Analyst Conference Summary

Intuitive Surgical

conference date: January 24, 2019 @ 1:30 PM Pacific Time
for quarter ending: December 31, 2018 (fourth quarter, Q4 2018)

Forward-looking statements

Overview: Continued strong revenue and procedure growth.

Basic data (GAAP):

Revenue was $1,047 million, up 14% sequentially from $921 million and up 17% from $892 million in the year-earlier quarter.

Net income was $293 million, flat sequentially from $293 million, and up from negative $32 million year-earlier.

EPS (earnings per share, diluted) were $2.45, flat sequentially from $2.45 and up from negative $0.28 year-earlier.


For the full year 2019 procedure growth of 13% to 17%. Q1 will show weakest growth, as is normal. Gross profit margin, non-GAAP, 70% to 71%. Operating expenses to grow 20% to 28% y/y. $310 to $340 million stock based compensation expense. Other income $120 to $130 million. Income tax pro-forma 19% to 20%.

Conference Highlights:

CEO Gary Guthart said, "In 2018 over 1 million surgeries were performed using da Vinci systems. . . We believe applicable procedures [potential markets] exceed 5 million annually."

Fourth quarter 2018 expenses included our $25 million initial contribution to launch the Intuitive Foundation. It will support both research and philanthropy.

Early in da Vinci SP launch, with 15 machines installed for just one indication so far.

Ion flexible diagnostics machine nearing launch.

Expects to accelerate sales in China in 2019. Investing in other nations as well. This will result in an increased spend in 2019. Will also accelerate R&D spend.

Procedures using da Vinci systems in Q4 grew 19% y/y, driven by U.S. hernia repair and general surgery and global urologic surgery. Procedures grew over 40% in Japan.

Revenue from Da Vinci system sales was $341 million, up 24% sequentially from $275 million, and up 20% from $285 million year-earlier. Systems shipped was 290, up from 216 year-earlier. System shipments included 84 systems under operating lease compared with 40 during q4 2017. 28% of shipments in quarter involved trade-ins. ASPs were $1.46 million y/y.

Revenue from instruments and accessories was $539 million, up 11% sequentially from $486 million, and up 18% from $457 million year-earlier. Hurt by buyback of some inventory from Taiwan. $1,890 per procedure, down 1% y/y.

Revenue from services was $167 million was up 4% sequentially from $160 million and up 11% y/y from $150 million.

Non-GAAP numbers: Net income was $353 million, up 5% sequentially from $337 million and up 16% from $305 million year-earlier. Non-GAAP EPS was $2.96, up 5% sequentially from $2.83, and up 14% from $2.60 year-earlier. Non-GAAP numbers exclude trade out revenues and $ million in stock-based compensation. 71.8% gross margin, down y/y due to mix and higher expenses.

The cash and equivalents balance ended at $4.8 billion, up sequentially from $4.6 billion. $ million cash from operations. ? repurchases in quarter. There is no debt.

Increased investment in next-generation products, including molecular imaging agents. Spending to increase into 2019, including for overseas expansion.

Cost of revenue was $311 million, leaving gross profit of $736 million. Operating expenses of $404 million included: $284 million for selling, general, and administrative; $120 million for research and development. Leaving income from operations of $332 million. Interest income was $27 million. Income tax expense $68 million.


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

2019 spending, R&D; SG&A? Weighted to SG&A, mostly for ex-U.S. commercial organizations. Infomatics and digital capabilities will and to research expense for announced projects.

Moat from competitors? Customers appreciate choice. We focus on total cost, usability, stability. We have a large base of surgeons to train surgeons for our robots. Large competitors entering validates the market. We look at the competitive concepts to help make our decisions.

Spend increase, how much for China, and is this one-time or longer term? These are multi-year investments, like we made in Japan. Some investments are to scale the business, some to improve manufacturing.

Augmented reality opportunity? We have been working on it for a while. Adds other types of imaging. It is already in Ion. First clinical use this year. Not meaningful to revenue in the short term.

Ion timeline? We are in contact with the FDA. We do not know if there will be an impact from the shutdown. We think the demand pipeline for Ion looks good. Introduction will be slow, so small impacts on both revenue and gross margin.

China new quota? 154 system quota, would include competitors if they quality. A tender process is also required. There is also a 25% tariff. Expect to see higher shipments in 2020 than 2019.

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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 2018 William P. Meyers