Analyst Conference Summary

Intuitive Surgical
ISRG

conference date: January 24, 2016 @ 1:30 PM Pacific Time
for quarter ending: September 30, 2016 (third quarter, Q3 2016)


Forward-looking statements

Overview: Good quarter and will also borrow money for $2.0 billion in stock repurchases.

Basic data (GAAP):

Revenue was $756.9 million, up 11% sequentially from $682.9 million and up 12% from $676.5 million in the year-earlier quarter.

Net income was $204.0 million, down 3% sequentially from $211.0 million, and up 7% from $190.0 million year-earlier.

EPS (earnings per share, diluted) were $5.13, down 3% sequentially from $5.31 and up 3% from $4.99 year-earlier.

Guidance:

2017 procedures growth rate expected between 9% to 12%. Lower than 2016 growth rate due to mature U.S. specific and general surgery procedures. Expects the usual weak Q1 revenue results. Gross profit margin 69% to 71% non-GAAP due to stronger U.S. dollar and no medical device tax refund. Operating expenses up 15% to 18% y/y. $190 to $200 million non-cash compensation. $25 to $30 million other expense. Tax rate (non-GAAP) 26.5% to 28.5%.

Conference Highlights:

Intuitive Surgical shipped 163 da Vinci Surgical Systems, up 25% sequentially from 130, and up 3% from 158 in the year-earlier quarter.

The SP system started its clinical trials in the quarter. No revenue from SP system sales is expected in 2017.

Procedures using da Vinci systems in Q4 grew 15% y/y "driven primarily by growth in U.S. general surgery procedures and worldwide urologic procedures."

Revenue from Da Vinci system sales was $235.9 million, up 16% sequentially from $202.7 million, and up 2% from $230.7 million year-earlier. $ million average price.

Revenue from instruments and accessories was $386.3 million, up 14% sequentially from $339 million, and up 20% from $322.1 million year-earlier. $1,900 per procedure average, up from $1,840 year-earlier.

Revenue from services was $134.7 million was up 5% sequentially from $128.1 million and up 12% y/y from $120.2 million.

Non-GAAP numbers: Net income was $242 million, up 10% sequentially from $220.4 million and up 8% from $224.3 million year-earlier. Non-GAAP EPS was $6.09, up 8% sequentially from $5.62, and up 3% from $5.89 year-earlier. Non-GAAP numbers exclude trade out revenues. Share based compensation expense was $45.6 million. 71.1% gross margin. 42.2% operating margin.

The cash and equivalents balance ended at $4.8 billion, up sequentially from $4.22 billion. There is no debt.

"Intuitive Surgical has entered into an accelerated share repurchase program (the “ASR Program”) on January 24, 2017, with Goldman, Sachs & Co. (“Goldman”) pursuant to which Intuitive Surgical will repurchase $2.0 billion of its common stock from Goldman. Goldman is expected to make an initial delivery by approximately January 27, 2017, to Intuitive of approximately 2.4 million shares of Intuitive’s common stock, which represents 80% of the payment amount divided by the closing price of Intuitive’s common stock on January 23, 2017." $1 billion will remain authorized above the initial deal.

Cost of revenue was $229.7 million, leaving gross profit of $527.2 million. Operating expenses of $262.8 million included: $193.7 million for selling, general, and administrative; $69.1 million for research and development. Leaving income from operations of $264.4 million. Interest income was $11.7 million. Income tax expense $72.1 million.

Full year 2016 results: revenue was $2.70 billion. Net income (GAAP) $736 million. Diluted GAAP EPS $18.73.

Will increase capital investments in 2017. Will continue to focus on expansion in Europe and Asia.

Q&A:

[note not all questions are included, and long answers are made short]

Imaging plans? Better hardware. Better processing and analytics. Better sensors like the urinator (sp?) agent. We do some in house, some co-development.

Therapeutics plans? Believes the computer-controller catheters will have the ability to delivery therapies, but it is early.

After the $80 million extra spend in 2017, we would expect more normal margins going forward.

XI expectations, ACA slowdown? Our sense for ACA is that utilization will remain stable. We have early indications that capital replacement will remain stable, but we don't know enough yet.

Hernia penetration? We believe we are in the early stages on both ventral and inguinal opportunities.

Is the 2017 extra spending related to a new platform? It is about SP components as well as trial work. We are excited about our coming diagnostic platform, but we are just in the design and early testing stage.

We believe the opportunity in Europe is significant. Likewise in Japan, where we anticipate additional reimbursements in 2018.

We expect op ex to continue to grow in 2018, but at more normal rates than we expect in 2017.

China quota, next steps, and getting Xi approved? The quota is from the Chinese government budget. The budget was approved in December. But the allocations for hospitals have not been set, and we have little visibility. The approval process for Xi looks positive, but again we have little visibility as to timing.

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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 2017 William P. Meyers