直覺手術 (ISRG) 2002 Q2 法說會逐字稿

Good afternoon, and welcome to the Intuitive Surgical second quarter earnings release conference call.

All participants will be able to listen-only until the question-and-answer session of the call.

This conference is being recorded.

I would like to introduce your first speaker for today?s call, Mr. Ben Gong, Vice President, Treasurer, and Corporate Controller.

Sir, you may begin.

Good afternoon.

And welcome to Intuitive Surgical?s second quarter conference call.

With me today we have Lonnie Smith, our President and CEO, Susan Barnes, our Chief Financial Officer, Fred Moll, our Co-Founder and Medical Director, Alex [Sutkege], our Vice President of Business Development and Strategic Planning, and David Shaw, our Vice President of Legal Affairs and Corporate Counsel.

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 & 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 web site at www.intuitivesurgical.com on the audio archive section under our Investor Relations page.

In addition, today?s press release has been posted to our web site.

Today?s format will consist of providing you with highlights of the second quarter, as described in our press release announced earlier today, followed by a question-and-answer session.

First, Lonnie will present the business highlights of the second quarter.

Susan will follow with a review or a second quarter?s financial results and provide an outlook for the third quarter.

Next, Fred, will describe our most recent clinical and regulatory progress.

Alex will discuss sales and marketing.

And then David will update you regarding intellectual property issues, including further details on today?s press release.

Finally, we will host a question-and-answer session.

With that, I would like to introduce Lonnie Smith, our President and CEO.

Thank you, Ben.

I?d like to thank each of you for taking the time to join us for today?s conference call.

We will begin with a review of the highlights of the second quarter.

We had strong second quarter financial results.

We shipped 16 da Vinci Surgical Systems, and ended the quarter with 118 systems installed worldwide, achieved record revenue of 19.4 million up 52 percent from prior year, grew recurring revenue to 3.3 million up 82 percent from prior year, and grew gross margin to 52 percent.

We used only a little over one million in cash, ending the quarter with 55.4 million in cash and cash equivalents.

We?re quite pleased with our revenue growth, improving gross margins, and cash management in the second quarter.

We continue to see healthy growth in our recurring revenue stream, and increased system usage.

Susan will provide further financial details later in this call.

Approximately two-thirds of the systems shipped in the second quarter went to community hospitals.

We completed our U.S. clinical trial for mitral valve repair, and will submit the results to the FDA shortly.

We completed our clinical trial for [General Shonen] approval in Japan.

We received [C-mark] clearance to market in Europe our endoscopic heart stabilizer for beating heart coronary bypass.

And this morning we received the favorable rulings from the Delaware Court.

Those rulings are detailed in a press release issued earlier today, and we will proceed to trial in two weeks.

As we?ve mentioned in last quarter?s call we moved to a new 83,000 square foot facility in last February.

We?ve now been up and running in this new facility for approximately five months, and we couldn?t be more pleased.

It has proven to be a true asset to the company, contributing to the productivity of our employees, and creating a positive impression for all who visit.

Our expanded lab facilities, combined with our customer demonstration and training center, have greatly enhanced our clinical development and our customer education capabilities.

The new mobile operating room and demonstration system we introduced last quarter has been a great success.

As you may remember this is an 85-foot tractor trailer that expands accordion-style to a full operating room, which allows us to easily take surgical demonstrations of the da Vinci System to medical centers across the United States.

During the quarter this mobile system was completely booked, and competition among our sales force for use of this system was very intense.

The power of this tool beyond its visibility is that it can significantly shorten the selling cycle by making it possible for surgeons or staff, hospital administrators, to see and test-drive the system in a single day without disruption to their schedules.

On-site system demonstrations clearly accelerated the purchase process at several hospitals this past quarter.

We?ve now received the results of a recently completed JD Power study for survey of our customers.

This is a comprehensive survey covering all aspects of our business.

The purpose of the survey is to obtain objective third-party feedback on our performance in the eyes of our customers, to help us to prioritize and focus our efforts to better serve them.

Overall, the results demonstrated that our customers are quite happy with their purchase of the da Vinci System.

When asked the question if they believed that their hospital had made a good decision to buy the da Vinci Surgical System, physicians gave us an average rating of nine on a scale of one to 10.

Their survey also indicated they are quite pleased with the surgical capabilities of the da Vinci System, and are enthusiastic about increasing its use in their practices.

On the legal front our joint Delaware litigation with IBM against Computer Motion is set to begin in early August.

And in California we?ve begun filing our summary judgment motions.

David Shaw will give you the details later in this call.

With that, I?ll pass the time over to Susan who will discuss our second quarter financial results.

Thank you, Lonnie.

Overall, as Lonnie mentioned earlier we had a strong second quarter with our financial performance meeting or exceeding our established goals.

We realized 19.4 million of revenue which exceeded our previous record of 16 million by over $3 million.

We improved gross margin to 52 percent which represented our first quarter over 50 percent, and exceeded our previous quarter by over three percent.

We recorded a net loss of 10 cents per share, while using only $1.2 million in cash.

Our second quarter 2002 revenue was $19.4 million, up 52 percent from second quarter 2001 revenue of 12.7 million.

We shipped 16 da Vinci Surgical Systems during the quarter, 13 in the United States, and three in Europe.

The 16 total units shipped, were up four compared to 12 units shipped during the second quarter of 2001.

We now have cumulative placements of 118 systems. 75 in the United States, 38 in Europe, and five in the rest of the world.

Total Q2 2002 revenues by product group was as follows: systems 15.6 million, instrument and accessories 2.7 million; and service 1.1 million.

Included in the instrument and accessory category is $500,000 related to the sales of a separate surgeon console to one of our existing customers.

Excluding the impact of this specific item the current revenue was up 82 percent compared to Q2 2001.

Recurring revenue grew to 3.3 million or 17 percent of total revenue, compared to 1.8 million or 14 percent of revenue in the second quarter of 2001.

Our recurring revenue continues to climb each quarter as we place more systems, and our customers perform more robotic procedures.

Total year-to-date sales equaled 33.8 million, up nine million or 36 percent compared to the first half of 2001.

Second quarter 2002 gross margins rose to 52 percent, compared to 48 in the same quarter last year.

The improvement in gross margin over the prior year resulted in large part from a higher da Vinci Surgical System average selling price and higher unit sales.

Total operating expenses for the second quarter of 2002 were 14.4 million, up 3.4 million compared to the second quarter of 2001.

Our operating expense for the quarter was higher than we had guided.

This was primarily due to a spike in R&D expenses related to new product development.

Research and development expense was 4.6 million in the second quarter of 2002, of approximately 1.3 million from the 3.3 million in the second quarter last year.

This increased versus prior year, resulted from headcount growth and higher prototype material costs.

SG&A expenses were $9.8 million in the second quarter of 2002, up approximately 2.1 million from the 7.7 million in the second quarter 2001.

The increase over prior year was mainly due to growth in our field sales and support organization.

Non-cash deferred compensation and patent amortization expenses represented 400,000 of total operating expenses in Q2 2002, compared to $770,000 in Q2 2001.

We ended the quarter with 272 regular employees, up 15 from the previous quarter end.

Total worldwide field employees increased by four, from 65 to 69 during the quarter.

The remainder of the additions were primarily in manufacturing and engineering.

Other income was approximately $500,000 for Q2 2002, compared to a $700,000 income in the second quarter of 2001.

The decrease is mainly due to lower cash balances and lower rates of return off earned on cash investments.

Our net loss for the second quarter 2002 was $3.7 million or 10 cents per share, compared to 4.2 million or 12 cents per share in the second quarter of 2001.

Basic and diluted shares outstanding for EPS calculations were 36.4 million shares for the second quarter of 2002, compared to 35.7 million shares for the same period last year.

Now, in regards to our balance sheet.

We ended the quarter with $55.4 million in cash, down 1.2 million from the previous quarter end.

The reduction reflected the company?s net loss of 3.7 million, offset by non-cash expenses of 1.1 million and favorable working capital changes.

Our quarter end accounts receivable balance of $15.2 million was down 300,000 from the previous quarter end.

Taking into account our higher Q2 revenue, our average day sales outstanding was 71 days, down from 97 at the end of Q1.

Ending fourth quarter net inventory was at 7.2 million, up about $1 million from the previous quarter end, reflecting higher sales volume.

Our annual inventory turns are now about 5.1, compared to the 4.8 we had at the end of the first quarter.

In regards to our outlook for the third quarter we expect third quarter revenues to come in between $15 and $19 million on system unit shipments of between 12 and 16 systems.

The third quarter tends to be our slowest due to the impact of summer vacation season in Europe and the United States.

We anticipate Q3 gross margins to decrease slightly due to lower sales and production volume.

We expect operating expenses in the third quarter to be equal to or slightly lower than the second quarter.

Due to, including expenses related to several trade shows with only one to occur in Q3.

We also had high prototype expenses in Q2.

We don?t expect these expenses to be at the same level moving forward.

Offsetting these items we do plan to grow our sales force and customer field support organizations, and to incur more legal expenses as our trial gets computer motion and begins in Delaware.

We expect the average number of shares outstanding during the third quarter of 2002 for EPS calculations to be approximately 36.6 million shares.

And with that, I?d like to turn it over to Fred who will provide a summary of our latest clinical progress.

Thanks, Susan.

I am pleased to report that we have made significant progress in our cardiac clinical trials, product offerings, and surgical procedures.

As Lonnie highlighted earlier, we have completed all cases required to file a 510-K for mitral valve repair.

And we expect to file this application within the next few days.

We are confident in the quality of the data and anticipate clearance by the end of this year.

Importantly, the FDA has granted permission for all sits involved in the mitral trial to continue performing this procedure while the agency is reviewing our application.

Cases for the atrial septal defector [para] trial are progressing positively, and we expect to file our 510-K during the fourth quarter and receive FDA clearance for this syndication by the first quarter of next year.

Our coronary artery bypass trial is also progressing with cases ongoing.

We believe we are still on-pace to obtain [cavedge] clearance by the end of 2003.

During the second quarter we received CE mark clearance to market our new heart stabilizer product, key to the execution of beating heart cavedge procedures.

We will introduce the new beating heart system to all of our European customers next month.

The beating heart cavedge procedure continues to improve with clinical investigators now achieving consistent three-hour case times and highly reproducible results.

In neurology we have had another quarter of strong growth in the da Vinci prostatectomy, or DVP procedure.

The number of DVPs performed in Q2 grew by over 25 percent versus Q1.

Also, the number of sites performing the DVP grew by 35 percent versus Q1.

We are seeing patient demand driving this procedure, and regional competition intensifying.

Regarding new procedures we are excited about the expanding role of the da Vinci System in microsurgical applications.

The ability of da Vinci to provide precise, articulated movement under high magnification offers a unique clinical capability in microsurgical technique.

For example, recently Dr. Richard Graham at the [Marenko] Doctors Hospital in Richmond, Virginia was the first to perform a microsurgical vasectomy reversal by using the Intuitive System.

Other procedures in the area of plastic, reconstructive, and vascular surgery are ideal candidates to robotic technique.

We see many of these procedures being done in the future as microsurgeons discover the capabilities of Intuitive?s technology.

That completes my summary, and I?ll pass the time over to Aleks Cukic.

Thank you, Fred.

As was previously mentioned we shipped 16 da Vinci Surgical Systems during the second quarter, the most in any quarter thus far for Intuitive.

We had another strong quarter in the U.S. with 13 units going to U.S. customers.

We again installed our systems in some of the most prestigious hospitals in the country, including New York University, The University of Pennsylvania, William Beaumont Hospital in Royal Oak, Michigan, St. Luke?s, Kansas City, and St. Joseph?s, Atlanta.

Three systems were sold in Europe, up from one in the previous quarter.

We continue to see a higher percentage of systems shipped to community hospitals versus academic institutions.

Five of our Q2 sales were to academic centers, while 10 went to community hospitals.

The remaining system was sold directly to a physicians practice.

The Peoria Surgical Group of Illinois became the first group of physicians to directly acquire da Vinci System as a strategic investment for their practice.

The fact that these surgeons are willing to invest in a da Vinci Surgical System out of their own pockets for their own practice is a significant testimony as to the economic benefits that the da Vinci Surgical System offers.

We were very active during the second quarter at various trade shows.

In the cardio thoracic area we attended the American Association of Thoracic Surgeons meeting in Washington, D.C.

Thoracic surgery has been an area of momentum for us, particularly in the Esophageal and lung surgeries.

In June we participated in the International Society of Minimally Invasive Cardiac Surgeons Conference in New York City.

As Intuitive gets closer to obtaining U.S. cardiac clearances we have seen many U.S. hospitals show considerable clinical interest, as to have time to plan and implement their robotics programs around these clearances.

This show generated a significant number of high-quality leads for Intuitive.

Also in June we attended The American Society of [Bariatric] Surgeons meeting for the first time.

Bariatric, or obesity surgery, is another area that we have experienced recent growth and see great potential to capitalize on the da Vinci?s strengths.

Several hospitals such as Mt. Sinai, New York, Westchester Medical Center, and the University of Illinois, Chicago have done a significant number of successful gastric bypasses and gastric banding procedures with the da Vinci Surgical System.

Our biggest marketing event of the quarter was probably the American Neurology Association Meeting held in Orlando.

Overall attendance was close to 10,000, about equally split between international attendees and U.S.

At this show there were eight different presentations highlighting Intuitive and the da Vinci Surgical System.

One of the most impressive was that of Dr. Manny [Menan] of Henry Ford Hospital in Detroit, who presented his DBT technique and clinical results in a session attended by nearly a thousand neurologists.

Overall, this year?s AUA meeting was a key event for Intuitive Surgical.

The quality of the leads and the enthusiasm were both very high.

Surgeons are now both routinely seeing and hearing the successes that the da Vinci Surgical System brings to the field of urology.

Those who attended our booth were very interested in becoming part of this robotic urology movement.

At this point, I?ll pass the time over to David Shaw who will discuss the legal developments of the quarter.

Thanks, Alex.

I?ll first address our joint Delaware litigation with IBM against Computer Motion on our patent covering voice-controlled surgical robots.

We issued a press release earlier today explaining in greater detail what I?m about to cover.

This morning?s ?LA [indiscernible]? announced the results of the parties summary judgment motions.

On our motion for judgment the district court concludes that all of Computer Motion?s AESOP, Zeus, and [Home Ease] products literally infringed the 984 patent.

And so, entered summary judgment against Computer Motion on that basis.

Intuitive, thus, will not now have to prove infringement at trial.

This is a great result for us.

We?re equally pleased that the court also denied all four of Computer Motion?s own request for summary judgment.

The court first rejected Computer Motion?s request that the case be thrown-out on the basis of prosecution laches and instead, after denying our cross motion on that same issue they set the defense for trial.

The court also refused Computer Motion?s request that the 984 patent be invalidated for lack of enablement or for violation of the best mode requirement.

And further rejected Computer Motion?s attack on our standing to sue.

Instead, affirmatively ruling that Intuitive is entitled to defend its marketplace as the exclusive licensee of the 984 patent.

As a result of the court?s rulings and the entry of judgment for the AESOP, Zeus, and Home Ease infringe, if Computer Motion cannot now prove at trial by clear and convincing evidence that the 984 patent is somehow invalid or unenforceable it will face liability for patent infringement.

Trial is now less than two weeks away.

I will next address our interference proceedings against Computer Motion in the U.S. patent office, all of which have now concluded.

As you likely already know, of the three Computer Motion patents we challenged interference we won two outright.

As a result, Intuitive gained the right to patent those two key inventions for itself, and Computer Motion lost its entire former AESOP 193 patent and all of its former Zeus 583 patent.

Just yesterday Computer Motion filed its appeal of these judgments in the Central District of California.

I won?t comment further on the appeal process at this point until Computer Motion has made its intentions clear to the court.

In the third interference on Computer Motion?s 664 patent the Patent Office ended judgment against this, ruling that we cannot patent that third invention for ourselves.

Nevertheless it was left open whether the 664 patent is, in fact, invalid as we?d argued.

In any event, since the 664 patent did survive the itnerferences, and since Computer Motion now discovered that patent during its original prosecution we made the 664 the subject of our first motion for summary judgment of non-infringement in the California litigation to which I?ll now turn.

And the ongoing litigation against Computer Motion in California in which Computer Motion is attempting to assert its eight remaining patents against us, Intuitive has already filed four motions for summary judgment of non-infringement.

We expect decisions on these four motions to start issuing sometime in the next several months.

We continue to believe in our ability to effectively defend on the merits all of Computer Motion?s remaining allegations, and look forward to the Court?s decisions on our first four motions.

We anticipate filing further motions for summary judgement before year-end after the Court has addressed those already on file.

Finally, turning to our opposition proceeding and the European Patent Office against Computer Motion?s only European patent.

Computer Motion previously announced in its April 3, 2002 press release that a preliminary ruling in this proceeding was in its favor.

That is no longer accurate.

On July 2nd the three-judge panel of the European Patent Office postponed consideration of the substantive issues in the opposition proceeding until after further written briefing can be submitted, thereby mooting the initial preliminary decision.

In addition, because the three-judge panel found that this postponement was necessitated by Computer Motion?s abuse of process the Patent Office ordered Computer Motion to pay Intuitive?s costs including our attorney fees.

We do not expect another hearing in the EPO on this matter until some time in early 2003.

That completes the legal summary, and now I?ll pass the floor back to Lonnie.

That completes our presentation, and we will now open the call to questions.

Thank you. (Caller Instructions.)

Charles Olsziewski from UBS Warburg.

Well, there?s certainly a lot of speakers on this call, but I?m sure David is going to be the most popular.

And that?s not a knock on anyone else.

But let me start, David, with you.

My ? obviously, in the press release that came out today that the Court clearly concluded that infringement exists.

But in listening to your other comments, did Computer Motion, in fact, try to show that this patent was also invalid or unenforceable?

And my question is if I did hear you correctly, and they did under certain, did somehow try to do that, if they have to go to Court to try and do that, what other path would they have if they were, in fact, denied those motions, if that?s what they?re called?

In the initial phase of this whole process?

Hi, Charles.

Let me say ?

That wasn?t a very clear question.

I understand that, but.

I think I know where you?re going with it, so let me try it this way.

The summary judgment process was a means by which Computer Motion attempted to avoid trial.

Okay.

If a summary judgment motion is filed and it is granted by the defendant then trial won?t be necessary.

They win as a matter of law based on the facts presented to the Court.

The Court ruled, actually the Court denied all four of Computer Motion?s attempts to avoid trial.

Okay.

They basically said, you know what, you presented your arguments to me, you?ve presented the facts, and I cannot grant you the relief you request.

And so now we need trial.

Computer Motion, the trial, since infringement is already proven, the judgment is already entered, we now don?t carry a burden of proof on that.

The jury will be instructed that they infringe.

The issue now is whether Computer Motion can prove by a certain amount of evidence called ?clear and convincing? that the patent is invalid before the jury, and they can try arguing ?enablement? once again.

They can try arguing ?best mode? once again.

They may try other defenses, and obviously, there will be a jury verdict on those kinds of issues.

The denial of these motions, however, was very important to us because if we?d not succeeded in defeating all of our motions we wouldn?t have a right to go to trial, and now we do.

And now we get a right to tell the jury why we should prevail.

And the damage that we have incurred as a result of that infringement.

And that was what they were trying to avoid.

Does that answer your question?

Yes, but I guess what I was ? where, to take it step further, they tried to establish invalidity or unenforceability on this, enabling or best mode path, if you will?

Yes.

Are those the most common ways to try and establish that?

And if the Court actually denied those motions why would they attempt to use that same type of approach in trial?

Wouldn?t it probably not work there as well?

I, out of Intuitive and Computer Motion, Computer Motion is probably better able to answer that question.

Okay.

They certainly have a right to continue to mount those defenses at trial if they so choose.

Whether they will choose to do so remains unclear.

Okay, and one final question.

And this may be a question more for Lonnie.

But ? or certainly you, too, David.

But I mean this ruling, obviously, gives you pretty bullish feeling about this case as it is initially unfolding.

But I would assume that when you talk about damages, since Computer Motion has limited financial resources, the more important part of this is, in fact, the tremendous leverage it might give you in the other litigation that?s ongoing.

Is that part of the strategy here?

Do you have any comments on that?

I don?t think it would be appropriate for us to comment on that at this point in time, Charles.

Okay, and my last question, David, is what?s a prosecution latch?

What is a prosecution ?

What does that mean?

Prosecution laches is a defense that computer motion has described a number of times.

It is an old doctrine that the Federal Circuit appeared to breathe some life back into with a recent decision. [Lemilson v Symbol Technologies.] And essentially, prosecution laches is an age-old doctrine that concerns delay.

And prosecution laches turns on a delay in prosecution that is somehow prejudiced the rights of another party due to late claiming of the invention, based on an application that did not originally disclose the invention.

Here, we have an application that did disclose the original invention, which is why we believe prosecution laches does not apply in this case.

The Court has asked for some further factual discussion.

That trial will be held before the judge after the jury phase.

The jury doesn?t get [abide] of the prosecution laches defense.

And the judge will rule, and will present the legal analysis to point-out why it doesn?t apply in this case.

Hopefully, that clears it up a little bit at least.

Okay.

I have a couple other questions, but I?ll get back in queue.

Thanks.

Alex [Arrow] from [Latenburg Thalman], you may ask your question.

Thanks.

Congratulations on your record-setting quarter.

My first question is about one of the comments Susan made about the second console being sold to an existing customer.

I?m wondering if that is representative of something, a trend that?s going to continue?

Why would a customer need two consoles?

And should we consider that a consumable?

And is that why you put it in your consumables line?

It?s put in accessories and consumables line, and called-out that it is not a recurring revenue pattern.

I think it?s unique to a European customer that?s doing simulation research in their lab.

So in other words, it?s two consoles hooked-up to the same robot at the same time.

Do they both operate the robot?

They will.

This is still in a developmental phase, but ?yes? they would be able longer term to have some control over the robot.

Or they could drive simulation software where there?s no actual patient underneath, that console could.

But at this point in time it?s being used as Susan said, for simulation.

OK, so we should just consider the consumables 2.2 million then for this quarter, rather than 2.7?

No.

That?s correct.

You?re right, that is right.

And then the consumables portion is 2.2, and then when we said 3.3 in total that included the service piece.

Okay, great.

Second question, the survey that you did about your customer satisfaction that you got the nine points out of 10 on that study.

That sounds great.

Can you give us any context to benchmark that?

I mean I would imagine that most of those studies come out fairly positive because of the psychology of having bought something.

You know, you want to feel good about your purchase.

So is there an average result across all different medical devices in those studies that we can compare that to.

Well, you know, not that we, not from this study specifically.

But from my prior, prior lives we used to benchmark ourselves against other, you know, leading medical companies.

And I will tell you that we didn?t hit the nine mark even at, in my prior experience.

And so I think that, but I do agree that there?s always, you know, with the recent purchase and a purchase of this size, there are elements as you say where people like, want to feel good about the purchase.

This study, that?s just a very top line.

The study goes into a lot of detail which we consider to be proprietary information.

And the purpose of that is, of course, as I said, not to pat ourselves on the back, or not to feel great about it, but to find out how we can better serve them.

How do we prioritize our efforts here.

And where do we, and really the focus is where do we improve.

Okay, and thanks.

And then my last question, and I?ll get back in queue, is for us to project your legal expenses going forward, I?m wondering if you can tell us what your relative inclination is to continue to fight to the end with Computer Motion versus the idea of settling at some point?

They?ve said publicly that they are ready to talk about a settlement, and I don?t think you?ve ever made any statement to that effect.

But you?re, if you feel so inclined to comment now about your relative appetite for settlement, that will help us project your legal expenses.

Well, I think that settlement requires both parties, and it?s a two-way street.

And you know, we are certainly interested in settling if the terms are appropriate.

Okay, that?s fair enough.

I?ll go back in queue, thanks.

Rick Wise from Bear Stearns, you may ask your question.

Good afternoon, everybody.

Hi, Rick.

A couple of things.

First, the Delaware trial, just how long do you think it?s going to last?

And you know, and just reflect on the possible outcomes, and how you would proceed to be on there?

Is it a short trial?

Is it a long trial?

It?s a two-week trial, Rick.

And just help us understand.

Assuming if you win, what?s the next step beyond that?

What are the options?

Well, if we win there could be an appeal of whatever we win.

I?m stuttering a little bit, because I?m not sure ?

Well, I?m just trying to understand, you know, it?s like just trying to understand the consequences of, you know, let?s hope you win.

Then there?s likely the appeal.

Just trying to figure-out how long this is likely to go on, assuming that Computer Motion persists to the end?

00:3628 David Shaw: Okay.

It likely won?t ? well, the Delaware litigation, at least in the District Court phase, likely won?t proceed much longer.

There will be a trial before the jury on whether Computer Motion can prove, you know, by the requisite level of evidence that the patent is somehow invalid.

There will be a quick trial after that on its prosecution laches defense, on whatever it would like to say about prosecution laches.

After that, there will be some post-trial motions regardless of how things turn-out, there will inevitably be post-trial motions.

And after the judge decides those motions then there will be the opportunity for an appeal phase.

Okay.

Jumping around a little bit.

Susan, your comfort with the second half outlook in terms of ? you talked about the third quarter.

We?re assuming 22 units in the fourth quarter, 22 instruments.

Does that still sound like a reasonable place to be to you?

Yeah, we do.

We are not changing year guidance.

It may be a cut-off issue, but we?re not changing your guidance.

Okay.

And can you comment on the, say it as you will, the instruments, the procedures per instrument?

Or per system rather, or instruments used per system, or procedures per system, are you seeing consistent growth, let?s say in the second 50 versus the first 50 instruments placed, or if the math is, you know, second 68 versus the first 50?

Is, you know, is this quarter, was it skewed more toward the more recently placed?

Or was there a higher number in the instruments placed earlier?

Can you help us in any way?

Right.

Yes, we?ve always said this isn?t an exact science and somewhat driven by surgeons and personalities, but I would say this that where we?ve had a chance and an opportunity to train more than one specialty which tends to be in the earlier units versus the brand-new units, we have seen system usage consistently grow with the addition of multi-specialty units.

And that?s about as much detail as we want to go into.

Okay.

And you know, perhaps touch on the impact to the higher average selling price.

The reaction you?re getting, and just that?

Other than everyone always asking us to discount which we don?t, that information on how much you sell a system for gets out to the hospitals pretty quick.

And we hold on that.

And what you?re seeing is the mix with the U.S.

Increase in price from the units that were placed on order in the first and second quarter, and we?re executing on those units.

Okay, well, that?s great.

Thanks again for a good quarter here.

Thank you.

And thank you.

Charles Olsziewski from UBS Warburg, you may ask your question.

Okay, thanks.

Kind of follow-up on more of the fundamental side of the business.

You guys have given us a good update on kind of where you are with your clinical programs with mitral valve and ASP, and cavedge, et cetera, and some of the other things that both Fred and Alex talked about.

What, just looking ahead kind of at next generation systems, you know, with the integration potentially of image guided technology, or the integration of procedure simulations for planning and training, and some of the things that may be incorporated into future systems, when should we think, be thinking about kind of the next generation system hitting the market, you know, so from a timing perspective would it cost more for the hospital or less in rough terms, size, et cetera?

Charlie, you know, one, we don?t preannounce our development plans or the timing of them.

What I will say is that the system is developed, the system is quite modular, and we continue to enhance it.

Enhancements will be modular as we, as something allows hospitals to enhance the current system or buy a new system.

It deals with both software and hardware, and you know, that?s part of, you know, we consider that to be very proprietary.

And you know, our job is to make sure that we are constantly increasing the surgical capability to the surgeon, and the economic attractiveness to the hospital.

And providing the procedure development that, you know, provides significant benefits to the patients because we believe that this will be largely in the long-term the fuel driving that will be patient demand.

But we are not in a position or willing to share our specific developmental plans.

Okay.

And just, Alex, a question for you.

You had ticked-off a few new sites that you added in the quarter.

William Beaumont, St. Joseph?s Hospital in Atlanta, and you talked about the physician group in Peoria, Illinois.

I think there were a few others that I just didn?t get a chance to write down.

If you wouldn?t mind ticking those off I?d appreciate it?

Yeah, well, Charlie, the ones that I mentioned were New York University Hospital, University of Pennsylvania which is also known as [HUP], William Beaumont you mentioned, St. Luke?s, Kansas City, and St. Joseph?s in Atlanta.

Great, thanks very much.

You bet.

Brian [Gagnon] from Gagnon Securities.

You may ask your question.

Hi, it?s Neal and Brian.

Good afternoon, folks.

I?m looking at the deferred revenue line and seeing a small increase, and I?m wondering are you having any success in building a backlog or a pipeline that you can be cementing in your foundation?

Yes, except when building a backlog in a pipeline, but I don?t think that in this day and age that using the deferred revenue line will give you the same sort of insight.

And we are guiding away from that.

So that?s not the indicator, that?s it?

Right.

Okay.

Can you chat a little bit, or address the pipeline issue?

And what are you seeing?

I think we?re seeing, and it?s evidenced I think in the call by the continued investment of fields that we?re seeing large appetites, we?re seeing continued interest, and we?re seeing growing procedure and momentum out there that is getting out, the word is getting out to more and more communities, hospitals that it?s necessary to have a da Vinci in order to move their surgery programs ahead in a large, you know, a large focus of minimum basis surgery.

Okay.

You mentioned that you were going to increase your field force in the third quarter.

Can you give us some idea of what you?re thinking about achieving by say year-end?

Well, we have said before that in the United States we will go from 10 area sales managers to 20.

And we will continue to execute on that plan.

And in Europe going from three to five.

And then, of course, supporting that are the clinical specialists as well as the service techs.

Right.

Right.

On legal expenses.

I know you don?t want to identify what they are in a quantitative way, but can you give us some direction on kind of what you?ve been spending, and what you think you might spend in the second half?

I think that we have spent a significant amount going into trial, but trial is expensive.

And those numbers are imbedded in the guidance we?ve given for the year.

Yeah, thank you.

Alex [Arrow] from Latenburg Thalman, you may ask your question.

Thanks.

Just one clinical question.

You described three different cardiac trials that are in-progress.

The HL septal defect, mitral valves, and cavedge.

Is there some point at which you will have general clearance for all cardiac, or are you always going to have to have individual clearances for the different cardiac procedures?

That?s a good question, and that?s a dialogue that the company will have in the future with the FDA.

Well, we certainly hope that we will have general cardiac approval at some point in time.

But you know, it?s hard to commit to that until it?s reality.

Well, looking at the historical example of what happened in the abdomen did you first have to have gallbladder and then other procedures, and then finally you got general ?

No, in fact, we agreed to with the agency is that when we got those, those would be representative, an that we would get general laparoscopic approval based upon it.

And we have had discussions quite a long time ago, discussed kind of the number of procedures, and the type of procedures it would take to get general cardiac approval.

But you know, that is not, there?s nothing, the commitment there, people change at the agency.

And positions change.

And so we are marching down a path that builds, with approval for several procedures.

And then, of course, we would hope to ask for general cardiac approval.

Okay, thanks very much.

(Caller Instructions.)

Rick Wise of Bear Stearns, you may ask your question.

Rick Wise, Representative: Hi, it?s actually, she told me to ? just a couple quick follow-ups.

First, can you talk about any new product launches in terms of instruments that you?re going to have later this year?

And then maybe also address pricing on these instruments?

If you?ve been able to pass-through some increases on the actual, the da Vinci, can you pass-through some pricing increases on the instruments, as well.

And then second question, is there any update that you can give us with regard to the da Vinci placement at [J&Js] as a cost facility?

Is there anything tangible that?s come out of that, I don?t want to say joint venture, but that placement at that facility?

Thanks.

All right, you know, we have talked in the conferences about having a series of instruments including our [atrimatic graspers] and our [tripolar atrimatic graspers] are out, the bipolar is coming.

We are very sensitive to the price per procedure, and do not intend to increase that to the medical community at this point in time.

In terms of the [Epicon] Center, I will let Alex take that one.

As far as to your question as to anything tangible, I think actually today Epicon will be receiving a second console independent of the one Susan was discussing earlier.

And this console is intended to be used by multiple physicians as they are a part of the test drive program on da Vinci at the Epicon Institute.

In other words, it will accommodate for the overflow of just, of being able to accommodate for more than one surgeon sitting down and seeing the 3-D visualization, and help manage some of that flow.

As far as tangible, we have a number of leads that were written over the quarter, and those leads are funneled back into the general sales organization in which there?s follow-up protocols by the individual sales manager.

And we?ve been quite pleased with both the number of test drives, the number of leads, and the number of follow-up activities generated from that system.

And for the Midwest it?s been a great place to take surgeons for a test drive, and to give them a chance to use the system in a clinical environment.

Rick Wise, Representative: Okay, great.

And then maybe just one final question regarding can you give us some update on your clinical progress for atrial fibrillation?

Thanks.

We do not have an Intuitive sponsored afib trial going on.

There may at some point in time be something a physician would want to sponsor, but we?re not doing a global afib trial at this point in time.

Rick Wise, Representative: But there is some clinical activity going on in afib?

Am I right?

Or is it just individual physicians doing it?

It is individual physicians doing it.

Rick Wise, Representative: Okay, great.

Thank you.

Thank you.

We have time for one more question.

Daniel [Zemuth] from [Chilton] Company.

You may ask your question.

Thanks very much.

Excellent quarter.

Good results.

Also, just wanted to follow-up, can you provide any information regarding the number of the units in place where there is multi-specialty surgeons qualified to use the device?

And then, also can you give some quantification for the date at which doctors are being trained on the device?

And how many doctors in total are trained to use the device?

Well, I don?t have off the top of my head, I don?t have the number of centers that are multi-specialty versus single specialty.

Our goal in the sales organization is to make every center a multi-specialty site if we can.

Some of those sites that?s not possible, where it?s strictly a cardiac center and they have no other specialties.

What was the second part of the question?

The total number of doctors that are trained, and the rate at which you?re training doctors?

Well, right now we?re training at, I?ve forgotten what we?ve done ? what have we done this year?

So far this quarter?

A hundred?

We?re training at a higher rate, you know, in fact, you know most of our training centers are pretty much booked.

And you know, this is something we see as kind of transitioning.

Especially with some of the approvals to some of these centers will become very procedure specific.

You know, we get mitral valve approval, I would expect there will be several centers that will focus heavily on mitral valve training.

And I think with the DVP we will start to see some centers specialize on the specifically da Vinci prostectomy surgery.

Right.

The other thing we?re working on, Dan, a bit, is that we don?t want to train without a clinical plan behind it.

That just saying you train doctors for the sake of training doctors is not only a number that doesn't mean much, but is an expensive number.

So we are working very closely with the sales force that when a doctor is trained, they have a clinical plan, once they?re back at their hospital.

Yeah, the key is once they?re trained is for them to immediately begin doing procedures, and do enough that they get down the experience curve aways so that the, you know, so this becomes the way they want to do procedures in the future.

I see.

And then just on the atrial defibrillation, why wouldn?t the company want to be involved in sponsoring the trial?

We didn?t say we wouldn?t want to.

I think that we have found a pattern on clinical trials.

If the surgeon does a feasibility study first, which is what they did with the mitral valve trial, cook the procedure.

We go arm in arm to the agency, discuss that procedure, define a clear and definite outcome and execute a multi-center trial against that, that is what we prefer to do.

That has worked well with the agency, and it goes back to a previous question on what does it mean to get cardiac approval.

That is early stage right now.

We have seen lots of ideas floating around, and some activity out there, but not enough.

What we feel could be defined as a clear clinical path to work with the FDA on yet.

We?re not saying we won?t do it, we?re just not doing it right now.

The answer is we are very interested in doing so when we think that the instrumentation and the data supports such a study.

And you know, as Susan said, this is still a pretty early stage.

There?s a lot of people working on afib ablation devices.

And you know, we?re looking at those results very carefully, and so are the surgeons.

And we anticipate that if the results are good that we will have surgeons that will want to do exactly as Susan says.

Know the procedure, to a physician sponsored IDE, and if the results are good then we will take that to the FDA with a proposal for a broader study.

And just one final question, to stretch-out my last question here.

Have there been approvals, or any new devices introduced, you know, [indiscernible] devices, or clips that are perceived to be important in shortening the procedure time?

And have surgeons, you know, excited about the opportunity, the potential?

Dan, there are a whole slew of companies that are developing an astomatic, or automatic and astomatic coupling devices.

So I won?t comment on the individual companies, but I will say that we are working with some of these companies, and you know, we are encouraged that da Vinci will fit into potential, as a potential platform for launching some of these devices in the future.

But to say you know, which device, or what we expect, or when we expect it would be sort of premature on our part.

So I would just say that we?re very interested in it, we?re looking at it, and stay-tuned.

So this is kind of a long-term thing?

These things have to go through a very extensive trial of some sort before they get out in the field?

Or would it be something that we would be looking at in the next six to 12 months, when something might be introduced?

Clearly it depends on FDA approval for the devices, and we, as Alex said, and as Fred has said over and over again, is that we believe that with our articulation, the capability of our system we?re well-positioned to support and complement any astomatic devices.

But you know, these things, the development processes are long and so are the approval.

And you know, there are several that are being used with the system in trials in Europe.

And you know, we?ll see.

You know, we clearly are supportive of it.

We do a lot of work in our lab with these companies, and we?ll continue to do so because we see this as enabling technology.

But, you know, we aren?t in the position to call which will be the winners and losers, and which will be FDA approved, and which ones won?t.

So.

Have any actually been submitted for approval?

You know, I can?t comment on it.

It depends on the ones that you?re talking about.

The only one that?s approved for vascular use is [coalescent clip system] which is not a connector, it?s more an alternative to conventional suture.

And we have used that in clinical studies in Europe.

And is in our FDA protocol.

And believe that does fit nicely with the ability to, you know, the system to use devices that are alternative to sutures, and provides an alternative means of putting vessels together.

So that one, to my knowledge, is the only FDA approved distal and astomatic device.

And then I guess St. Jude?s [proximal] astomatic device is also approved.

Great.

Thank you so much.

Appreciate it.

You bet.

Thank you.

To close what I would like to do is just review or summarize the quarter.

And as we?ve stated, we had a strong financial quarter.

Shipped 16 da Vinci Systems, recorded 19.4 in total revenue, up 52 percent from last year?s second quarter.

Gross margins were over 52 percent, and we used only 1.2 million in cash, and ended the quarter with over 55 million in cash and cash equivalents.

System usage is healthy.

We showed solid growth in recurring revenue up to 3.3 million, 82 percent over the prior year, and 17 percent of total revenue.

And as Fred mentioned, we?ve completed the mitral valve trial cases, and plan to receive FDA clearance or expect to receive FDA clearance late this year.

The [SD] trial is on-track, and we expect that to be early next year, and our cavedge trials are ongoing and we expect clearance sometime late 2003.

That closes the call for the quarter.

We look forward to updating you on our progress again in three months.

And wish you all a great summer.

Thanks for your participation.