Intuitive Surgical, Inc. (ISRG)
Q2 2008 Earnings Call
July 22, 2008, 4:30 PM ET

Executives
Benjamin Gong - VP, Finance and Treasurer
Lonnie M. Smith - Chairman and Chief Executive Officer
Gary Guthart – President and Chief Operating Officer
Marshall L. Mohr - Sr. VP and Chief Financial Officer
Aleks Cukic - VP, Business Development and Strategic Planning

Analysts
Eli Kammerman - Cowen & Co.
Tao Levy - Deutsche Bank
David Lewis - Morgan Stanley
Ben Andrew - William Blair & Company
Frederick Wise - Leerink Swann
Amit Hazan - Oppenheimer & Co.
Mimi Pham - JMP Securities

Presentation

Operator

Good afternoon and welcome and thank you for standing by. At this time, all participants are in a listen-only mode. (Operator Instructions) During the question-and-answer session please press *1 on your touchtone phone. This conference is being recorded. If you have any objections, you may disconnect at this time. I''d now like to introduce you to speaker for today''s call Mr. Ben Gong, Vice President of Finance. Sir, you may begin.

Benjamin Gong - Vice President, Finance and Treasurer

Good afternoon and welcome to Intuitive Surgical''s second quarter conference call. With me today, we have Lonnie Smith, our Chairman and CEO; Gary Guthart, our President and Chief Operating Officer; Marshall Mohr, our Chief Financial Officer; and Aleks Cukic, our Vice President of Business Development and Strategic Planning.

Before we begin, I would like to inform you that comments mentioned on today''s call may be deemed to contain forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties. These risks and uncertainties are described in detail in the company''s Securities and Exchange Commission filings. Respective investors are cautioned not to place undue reliance on such forward-looking statements. Please note that this conference call will be available for audio replay on our website at www.intuitivesurgical.com on the Audio Archives section under our Investor Relations page. In addition, today''s press release has been posted to our website.

Today''s format will consist of providing you with highlights of our second quarter, as described in our press release announced earlier today, followed by a question-and-answer session. First, Lonnie will present the quarter''s business highlights. Marshall will follow with a review of our second quarter''s financial results. Next, Aleks will discuss sales and marketing highlights, then I''ll provide an update to our financial forecast for 2008 and finally, we will host a question-and-answer session.

With that, I''d like to introduce Lonnie Smith, our Chairman and CEO.

Lonnie M. Smith - Chairman and Chief Executive Officer

Thank you for joining us today. This past quarter, we continued to drive and broaden the adoption of robotically-assisted surgery resulting in significant top and bottom line growth. Operating highlights for the second quarter is as follows. We sold 85 da Vinci Surgical Systems, up from 56 sold during the second quarter of last year. 24 of the systems sold were to existing customers. Our international team contributed 19 of 85 systems sold, up from 13 last year. We ended the second quarter with 946 da Vinci Surgical Systems installed worldwide.

Procedure adoption, it continues to be procedure-specific, patient-driven and the primary growth driver of our business. We had a solid quarter-over-quarter procedure growth in all significant specialties again led by GYN. Based upon our numbers, da Vinci Prostatectomy has now become the number one treatment for prostate cancer in the United States. Among our fastest growing procedures in terms of percent, sequential quarter-to-quarter growth were Nephrectomy and partial nephrectomy for kidney cancer, radical cystectomy for bladder cancer, hysterectomy, myomectomy and sacral colpopexy.

Total revenue grew to $219 million, up 56% from last year, Instrument and accessory revenue increased to $74 million, up 61%. Total recurring revenue including service grew to a $103 million, up 56% from the prior year comprising 47% of total revenue. We generated an operating profit of $98 million, 45% of revenue before non-cash 123R stock option expense, up 80% from the second quarter of last year. GAAP net income grew to $51 million, 23% of revenue, up 67% from last year. We ended the quarter with $740 million in cash and investments, up $40 million from the last quarter and up $292 million in the last 12 months. After subtracting $8 million in cash received for exercise of stock options, and adding back $54 million invested in fixed assets, purchased intellectual property, and working capital during the quarter, our gross operating cash flow in the second quarter amounted to 168% of our reported GAAP net income.

Our new instrument plant in Mexicali, Mexico came on line in production in Q2 and Q3 and we grew our Intuitive team by 76 members to 935.

With that, I will pass the line over to Marshall Mohr, our Chief Financial Officer.

Marshall L. Mohr - Senior Vice President and Chief Financial Officer

Thank you, Lonnie. Total second quarter revenue of $219.2 million increased 56% compared with $140.2 million for the second quarter of 2007, and increased 16% compared with $188.2 million for the first quarter of 2008. Second quarter revenues by product category were as follows. Instrument and accessory revenue increased to $73.6 million, up 61% compared with $45.8 million last year, and 19% compared with $61.9 million last quarter. The growth rate in instruments and accessories is comparable to the direct result of our procedure growth rates. The amount of instrument and accessory revenue we earn per procedure remained relatively unchanged at between $1,500 and $2,000 per procedure for established da Vinci accounts, and $2,000 to $2,300 per procedure if you include initial stocking orders. Systems revenue of $116.1 million increased 57% compared with $74.1 million last year and increased 17% compared with $99.1 million last quarter. The increase in systems revenue compared with the first quarter of 2008 reflects increased unit sales as well as an increase in the average revenue per system.

Second quarter da Vinci Surgical System revenue reflects the sale of 85 systems compared with 56 systems sold during the second quarter of last year, and 74 systems sold in the first quarter. 70 of the systems sold in the quarter were our latest S model, incorporating high definition vision capability. Seven were four-arm S models incorporating standard vision capabilities, four were three-arm S models and four were refurbished standard systems. 19 of the systems sales were outside of the United States compared with 20 in the first quarter. Six of the systems sales in the quarter included trading.