Analyst Conference Summary

conference date: July 21, 2015 @ 1:30 PM Pacific Time
for quarter ending: June 30, 2015 (second quarter, Q2 2015)

Forward-looking statements

Overview: Strong sequential growth and y/y revenue ramp.

Basic data (GAAP):

Revenue was $586.1 million, 10% sequentially from $532.1 million and up 14% from $512.2 million in the year-earlier quarter.

Net income was $134.5 million, up 39% sequentially from $97.0 million, and up 29% from $104.0 million year-earlier.

EPS (earnings per share, diluted) were $3.56, up 39% sequentially from $2.57 and up 29% from $2.77 year-earlier.

Guidance:

Increasing 2015 procedure estimate growth 11% to 13%. Gross profit margin second half raised 67 to 68%. Operating expense non-GAAP range increasing 7% to 10% y/y. Other income $16 to $18 million. Income tax non-GAAP 28% to 30%, excluding R&D tax credit.

Conference Highlights:

Growth in procedures was healthy. System sales were stronger.

Intuitive Surgical shipped 118 da Vinci Surgical Systems, up sequentially from 99, and up from 96 in the year-earlier quarter. 64% of systems placed were da Vinci Xi. $ million average sales price, higher y/y due to increased % of Xi systems. 72 of the systems were placed in the U.S., 46 outside the U.S. 13 systems were placed in Japan, 5 Xi.

$168 million of revenue was from outside the U.S., up sequentially from $150 million and up from $ million year-earlier. The main impacts were higher sales in Japan and foreign exchange rates.

Procedures using da Vinci systems in Q1 grew about 14% y/y and 8% sequentially. U.S. procedures were up %, international up %. Growth in Japan was healthy. International prostatectomy growth was also strong.

Revenue from Da Vinci system sales was $176 million, up 25% sequentially from $141 million and up 22% from $144 million in the year-earlier quarter. Higher mix of Xi systems raised ASPs y/y.

Revenue from instruments and accessories was $297 million, up 7% sequentially from $277.2 million and up 13% from $262 million year-earlier. $1,830 per procedure average, nearly flat sequentially and y/y.

Revenue from services was $113 million, down slightly sequentially from $113.9 million and up 6% from $107 million year-earlier. Hurt by foreign exchange rate.

Additional Xi instruments were released in the quarter, including the harmonic ACE curved shears in the U.S. In June the integrated table motion product for Xi was approved in Europe.

Studies released in the quarter showed that overall costs are reduced using Da Vinci robotic surgeries

Non-GAAP numbers: Net income was $173 million, up 28% sequentially from $135 million and up 24% from $140 million year-earlier. Non-GAAP EPS was $4.57, up 28% sequentially from $3.57, and up 23% from $3.73 year-earlier. 68% gross margin, down y/y due to exchange rates and a higher mix of new products.. Non-GAAP numbers exclude trade out revenues.

The cash and equivalents balance ended at $2.9 billion, up $202 million in the quarter. There is no debt. $49 million was spent on stock buybacks in the quarter.

Cost of revenue was $199.6 million, leaving gross profit of $386.5 million. Operating expenses of $212.7 million included: $163.3 million for selling, general, and administrative; $49.4 million for research and development. Leaving income from operations of $173.8 million. Interest income was $4.6 million. Income tax expense $43.9 million.

Q&A:

Gross margin longer term? We don't see huge changes from what we are predicting for the second half. Mix between regions and products can shift it around.

Sustainability of hernia surgery growth rate? We are seeing good early growth. Hernia is a broad set of procedures. We see early evidence of strong clinical benefit for some of the procedures.

Sp timeline? We are not predicting the ship date at this time. We are in discussions with regulators, nor have we said it is necessarily a 2016 event.

Japan reimbursement? Clinical investigators do the submissions in Japan, not Intuitive. "Nothing has been assured ... but we are having multiple conversations."

Stapling products? They are currently focused on colorectal surgery, and adoption has been good. Vessel sealing is used more broadly.

Interoperative table motion has been well received by early adopters as we work towards clearances.

Could we see more revenue flow over into operating margin now that Europe revenue is growing? In Europe we are seeing good performance and better returns on our investments there. As to getting more leverage, we intend to continue to invest heavily outside the U.S. to address the large size of the market.

Drivers for future system sales? 3 levers: upgrades to Xi. Buying to fill capacity. And moving physically within a system.

One area we want to address in the future is thoracic surgery, but we are looking at the whole human body.

Why not more stock buy backs, given the improved business visibility? We intend to return excess cash to shareholders. Our stock has been volatile over time, and we try to buy when the price is low. We don't really have visibility into all the capital purchase cycles of the different nations.

We believe market acceptance of robotic surgery is improving. But working through regulatory and reimbursement pathways takes time.

Potential competition? Increased competition is inevitable and validating. We believe our investments have made our competitive position sustainable.

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