Analyst Conference Summary

Biotechnology Investor Aids

conference date: January 21, 2010 @ 1:30 PM Pacific Time
for quarter ending: December 31, 2009 (fourth quarter)

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

Overview: Another great quarter.

Basic data (GAAP) :

Revenues were $323.0 million, up 15% sequentially from $280.1 million, and up 40% from $231.5 million in the year-earlier quarter.

Net income was $77.6 million, up 20% sequentially from $64.5 million, and up 53% from $50.8 million year-earlier.

EPS (earnings per share) were $1.95, up 19% sequentially from $1.64, and up 54% from $1.27 year-earlier.

Guidance:

For 2010, we expect strong procedure growth, about 35% for the year. Revenue growth of about 25%. Gross margin about 71.5%. Operating expenses up 25%. Non-cash stock compensation of $127 million. Other income $15 million. Income tax rate 37%. Estimate share count 40.7 million. Cash flow from operation significantly higher than net income.

Conference Highlights:

We adapted well to a rapidly changing environment in 2009. We continue to drive the adoption of robotic surgury procedure by procedure. Procedures with over 100% y/y growth in 2009 include DVH (da Vinci hysterectomy), partial nephrectomy, sacro-copralplexy (?), colon and rectal resections, and thyroidectomy. DVP (da Vinci prostatectomy) is the largest use.

Instrument and accessory segment revenue increased 39% y/y to $113.3 million. Procedure unit growth was up 44%. Revenue was $960 per procedure, declining due to lower ratio of intial stocking compared to larger installed base.

da Vinci Surgical Systems revenue was $162.0 million, up 42% y/y. 110 systems were sold, up from 85 year-earlier. 80 were sold in the U.S., 30 internationally. 1395 da Vinci systems are now installed. 79% of new system sales were the SI model. There were 23 trade-in transactions or S to SI upgrades in the quarter. 16% of SI sales included dual consoles so far. Average sales price per system was $1.41 million.

Service revenue was $47.8 million, up 32% y/y.

Non-cash based stock compensation expense was $25.0 million. Non-GAAP operating profit was $153 million.

Cash and investment balance ended at $1.172 billion, up $148 million sequentially. Capital expenditures were $8 million.

Gross margin was 72.2%, up from 71.4% year-earlier.

Cost of revenue was $59.9 million, leaving gross profit of $233.2 million. Operating expenses of $104.8 million include selling, general and administrative expense of $79.0 million and R&D expense of $25.8 million. Leaving income from operations of $128.4 million. Interest income was $4 million. Income tax provision was $55.0 million.

The FDA gave approval for trans-oral tumor surgery using the system. Japanese clearance for S systems was granted, but are still working on reimbursement permission.

1,263 employees at end of quarter, up 75. New manufacturing facility construction has resumed.

Accounting for S to SI upgrade guarantees completed in Q3, with $6.3 million in revenue recognition. In Q4 this went to zero.

Q&A:

How should we think about the future hysterectomy market size? We talked about 250,000 open procedures where we thought we added the most value. But laproscopic procedures are now being converted to da Vinci, which is about 300,000 procedures. So we see it potentially larger than the 250,000, but we don't know how big.

What are the next big opportunities? They could be colorectal surgery and thyroidectomy. But there is still a lot of room where we have been most successful, like prostatectomy and hysterectomy. ENT application has high patient value, which is a good leading indicator. The first clearance gives us about 10,000 U.S. cases, mayber 70,000 global.

Is Japan just not a 2010 event? We are working on clearing the importation hurdles, which may allow us to place some systems. Reimbursement will be granted procedure by procedure, so it will play out over time.

Selling environment and guidance? Visibility on procedures and service is reasonable. Utilization drives some capital sales, but capital visibility is not great yet. It is possible that capital was released at the end of the year; we don't know if that will repeat in 2010, or spend will be more even.

Cost of goods sold includes training expenses, which brings down gross margin, and which fluctuates.

The cardiac space is one of slow steady growth. It is a more conservative space. The patient value is excellent, and the demand for training is growing.

There are about 350 standard da Vinci systems in the installed base.

When you see operating leverage in Q4, you want to remember that it is a strong revenue quarter, and you may want to look at larger chunks of time to see long term leverage.

Cash? We have no immediate plans for share buy backs or dividends. But we still have the approval for $150 million in buy backs.

Does physician training give you insight into growth areas? Yes. At some point, however, the specialists themselves train other specialists.

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