Analyst Conference Summary

Biotechnology Investor Aids

conference date: April 16, 2009 @ 1:30 PM Pacific Time
for quarter ending: March 31, 2009 (1st quarter)

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

Overview: Seeing reduced demand due to economy, revenues almost flat year over year, profits down dramatically.

Basic data (GAAP) :

Revenues were $188.4 million, down 19% sequentially from $231.5 million and up slightly from $188.2 million year-earlier.

Net income was $28.1 million, down 45% sequentially from $50.8 million and down 37% from $44.8 million year-earlier.

EPS (earnings per share) were $0.72, down 43% sequentially from $1.27 and down 36% from $1.12 year-earlier.

Guidance:

Expect procedure growth of 45% for year. Revenues per procedure should normalize over time. Suspending instrument and accessory revenue guidance until there is better visibility.

Capital spending environment is uncertain for hospitals. So we are suspending guidance for systems revenue. Service model to remain in place, growing 35% this year.

When deferred revenue is recognized it should increase gross margin. Expect 70 to 71% gross margin for the full year. GAAP operating expense expected up 17% for 2009, including some significant non-cash expense increases.

40% GAAP tax rate.

Cash net income will continue to be considerably higher than GAAP net income.

Conference Highlights:

Believes the team's operational execution was excellent, despite the trying economic conditions.

Instrument and accessories revenue was $79.5 million, systems revenue were $69.5 million, services revenue $39.3 million.

Revenue was net (reduced by) $20.1 million "of revenue deferrals associated with offers made to certain customers to upgrade their recently purchased" systems. The upgrades would be from S to Si models, which have improved 3D visual capacities. All $20.1 million in deferrals should be recognized in 2009. The Si became available April 2.

Revenue growth was concentrated in Instruments and accessories, from a 60% y/y increase in surgical procedures. This despite the fact that hospitals were trying to lower their own cash outlays and lower revenue per procedure to $1800. Services revenue also increased markedly.

Only 66 da Vinci Surgical Systems were sold, down from 74 in the year-earlier quarter. 22 systems were sold outside the U.S. $1.33 million per system average. 6 system sales involved trade-ins; 5 sales were of refurbished systems. 1171 systems have been installed world-wide.

Operating expenses of $83.7 million included $62.4 for selling, general and administrative; $21.3 million for Research and Development. Leaving income from operations of $45.0 million. Interest income was $5.0 million. Income tax provision $21.9 million.

There was $22.7 million in stock-based compensation expense.

1.4 million shares were repurchased for about $150 million. $90 million cash from operations. Cash and equivalents ended at $822 million, down from $902 million at the end of 2008. $27 million was invested in intellectual property and fixed assets. Gross cash flow from operations was $17 million in the quarter. Acquired NeoGuide Systems. In-licensed rights from several companies.

California taxes will be reduced in 2011.

Inventories and accounts receivable are in good shape.

Partial nephrectomy, hysterectomy and prostate cancer operations are among the procedures where doctors are promoting the da Vinci systems among themselves.

Q&A:

Decision to suspend guidance? Our visibility in system sales is not very good. We missed our first quarter guidance for systems by 10%. When visibility improves we will resume giving guidance. It is particularly hard to predict when sales will close right now.

All customers in the quarter were offered the right to buy the new SI model. There were 44 customers offered a discounted upgrade. The offer is valid until the end of June. The accounting rules are complicated. We had some customers that were unhappy when we introduced the S, which could not be upgraded to from the standard, original system.

How many S systems could be upgraded to SI? About 700. The offer will not be available to Q2 customers.

Any trends into Q2? Best data point is 66 systems in Q1.

Usual seasonally up Q2? With system revenues there is less certainty now.

Believes the demand for systems is strong, converting it to sales is uncertain at present.

The second console is not necessarilly part of the SI or an upgrade to an SI. We will continue to sell the S version for quite some time.

Surgical stapler? It is in the process of development.

Standard systems are no longer being made, but they are taken back in trade and refurbished for sale.

Weakness of Korean currency may be why we sold no systems there in Q1.

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