Terry Gregg - CEO Steve Pacelli - Executive Vice President of Strategy and Corporate Development Kevin Sayer - President, Chief Operating Officer Jess Roper - Chief Financial Officer.

Danielle Antalffy - Leerink Partners Ben Andrew - William Blair Tom Gunderson - Piper Jaffray Robbie Marcus - JPMorgan William Plovanic - Canaccord Genuity Raj Denhoy - Jefferies Tao Levy - Wedbush Securities Erica Layon - Benchmark.

Hello and welcome to the DexCom Third Quarter 2014 Earnings Release and Conference Call. My name is Joe, and I'll 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-answer session. Please note that this conference is being recorded.

I will now turn the call over to the CEO of DexCom, Mr. Terry Gregg. Sir, you may begin..

Thanks Joe thanks every one for joining DexCom today on our third quarter 2014 investor conference call. I have Steve Pacelli read our Safe Harbor statement to kick things off..

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 the 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 Report on Form 10-K, our quarterly reports on Form 10-Q, and our other reports filed with the SEC.

We undertake no obligation to update publicly or revise these forward-looking statements for any reason. Additionally, we will discuss certain financial information that has not been prepared in accordance with GAAP with respect to our cash operating performance.

This non-GAAP information is provided to enhance your overall understanding of our current financial performance. 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.

Terry?.

Thanks, Steve. Joining me today are Kevin Sayer, our President and Chief Operating Officer; Jess Roper, our Chief Financial Officer; and you just heard from Steve Pacelli, our Executive Vice President of Strategy and Corporate Development.

So today’s call will follow our traditional format, Kevin will review our third quarter 2014 financial results and provide a business update, that I will then follow with some concluding thoughts. But before I turn the call over to Kevin. I’d like to comment briefly on our results for the quarter.

Our product revenue growth is unparalleled, we have grown over 60% annually for six consecutive quarters and our average year-over-year quarterly revenue growth has been 65% since the launch of G4 PLATINUM. In Q3 and cash based operating income increased by approximately three times over Q3 2013, clearly our business model is working as planned.

All the while we’re in the midst of three simultaneous product launches, first a new smaller version of our G4 PLATINUM transmitter. Second, DexCom SHARE our first step into mobile remote monitoring and third, our new G4 AP Algorithm with an unprecedented 9% MARD. Things could not be better for us. With that I’ll turn the call over to Kevin..

Thank you Terry. I’ll start with the financial update. DexCom generated $67.9 million in product revenue for the third quarter of 2014 compared to $42.5 million for the same quarter in 2013, a $25.4 million or 60% increase. Sequentially product revenue for Q3 of 2014 increased 17% from the prior quarter.

Total revenue for the third quarter of 2014 was $69 million compared to $42.9 million during the same quarter in 2013.

Our product gross profit totaled $46.1 million generating a product gross margin of 68% for the third quarter of 2014, compared to product gross profit of $27.7 million and product gross margin of 65% for the same quarter in the prior year.

Sequentially our product gross margin in Q3 2014 was flat, as we said previously our gross margin target for the G4 PLATINUM sensor is between 70% and 75% and our gross margin target for G4 PLATINUM hardware is 50% or better. With the blended gross margin of 68% we’re achieving our targets.

While we may see minor incremental gross margin gains in future quarters, we do not expect to see continued large improvements in gross margin until we introduce new products and achieve even greater sales volumes. I would like to share some additional thoughts on our product revenue on our gross profits.

During Q3 2014, our revenue mix between durable and consumable products was again approximate 30% durable and 70% consumable.

ASP for sensors was flat for the third quarter at approximately $72 per sensor and the ASP for our hardware was approximately $850 per starter kit with a little more than half of our hardware ASP attributable to the transmitter.

While we continue to target ASPs in a range of $70 to $75 per sensor and a range of $850 to $900 per starter kit going forward. Finally our international business continued to exceed our expectations in Q3 with international product revenues representing approximately 15% of product revenue during the quarter.

On the expense side research and development expense totaled $18.5 million for Q3 of 2014 compared to $11.8 million in Q3 of 2013 and $14.8 million in Q2 2014. Yes we are making a significant investment in our future. As Terry mentioned in his opening remarks we have seen exceptional growth since the launch of G4 PLATINUM.

And we have clearly demonstrated that superior product performance has been key to driving this growth. Yet as we evaluate what believe will be required in terms of improved sense performance and advance system features and functionality to meet the ever increasing demands of our patients and clinicians we must continue to invest in the near term.

In addition, we need to complete the clinical trial work necessary to demonstrate improved lower outcomes and lower cost to drive favorable payer policies.

We will work to take advantage of near term opportunities such as advance integrated pump, CGM system, simplification of censored deployment, mobile and cloud based data platforms and additional system performance improvements such as improved accuracy extended duration and reduced calibration.

Overtime, we will focus on miniaturization and advance decision support tools, all while keeping an eye on increasing patient convenience, improving outcomes and lowering cost. We will not lose side of our ultimate goal of replacing fingerstick entirely.

Selling general administrative expense totaled $33.7 million in Q3 of 2014 compared to $21.6 million during same quarter of 2013, an increase of $12.1 million.

The year over increase in SG&A expense relates primarily to increase sales cost driven by a robust sales, increase marketing spending and our key expenses for our commercial infrastructure as we scale the business for continued revenue growth.

SG&A expense also include a $4.4 million increase in non-cash share based compensation expense over the prior year. SG&A expense for the preceding quarter was $30.9 million.

The sequential increase of $2.8 million includes $600,000 an incremental non cash share based compensation expense and commercial expense to support our 17% sequential growth in product revenue.

Our net loss for the third quarter of 2014 totaled $5.2 million and included $15.2 million in non-cash expenses centered in share based compensation, depreciation and amortization. Absence of this charges our cash based operating income would have been approximately $10.1 million for Q3 2014.

Obviously, we are quite pleased with our cash based operating results as this compares very favorably to a cash based operating income for Q3 2013 of $3.5 million.

Our basic loss per share for the quarter was $0.07 with respect to our balance sheet, we ended the third quarter with $74.9 million in cash and marketable securities up almost $13.6 million sequentially. We remain quite comfortable with our cash position.

Finally, consisting with cash practices we take this opportunity to update our full year revenue guidance. We now expect product revenue for the full year to meet or exceed the top end of our range of $235 million.

Now for our business update over the past few weeks we have had a very exciting string of news related to our product portfolio first in mid-October we were very pleased to announced the approval of DexCom Share.

The first FDA approved remote monitoring system developed to address the unique challenges faced by care givers in assisting people of Typ-1 Diabetes.

As a reminder the DexCom Share system is a docking station where the G4 Platinum receiver which enables wireless transmission of glucose information such as patients trend graph from the G4 Platinum to designated recipients allowing their recipient to view the patients data today on their iPhone or iPod touch and in the future on an android platform as well.

We view DexCom’s Share is the first of many steps in bringing CGM to mobile devices. We successfully launched DexCom’s Share within days of approval and we couldn’t more excited about the early feedback we received from patients using the system.

Just this morning we were pleased to announce that FDA has approved a new algorithm for the G4 PLATINUM system that we dub the G4 Artificial Pancreas or G4AP algorithm. The clinical data from this new algorithm was first presented at 8am, June and a late breaking poster entitled CGM is not the limiting factor in artificial pancreas system.

In this study, we’ve demonstrated that our technology is approaching fingerstick accuracy with an overall G4AP MARD versus YSI and an impressive 9.0% compared to a fingers stake MARD of 5.6% versus YSI.

The new algorithm will be made available free of charge to existing adult patient using the G4 PLATINUM they can simply go online and download the software to update their receiver. Additionally, we expect the file a PMA supplement for pediatric indication for the G4AP algorithm this quarter.

All new adult patients going forward will receive this software preloaded on to their DexCom receiver with new orders. We believe this new algorithm represents an important next step on a path to obtaining an insulin dosing claim and the potential prefatory calibration both of which support our ultimate goal of replacing fingersticks altogether.

Shifting to our integration partnerships, Animus that the Vibe is nearing U.S. FDA approval and we’re gearing up for a commercial launch of Vibe in the U.S., which could come before the end of this year.

On our last call the Tandem has submitted a PMA application to the FDA for the T-Slim G4 insulin delivery system, which integrates Tandem T-Slim pump with our Gen 4 PLATINUM system.

As Tandem reported this morning they’re extremely pleased with the level of interaction with the FDA since the filing and their confidence in their ability to bring this device to market. That being said timing of product approval is have the discussion of the FDA and Tandem continues to estimate 12 to 18 months review cycle for the T-Slim G 4.

Finally, on the data integration and data management front there seems to be a considerable amount of confusion in the market place as to where and to what extent DexCom is a participant.

When it comes to retrospective display of our CGM data we have announced open architecture policy whereby we will allow third-party software developers, companies such as Tidepool, Diasend and others, to display retrospective data from our G4 PLATINUM system within their data aggregation platforms.

When it comes to our mobile app platform we have stated a desire to incorporate insulin onboard data and other potential relevant data into our mobile platform. To that end we have entered into agreements with Insulet and Asante and are considering others to integrate data from their insulin delivery systems into our Gen 5 mobile platform.

This platform will enable us to aggregate glucose and other diabetes related data from patients devices and display this integrated data on a smartphone. This will be a DexCom driven software development process and we expect these apps to be P&A products.

With respect to real time display of DexCom CGM data we have thus far elected to maintain tight control doing large part to the regulatory and quality systems requirements imposed upon CGM devices by the FDA. Obviously our standalone products will provide patients with real time information.

To-date we have only granted rights to commercialize display of our real time data to a select few insulin pump companies.

Going forward we will consider on a case-by-case basis whether we open up real time data display for commercialization to other third-parties such as other insulin pump companies or groups working to develop an artificial pancreas utilizing our sensor technology where it makes commercial sense.

Prior to doing so however we would want assure ourselves that any such third-party has a robust quality system and regulatory resources required by FDA to develop and maintain a Class 3 medical system. With that I would now like to turn the call over to Terry for some concluding remarks. .

Thanks Kevin.

While our third quarter performance did not entirely surprise us as we continue to see momentum for G4 PLATINUM build in the diabetes community, one needs only to read the diabetes blogs and chat room discussions to know what a tremendous difference we are making for patients as well as their parents and love ones as they strive to improve control over their diabetes.

We must continue to innovate, never resting on what we have accomplished which of course today is the industry leading CGM technology.

We will never be satisfied until we reach our goal of replacing fingersticks and upon achieving that milestone we will simply develop new goals to continue to drive DexCom to remain the dominant name in continues glucose monitoring.

We recently received approval for our SHARE system and we believe this is the first step in the connectively pipeline we are developing to ease the burden of trying to better control glucose level safely. But even more importantly is that SHARE actively engages the patient and his or her support team which are parents, spouses, and loved ones.

For the first time with an FDA approved device you can me in the next room, the next state or across the globe and someone has your back remotely. We are changing the paradigm of managing diabetes for the better. Kevin mentioned the recent approval of the algorithm the G4AP that we will begin to distribute shortly.

I can remember how happy and satisfied patients were with the improvement and accuracy from the 16% MARD as a SEVEN PLUS to the 13% MARD of the G4 PLATINUM. So, I’m even more excited to get this new algorithm with MARD of 9% into the hands of patients.

We have learned the importance of accuracy in CGM it translates into confidence and trust in the G4 system. It also translates into freedom for the patients to live a more normal life and it moves DexCom a step closer to our goal of replacing fingersticks. Our pipeline is very robust.

We expect to introduce a steady stream of product innovations on our sensor technology as we look at Gen 6 on the durables with an improved sensor deployment system and especially on the connectivity side as we introduce our Gen 5 system. We will continue to make the appropriate investments to achieve these goals.

As I have often commented, being in the CGM space is extremely difficult and expensive, many have tried and most have failed and yet we continue to prosper and drive adoption by providing superior technology in a patient friendly format.

Kevin said based reimbursement challenges facing the Medtech world as cost of care becomes front and center for the payer universe, and we believe we’re well positioned to demonstrate improved outcomes while saving the system money.

A single severe hypoglycemic event, with a hospital admission can cross on average $17,000 and here we can reduce or eliminate hypoglycemia events. And the compendium of positive outcome data associated with continuous glucose monitoring continues to grow.

And one of our near-term goal is to harness that data to enable payers and healthcare providers to better manage treatment modalities and ultimately further reduce cost of care. The world is waking up the potential benefits of connectivity with wearables for improved health.

DexCom has been a pioneer in this area since our inception, so we’re excited to be able to partner with companies like Apple to accelerate our efforts. You’ll be hearing more about these collaborations in the future. With that we’ll take questions..

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Danielle Antalffy from Leerink Partners. Please go ahead..

I was hoping you could comment -- there was some talk in the quarter about a competitive launch in Europe, obviously I am talking Abbott Libre, which from what I understand is not a true CGM.

So I was hoping maybe you could talk a little bit about what that product is and more importantly what you’re seeing so far in Europe from an adoption -- potentially market expansion perspective.

And also any comments on pricing with that product?.

Danielle this is Steve, I’ll this one. I think you kind of hit it on the head, the Abbott Libre product is first and foremost it’s not a CGM product, it does not have the capability of alerting a patient for example to nighttime hypoglycemia which is a critical attribute to CGM.

So it’s not really fair to have an apples-to-apples comparison between DexCom CGM and the Abbott Libre product. That being said we long assumed that Abbott would come back into the market, they have been talking about this product for over a year now. And so it certainly wasn’t a surprise to us.

We’ve been watching the blogs frankly that I think they’re in a very early stages of their launch, so there isn’t a whole lot of detail or information out in the marketplace at this point.

I have heard pricing, it appears to be priced favorably to a full blown CGM, but again you’re purchasing products that doesn’t have the full protection that CGM in terms of alerts and special alerts and alarms.

So I think at this point we’re going to take a wait and see approach, wait and see what different -- what they develop as a category in market in Europe. No idea, they’ve have been very silent as to potential timelines for U.S. commercialization, so we’ll take away and see if there’s really anything.

And as far as I see look, I mean the configuration that Abbott has come to market which is certainly something that we could mimic it potentially make some tweaks to the Abbott product that would be very competitive an Abbott Libre product to the extent that they’re able to develop some new category for the products.

So I think with that we’re going to take a bit of a wait here,.

And then I was hoping you could give us some more color on SHARE, congrats on the approval.

How we should think about not contributing to revenue? Is that a subscription based model or how the SHARE working and how do we look at that going forward from a revenue top line driver perspective?.

Sure Danielle I’ll take that one. The SHARE System, it’s an upfront charge of I think $299 and you get the cradle and your data to start off. It is not a subscription model at this point in time. Our patients buy the hardware and that’s what they get.

With respect to driving our revenues as I said in the prepared remarks this is really the first step in our mobility platforms and while we expect this to contribute some, it’s not going to be a major revenue driver when we’re already growing at 60%.

What we do see -- what we do anticipate is that this will be very helpful in continuing to grow the pediatric markets. And the other benefit of SHARE quite frankly is not in the top line, it’s a pressure test for all the infrastructure we’ve been building for a long time to manage this data remotely.

And we have learned a whole bunch in a very short period of time about our patients behaviors and patterns and their glucose reading. So all in all it’s a great launch for us..

Thank you. Our next question here comes from Ben Andrew from William Blair. Please go ahead..

So few question from me. If you think about the fact that FDA moves so quickly with the new algorithm, I mean obviously the benefits that it provides are material.

Does it give you any information content relative to what that could mean for the G5 approval or does that transmitter because it’s really just a transmitter now that changing I believe and kind of the connectivity dynamic that would represent the G5..

I think they’re different, the algorithm is certainly science that the FDA is familiar with respect to DexCom as we’ve been through several sensor launches and even in algorithm change in the past with respect to the SEVEN system, we are now changing hardware and the data was very clear cut.

We’re hopeful that we’ll get a quick approval on the G5 system but it is more than just a transmitter it is -- just lay directly on the cell phone, it is human factors work on display on a cell phone it’s all the things we have to mitigate for loss of connectivity and things of that nature band, so while we’ve meet with the FDA on several occasion and have a very good idea of what that files going to look like and we believe they have a very good idea what is files going to look like.

I don’t think that two are related. We’re hopeful we’ll just have to wait and see..

Okay and then Kevin you talked about the R&D stunning inventory as well will be allowing you to do some more things and you mentioned device integration with the vast pumps or delivery system as well as advance decision making tools.

What time frame should we see you guys moving forward with that commercially is this two, three, four years? Clearly, it will be an evaluation, obviously if we’re including the current portfolio.

But does this allow you to accelerate some of that and bring those things forward because I am seeing they represent additional revenue opportunities as well..

Ben, right now a lot of that is infrastructure building and getting ready to develop those type of tools. I think its two to three to four years out where we really have good really good life decisions -- a really good life decision support tool.

We have even been through and FDA path on something like that yet, but we do know that we have great date and we’ll accumulate more to whereby we can develop those things.

And we were just making more investment, Terry and I have been around the diabetes sensory for long time and we’ve seen what happens when companies take their foot off the paddles as far innovation and we’re not going to do that Terry if you have anything?.

Sure one other things, you know that the founding members were Joslin translational group, as we look at taking data and not only using predictive analysis, but in a real time sense to allow therapy changes on the a fly that patients can do ultimately -- with obviously the council of their physician.

Then all of this becomes -- the more like a prediction software becomes very exciting to us at this diseases called diabetes is one that would be particularly benefited by this types of programs.

So we’re moving as fast as we can but once again its DexCom breaking brand new ground and we’ve got to go about a slow and we can always move as fast as agency will allow us to move with this. Because we are in the end we are not physicians and there is the great degree concerned that we don’t cross over that line..

Okay and last thing from me. Kevin you are kind enough to give us these 30% of revenues coming from hardware. Can you give us a sense of that breaks down at all in terms of replacement hardware versus new patients? Thank you..

We get asked this question every quarter and we’re not going to add any more color to what we’ve have. We are having great new patient results you can’t grow as fast as we are without having that, so we’ll leave it the way it is..

Thank you our next question here comes from Tom Gunderson from Piper Jaffray. Please go ahead..

Hi guys so my first question is around the pediatric indication. We all know a lot of parents that have been waiting for share. But it kind of begs the question of, yes that other approval that you had recently on pediatric expansion.

Can you give us a little color on that, how you are doing from a penetration of clinic standpoint and also is the split pretty much the same right now with pediatric and I am sorry with durable and consumable with pediatric or is a little bit more on the starter kits any color there would be helpful..

Tom the pediatric launch is been very successful. We’re couple quarters into it and as we said last quarter. Pediatric patient has the same usage and spending pattern as a regular patient. So we’re not going to break that out and then continue to report on it every single quarter.

But I can say it’s certainly been a driver in our growth and has been very successful so far and you are right a lot of parents are very happy with the share launch..

Okay and then OUS coming in at roughly $10 million it’s starting to get significant gear. Again, can you give a little more color there is it mostly Europe, is it mostly out of pocket, is it mostly starter kit as people figure out that the accuracy is worth the investment? Thanks..

It is really very much most Europe. We’ve done very well in Canada this year as we’ve launched there as well. We have some country that have carried this Italy, Sweden, Germany are three of the bigger ones and the Netherlands they are a supporter larger than Europe where we have done very, very well.

Reimbursement is improving, we see reimbursement in some countries in Europe. We are also investing -- I talked about the study investment in my prepared remarks. We are investing in some very large studies over there to drive government reimbursement of CGM for patients and so we’re making investments over there to get full on reimbursement for CGM.

So lot of it’s out of pocket and lot of is durable. I’d say it’s a mix, it’s not the same mix as the U.S. and is not as predictable. We have don’t have as much color on those patients as we have over here but the business is doing very, very well..

And just a quick follow up Kevin, does Vibe contribute meaningfully to that $10 million or is it still early?.

No, it does, the Vibe is doing very well in Eurpoe. Animas has done very well with that products over there..

Got it. That’s it from me, thank you..

And your next question comes from Mike Weinstein from JPMorgan. Please go ahead, sir..

Hi. This is actually Robbie Marcus in for Mike. Congrats on the great quarter.

I was hoping maybe you can give us some more insights into trends, into where the patients are coming from? Is the pharmacy benefit helping out there, are you taking share from Medtronic are these all new to CGM, adult versus pediatric, any kind of inside into the trends would be really helpful..

All of the above, literally pharmacy benefit is helping in some cases. We’re certainly no losing market share based on all the independent data that we look at. We have very significant new patient growth combined that with the fact they were not losing patients like we used in SEVEN plus days.

Our retention rates are very good, our utilization rates appear to be very strong as people trust and relay on this sensor array. I can tell I’ve had many, many patients say, the worst two hours of my week or two weeks if they wear the sensor alarm [indiscernible] warm up time while I wait for the next sensor to start.

So every variable in there is working and again now go back to earlier same, to achieve growth like we have they all have to be good. So every one of them is doing well. .

Okay, great. And then at the end of September Medtronic reveal the Guardian Mobile their on standalone CGM, how are you looking at this as a competitor to G5 and any comments around your take on that product will be really helpful. Thank you..

Yes, I mean Medtronic reveal a potential standalone system at a trade show earlier this year. We haven’t seen or heard frankly anything else about it since that.

So much like the Abbott Libre we’re going to take a wait and see approach, not clear to us what sensor component would be included, whether it’s a current inline sensor which we’ve all seen the performance of that sensor or some feature sensor.

So again it’s somewhat -- I think one of the comment that was made by Medtronic was that first generation Guardian remote or whatever they are calling it would not have a remote monitoring feature it would simply be display to the patient.

So in that respect it’s so much difference that what we’re going to come market with Gen 5, but outside of that I don’t think we know a whole lot about it. .

Thank you. Our next question here comes from William Plovanic from Canaccord Genuity. Please go head sir..

Great, thanks, good evening.

Can you hear me okay?.

Yes..

Great. So a couple of questions.

Gen 5, what does that include today and when do you expect to file that?.

We expect to file that in the first quarter of 2015.

The primary focus of Gen 5 is the transmitter will be able to speak directly with two separate devices via Bluetooth connectivity, so you could speak to your phone and your receiver at the same time, it gives straight to just your phone or just your receiver and then that data will be shared through the applications on the phone to the cloud and people have access to the SHARE system which will be the exact same system that we’ve launched pretty much the SHARE that was launched this year.

So the focus of Gen 5, it will be Gen 4 sensor with respect to its performance characteristics, it will have G4AP algorithm, it will have that level of accuracy. So we are not changing the system or system performance for the Gen 5 platform.

We are going to come with a user interface that’s very much designed to be a mobile platform for those who look at the date on the phone that we think is just fabulous. So that’s what the Gen 5 system is going to be..

Okay.

And on that is it going to address the calibration requirements or the fingerstick replacement or that to G6?.

We will not change the calibration scheme for the Gen 5 sys. .

Okay. So it sounds like you’re getting ready to lock that down and submit that..

We are working very hard to lock that down, yes..

Great, thank you.

And then on the pediatric mix, as you think about the new patients coming in the door in the quarter how much our Peds and how much are adults if you’re looking at what was coming in in kind of overall business?.

Bill, I’ll go with what I said earlier we’ve announced for a couple of quarters with Peds, everybody is a patient and they’ll have the same economic patterns and we’re just not going to report that every quarter. So it’s going very well in Peds, we’re very happy, it’s met all our expectations..

And then my last question just is, how long would the new G4AP algorithm -- how long do you think that’ll take to get into your current installed base, number one? And then number two, I take that it will just be the algorithm going forward..

Bill this is Steve, for the purpose of your question I went and asked the Ops guys how we were doing, it was actually posted on our Web site earlier today. We’ve had several hundred users already download and install the upgraded software. So it’s going to go fast.

What we expect to start shipping the new algorithm with new purchases with new receivers next week, so we’re going..

And are there any costs or anything that will be associated with that for you that would be incremental material to call out or?.

Nothing material..

Thank you. Our next question comes from Raj Denhoy from Jefferies. Please go ahead sir..

What if you could ask just one about the spending levels? And I appreciate that the necessity you continue to spend on R&D and sales and marketing to keep the growth as it is.

But should we assume that the new kind of 18.5 million R&D level likewise with SG&A sort of the new baseline we should assume kind of going forward from here?.

Raj that’s a very good question, with respect to R&D as we prepared, we sat and discussed that. I started here about 3.5 years ago. R&D is a lot different than it was in -- for example now whenever we do something new, we’ve got to run trials for adults and Peds the cost of getting anything to market is now doubled on the trials and execution side.

Once we get something developed we’re spending money on the cloud infrastructure, and a lot of things that we weren’t working on before and fortunately we’ve had the acceleration of growth necessary in the top line to hit our performance objectives.

It is important as we look going forward into next year that we look at base volumes in Q3 and Q4 of this year, as everybody may remember in Q1 of last year everybody took our expenses way down from Q4 to lower numbers and we ended up with much higher expenses than everybody thought.

We typically don’t give a lot of expense guidance but I think you can look at this number and go from there, there is lot of stuff going on here and it’s good.

I don’t know Steve, is there anything else?.

I am going to way in a little bit. So I spend a lot of my time thinking strategically for the company at this point.

And what -- how this is [indiscernible] on others as you look around the universe the cost of care is something that is obviously on everybody’s mind, we heard it as a key note speech at the AdvaMed, Mike was talking about it during with Edwards.

And so we need to spend some of those R&D dollars to ensure that we know as a category CGM saves the system money. And I preach to whoever would listen that the first stage as we look at ACA whether or it gets changed because of administration change, who knows.

But I will tell you this that in the future the healthcare providers will get some of their compensation based on outcomes. And it won’t be too long after that, I can’t tell you when my crystal ball says three years, four years.

That industry is going to be part of that game, that if you can’t demonstrate, you are taking dollars out of the cost of care with your products, your products are not going to be reimbursed.

And so what we have to do is we know and it’s a lot of lift service at this point, everywhere we turn I just gave you $17,000 number for hospital admission we’re spending over $250 billion a year in the United States treating diabetes. And unfortunately it continues to grow at unparalleled rates that we have seen.

So we can be cognizant about that, and some of that R&D spend is creating and demonstrating the system that we’re in fact saving them a lot of money and we’ll save them even more money in the future.

And as Kevin mentioned, I mean everything we do from a standpoint of building is they hear -- preach to them every day, make it better and make it less expensive. So at that level as well. So these are investments for the future with the return being -- things that are not as price sensitive. We know we have to hit certainly gross margin.

And no matter what we do regardless of what the price is we’ve got to hit those gross margins. And so from that perspective we need to make those investments today..

Just need to ask a couple of follow ups. You noted, I think you mentioned that one of the things you’re spending on is new smaller transmitter.

Did I hear that correctly?.

Actually we launched a new smaller transmitter this quarter..

I guess this wasn’t appreciated as that.

But maybe you could describe a bit about how much smaller that is and what sort of receptivity you are seeing with that?.

Well the receptivity has been outstanding because everybody likes things that are less aspersive on their bodies when they have to wear our devices, so people have liked it very much.

Driving that we had to make a transmitter that had all the features that the previous Gen 4 one, particularly the ability to transmit over an extended range and also ability to talk to our integrated pump partners the transmitter does both of those things. And it does cost less to make so it meets all of our objectives.

Terry stated what we do to make it better and make it cheaper they achieved them both the guys did a great job..

Okay just one last one sorry but, look back I think it been almost exactly two years when you got the Gen 4 approved.

As you noted I think in your marks is grown continuously roughly 65% on average since then and it sort of very exit question of how long you can sustain this and it sounds like the Gen 5 is getting filed soon and that should kind a keep things going but 65% is a pretty high bar to keep that into jump over a 60% even give me thoughts just around that?.

We’ve typically said that, we believe that ours is sustainable growth and what we plan for us is to grow at 40% every year. That allows you double every two years and so we have been greatly -- we’ve been very fortunate to grow faster than that, but our plans have always been to grow at 40 and I have the infrastructure to support 60.

So we are doing both and we’ll keep pushing.

But this pipeline that we’re developing and we firmly believe it can drive the business the way it has but it takes everyone and innovations to keep it going it, it took the peoples approval , it’s going to take a new outgrowth and it’s going to the going to the top, it’s going to take the share system, it’s going to take every one of this things to continue to drive that growth we can’t drive the growth just by continuing to market G4 as it is, we got to be better and we will..

And thank you our next question here comes from Tao Levy from Wedbush Securities. Please go ahead..

Great thanks good afternoon.

The professional CGM they have any impact in the quarter or how is the roll out of that product, is it allowing you to convert more patients to CGM? Sort of any color there will be helpful?.

The roll out is gone fine as we said when we announced that approval a while ago, we don’t expect this to be a huge direct topline driver of our financial has not been. Maybe you covert some patients. I don’t have the statistics on the top of my head we know that percentage of people who wear our sensor on this professionally use system.

The presenter who convert the purchasing one is very large, is very consistent, very favorable. So it certainly helps us it really hasn’t been a measurable driver in direct sales and indirect sales are I don’t have a number to share with you..

Okay and with the APM algorithm is that applicable also to sort of maybe the integrated system that will be coming out the Animus 5 and the Tandem?.

This is Steve unfortunately they will not have the ability neither the Animus 5 pump nor the Tandem. Cheap counts have the ability to upgrade as we do our G4 PLATINUM receiver is to upgrade to the new algorithm.

So those patients would have one of two options they will have to wait until a next generation really Gen 5 version of the pump or they will have the opportunity to purchase, we’ve actually seen this happen in Europe where patients -- even patients on the Animus 5 have elected to purchase a standalone DexCom receiver to get a preferred to pull that out of their pocket, purse, backpack whatever to technically because its preferred rather than pull their pump out.

So the transmitter would be the same so the patients wish he is the new algorithm would be able to use it with chain transmitter if they buy a separate receiver..

Okay great and then just as lastly Terry you mentioned to any other collaboration with Apple and I know with -- share it’s right now it only work on the Apple platform.

Is that kind of what you were referring to or you potentially going beyond that and you started thinking?.

We’ll go beyond that.

As you know you can buy the app on the iTunes store today for SHARE so that’s the first stage and as we have indicated there is a trial being proposed now is been approved by Apples that we will utilize CGM technology for -- through first being up at Stanford University at the hospital system and while integrate into the Apex system using iOS8 in the healthcare.

So we do this as a long term opportunist relationship again it got back to my, part of my comments to was when you look at this wearable technology that surely going to drive companies like Apple, Google, Samsung whoever into this digital health world that everybody looks at and says, wow that’s what we something that’s the place we want to play to expand our own platform from where there at now because they see the aging of the population and the opportunities to engage that population and trying to empower them to take better care of themselves and again reduce this healthcare burden that we spend a lot of time looking at.

And so obviously anything along those lines benefits what we intend to do.

We have always considered CGM to be a consumer product, it has requirement of a medical device, but the utility of it and its power as a consumer tool -- because this is actionable for a patients that has to have many transactions in their daily life in order to better control their diabetes.

So you’ll continue to see these growth as, first you see the Vibe system develop, but that’s only the beginning because that’s easy to do. I mean we demonstrated deploying our system with Pebble watch, as an example. And a lot of that stuff from a technology standpoint is off the shelf with the utilization of Bluetooth low energy.

Now, getting this through the regulatory challenges is much different obviously it’s in the news with regards to type of security and other challenges risk in risk mitigation that Kevin mentioned during his presentation, you’ll continue to see these growth, that’s really what I was focused on in my comments..

Your next question here comes from Erica Layon from Benchmark. Please go ahead..

Thank you very much for taking my question. I’m on for Jan Wald, because he had to hop. Looks like a great quarter, so congratulations there.

As you are looking forward to the future, smaller and integrated systems, are you looking to move both sensor performance and quality of life together at the same pace? Or does one take precedence over the other, if you do have to make a compromise?.

No, I don’t think we have to make a compromise I think are simultaneous, right now we focus –sensor accuracy of 9% MARD that is point care time to the accuracy particularly when you add in variability associated with the human influence on accuracy. If you take a patient on the SMBG, I assure that it is not 5.6% is something far great than that.

We’re seeing variability in fingerstick measurement upwards two measurements down on the same thing there within a second of each other to be widely different. And so we actually from accuracy standpoint are far better than fingerstick measurements and we’re certainly more consistent.

That is something that we will continue to drive till we certainly believe that a 9% MARD, we are at that threshold at which can dose insulin. We have to demonstrate that successfully to the agency but clearly we believe that accuracy is there.

Now you move the quality of life and it goes hand in hand and patients have more confidence more trust and the tools that they’re using to better manage their diabetes their quality of life has improved.

They are less worried day in and day out of everything they do apparent is less worry of sending the child over to and overnight because of the share system, all of these things contribute to improving in the quality of life..

Okay. So it's just a matter of maybe one will step forward ahead of the other, but they’re both moving forward together, just to --.

They’re both moving forward..

And what trials are you most excited about that are happening with your sensor? And when would you expect data on those trials?.

We’re excited about a bunch of trial.

The biggest trial that we started and started this quarter is our what we call a Diamond study internally which is a steady that where we can truly bracket the benefit of CGM from a therapy perspective, from a cost perspective where we can really do a study that shows how we drive CGM outcomes in patients new to CGM, in particular with MDI patients and what happens and what changes in their lives.

This is going to be a long-term study for us the data probably won’t be available for 18 to 24 months. But we’re going to use 20 centers and fund the study to really learn about those things that are important in our business through study of that nature, that’s the study I’m very excited about is this going to not happen as fast as I’d like it.

Terry, if you have any other..

No, you’ll see some interim results at some point during the course of the study but it is really in our opinion a key study for the future and certainly for the first time as a company it’s a study that is being conducted without the primary intent to get a product approved from that perspective.

If you look at all the studies we’re involved in its hard and we’re in 20 different artificial pancreas programs, it’s not our study, we participate, we provide some support. Those are exciting to see, those progress along that intent to again reduce the challenges of managing glucose level.

But I would agree with Kevin the Diamond study is even though it’s not a near term study as probably one we’re very focused on and just given the magnitude of the study with 20 centers at key sites throughout the U.S. .

That sounds like a very powerful study, and sometimes you have to wait for the right science to happen. So, thanks for working on that one.

That probably will help the growth even as those out years continue, hopefully outpacing your 40% goals? And you definitely gave us some good color towards, not quite guidance, but helping us look at the big picture here. There is one more that I was hoping that I could ask you.

Right now, it’s great that we’re seeing that you’re positive on a cash running basis even though we’re not seeing reported positive earnings.

Is that something you’re putting much weight on or right now just trying to keep your foot on the gas being responsible with your cash but paying less attention to the sort of reported earnings number because you think there is more investment that needs to be made before that could be a main focus..

Erica for a long time Terry and I have philosophically operated under the principle, let’s grow the top line fast and let’s grow the bottom line faster. And we’re certainly doing that as Terry said in his remarks the cash operating income was 3x of what it was the same quarter a year ago when we had 60% of growth on the top line.

As we look at our business going forward we think about three things. How much can we add to the top on a revenue basis and then we get to an accessible gross profit number.

And we ask ourselves two question, how much do we need to spend to continue to push the agenda to keep growing the top line and how much do we need to keep to meet our commitment to our shareholder and we evaluate all three of those things at the same time, not just as a management team, but at the Board level and throughout the entire organization.

So we look at all and we’ll continue to evaluate our business that way..

I have to laugh because here we’re, thank you -- but we carry this non-cash based equity that prevents us from being GAAP positive. So we’ve got, when cash was keen and it still is and we like to add it rather than take away from that.

But we did in order to attract the right talent in this company we were low on the salary side and we made it up on the equity side. So we gave our employees equity and behold our employees don’t really want to sell the shares that they hold, because they look at the upside of what this company can achieve from shareholder value improvement.

So, the end result of that is probably $15 million a quarter shared based equity that we -- non-cash, that we have to carry forward. So you just do the math and say if we want to get 20% operating number we’ve got to do a lot. Just to cover the shares the people aren’t selling.

You can’t go and tell your employees why don’t you go all sell shares, in order to get this down. And it’s just a sense routine dynamic and so yes we do, we make statements to what we think we can do in 2015, but it’s really driven I think growing top line again by growing the bottom line faster..

That’s very helpful, it’s just your so close to the number. I don’t want us to focus too much on something that actually goes counter towards the goal to the company. That note was my last question, thank you.

Thank you. (Operator Instructions). We also have a question here from Jayson Bedford from Raymond James. Please go ahead sir..

I wanted to ask about the marketing effort the AP Algorithm, clearly accuracy matters, it’s proven to drive adoption. Your current user base will be ecstatic with the upgrade. But I am just wondering if the software allows you to be more aggressive in going after new patients.

And I guess the question really is, do you view it as a new driver of patient growth?.

I think it will drive patient growth, when patients hear that we have an algorithm that was designed for the artificial pancreas, so it’s now been integrated into a commercial device that they can purchase, it will be very, very helpful. It definitely will be a driver.

It was our goal to make our patient base ecstatic, because that is how we build the business here..

When you think your sales team and the infrastructure you get a lot of new products here.

Wondering your thoughts on increasing the team as we look to 2015?.

We’re in the middle of our planning process, certainly with 60 plus percent year-over-year growth for the entire year we have an opportunity to expand to grow next year and we’ll give more guidance on that at the end of the year after we get through our process..

I guess last one, you mentioned the center transmitter has a lower cost to goods.

But I am wondering where there startup cost that impacted gross margins in the quarter associated with that?.

No, there were not..

And at this time I am showing no further questions from the audience. I would now like to turn the call over to Mr. Terry Gregg for closing remarks..

Thank you. Well I hope everyone got a good picture of how excited we’re about DexCom and the opportunities for our company. But I would need you to understand also, we’re setting our site this will be a billion dollar revenue company, not a 300, not a 500 million, a billion plus.

And so our employees believe in our mission, we believe that they know the opportunity that DexCom is truly a unique one and they want to participate in that, and they’re clearly aligned with shareholder value. And so with that I again will say thank you and see you in 2015..

And thank you ladies and gentlemen. This concludes today’s conference. Thank you for your participation and you may now disconnect..