Analyst Conference Summary

Biotechnology Investor Aids

conference date: January 20, 2011 @ 1:30 PM Pacific Time
for quarter ending: December 31, 2010 (fourth quarter)

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

Overview: Excellent quarter, but y/y systems growth lagged.

Basic data (GAAP) :

Revenues were $389.3 million, up 13% sequentially from $344.4 million and up 21% from $323.0 million year-earlier.

Net income was $121.2 million, up 40% sequentially from $86.5 million and up 56% from $77.5 million year-earlier.

EPS (earnings per share) were $3.10, up 45% sequentially from $2.14 and up 59% from $1.95 year-earlier.

Guidance:

Expects more seasonality in 2011 than 2010. 16 to 20% annual revenue growth in 2011. Q1 to be seasonally lightest, Q4 strongest. Can maintain margins at 72% to 73% of sales. Operating expense to grow by 16 to 20%. Income tax rate to increase to about 34%. 40.3 million shares in Q1 2011. Stock repurchase program to remain active.

Conference Highlights:

Trends in 2010 were encouraging despite some challenges. Focus was gynecology market. In fourth quarter procedure growth remained strong, led by DDH and DDP.

124 systems sold in quarter. da Vinci Surgical Systems revenue was $177.6 million, up 10% y/y. $1.41 million average cost per system. No longer upgrading S systems, rather trading for newer SI systems. 1752 systems installed by end of quarter. Instruments and accessories revenue was $151.1 million, up 33% y/y and averaged $1940 per procedure. Services revenue was $60.6 million, up 27% y/y.

Hysterectomy procedures continued strong growth. Urology procedure growth was strong. Emerging, new procedures grew strongly. Several new products are in the mid to end stages of development. Developing robotic stapling and vessel sealing products. Working on improved surgical imaging. Myomectomy is a promising new procedure.

25% of revenue was from outside the U.S. 38 systems sold outside U.S. including 2 trade ins. 28 were in Europe.

Cash and equivalents ended at $1.61 billion, down $12 million in quarter. $120 million cash flow from operations. $140 million used for stock buy backs, $9 million for capital expense.

Cost of revenue was $107.1 million, leaving gross profit of $282.2 million. Operating expenses were $128.4 million consisting of $95.8 million for selling, general and administrative and $32.6 million for research and development. Leaving operating income of $153.8 million. Interest and other income was $3.4 million. Income tax provision was $36.0 million. Non-cash compensation expense included was $30 million.

73% gross margin, up.

150 new clinical sales employees, and 400 total employees, were added in 2010. 92 employees were added in Q4.

Q&A:

Lower procedure growth rate in 2011? Major growth drivers will be gynecology and hysterectomy in U.S. and urology in Europe, plus emerging procedures. Just a timing of adoptions of emerging procedures.

Continued hiring in 2011? We have caught up in 2010, after a slow 2009. Will continue to hire in 2011, but at a slower pace than 2009.

We are in the process of optimizing stapling procedures. It could become important in many complex procedures. Just in development, no date for submitting to FDA.

Because of seasonality in the quarters, expenses tend to be higher as a percentage of revenue in Q1 and Q3, lower in Q2 and Q4, mainly because of seasonal revenue.

Will get an R&D tax credit in 2011, but the main impact in 2010 and 2011 was increased overseas income, which is taxed at a lower rate.

Do you believe medical capital spending was higher in Q4, or were your results ISRG specific? We feel really good about the increase in procedure growth. On the capital side it feels in the middle, neither strong nor weak.

Systems left to upgrade? There are 162 U.S. systems left to upgrade, not all will come back in time.

Is 360 the right annual run rate for new systems going forward? The most recent data is 74 systems went to new owners, not upgrades. Can't say about add rate going forward.

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