Analyst Conference Summary

conference date: April 18, 2017 @ 1:30 PM Pacific Time
for quarter ending: March 31, 2017 (first quarter, Q1 2017)

Forward-looking statements

Overview: Sequential revenue decline but y/y growth with strong EPS growth. Cash balance down considerably due to stock buy backs. Robot growth was tepid, most growth came from instrument, accessory, and services sales.

Basic data (GAAP):

Revenue was $674.2 million, down 11% sequentially from $756.9 million and up 13% from $594.5 million in the year-earlier quarter.

Net income was $179.8 million, down 12% sequentially from $204.0 million, and up 32% from $136.4 million year-earlier.

EPS (earnings per share, diluted) were $4.67, down 9% sequentially from $5.13 and up 32% from $3.54 year-earlier.

Guidance:

Expects procedure growth rate to slow in Q2 in U.S. due to timing of the Easter holiday. 700,000 further reduction in number of shares outstanding.

For full 2017, procedure growth y/y upped to 12% to 14%. System placements are expected to increasingly be leases rather than outright sales. Average system selling price expected to trend lower due to sales in more cost-sensitive national markets.

Gross profit margin upped to 70% to 71%. Operating expenses up y/y near the high end of the earlier 15% to 18% range. Income tax rate 26.5% and 28.5%, unchanged.

Conference Highlights:

Intuitive Surgical shipped 133 da Vinci Surgical Systems, down 18% sequentially from 163, and up 21% from 110 in the year-earlier quarter. U.S. placements were up only moderately y/y, were strong in Europe, Korea and India, but weak in China. 21 of shipped systems were leased, raising the total to 95.

Procedures using da Vinci systems in Q1 grew 18% y/y driven by general surgery in the U.S. and urologic surgery worldwide. Growth was up 2% sequentially. 14% y/y growth in U.S., 28% growth ex-U.S.

Revenue from Da Vinci system sales was $153 million, down 35% sequentially from $235.9 million, and up 4% from $148 million year-earlier. $1.46 million average price. Q1 revenue excludes $23 million deferred for a customer trade-out program for future buyers of da Vinci X.

Revenue from instruments and accessories was $381 million, down 1% sequentially from $386.3 million, and up 18% from $322 million year-earlier. $1,840 per procedure average, up from $1,830 year-earlier. Increased sales of stapling and vessel-sealing products.

Revenue from services was $140 million was up 4% sequentially from $134.7 million and up 13% y/y from $125 million.

CEO Gary Guthart said, "We are pleased with broad-based da Vinci procedure growth during the first quarter and are encouraged by trends in key global markets and our U.S. general surgery business. Consistent with our mission, we strive to make surgery more effective, less invasive and easier on surgeons, patients and their families by actively engaging hospitals and surgical teams." That is, nothing new. But "procedure growth accelerated in the quarter."

Non-GAAP numbers: Net income was $196.0 million, down 19% sequentially from $242 million and up 15% from $170.3 million year-earlier. Non-GAAP EPS was $5.09, down 16% sequentially from $6.09, and up 15% from $4.42 year-earlier. Non-GAAP numbers exclude trade out revenues. Share based compensation expense was $47 million. 72% gross margin.

The cash and equivalents balance ended at $3.15 billion, down sequentially from $4.8 billion mainly due to $2 billion used in share repurchases. There is no debt.

Increased investment in next-generation products. Will launch di Vinci X in Europe in Q2, but XI will remain the flagship. SP program continues to progress, but urology application will be pushed back. Flexible robotics is getting ready for pilot production phase.

Cost of revenue was $208 million, leaving gross profit of $466 million. Operating expenses of $275 million included: $201 million for selling, general, and administrative; $74 million for research and development. Leaving income from operations of $192 million. Interest income was $9 million. Income tax expense $20 million.

GAAP Net income included $21 million in litigation charges related to injuries suffered in during surgeries.

Pleased to see the U.S. government back off recommending against extensive PSA testing, [which should drive up detection of prostate tumors, and then the number of surgeries].

Still waiting on a new quota to allow Chinese hospitals to buy more robots, but procedure growth in China has been good.

Q&A:

[note not all questions are included, and long answers are made short]

da Vinci X launch timing? We plan to launch in Europe first, after the CE Mark review, which should complete in "the next quarter or so."

New market opportunity for X? Combines SI cart chassis and the best software and imaging. It should be at an attractive price point. ASPs will be between SIs and XIs. We will announce feature benefits later. XI will remain top of the line.

Could X launch in the U.S. this year? It is possible, but we have not announced a launch window yet.

Gross margin guidance? Is it from X margins? We are pleased with Q1 margins. So we moved guidance for 2017 to the higher end of the prior range. Q1 margin had some boosters that won't be repeated so much in other quarters. The more systems we sell, the lower the margin is, and the lower-priced systems have lower margins.

"We feel like our Q1 results were exceptional," so things could moderate going forward.

Can Xs be upgraded to SPs? Ultimately yes.

The main growth opportunities are now outside the U.S., especially Asia.

X vs. XI instruments? Same family as XI, generation 2, also the same imaging system.

China quota? No visibility.

ACA politics effect on investment in robotics? The ACA has injected some caution on the margins.

The attach rate for table-motion has exceeded our expectations.

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