Intuitive Surgical Management Discusses Q2 2012 Results - Earnings Call Transcript

Intuitive Surgical (ISRG)

Q2 2012 Earnings Call

July 19, 2012 4:30 pm ET

Executives

Calvin Darling

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

Analysts

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

Lennox Ketner - BofA Merrill Lynch, Research Division

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

David R. Lewis - Morgan Stanley, Research Division

Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division

Jose T. Haresco - JMP Securities LLC, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Intuitive Surgical Q2 2012 Earnings Release Call. [Operator Instructions] As a reminder, this call is being recorded. I'd now like to turn the conference over to Calvin Darling, Senior Director, Investor Relations for Intuitive Surgical. Please go ahead.

Calvin Darling

Thank you, and good afternoon. Welcome to Intuitive Surgical's second 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 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's 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 second quarter financial results. Aleks will discuss marketing and clinical highlights, and I will provide an update to our financial forecast for 2012. And finally, we will host a question-and-answer session.

With that, I will turn it over to Gary.

Gary S. Guthart

Thank you for joining us today. In the second quarter, our team has delivered a solid performance driven by robust growth in both our U.S. gynecology business and our emerging general surgery business. As a reminder, for 2012, Intuitive is focused on the following: First, continuing our growth in gynecology and urology worldwide through outstanding execution in the field; second, disciplined execution of our Single-Site and vessel sealing launches focused on outstanding early customer experiences; third, building robust clinical programs with leading customers in emerging procedures in general surgery, thoracic surgery and transoral surgery; and finally, strengthening our capabilities in international markets, particularly Europe, Japan and Korea.

In the second quarter, we continued to experience strong growth in gynecology and general surgery. Growth in gynecology came from a broad base of procedures, including benign and cancer hysterectomies, sacrocolpopexy, myomectomy and endometriosis resection. Growth in general surgery was also multifaceted, including growth in colon and rectal surgery, as well as cholecystectomy. The latter following the introduction of Single-Site earlier in the year. This strength was tempered somewhat by weakness in Europe and a decline in our U.S. da Vinci Prostatectomies. In total, procedures for the second quarter 2012 grew by approximately 26% over the second quarter of 2011. Aleks will provide additional procedure commentary later in the call.

Globally, our business in Asia has continued to build as a result of fine execution by our team. Japan's system sales and procedure performance have responded well to MHLW's reimbursement of da Vinci Prostatectomy at the start of the second quarter, and we continue to invest in building our capabilities in Japan. Conditions in Europe are challenging, with both broad austerity issues, as well as specific structural issues impacting our business. In response to these conditions, we have brought in an experienced executive from our key accounts group in the United States to lead our European commercial organization. We also continue to invest in our international regulatory and reimbursement teams. Given the depth of environmental issues in Europe, we expect challenging conditions to persist into the second half of the year.

Turning to operating highlights for the second quarter. Procedures grew approximately 26% over the second quarter of 2011. We sold 150 da Vinci Surgical Systems, up from 129 during the second quarter of last year. Total revenue was $537 million, up 26% over last year. Instrument and accessory revenue increased to $224 million, up 30% over Q2 2011. Total recurring revenue grew to $307 million, up 28% from prior year and comprising 57% of total revenue. Net income was $155 million, up 32% over last year. We generated an operating profit of $259 million before noncash stock option expense, up 27% from the second quarter of last year. We generated $223 million in gross cash flow from operations and ended the quarter with $2,631,000,000 in cash and investments.

Turning to recently launched products and those in development. In the second quarter, we focused on launches of our Single-Site instruments and vessel sealer. We expanded the use of Single-Site cholecystectomy in the U.S. in response to growing early customer demand. Surgeon and patient response to Single-Site has been positive with over 200 of our U.S. hospital customers having purchased initial Single-Site kits 2 quarters after launch. As mentioned in prior calls, we are working on expanding our instrument offering in Single-Site to enable its use in additional indications.

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