Analyst Conference Summary

conference date: April 17, 2018 @ 1:30 PM Pacific Time
for quarter ending: March 31, 2018 (first quarter, Q1 2018)

Forward-looking statements

Overview: Strong y/y revenue and profit growth. Sequential declines are seasonal.

Basic data (GAAP):

Revenue was $848 million, down 5% sequentially from $892.4 million and up 25% from $680 million in the year-earlier quarter.

Net income was $288 million, up sequentially from negative $38.8 million, and up 59% from $181 million year-earlier. Q4 2017 had a high tax charge.

EPS (earnings per share, diluted) were $2.44, up sequentially from negative $0.35 and up 55% from $1.57 year-earlier.

Guidance:

1:56 Procedure growth 12% to 15%. Revenue uncertain. 70 to 71.5% gross profit. Operating expenses to grow 16% to 18% y/y. $245 to $255 million non-cash employee compensation expense. Income tax rate 20% to 21%, but may be subject to IRS interpretations of the new tax law.

Conference Highlights:

CEO Gary Guthart said, "European procedure growth was mixed by country." But "capital placements rose over Q1 2017. . . we anticipate volatility in placements for the remainder of 2018." Also “We are pleased with our customers’ continued adoption of Intuitive’s products into their minimally invasive surgery programs. We remain deeply focused on meeting their clinical, workflow, and economic needs.”

"Effective in the first quarter 2018, the Company adopted a new revenue standard using the full retrospective method and all historical information has been restated accordingly. As a result, first quarter 2017 total revenue increased by $5 million and GAAP and non-GAAP* net income increased by $1 million, or $0.01 per diluted share."

Q1 growth in the U.S. was driven by hernia repair and general surgery.

The company had a 3 for 1 split on October 6, 2017.

Intuitive Surgical shipped 185 da Vinci Surgical Systems, down 14% sequentially from 216, but up 39% from 133 year-earlier. Installed base grew 13% y/y. 43 systems were shipped under lease agreements. The highest end XI systems had a larger share.

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

Revenue from Da Vinci system sales was $235 million, down 17% sequentially from $283 million, and up 46% from $161 million year-earlier.

Revenue from instruments and accessories was $460 million, up 1% sequentially from $457 million, and up 21% from $381 million year-earlier. $ per procedure, roughly flat y/y.

Revenue from services was $153 million was flat sequentially from $153 million and up 11% y/y from $138 million.

Da Vinci X received commercial clearance in Japan.

Da Vinci SP could be launched in 2018; in discussions with FDA. Also in talks with FDA for new stapler system. Also continued to work to improve imaging systems.

Non-GAAP numbers: Net income was $288 million, down 3% sequentially from $298 million and up 46% from $197 million year-earlier. Non-GAAP EPS was $2.44, down 4% sequentially from $2.54, and up 43% from $1.71 year-earlier. Non-GAAP numbers exclude trade out revenues. % gross margin.

The cash and equivalents balance ended at $4.1 billion, up sequentially from $3.80 billion. $280 million cash from operations. No repurchases in quarter. There is no debt. Deferred revenue increased to $280 million.

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

Cost of revenue was $253.4 million, leaving gross profit of $593.8 million. Operating expenses of $317.1 million included: $221.6 million for selling, general, and administrative; $95.5 million for research and development. Leaving income from operations of $276.7 million. Interest income was $13.2 million. Income tax expense $2.6 million.

Q&A:

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

Leasing increasing as % of shipments? We are happy to help customers with leasing, but don't see it as a massive strategic change to counter competition. Over time customers will evaluate competitive systems, leasing not likely to make a difference in their choices.

Flexible catheter timeline? We have a strong support system that competitors may not have. We have been investing in catheter robots for years. We also know the customer base.

Systems placement strong growth in quarter? We had a higher proportion of trade outs, and a higher proportion of XI, showing features drive adoptions. Given the trade outs, would not read too much in. Long run, systems should follow procedure growth.

China? No update on the quota, still waiting for it to be finalized, it is for 2016 to 2020.

International revenue vs. systems shipped differential? Operating leases, FX, and product mix.

Indian opportunity? Long term, sure, but it will not happen short term. We have a distributor there and 68 installed systems, but they don't generate that many procedures.

The raising of the low end of the procedure growth range for 2018 resulted mainly from Q1 U.S. results.

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