Highlights From ISRG's Q3 Conference Call: Total Revenues Grew 16%; 1,308 Da Vinci's Installed Worldwide

October 21, 2009 12:22 PM EDT

Intuitive Surgical (NASDAQ: ISRG) reports Q3 GAAP EPS of $1.64, 16 cents better than the analyst estimate of $1.48. Revenue for the quarter was $280.1 million, which compares to the estimate of $258.2 million.

Highlights From ISRG's Q3 Conference Call:

• (CEO) Operating highlights for Q3 were as follows: Procedures grew approximately 49% over Q3 of 2008. We sold 86 da Vinci Surgical Systems, down from 91 sold in Q3 of last year. 14 of 86 systems were sold to international customers.
  
• We ended Q3 with 1,308 da Vinci Systems installed worldwide.
  
• Total revenue grew to 274 million, up 16% from last year.
  
• Instrument and accessory revenue increased to 101 million, up 33%.
  
• Total recurring revenue grew to 144 million, up 31% from prior year, comprising 53% of total revenue.
  
• We generated an operating profit of 123 million before non-cash stock option expense, up 16% from the third quarter of last year. And we ended the quarter with 1,024,000,000 in cash and investments, up 122 million from last quarter and up 203 million from this time last year after spending 150 million to repurchase stock earlier this year.
  
• (COO) In the quarter we generated 106 million in gross cash from operations, which is 165% of our reported GAAP net income and $2.71 per fully diluted share, as compared with GAAP net income of $1.64 per fully diluted share.
  
• Our significant cash outlays during the quarter totaled $5 million invested in property, plant and equipment and we benefited from a $1 million change in working capital. In addition, we grew our global ISI team by 64 members in Q3, bringing our total employee count to 1,188.
  
• We have seen steady adoption of our Si System in regions in which it is approved, representing 81% of sales in these markets. Introduction of the Si has also catalyzed trade-in transactions for da Vinci Standard Systems.
  
• We continue to invest in manufacturing efficiencies with regard to our Si Systems and are realizing improving Si System margins. Second consoles were included in 16% of Si sales and early reports of training efficacy with Si second consoles are encouraging.
  
• With regard to imaging, we are working closely with our technology partners to bring to market real-time, contrast-based imaging capabilities to supplement the 3D view.
  
• (CFO) In our Q2, we recognized $13.8 million of the total 20.1 million originally deferred. In our Q3,
  we've recognized the remaining Q1 deferred revenue of 6.3 million as we completed the 13 remaining upgrades in Q3.
  
• Quarter-to-quarter revenue and procedure growth reflected a seasonal slowdown, particularly outside the United States.
  
• Q3 instrument and accessory revenue was 100 million, up 32% compared with 76 million for Q3 of 2008, and up 6% compared with 94 million in Q2 of 2009. The increases compared with the prior quarters are driven by procedure growth. Specifically, procedures have increased 49% compared to Q3 of 2008.
  
• The amount of instrument and accessory revenue we realized per procedure, including initial stocking orders, was approximately $1,920 per procedure, down approximately $250 per procedure compared to last year and up approximately $30 per procedure compared to Q2.
  
• Q3 2009 systems revenue of 130 million was 4 million higher than the 126 million of systems revenue for Q3 of 2008 and 19 million higher than the 111 million of systems revenue for Q2.
  
• Despite the increase in systems revenue, we continue to feel the impact of curtailed hospital spending for capital equipment in the ongoing economic recession.
  
• Q3 system revenue also included 10 million of upgrade revenue compared to 1 million in Q3 of 2008 and 2 million in Q2 of 2009.
  
• Our Q3 average sales price per system, including all da Vinci models but excluding upgrades and the revenue deferral was 1,390,000, a decrease from 1,430,000 realized in Q2, and an increase from
  the 1,370,000 realized in Q3 of 2008.
  
• Service revenue increased to 44 million, up 30% compared with 34 million last year and up 6% compared with 41 million last quarter. The growth in service revenue is primarily driven by a larger system install base.
  
• Total Q3 recurring revenue comprised of instrument, accessory and service revenue increased to 144 million, up 31% compared with Q3 of 2008 and up 6% compared with Q2 of 2009. Recurring revenue represented 53% of total Q3 revenue, compared with 46% in Q3 last year and 55% last quarter.
  
• Gross margin in Q3 was 70.4% compared with third quarter 2008 gross margin of 71.9% and Q2 2009 gross margin of 71.5%.
  
• Q3 operating expenses of 95 million were up 12% compared with Q3 of 2008 and up 4% compared with Q2.
  
• Excluding the impact of deferral activities, Q3 2009 operating income was 98 million or 36% of sales, compared with 85 million, or 36% of sales for Q3 of 2008 and 86 million or 35% of sales for Q2 of 2009.
  
• Our effective tax rate for Q3 of 40.7% was slightly higher than our anticipated rate of 40% due to higher state tax rates.
  
• Our effective tax rate for Q3 of 2008 was 35.7%, reflecting R&D credits recorded in Q3 of 2008, but relating to our 2007 tax return.
  
• Since December 31, cash flow from operations of 269 million and stock option exercises of 34 million was partially offset by IP purchases and capital expenditures of 46 million and the 150 million used to buy back and retire 1.4 million shares of common stock.
  
• Our accounts receivables balance increased to 187 million at September 30, from 175 million at June 30. The increase in receivables reflects increased revenue.
  
• Our net inventory decreased to 57 million at September 30, from 59 million at June 30. Despite growth in revenues, our inventory declined during Q3, primarily due to the utilization and material built up to support the da Vinci Si product launch.
  
• (VP, Strategy) Our greatest market opportunity resides within the benign GYN patient segment. And last quarter, the Journal of Robotic Surgery reported a collective series from a GYN group, Rochester General Hospital in Rochester, New York. The study is entitled "Robotic Assisted Gynecologic Surgery in a Community Setting." The authors reviewed the outcomes of 110 GYN procedures. 74 patients underwent a dVH with bilateral salpingo-oophorectomy, 18 da Vinci sacral colpopexies, 15 da Vinci myomectomies and 3 da Vinci oopharectomaries The patient group study had undergone procedures between June of 2005 and April of 2008. All of the procedures were completed robotically without the need to convert to an open approach. The average procedure time was 135 minutes, with an average blood loss of 160 ccs. There was only one intraoperative complication, which was repaired robotically, and the mean hospital stay was one day with over half of the patients being discharged within a 24-hour time period.
  
• (CFO) Given our current run rate, we should exceed 200,000 procedures for the year, which is more than 47% higher than the 136,000 procedures we completed last year. This will continue to drive significant growth in our total instrument and accessory revenues this year.
  
• We expect other income to remain at approximately $4 million for Q4.
  
• With regard to income tax, we have recorded a tax rate of 41% year-to-date and it is likely to remain at approximately this rate for 2009. We are working on setting up processes that would allow us to start reporting a lower tax rate sometime in 2010.
  
• (Q&A) So it looks likes the OUS results that you had were the weakest that we've seen in some time. What else can you tell us about the source of the sequential decline from 2Q? Is there a specific country where orders didn't materialize, or you're seeing some seasonality in the EU? The CapEx spending cycle's bottoming out OUS, maybe with a lag from the U.S. cycle? (A)I think a little of everything you has probably affected our Q3 numbers. First off, Q3 is historically a slow quarter in Europe. There are lot of vacations, both from a patient side - although our procedures remain strong, just putting deals together is always more challenging. But I think on top of that is without question there is some recessionary activity being felt in Europe, and I don't think it's the same in any country, as evidenced by Germany having three systems for example this quarter, while other countries did not contribute. So I think we really attribute it to nothing really structural other than some forces that were at work against us in Q3.
  
• And that on a different topic, getting back to the JAMA study, if you think about the clinical data published on da Vinci, it's not been sponsored by the company and much of it tends to evaluate the single-center experience. After the JAMA study came out last week, how much sense does it make for Intuitive to sponsor clinical work, particularity larger, more multi-center trials that can demonstrate the real value of the technology? (A)I think our position has always been that the data will come and it will probably come in forms that people become accustomed to, meaning multi-center trials and surgeons working together to put together multi-center trials. In fact, we're seeing some of that, and you saw some of that - actually I referenced it on the GYN/oncology side. One of the challenges of a rapid multi-center trial is going to the source of the information. For example, you could do a retrospective analysis and observational study using CPT codes, but the medical community doesn't really look at that as really good, solid evidence-based medicine. And so I think what you're asking for will happen, and perhaps there are some things we can do to help it. But I think it's always been our belief and it remains our belief that staying out of good clinical evidence is probably not a bad position for us to take.
  
• And then, just finally on the hysterectomy market. You mentioned that you'd been seeing doctors that sometimes may start out to doing their more complex cases on the robot, then gravitate towards using the robot exclusively. Are you starting to think that maybe the initial market that you identified for hysterectomies - that is, the 250,000 oncology and complex benign - might really be bigger? And could it to be closer to all practicing GYNs or all operating GYNs? (A)I think the way we've really looked at that and the way we've sized it is you have heard us not waver from our position where we talk about the surgeon value equation. And we know that the highest surgeon value equation that we can help contribute comes from those very complex cases, and that's where we're going to start. Does that mean that we can't get to all of the hysterectomies? You know, it really doesn't. There are non-complex cases that people have gravitated to with da Vinci, and I think that's great. But we feel very strongly about the patient value that we contribute to the open hysterectomies when we can convert them to minimally invasive, and we'll see where it goes. It may turn out that we were wrong and the market can be significantly larger but I think it's early for us to say that.

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