INTUITIVE Q3 2026 EARNINGS RELEASE - INTUITIVE SURGICAL INC

Explicit Guidance:

• FY 2026 da Vinci Procedures: Guidance narrowed to a range of 14% to 15% growth (previously 13.5%–15.5%), with an expectation to be closer to the midpoint; this range accounts for ACA premium subsidy changes in the U.S., tender volumes, and competitive intensity in China.
• FY 2026 Non-GAAP Gross Profit Margin: Updated to a range of 68.3% to 68.7% of revenue (previously 68%–69%); includes an estimated 90 basis points impact from tariffs and related refunds; headwinds include faster growth of newer products (Da Vinci 5, ION) partially offset by cost reductions, while tailwinds include product mix shifts; risks include higher input costs for freight and semiconductor memory.
• FY 2026 Non-GAAP Operating Expense Growth: Expected to grow 11% to 13%; R&D growth will continue to outpace SG&A; no multiyear contribution to the Intuitive Foundation expected in 2026 (following a $70M contribution in Q4 2025).
• FY 2026 Non-GAAP Other Income: Forecast between $300 million and $310 million, driven by interest income, with lower balances reflecting Q3 share repurchases.
• FY 2026 Non-Cash Stock Compensation: Estimated between $860 million and $870 million.
• Q4 2026 Non-GAAP Effective Tax Rate: Expected to be 22% (±50 basis points).
• Instrument Pricing Impact: Pricing actions (Extended Use Program and China reduction) expected to lower Da Vinci I&A revenue per procedure by 3% to 5% on a mixed constant basis once fully implemented; China reduction takes effect in Q4 2026; Extended Use Program rollout begins in first half of 2027 and impacts will build progressively through 2027.

Business-Segment Outlook:

• da Vinci Systems: Exited Q3 with >13,200 installed systems worldwide; Da Vinci 5 and SP accounted for 65% of global placements; >2,000 Da Vinci 5 systems installed, used by >18,000 surgeons; plans to accelerate expansion into new geographies in 2027.
• SinglePort (SP): SP procedures grew 55% in Q3 (US +50%, Korea +40%); installed base reached 487 systems across 27 countries; U.S. submission for SP vessel sealer planned for Q4 2026 to enable wider adoption; new SP stapler adoption broadening.
• ION Platform: Reimbursement received in Korea; CE marks received for transvaginal gynecological procedures; CE mark received for force feedback instrumentation and cardiac procedures on Da Vinci 5; clearance expected in more geographies in coming quarters; new development programs include ROSE (real-time cytology) and endobronchial ultrasound integration.
• Cardiac Procedures: CE mark received for Da Vinci 5 cardiac procedures in Europe; U.S., India, Japan, and Korea cleared; line-of-sight opportunity estimated at 300,000–400,000 procedures/year in cleared regions; Q3 growth was 40%.
• Breast Surgery: Q3 growth was 42%; early-stage opportunity linked to surgeon training and clinical evidence accumulation.
• International Markets:
  • China: Operating environment remains challenging; significant pricing reductions (policy-driven) effective November 2026; focus on regulatory "green channel" for SP and Da Vinci 5.
  • Japan: Procedure growth accelerated in Q3 following June reimbursement changes; strong system placements.
  • Europe: Germany led with 20 system installations; strong growth in UK, Italy, Portugal, Turkey, and Austria; benign procedures driving growth.
  • Asia: India procedures grew 42% (surpassing 200k cumulative); Singapore and Taiwan strong; Malaysia facility planned.
  • New Markets: Plans to enter new countries in 2027; existing expansions into Croatia, Peru, Morocco, and Lithuania.
• Ambulatory Surgery Centers (ASCs): Early-stage, multi-year effort; 18 systems installed in U.S. ASCs in Q3; pipeline of ASC opportunities building; <10% of U.S. soft tissue surgery currently in ASCs (growing segment).
• Next-Gen GI Robot: Received FDA 510(k) clearance in August 2026 for next-generation flexible robotic endoscope system for GI tract; program is early in development.
• Telepresence/Telesurgery: Telepresence adoption increasing; multiple regulatory clearances expected for telesurgery in first half of 2028.
• AI & Digital Capabilities: Development ongoing for voice-activated UI, automated fourth arm control, AI-controlled motion, and advanced visualization (hyperspectral imaging, fluorescing molecules); AI deployment at scale contingent on regulator and user confidence.
• Force Feedback: Current adoption at 8% of Da Vinci 5 cases (limited by supply); ambition for significantly higher penetration; value proposition evidenced by improved outcomes (e.g., potency return in prostatectomy).
• Clinical Evidence: "Benign COMPARE" study published confirming benefits in 13 high-volume benign procedures; >48,000 peer-reviewed publications total; focus on generating real-time economic/clinical data for hospital decision-makers.

Market and Competitive Outlook:

• Pricing Strategy: Strategic pricing actions implemented in high-volume benign procedures to lower cost barriers; extended use program expands instrument life for 4th/5th gen platforms with volume-based pricing; no-fault settlement with U.S. customers regarding third-party remanufacturing and servicing reached (subject to court approval), providing certainty on instrument/servicing landscape.
• Competitive Dynamics: Management believes cart-based architecture remains optimal for ASC and OR environments; customers prioritize ecosystem, reliability, and training over modularity alone; managing competition in ASCs with tiered portfolio (XIR) and pricing actions.
• Addressable Market: Benign procedures represent the majority of the gap between current international volumes and addressable opportunity; pricing actions and tiered systems (XIR) aim to right-size programs for local reimbursement constraints.
• Demand Trends: Strong global demand across all platforms; Da Vinci 5 and SP driving revenue mix shift; ASC and international benign adoption accelerating.

Macro / Industry Outlook:

• U.S. Macro Factors: Monitoring impacts of lower ACA enrollment, Medicaid eligibility changes, and potential 340B program changes on patient behavior and procedure volumes.
• China Environment: Operating environment described as "challenging" due to tender volumes and competitive intensity; government policy changes driving significant price reductions.
• Regulatory: Continued focus on regulatory clearances for new indications (cardiac, benign, gynecological) and new platforms (GI robot, handheld endoscope); telesurgery clearances anticipated in 2028.
• Tariffs: Q3 included a $28M one-time refund; future margins include ~90 bps tariff impact forecast for 2026.
• Cost Structure: Managing input cost inflation in freight and semiconductor memory; leveraging manufacturing scale and cost reduction programs to offset pricing headwinds.

Strategic Initiatives:

• Manufacturing Expansion: Significant new INA manufacturing facility in Penang, Malaysia announced; expected to begin operations in 2028 to support long-term Asia growth.
• Product Launches & Submissions:
  • Q4 2026: U.S. submission for SP vessel sealer.
  • 2027: Rollout of Extended Use Program (EUP) for core instruments; update to long-term soft tissue surgery opportunity estimate.
• Capacity & Access: Increasing investments in international market access (regulatory, reimbursement, training); accelerating entry into new geographies in 2027.
• Litigation Resolution: Settlement reached with U.S. customers regarding third-party remanufacturing/servicing; $450M GAAP impact (one-time) in Q3; provides framework for future collaboration.
• Shareholder Returns: Completed $2.9B in share repurchases in Q3 at avg $377/share; cash balance $6.8B.

Risks and Headwinds to Outlook:

• Regulatory Delays: Potential delays in FDA/CE clearances for new indications (e.g., GI robot, telesurgery) or instrument extensions could delay revenue growth.
• Pricing Volatility: Stocking ahead of Extended Use Program implementation may cause customer ordering pattern volatility; China pricing policies remain subject to government implementation.
• Macro Uncertainty: U.S. healthcare policy changes (ACA, Medicaid, 340B) could dampen procedure growth; slower-than-expected adoption of benign procedures in international markets.
• Cost Inflation: Persistent inflation in freight and semiconductor memory could pressure margins despite cost reduction programs.
• Competitive Intensity: Heightened competition in China and ASC segments could impact pricing and market share.
• Adoption Timing: Early-stage programs (cardiac, breast, GI robot, AI) may take longer than expected to achieve scale or gain regulatory confidence.
• Settlement Finalization: Litigation settlement remains subject to court approval, expected in next year.

Management Tone on the Future:

• Confidence Level: High confidence in "durable U.S. procedure growth" driven by clinical data (COMPARE study), capacity expansion, and pricing actions; confident in "elasticity" of benign procedure volume in response to cost reductions.
• Strategic Focus: Emphasis on "broadening access" and "expanding addressable opportunity" through pricing and tiered portfolios rather than pure premium pricing; commitment to long-term innovation in AI and robotics.
• Long-Term Vision: Aim to reach "more patients with the best care available" by combining robotics, data, and AI; focus on the "quintuple aim" (better outcomes, experiences, cost, access).
• Investment Stance: Willing to invest incremental capital in R&D (especially AI and new platforms) and international expansion to support accelerated growth; operating margin target remains 35%–40% range with capacity to invest further.
• Hedges/Qualifiers: Explicitly notes that AI deployment requires earning regulator/patient confidence; acknowledges uneven quarter-to-quarter performance in new geographies and ASCs; cautious on near-term U.S. growth due to macro comparisons but optimistic on long-term trajectory.

Miscellaneous:

• Cash Flow: Q3 operating cash flow offset by $2.9B share repurchases and $113M capex; cash and investments ended at $6.8B.
• Legal: No-fault settlement regarding third-party instrument remanufacturing and servicing finalized subject to court approval.
• Clinical: "Benign COMPARE" study confirms da Vinci superiority in reducing conversions to open surgery and shortening hospital stays for high-volume benign procedures.