直覺手術 (ISRG) 2002 Q4 法說會逐字稿

Hello and welcome to the Intuitive Surgical, Inc. fourth quarter 2002 and year-end earnings release conference call.

At the request of Intuitive Surgical the call is recorded for instant replay purposes.

At this time I would like to turn over to Ben Gong, Vice President of Finance, Treasurer and Corporate Controller for Intuitive Surgical.

Sir, you may begin

Thank you and welcome to the conference call.

With me today we have Lonnie Smith, our President and CEO;

Susan Barnes, our Chief Financial Officer;

Aleks Cukic, our Vice President of Business Development and Strategic Planning;

David Shaw, our Vice President of Legal Affairs, and Corporate Counsel; and Fred Moll, our Co-Founder and Medical Director.

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 express or implied as a result of certain risks and uncertainties.

They are described in detail in the company's Securities and Exchange Commissions filings.

Prospective investors are cautioned not to place undue reliance on such forward looking statements.

Please note this conference call will be available for audioreplay on our website at www.intuitivesurgical.com on the audioarchives 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 the fourth quarter as described in the press release announced earlier today followed by a question and answer session.

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

Susan will follow with a review of our fourth quarter and full year financial results and provide an outlook for the next year.

Next Aleks will discuss sales and marketing and finally David will update you on intellectual property issues.

Following that 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 would like to thank each of you for taking the time to join us for today's conference call.

I will begin with highlights of the fourth quarter.

As we announced last month, we achieved record quarterly revenues, systems shipped and recurring revenue.

During the fourth quarter we achieved total revenue of $21.1 million, up 32% from prior year.

Grew recurring revenue to $4.7 million, up 105% from prior year and shipped 17 da Vinci surgical systems, ending the year with 149 systems installed worldwide.

We continue to make progress in our financial metrics in the fourth quarter.

Our gross profit margin reached a new high of 55%.

Our fourth quarter operating expenses were $14.6 million, down $1 million from our last quarter's results.

Our fourth quarter net loss was $2.6 million or seven cents a share.

This is an indication of progress toward our goal of achieving profitability by the end of this year.

Finally, we had a cash positive quarter.

Ending the year with $50.8 million, up $2.3 million from the end of the third quarter.

Now, turning to operations, we have made significant progress in the cardiac segment.

In November of last year, the FDA cleared da Vinci surgical system to perform minimally invasive mitral valve repair.

This intercardiac clearance for the da Vinci system represents the first cardiac clearance by the FDA for any operative robotic system.

Randy Chipwood, [ph] Chairman of the Department of Surgery at Brody [ph] School of Medicine at East Carolina University and principal investigator in our multi [INAUDIBLE] trial commented for the first time we will be able to offer a wider range of patients a minimally invasive intercardiac procedure to repair the mitral valve.

He said this news from the FDA will allow more patients to enjoy the benefits of high precision minimally invasive surgery robotic surgery.

These benefits include less pain and trauma, shorter hospital stays, quick recovery, and a better cosmetic result.

Last week we announced we had added a second cardiac procedure to our intercardiac clearance for totally endoscopic atrial septal defect closure or ASD.

Hospitals can now use the da Vinci surgical system to minimally invasively close a hole between the chambers of the the patient's heart.

Michael Argenziano, Assistant Professor of Surgery at Columbia University, and Director of Minimally Invasive and Robotic Cardiac Surgery at New York Presbyterian Hospital performed 19 robotic ASD closures.

The results were recently presented at the scientific session of the American Heart Association meeting in November.

Dr. Argenziano reported that the da Vinci surgical system can be utilized to perform open heart procedures safely and effectively.

The closed chest approach furthermore, his outcome suggests the patients undergoing ASD closure with the da Vinci have a superior post operative quality of life than those undergoing other surgical approaches.

Thus, this technique represents an option for patients seeking a reliable ASD closure without [INAUDIBLE] or orthotocotomy [ph] and uncertainty of transcatheter techniques.

These clearances bring many of the promises of the da Vinci to actual practice in the United States.

We can now specifically market the da Vinci system for these two cardiac procedures.

These are the type of procedures that maximize the value the da Vinci surgical system delivers to patients, surgeons and hospitals.

In cases like mitral valve repair and ASD closure where the da Vinci enables an endoscopic approach, the system delivers incremental revenues to the hospitals and surgeons through incremental patients.

It reduces the cost by reducing the length of stay and complication rates.

Very importantly, the shorter length of hospital stay exhilarates patient through put and thereby adds valuable capacity to the hospital without an increase in the staffing cost associated with additional hospital beds.

This combination of increased revenue, reduced operating cost, increased capacity, and incremental profit contribution provide a very attractive value proposition to the hospitals.

The value added to the patient is obvious.

Shorter hospital stay, less post operative pain, less risk of infection, less blood loss and associated transfusions, less scarring and approved kosnethis [ph], fast recovery and return to normal daily activities.

These cardiac clearances are another example of the company's consistent track record, discipline and commitment to execution of key business objectives within our plan time horizons.

On that note, we logged a significant number of cases during the fourth quarter in our ongoing stopped heart coronary bypass trial.

Results are positive and we continue to expect FDA clearance by the end of this year.

One final cardiac milestone -- the first beating heart T cap [ph], totally endoscopic coronary bypass, performed in the U.S. was successfully completed by Dr. Sudhir Srivastava at Odessa Regional Medical Center this past Monday under a physician-sponsored FDA investigational device exemption.

The procedure was completed in less than four hours and the patient was released from the hospital 24 hours post op and is doing great.

Before I turn the time to Susan, I would like to share one last observation.

When we started the company, one of the objectives was to create a surgical system that would help "good surgeons become great surgeons."

I think that's a term that Fred wrote.

That was a pretty ambitious goal at the time.

However, data now being published and reported at recent surgical meetings confirms we have made significant progress toward that goal.

Doctor Mani Menon, Chief of Urology at the Henry Ford Hospital and the Vattikuti Institute recently presented data that compares results of his last 100 open prostatectomies with the first 200 da Vinci prostatectomies.

He used six primary outcome metrics for the comparison.

The first, removal of the cancer.

Measured by net margins.

His open procedures were 76%.

His procedures with da Vinci or closed procedure were 94%, a significant improvement.

In terms of continence after six months, measured by no pads, no diapers, his results were 60% and 96% with da Vinci.

In terms of potency, measured by ability to have sexual intercourse after six months, his results were 33% open and 66% with da Vinci.

In terms of safety measured by no complications. 85% open and 98% with da Vinci.

Pain, measured on a 1-10 score, seven open and three with da Vinci.

Finally blood loss measured by the need for transfusion, he had 11% transfusion rate open and 0 with da Vinci.

Dr. Menon also compared his first 200 da Vinci prostatectomies with best in class in each category from published data.

In other words, he compared his minimally invasive results using the da Vinci system with the open results of a dream team of the best urologists in the world.

Dr. Menon's results results with the da Vinci surgical system were significantly better than the best published result in nearly every category including continence, potency, safety, pain, and blood loss.

The bottom line with da Vinci for Dr. Menon and the Henry Ford hospital system is: one, better outcomes for the patient; two, dramatic growth in the number of prostatectomy patients.

I think he was doing about 170 before and did something near 400 -- 300 this year.

And anticipates 400 plus next year.

And three, significant reduction in the length of hospital stay.

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

Thank you, Lonnie.

As Lonnie mentioned earlier, we had many financial milestones this quarter.

We realized directed revenue of $21.1 million, up 32% from our fourth quarter 2001.

Gross margin improved to 55%.

We grew recurring revenue to $4.7 million, up 105% over last year.

Our operating loss decreased to $2.6 million or seven cents a share, representing our smallest quarterly loss since we started selling da VInci surgical systems in 1999.

We were $2.3 million cash positive during the fourth quarter ending the year with $50.8 million in cash.

Now going into the details, our fourth quarter 2002 revenue was $21.1 million dollars, up 32% from the fourth quarter of 2001 revenue of $16 million.

We shipped 17 da Vinci surgical systems during the quarter.

With 17 total units shipped, we are up 2 compared to 15 units shipped during the fourth quarter of 2001.

We now have cumulative placements of 149 systems. 100 in the United States, 40 in Europe and 9 in the rest of the world.

Our January press release and subsequent conference call, we estimated approximately $20 million in fourth quarter revenue.

Our auditors have since completed the review and we are now able to disclose revenue actually exceeded that estimate by $1.1 million.

Included in the $21.1 million is the recognition of $400,000 of revenue related to obtaining FDA mitral valve clearance.

Total Q4 2002 revenue by product group was as follows: System $16.4 million.

Instruments and accessories, $3.2.

And service, $1.5.

Recurring revenue grew to $4.7 million during the fourth quarter, up 105% from the $2.3 million last year.

Recurring revenue grew to 22% of total revenue this fourth quarter, as compared to 14% in the fourth quarter last year.

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

For the fiscal year ended December 31, 2001 -- 2002, we have total sales of $72 million, up $2.3 million or 39% compared to 2001.

We shipped 60 da Vinci surgical systems in 2002 compared to 49 in 2001.

Total recurring revenue was $15.1 million, up $8.1 million or 116% over the 2001 recurring revenue of $7 million.

Gross margin for the fourth quarter of 2002 was 55% compared with 42.3% for the fourth quarter of 2001.

Our fourth quarter 2002 gross margin improvement was driven by higher ASP's on our system sales and improved manufacturing processes.

Further, we have been incurring significantly lower warranty costs and we made a one-time adjustment this quarter to decrease our warranty reserves.

In order to compare quarter over quarter annually, we need to remind you that the fourth quarter of 2001 gross margin was negatively impacted by the final $1 million IBM royalty charge taken to cost of sales.

Excluding the impact of this item, fourth quarter 2001 gross margin would have been 48.5% versus the 55 for Q4, 2002.

Full year 2002 gross margin improved to 52% from last year's 45.4.

Total operating expenses for the fourth quarter of 2002 were $14.6 million, up $2.8 million or 24% compared to fourth quarter of 2001.

Operating expenses were one million less than recorded during the third quarter of this year.

SG&A were $10.6 million in the fourth quarter of 2002, up approximately $2.6 million from the $8 million in the fourth quarter of 2001.

The increase over prior year was driven by growth in our field sales and customer support organization as well as legal fees.

Full year 2002 SG&A expenses were $57.7 million, up 32% $from 43.8 million in 2001.

Research and development expense was $4 million for the fourth quarter of 2002, up approximately $200,000 from $3.8 million in the fourth quarter of last year.

The increase versus prior year resulted primarily from increased clinical trial activity in Q4 2002.

Full year 2002 R&D expenses totalled $16.8 million, up 21% from $13.9 million in 2001.

We ended the quarter with 291 regular employees, up 13 from the previous quarter end. 11 of the 13 additions were made to booster the U.S. field sales and support team in preparation for 2003.

We believe we have a critical mass of field sales and support personnel and intend to grow the organization at a much slower rate in 2003.

Noncash deferred compensation and patent amortization expenses represented $300,000 of total operating expenses in Q4 2002, compared to $500,000 in Q4, 2001.

The balance of deferred compensation is now down to $200,000 and should be completely amortized early next year.

Our balance of unamortized patents is now $2.6 million which will be taken into the income statements at a straight line rate of $197,000 per quarter until it's fully expense.

Other income expense approximately $400,000 from Q4, 2002 compared to $800,000 in 2001.

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

Our net loss for the fourth quarter 2002 was $2.6 million or seven cents per share compared to $4.3 million or 12 cents per share in the fourth quarter of 2001.

Our narrowing net loss reflects progress in achieving profitability.

We intend to be profitable by the fourth quarter of 2003.

Basic and diluted shares outstanding for EPS calculations were $36.6 million shares for the fourth quarter of 2002 compared to $36.1 for the same period last year.

Now going on to our balance sheet.

We ended the quarter with $50.8 million in cash, up $2.3 million from previous quarter end.

Our positive cash quarter was driven primarily by working capital provided from accounts receivable and inventory reduction offset by the net loss.

Note that our Q4 net loss of $2.6 included $1.2 million of noncash expenses, comprised of patent amortization and deferred compensation I described before as well as depreciation.

We ended the quarter with an accounts receivable balance of $16.9 million, down $2.2 million from the quarter end.

The decrease was due to successful collection efforts during the fourth quarter.

Our average days sales outstanding was 72 days down from 100 at the end of Q3.

Ending net inventory for the quarter was $8.7 million, down about $1.1 million from the previous quarter end.

Our annual inventory turns are now about 4.4 compared to 3.4 ending the third quarter.

Focusing on our outlook, we would like to give an estimate of what we see for the year 2003.

With regard to quarterly estimates, we are sensitive to the fact that the timing of one or more system sales can significantly impact our results.

Therefore, we have decided to de-emphasize the focus on quarterly estimates for revenues and unit shipments and give you our view of what we see for the coming year.

Obviously we will update our annual projection as the year unfolds.

With that in mind, we have a positive outlook for continued revenue growth in 2003.

We would like to reiterate that we expect full year to total between 85 and $100 million, representing approximately a 20-40% growth over 2002.

We continue to see system usage increasing which drives higher recurring revenues.

As a result, we expect recurring revenues to grow in excess of 50% over 2002.

We anticipate full-year 2003 growth margin to be in the mid-50s.

The first quarter of 2003 will likely dip down from the 55% recorded in Q4, and then rise again throughout year.

We are holing the line on operating expenses and expect only modest increases over 2002.

We expect operating expenses in the first quarter of 2003 to be down slightly from the fourth quarter of 2002.

With our current sales outlook and continued improvements in margins and cost controls, we expect to achieve profitability by the fourth quarter of this year.

We expect the average number of shares outstanding for EPS calculations to grow to 36.8 in Q1 2003 and average 37 million shares outstanding for the year.

With that I would like to turn it over to Aleks who will provide a summary of our latest sales and marketing highlights.

Thank you, Susan.

As was previously mentioned, we shipped 17 da Vinci surgical systems during the fourth quarter.

We shipped 12 systems to U.S. hospitals, 1 to Europe and four to the rest of the world.

Of the shipments made to the rest of the world, one went to Japan and the other three represented initial shipments into new international markets.

After 12 months of planning, training and preparation with our new distributor partnering, we shipped the first da Vinci systems into Canada, Singapore and India.

We are delighted with our new distributors and look forward to developing these new markets for Intuitive.

Of note is the sale to Escorts Heart Institute.

India's premiere cardiac center.

Escorts performed over 4,000 cardiac surgeries annually and is off to a quick and successful start with its da Vinci system.

The sale to Escorts occurred prior to the 2002 winter International Society For Minimally Invasive Surgeons' conference, ISMICS, held in New Deli.

This conference is widely attended by European as well as Asian cardiac surgeons.

Dr. NareshTrehan of Escorts Heart Institute used the conference as a forum to promote several robotic surgeries which were broadcast live into the general session at ISMICS .

Included in these broadcasts were several successful beating hearts, close chested [INAUDIBLE] procedures very well received by the audience.

This type of customer commitment assures us that we picked the right clinical partner to open up the new market.

To date, Intuitive penetrated the most prestigious hospitals in the world and this quarter was no different.

On the academic side we shipped a Q4 system into the University of Chicago, Boston Children's Hospital and our first Canadian sale to Sacre Coure Hospital in Montreal.

Also during the quarter, we made two additional sales of second da Vinci systems into existing accounts.

We sold a second into Enrico [ph] Doctor's Hospital in Richmond, Virginia and Boston Children's Hospital as previously mentioned.

That now makes a total of 11 sites with two da Vinci surgical systems.

The second system at Boston Children's is significant in that it confirms this most important pediatric hospital's commitment to Intuitive Surgical.

Boston Children's has also established a pediatric robotic training center at the facility.

As has been the recent trend, we sold a large number of our fourth quarter systems into community hospitals.

This quarter, 12 of the 17 systems shipped went to community hospitals.

This continued high concentration into the segment confirms, as Lonnie described earlier, the real economic value that da Vinci provides to surgeons and hospitals.

We have also seen a noticeable shift in the type of surgical procedures performed over the past few quarters.

We now see a larger percentage of more complex higher value-add procedures in relation to simpler procedures.

For example in general surgery, we now see a shift towards colon and rectal procedure as well as gastric procedures.

In urology procedures such as prostatectomy are comprising a larger percentage of total procedures performed.

And overall we are seeing more cardiac procedures which by their nature are more delicate and complex.

We believe this is all very healthy.

Showing that our customers are fulfilling the promise of the technology and seeing the value in working up the learning curve.

With that I will turn the time over to David Shaw.

Thanks, Aleks.

This past quarter we continued to invest in our joint Delaware litigation with IBM against Computer Motion on our patent covering voice control surgical robots.

As our December press release announced the Delaware court rejected Computer Motion's final prosecution latches [ph] defense and so entered judgment in our favor on the jury's verdict of $4.4 million.

Computer Motion has since filed three post trial motions asking the court to throw out the jury's damage award on a variety of grounds arguing the verdict was not supported by sufficient evidence and was legally flawed.

We believe the jury's verdict was proper and was adequately supported with evidence.

We anticipate the court's decisions may issue shortly.

As we said we would, we have now requested the Delaware court enter a permanent injunction barring future sales of Computer Motion's voice controlled Aesop [ph] induced products.

Computer Motion has hired new legal council and has opposed our request for an injunction.

Briefing is concluded and the court's decision may issue shortly.

Turning now to our ongoing litigation against Computer Motion in California.

First, Computer Motion has now asked to dismiss two of its own patents from suit.

The two that we successfully invalidated in the recent patent [INAUDIBLE] interferences.

We agreed to that request; thus we anticipate the 583 and 193 patents will soon no longer be part of the suit.

Second, last summer we filed four motions for summary judgment of noninfringement against four others of Computer Motion's patents.

The court has now started to decide those motions.

In November it decided the first in our favor, concluding [INAUDIBLE] how the da Vinci system uses the two master handles to control robotic arm movement does not infringe Computer Motion's 850 patent.

That patent therefore also is no longer part of the suit.

Of course Computer Motion can try to seek review of that motion at some point.

We expect the court to decide our other three motions for summary judgment very soon.

Once it does, the court indicated it would like to hold a status conference to discuss what remains of the case.

At that status conference, we will ask for permission to file further summary judgment motions to address Computer Motion's other four patents, none of which we had the chance to address by motion.

We believe the court at that conference will also consider how to manage the case schedule from here on out, including the trial date to accommodate everything that remains to be done in the case.

That completes what I have to say for today and I will pass the floor back to Lonnie.

That concludes the presentation and we will open floor to questions.

Thank you.

At this time we will have the question and answer session.

If you have a question, we ask that you press star 1 on your telephone touch pad.

If you need to cancel you may press star 2.

That is star 1 if you have a question and star 2 to cancel.

One moment while the questions register.

The first question comes from Rick Wise with Bear Stearns.

How are you doing?

We are having a hard time hearing you.

First, you talked about the heart approval coming by the end of this year.

I assume that's a very major event for you.

I guess a couple of things.

One, I would like you to reflect on what it could mean for '04.

Are we likely to see some major potential acceleration from that?

Second, a broader question.

Has the FDA clarified what you need for the general cardiac approval?

If I remember correctly, there were three approvals they wanted you to get before they gave that and where does that all stand?

Rick, it's Susan.

There two elements there.

In terms of how this plays into 2004, I think Aleks earlier mentioned that we are seeing momentum in the heart cases with the two clearances we have so far.

We will obviously take people through a training pathway and a process to get up to doing a totally endoscopic stopped heart bypass [INAUDIBLe] to approve.

There is a training pathway we can't under estimate the profits there.

So, again, we see incremental increases, not a giant up surge.

The FDA had conversations very early on with us on three types of cardiac procedures for cardiac clearance.

That will be a dialogue we have once they had a chance to review the 5 and 10-K.

That was more of an informal guidance.

Time will tell how to that proceeds.

On the question about the sales range and the notion of being profitable by the fourth quarter, does the notion of profitability, are you there if you are at $85 million for the year or do you need to be at 90 or $100 million to get to the fourth quarter goal?

Can you give us perspective on that, Lonnie?

I think that you know the goal is not to be profitable in any single quarter, but to be profitable and continue to be profitable.

Clearly depending on how -- the fourth quarter at the end of each year is typically the strongest quarter.

With $85 million, we may be profitable in the fourth quarter.

But to be profitable on an ongoing basis, we will need to be in the higher end of that range.

Okay and I want to make sure I understood.

I think you preannounced $20 million for the fourth quarter.

You came in at 21.

Can you give more detail on what was there.

Prices for [INAUDIBLE], did I understand correctly?

No, it was a matter of when we have to estimate, there are always revenue recognition issues of the revenue.

How much goes into deferred revenue and how much goes into current income.

Those are issues we haven't had a chance to go through with auditor.

That's why we erred on the side of conservative when we made that estimate.

Got it.

Thanks.

The next question comes from Charles Olsziewski with UBS Warburg.

No fair.

He got it right.

Two questions The as far as the lower warranty costs that boosted gross margins, Susan, what was the impact either in dollar terms of the boost to gross margin, and without that change, what would gross margins have been?

This is Ben.

I think that Susan mentioned also that there was a revenue of $400,000.

Correct.

So, the combination of that and the reduction of the warranty, if you compared a warranty reserve from the third quarter to the fourth quarter, you'll see that it decreased a bit.

The impact of those two items probably impacted gross margin by two points.

Staying with the revenue recognition of the $400,000, is that essentially procedures done during the quarter that you couldn't recognize as revenue?

No..

Disposals or reposeables, I should say, associated with those procedures until you got approval or what is the revenue recognition specifically?

We were holding back some portion of a system revenue.

A contention upon approval of the mitral valve cases even though we had actually collected the cash long ago.

It was in accounting deferred revenue issue on a system.

Okay.

That's all I had.

Thanks.

The next comes from Henry Binestein [ph] with Gagnon.

Hi, it's Neal Gagnon [ph] with Henry Binestein [ph] on the phone.

Can you give us indication about your pipeline and backlog and also answer the question of when a machine system gets to the point were I think yours is, doctors and individual groups get together and start buying them because they can see a hard dollar return on their assets and makes money.

What's going in that part?

Well, in terms of our visibility, I think it is not changed significantly from what it has been in the past and continues to be a fairly long purchase process.

That can vary from institution to institution.

In terms of groups buying, we have I think a couple of those.

One, I think We have a couple others looking at it.

These are trends that develop initially slowly.

One or two.

And people have a good experience and build confidence and others do the same.

It's in the early stages at this point in time.

If I can throw in one more, please.

What's been the trend in legal fees starting with the little of '02 and what you are thinking about going forward?

I'll take a shot at it.

In a nonnumerical way.

I'll take a shot at that.

We had a pretty high peak in the third quarter of 2002.

That related to the trial that we had in Delaware.

It dipped down from the third quarter to the fourth quarter.

We don't disclose the absolute numbers, but we continue to spend money on the legal fronts of both the Delaware and California actions.

Going forward we will stay at the fourth quarter levels or there abouts?

It really depends on what David said earlier which is when we have the conference and understand when the trial will be.

There is a significant investment and expert witness and still depositions and all the prep.

Clearly the spending accelerates just prior and during trial.

Thank you.

Once again that is star 1 for additional questions.

The next question comes from Rick Wise with Bear Stearns.

It's actually Sheila Mason [ph] here.

For system placements, you guys had four in the rest of the world.

Are you expecting a significant contribution from the rest of the world again in '03; and my second question is regarding instruments, accessories and services.

What are expectations on percentage of sales for '03?

I think it was 20% existing, or 20% for full year '02 and what your expectations are for 03.

Thanks.

I will take the first part of the question pertaining the to rest of the world.

This is Aleks.

If you go back 12 months and see when the cultivation period started for the sales that were recognized in the fourth quarter, you will see there is a pathway that we follow to make sure that we choose and qualify the right partners in the rest of the world market.

We are well into that stage with several distributors in other parts of the world; however, I think it would be premature to tell you in Q1, you can expect a specific number and be truthful about the number.

I will say that the momentum is growing in key international markets.

The process of cultivating those distributors is picking up.

I will say that it is going to continue to grow for us.

For the second part of your question, we expect the recurring revenues to grow in excess of 50% year over year.

We gave guidance on the total revenues of growing 20-40%.

What is certainly going to happen is the percentage of revenues that are recurring is going to increase, but it tends to go up and down based off of the fluctuation that we have in the capital sales.

I think you can probably get to the right answer if you model it.

Okay.

Thanks.

The next question is from Dan Zenith [ph] with Chilton.

I wonder if you can give an update on new instrument introductions, including the fourth arm.

And also can you discuss at all the progress being made with the treatment of atrial fibrillation and the devices on the market place in combination with the da Vinci surgical devices.

Dan, it's Aleks.

With regard to the fourth arm, we have done a great deal of testing with the fourth arm and shipped a number of units into our beta trials.

We are looking and continuing to make progress with that as a commercial product.

I don't know, to be honest, how that is reflected in the Q1 numbers, but we are continuing to make progress with forearm systems and the demand is definitely building for the fourth arm systems.

As far as the story that's unfolding in the industry with atrial fib, there are a number of companies are focused on different ablation catheters for the treatment of that disease.

We are working closely with several of those companies.

At the recent STS meeting, there was a great deal of interest in a minimally invasive approach to atrial fibrillation.

I know that one of the accounts in New York, actually two of them, have reported they have done a minimally invasive procedure where they incorporate da Vinci as a delivery system for the specific catheters.

So I will say the momentum and the appetite in that particular area is continuing to grow rapidly.

On the other question, you raised an issue of where we stood on new instruments and that sort of thing.

Obviously instrument development continues.

We do have a new generation of five millimeter instruments that has a, I think we've shared before, that has a very new and effective risk.

We are still refining that.

We had a bunch of surgeons in last month, I guess.

They used it in the lab on cadavers and it performed very, very well.

So we are making good progress on that and that will be released sometime in the -- those instruments in the second quarter.

Thank you.

The next question is from Robert Natalie with Bear Stearns.

It's John Massie [ph].

Two quick questions for you.

In terms of community hospital, can you give me the count for the U.S.?

You said, I think 12 of 17. 12 shipments to the U.S.

Yeah, 10 of those were into community hospitals.

There were two academic centers recognized and that Boston Children's Hospital and the University of Chicago.

Other than that, the remaining were nonacademic.

The second question is, you mentioned in a conference call about a month ago that there were two systems that slipped.

That was part of the short or low end of the range.

Can you tell me the progress on those two?

This is Ben.

No surprises there.

At the end of the quarter, things don't stop.

We just continue on and go ahead and do installations as a matter of course.

So can I understand you are still working on them and haven't sealed the deal?

We will give you a full report on the installations at the next conference call.

One other thing to clarify, a comment earlier on -- I think the true gross margin is about 53%, then if we strip out the warranty reserve and milestone payment?

That's correct.

At this time we have time for more question.

I do show the next question comes from Charles Olsziewski.

I will try to make this quick.

I got three little ones.

If the gross margins are going to dip sequentially in the first quarter, and given your guidance, would it be fair to assume they will end somewhere in the high 50s, Ben.

We said the mid-50s.

No, I meant leaving the year, in other words the fourth quarter, is that fair?

Yeah, we think it will average the mid-50s for the year.

Okay.

I will ask one more.

As far as -- Computer Motion showed a pretty sharp growth sequentially in their most recent quarter which they are yet to release the full results, but clearly just the top line they released, are you seeing them head to head or are they selling into different places than you are?

How would you characterize what's going on from a competitive standpoint?

I think -- I guess my comment is I think the numbers they released if you looked at the fourth quarter in the last two years to be pretty flat.

We are seeing them.

They've increased their sales organization and they are clearly very active in the market.

Thanks.

That's our last question.

Let me close with summarizing the highlights of the fourth quarter.

Again we achieved record revenue of $21.1 million.

We shipped 17 da Vinci systems.

Ending the year with 149 da Vinci installations.

We grew recurring revenue to $4.7 million, up 105% from prior year.

We improved gross margin to 55% or a net 53% after the unusual adjustments.

We had a cash positive quarter ending with $50.8 million in cash.

We shipped initial systems into three new international markets.

Canada, India and Singapore.

We obtained the first cardiac clearance for mitral valve repair and subsequently added a second with atrial septal defect closure.

And we continue to build our install base and its associated recurring revenue stream.

That concludes today's call.

We thank you for participation and look forward to talking to you in about three months.

Once again we would like to thank everyone for attending the ISRG teleconference and have a pleasant day.