Analyst Conference Summary

conference date: October 17, 2019 @ 1:30 PM Pacific Time
for quarter ending: September 30, 2019 (third quarter, Q3 2019)

Forward-looking statements

Overview: Very strong revenue and profit growth

Basic data (GAAP):

Revenue was $1.128 billion, up 3% sequentially from $1.10 billion and up 23% from $921 million in the year-earlier quarter.

Net income was $397 million, up 25% sequentially from $318 million, and up 36% from $292 million year-earlier.

EPS (earnings per share, diluted) were $3.33, up 25% sequentially from $2.67 and up 36% from $2.45 year-earlier.

Guidance:

17% to 18% full year procedure growth. Gross profit margin 71.0 to 71.5%. Operating expense growth restricted to 24% to 27%. Stock compensation $330 to $340 million. Other income $125 to $130 million. Income tax Q4 rate 19% to 20% pro-forma.

Conference Highlights:

CEO Gary Guthart said, "We are pleased with performance in the quarter, reflected in our support of customers in procedures performed and system placements. Intuitive is committed to enabling care givers in their pursuit of better outcomes while lowering their total cost of treatment," Growth centered on general surgery in the U.S., but with support from Germany, Korea and Japan. Sales force productivity improved in the quarter. Expects return of the medical device tax in 2020.

Revenue growth was driven primarily by 20% y/y procedure growth. 23% outside the US, driven by DPT.

Still early in da Vinci SP launch. Installed 4 SP systems in Q3, with a delay in the quarter due to need to investigate endoscope issues. Now does not expect a third indication for SP to be approved in the US in 2019.

Intuitive sold its first three Ion endoluminal systems in Q3 2019. Ion is the Company's new flexible, catheter-based platform, designed to navigate through very small lung airways to reach peripheral nodules for biopsies. Ion flexible platform received clearance from FDA in Q1, 2019. In July 2019, the company received FDA clearance for the SureForm 45 Curved-Tip stapler.

In August 2019 acquired Scholly Fiberoptic's robotic endoscope business to strengthen the supply chain and increase manufacturing capacity for imaging products

Working to support cloud-enabled real time visualization systems.

Revenue from Da Vinci system sales was $339 million. 275 systems shipped, up 19% from 231 in Q3 2018, including 92 leased systems. Average system price of $1.57 million. 79% of placed systems were XI's. Installed base is now 5,406 systems. 116 systems involved trade-ins.

Revenue from instruments and accessories was $606 million up 25% y/y. $1,980 per procedure.

Revenue from services was $183 million.

Non-GAAP numbers: Net income was $409 million, up 5% sequentially from $388 million and up 21% from $337 million year-earlier. Non-GAAP EPS was $3.43, up 6% sequentially from $3.25, and up 21% from $2.83 year-earlier. Non-GAAP numbers exclude trade out revenues and stock-based compensation. 72.0% gross margin.

The cash and equivalents balance ended at $5.43 billion, sequentially from $5.10 billion. There is no debt. Repurchased $70 million of shares.

Grew inventory about $70 million in Q3 and plans to continue inventory growth.

Cost of revenue was $343 million, leaving gross profit of $786 million. Operating expenses of $420 million included: $284 million for selling, general, and administrative; $136 million for research and development. Leaving income from operations of $366 million. Interest income was $33 million. Income tax expense $0 million. Loss attributed to non-controlling interest $2 million.

Q&A:

Procedure drivers? General surgery was positive, but we have not resolved all the constraint issues we talked about in Q2. Believe there is more opportunity. Urology was a positive surprise.

Capital environment? Procedure growth is the dominant driver of system growth over time.

Competition? We expect some impact when the systems come out, but we do not have the timing yet.

Margins in 2020? Will give more guidance in January call. We will continue to spend on expanding to capture the opportunities we see.

Ion? The larger market will be data oriented, looking at safety and efficacy. There have been systems in the market in the past, a lot of the market will wait to see the data.

Stapling, 60 mm in particular? Mostly used in the lower abdomen. Stomach and colorectal.

Japan has a single payer system, so data needs to be submitted, it is in early days for us.

In a mature market productivity, features and procedure growth drive system sales. Competitors are making claims, will need to see how they work out in the real world as customers evaluate.

Headcount direction? Staffing during rapid growth is a challenge, balancing with the clear opportunity.

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