Analyst Conference Summary

conference date: October 15, 2020 @ 1:30 PM Pacific Time
for quarter ending: September 30, 2020 (third quarter, Q3 2020)

Forward-looking statements

Overview: Rough quarter impacted by pandemic, not as badly as Q2.

Basic data (GAAP):

Revenue was $1.08 billion, up 27% sequentially from $852 million and down 4% from $1.13 billion in the year-earlier quarter.

Net income was $314 million, up sequentially from $68 million, and down 21% from $397 million year-earlier.

EPS (earnings per share, diluted) were $2.60, up sequentially from $0.57 and down 22% from $3.33 year-earlier.

Guidance:

No specific guidance. Expects a challenging year for capital placements. Visibility is limited by Covid outbreaks.

Conference Highlights:

CEO Gary Guthart said, "Lower third quarter revenue was driven by fewer system placements, primarily as a result of the significant impact of the COVID-19 pandemic, as well as a $23 million decrease in service revenue related to service fee credits from the previously announced Customer Relief Program. Performance varied strongly by region. We expect surgeries to return to pre-pandemic levels longer term." Q3 2020 GAAP net income included $62 million, or $0.51 per diluted share, of other income related to unrealized gains on strategic investments.

Global procedures grew 7% y/y, but 36% sequentially. U.S. growth was 7% and China growth was strong. Gynecology growth was strong. Diagnostic procedures have been delayed, creating a backlog of potential patients.

Intuitive launched Intuitive Ventures, a $100 million fund focused on investment opportunities in companies committed to advancing positive outcomes in healthcare.

Installed 58 da Vinci SP systems in Q3. Ion shipped 11 systems in the quarter. XI is still the top seller. Adoption of newly launched products like staplers and sealers has been strong.

Revenue from Da Vinci system sales was $268 million, up sequentially from $261 million and down 21% y/y from $339 million. 195 systems shipped, up sequentially from 178, and down 29% from 275 year-earlier, including 68 leased systems. 40% of sales involved trade-ins. Average system price of $(not given) million. Installed base is now 5865 systems, up 8% y/y. 12 systems shipped to China. 79 system outside U.S. total.

Revenue from instruments and accessories was $631 million, up sequentially from $461 million, and up 4% y/y from $606 million. $1,910 per procedure up reflecting increased usage of existing inventory. An extended use instrument program was introduced in October 2020, which should help customers cut costs. That will negatively impact revenue short term, but help grow the market longer-term.

Revenue from services was $179 million, up sequentially from $130.3 million and down 2% from $183 million year-earier.

Non-GAAP numbers: Net income was $344 million, up sequentially from $132 million and down 16% from $409 million year-earlier. Non-GAAP EPS was $2.77, up sequentially from $1.11, and down 19% from $3.43 year-earlier. Non-GAAP numbers exclude trade out revenues and stock-based compensation.

The cash and equivalents balance ended at $6.4 billion, up sequentially from $6.1 billion. There is no debt. Repurchased no shares, but has $1.7 billion remaining authorized.

Ion is the Company's new flexible, catheter-based platform, designed to navigate through very small lung airways to reach peripheral nodules for biopsies.

Iris visualization systems entered clinics in Q4, 2019 with a good initial response.

Cost of revenue was $353 million, leaving gross profit of $724 million. Operating expenses of $454 million included: $299 million for selling, general, and administrative; $155 million for research and development. Leaving income from operations of $270 million. Interest and other income was $84 million. Income tax $38 million. Income attributed to non-controlling interest $3 million.

Q&A:

Procedures within the quarter? Gradual return during the quarter, reaching a peak near the end of the quarter. It is hard to predict how quickly diagnosis will return to normal.

Extended use regulatory hurdles? We don't see major hurdles, just fulfilling the requirements.

Competitive platforms? Several groups are working on systems in China. When they get through the regulatory process they will compete for the quotas, but we believe we are in a strong position.

Hospitals have improved how they handle their concurrent needs with Covid patients. So capcity is better, but how it plays out depends on the pandemic course.

Any plan for growth through acquisition? We are proud of our organic innovation capabilities. But a lot of new avenues with AI and robotics are opening up. Our tuck-ins may bet bigger over time, but we like to bring things in earlier rather than later.

We have worked through some of the backlog, but clearly there are patients delaying diagnosis and treatment. The timing and specifics are hard to predict.

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