Analyst Conference Summary

Intuitive Surgical

conference date: January 23, 2014 @ 1:30 PM Pacific Time
for quarter ending: December 31, 2013 (fourth quarter, Q4 2013)

Forward-looking statements

Overview: Sequentially better quarter, but still below year-earlier levels except for EPS, which rose mainly due to reduced share count from share buy-backs. No revenue guidance.

Basic data (GAAP):

Revenue was $576.2 million, up 15% sequentially from $499.0 million, but down 5% from $609.3 million in the year-earlier quarter.

Net income was $166.2 million, up 6% sequentially from $156.8 million, but down 5% from $174.9 million year-earlier.

EPS (earnings per share) were $4.28, up 7% sequentially from $3.99, and up 1% from $4.25 year-earlier.


For full year 2014, procedures to grow 9% to 12%, but with quarterly seasonality higher than in the past. Systems sales volumes are hard to predict. It is likely less than the 546 in 2013. No revenue forecast, but if visibility improves will give more detailed guidance. Also, 2014 will be a time of increased investment to pursue growth. Op ex up 12 to 15% above 2013. $180 to $190 million non-cash stock-based compensation in 2014. Income tax rate 25% to 28%, depending on mix of U.S. vs. non-U.S. revenue.

Conference Highlights:

2013 was a challenging year, starting with Q2, resulting in a slowing of Intuitive's growth, particularly in gynecology. Negative media views of robotic surgery hurt. However, procedure growth accelerated in Europe and Japan.

Revenue from Da Vinci system sales was $204.6 million, up 29% sequentially from $158.5 million, but down 23% from $264.9 million year-earlier. 138 systems were sold, down from 175 year-earlier. Sales were impacted by moderating growth in benign gynecology and re-alignment of priorities due to the ACA (Affordable Care Act). Sales were down in the U.S. to 72, but rose outside the U.S. Also more low-cost systems were sold for lower-cost, benign surgeries.

Revenue from instruments and accessories was $268.2 million, up 12% sequentially from $239.1 million, and up 6% from $253.8 million year-earlier. Surgical procedures grew near 12% from the year-earlier quarter. General surgery growth was 96%, and overtook urology as the second largest type of Da Vinci surgery. $1930 per procedure, down y/y due to fewer stocking orders for new sales.

Revenue from services was $103.4 million, up 2% sequentially from $101.4 million, and up 14% from $90.6 million year-earlier.

69.1% gross margin, down due to expensing system production costs over a smaller number of systems.

Sustained growth in Japan is likely to be constrained until 2016, when reimbursement for more procedures may be approved.

Firefly use grew nicely, led by colorectal surgery. 80% of SIE systems sold included Firefly. Vessel Sealer was cleared for use in Korea in Q3. The Stapler did well, mainly for colorectal.

Acquiring shape-sensing business from Luna; expects no material impact in 2014.

The cash and equivalents balance ended at $2.8 billion, up $222 million in the quarter. Cash flow from operations was $193 million, $4.98 per share.

Cost of revenue was $178.2 million. Operating expenses of $189.4 million included: $147.7 million for selling, general, and administrative; $41.7 million for research and development. Leaving income from operations of $208.6 million. Interest income was $5.9 million. Income tax expense $48.3 million.

There was $44.6 million non-cash stock compensation expense in the quarter.

2,792 employees at end of year.

Believes there is still a lot of room for minimally invasive surgery around the globe.

Positive data about Da Vinci surgeries continues to be reported by investigators.


Lack of full year guidance, comment on current analyst concensus? Not worth speculating on. Laid out near-term dynamics, would share more with you if we had it. The range of outcomes in wide, depending on the ACA and other factors.

SIE vs. SI system profitability? Avergage $1.0 to 1.2 million for SIE, lower than SI. Gross margins are several points below SI, but if it gets us sales for benign procedures, it is worthwhile.

Most of the SIE sales in 2013 were in the fourth quarter.

ASPs will vary more going forward because in addition to the SIE low-end, there is a high end with Firefly and other accessories added. The pricing of the systems is not likely to change, but the mix could change.

Headcount? Will likely grow in 2014, but not at a high rate.

Why should we not assume you have saturated the market, and not assume more growth until procedure volumes go up? A major factor is hospitals targetting specific markets. They may not have capacity for their growth areas. Up until 2013, we tended to see utilization grow over time, and it did decline in 2013, but capacity is just one factor in hospital decision making.

We will manage the business for the long term. There is a lot of opportunity for us. Fiscal discipline is important, but investment discipline is important too. So we will continue to invest to improve surgery in the long term.

Colorectal opportunity in 2014? The vessel sealer and stapler set are targetted at colorectal. Combined with Firefly the set is very powerful, and should drive growth. But we are early in the adoption process.

General surgery has a lot of separate subsectors, so it is harder to predict the rate of adoption in the category as a hole.

Gross margin in 2014? In Q4 lower system volumes impacted margin. Product mix changes could predict margins. But long-run, we have an opportunity to increase margins.

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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 2014 William P. Meyers