Analyst Conference Summary

conference date: January 22, 2009 at 1:30 PM Pacific Time
for quarter ending: December 31, 2008 (4th quarter 2008)

[at the time this summary is written]
Forward-looking statements

Overview: Pace of growth has slowed, and revenues are growing faster than profits.

Basic data (GAAP) :

Revenues were $231.5 million, down 2% sequentially from $236.0 million, but up 22% from $189.4 million year-earlier.

Net income was $50.8 million, down 12% sequentially from $57.6 million, but up 3% from $49.2 million year-earlier.

EPS (earnings per share) were $1.27, down 12% sequentially from $1.44, but up 2% from $1.24 year-earlier.

Guidance:

Expect system sales to be flat compared to 2009, but with services up 35%. Top line growth of 15%. 7% to 8% operating income growth. Expect gross margins to be 70% to 71%, partly because of strong dollar. Stock compensation expense to rise to $93 million. IP amortization charges will also increase. Effective cash tax rate could reach as high as 40%.

Conference Highlights:

Results are in line with press release of January 7. Pleased with procedure growth, although unit sales were lower than plan. Continuing to drive adoption curve. A number of procedures grew over 100% in 2008. Systems sold decreased due to decrease in hospital standard systems.

Procedures grew 61% from year earlier. Accessory revenue increased 45% to $81.6 million from year earlier and 7% from 3rd quarter and comprised 55% of total revenue. 335 systems sold during full 2008.

Da Vinci Surgical Systems revenue was $113.7 million, up 5% y/y but down 10% from Q3. 85 systems sold, up from 78 year-earlier (but six were trade-ups). 1111 systems installed worldwide. 30 systems were sold outside the U.S. $1.32 million revenue per system sold.

Service revenue was $36 million.

71.4% gross margin.

Believes will continue to grow in 2009.

$104 million non-GAAP operating profit, which excludes stock-based compensation.

Cash and equivalents ended at $902 million, up $80 million in the quarter and up $266 million from year-earlier. $23 million in capital expenditures. Accounts receivable decreased by $4 million. Inventory increased.

$338 million in cash from operations during full 2008 before investments.

Operating income was $82.7 million, up 13% y/y. This included $21.4 million non-cash stock-based compensation.

Cost of revenue was $66.2 million. Operating expense of $82.6 million included $61.7 million for selling, general and administrative and $20.9 million for research and development. Interest income was $5.5 million. Income taxes $37.5 million.

Accounts receivable ended at $170.1 million, inventory $63.5 million, accounts payable $128.6 million (up $20 million in the quarter), deferred revenue $79.3 million.

1049 employees at end of year, an increase of 36 in quarter.

$83 million operating expenses, down $2 million from Q3. Purchased an additional facility in Sunnyvale, but postponed new facility next to main campus.

22% cash tax rate in 2008, slightly higher than previously thought.

Emphasized full 2008 figures because Q4 did not compare well with Q3 [my comment].

Over 200 publications on da Vinci system in quarter. Surgeons are very happy with the systems and the types of surgery it is used for continue to increase.

Q&A:

International strength, why does it come in chunks? For example, we had 5 different sales to individuals in Germany. But 3 in Korea might be affected by dollar rate. International system sales in Q1 likely to be below Q4. But procedures were exceptionally strong outside the U.S.

Sales force in Europe seems relatively positive, but from where we sit we don't think there is all that much visibility. Procedures will be the key to driving new systems sales. We have to take it one step at a time until we come out of this economic disaster.

R&D alliances update? Surgiquest, PMI, etc., we are looking for component technologies that when added to robotics give us better clinical outcomes. We pursue those opportunities when we see them.

Q4 system shortfall in U.S.? We went into December with customers who indicated they wanted to purchase systems, but did not. We think they are real customers and are postponements. But we don't know how long the postponements would be for. We did not notice any particular reason like inability to get loans, but some hospitals pressed for significant discounts, which we walked away from. In Q4 between 15 and 20% were financed. Five leasing companies provided financing, so it is generally available.

Pipeline for sales? Our forecast was based partly on pipeline. The pipeline appears healthy, the question is when sales will close.

Typically 3rd month of each quarter is the heaviest for selling systems. Going into December seemed normal, but towards the end of the month people decided not to buy. Overall demand seemed strong, just that deals were not signed. Hospital boards are frightened by economy situation and postponed or cut capital expenditure plans.

We have taken out Euro hedges on balance sheet position at end of year.

We do expect a gradual decrease in revenue per procedure over time.

Is flat outlook for full 2009 based on weak first half, strong second half? We are in a period of uncertainty, of uncertain duration. We have plenty of cash to endure a period of weakness.

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