Intuitive Surgical (ISRG) Blows Out Street Estimates; Highlights from Q409 Conference Call

Intuitive Surgical (NASDAQ: ISRG) reported a Q409 EPS of $1.95, 24 cents better than the analyst estimate of $1.71 yesterday on revenues for the quarter of $323 million, which compares to the estimate of $292.72 million.

The following are highlights from the company's Q409 conference call:

• Gary S. Guthart, Ph.D, President and CEO:
  • Procedures grew 44% over the fourth quarter of 2008. We sold 110 da Vinci Surgical Systems, up from 85 sold during the fourth quarter of last year. Our international team contributed 30 of the 110 systems sold. We ended the fourth quarter with 1,395 da Vinci Systems installed worldwide. Total revenue for the quarter was 323 million, up 40% over fourth quarter of last year. Instrument and accessory revenue increased to 113 million, up 39%. Total recurring revenue, including service, grew to 161 million, up 37% from the prior year and comprising 50% of total revenue.
    
    
  • We generated an operating profit of 153 million before non-cash stock compensation expenses, up 47% from the fourth quarter of last year. And GAAP net income grew to 78 million, up 53% from fourth quarter of last year. For the full-year of 2009, worldwide procedures grew by 51% over 2008. Our international procedures grew by 60% over 2008. We sold 338 da Vinci Surgical Systems in the year. Total revenue grew to 1.052 billion, up 20% over 2008. Recurring revenue grew to 562 million, up 34%, and comprising 53% of total revenue. We generated 474 million in operating profit before non-cash stock compensation expense, up 22% from last year; and GAAP net income grew to 233 million, up 14% year-over-year.
    
    
  • We ended the year with 1.172 billion in cash and investments, up 148 million from last quarter and up 217 million from last year, which, excluding 59 million in cash received during the year from the exercise of stock options and adding back 15 million invested in intellectual property working capital, property plan and equipment, and 115 million stock buyback during the year, amounts to a gross cash generated from operations of 377 million, or $9.61 per fully diluted share; and 162% of our reported GAAP net income for the year.
    
    
  • We launched our Si System in Q2 of 2009, and by Q4 79% of the new system sales were our Si product. The Si System has catalyzed trade-in sales for our first platform, the da Vinci Standard, and upgrades of da Vinci S Systems with 23 trade-in transactions and 10 S to Si upgrades in the fourth quarter. Si dual consoles were sold in 16% of Si System sales through the year, representing an opportunity for increased training efficacy at those sites. We obtained FDA approval for a new indication of da Vinci Systems for transoral da Vinci surgery, procedures for which patient value is very high.
• Marshall L. Mohr, Senior Vice President and CFO:
  • We deferred a total of 20.1 million of revenue in the first quarter. In our second quarter, we recognized 13.8 million of the total 20.1 million originally deferred. In our third quarter, we recognized the remaining first quarter deferred revenue of 6.3 million as we completed the 13 remaining upgrades in the third quarter.
    
    
  • Fourth quarter instrument and accessory revenue was 113 million, up 39% compared with 82 million for the fourth quarter of 2008, and up 13% compared with 100 million in the third quarter of 2009. The increases compared with prior quarters are driven by procedure growth. Specifically, procedures increased 44% compared to the fourth quarter of 2008.
    
    
  • The amount of instrument and accessory revenue we realized per procedure, including initial stocking orders was approximately $1,960 per procedure, down approximately $70 per procedure compared to last year; and up approximately $40 per procedure compared to the third quarter. The decline in revenue per procedure compared to the fourth quarter of 2008 reflects the lower impact that initial stocking orders have on a larger installed base, as well as customer efficiency.
    
    
  • Our fourth quarter average sales price per system, including all da Vinci models but excluding upgrades and the revenue deferral was 1.41 million, an increase from the 1.39 million realized in the third quarter, and an increase from the 1.32 million realized in the fourth quarter of 2008.
    
    
  • Service revenue increased to 48 million, up 32% compared with 36 million last year, and up 9% compared with 44 million last quarter.
    
    
  • Total fourth quarter recurring revenue comprised of instrument, accessory and service revenue increased to 161 million, up 37% compared with the fourth quarter of 2008, and up 12% compared with the third quarter of 2009.
    
    
  • Fourth quarter 2009 operating expenses of 105 million were up 27% compared with the fourth quarter of 2008 and up 11% compared with the third quarter. The quarter-over-quarter increase reflects commissions associated with higher revenue, costs associated with 75 employees added during the quarter, and increased research and development costs. In addition, patent and amortization expenses increased to 3.6 million for the quarter, compared with 3.2 million during the fourth quarter of 2008, and 3.6 million last quarter.
    
    
  • Fourth quarter 2009 operating income was 128 million, or 40% of sales compared with 83 million or 36% of sales for the fourth quarter of 2008, and excluding the impact of deferral, 98 million or 36% of sales for the third quarter of 2009. Fourth quarter 2009 operating income reflected 25 million of non-cash stock compensation expense, compared with 21 million for the fourth quarter of 2008, and 25 million last quarter.
    
    
  • We ended the fourth quarter of 2009 with cash and investments of 1.172 billion, up 148 million compared with September 30, 2009, and up 270 million compared with December 31, 2008. The increase during the quarter reflects cash flow from operations and 25 million from the exercise of stock options, partially offset by 8 million of capital expenditures.
• Aleks Cukic, Vice President - Strategy:
  • we finished 2009 having completed an estimated 205,000 procedures representing several different procedure categories.
    
    
  • We were notified by the Japanese Ministry of Health that da Vinci S, along with several da Vinci instruments, received - shown in clearance in Japan. We've worked hard with the Japanese authorities to obtain this clearance, so we're certainly pleased to have received it.
    
    
  • At current growth trajectories, dVH will become our largest procedure at some point in 2010. The market opportunity is large, hospitals and physicians are adopting it, and patients are seeking it.
• Benjamin B. Gong, Vice President - Finance:
  • We expect to achieve annual revenue growth of approximately 25%.
    
    
  • With regard to gross margin, we have averaged between 71 and 71.5% over the past two years.
    
    
  • we expect our GAAP operating expense to grow by approximately 25% in 2010, which is in line with our expected top line growth. Excluding non-cash stock compensation charges, we expect operating expense to grow approximately 23 to 24%.
    
    
  • We expect our non-cash stock compensation charges to increase from 97 million recorded in 2009 to approximately 127 million in 2010.
    
    
  • We will continue to amortize previous purchases of intellectual property in our R&D expense line, which is scheduled to amortize at 14.5 million for the year. These items total over $140 million in estimated non-cash expense for the year.
    
    
  • Assuming our stock price remains where it is today, we estimate that our share count for calculating EPS in Q1 will be approximately 40.1 million shares and for calculating EPS for the year, we estimate it will be approximately 40.7 million shares.
• Q&A Session:
  • (Q) But given the significant box placements in the fourth quarter, you still had revenue per procedure that was down year-over-year. Can you kind of maybe just walk us through dynamics there, how we should think about revenue per procedure heading into 2010, have we troughed? (A) I think if you take a look at it across larger time periods, and sort of even out those quarterly fluctuations, you will see a gradual trend downward caused by two things. And the biggest thing is that stocking orders are becoming a less percentage of the total. And as that happens, that will gradually bring down our revenue per procedure metric. And another thing that does happen on a gradual basis, although there is noise in the system, is that customers in general become more efficient over time as the procedure numbers grow. So, I think, Marshall mentioned that if you compare fourth quarter of last year to fourth quarter of this year, I think it was down by about 4%. And that might be a sort of a - I know it's only a 1 point measurement, but it's more of a better comparison than saying, comparing two sequential quarters when you could have some more variations in the sequential rates. Does that answer your question? Hello? Operator?
    
    
  • (Q) In the procedure volume performance in the quarter was obviously very strong. Can you guys just talk a little bit about next two or three big opportunities that you are looking at, and quantify that a little bit more for us? (A) Matt, I think if you look at where our resources are going and where we are focused, they are really in the areas that we talk about. And I don't think we're quick to run any victory laps on our completion with hysterectomy or even prostatectomy internationally, or partial nephrectomy and cystectomy, and so on and so forth. So outside of our target areas, I think you heard Gary mention a couple of procedure categories that we haven't really colored up a lot of, and that being colorectal surgery, and there were some discussion of thyroidectomy and so on. I would caution you to not run there too fast because there is a lot of opportunity both domestic and internationally in the procedures that you're used to talking to us about. And then we will resource the others appropriately, again, not abandoning the winners that we know we have in our hand right now.
    
    
  • (Q) Can you just talk along those lines, Aleks, in terms of ENT, the size of that opportunity, and when we can start to think about that coming online? (A) Yeah. I think, again, the ENT application is one that we believe has very high patient value, which has always been a great leading indicator for our ability to penetrate a market. And so we're very encouraged by that. In terms of the raw numbers, again, based on the approvals we have today - and you have to remember, this is going to be our first foray into that vertical. And what we've learned in the past is ultimately the long-term success goes beyond that first clearance. But that first clearance puts us in a position of about 10,000 or so, perhaps a little more U.S. cases, but OUS you are talking about a number north of 70,000 and some would estimate as high as 100 or perhaps even higher. But, we're in that one for the long-term and we're very encouraged with the first clearance. I would ask you to sort of follow that for a while, we're not ready to make a lot of declarations there because we just received the clearance, literally, a month ago.
    
    
  • (Q) And then one last one on Japan. And I apologize, I know you guys aren't providing too much in terms of guidance on that, but should we just think about that likely not being a 2010 event? I know you are selling there already a bit, but do you anticipate any hospitals just buying in front of what will likely be a reimbursement in 2011 or a bit later? (A) We are working on two things in parallel. We are working on clearing all the importation hurdles that would allow us to start placing systems, and we think we'll have an opportunity to place some. And then we're working on reimbursement. And reimbursement is a complex pathway in Japan because we are a new medical device and they are a single payer system. And that will likely occur procedure-by-procedure in the beginning, it won't be a blanket coverage, it will be a reimbursement for prostatectomy followed by something else. And that part, the reimbursement part, is a lot harder to penetrate in terms of what the timings will be, and that will play out over time. So, I think, while reimbursement is at issue I think that the penetration assistance will be measured.
    
    
  • (Q) Could you start by commenting on capital deployment strategies? As we think about 2010, you've obviously got tremendous cash flow, and just talk about some of the priorities for the year ahead? (A) So, we have over, as we said, over $1 billion of cash, we think that that's a good thing. It provides us with a flexibility to do what we want to do going forward. You've seen us do purchases and licenses of IP, where we think there is benefit in the long term. We'll probably continue to do some of those and recognize, those haven't been big to date. The only sizeable expenditure this next year that we will undertake is, if you listened to Gary, he mentioned that we turned back on the construction of our facility next to our main campus. Other than that, we don't have any immediate plan.
    
    
  • (Q) Can you talk to me a little bit about mix in physician training, is it mimicking what you are seeing on the procedure growth side? And do you get good visibility on what procedure growth would look like from that training? (A) I would say in general the answer is probably yes to both. In other words, you can imagine that the number of surgeons being trained in hysterectomy is going to be larger in terms of raw numbers than prostatectomy at this stage. We've done a lot of training in prostatectomy. And then the - after a certain point, the specialty starts to take over some of those responsibilities. In other words, one partner trains another, or one leader trains another person or it gets integrated deeper into the academic medical centers. So we become more focused on driving the procedures that we are focused on. And from that you can tell certainly what the demand for training is. And hopefully that is a direct relationship to the procedure growth.

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