Analyst Conference Summary

conference date: July 20, 2021 @ 1:30 PM Pacific Time
for quarter ending: June 30, 2021 (second quarter, Q2 2021)

Forward-looking statements

Overview: Revenue up strongly y/y, compared to a weak 2020 quarter.

Basic data (GAAP):

Revenue was $1.46 billion, up 13% sequentially from $1.29 billion and up 71% from $852 million in the year-earlier quarter.

Net income was $517 million, up 21% sequentially from $426 million, and up 660% from $68 million year-earlier.

EPS (earnings per share, diluted) were $4.25, up 21% sequentially from $3.51 and up 646% from $0.57 year-earlier.

Guidance:

For 2021, assuming no supply constraints or new pandemic risks. Procedure growth estimate increased to 27 to 30%. Gross profit margin upped to 70.5 and 71.5% of revenue. Por forma operating expense growth 17 to 21%. Income tax second half 21 to 22% pro forma.

Conference Highlights:

CEO Gary Guthart said, "We are pleased with our second quarter procedure growth and financial results, which reflect both the demand for high-quality minimally invasive procedures as well as a return to surgeries deferred during the pandemic." System placements were above plan in the quarter. Expenses are ramping, up 24% y/y, but still somewhat impeded by the pandemic. More workers are returning to offices. Revenue grew 15% compounded over 2 years.

Global procedures grew 68% y/y. Noted the compound 2 year growth rate was 16.5%, which is what was expected if there had been no pandemic. U.S. procedure growth was strong as pandemic procedures eased, led by herias and bariatric, and likely includes surgeries deferred during the pandemic. In China procedure growth was strong, reflecting a 40% system installation growth in the past year. The U.K. saw a healthy recovery. Other nations varied, for a 51% ex-US procedure growth y/y.

Revenue from Da Vinci system sales was $440 million, up 19% sequentially from $369 million and up 69% y/y from $261 million. 328 systems shipped, up 10% sequentially from 298, and up 84% from 178 year-earlier; includes 128 leased systems or 33%. About 38% of sales involved trade-ins. 4 systems sold were SP. Average system price of $1.55 million, down y/y due to volume discounts. Installed base is now 6,335 systems, up 8% y/y. 19 systems shipped to China. 115 systems outside U.S. total. 55% increase in utilization y/y, but over 2 years was 6%.

Revenue from instruments and accessories was $796 million, up 13% sequentially from $706 million, and up 73% y/y from $461 million. $1.940 per procedure increased y/y. Procedures per system increased 8% y/y. An extended use instrument program was introduced in October 2020, which should help customers cut costs. That will negatively impact revenue short term, but help grow the market longer-term. Pretty fully adopted in US in Q2 2021.

Revenue from services was $228 million, up 5% sequentially from $218 million and up 75% from $130 million year-earier.

Ion flexible robotics shipped 20 systems in the quarter. Adoption of newly launched products like staplers and vessel sealers has been strong. SP access port was used in surgeries for the first time in Q1 2021. MyIntuitive mobile app was launched in Q1 2021.

Non-GAAP numbers: Net income was $477 million, up 12% sequentially from $427 million and up 261% from $132 million year-earlier. Non-GAAP EPS was $3.92, up 11% sequentially from $3.52, and up 253% from $1.11 year-earlier. Non-GAAP numbers exclude trade out revenues and stock-based compensation.

The cash and equivalents balance ended at $7.73 billion, up sequentially from $7.23 billion. There is no debt. Repurchased no shares.

Cost of revenue was $440 million, leaving gross profit of $1.02 billion. Operating expenses of $513 million included: $350 million for selling, general, and administrative; $162 million for research and development. Leaving income from operations of $511 million. Interest and other income was $15 million. Income tax $3 million. Income attributed to non-controlling interest $6 million.

Q&A:

Pandemic variant risks? Infections are going up, but not so much hospitalization. Guidance reflects seasonality, pent up demand, a lower diagnostic pipeline, slower vaccine rollouts outside the U.S.

Extended use program? Rolled out in EU and US in Q4, most other markets this year. Seen elasticity in markets, positive feedback from procedures. But it is early days, perhaps affected by pandemic.

Procedure strength in benign cases, etc.? My impression is the longer diagnostic pipelines have been delayed by the pandemic. That causes demand to accumulate. As vaccination rates go up the backlog can be addressed.

Q2 margins were extraordinary, future quarters will be lower as spending ramp backs up to take advantage of our opportunities and delays in our infrastructure build during the pandemic.

How much of the catch up is left? Some, it is hard to predict.

Competition? Customers like choice. We are seeing competitors fielding systems in competition to ours. Our ecosystem is more than a good robot. So even if they have a good robot, they will remain behind for a while. But they are calling on customers and that could delay some sales or we could lose some sales. We also can offer a variety of systems at different price points.

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