Analyst Conference Summary

Biotechnology Investor Aids

conference date: July 21, 2010 @ 1:30 PM Pacific Time
for quarter ending: June 30, 2010 (second quarter)

[at the time this summary is written]
Forward-looking statements

Overview: Another solid growth quarter.

Basic data (GAAP) :

Revenues were $350.7 million, up 7% sequentially from $328.6 million and up 35% from $260.6 million in the year-earlier quarter.

Net income was $88.7 million, up 4% sequentially from $85.3 million and up 42% from $62.4 million year-earlier.

EPS (earnings per share) were $2.19, up 3% sequentially from $2.12 and up 35% from $1.62 year-earlier.

Guidance:

2010 procedures expected to grow 35% y/y. Revenue forecast raised to 30% to 33% growth y/y. Gross margin 72% to 73%, lower due to lower Euro and mix. 29 to 31% increase in GAAP operating expenses. $120 million 2010 stock compensation expense. Tax rate 37.4%. Cash flows higher than reported net income.

Conference Highlights:

Growth was driven both by more da Vinci surgical systems sales and procedure adoption, led by hysterectomies. Expansion also continues in urology, but prostatectomy has largely flattened out.

Increasing investments in business to increase salesforce, manufacturing capacity, and new indications.

Instruments and Accessories revenue was $127.5 million, up 33% y/y. $1870 per procedure, flat y/y but down $100 from Q1.

Systems revenue was $167.8 million, up 36% y/y. 108 systems sold, up from 76 year-earlier. Sold more systems sequentially in Europe, but seeing caution there. 89 were SI systems. $8 million was upgrade revenue from 10 upgrades. ASP per system was $1.48 million, up due to proportion of SI systems sold. 22 systems sold outside U.S. with 14 in Europe. 1571 systems in place worldwide.

Services revenue was $55.4 million, up 34% y/y.

Non-GAAP operating income was $170.0 million; net income $119 million, EPS

73% gross margin.

Cost of revenue was $93.9 million, leaving gross profit of $256.8 million. Operating expenses were: Selling, General, and Administrative $88.6 million; Research and Development $28.5 million; total $117.1 million. Leaving $139.7 million income from operations. Other income $4.5 million. Income taxes $55.5 million. Net income $88.7 million.

$30 million expense was from annual grant of employee stock compensation.

Cash and equivalents balance was $1.59 billion, up $193 million sequentially. $137 million gross cash flow from operations. $23 million received for exercise of stock options. $20 million was used for capital expenditures.

119 new employees added in the quarter.

Q&A:

Pressure from derivative competitors? Last quarter we called out benign hysterectomy slowing. But this quarter we had a strong increase in benign hysterectomies. We believe adding salespeople has been important.

ASPs (Prices)? The positive Q2 was due to a favorable mix of SI systems. Going forward we have a price decrease in Europe, 15% lower due to exchange rates. We are seeing weakness in some places where we use distributors. It is hard to predict mix.

No commercialization timeline for single incision systems, but we are making good progress.

Sales force has 70 selling sytems, 380 driving procedures, plus trainers.

We are early in the adoption for benign hysterectomy. Will continue to expand.

We are pushing procedure growth. When the economy gets back to normal that will push system sales.

Cash use? We talk about cash use, including share buy backs.

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