for taking my questions and congrats on a really good quarter.
Maybe I'll ask about the debates.
Based on opportunity and this is really exciting here.
I just wanted to try and set expectations for how we should think about updates to the model.
First off when do you think this can really start to.
Yes.
Did it start to when should it start to impact the model and add new patients and I realize it's about a third of patients are Medicare.
And then expectations.
If you have them for reimbursement should this be it the normal Medicare rate, meaning higher than the pharmacy right now and when should we start to think about commercial plants coming online.
You know what I'll start with.
The Big picture things were starting commercial plans and talking about this now this is such a big event for us in such a big win.
That we would be.
We'd be stupid not to so we are thinking about this now our product offerings, our distribution strategy in all of those things Ravi as far as when it's exactly going to hanging onto your models. That's something we'll discuss later we know the timeframe for this can be anywhere from.
Alright.
Four five to nine months out as we work through this but we're confident we're going to get through it.
We're just thrilled with the ruling and we are thrilled that then.
We can be part of this are our data from the mobile study was a large component.
And pushing this initiative across the finish line because we saw how are those people did are Jeremy if you want to get into more specific on the numbers side go ahead sharp models, absolutely. So Ravi the way we're thinking about it now is it's really it's likely a second half 2023 event just given the time and so expect that we will give you more clarity as to how much. The contribution is as we guide for 2000.
'twenty three in terms of commercial payers following we do expect to see that.
As you certainly think of Medicare advantage plans, but even as you have folks.
Progressing throughout their journey, we know that this product ultimately reduces costs from the system improves lives and outcomes and so we do expect those to come along as well in terms of reimbursement the way that CMS typically reverses. It is based on qualification and this is an expansion of the category of qualification and so thus far it looks like it's reimbursed in line.
The existing qualifications and at the end of the day, it's incumbent upon us and we think we continue to show it that the economic benefits of putting somebody on CGM far outweigh the costs and so it's on us to continue to show that evidence and we think we can continue to prove that as more and more evidence comes so we'll get back to you a little bit later in terms of the expectations for 2023.
But that should give you a feel for what we expect over the coming year.
Thank you Sir the next question in the queue comes from Mathew Blackman with Stifel. Your line is open. Please proceed.
Good afternoon, everybody. Thank you for taking my question I have another question on on basal.
So as we try to think about modeling the annual value of these lessons because of patients what is a reasonable way to think about where frequency for <unk>.
Haynesville patient, we've heard varying feedback from clinicians and frankly, it's been tracking higher than we would've thought maybe at 20 plus days per month, but I can't tell if there is any.
Adopter skew in that just any thoughts there would be helpful. I appreciate it.
Yes, well maybe draw you back to the mobile study, which the mobile study was really targeted at folks wearing it full time, which was the basis for CMS coverage and so I think what we would expect to see is as folks get onto therapy. We would expect a relatively similar utilization now there might be dips in between it for here and there a day here or there a day here and there is product is coming in.
In.
But for the most part we expect full time, where and that's how we've seen folks get the most benefit so I'd expect it from there clearly this is a new market for us, but all the early work we've done around patient satisfaction patient results. These folks have wanted to where they wanted to work full time and so we expect that to be the baseline going forward.
Thank you Sir the next question comes from Margaret Kaczor with William Blair.
Hey, good afternoon, guys. Thanks for taking my questions.
Yeah, I wanted to talk a little bit about U S growth. Obviously, you saw really nice acceleration from Q2 to where we are in Q3.
Can you provide any context around the growth in new patient adds how that's trended going into Q3.
More specifically in Q4, and I know you loved us going into 'twenty three all of this growth is coming in advance.
So why shouldn't we assume even more of an acceleration to occur for several quarters now.
Sure Yeah happy to talk about the patient trends. So what we saw kind of rewind back Q2, a record for US Q3 early feedback is as it's at least equivalent of that of Q2 and will even get more data here. Soon so Q3 was another very strong new patient add quarter for us and so when we talked last about and expecting a reacceleration.
<unk> that was on Q2 and an expectation of a strong Q3, I think we had a very very strong Q3 and quite frankly, we expect a strong Q4, so thats, where you see that reacceleration in the U S. So very bullish on that particular opportunity and you are right that is with <unk> and so we obviously are very excited about the ability to offer <unk> seven to the U S.
Population as it pertains to momentum and moving into 'twenty three we'll we'll talk about that as we give guidance in 2023, but I think the takeaway here is we are still very bullish on this business very bullish on the opportunity in a static about the opportunity to offer <unk> seven.
Thank you Sir the next question in the queue comes from Matthew O'brien.
With Piper Sandler Your line is open Sir.
Great. Thanks for taking my question.
Jeremy just if you could put a little bit finer point on.
Well for next year I know you said second half of next year and Youre expecting a lot of aware, but.
But it is going to be pretty early days.
Things got to work through so is it fair to think of it is fairly modest.
Just contributor next year and then this might be.
You've got two seven coming out next year, then we're going to have all these new basal patients talk about manufacturing for all of these all of these products youre going to need over the next several years. Thank you.
Sure Yeah, let me start with the maybe the model expectation, we have Jake here and I think it'll be good for them to talk through the manufacturing so.
In terms of how to model it out.
Kevin alluded to it earlier generally there was about a six to nine month period, where there's a proposal and how things have to go through and so as folks start to open up coverage. That's why we expect that coverage to really start in the back half and again. This is a recurring revenue business. So there will be a contribution we expect in 2023 how.
Material, we're going to size that up and.
We will make sure that we as we size it up for you we'll give you the context for how we're guiding to it in 2023. So you understand our assumptions if things come earlier or things go faster or slower. We'll certainly give you that clarity. So that you have it but our expectation is there is a contribution.
Material is going to take a little bit of time as that grows but still a contribution and really momentum exiting 'twenty three into 2024, but in terms of capacity, maybe let me turn it over to Jay to give you. Some context there yeah. Thanks. Thanks, Jeremy so from a capacity perspective, we've been gearing up for the <unk> G. Seven launch for quite a while so we've got G. Seven lines installed here in San Diego.
<unk> as well as in Mesa, and so we feel really good about our position to meet the needs of our full G. Seven U S launch as well as the international launches that will continue throughout the year.
Also remind you that we've got our Malaysia plant coming online mid next year. So that should also help boost our capacity.
So feel really good about the ability to both provide 687 products.
Yeah.
Thank you. The next question in the queue comes from Joanne Wuensch with Citi. Your line is open.
Yes.
Sorry, I don't know if you heard any of that just said Hello, and thank you we did let's start over.
Good evening and thank you for taking the question one.
Launched and I think you said six geographies outside the United States, how is that ramping how should we think about that contributing because I'm starting to put together in my mind like your core base business you layer on top of that Jay Kevin benefit you layer on top of that does come on and then of course basal what's the layer for <unk> one.
I'm not getting into numbers and we'll get into models later Joanne I can tell you again I'll reiterate our comments on the call. There are many geographies, where CGM is accepted where we had been isolated to higher risk.
Patients patients on pumps or severe hypoglycemia, we were reimbursed more but we were narrowly viewed and many of these geographies now with <unk> with our lower cost offering, but with real time, CGM and the accuracy and other features we deliver.
We're now able to go compete for those customers that will be a very important level of business for us, particularly in Europe going forward.
And other countries and other places, where we need to launch it that will be a layer I mean, our core business. Our core G series product is going to be our primary source of revenue for a while but over time you will see all of these elements grow bigger and take a bigger piece of the pie Jeremy you build the models.
Not sure I have a little more yes, so joanne.
We understand the question and how to model. It I think what I would say is in 2022. This is a business just getting started so it's not a material contributor in 2022. However, we understand the challenge and so we will make sure that we're able to identify what the contribution looks like as we start to give forward looking guidance over time. So just rest assured as that business gets bigger we will start to give you a line of <unk>.
Right into that for now what's most important is we've unlocked an incredible amount of Tam and that's super important as we think about how many new patients, we're certainly going to be bringing in so more to come there will certainly help you with models going forward, but for now just know <unk> is a relatively small contributor this year and we'll talk about 2023 here in a few months.
Thank you. The next question comes from Jason Bedford with Raymond James Your line is open.
Good afternoon. Thanks, just a quick one I may have missed this but did you talk about volume growth in the quarter and if not can you and maybe maybe comment on any geographic differences.
Sure. Yes. So we were in that we were in the unit volume in the mid to upper Thirty's globally.
In terms of the performance the U S. The U S was slightly below that but still in the mid <unk> and O U S was slightly above that in the upper <unk> and so really just continued strong momentum in that patient cohort or that underlying patient volume.
Thank you Sir the next question in the queue comes from Larry <unk> with Wells Fargo.
Good evening. This is a trademark com for Larry in terms of your comments around <unk> seven U S launch timing by year end is there anything that still needs to be done and then how soon after the approval do you expect a full launch and how should we think about the ramp is there any reason why it should be different than the <unk> six.
Yes, thanks for the questions Jacob I'll take that one so yes.
Yes.
We responded to the FDA in Q3 with the answers to their final questions and so we feel really good about how that positions us for approval in Q4. So before the end of the year, we're really planning our launch to occur in Q1. So.
So that'll be a full launch.
And.
D R.
<unk> status with the FDA as we've gone back and forth. We're feeling really good about this being kind of the end of the review period and so we're very confident in that Q4 approval timing in our Q1 U S launch.
Thank you Sir the next question in the queue comes from Matt Taylor with Jefferies. Your line is open.
Hi, Thanks, very much for taking the question.
I actually wanted to double click on some of your commentary on on <unk> and thinking about your portfolio strategy as you get G. Seven out there I guess can you talk a little bit more about how youre going to use.
<unk> six and one together to kind of meet customers, where they are at in different markets around the world. What are some of the deferred flavors are different ways you could you could use that portfolio.
Yes. This is Kevin I'll take that at a high level certainly RG.
<unk> G series product, our <unk> seven is going to be our flagship products that we roll it out.
And that will be.
We're very comfortable that being a homerun there'll be some countries, where <unk> is not going to be prudent to go rush G. Seven into those geographies, we can let that.
Customer base grow while we expand others. So we look at <unk>, 7% in a very similar line as far as their features that connectivity and all the things that they do with Dex Com. One currently energy six platform, we have areas, where we need to grow and we need to get there fast and that product will remain on the <unk> platform, we're not ready to move into <unk>.
So in any way, we're going to use our existing G. Seven capacity to sell a <unk>, 7% in the beginning and strengthen ourselves in our current business and where we are doing very well now with our partners and everybody else ultimately <unk> will shift to that platform and.
And we will rollout that way so as you look at <unk> one.
We've said many times that product is for two major purposes. The first one is to go into new geographies, where we can do an online ecommerce type business and launch it as we have in those first four countries and countries, where CGM is reimbursed, but again, we have this situation where there are two types of CGM.
They will pay for.
For the high risk patient and connectivity.
And with those features that we've always had on the G series and then the other area. We are using <unk> as a vehicle to get into those markets and utilize our capacity.
To go sell sensors and serve customers, there and give them a better experience than they've ever had before.
And that is the plan for right now.
Thank you Sir the next question in the queue comes from Murray <unk> with BTG.
Thank.
Thank you so much for taking the questions I wanted to ask one here on your comments on cash pay in the U S.
Unless I'm mistaken I believe that's a recent shift or a new shaft four decks com strategy would love to hear a little bit more about how that is being rolled out how patients and providers who are hearing about that cash pay option. Thanks. So much.
Yeah sure. Thanks for the question this is Jeremy.
It's a bit of a change I would say, it's I'd say, it's an addition, or an augment to an existing strategy. So we've always believed that access is incredibly important and we believe that over the long term access is at the basis of adoption.
There are some certain populations out there that have high interest in the product that continue to want to use the product to manage their diabetes and we felt that this was a way to allow them to do so while we work on that access and so what we are doing is we're launching multiple different versions of cash pays will have those being promoted here shortly to targeted.
Populations.
And what's the goal here is is it folks don't have coverage, while we work in the background to get coverage Basil is a good opportunity a good example, I should say they can't get the product for a discounted price and the price is less than 50% of what the just get the cost of them is 50% less than what historically would have been so.
A real good opportunity multiple different options multiple different ways, we're going to be rolling it out youll see some marketing materials around it soon but I would I think this is a great thing for access and I think it's a great thing for folks who have been looking to get on a decks com that for whatever reason haven't been able to allow them to do so.
Thank you Sir the next question in the queue comes from Kyle Rose with Canaccord.
Great. Thank you for taking the question. So obviously the <unk> launch.
<unk> in a few countries now.
Move into the U S in the <unk>.
Q1 next year, just how should we be thinking about gross margins when we when you turn on those those.
Those facilities and then in particular, the Malaysian facility coming online as well just how should we think about about the Cogs line.
Over the course of the next 18 months.
Yeah. So the best way to good question, the best way to think about it as you know in the first quarter in which we turn on lines you generally have a dip in gross margin and Thats. The initial set up the yields will give you guys a little bit more.
Line of sight into cadence as we get into 2023 guidance, but as you turn on those lines. The first sets the yields are a little bit lower you are absorbing in depreciation.
And then as those yields start to improve you start to get a better gross margin run on those so I think the expectation is you'll have some some blips there in the periods in which we launch into certain countries, specifically U S. And then as more and more folks transition off of <unk> six to <unk>, seven and those volumes increase youre going to see those margins improve.
<unk> longer term.
Seven we can make it a lower cost and <unk> six and so it's just this transitory we'll help you out on the modeling as we get into 2023 guidance, but as you're trying to get your head around what the cadence looks like when we turn on lines. That's the expectation of when Youll have the dip and then a recovery after that.
Thank you Sir and the next question in the queue is Steven Lichtman with Oppenheimer.
Thank you hi, guys as we think about some of these these new opportunities from from.
From the LCD I'm wondering in the near term how things are progressing on the intensive type two side with given the comments you made in terms of primary care Doc.
<unk> as well as the work you've done on coverage.
Can you update us on where you guys do you think the market is in terms of penetration intensive type twos are the pieces in place for that just to continue to expand meaningfully in the coming couple of years few years.
Yeah. Thanks for the question.
We continue to do very very well. So if you think about kind of where that type two intensive penetration as it is surpassing 35%.
In terms of how we're doing I think a couple maybe data points, which I think is helpful.
First off record new patients in Q2 Q3 is in line with that based on early feedback could even be a little bit higher and so youre seeing patients coming in which is just an indication of more and more folks adopting where a good majority of those are coming from that type two intensive population. It's our fastest growing segment. I think you also think about it from a from a context of who we.
Colon.
When we look at our sales team and we talk about productivity more than three quarters of the calls we make ours now to primary care physicians and that's because that's where we're looking to expand over time. So I think what we've done in expanding the sales force last year and really focusing on those sales to tools thinking about the type two intensive and then beyond.
<unk> and beyond I think you're really seeing that play out and you are seeing some very strong growth in that type two intensive segments and it sets us up well for that basal segment.
Yes.
Thank you Sir the next question in the queue comes from Matt <unk> with Barclays.
Hi, great. Thanks, so much for taking the question maybe just a follow up on some of the questions about how.
The ramp up of <unk> seven this is a little bit of a modeling question not not really at all sort of a guidance question, but just in terms of.
How the portfolio comes together and works.
Maybe following up on Kyle's question on ramping up these new lines can you talk a little bit about channel.
How the sort of middle of the P&L.
Might respond or or or.
Flex as you kind of get into some of the some of the different opportunities you are talking about.
Channel synergy across all of these do you expect you have to kind of spend into some of these opportunities and then get leverage over time, maybe if you could talk a little bit about that that'd be that'd be super helpful. Thank you.
Yeah sure. So the lines of what you think about the lines and this is the way we've set it up as decks com, one physical form factor cost to manufacturer not necessarily cost to support and how we service it but really the physical product <unk>.
<unk> is very similar to <unk>. There are other features that <unk> has but hardware is very similar and it's very similar in <unk> seven lines and eventually decks com one will migrate to a <unk> seven line and so as you think about these products then it becomes a question of price point and then how we ultimately service to patient there and so that's the way to think about it.
Over time.
As we go into certain markets, depending on price point, its got much less to do.
With with what I would say is the physical product itself, we grow into those markets over time through economies of scale and so that's one of the reasons, we believe with Dex com one theres a real great opportunity here the economies of scale for us are massive and by going into those markets. We certainly can grow into that profitability profile. So as you think down the middle of the P&L.
Certainly as you go into decks com, one there could be a slight margin differentiation, but those economies get scale has helped offset it. We also look at the service model and we're able to manage the service model in a different way so that the ultimate operating margin contribution is the same so that's how we think about it and so as you're modeling it through that's how I would think about it.
I'd just add to that.
And I don't want this last on the call take a look at our operating performance this quarter.
Record cash flows as a former CFO is something I love to hear.
And so we have managed our business very tightly and as we look at these work streams and these new product lines. Youre question is very appropriate and we do have work streams about our cost to serve our patients our cost to develop our new products our manufacturing costs given all these new things. We're doing we are looking at the cost structure of the company.
Every bit as much as we're looking at the product launches. So we can make sure that when we get to the end of this road with these launches and what these products in new markets and new products that we have operating margins that are acceptable to us.
As we increase our customer base dramatically.
Thank you Sir the next question in the queue comes from Joshua Jennings with Cowen.
Hi, good evening, thanks for taking the questions I wanted to just.
Ask about the sequential acceleration in <unk> of revenue growth.
Either.
Could quantify or just qualitatively describe contributions from your new pump partner.
And just on that topic, if you could just remind us the requirements once <unk> is approved.
<unk>.
Great <unk>.
Into the tandem and insulin pumps.
Any steps that you can highlight.
And what your expectations are on that front and can can anything be done in front of $2 seven approval with your partners. Thanks for taking the questions.
Sure I'll start with the contribution and then let me turn it over to Jake who.
<unk> is our maestro on product development and understanding products.
In terms of in terms of contribution look we're very excited about both tandem and insulet products and.
As they launch more and more products that we are obviously integrated with we expect it to contribute now quantifying that and having those contributions it is a little bit difficult to do given some products. Some folks who are already on <unk> com CGM, who bring in pumping and some folks pullover. So as time moves on we'll be able to really tease that.
Apart, but I think what we would say is we're still bullish on the opportunity.
Of folks ultimately using our product with these incredible pump partners I'll leave it at that just because it gets hard to contribute again, we will be able to retrospectively give feedback as time moves on but let me give it to Jake in terms of the connectivity and the timelines on G. Seven yes, thanks, Jeremy so on.
<unk> integration with with our pump partners basically the steps are to make.
A few updates on the pump side to take advantage of the new features that are within <unk>, such as the fast warm up as well as the Grace period.
So those groups are already they have been already working on that for quite a while and so we do see great progress on those integrations theyre gone through.
Final steps development and validation so a lot of that work can be to your point done ahead of time and so when it comes to the specific timing of approvals and launches, we'll leave that to our pump partners, but the work's progressing very rapidly and we do expect them to.
Be integrated soon one thing I'll note is that on our other side on the digital Health partners. For example, in Europe , where we have <unk> seven out those that are connected up to a real time API already have seven integration. So for example, sugar made is it.
Group, that's already consuming seven data within their app at the beginning of the launch so very excited about the opportunity to bring more to the ecosystem of <unk> seven.
Thank you Sir we have no further questions at this time I will turn the call over to Mr. Sayer for closing remarks.
Thanks, a lot everybody. This was a great quarter for us with growth with excitement related to our product launches expanding global access and performance on the bottom line as well in a time when the world is in a lot of chaos. We've done what we said we were going to do yet again. Our teams are just executing very well as we press tours and.
For the year and look to build momentum next year.
I want to thank our team members for their hard work as we strive towards these goals and it's all hands on deck to get G. Seven done to get to.
<unk> Com went out in these markets and do all the things that we're trying to do.
But I want to close with a special note I want to thank all the members of the diabetes community that has been working together to help improve access to CGM technology.
The recent CMS proposal represents a big win for people with diabetes and we're only one member of a large group advocating for this result, this was a collective effort from the diabetes community on behalf of the diabetes community. We want to acknowledge all the hard work that led to this proposal both inside and outside of <unk> Com and.
And shar excitement to help so many more people with diabetes in the U S live healthier lives and it's only the beginning thanks a lot everybody.
Thank you ladies and gentlemen, this will conclude today's teleconference. Thank you for participating you may now disconnect speakers. Please standby for your debris.
Yes.
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