Analyst Conference Summary

conference date: July 21, 2020 @ 1:30 PM Pacific Time
for quarter ending: June 30, 2020 (second quarter, Q2 2020)

Forward-looking statements

Overview: Rough quarter impacted by pandemic.

Basic data (GAAP):

Revenue was $852 million, down 22% sequentially from $1.10 billion and also down 22% from $1.10 billion in the year-earlier quarter.

Net income was $68 million, down 78% sequentially from $314 million, and down 79% from $318 million year-earlier.

EPS (earnings per share, diluted) were $0.57, down 78% sequentially from $2.62 and down 79% from $2.67 year-earlier.

Guidance:

"Due to the continued uncertainty around the scope and duration of the pandemic and the timing of global recovery and economic normalization, we cannot, at this time, reliably estimate the future impact on our operations and financial results."

Conference Highlights:

CEO Gary Guthart said, "We saw procedure declines in all categories... In July we see continued growth of Covid in some regions, making predictions difficult... System sales were greater than anticipated at the beginning of the second quarter... We see significant variability by region... We expect the recovery tail of surgery will last several quarters."

In the U.S. procedures dropped significantly in early Q2 v. early Q1, then grew back, but are now declining again. China, Japan, and Korea had y/y growth. Procedures dropped 19% y/y, mainly due to the pandemic. Down 22% sequentially. But the bottom of the trough was in April, so far.

Margins could be reduced as overhead is spread over fewer systems and instruments. Some other cost-cutting measures are planned.

Installed 5 da Vinci SP systems in Q2. 3 Ion systems shipped in the quarter. XI is still the top seller.

Revenue from Da Vinci system sales was $261 million, down 8% sequentially from $283 million and down 24% y/y from $344 million. 178 systems shipped, down sequentially 25% from 237, and down 35% from 273 year-earlier, including 52 leased systems. Average system price of $(not given) million. (not given)% of placed systems were XI's. Installed base is now 5,764 systems, up 9% y/y. 21 systems shipped to China.

Revenue from instruments and accessories was $461 million down 20% y/y from $579 million. $1,900 per procedure up reflecting increased usage of existing inventory. An extended use instrument program will be introduced this year, which should help customers cut costs. That will negatively impact revenue short term, but help grow the market longer-term.

Revenue from services was $130.3 million down 26% from $176.6 million year-earier. Q2 revenue included a $59 million decrease in service revenue from the previously announced Customer Relief Program.

Non-GAAP numbers: Net income was $132 million, down 59% sequentially from $323 million and down 76% from $388 million year-earlier. Non-GAAP EPS was $1.11, down 59% sequentially from $2.69, and down 66% from $3.25 year-earlier. Non-GAAP numbers exclude trade out revenues and stock-based compensation.

The cash and equivalents balance ended at $6.1 billion, up sequentially from $5.90 billion. There is no debt. Repurchased no shares, but has $1.7 billion remaining authorized.

Ion is the Company's new flexible, catheter-based platform, designed to navigate through very small lung airways to reach peripheral nodules for biopsies.

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

Cost of revenue was $349 million, leaving gross profit of $503 million. Operating expenses of $422 million included: $279 million for selling, general, and administrative; $143 million for research and development. Leaving income from operations of $81 million. Interest income was $27 million. Income tax benefit $37 million. Income attributed to non-controlling interest $2 million.

Q&A:

Extended use intstrument program? It is hard to predict the timeline because of the pandemic. We believe over a couple of years it should increase adoption. Should also help with adoption in some geographic regions.

Gross margin impact from extended use? Margin impact should be marginal, slightly down because you have more systems revenue in the mix, which has lower margins.

Customers on leasing? It varies regionally. We saw good use of capital to buy systems in China. Covid-disrupted regions have capacity on existing installed base, so not looking to expand capacity yet. When demand expands leasing should help us.

Backlog of patients, alternatives? Don't see a shift by perioperative services. But if they have no choice they may go that way. We have seen no evidence of share shifts so far.

Recent uptick in U.S. covid cases? Varies by region, we are seeing no trend in the first weeks of July.

We saw a 29% decline in utilization, and that is likely to create pressure on capital spending. Capital commitments have long pipelines, so we had closures in Q2, no particular program drove this. We do see strength outside the U.S., particularly in Asia.

Philips competition? We have seen the FDA increase their demands for clinical data these past few years.

Doctor training, impact going forward? We are trying to address this with things like having training closer so it requires no air travel, virtual training. But it is currently substantially below historical levels.

A good future driver of capital demand would be new features. In the shorter run the driver might be the catch-up from postponed surgeries.

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