Analyst Conference Summary

conference date: October 18, 2018 @ 1:30 PM Pacific Time
for quarter ending: September 30, 2018 (third quarter, Q3 2018)

Forward-looking statements

Overview: Revenue growth strong, but not as strong as usual. GAAP EPS down y/y. Systems sold was strong.

Basic data (GAAP):

Revenue was $921 million, up 1% sequentially from $909 million and up 14% from $808 million in the year-earlier quarter.

Net income was $293 million, up 15% sequentially from $255 million, and down 2% from $299 million year-earlier.

EPS (earnings per share, diluted) were $2.45, up 14% sequentially from $2.15 and down 4% from $2.56 year-earlier.

Guidance:

17 to 18% y/y procedure growth, increased. Larger % of systems placed through leases. Pro-former operating margin lower end increased. Operating expense growth lowered to 15.5 to 17% growth. Higher non-GAAP stock based comp. Income tax non-GAAP lower to 19 and 20% of pre-tax income.

Conference Highlights:

CEO Gary Guthart said, "We are pleased with our strong third quarter procedure growth, da Vinci system placements, and the financial results that follow. With our customers, we remain dedicated to the pursuit of our shared mission to improve the availability and quality of minimally invasive surgery." We believe acceptance of our products and introduction of fourth generation products are driving growth. We are in the early stages of several important product launches.

Intuitive shipped its first 3 da Vinci SP surgical systems in the quarter.

A premarket notification to the FDA for Ion endoluminal system was submitted; a catheter-based platform.

Procedures grew in Japan about 40% y/y. U.K. also showed strength.

In July the company received FDA clearance for the single-patient use 60 mm stapler for 4th generation systems. Vessel sealer extend was approved in April.

Leasing systems is growing as a % of systems shipped.

Intuitive Surgical shipped 231 da Vinci Surgical Systems, up 5% sequentially from 220 and up 37% from 169 year-earlier. Installed base grew 13% y/y. 58 systems were shipped under lease agreements. 28% of shipments involved trade-ins. Average price was $1.45 million.

Procedures using da Vinci systems in Q3 grew 20% y/y, driven by U.S. general surgery and global urologic surgery. But was about flat from Q2.

Revenue from Da Vinci system sales was $275 million, down 1% sequentially from $277 million, and up 5% from $262 million year-earlier. ASPs were lower y/y.

Revenue from instruments and accessories was $486 million, up 2% sequentially from $476 million, and up 21% from $401 million year-earlier. $1,900 per procedure, up 1% y/y.

Revenue from services was $160 million was up 3% sequentially from $156 million and up 10% y/y from $145 million.

Non-GAAP numbers: Net income was $337 million, up 3% sequentially from $327 million and up 4% from $325 million year-earlier. Non-GAAP EPS was $2.83, up 3% sequentially from $2.76, and up 2% from $2.78 year-earlier. Non-GAAP numbers exclude trade out revenues and $70 million in stock-based compensation. 71.5% gross margin, down y/y.

The cash and equivalents balance ended at $4.6 billion, up sequentially from $4.3 billion. Not stated $ million cash from operations. No repurchases in quarter. There is no debt.

Increased investment in next-generation products, including molecular imaging agents. Spending to increase next quarter and into 2019, including for overseas expansion.

Cost of revenue was $279 million, leaving gross profit of $642 million. Operating expenses of $329 million included: $221 million for selling, general, and administrative; $108 million for research and development. Leaving income from operations of $313 million. Interest income was $22 million. Income tax expense $43 million.

Q&A:

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

Capital allocation, why no stock buy back currently? No change in priorities. Organic investment, then adding talent, then return cash to shareholders, which we do based on market assesment (price).

Drivers of procedure demand? Urology, gynecology, general surgery. Utilization going up.

Hiring? Some tracks to procedure growth, for customer support. Some support for new products.

Bariatric procedures with new stapler? We are long-term enthusiastic, near term we are optimizing. In first stage of launch.

Changes in hernia procedures? Starting to see data supporting clinical benefit. Seeing reorders from existing customers. Still seeing some sub-segments shift around.

Lung cancer, Ion system, market has seen other products fail, so we need to show our system works.

Augmented reality products? We routinely work on improving imaging. We have built cloud capabilities; 90% of our systems are connected, so we can use machine learning techniques, and eventually augmented reality.

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