Analyst Conference Summary

Intuitive Surgical

conference date: January 22, 2015 @ 1:30 PM Pacific Time
for quarter ending: December 31, 2014 (fourth quarter, Q4 2014)

Forward-looking statements

Overview: Good recovery from Q1 to Q3 slump, but revenue still up just 5% y/y for this high P/E stock. Net income fell y/y.

Basic data (GAAP):

Revenue was $604.7 million, up 10% sequentially from $550.1 million and 5% from $576.2 million in the year-earlier quarter.

Net income was $146.8 million, up 19% sequentially from $123.7 million, but down 12% from $166.2 million year-earlier.

EPS (earnings per share, diluted) were $3.94, up 18% sequentially from $3.35 and down 8% from $4.28 year-earlier.


Full year 2015 precedure growth expected between 7% and 10%. Seasonal timing expected to be the same as in prior years, with Q1 weakest.

No specific revenue guidance, but Q1 lower than Q4, and foreign exchange headwinds. Gross profit margin about the same as Q4 2014. Operating expenses to grow 7% to 10%. Non-cash stock compensation expense $180 to $185 million.

2015 non-GAAP income tax rate 28 to 30%, not assuming R&D tax credit.

Conference Highlights:

Growth in the quarter was driven by international sales efforts, particularly in Europe and Japan.

Intuitive Surgical shipped 137 da Vinci Surgical Systems, up sequentially from 111, and almost as many as the 138 in the year-earlier quarter. 97 systems were da Vinci Xi. $1.55 million average sales price, increasing due to increased % of Xi systems and dual-console systems. 71 of the systems were placed in the U.S, 66 outside the U.S, of which 39 were in Europe.

Procedures using da Vinci systems in Q4 grew about 10% y/y, with U.S. general (up 33% y/y) and global urologic procedures the main growth drivers. But gynecology was flat y/y. Non-U.S. procedures were up 20% y/y. Single site hysterectomy in the U.S. is growing rapidly off a small base. Hernia repair was strong.

Revenue from Da Vinci system sales was $214 million, up 27% sequentially from $169 million and 4% from $205 million in the year-earlier quarter. Interest in Xi systems has been strong, and the Xi product suite is being filled out. The stapler system has been requalified (fixing the cause of the 3 incidents in late 2014) and is shipping again.

Revenue from instruments and accessories was $281 million, up 3% sequentially from $273 million and 5% from $268 million year-earlier. $1830 per procedure average.

Revenue from services was $110 million, up 1% sequentially from $109 million and 6% from $103 million year-earlier.

The wristed Single Site needle driver launched in the quarter.

Non-GAAP numbers: revenue was $601 million (due to exclusion of trade-outs). Net income was $184 million, up 27% sequentially from $145 million but down 5% from $193 million year-earlier. Non-GAAP EPS was $4.92, up 26% sequentially from $3.92, and down 1% from $4.98 year-earlier. 67.1% gross margin, down both sequentially and y/y. The main items included in GAAP but excluded from non-GAAP were: $2.2 million Xi trade out income; $41.2 million share based compensation; $6.5 million amortization; $5.4 million litigation/product liability; $4.3 million impairment of investments.

Both GAAP and non-GAAP net income benefitted from $20 million of income tax reserve releases.

The cash and equivalents balance ended at $2.5 billion, up $234 million in the quarter. There is no debt.

Cost of revenue was $211.3 million. Operating expenses of $207.3 million included: $160.0 million for selling, general, and administrative; $47.3 million for research and development. Leaving income from operations of $186.1 million. Other net was $1.3 million. Income tax expense $38 million.

Taxes were lower in Q4 due to the reinstatement of the federal R&D tax credit.

Believes there are still many opportunities to develop and sell robotic surgery systems and instruments. Intuitive Surgical continues to invest in selling into international markets.

Plans to continue to grow the organization in 2015, particularly in Asia.


Investment plans, international vs. U.S.? We anticipate modest growth in U.S. headcount. We will invest more outside the U.S.

Gross margin guidance? FX affects about 20% of revenue. Ramping Xi should allow costs to be worked down, but not likely to get down to be on par with Si.

Bounceback in Q1 from stapler restart? The bigger buying pattern was less stocking with new system sales. We would expect normalization over time of the instruments & accessory revenue per procedure.

Buy backs in 2015? We are not making a statement at this time.

M&A opportunities? We are thougthfull and persistent, doing investigations all the time.

Sp timeline? Dedicated single-port platform, adding Xi features. Will start getting customer feedback in second half of the year. We don't have a timeline for regulatory submissions.

Japan? We remain actively involved in conversations in Japan. Government decisions must be made.

Are you expecting declines in use for single-site cholecystectomy next year? We believe it is safe and efficacious. Where systems are highly used we see the chole procedures being replaced by hernia procedures, but on the whole the number of procedures is growing. We saw in increase in procedures per system in the U.S. in 2014. Our economics are competitive both for cholecystectomy and hernia surgeries.

Sustainability of recent International growth rate? There are interesting and durable opportunities outside the U.S., but the results can be quite lumpy, partly due to a need for government approvals in each company.

Your view of the macroeconomy? Our customers have better visibility, partly because they have a year of experience with the Affordable Care Act. But there are still limits to capital budgets, so decisions depend on prioritization.

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Disclaimer: My analyst call summaries may include both our condensations of statements made by company representatives and my own analysis. They are not covered by any warranty. I cannot guarantee anything said by company representatives is true. I try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2015 William P. Meyers