直覺手術 (ISRG) 2003 Q1 法說會逐字稿

We would like to thank all parties for holding, and to remind you we've placed your lines on listen-only until the question-and-answer segments of today's conference.

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I would now like to turn the call over to today's speaker, Mr. Ben Gong (ph), VP, Treasurer and Corporate Controller.

Thank you.

Sir, you may begin.

Hello.

Welcome to Intuitive Surgical's first quarter conference call.

With me today, we have Lonnie Smith, President and our CEO, Susan Barnes, our CFO, Aleks Cukic (ph), our VP Business Development and Strategic Planning, David Shaw, our VP 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 expressed or implied as a result of certain risks and uncertainties.

These risks and uncertainties are described in detail in the company's SEC filing.

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

Please note that this conference call will be available for audio replay on our website at www.IntuitiveSurgical.com, on the audio archive section of our investor relations page.

In addition, today's press release is posted to our website.

We'd like you to read our press release and all other SEC filings mentioned in that release.

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

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

Susan will follow with a review of our first quarter's financial results and provide an outlook for the year.

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

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.

First, I would just like to say that I'm delighted David [Shaw's] quarterly update on the status of litigation with Computer Motion is no longer necessary.

However, David will give a brief update on the [Wilke] litigation.

Having said that, I'll begin with the highlights of the first quarter.

During the quarter, total revenue grew to $19.2 million, up 33% from prior year.

Recurring revenue grew to $5.4 million-up 103% from prior year-comprising 28% of total revenue.

We shipped 14 [da Vinci] Surgical Systems, and end the quarter with 163 systems installed worldwide.

We continued to make progress in our financial metrics during the quarter.

Our gross profit margin improved to 54.6%, from 47.9% in the first quarter of last year.

Our first quarter net loss was $2.3 million-down from a loss of $5.6 million-representing a 59% improvement from the first quarter of last year, and down $300,000 from last quarter, as we drive toward profitability at the end of this year.

Finally, the first quarter has historically been our highest cash burn quarter.

We cut our cash burn to $5.8 million from $10.1 million in the first quarter of last year.

We ended the quarter with $45 million in cash.

Now, turning to operations.

Our sales, service and clinical support team continue to grow systems sales on an installed-system base, and procedures as reflected by the growth in our top line.

A few of the significant milestones this quarter include purchase by Hackensack University Medical Center of their third da Vinci Surgical System, and the decision to upgrade all three of their systems with a new fourth arm; the University of California Irvine's purchase of a second da Vinci system to go into their neurologic surgery training center, which is led by Dr. [Ralph Clemon], and the purchase of da Vinci Surgical Systems by two of the leading children's hospitals in the United States-Denver Children's Hospital and Arkansas Children's Hospital.

We formed a strategic alliance with Medtronic, to advance minimally-invasive beating-heart surgery.

Aleks will give you more details on the sales and marketing, and this alliance, later on this call.

As we mentioned last quarter, we added a second cardiac procedure to our inter-cardiac clearance.

Totally endoscopic atrial-septal defect repair for closure.

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

Our engineer in the marketing team [leads] for sale the fourth arm that I mentioned earlier, with its supporting electronic hardware and software.

In addition, they released several versions of vision and ease of use enhancements, including a three optical channel endoscope, a new eliminator, a bifurcated light guide, a new twist-lock [candula].

Each of these products enhance the surgical capability, ease of use, and/or performance of da Vinci Surgical Systems.

We continue to make significant progress in our new 5 mm instrument architecture.

We expect to release these new instruments this summer.

Our operations team made excellent progress in their drive toward lean manufacturing.

They achieved significant reductions in both instrument and systems cost.

On March 7th, we announced that we intend to merge with Computer Motion, to combine the strengths of both companies, to advance minimally-invasive surgery and better serve our customers.

We sincerely believe that combining our highly-complementary technologies and organizational talents, we will be able to provide surgeons and hospitals with the best possible products and clinical support.

This merger will also end the ongoing litigation between the companies, and will allow management to focus our time and total energy on value-creation for our customers and our shareholders.

We filed our S4-our joint proxy statement and prospectus-on March 28th.

We expecting to complete the merger by the end of the second quarter.

We've set three primary post-merger objectives as we prepare for the combination of our companies.

The first is profitability.

The second is superior products and service for our hospitals and surgeon customers and their patients.

Third, a results-driven company culture in which we measure ourselves by our accomplishments.

Currently, planning for the post-merger transition is underway.

The companies expect to meet the $18 million in annual operating pre-tax cost savings we estimated in the S4.

In order to achieve these objectives, we are analyzing possible post-merger plans to enhance the efficiency and productivity of a merged company.

While no final decisions have been made, the companies are considering various post-merger opportunities, including the consolidation of manufacturing and administrative functions at our corporate headquarters in Sunnyvale, maintaining an engineering presence at currently-existing locations, and creating a single sales-and-service force to cost-effectively serve and support our customers worldwide.

As we have previously stated, we expect to close the merger by the end of this quarter, subject of course to SEC and shareholder approvals.

With that, I'll pass the time over to Susan, our CFO, who'll discuss our first quarter financial results.

Thank you, Lonnie.

Overall, as Lonnie mentioned earlier, we had many significant financial highlights for the quarter.

Specifically, we realized $19.2 million of revenue-up 33% from our first quarter 2002.

We grew recurring revenue to $5.4 million-up 103% over last year.

We reduced our operating expense by $1 million sequentially, compared to Q4 of 2002.

Our net loss dropped to $2.3 million, or $0.06 per share-representing our smallest quarterly loss since we started selling da Vinci Surgical Systems.

Now, for the details.

Our first quarter 2003 revenue was $19.2 million-up 33% from first quarter 2002 revenues; up $14.4 million.

We shipped 14 da Vinci Surgical Systems during the quarter; 12 in the United States, 1 in Europe and 1 in the rest of the world.

The 14 total units shipped were up 1, compared to 13 units shipped during the first quarter of 2002.

We now have 2 more replacements of 163 systems; 112 in the United States, 41 in Europe, and 10 in the rest of the world.

Total Q1 2003 revenue by product group was as follows.

Systems, $13.8 million.

Instruments and accessories, $3.6 million. and Service, $1.8 million.

Recurring revenue grew to $5.4 million in the first quarter-up 103% from the $2.7 million during the first quarter of last year, and up 15% sequentially from the $4.7 million we earned last quarter.

We are quite pleased with our recurring revenue growth, and the fact that our recurring revenue continues to increase as a percentage of our total revenue.

Recurring revenue grew to 28% of total revenue this first quarter, as compared to 19% in the first quarter of last year.

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

Gross margin for the first quarter of 2003 was $54.6%, compared to 47.9% for the first quarter of 2002.

First quarter 2003 gross margin improvement was driven by higher da Vinci Surgical Systems selling prices and lower product warranty costs, resulting from improved sales reliability.

Total operating expenses for the first quarter 2003 were $13.6 million; up $600,000 or 5%, compared to the first quarter of 2002.

Operating expenses were $1 million less than those recorded during the fourth quarter of last year.

The overall decrease in expenses was due to our drive to realize greater operating efficiencies.

We ended the quarter with 273 regular employees; down 18 from the previous quarter end.

SG and A expenses were $10.3 million for the first quarter of 2003; up approximately $1.4 million from the $8.8 million spend in the first quarter of 2002.

The increase over the prior year was driven by growth in our field sales and customer support organization.

SG and A included a $500,000 credit for an insurance recovery made to help cover the employee theft incurred last year.

Research and Development expense was $3.4 million for the first quarter of 2003; down approximately $800,000 from the $4.2 million in the first quarter last year.

The decrease from the prior year resulted primarily from lower clinical trial activity and lower prototype acceptance.

Other Income and Expense was approximately $800,000 for Q1 2003, compared to $500,000 the first quarter of 2002, and $400,000 last quarter.

The increase was due to $500,000 of gains realized during the first quarter on sales and investment securities.

The remaining $300,000 of Q1 Other Income related mostly to interest earned on investments and [inaudible] the prior quarters due to lower investment balances.

Our net loss for the first quarter of 2003 was $2.3 million; $0.06 per share, compared to $5.6 million or $0.15 per share in the first quarter of 2002.

Our Q1 net loss was 69% lower than the first quarter of 2002, and represents the lowest net quarterly loss we've reported since selling the da Vinci Surgical Systems.

Our narrowing net loss reflects our progress toward achieving profitability, which we expect to have by the fourth quarter of this year.

Basic and diluted shares outstanding for EPS calculations were 36.9 million shares for the first quarter of 2003, compared to 36.3 million for the same period last year.

In regard to our balance sheet, we ended the quarter with $45 million in cash-down $5.8 million from the previous quarter end.

The cash was used to fund our operating losses and higher accounts receivable balances.

Our quarter-end accounts receivable balance of $[20].9 million was up $4 million from the previous quarter.

Our Q1 average days sales outstanding was 98 days-up from 72 days at the end of Q4.

Ending first quarter net inventory was $8.3 million-down $500,000 from the previous quarter end.

Our annual inventory turns are now 4.2 compared to 4.4, ending last year.

In regard to our outlook for 2003, as Lonnie has already described, we do plan to close our merger transaction with Computer Motion by the end of the second quarter.

Our outlook for the combined entity is to record between $110 million and $130 million of 2003 revenue on a pro forma basis.

We are targeting profitability by Q4 of this year for the combined entity, excluding amortization of intangible assets and one-time charges associated with the merger.

This outlook is consistent with the guidance we gave for Intuitive Surgical as a stand-alone entity during our last quarter call.

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

Thank you, Susan.

As Lonnie mentioned, we shipped 14 da Vinci systems during the quarter.

Twelve systems were shipped to US facilities, one to Europe and one to the rest of the world.

The list of placements was notable, including Vanderbilt University Medical Center, Denver Children's Hospital, Arkansas Children's Hospital, and Institut Mont [Cerise] in Paris, which is widely recognized as one of Europe's premier, minimally invasive centers.

And, the Cradle, for the laparascopic radical [prostatectomy] procedure.

We believe that the early enthusiasm of these new customers will translate into rapid adoption and use of the da Vinci system within prestigious hospitals.

Also during the quarter, we shipped a second system to the University of California Irvine, which has established a da Vinci-based urology training facility.

And, for the first time, we shipped a third da Vinci system to a single facility.

In this case, Hackensack University Medical Center.

This brings to 11 the number of our customer sites having multiple da Vinci systems.

During the first quarter, we began commercial shipments for the da Vinci system fourth-arm upgrades.

The clinical capabilities provided by the extra arm have been well-received by cardiac and general surgeons, as well as urologists performing da Vinci prostatectomies.

The fourth arm was featured at three of the four major medical conferences that we attended during the quarter.

The conferences we attended were the Society of Thoracic Surgery, STS; [Sages], EUA-the European Association of Urology-and for the first time, IPEC-the International Pediatric [inaudible] surgery group.

The enthusiasm surrounding robotic surgery at these conferences was clear.

With each passing conference, the momentum for minimally-invasive robotic surgery increases.

At the STS, we built on the Intuitive Cardiac story by highlighting atrial septal defect repair-Intuitive's second [intracardiac] surgery clearance.

At the scientific sessions, four films were shown, which featured robotic cardiac surgery with the da Vinci system.

Following the close of the congress exhibits, nearly 200 surgeons attended a reception we co-hosted with Johnson and Johnson's Cardio-Innovation Division, featuring an international panel of da Vinci system users presenting their techniques and results for several advanced cardiac procedures.

At the EAU in Madrid, which was attended by over 6,000 urologists, the da Vinci system ran nearly nonstop for three days, with test drives.

Urologists, which traditionally have been slow to adopt laparascopy within their practice, visited our booth in large numbers to learn more about the da Vinci system.

During the president's address, laparoscopy within urologist's practice was recognized as one of the two most-relevant movements currently taking place within the field of urology.

Intuitive is well-positioned to play a prominent role within this movement.

At [Sages]-the da Vinci system was once again well represented within the scientific sessions.

Surgeons representing Ohio State University, University of Illinois Chicago and Johns Hopkins University provided clinical presentations of da Vinci.

Live da Vinci systems surgeries, featuring gastric bypass procedure, were piped into both the Intuitive and the [Epicom] endosurgery booths.

Also, Dr. [Mark Palomini] of Johns Hopkins called a special organizational session to discuss the notion of creating an organization to focus on robotics within general surgery.

At the [IPEC] conference, which ran in parallel with [Sages], the interest for the da Vinci system was strong.

The pediatric community, although small by numbers, is influential in stature, and has been moving toward robotics to address several unmet needs within their MIS practices.

As I mentioned earlier, two prestigious children's hospitals purchased da Vinci systems during the quarter, while two additional units were sold to facilities in which pediatrics played a significant role.

Overall, the Q1 tradeshow season was substantial in both content and sales leads.

Surgeons continued to demonstrate the da Vinci system's clinical efficacy within general surgery, urology, cardiac surgery and now pediatric surgery.

During the first quarter, we consummated a strategic alliance with Medtronic cardiac surgery.

The cardiac industry's preeminent company.

We are pleased to be allied with Medtronic toward the advancement of minimally-invasive and totally endoscopic beating-heart cardiac surgery.

The agreement is framed around co-marketing, procedure development and training initiatives, as well as for the potential for co-product development.

As part of our agreement, Intuitive will transfer ownership of its endo-stabilizer system to Medtronic, who will begin marketing the product in Europe-and following FDA clearance, within the United States.

In March, Dr. [Frank van Pratt] of [Ohls] Belgium, performed a multi-vessel small [thoracautomy] or MVST procedure, using the da Vinci system in concert with Medtronic's new Starfish NS, which was broadcast live into the general session of the cardio-thoracic techniques and technology conference in Miami.

This MVST procedure holds promise for patients undergoing surgery for multi-vessel cardiac disease.

This broadcast also represented the first of many co-marketing events between Intuitive and Medtronic.

Also during the quarter, we began to market our new vision system.

This new three-channel vision system was born out of our collaboration with Olympus Optical.

The product provides the surgeon with the ability to toggle between a wide-angle two-dimensional view and a high-precision three-dimensional view, without every touching or adjusting the scope.

Also during [Sages], we featured a new surgical [annotator] for use with our da Vinci system.

This surgical [annotator] was developed by [Striker] Communications and provides [illustration] capabilities to the da Vinci console surgeon from a proctoring or assistant surgeon.

The surgical [annotator] has the potential to aide in the procedure-training pathway for complex, minimally-invasive surgery.

That wraps up my comments on our activities and sales marketing and business development.

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

Thanks, Aleks.

As Lonnie mentioned, I'd like to provide a little background on our panel litigation against [Brookhill Wilke], which I'll call [Wilke] for short, for now.

In our comments calls, we don't normally comment on events or activities we don't believe have a likelihood of being material to our company.

But we think there are enough questions on what this litigation actually is, so I'll say a few words, now.

Hopefully, it'll put the suit into context and perspective.

It's worth mentioning up front that we continue to view [Wilke's] suit as without merit on a number of different grounds, including that we believe we don't practice what [Wilke] claimed at intervention; for several different reasons. [Wilke] certainly did not invent auto-robotic surgery, since this idea came after much of the early work in the field by [SRI], IBM and others.

As for a little of the history, [Wilke's] suit is in 2000 on essentially one main patent that identifies a Dr. Peter [Wilke] as the sole inventor.

Dr. [Wilke] has over 200 patents to his name, that run the gamut from food processing and personal hygiene to medical tools and sporting techniques.

The patent that he chose to assert against us concerns a particular remote surgery apparatus that separates the surgeon from the patient with various specific hardware.

From all the defenses available to us, we selected one to support our first motion for summary judgment.

In late 2001, the district court agreed with us and threw the suit out.

Recently, the court repealed so the federal circuit reversed the district court's judgment, because they reached a somewhat different conclusion as to what two words in the claims actually mean.

So that sent the case back for further proceedings.

However, we believe that a fair reading of the appellate court opinion still supports our original non-infringing position.

It allows us to continue to raise that defense with the district court on remand.

In addition and as necessary, we'll continue to apply all of our other defenses to this patent.

Including that we believe we don't infringe for several other reasons, the patent isn't valid on several grounds, and that it's unenforceable as prosecuted.

At this point, we believe the patent suit is in essence not much more than a distraction and an unfortunate part of the cost of doing business in this space.

Shifting gears, now.

In connection with the [Moser] agreement with Computer Motion.

I'm happy to announce as Lonnie already indicated, that we are no longer fighting patent battles on the forefronts we were.

All patent disputes with Computer Motion are now either on hold or are in a period of inactivity, pending closure of the merger.

Should the merger consummate, all will be terminated.

Our merger agreement has allowed both companies to refocus all of their efforts on what counts the most.

Our customers, their patients, and improving the quality of minimally-invasive surgical care.

We believe the proposed merger and its benefits are a very positive step for both companies, and we look forward to being able to put the companies together at the end of June, after we have the required approvals.

Thanks for listening; and now I'll turn the rest back to Lonnie.

That concludes our presentation.

We'll now open the floor to any questions you might have.

At this time, if you do have a question, please press star-1 on your touchtone phone.

You will be announced prior to asking your question.

Once again, that is star-1 on your touchtone phone to ask a question.

Sheetal Mehta from Bear Stearns, you may ask your question.

Good afternoon.

Just a couple of quick questions.

Can you remind me where in the revenues you record the fourth-arm sales?

Is that in Systems?

Or is that in Instruments and Accessories?

That's in Systems.

It's in Systems.

So does the inclusion of that revenue in the Systems what propels the higher average selling price?

Or did the actual system have a price increase, there?

Sheetal, this is Ben.

Yes.

The fourth-arm sales did help increase the ASP, there.

But also, we had a pretty high proportion of sales in the United States this quarter.

Okay.

Thank you.

Can you remind me if there was an actual increase on list price in 2003, to the system?

From 2002 to 2003, yes.

There was an increase in the list price.

Can you quantify that?

It increased by about $30,000.

Second question is just a housekeeping item.

The deferred compensation and amortization line.

Can you quantify that?

Does that come just from SG&A?

If I pull that out?

Let me just kind of repeat what we said last quarter on this, Sheetal.

I just want to remind you that last quarter what we mentioned was that there was $200,000 left in deferred compensation to be amortized over the first two quarters of this year.

That is still the case.

Over the first two quarters?

Yes.

Then just in terms of R&D spending.

You mentioned the end of clinical activity, going forward.

Is this less than 18% of sales something that we should expect, going forward?

We mentioned that we dropped that year-over-year.

We were running three heart trials, last year.

We now have two of those cleared by the FDA, and we're running.

That number is now containing one of our heart trials.

Where we go in the future, we have not guided yet, at this point.

My final question is, if I look at the number of units I had projected for 2003, just again-da Vinci systems.

I had 68 projected for this year.

Would you say that that's still doable?

Given the run rate that we've got right now?

Yes, Sheetal, this is Ben.

I'm going to go back to our guidance on revenue.

We had given you guidance on revenue for Intuitive as a standalone company of $85-100 million.

That was [gross] of 20-40% over last year.

We're still staying with that guidance.

Thank you.

You bet.

Charles Olsziewski with UBS.

You may ask your question.

Okay.

Was that me?

I don't know.

A couple of things.

As far as the guidance you gave last quarter regarding the outlook for gross margins of mid-50s.

You're essentially in the mid-50s here in the first quarter.

Does that essentially mean you're ahead of where you thought you'd be?

Or should we look for sort of a flattish number throughout the year-although the recurring revenue [change] is probably going to climb?

I guess I'll take a shot at that, Charlie.

I think you recall last quarter, we mentioned that we had some gross margin improvement due to improved reliability in the field.

Correct.

We continued to experience that in the first quarter, as well.

As a result, we're booking less warranty reserves.

Correct.

We hope that that will continue.

But I think that's something that we can't necessarily count on, going forward.

So we're still going to stick with the mid-50s, in terms of gross margin at this point.

As far as the credit to SG&A, I guess that you've essentially recovered half of what was pilfered.

Is that a good way to look at it?

That is.

Laughing.

In other words, we were insured for about half of what was pilfered.

So the other half you probably won't get back?

That's correct.

We are pursuing legal channels on the other portion.

Time will tell whether we're able to recover anything, or not.

As far as the first quarter is concerned, it's clear.

I guess you announced your pending union with Computer Motion on March 7th.

Obviously, there were discussions for some period of time leading up to that announcement.

Were you expecting to spend more in legal in the first quarter than you ultimately did, given your discussions?

In other words, if this merger weren't announced, would you have spent more money on legal than you ultimately did?

Yes.

A significant amount or insignificant?

Significant.

The rate we were spending, it definitely was significant.

Then as far as Medtronic, Aleks.

Have they started selling the product in Europe, yet?

Or is it still kicking off?

They have not.

There are a few final tests that are required in order for them to begin selling the product in Europe.

Okay.

Thanks.

Thank you, Charlie.

Brian Gagnon (ph) with Gagnon Securities.

You may ask your question.

Hi.

I've got three questions for you.

The first is, did the third arm finally start shipping?

Fourth.

Fourth arm.

Fourth.

I lose track of my arms.

Yes, it has.

It did.

Yes.

How many did you actually ship in the quarter?

We sold one fourth arm in the fourth quarter, [Brian].

So is Hackensack a Q2 event?

One of those was Hackensack.

The others are coming.

Deferred revenue line item went up quite a bit.

Can you tell us what that was all about?

Yes.

Deferred revenue is a place where we also record or mostly record our deferred service revenue.

And we've described in the past, when a customer buys a system, there's a one-year warranty.

Following that, service revenue kicks in.

So typically, what you're going to see is that deferred revenue item will kick up, as you know, a larger and larger [inaudible].

That's really what's driving that.

Actually, I lied;

I've got two other questions.

The operating expenses, going forward.

Now that this Computer Motion issue is temporarily behind you-can you give us an idea of what the ongoing operating expenses might look like?

Yes.

I guess the best way for us to describe us is this, [Brian].

We had given some guidance that from last year to this year, operating expenses were going to grow by 5% or less.

So as a standalone company and the things that we've done, that's still true.

Now With the combined company, we can't give comment on.

But we're doing the best to make sure we get to profitability by the fourth quarter.

But if I look at the $13.6 million you had in operating expenses this quarter-down a million-should we expect that in Q2 that those numbers should remain stable, go down or go up?

Again, [Brian], we're going to have to iterate on the year, which is year-over-year as a standalone.

Then you're looking at the 5% reduction.

The last question is what are you pricing the fourth arm at, at this point?

We're not going to give that out at this point, [Brian].

We'd be giving that out at a later time.

Good.

Thanks very much.

Okay.

Just as a reminder, if you do have a question, please press star-1 on your touchtone phone.

Mark Smillie, you may ask your question.

Great.

Thanks.

Good afternoon, everybody.

Mark.

Quick question.

You guys are going AUA this year.

What are you guys looking at for that show?

Is it a big show for you?

Do you expect a lot of interest to come out of that?

What are the highlights of the show that you're looking at, this year?

Yes, Mark; this is Aleks.

We definitely view the AUA as an important show for us, on many levels.

What do we expect there?

There will be a few live surgeries that will be piped into our booth.

There are a number of clinical presentations and poster sessions that will include I think some very favorable evidence-based medicine for da Vinci, with respect to radical prostatectomies.

There will be approximately, I think we're expecting somewhere on the order of 10,000-11,000 urologists there from all over the world.

We definitely see this as an important show.

There will be a fourth-arm system there, and if the EAU in Europe, which is really a precursor to the show, is any indication, our systems are going to be very busy with test [runs].

Great.

Thank you.

Charles Olsziewski, you may ask your question.

Yes.

A follow-up.

Susan-maybe I heard you wrong.

Did I hear you say that you actually had a headcount reduction of 18 quarter to quarter?

Yes, you did.

Correct me if I'm wrong.

Is that the first?

Certainly I don't remember a time as you've grown where your headcount has declined.

That's correct, Charlie.

We've always been building our sales force and field operations group.

We've talked earlier that we would reach a point where we stopped being able to leverage that.

That's just an outgrowth of the leverage?

Yes.

Thanks.

We'll take one more question, and close the meeting.

Our final question comes from [Larry Hemovitch].

You may ask your question.

Good afternoon.

Perhaps asking Charlie Olsziewski's question a different way.

Susan, were there any expenses incurred during the quarter as a result of the negotiations and the Computer Motion announcement that were significant, relative to the ongoing legal expenses that you were incurring, with regard to the [inaudible]?

No.

As we said on a previous call, we do anticipate merger expenses.

That will be significant.

Right.

They weren't in the first quarter.

Those are capitalized as part of purchasing accounting.

So we didn't see anything that would have affected the first quarter bottom line in that regard?

That's correct.

I'm wondering, given that when companies that have been competing merge, if there were any impacts you saw in the selling cycle in the quarter.

Did people have some hesitancy, perhaps, in closing deals?

During the last month of the quarter, I'm sure you do more than 1/3 of your quarter.

Because of any merger uncertainties at all.

Can you comment on that?

Do you think you would've done better, I guess, on the top line if the merger had not been done?

Larry, this is Lonnie.

I won't comment on whether we would've done better or worse, but I will say that when something like this occurs, it does cause greater uncertainty.

Certainly, I believe and know of medical centers that delayed their purchase decision until we became more explicit and it becomes clearer in terms of what this merger means.

So definitely, it does impact the market.

Yes.

Hopefully that all resolves itself as you go into the second half and the deal's done.

I think it clearly will.

But for this period of time-from the time of announcement 'til the deal is closed, there is uncertainty in the market, and a lot of noise that both companies are living with.

Lonnie or maybe Susan, aside from SEC delays or any SEC issues, is there anything else that could likely change the date that you'd suggested as the closing date in any material way?

Larry, as I said before, we are waiting for the SEC to review our S4, and then we will anticipate the next part of the calendar is the proxy mailing for shareholder votes.

Those two issues will be ahead of us.

Again, that's why we're sticking with the end of the quarter guidance we gave you before.

Thanks very much.

That was our last question for today.

To again summarize the highlights of the first quarter-we recorded revenue of $19.2 million; up 33% from prior year.

We shipped 14 da Vinci Surgical Systems, ending the quarter with 163 systems installed worldwide.

We grew recurring revenue to $5.4 million-up 103% from prior year.

We improved our gross margin to 54.6%, up from 47.9%.

We recorded our smallest quarterly loss, at $2.3 million.

That's going public.

We signed an agreement with Medtronic, aimed at advancing minimally-invasive beating-heart surgery.

We released several new products for sale and shipment, including a fourth arm for the da Vinci Surgical System.

And we made significant progress in our planning for a post-merger transition with Computer Motion.

That concludes today's call.

We thank you for your participation.

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