Analyst Conference Summary

conference date: October 20, 2015 @ 1:30 PM Pacific Time
for quarter ending: September 30, 2015 (third quarter, Q3 2015)

Forward-looking statements

Overview: Moderate 7% y/y revenue increase, but better increases in net income and EPS.

Basic data (GAAP):

Revenue was $589.7 million, up 1% sequentially from $586.1 million and up 7% from $550.1 million in the year-earlier quarter.

Net income was $167.3 million, up 24% sequentially from $134.5 million, and up 35% from $123.7 million year-earlier.

EPS (earnings per share, diluted) were $4.40, up 24% sequentially from $3.56 and up 31% from $3.35 year-earlier.

Guidance:

For full year 2015 procedures growth is expected to be up 13% to 14% y/y. Gross profit outlook improved. Q4 margin 67.5% to 68.5%. Operating expenses between 7% and 10% above 2014 levels. $16 to $18 million 2015 other income.

Conference Highlights:

Intuitive Surgical shipped 117 da Vinci Surgical Systems, down sequentially from 118, and up from 111 in the year-earlier quarter. 77% of systems placed were da Vinci Xi. $1.6 million average sales price, up both sequentially and y/y due to high mix of Xi and dual consoles. 80 of the systems were placed in the U.S., 37 outside the U.S. No systems were placed in Japan or China. 25% of systems places were financed, 20% by Intuitive.

$151 million of revenue was from outside the U.S., down 10% sequentially from $168.

Procedures using da Vinci systems in Q1 grew about 15% y/y, led by 28% growth in international procedures.

Revenue from Da Vinci system sales was $174.2 million, down 2% sequentially from $176 million and up 3% from $168.8 million in the year-earlier quarter. Average system prices were higher.

Revenue from instruments and accessories was $298.1 million, up slightly sequentially from $297 million and up 9% from $272.8 million year-earlier. $1840 per procedure average.

Revenue from services was $117.4 million, up 4% sequentially from $113 million and up 8% from $108.5 million year-earlier.

Non-GAAP numbers: $590 million in revenue. Net income was $199 million, up 15% sequentially from $173 million and up 37% from $145 million year-earlier. Non-GAAP EPS was $5.24, up 15% sequentially from $4.57, and up 34% from $3.92 year-earlier. 69.3% gross margin. Non-GAAP numbers exclude trade out revenues.

The cash and equivalents balance ended at $3.1 billion, up sequentially from $2.9 billion. There is no debt. $36 million was spent on stock buybacks in the quarter.

Cost of revenue was $193.9 million, leaving gross profit of $395.8 million. Operating expenses of $205.9 million included: $154.9 million for selling, general, and administrative; $51.0 million for research and development. Leaving income from operations of $189.9 million. Interest income was $3.7 million. Income tax expense $26.3 million.

SP development continues. During the third quarter 2015 the company filed for FDA 510(k) clearances in the U.S. for Single-Site instruments and 30mm EndoWrist stapler products for the da Vinci Xi system.

More data came in showing the advantages of da Vinci robotic surgeries for various procedures.

Q&A:

Legacy U.S. procedures, DVH and DVP? Anecdotally the DVPs have been well supported by analyses.

International procedure growth acceleration? Korea has been building nicely. Japan has a lot of interest, but we are waiting on reimbursement. China has a quota for system placements, we are not done with our quota, but will need a new one. 18 systems remain on the quota, there is a tender process for hospitals. Future shipments are unpredictable.

Procedure volume environment? For DVP we believe there was flowback from watchful waiting. In DVH the trend is towards concentration with the more productive surgeons. In a lot of markets we are just getting started, including Europe and certainly Asia.

Gaining more Japan reimbursements? Multiple stakeholders exist in Japan with decision making input. We are in a partial nephrectomy process. Other procedures are not yet officially in processes. There is interest, and active conversations.

Forward outlook? We are seeing good response from general surgeons. In Europe we have been investing, customer demand is strong. We can strengthen some of our own processes.

Does guidance indicate a soft Q4 for procedure growth? Overall we are pleased, and this is the third quarter in a row we have increased our procedure guidance. 13% to 14% in Q4 is good since the y/y comps get harder.

Leasing to place more systems? We are trying to be flexible with our customers. Installed systems drive procedures and so accessory revenue. Some leases have resulted in customers buying the systems.

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