Analyst Conference Summary

conference date: July 18, 2013 at 1:30 PM Pacific Time
for quarter ending: June 30, 2013 (second quarter 2013)

Forward-looking statements

Overview: Revenue growth rate a moderate 8% y/y, but declined sequentially. Reduced guidance.

Basic data (GAAP):

Revenue was $578.5 million, down 5% sequentially from $611.4 million but up 8% from $536.5 million in the year-earlier quarter.

Net income was $159.1 million, down 16% sequentially from $188.9 million but up 3% from $154.9 million.

EPS (earnings per share) were $0.41, flat sequentially from $0.41 and also flat from $0.41 year-earlier.

Guidance:

Full year 2013 procedure growth rate is seen moderating, so reduced projected growth rate to 15% to 18%. Revenue forecasting is challenging, so widened range to from flat to up 7% over 2012. Operating income lowered to 37% to 38% of revenue, despite taking steps to reduce expenses. Non-cash stock based compensation lowered to $164 to $172 million. Interest income $17 to $19 million. Share count should decline modestly in Q3.

Conference Highlights:

It was a challenging quarter, with the shortfall mainly in the United States. Benign gynecology procedure growth was slower than expected.

Longer term, they believe da Vinci will do well because Intuitive is early in the global adoption cycle, despite saturation in some areas in the United States. Expanded offerings (single site, vessel sealing, and Firefly) and types of procedures will also help future sales.

Revenue from system sales was $215.9 million, down 16% sequentially and down 6% y/y. 143 da Vinci systems sold in the quarter, compared to 150 year-earlier. 90 systems were in the U.S., down from 124 year-earlier. 21 systems were sold in Europe and 20 in Japan. Negative press in the quarter may have impacted utilization. "Looking towards the second half of the year we see increasing pressure on U.S. system sales." But system sales are ramping in Asia, particularly in Japan, despite resistance to extending reimbursements to new types of procedures. Average price per system was $1.5 million. 43 sales included trade-ins.

Revenue from instruments and accessories was $264.5 million, up 18% y/y. Service revenue was $98.1 million, up 4% sequentially and up 18% y/y. Revenue per procedure, including stocking orders, was $2020.

Surgical procedures using da Vinci robots grew about 18% y/y. In the U.S. strong general surgery growth continued, except in benign gynecology. Urology procedures were stable. Procedure growth was solid in Europe and strong off a small base in Asia.

Non-GAAP operating profit was $257 million (excludes $39 million stock option expense), down 1% y/y.

The cash and equivalents balance ended at $3.03 billion, down $89 million in the quarter as $270 million was used to repurchase shares at an average price of $494. $189 million gross cash flow from operations in quarter. $25 million was used for capital expenses.

Cost of revenue was $173.3 million. Operating expenses of $186.7 million included: $145.5 million for selling, general, and administrative; $41.2 million for research and development. Leaving income from operations of $218.5 million. Interest income was $4.3 million. Income tax expense $63.7 million.

740 customers have now bought single-site accessory kits. Vessel sealer sales were strong. 76 customers purchased Firefly systems in the quarter. Stapling system is in staged rollouts, but won't contribute substantially to 2013 revenue.

Q&A:

Lumpy system growth statement inputs? We see an issue with some existing customers having enough capacity in the U.S., so delays until they need more capacity. The new technologies are helping.

Correlation between benign gyn cases (hysterectomies) and physician visits? Problem is lower total admissions as a whole and women not seeking hysterectomies, but it is hard to quantify. MCS notification issue was also hard to quantify.

Warning letter from FDA details? Two mentions of things they would like additional insight into: recall classification procedures and user input in design elements in a particular products. We believe we can address these issues quickly. They will come back and audit around recall classifications.

Japan lack of reimbursement? They (NHLW) are doing a general review, larger in scope than Intuitive, as to what data to use for determining reimbursements. For prostatectomies we were able to use global data. "It looks like there will be partial reimbursement followed by national reimbursement on a timeline based on their data requirements."

Intuitive Surgical is investing in large scale studies to show the value of da Vinci systems.

We did not see a fall off of procedures within the quarter (it was quarter to quarter), outside the usual pattern that is back-end loaded. Reasons given for sales that slid in the pipeline included inability to get financing and a need for higher levels of approvals. We believe they were just pushed off, but it is hard to predict how many will come back.

In the second half system prices, on average (ASPs) are likely to be lower than in the first half.

Movement of hysterectomies from in-patient to out-patients has been a long term trend, why did it start to affect you now? We are hearing payers are putting pricing pressures on hysterectomies, pushing for more conservative medical management and ambulatory settings.

There are almost 2,800 systems out there now. We are not worried about higher utilization rates, it is better for the customers and for Intuitive.

More stock buy backs are authorized and we will use them appropriately.

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