Analyst Conference Summary

Biotechnology Investor Aids

conference date: July 22, 2009 @ 1:30 PM Pacific Time
for quarter ending: June 30, 2009 (2nd quarter)

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

Overview: Year over year revenue gains, but on reduced number of robots sold.

Basic data (GAAP) :

Revenues were $260 million, up 38% sequentially from $188 million and up 19% from $219 million in the year-earlier quarter.

Net income was $62.4 million, up 122% sequentially from $28.1 million, and up 22% from $51.2 million year-earlier.

EPS (earnings per share) were $1.62, up 125% sequentially from $0.72, and up 27% from $1.28 year-earlier.

Guidance:

Believes procedures will grow around 45% this year, but revenues from instruments and accessories is hard to predict on a quarterly basis. It is also hard to predict system sales in this economic environment. Gross margins for 2009 around 71%. Operating expenses will grow 18 to 20% in 2009. Share count 38.6 to 39 million. Cash flow expected to continue above net income.

Conference Highlights:

Despite the challenging economy, doctors and patients see the value of our products and services.

Second quarter revenue was bolstered by $13.8 million in previously-deferred revenue. This was from first quarter discounted offers for da Vinci Si systems upgrades. Another $6.3 million is expected to be recognized in the second half of 2009.

18% sequential increase in revenue if you exclude the deferred revenues in Q1 and Q2.

Revenue from surgical systems was $124 million. Instruments and accessories revenue was $95.8 million, and services revenue was $41.3 million, up 40% y/y.

76 da Vinci Surgical Systems were sold in the quarter, down from 85 in the year-earlier quarter. 47 of the 76 were Si models. 20 were sold outside the U.S. Systems revenue was also down y/y. Still see curtailed capital spending. Average sales price per system $1.43 million, up from $1.33 million in Q1. Five systems were part of trade-ins.

GAAP results included $24.6 million in non-cash stock-based compensation expense.

Cash and equivalents ended at $902 million, up $80 million sequentially. Repurchased $150 million in stock. Capital expenses were $13 million. $175 million accounts receivable. Inventory $59 million.

Cost of revenue was $70.4 million, leaving gross profit of $190.2 million. Operating expenses of $90.6 million included $67.3 million for selling, general and administrative and $23.4 million for research and development. Leaving income from operations of $99.5 million. Interest income was $5.2 million. Income tax provision was $42.3 million.

Procedures grew 52% y/y. $1800 average revenue per procedure. A wide variety of procedures are being formed in urology and gynecology. Cervical and endometrial cancer surgery is a major new area. Cardiac procedures also increased in the quarter. A study shows that long term survival for prostate cancer is enhanced by surgery compared to radiation.

Si model has been well received. Intuitive is continuing to create new capabilities for the system. 19 of 45 system upgrade offers were accepted. 152 customers now have 2 or more systems.

Gross margins were flat sequentially at 71.5% if you exclude deferred revenue.

Q&A:

Why no sequential improvement in gross margins? Even though the Si model has a higher price, it is also costlier to produce, so the margins are similar.

Health care reform effects? Patients have been shown to have to average 4.6 more years of life for radiation therapy and 8 more years of life for surgery. Works out that surgery is by far the cheapest per year of life. So we are proponents of comparative effectiveness for cost and outcomes.

Customers without Da Vinci systems are feeling impact of loss of radical prostatectomy and hysterectomy customers as the robotic surgery has become the standard of care. So there is pressure to move to robotic surgeries.

Yes, customers are trying to use their current systems more intensively before buying a second system.

International rollout? The main holdup is the lack of approvals in Asia including Japan and in Canada. We mainly have been approved in Europe.

Reversal in revenue per procedure? This varies because of stocking orders. We are not ready to predict stocking patterns.

Systems in U.S.? Large hospitals have 457 sites with 614 systems. Medium hospitals 176 sites with 190 systems. Small hospitals 100 with 112 . Totaling 733 sites with 916 systems.

We are investing for the long term, so we are not pulling back on sales or R&D expense. We added 20 field people in Q2 and 25 in Q1. In full company 34 employees were added in Q2. Part of the hiring is for Europe, but we are also looking to expand through our distribution partners.

Prostate market growth? Debate about treating or not treating continues, same for PSA testing. We don't see any material impact on our business at this point.

Colonrectal surgery is growing both in Asia and in the U.S. Thyroidectomy is mainly happening in Asia at this point, and growing very rapidly.

We hope to reduce our tax rate to the mid-thirties over time.

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