Intuitive Surgical's CEO Discusses Q3 2011 Results - Earnings Call Transcript

Intuitive Surgical (ISRG)

Q3 2011 Earnings Call

October 18, 2011 4:30 pm ET

Executives

Gary S. Guthart - Chief Executive Officer, President and Director

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

Aleks Cukic - Vice President of Strategy

Calvin Darling - Director of Financial Planning

Analysts

Lennox Ketner - BofA Merrill Lynch, Research Division

Frederick A. Wise - Leerink Swann LLC, Research Division

Tao Levy - Collins Stewart LLC, Research Division

Ben Andrew - William Blair & Company L.L.C., Research Division

David H. Roman - Goldman Sachs Group Inc., Research Division

Jonathan Demchick - Morgan Stanley, Research Division

Tycho W Peterson - JP Morgan Chase & Co, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Intuitive Surgical Q3 2011 Earnings Release Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to our host, Mr. Calvin Darling, Senior Director of Finance. Please go ahead.

Calvin Darling

Thank you. Good afternoon, and welcome to Intuitive Surgical's Third Quarter Conference Call. With me today, we have Gary Guthart, our President and CEO; Marshall Mohr, our Chief Financial Officer; and Aleks Cukic, our Vice President of 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. Prospective 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 intuitivesurgical.com, on the Audio Archive 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 third quarter results, as described in our press release announced earlier today, followed by a question-and-answer session. Gary will present the quarter's business and operational highlights. Marshall will provide a review of our third quarter financial results. Aleks will discuss marketing and clinical highlights. Then I'll provide you with an update to our financial guidance for 2011. And finally, we will host a question-and-answer session.

With that, I'll turn it over to Gary.

Gary S. Guthart

Thank you for joining us today. We are pleased with the growth in da Vinci procedures and with the performance of our capital and clinical teams in the third quarter. Overall, the Intuitive team is executing well in our 4 2011 focus areas, which are first, extending the benefits of minimally invasive surgery in gynecology and urology; second, expanding robotic surgery and deepening our organizational capability in Europe and Asia; third, crisp execution in our product development efforts; and finally, enabling emerging procedures in thoracic, transoral, colorectal and general surgery.

Total procedures grew approximately 30% over Q3 2010 with strong year-over-year growth in gynecology. Gynecology procedure performance was solid for all of our target procedures, including hysterectomy for malignant and benign conditions, sacrocolpopexy and myomectomy. In urology, da Vinci Prostatectomy continued to grow year-over-year driven by European uptick. dVP was flat in the quarter on a sequential basis, expected given the summer seasonal slowdown in Europe.

For follow-on procedures in urology, our penetration into treatment for kidney cancer continues to grow as more total nephrectomies are converting to nephron-sparing partial nephrectomies enabled by da Vinci.

Emerging procedures in thoracic surgery and colorectal surgery continued to show strength both sequentially and year-over-year.

Transoral robotic surgery grew nicely on a year-over-year basis, however, absolute volumes in TORS are relatively small and quarter-to-quarter variation is significant. Aleks will provide additional procedure commentary later in the call.

Operating highlights for the third quarter are as follows: Procedures grew approximately 30% over the third quarter of 2010. We sold 133 da Vinci Surgical Systems, up from 105 during the third quarter of last year, 99 of which were purchased by U.S. customers.

Total revenue was $447 million, up 30% over last year. Instrument and accessory revenue increased to $176 million, up 38% over Q3 of 2010. Total recurring revenue grew to $248 million, up 34% from prior year and comprising 55% of total revenue. Net income was $122 million, up 41% over the last year. We generated an operating profit of $214 million before noncash stock option expense, up 32% from the third quarter of last year and represented [Audio Gap] of Q3 revenue.

We ended the quarter with $1.9 billion in cash and investments, up $65 million from last quarter. Significant cash outlays during the quarter included $15 million invested in intellectual property and fixed assets and $181 million used in the repurchase of our stock.

Excluding the impact of these outlays, as well as $91 million from stock proceeds and $19 million provided by working capital, we generated $190 million in gross cash flow from operations, which is 155% of our reported GAAP net income in the third quarter.

Turning to products. We received FDA approval for our suction irrigation instrument in the quarter, which, combined with the new thoracic grasper and new bipolar dissector, comprises an instrument kit designed to facilitate thoracic procedures. Early uptake of our thoracic instrument kit has been encouraging.

As we mentioned on our last call, we continued to answer questions posed by FDA on our Single-Site and vessel sealing products. Our interactions with FDA have been constructive and our teams are working diligently to answer their questions.

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