Analyst Conference Summary

conference date: April 18, 2019 @ 1:30 PM Pacific Time
for quarter ending: March 31, 2019 (first quarter, Q1 2019)

Forward-looking statements

Overview: Continued strong revenue and procedure growth y/y, usual Q1 sequential decline.

Basic data (GAAP):

Revenue was $974 million, down 7% sequentially from $1,047 million but up 15% from $848 million in the year-earlier quarter.

Net income was $307 million, up 5% sequentially from $293 million, and up 7% from $288 million year-earlier.

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

Guidance:

Updated capital expenditures for 2019 to over $250 million. Procedure growth 15% to 17%. Continued variation by quarter in systems placement revenue due to leasing and trade ins. 70 to 71% gross profit margin. Operating expenses 24% to 28% above 2018 levels. $320 to $340 million stock based comp expense. $120 to $130 million other income, mostly interest. Non-GAAP tax rate 19% to 20%.

Conference Highlights:

CEO Gary Guthart said, "We are pleased with our first quarter procedure and da Vinci system placements. Our teams continue to work closely with hospitals, physicians and their care teams in pursuit of better outcomes, decreased variability, better experiences for both physicians and patients and, ultimately, lowering the total cost of care."

Plans increased spend on research, manufacturing and sales in 2019. Launched the new vessel sealer, with initial adoption strong.

Still early in da Vinci SP launch. Installed 6 SP systems in Q1, bringing the total to 21. Trade ins of earlier generation systems increased. Leasing also increased.

In February 2019 the Intuitive received FDA clearance for the Ion endoluminal system. This new flexible robotic-assisted catheter-based platform is designed to navigate through very small lung airways to reach peripheral nodules for biopsies. In February 2019, the company received FDA clearance for the IRIS augmented reality product for delivering a 3D image of patient anatomy. In March 2019, received FDA approval for the da Vinci SP Surgical System for certain transoral otolaryngology procedures.

Expects to accelerate sales in China in 2019, but placed on 3 in Q1. Investing in other nations as well. This will result in an increased spend in 2019. Will also accelerate R&D spend. Will roll out Ion, but does not expect material revenue in 2019. Same for IRIS.

More data was released supporting the use of da Vinci systems.

Revenue from Da Vinci system sales was $247.5 million, down 27% sequentially from $340.6 million, and up 6% from $234.5 million year-earlier. Systems shipped was 235, down 19% sequentially from 290, but up 27% from 185 year-earlier. System shipments included 78 systems under operating lease compared with during q1 2018. 36% of shipments in quarter involved trade-ins. ASPs were $1.31 million, down y/y. The installed base was 5,114 sytems.

Revenue from instruments and accessories was $552.3 million, up 2% sequentially from $539.3 million, and up 20% from $460.3 million year-earlier. $1,960 per procedure, up 2% y/y.

Revenue from services was $173.9 million was up 4% sequentially from $167 million and up 14% y/y from $152.7 million.

Non-GAAP numbers: Net income was $312 million, down 12% sequentially from $353 million and up 9% from $288 million year-earlier. Non-GAAP EPS was $2.61, down 12% sequentially from $2.96, and up 7% from $2.44 year-earlier. Non-GAAP numbers exclude trade out revenues and $76 million in stock-based compensation. 71.2% gross margin, down slightly from 71.6 %y/y due to lower system ASPs.

The cash and equivalents balance ended at $5.1 billion, up sequentially from $4.8 billion. $ million cash from operations. No repurchases in quarter, but $2 billion authorized. There is no debt.

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

Cost of revenue was $304 million, leaving gross profit of $670 million. Operating expenses of $417 million included: $273 million for selling, general, and administrative; $144 million for research and development. Leaving income from operations of $252 million. Interest income was $28 million. Income tax benefit $24 million.

Q&A:

Bariatric surgery opportunity? Exceited about bariatric as a long-term opportunity. Commercial focus is on hernia and colorectal, but we are seeing early interest for bariatic. 180,000 aggregate procedures annually, with many subtypes that should show clear benefit from robotic surgery.

China quotas? 154 systems quota (including our rivals) currently. It is a long process. So should ramp eventually, but the 3 systems in Q1 were from the prior quota.

Operating leases, could % move higher? Leasing introduced a few years ago. We believe we have allowed customers to expand more quickly. Leases create a recurrent revenue stream. But it is hard to predict how high the % would go; we would like to see it go further.

R&D spend increase? Computational capability and informatics are the priority, then Ion, advanced instruments, and imaging. This should support our future growth.

Mix dynamics? There was a shift to trade-ins, up to 36%. Customers want to trade up to 4th generation technology. More multisystem deals, standardizing on a platform. Higher X system proportion, a lower cost product for geographies where reimbursement is lower, like Europe. ASPs for 2019 are more likely to be near the Q1 number than the 2018 number.

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