Analyst Conference Summary

conference date: April 19, 2016 @ 1:30 PM Pacific Time
for quarter ending: March 31, 2016 (first quarter, Q1 2016)

Forward-looking statements

Overview: Revenue and net income up significantly y/y, but down sequentially.

Basic data (GAAP):

Revenue was $594.5 million, down 12% sequentially from $676.5 million and up 12% from $532.1 million in the year-earlier quarter.

Net income was $136.4 million, down 28% sequentially from $190.0 million, and up 41% from $97.0 million year-earlier.

EPS (earnings per share, diluted) were $3.54, down 29% sequentially from $4.99 and up 38% from $2.57 year-earlier.

Guidance:

For 2016 estimates procedure growth increased to 12 to 14% over 2015. Gross profit margin range pro-forma (non-GAAP) 69% to 70%. Operating expenses to grow 12% to 15%. Non-cash stock-based compensation $170 to $180 million. Other income $20 to $25 million. Income tax rate 26.5 to 28.5% of non-GAAP income.

Conference Highlights:

Intuitive Surgical shipped 110 da Vinci Surgical Systems, down sequentially from 158, and up from 99 in the year-earlier quarter. 77% of systems placed were da Vinci Xi. 36 systems (flat y/y) and $164 million revenue was from outside the U.S. 13 systems were placed in Japan or China. 19 systems were shipped under leases, up from 9 year-earlier.

Procedures using da Vinci systems in Q1 grew about 17% y/y, "driven primarily by growth in U.S. general surgery procedures and worldwide urologic procedures." Colorectal and hernia repairs had strong growth. 22% procedure growth outside the U.S. Japan made some approvals for reimbursement for some surgery types in the quarter.

Revenue from Da Vinci system sales was $148 million, up 5% from $141 million year-earlier. The revenue increase is mainly from shipping more on a leased basis. $1.5 million ASP.

Revenue from instruments and accessories was $322 million up 16% y/y. $1,830 per procedure average.

Revenue from services was $125 million up 9% y/y.

In March, Intuitive received FDA clearances in the U.S. for XI Single-Site instruments and the 30mm EndoWrist stapler products. Table motion launch going well. Plans to continue to increase investments in advancing technology including imaging and analytics. SP program remains on track.

Non-GAAP numbers: Net income was $170.3 million, down 24% sequentially from $224 million and up 27% from $134.6 million year-earlier. Non-GAAP EPS was $4.42, down 25% sequentially from $5.89, and up 24% from $3.57 year-earlier. 70% gross margin. Non-GAAP numbers exclude trade out revenues. Share based compensation expense was $43 million.

The cash and equivalents balance ended at $3.80 billion, up sequentially from $3.35 billion. There is no debt. No cash was spent on stock buybacks in the quarter.

The medical device tax has been suspended for 2 years. The R&D tax credit is now permanent.

Product cost reductions exceeded expectations.

Cost of revenue was $189.5 million, leaving gross profit of $405.0 million. Operating expenses of $226.0 million included: $172.8 million for selling, general, and administrative; $53.2 million for research and development. Leaving income from operations of $179.0 million. Interest income was $5.5 million. Income tax expense $48.1 million.

Q&A:

Procedure volume growth in U.S., types that accelerated? Mature procedures sustained strong growth, which was better than expectations.

Operating expense spend in 2016? The increased spend is born of confidence. Some is in markets outside the U.S. The rest is R&D, mainly imaging, robotic architectures, and analytics.

Hysterectomy in Japan? Clinical trials now okay to enroll.

Table motion sales? Pleased with adoption so far. Surgeons like it. Not disclosing units sold. Margins are from our software, the actual tables are from Trump.

Europe in quarter and outlook? It varied by country for procedures. For systems there is the environment and the wait-and-see competitive products. It has also become very seasonal, so we had a very strong Q4.

Gross margin rest of year? Biggest factor is product mix. Instruments and accessories have higher margins than systems. Q1 is lowest for systems, so we are not likely to maintain 70% in future quarters.

Advanced imaging updates? We have Firefly. We have invested in raw imaging hardware capabilities. We will inform you of milestones when we reach them.

Confidence is building from clinical outcomes and anecdotes for abdominal surgery.

Operating lease dynamics? It allows us to be flexible with customer financial needs. The short term ones are often just to allow them to get capital approvals. But most are long term and will drive revenue going forward.

U.S. urology and gynecology growth? Three main urology procedures, biggest is prostatectomy, where a bolus is in watching waiting. Demographics, aging population also leads to more prostate cancer. High volume gynecologists are taking a larger share and tend to be our customers. Also a positive demographic element. Single site procedures have been declining, but benign procedures have been growing.

42 trade ins, up from more typical 30s per quarter? Nothing specific in quarter to call out.

We see a lot of opportunities we should pursue, but we try to balance revenue and profit, but there will continue to be lumpiness.

Share repurchases? We are thoughtful about capital allocation. We start by looking at investing in growth in the business. We are opportunistic about buy backs. We continue to consider paying a dividend.

China going forward? Only one system left on the current quota. Additional quotas would be part of the budget process, and we do not know the timeline nor can we predict a number in advance.

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