Analyst Conference Summary

Biotechnology Investor Aids

conference date: April 19, 2011 @ 1:30 PM Pacific Time
for quarter ending: March 31, 2010 (first quarter, Q1)

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

Overview: Continued solid y/y growth in robot sales.

Basic data (GAAP) :

Revenues were $388.1 million, down slightly sequentially from $389.3 million, but up 18% from $328.6 million in the year-earlier quarter.

Net income was $104.1 million, down 14% sequentially from $121.2 million, but up 22% from $85.3 million year-earlier.

EPS (earnings per share) were $2.59, down 14% sequentially from $3.02, but up 22% from $2.12 year-earlier.

Guidance:

2011 forecast update: overall procedure growth 25 to 28% y/y. Revenue estimate unchanged at 16 to 20% y/y growth. Gross margin at low end of prior 72 to 73% forecast. Continuing to invest, so operating expenses up 16 to 20%. $140 to $145 million non-cash stock compensation. Interest income $17 to $18 million. Income tax rate reduced to 33%. Dilute share count 40.3 million. Cash flow should be significantly higher than net income.

Conference Highlights:

Compared to Q1 2010, revenue and profit growth "was driven by continued robotic procedure adoption and higher da Vinci Surgical System sales."

120 systems sold in quarter. da Vinci Surgical Systems revenue was $167.1 million, down sequentially from $177.6 million, but up from $155.3 million in Q1 2010. Includes 19 upgrades to Si made. Average price per system was $1.38 million. 1840 systems are now installed worldwide.

Instruments and accessories revenue was $157.4 million, up sequentially from $151.1 million, and also up from $122.7 million in the year-earlier quarter. Services revenue was $63.6 million, also up both sequentially and y/y.

$180 million non-GAAP net income before stock option expense. 72% gross margin.

The cash and equivalents balance ended at $1.76 billion, up $148 million in the quarter. $168 million cash flow from operations. $12 million was used to repurchase stock. $15 million capital expense. Buy back program remains active, to be used to contain dilution from stock option compensation.

Several geographies and specific procedures showed strong growth in the quarter, notably urology and thoracic surgery. 30% y/y procedure growth. Outside U.S. 31 systems sold, $91 million revenue, up 38% y/y. 5 systems were sold in Japan, however the situation there means sales in the near future are unlikely.

FDA approved fluorescent imaging system. Vessel sealer has been submitted to the FDA. The stapler is still under development. Single-Site surgery development continues.

Now not field upgrading S to Si systems, instead swapping in Si systems.

Outside the U.S. nations are now the primary theater of growth.

Over 200 clinical papers on da Vinci system procedures were published in the quarter. Typically show better average outcomes for robotic surgeries.

Added 69 employees in the quarter.

Cost of revenue was $109.3 million, leaving $278.8 million in gross profit. Operating expenses were $130.5 million, consisting of $99.1 million for selling, general and administrative and $31.4 million for R&D. Income from operations was $148.3 million. Interest income was $5.3 million. Income tax provision $49.5 million.

Q&A:

Hiring plans? Hiring will continue, but will decline as a percent of the base. We were hiring to cover more geography, that is growing closer to completion.

Added 59 U.S. de novo systems this quarter? Yes. 89 total systems in U.S. was a record. It is hard to predict the rate of upgrades from standard and S systems to Si systems. There is no clear trend, we will probably see some ups and downs. Multiple systems customers are very important to us. Several hospitals have 6 systems now.

We had greater demand for simulators than we expected in the quarter, some of those were not shipped until Q2.

Three Sie units were shipped in the quarter.

Cholecystectomy initial experience was good in Europe, having good conversations with FDA. We don't have data on market size available yet. Colorectal procedures are on a small base, still working on introducing them to the community.

Can't provide timeline for stapling and sealing instrumentation. Initial vessel sealing target would be cholecystectomy, but stapling would be useful in a wide variety of procedures.

Q4 is traditionally the strongest season for sales outside the U.S., Q1 is typically the weakest quarter. So we don't see the international system Q4 to Q1 decline to indicate anything in particular.

S trade ins for Si, which results in a discount on the new system, is the main reason for ASP and margin declines.

We can't make benefit claims on vessel sealing until we get FDA approval, but it should bring the usual benefits of robotic surgery.

First clearance for fluorescent imaging is for vascular imaging so it is used for colorectal surgery. It is a platform technology; it will be a slow build for us.

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