Analyst Conference Summary

conference date: January 23, 2019 @ 1:30 PM Pacific Time
for quarter ending: December 31, 2019 (fourth quarter, Q4 2019)

Forward-looking statements

Overview: Very strong revenue and profit growth.

Basic data (GAAP):

Revenue was $1.278 billion, up 13% sequentially from $1.128 billion and up 22% from $1.047 billion in the year-earlier quarter.

Net income was $358 million, down 10% sequentially from $397 million, and up 22% from $293 million year-earlier.

EPS (earnings per share, diluted) were $2.99, down 10% sequentially from $3.33 and up 22% from $2.45 year-earlier.

Guidance:

2020 procedure growth range 13% to 16% with normal seasonality. Proportion of systems leased could trend up, but trade-ins should trend down. Gross profit margin 70% to 71%, non-GAAP. Non-GAAP op ex up 15% to 20% y/y. Non-cash based comp. $400 to $440 million. Other income $100 to $115 million. Tax 20% to 21%, non-GAAP.

Conference Highlights:

CEO Gary Guthart said, "Procedures grew 19% y/y. . . Leasing and usage based placement models have helped our customers increase capacity with lower capital outlays. . . Placement of new systems in the quarter was solid."

Revenue growth was driven primarily by U.S. general surgery and worldwide urologic procedures. Could see pricing pressure in the future as competitors launch products.

Still in da Vinci SP launch. Installed 6 SP systems in Q4. But XI is still the top seller. 7 Ion systems shipped in the quarter.

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.

Revenue from Da Vinci system sales was $416 million, up 22% y/y from $341 million. 336 systems shipped, up 16% from 290 in Q4 2018, including 126 leased systems. Average system price of $ million. 81% of placed systems were XI's. Installed base is now 5,582 systems. 138 systems involved trade-ins. 39 systems shipped to China, perhaps accelerated to avoid tariff increases.

Revenue from instruments and accessories was $671 million up 24% y/y from $539 million. $1,980 per procedure up 5% y/y reflecting increased usage of advanced systems.

Revenue from services was $190 million up 14% from $167 million year-earier.

Non-GAAP numbers: Net income was $417 million, up 2% sequentially from $409 million and up 18% from $353 million year-earlier. Non-GAAP EPS was $3.48, up 1% sequentially from $3.43, and up 18% from $2.96 year-earlier. Non-GAAP numbers exclude trade out revenues and stock-based compensation. 72.2% gross margin.

The cash and equivalents balance ended at $5.85 billion, sequentially from $5.43 billion. There is no debt. Repurchased $0 million of shares,but has $1.7 billion remaining authorized.

Iris visualization systems entered clinics in Q4, 2019 with a good initial response.

Cost of revenue was $382 million, leaving gross profit of $896 million. Operating expenses of $498 million included: $342 million for selling, general, and administrative; $157 million for research and development. Leaving income from operations of $398 million. Interest income was $34 million. Income tax expense $69 million. Income attributed to non-controlling interest $5 million.

For the full year 2019 revenue was $4.48 bilion, GAAP net income $1.38 billion, and GAAP EPS diluted $11.54. Non-GAAP net income $1.53 billion, non-GAAP EPS diluted $12.76.

Q&A:

Coli procedure acceleration last 2 quarters? We are bringing differentiated clinical value. It is a large category as a whole. We believe it is durable, but predicting it over time is difficult.

Capital environment, competition so far? Reasonably stable. We see competition delay deals. The level of competition will likely increase.

We expect a number of publications about our systems' effectiveness in the coming quarters.

Feedback on our new visualization capabilities is very positive, but Iris is not likely to be a significant revenue generator in 2020.

Benign proceedures contribute to I&A revenue growth, but are at a lower rate per procedure. So if they grow at a faster rate than advanced procedures, the overall growth rate for revenue per procedure would grow at a lower rate.

Ion will be a measured launch, so slow growth in 2020, faster thereafter.

Trade ins are flattening out because the number of SI systems still out there to trade in is decreasing.

We still need to expand into new territories, there are still many opportunities.

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