Analyst Conference Summary

conference date: January 25, 2018 @ 1:30 PM Pacific Time
for quarter ending: December 31, 2017 (fourth quarter, Q4 2017)

Forward-looking statements

Overview: Strong revenue growth continues, but GAAP profits hit by tax law change.

Basic data (GAAP):

Revenue was $892.4 million, up 11% sequentially from $806 million and up 18% from $756.9 million in the year-earlier quarter.

Net income was negative $38.8 million, down sequentially from $298 million, and down from $204 million year-earlier.

EPS (earnings per share, diluted) were negative $0.35, down sequentially from $2.55 and down from $1.71 year-earlier.

Guidance:

For 2018 expects proceedure growth range 11% to 15%, slower than 2017. Growth driven by ex-U.S., and in the U.S. by general surgery.

Expects a modest procedure headwind in Q1due to less working days . 2018 capital placements expected to follow the usual seasonality. Proportion of systems place under operating lease expected to increase.

Revenue will depend on procedure growth and capital spending.

2018 gross profit margin (non-GAAP) 70% to 71.5%, down due to higher cost of new products.

Non-GAAP operating expenses 16 to 18% higher y/y. $225 to $235 million non-cash stock-based compensation.

20 to 22% non-GAAP tax rate.

Conference Highlights:

CEO Gary Guthart said, "The opportunity for improvement in surgery is substantial."

The company began trading following a 3 for 1 split on October 6, 2017.

Intuitive Surgical shipped 216 da Vinci Surgical Systems, up 28% sequentially from 169, and up 33% from 163 in the year-earlier quarter. But 40 were shipped under leases, vs. only 13 in Q4 2016. 4,409 systems installed to date. 61 X systems sold. 86 systems were sold outside the U.S., including 22 in Japan.

Procedures using da Vinci systems in Q4 grew 17% y/y. Prostatectomy in the U.S. outperformed expectations. Lung lobectomies have been growing market share, and a recent data report showed robotic assisted surgery had better outcomes.

Revenue from Da Vinci system sales was $283 million, up 10% sequentially from $258 million, and up 20% from $236 million year-earlier.

Revenue from instruments and accessories was $457 million, up 14% sequentially from $401 million, and up 18% from $386 million year-earlier. $1,910 per procedure, roughly flat y/y.

Revenue from services was $153 million was up 4% sequentially from $147 million and up 13% y/y from $135 million.

Japan has expanded the types of procedures allowed for da Vinci systems to 12, but reimbursement levels have not been set yet.

60 mm stapler application made in the quarter.

Sees increased competition as possible, particularly outside the U.S.

Non-GAAP numbers: Net income was $298 million, down 8% sequentially from $324 million and up 23% from $242 million year-earlier. Non-GAAP EPS was $2.54, down 8% sequentially from $2.77, and up 25% from $2.03 year-earlier. Non-GAAP numbers exclude trade out revenues. 72.3% gross margin.

The cash and equivalents balance ended at $3.8 billion, about flat sequentially from $3.80 billion. There is no debt. Deferred revenue increased to $303 million.

Increased investment in next-generation products, including molecular imaging agents.

Cost of revenue was $259 million, leaving gross profit of $633 million. Operating expenses of $306 million included: $219 million for selling, general, and administrative; $87 million for research and development. Leaving income from operations of $327 million. Interest income was $12 million. Income tax expense $378 million.

$270 million of taxes was 15% of ex-U.S. cash. Also had a write-down. May change as IRS updates regulations to reflect the law. Will evaluate the need to repatriate cash.

Q&A:

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

No flexible endoscope revenue in 2018, but any approvals? We are not guiding to the clearance date yet. We will let you know when we do a submission. But going well.

Japan guidance? We don't know the reimbursement levels, but Japan is not substantial yet. the 2018 growth drivers are urological procedures outside the U.S. and general surgery in the U.S.

For current products and markets we believe we are not yet one-quarter penetrated. We look at differentiated value by procedure to estimate TAM. SP is a clear opportunity for new procedures. Flex also. We like platform ideas that can broaden over time.

SP additional indications in 2018? Not ready with timing for additional indications. It depends on conversations with the FDA. 60 mm stapler should follow historical timelines, so hope to see it this year.

Investing in computer-assisted surgery, which should generate more opportunities, but also more competitors.

China JV, hiring of team? We have hired a CEO and CFO. Building out the team and preparing for the business launch, but that requires the catheter product in the U.S.

Still selling SI systems? There are countries where we don't have regulatory approval for newer systems, and some customers already have SI and prefer to not have mixes of systems. We expect SI system sales to decline over time. Retiring machines is an accepted part of our business cycle, and most are traded in, as 18 were in the quarter.

China quota visibility? No new news. We do not think anything is wrong, or Intuitive specific. Last time we had a quota approved was 2013, and the systems did not sell until 2015.

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