Analyst Conference Summary

conference date: January 21, 2016 @ 1:30 PM Pacific Time
for quarter ending: December 31, 2015 (fourth quarter, Q4 2015)

Forward-looking statements

Overview: Showed both y/y and sequential revenue increases.

Basic data (GAAP):

Revenue was $676.5 million, up 15% sequentially from $589.7 million and up 12% from $604.7 million in the year-earlier quarter.

Net income was $190.0 million, up 14% sequentially from $167.3 million, and up 29% from $146.8 million year-earlier.

EPS (earnings per share, diluted) were $4.99, up 13% sequentially from $4.40 and up 27% from $3.94 year-earlier.

Guidance:

In 2016 procedures are expected to grow about 9% to 12% y/y, with seasonality as in the past. Capital sales seasonal patterns are expected to become more pronounced, with Q1 worse than in the past. Gross profit margin range 68% to 69.5%. Operating expenses will increase 9% to 13% y/y. $170 to $180 million non-cash stock based compensation expense. Pro-forma tax rate 26.5 to 28.5%, depending on % of international revenue.

Conference Highlights:

Intuitive Surgical shipped 158 da Vinci Surgical Systems, up sequentially from 117, and up from 137 in the year-earlier quarter. 72% of systems placed were da Vinci Xi. $1.55 million average sales price. 75 systems and $219 million revenue was from outside the U.S., up sequentially from $151 million. 24 systems were placed in Japan or China. 17% of systems places were financed, 20 by Intuitive.

Procedures using da Vinci systems in Q1 grew about 15% y/y.

Revenue from Da Vinci system sales was $230.7 million, up 8% from $214.0 million year-earlier.

Revenue from instruments and accessories was $325.6 million. $1840 per procedure average.

Revenue from services was $120.2 million up 9% y/y.

After the quarter ended Intuitive Surgical received clearance for its integrated table motion product. Plans to continue to increase investments in advancing technology.

Non-GAAP numbers: $677 million in revenue up 13% y/y. Net income was $224 million, up 13% sequentially from $199 million and up 22% from $184 million year-earlier. Non-GAAP EPS was $5.89, up 12% sequentially from $5.24, and up 20% from $4.92 year-earlier. 69.6% gross margin. Non-GAAP numbers exclude trade out revenues. Share based compensation expense exploded was $41.5 million.

The cash and equivalents balance ended at $3.35 billion, up sequentially from $3.1 billion. There is no debt. $84 million was spent on stock buybacks in the quarter.

The medical device tax has been suspended for 2 years. There was a $6 million credit for the reinstatement of the R&D tax credit, which has been made permanent. There were no litigation charges in the quarter, as accrued reserves were sufficient.

Cost of revenue was $217.7 million, leaving gross profit of $458.8 million. Operating expenses of $212.9 million included: $160.3 million for selling, general, and administrative; $52.6 million for research and development. Leaving income from operations of $245.9 million. Interest income was $5.9 million. Income tax expense $61.8 million.

Believes 2016 prostatectomy procedure rate will come into line with new prostate disease rate. Also believe U.S. benign hysterectomy market will be challenging. But there is a large opportunity in hernia repair and colectomies.

Q&A:

Competitive landscape? We see it as an ecosystem, including instruments and accessories, training, etc. Competitors will have to show value. We have been getting ready for competition for years. "We think we are really well positioned."

2016 margins, are they deteriorating if you take out the medical device tax? We are working to reduce the costs of new products. A higher proportion of 2016 sales will be new products, which have a lower margin, and less dual systems. FX could still be a headwind. Also, we don't know what impact there will be from competition.

Investments are focuses on increasing visibility for surgeons, filling out families of instruments, and specific procedures that we are not in today.

Single site proceedure competition and SP? SP adds value in a different way. It is broader and more capable than single-site. It is able to reach complex structures when needed.

U.S. system utilization, potential for more system sales? There is not a single customer profile. We see some networks are trying to optimize procedures per system per year. Others are looking for convenience for surgeons and patients.

When might we see SP clinical data? Not releasing timeline data yet, but could describe it later in 2016.

China a regulatory approval, procedure growth? It is more than just system authorizations. Growth could be across a much larger range of markets than in 2015.

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