Analyst Conference Summary

conference date: July 19, 2018 @ 1:30 PM Pacific Time
for quarter ending: June 30, 2018 (second quarter, Q2 2018)

Forward-looking statements

Overview: Continued strong y/y revenue growth, but sequential drop in GAAP net income. GAAP EPS up 11% y/y. Shipments of new surgical systems was very strong.

Basic data (GAAP):

Revenue was $909 million, up 7% sequentially from $848 million and up 20% from $759 million in the year-earlier quarter.

Net income was $255 million, down 11% sequentially from $288 million, and up 14% from $223 million year-earlier.

EPS (earnings per share, diluted) were $2.15, up sequentially from $ and up 11% from $1.94 year-earlier.

Guidance:

Procedure growth increased to 14.5% to 16.5%. Gross profit (non-GAAP) range 70% to 71.5%. 16% to 18% operating expense increase y/y. Non-cash stock based comp $245 to $255 million. Income tax range 19.5% to 20.5%

Conference Highlights:

CEO Gary Guthart said, "We are pleased with our customers’ increased use of da Vinci in the second quarter and the financial results that follow. We remain dedicated to working with our customers to deliver superior programs, while continuing to build on our record of innovation - including the recent clearances of our SP surgical system and 3rd generation stapling platform." Believes there are still substantial opportunities available. But system placements may be volatile for remainder of 2018. Still no new quotas allocated by China.

Despite growing competition, believes has set a high bar for new entries to the market.

Q1 growth in the U.S. was driven by general surgery procedures, including hernia repair. Global growth was driven by urology. The U.K. was particularly strong.

SP shipments will begin later this year. The rollout will be gradual.

In July the company received FDA clearance for the single-patient use 60 mm stapler. Vessel sealer extend was approved in April.

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

Intuitive Surgical shipped 220 da Vinci Surgical Systems, up 19% sequentially from 185 and up 32% from 166 year-earlier. Installed base grew % y/y. 44 systems were shipped under lease agreements. Installed base grew 12% y/y. 34% of shipments involved trade-ins. Average price was $1.42 million.

Procedures using da Vinci systems in Q2 grew 18% y/y, driven by U.S. general surgery and worldwide urological surgery.

Revenue from Da Vinci system sales was $277 million, up 18% sequentially from $235 million, and up 25% from $221 million year-earlier. ASPs were lower y/y.

Revenue from instruments and accessories was $476 million, up 3% sequentially from $460 million, and up 20% from $398 million year-earlier. $1,850 per procedure, up 1% y/y.

Revenue from services was $156 million was up 2% sequentially from $153 million and up 11% y/y from $140 million.

Non-GAAP numbers: Net income was $327 million, up 14% sequentially from $288 million and up 42% from $230 million year-earlier. Non-GAAP EPS was $2.76, up 13% sequentially from $2.44, and up 38% from $2.00 year-earlier. Non-GAAP numbers exclude trade out revenues. 71.1% gross margin, down y/y.

The cash and equivalents balance ended at $4.3 billion, up sequentially from $4.1 billion. $220 million cash from operations. No repurchases in quarter. There is no debt. $1.4 billion of cash was repatriated to the U.S. Deferred revenue increased to $302 million.

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

Cost of revenue was $277.0 million, leaving gross profit of $632.3 million. Operating expenses of $354.9 million included: $259.8 million for selling, general, and administrative; $95.1 million for research and development. Leaving income from operations of $277.4 million. Interest income was $18.2 million. Income tax expense $295.6 million.

Q&A:

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

U.S. proceedure growth details? XI introduction and imaging brings value to surgeons. Geriatric surgeons show new interest. Hernia repair and colorectal are showing good stick rates. Prostatectomy increases have been a surprise, may not be sustainable.

We have been pleased so far with customer interest in SP systems. Interest in urology. Provides a different kind of access to the body than XI systems.

Competitors features? We think about what allows for smooth operations in a broad set of procedure types. We have tried a lot of the ideas our competitors are now promoting, but does not mean we are right in our choices for all surgeons and types of operations.

Real time imaging overlays in first SP launch? Fusion of MRI or other images, currently pre-operative images can be brought in. We are working on further capabilities, no timeline to announce yet.

China, Japan? We are pleased with interest in Japan, testing the capabilities of the team there. No update on the China quota. Global political atmosphere is not helping. China is important to us. Some of our component prices will go up because of new tariffs, but the overall impact is small, we don't expect to pass on increases to customers.

SP supplies will be limited for the first few quarters.

Revenue per procedure is getting a positive effect from advanced products, but the quarters are still going to be volatile.

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