Analyst Conference Summary

Intuitive Surgical

conference date: April 21, 2015 @ 1:30 PM Pacific Time
for quarter ending: March 31, 2015 (first quarter, Q1 2015)

Forward-looking statements

Overview: Returned to good y/y revenue growth, but still well below Q1 2013 revenue of $611.4 million.

Basic data (GAAP):

Revenue was $532.1 million, down 12% sequentially from $604.7 million and up 15% from $464.7 million in the year-earlier quarter.

Net income was $97.0 million, down 34% sequentially from $146.8 million, but up 119% from $44.3 million year-earlier.

EPS (earnings per share, diluted) were $2.57, down 35% sequentially from $3.94 and up 127% from $1.13 year-earlier.


For full year 2015, raised procedure growth estimate to 8 to 11%. Gross profit (non-GAAP) margin flat from 2014 on constant currency basis, but varying quarter to quarter.

Op ex up at low end of prior 7% to 10% range. Income tax rate 28% to 30% non-GAAP, excluding reinstatement of R&D tax credit.

Conference Highlights:

Y/Y procedure growth was driven by general surgery, particularly hernia repair, in the U.S. and urology procedures worldwide. There was pressure on margins.

In March the da Vinci Xi system was cleared to sell in Japan, and one was sold in the quarter. In April the EndoWrist Stapler was cleared for sale in Europe.

Q1 system sales were lower than Q4 mainly due to seasonality.

Da Vinci SP development remains on track, and extension of various software and devices to the Xi systems continues.

Intuitive Surgical shipped 99 da Vinci Surgical Systems, down sequentially from 137, and up from 87 in the year-earlier quarter. 76% of systems placed were da Vinci Xi. $1.48 million average sales price, higher y/y due to increased % of Xi systems. 63 of the systems were placed in the U.S., 36 outside the U.S., of which 18 were in Europe, 8 were in China.

$150 million of revenue was from outside the U.S., down sequentially from $197 million and down from $155 million year-earlier. The main impacts were lower sales in Japan and foreign exchange rates.

Procedures using da Vinci systems in Q1 grew about 13% y/y. U.S. procedures were up 11%, international up 22%. U.S. prostatectomy growth continued. Growth returned to U.S. gynecology. Return of the stapler helped.

Revenue from Da Vinci system sales was $141.0 million, down 34% sequentially from $214 million but up 33% from $106.0 million in the year-earlier quarter.

Revenue from instruments and accessories was $277.2 million, down 1% sequentially from $280.7 million and up 9% from $254.8 million year-earlier. $1,840 per procedure average.

Revenue from services was $113.9 million, up 3.5% sequentially from $110 million and up 10% from $103.9 million year-earlier.

Non-GAAP numbers: Net income was $135 million, down 27% sequentially from $184 million and down 3% from $139 million year-earlier. Non-GAAP EPS was $3.57, down 27% sequentially from $4.92, but up 1% from $3.54 year-earlier (due to less shares). 65.6% gross margin.

The cash and equivalents balance ended at $2.7 billion, up $170 million in the quarter. There is no debt. $15 million was spent on stock buybacks in the quarter.

Cost of revenue was $195.3 million. Operating expenses of $206.4 million included: $162.0 million for selling, general, and administrative; $44.4 million for research and development. Leaving income from operations of $130.4 million. Interest income was $4.3 million. Income tax expense $37.7 million.

Margins were lower because the new models have higher manufacturing costs than older models; service cost for Xi imaging system have remained higher than expected; and foreign exchange rates.

$7 million in additional reserves were made in the quarter for legal claims for damages during procedures.


Sustainability of hernia trend? The response on ventral hernia from surgeons and the data look good. Inguinal hernia has subsegments, so it is more complex, with some simple and some difficult procedures.

DVP watchful waiting? We are seeing some patients come back to surgery from watchful waiting, plus some are progressing.

We have never committed to Xi products having as good of margins as older products, because they are more complex, but we are working to reduce costs.

Confidence in procedure growth, what would move it to the high end? We would expect to see continued strength in U.S. general surgery. Hernia is on a fast growth rate. Urology would have to continue to be at the high end. To hit the low end we would likely see a higher degree of payer push back on benign procedures.

Gross margin exiting 2015? The later part of the year should be better than the earlier part of the year. As we expand into vessel sealing and stapling, those will weigh on margins.

Broader capital environment? In the quarter we saw corporate owned hospitals optimizing their capital portfolio, which we think will drive capacity consumption. There was a difference in Japan, including reimbursement and the introduction of Xi. A lot depends on how hard they can push capacity before needing additional systems.

Single site with wristed articulation in hysterectomy? The wristed driver has been well-received, but it is still early. This quarter did look more like a typical Q4 to Q1 transition than we saw in 2014.

We are seeing more vessel sealer use in the field, but less sales of new equipment.

China? We are in the early stage. There was a release of governemnt quota a few quarters ago, the Q1 sales were a result of that. The level of interest is high and utilization is growing, but we could be limited by the quotas.

We don't have a launch date for SP nor have we determined pricing, and it is not in the guidance. Margins for new products tend to be low because these are low volume products that are optimized over time.

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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