Analyst Conference Summary

conference date: July 20, 2017 @ 1:30 PM Pacific Time
for quarter ending: June 30, 2017 (second quarter, Q2 2017)

Forward-looking statements

Overview: Impressive revenue quarter, especially given the healthcare system turmoil. Non-GAAP profit growth was not quite as great.

Basic data (GAAP):

Revenue was $756 million, up 12% sequentially from $674 million and up 13% from $670 million in the year-earlier quarter.

Net income was $222 million, up 23% sequentially from $180 million, and up 20% from $185 million year-earlier.

EPS (earnings per share, diluted) were $5.77, up 24% sequentially from $4.67 and up 23% from $4.71 year-earlier.

Guidance:

Full year 2017 procedure growth now estimated at 14% to 15% over 2016. But the rate will moderate in 2H from 1H due to saturation in China. In 2H the proportion of systems sold with leases will increase, and ASPs will trend lower.

Gross profit for 2017 margin raised to 70 to 71.5%. Operating expenses up 17% to 18% over 2016. Non-cash stock based compensation expense $200 to $210 million.

Tax 28% to 29.5% non-GAAP tax rate, higher due to a larger proportion of U.S. profits.

Conference Highlights:

Intuitive Surgical shipped 166 da Vinci Surgical Systems, up 25% sequentially from 133, and up 25% from 133 in the year-earlier quarter. But 27 were shipped under leases, vs. only 15 in Q2 2016. Includes 11 X systems. 63 systems were placed outside the U.S.

Procedures using da Vinci systems in Q2 grew 16% y/y. Growth was driven mainly by general surgery in the U.S. and global urologic procedures. China and Germany showed strong growth.

Revenue from Da Vinci system sales was $216 million, up 41% sequentially from $153 million, and up 7% from $203 million year-earlier. $1,46 million average price, down from $1.56 million year-earlier due to more lower-priced systems sold to cost-sensative customers..

Revenue from instruments and accessories was $398 million, up 4% sequentially from $381 million, and up 17% from $339 million year-earlier. $1830 per procedure average, up from $1810 year-earlier.

Revenue from services was $142 million was up 1% sequentially from $140 million and up 11% y/y from $128 million.

CEO Gary Guthart said, "Solid performance in procedures and growth in system placements. . . hernia repair continues to standout . . . growth in China was a highlight." There is still a lack of new quotas for systems in China, and limited procedure growth in Japan.

Non-GAAP numbers: Net income was $228 million, up 16% sequentially from $196 million and up 4% from $220 million year-earlier. Non-GAAP EPS was $5.95, up 17% sequentially from $5.09, and up 6% from $5.62 year-earlier. Non-GAAP numbers exclude trade out revenues. Share based compensation expense was $50.4 million. 71.3% gross margin.

The cash and equivalents balance ended at $3.42 billion, up sequentially from $3.15 billion. No material share repurchases. There is no debt. Deferred revenue increased to $298.

Increased investment in next-generation products. Launched di Vinci X in Europe and U.S. in Q2. SP program continues to progress, and urology application will be made in 2017. Flexible robotics is getting ready for pilot production phase.

Cost of revenue was $228 million, leaving gross profit of $528 million. Operating expenses of $270 million included: $186 million for selling, general, and administrative; $85 million for research and development. Leaving income from operations of $258 million. Interest income was $10 million. Income tax expense $46 million.

Because of the high share price, the remaining share buy back money may not materially change the total number of shares bought beyond those bought in January 2017.

A study of over 3000 colorectal patients showed costs of di Vinci surgeries were similar to standard surgery, but patients had a shorter time in hospitals. Other positive studies were published in the quarter.

Q&A:

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

On X, launch color? No surprises so far. Appeals to cost-sensative customers, particularly in Europe.

Prostatectomy volumes are expected to follow the general market trend.

Strength in U.S. capital number? Consolidation of U.S. customers into IDNs, they are making decisions in broader settings.

China quota timing? We don't know. We caution against putting anything in your models for this year.

SP beyond urology? We are collecting data on other procedures, we will make an announcement when we are ready. Feedback from the clinical trial sites has been really good.

SP regions? Should be global, but U.S. and China first, the Europe, where we are still working out what submission package will be required. No revenue in 2017, no date for commercial launch.

High rate of hiring? 4,108, up 100 sequentially, up 19% y/y. Most were in product operations group.

Japan, more systems than they need? They have a diffuse healthcare system. You have a lot of patients treated in remote areas. They are building capacity in hopes of broader reimbursements over time.

Beware of using XI launch for the new X or SP launches, due to consolidation of buying organizations, being better able to align demand and capacity.

X gross margin impact? Not a very different margin profile from our other products, initially. If we can expand the market by lowering the price a bit, we might do that.

Chinese procedure drivers? Willingness to expand the number of hours for surgery.

45 mm stapler launch? We have a number of stapler opportunities in development, but no timeline to announce.

Flexible catheter update? No update, the Australian data is being analysed, it is up to them to choose when it will be shared. "People are excited by flexible technologies in general."

XI vs. X decisions in quarter? There are still many markets where X is not yet approved. Some decisions had already been made. The approvals were late in the quarter for items with long sales cycles.

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