Analyst Conference Summary

conference date: July 18, 2019 @ 1:30 PM Pacific Time
for quarter ending: June 30, 2019 (second quarter, Q2 2019)

Forward-looking statements

Overview: Very strong revenue and profit growth

Basic data (GAAP):

Revenue was $1.10 billion, up 13% sequentially from $974 million and up 21% from $909 million in the year-earlier quarter.

Net income was $318 million, up 4% sequentially from $307 million, and up 25% from $255 million year-earlier.

EPS (earnings per share, diluted) were $2.67, up 4% sequentially from $2.56 and up 24% from $2.15 year-earlier.

Guidance:

Capital expenditures will grow to about $250 million for the year 2019. Procedure growth refined upward to 16% to 17%. GAAP gross profit margin at high end of prior range. Operating expenss to grow 24% to 28% y/y. $130 to $135 million other income, an increase from prior guidance.

Conference Highlights:

CEO Gary Guthart said, "Intuitive's performance in our second quarter was solid. Our teams remain focused on helping our customers improve outcomes and lower the total cost to treat per patient episode for their patient populations. By integrating human understanding, smart systems, imaging, instruments, and actionable insights, we aim to build solutions that help advance surgical care." Capital placements exceeeded expectations.

Revenue growth was driven primarily by 17% y/y growth in procedure volume. Second quarter 2018 GAAP income from operations included pre-tax litigation charge of $43 million. "Our tax rate will increase in 2020 with the return of the medical device tax."

Still early in da Vinci SP launch. Installed 13 SP systems in Q2, bringing the total to 34. SP is doing particularly well in Korea, where more indications have been cleared than in the U.S. 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 only 8 in Q2. 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.

Ion flexible platform received clearance from FDA in Q1, with measured rollout now underway. Commercial placements will commence soon, but expects no material revenue in 2019.

Revenue from Da Vinci system sales was $344 million. 273 systems shipped, including 88 leased systems. Average system price of $1.54 million increased as a result of mix changes. 74% of placed systems were XI's.

Revenue from instruments and accessories was $579 million. Intuitive saw increased use of advanced instruments, boosting revenue, but mainly driven by increased procedures.

Revenue from services was $177 million.

Non-GAAP numbers: Net income was $388 million, up 24% sequentially from $312 million and up 19% from $327 million year-earlier. Non-GAAP EPS was $3.25, up 25% sequentially from $2.61, and up 18% from $2.76 year-earlier. Non-GAAP numbers exclude trade out revenues and stock-based compensation. 71.3% gross margin.

The cash and equivalents balance ended at $5.1 billion, flat sequentially from $5.10 billion. Cash from operations was offset by investory growth and $200 million used for stock repurchases in quarter. 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 $340 million, leaving gross profit of $759 million. Operating expenses of $400 million included: $279 million for selling, general, and administrative; $121 million for research and development. Leaving income from operations of $359 million. Interest income was $33 million. Income tax expense $75 million. Loss attributed to non-controlling interest $2 million.

Q&A:

U.S procedure growth, moderation in hernia and colorectal? A tad of moderation, demand remains strong. There is competition for system access in some centers. Our commercial teams have been growing, it takes time to get new members productive. The rate of growth declines as the base increases.

System growth Q1 to Q2, rest of year outlook? Nothing different in customer behavior except for the mix. We saw more XI's in Q2 and less sold through distributors, with their discounts. It is best to view the first half as a whole.

Why do you expect ASPs to drift down going forward? Return to a more typical mix of distributor sales and more XIs vs. Xs.

Iris imiging interest? Interest from surgeons is high. We don't expect revenue this year, we are developing use cases.

Driver of next wave of procedure growth? Access in core markets. Surgeons want more access. SP and Ion will help over time, but will take some time to develop. Geographic expansion takes time.

We are seeing increased usage of advanced instruments like vessel sealing and staplers.

How much of a priority is flexible robotics? We like to think in platforms. Ion has exquisite sensing. It gives us a lot of optionality in clinical markets. Architectural choices are really important; we want to deliver a high quality product to the market.

Fiber optics acquisition? They have been a strong supply chain partner. They have a great team. Imaging is really important for surgery. Paying about $100 million in cash, closing timing subject to conditions.

Ion opportunity outside the U.S.? We are in discussions with Chinese regulators. Our focus is on understanding the technology and demonstrating differentiated results versus the other products on the market.

Use of cash? We are investing in the future. We want cash because of the volatile environment, including possible tariffs. Otherwise we want cash to buy back stock to return to shareholders.

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