Analyst Conference Summary

Biotechnology Investor Aids

conference date: October 19, 2010 @ 1:30 PM Pacific Time
for quarter ending: September 30, 2010 (third quarter)

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

Overview: Revenues down slightly sequentially, but well up from year-earlier.

Basic data (GAAP) :

Revenues were $344.4 million, down 2% sequentially from $350.7 million, but up 23% from $280.1 million in the year-earlier quarter.

Net income was $86.5 million, down 2% sequentially from $88.7 million, but up 34% from $64.5 million year-earlier.

EPS (earnings per share) were $2.14, down 2% sequentially from $2.19 but up 30% from $1.64 year-earlier.

Guidance:

For full 2010, procedures to grow 35% y/y. Revenue up 30% to 33% from 2009. Gross margin. Gross margin near 73%. GAAP operating expense up 27% to 29% y/y. Stock compensation $120 million. $18.5 million other income. 37.2% tax rate. Share count, diluted, 40.4 million. Cash flow significantly higher than net income.

Conference Highlights:

Third quarters are typically seasonally challenging. Gynecology procedures continued to show strength. Emerging procedures continue to expand. Investing in sales force expansion for new procedures.

da Vinci Surgical Systems revenue was $160 million, down 5% sequentially, up 18% y/y from $136 million. 105 systems were sold. Average price $1.43 million, up do to increase in proportion of SI and dual console models. $10 million was upgrade revenue. 15 standard systems traded in for SIs, so net 90 new systems.

Instruments and accessories revenue was $128 million, flat sequentially, up 27% y/y from $101 million. Surgical procedures grew about 33% y/y, with da Vinci hysterectomy (dVH) procedures leading. $1840 per procedure.

Services revenue was $57 million, up 30% y/y from $44 million.

Research continues on surgical stapling instruments and visualization. Timing of introductions depends on FDA approval.

22 systems sold outside the U.S., 16 in Europe, where market continues to be challenging. 4 were sold in Japan.

72.8% gross margin, up from 70% year-earlier.

Non-GAAP operating income was $163 million. Excludes $30 million non-cash operating expense.

$1.621 cash balance, up $33 million in quarter. $50 million for capital purchases intellectual property, $59 million for stock repurchases. $126 million gross cash flow from operations. $17 million from stock option exercise. $241 million authorized buy-back remains.

Cost of revenue was $93.8 million, leaving gross profit of $250.6 million. Operating expenses of $118.5 million included $91.6 million for selling, general and administration and $26.9 million for research and development. Income from operations was $132.1 million. interest income $5.0 million, tax provision $50.5 million.

Increased employees by 92 in quarter, mostly in sales and service.

Research data continues to show advantages of various types of robotic surgeries.

Q&A:

Procedure trends due to economy? At beginning of summer there was pressure on existing procedures, with a return to strength at the end of summer.

Sales force plan? For several quarters we will continue to invest in the sales force. We believe demand for procedures is real.

Hysterectomy segments? Greater patient value is in complex procedures. In benign segment we are picking up the more complex procedures. Benign growth is faster than malignant growth, but that is expected because malignant has been in place longer.

Representatives are not prostate specific, they cover urology too, so reps don't get redeployed, but spend more time on the newer procedures.

Exchange rate effects? We sell in Euros in Europe, in some cased direct, in some through distributors. We hedge for direct sales. Costs are also incurred in those currencies. We think we are hedging the majority of exposure.

SI's have been showing quarter over quarter growth pretty consistently. Pipeline trend is towards SI systems.

We try to match R&D spending growth to revenue growth. Given that, we want to drive robotic surgery, which is still in its early phase. We look at new procedures, visualization, benefit to patients, and training technologies.

Relatively strong Q4 guidance is based on what the sales force saw in September and October and the building of new procedures.

Semiconductor supplies were tight in the inventory earlier in the year, so we built inventories in those parts. We also have some inventory associated with new product introductions, which should be released when we get FDA approvals.

Full Japan launch? We are approved for the system. We are working on reimbursements, which will be procedure by procedure, with prostatectomy to be first. So no specific time frame, but don't expect broad reimbursements in the next 12 months.

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