直覺手術 (ISRG) 2003 Q3 法說會逐字稿

Welcome to the Intuitive Surgical third quarter 2003 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.

If anyone has any objections you may disconnect at this time. (OPERATOR INSTRUCTIONS).

I would like to introduce your host for today's call, Mr. Ben Gong, Vice President of Finance and Treasurer, for Intuitive Surgical Inc.

Hello and welcome to Intuitive Surgical's third-quarter conference call.

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

Susan Barnes, our Chief Financial Officer; and Aleks Cukic, our Vice President of Business Development and Strategic Planning.

Before we begin I would like to inform you that comments mentioned on today's call may be deemed to contain forward looking statements.

Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties.

These risks and uncertainties are described in detail in the company's Securities and Exchange Commission filings.

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

Please note that this conference call will be available for audio replay on our 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 third-quarter as described in our press release announced earlier this morning followed by a question and answer session.

First, Lonnie will present the quarter's business highlights.

Susan will follow with a review of our third-quarter financial results, described recent accounting changes and provide a forecast for the fourth-quarter.

Next, Alex will discuss sales, marketing and clinical affairs.

Finally we will host a question and answer session.

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

I would like to welcome and thank each of you for taking the time to join us for today's conference call.

As we indicated during our last call the third-quarter was a major transition period for Intuitive Surgical as we assimilated Computer Motion.

Highlights for the third-quarter are as follows.

During the quarter total revenue grew to 23.4 million, up 37 percent from prior year and 9 percent from prior quarter.

Recurring revenue grew to 7.7 million, up 98 percent from prior year and comprising 33 percent of total revenue.

We shipped 15 da Vinci Surgical Systems and 16 fourth arms ending the quarter with 192 da Vinci systems installed worldwide.

Our financial metrics continue to be very solid and particularly so when you consider the 3.7 million merger transition and purchase accounting expenses that we have absorbed during the quarter and the 1.7 million revenue reduction resulting from a change in the way we account for first-year system warranty and service.

Our gross profit margin improved to 55.9 percent from 51.2 percent in the second-quarter of last year.

We generated a second-quarter loss of approximately 3.4 million compared to second-quarter loss of 6.5 million last year.

We ended the quarter with 35.4 million in cash, down 7.5 million from the last quarter.

This change in cash position included outlays of 2.1 million in severance expense and 5 million to pay down Accounts Payable associated with the acquisition of Computer Motion.

The third-quarter was clearly a period in which everyone was stretched as we consolidated and reorganized, transferred information, knowledge and know-how, moved people, products and operations, communicated our new direction to our customers and work to find situation specific solutions, transitioned a significant number of people out of the organization, and continued to grow and improve the performance of our company while controlling our operating costs.

We believe that our new company has done -- that our new team has done an extraordinary job in all of these things.

It was our goal to complete most of the heavy lifting in the third quarter, to be well past the 90 percent mark by the end of the year and to meet or exceed the 18 million in annual operating pretax cost savings we estimated in the S4.

The heavy lifting is behind us and the merger process will be completed by year-end.

We will exceed the 18 million in annual pretax cost savings and while there are always a few surprises in the merger process we have met those surprises, dealt with them and are moving on.

Manufacturing has been consolidated in Sunnyvale.

Organizational changes and relocations are essentially complete in every functional area with only a small number of individuals remaining in the transition status.

We've made significant operational progress in spite of all the organizational disruption.

We have provided a trade-in pathway for current Zeus customers to move to the da Vinci platform and several customers have made that transition during the quarter.

While these trade-ins depress near term price realization and profit margins they will provide a more capable surgical platform to our customers and significant long-term recurring revenue and enhanced operational efficiencies to our company.

We experienced excellent procedure growth led by urology and closely followed by cardiac.

In urology the da Vinci Prostatectomy, DVP, is following a classic and predictable adoption curve driven by clinical outcomes and patient demand.

As surgeons become more proficient performing DVPs, we see them expanding their use of the system to other urologic procedures.

The World Congress of Endourology held in Montreal featured 41 da Vinci presentations and held its first scientific session dedicated to surgical robotics.

Henry Ford Hospital held its second annual International Robotic Urology Symposium and during that same week St. Vincent's Hospital in Birmingham, Alabama also held another well attended robotics surgery focused urology meeting.

In the cardiac segment we're seeing significant momentum in mitral valve repair, multivessel small thoracotomy cabbage, MVST, and pacemaker lead implantation for biventricular pacing procedures.

Dr. Randolph Chitwood from East Carolina University, performed his 100th mitral valve repair and trained the 30th surgical team to perform this procedure.

Dr. Van Praet, Frank Van Praet, from (indiscernible), Belgium, broadcast a live telecast of an MVST procedure to 10,000 cardiologists at the TCT meeting held in Washington D.C.

In general surgery we just returned from the American College of Surgeons meeting in Chicago, where surgeons telecast live Heller Myotomy and gastric bypass procedures.

Dr. Santiago Horgan from the University of Illinois presented the published results of a multicenter prospective da Vinci gastric bypass study.

We shipped the first three channel vision system and the customer response has been outstanding.

We started shipping 5mm instruments to some of our pediatric centers and began the launch of our 8mm veligrasper (ph) which we believe will help develop the large colorectal market. (indiscernible) operations continue to drive costs and cycle time reductions while achieving our product quality, delivery and service performance goals.

We continue to make progress with our cabbage clearance and expect to file the 510-K this quarter.

We're committed to managing within realistic financial constraints focusing on the vital few things that truly make a difference.

Driving future, product investment priorities based upon clinical needs and economic return.

Our priorities remain profitability, superior products and services in a results driven company culture in which measure ourselves by our accomplishments.

With that I will pass the time over to Susan, our Chief Financial Officer, who will discuss our third-quarter financial results.

This third-quarter was another quarter of growth and change for Intuitive highlighted by continued market development and recurring revenue growth impacted by a revenue recognition accounting change and affected by Computer Motion integration activity.

Summarizing this quarter's key financial metrics.

We realized record growth of $23.4 million, up 37 percent from our third-quarter of 2002.

We grew recurring revenue to $7.7 million, up 98 percent over last year and up 1.4 million sequentially over the second quarter of this year.

We recorded a net loss of $3.4 million or 12 cents per share compared to a net loss of 6.5 million or 35 cents per share last year.

We recorded a total of $3.7 million in merger related costs on the income statement.

Approximately one million of this amount was recorded in cost of sales on the balance and 2.7 was recorded in operating expense primarily in the SG&A line.

We ended the quarter with $35.4 million in cash, down 7.4 from last quarter.

Working capital increased to 42.8 million from 41.6 ending Q2.

We have substantially completed our computer motion integration and fully expect to meet or exceed cost reduction targets.

As described in this morning's press release we implemented during the third-quarter an accounting change associated with EITF 0021, accounting for revenue arrangements with multiple deliverables.

The impact of this accounting change through our third-quarter results was the deferrable approximately $1.7 million in revenue and a decrease in gross profit of $900,000.

This revenue will be recognized ratably over the next four quarters at approximately $425,000 per quarter.

Likewise the gross profit on that revenue will be recognized at approximately $225,000 per quarter.

As a result of our adoption of EITF 0021, system ASP will be reduced between $100,000 and $125,000 per unit and warranty expense will no longer be accrued upon shipment.

Despite the negative impact of this accounting change, third quarter 2003 sales totaled $23.4 million and were up 37 percent from the 17.1 million reported for the third quarter of 2002.

Driven by containing revenue growth, higher da Vinci system unit placements and fourth surgical arm shipments, third-quarter 2003 recurring revenue totaled $7.7 million, up 3.8 million over the prior year and up 1.4 million sequentially from the second quarter of 2003.

Recurring revenue comprised 33 percent of total revenue compared to 23 percent for the third-quarter of 2002 and exceeded our previous high of 30 percent during the second quarter of this year.

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

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

We shipped 15 da Vinci Surgical Systems in the quarter, 13 in North America, one in Europe and one in the rest of the world, our third into India.

Fifteen total units were shipped -- were up one compared to 14 units shipped during the third quarter of 2002.

We now have (indiscernible) placements of 192 da Vinci systems, 136 in North America, 44 in Europe and 12 in the rest of the world.

Third quarter 2003 system revenue was again bolstered by our successful fourth arm upgrade to da Vinci Surgical System platform.

We shipped 16 fourth arm units during the third-quarter after launching and selling nine units last quarter.

Six of these fourth arms that went out was new third-quarter system shipments while ten were upgrades to our previously installed system.

These fourth arms had an ASP of approximately $190,000 each and are recorded in system revenue.

During the quarter we recorded 1.3 million in sales from Computer Motion products.

We shipped five Aesop systems.

Total Q3 2003 revenue by product group was as follows. (indiscernible) systems 15.7 million, intimates and accessories 5 million, and service 2.7 million.

Our year-to-date sales totaled 64.1 million of 26 percent compared to 50.9 million last year.

Our gross margin for the third quarter of 2003 increased to 55.9 percent compared to 51.2 for the third quarter of 2002.

On a year-to-date basis our gross margin was 57.9 percent compared to 50.7 percent for the same period last year.

Improved 2003 gross margins was driven by lower product material costs, improved factory productivity and product reliability.

Gross margin was 7.3 lower than last quarter due to the anticipated impact of the Zeus trade-in program, write-downs of Zeus inventory and purchase accounting amortization.

We took a write-off of approximately $500,000 in Zeus product inventory.

We took this charge after determining that it is unlikely for us to sell any additional Zeus systems in the future.

In addition, we recorded a $500,000 charge in cost of sales primarily consisting of anticipated purchase accounting relating items.

Total operating expenses for the third-quarter of 2003 were 16.7 million, up 1.1 million compared to the third-quarter of 2002 and up 3.7 million sequentially compared to the second-quarter of 2003.

The 16.7 million included 2.7 million in merger related costs.

The 2.7 million of merger related cost and operating expense included approximately $1.5 million and transition costs primarily consisting of salaries and benefits of people who continued to work beyond July 1 in their transition role at Intuitive.

Approximately $800,000 related to onetime write-offs and $300,000 related to amortization of intangibles and deferred compensation.

We ended the quarter with 359 employees, up 97 from the previous quarter end reflecting the addition of Computer Motion employees up whom 42 will be transitioned off by year end.

SG&A expenses for the third-quarter were $12.3 million, up 600,000 from Q3 2002 and up 2.9 million sequentially compared to the second quarter of this year.

The sequential increase was driven Computer Motion related additions and integration costs.

Research and development expense was 4.4 million in the third-quarter of 2003, up approximately $500,000 from 3.9 million in the third-quarter last year and up $800,000 sequentially compared to the second quarter of this year.

Other income was approximately $300,000 for Q3 2003 compared to 400,000 in the third quarter of 2002.

The decrease was due to lower interest income earned on lower investment balance this year versus last.

Our net loss for the third-quarter of 2003 was $3.4 million or 12 cents per share compared to a net loss of 6.5 million or 35 cents per share during the third-quarter of last year.

Our September year-to-date net loss was $4.8 million or 22 cents per share compared to 15.8 million or 87 cents per share last year.

Now in regards to our balance sheet, we ended the quarter with $35.4 million in cash, down 7.4 million from the previous quarter end.

The anticipated decline in cash during the quarter resulted from paying down merger reliabilities and paying severances to employees impacted by our restructuring plan offset by 2.5 million in stock option exercises.

Our quarter end accounts receivable balance of $23.7 million was up 1.8 million from the previous quarter end primarily reflecting higher third-quarter sales.

We ended the quarter with 85 average day sales outstanding, up from 78 at the end of Q2.

Ending third-quarter net inventory was $12.7 million, down 900,000 from the 13.6 million at the previous quarter end.

The decrease was primarily due to the reductions in CMI inventory resulting from sales of CMI product and the reserve taken for the remaining reduced inventory.

Our annual inventory turns declined to 3.3 from 3.6 ending the previous quarter primarily due to the impact of CMI inventory.

With regard to our outlook, overall outlook for the fourth quarter, we continue to be in line with the guidance we gave last quarter.

As a reminder we expected revenues for the second half of 2003 to be between $50 and $60 million.

Given the effect of new accounting rules, we currently expect second half 2003 revenues to be at the low end of this range.

Of the $1.7 million we defer to Q3, approximately 425,000 will be recognized in Q4.

In the fourth quarter we will again defer revenues associated with first-year service on new systems.

We expect recurring revenues to comprise between 30 and 35 percent of total revenues.

As Lonnie mentioned earlier we have made significant progress during the third-quarter, integrate Computer Motion operation.

During the fourth quarter we are expecting to recognize a total of approximately $1 million in merger related costs, down from the 3.7 million we recorded in the third-quarter.

Approximately 400,000 of the one million expenses will be in cost of sales and the balance will be in operating expense.

Our gross margins including charges for the merger and a Zeus trade-in program will between 55 and 60 percent.

We expect operating expenses to decrease from Q3 as we reduce our transition costs, as I mentioned earlier.

This'll be partially offset by seasonal expenses related to trade shows and additional sales support costs.

Overall we expect operating expenses to decrease by approximately 5 percent for the third-quarter.

Last quarter we stated that we expected to return to profitability in the fourth quarter.

While our outlook for the business has not changed, the impact of accounting EITF 0021 will have the effect of reducing gross profit in the fourth quarter and bring us closer to breakeven on a net income basis.

However, as we have stated nothing has fundamentally changed in our business and our goal is to record a net profit in Q4.

We ended Q3 with 27.1 million shares outstanding and as you know we have filed a prospectus relating to a 5 million share underwritten public offering.

The underwriters will have the option to purchase an additional 750,000 shares to cover any overallotment.

We expect to price the offering later this week.

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

As mentioned earlier during the second quarter we shipped 15 da Vinci systems, 13 in North America, one to Europe and one to rest of world locations, which was our third system in India.

Of these 15 placements several were notable.

Included were George Washington University Hospital, Cleveland Clinic in Florida and Stanford University's Lucille Packard Children's Hospital.

The sale to Lucille Packard Children's Hospital is indicative of the progress being made into the field of pediatric surgery.

During the quarter we had a pair of two system sales, one to University Hospital of Cincinnati and the other to the University of California at Davis.

This brings to 15 the total number of multiple da Vinci system shipments to individual customers.

In the third quarter we began our Zeus trade-in program and issued credit for three Zeus systems against purchases for new da Vinci systems.

There remains a great deal of interest in the da Vinci platform among existing Zeus sites and we anticipate several more Zeus trade-ins going forward.

We continue to experience strong demand for da Vinci fourth arms.

After launching and shipping nine last quarter we shipped 16 more this third-quarter as the product has gained clear market acceptance.

Six of the 16 fourth arms went with new system installs while ten were installed as upgrades to existing customer sites.

We believe that the willingness of existing customers to purchase this $195,000 feature enhancement is a strong testament to their desire to add surgical capabillities to their minimally invasive surgical offering.

The fourth arm delivers this additional surgical capability for complex surgical procedures and enables the surgeon to perform surgery with reduced reliance on operating room support staff.

As you can see in the recurring revenue line we had another robust quarter with respect to system utilization and procedure growth.

While the procedure mix within surgical fields had been equally divided between cardiac, urology and general surgery procedures, our accelerated penetration into the field of urology through the DVP procedure has caused a shift within our procedure mix.

Today urology contributes the largest share of our recurring revenue line followed by cardiac and general surgery.

We see this trend continuing for the foreseeable future.

Our growth within the field of cardiac surgery is being driven by both the da Vinci mitral valve repair and the MVST, or multivessel small thoracotomy procedure.

As we indicated last quarter both Medtronic and Intuitive Surgical have new revenue opportunities to realize from the growth of the MVST procedure.

Medtronic from its new Starfish NS and stabilizer products and Intuitive from its da Vinci instrument sales.

As a result both companies have put forth recent marketing campaigns to drive procedure adoption.

We also believe that the MVST will serve as a catalyst to drive TECAB adoption once that clearance is received.

Regarding our TECAB trial, we have completed our multicenter trial and postoperative follow-up activity and anticipate filing our 5 10-K with the FDA later this quarter.

With a standard FDA review process we anticipate FDA clearance for this important indication in early 2004.

The third and fourth quarters are traditionally our busiest period for trade shows and surgical congresses.

As Lonnie indicated we attended ACS, EX, IRIS, the World Congress of Endourology and SLS.

In addition to the notable da Vinci presentations panel discussions and live surgery demonstrations which Lonnie touched on earlier, there is one presentation which I would like to take a moment to highlight.

At the American College of Surgeon's Conference held in Chicago last week, Dr. Santiago Horgan from the University of Illinois, Chicago, presented results from a multicenter prospective experience of 100 da Vinci gastric bypass procedures showing a record of zero leaks.

While gastric bypass surgery may be performed without the da Vinci, no one has reported a result of zero leaks in over 100 cases with a stable anastomosis.

The result of this study were also published in the Journal of Advanced Laparoendoscopic and Surgical Techniques.

We continue to be encouraged with this consistent and proved surgical outcomes being reported within our target surgical specialties.

With regard to Computer Motion product sales, during the quarter we made the decision to suspend all marketing activity for the Zeus system and therefore recorded no Zeus systems sales.

During the quarter we ship five Aesop systems as we evaluated different approaches to both marketing and selling of this product.

Customers, both domestic and international, have expressed their satisfaction with Aesop from a clinical and economic perspective.

Thus, we will continue to investigate the most efficient sales and service model as we gain experience with this new platform.

We also continue to supply our industry partners with the Hermes product.

While it is clear that the majority of ongoing sales will come from the da Vinci system platform we are pleased to be able to offer a range of complementary surgical products to our customers.

That concludes my overview and I will now turn the time back over to Lonnie.

That concludes our presentation.

We will now open the floor to any questions you may have.

(OPERATOR INSTRUCTIONS).

Sheetal Mehta with Bear Stearns.

First, regarding some of the Computer Motion products that you sell, Hermes, Socrates, it sounds like you sold five Aesop in the quarter.

Can you give us a sense of where you think those sales could go?

Obviously they are not going to be emphasized as much as da Vinci is but we expect that they will contribute something.

Can you give us a sense of where, what kind of contribution we can expect from those systems?

I think it is too early for us to give you a forecast in that range.

As Aleks said we are still working through our sales and distribution channel analysis and we can't comment further at this point.

Okay.

Clearly, as you said, this will not be the primary area of emphasis for us.

The Aesop is primarily a scope controller.

It sells for about one tenth of what a da Vinci does.

If we have a trade off we will focus on the da Vinci.

We are working on what is the best way because it is an excellent product for us to maximize the value of that productline.

Do you still plan on selling Hermes and Socrates as well?

Mostly Hermes product.

We have pulled back on the Socrates at this point.

We have always guided that of the 50 to 60 million and sales for the second half that we would be -- no more than 5 to 10 percent of that would be Computer Motion related product.

Couple of other questions.

First on the accounting change in deferred revenue, so that is going to go -- the deferred revenue will go into the service component, am I right about that?

That is correct.

Looking at the (technical difficulty) employees, I think you mentioned 42.

What percentage of that will be R&D versus SG&A?

It is half and half, isn't it?

Actually it is primarily SG&A.

Oh the 42.

The 42, excuse me.

I was thinking of the remaining.

The remaining will be dominated by R&D with some sales and marketing.

Let's put it half and half.

So primarily the 42 that you're going to transition by year-end is SG&A?

That is correct.

Can you give us an update on the various legal issues, first Brookhil-Wilk and then the patient suits from the second-quarter?

As we identified, there is a suit from Brookhil-Wilke.

We have talked about that that may go to arbitration sometime this year but that is the only activity we have seen so far on the patient litigation that is being early in the stage of discovery and we don't have any new events to report on that.

Great, thank you very much.

Tom Gunderson with Piper Jaffray.

Just a clarification on the guidance, Susan, for Q4 on OPEX.

As I heard it is 5 percent more dollars than spent in Q3.

No.

Five percent less dollars.

Okay.

Second, is there anything wrong with the math of taking your system sales of 15.7, subtracting out 1.3 for Aesop and subtracting 16 times 190 for the fourth arms and ending up with your da Vinci raw number and then dividing by 15 and coming up with about 750,000 or 760,000 average sales price?

The 1.3 of Computer Motion was across systems, accessories and service.

Actually I will just give you the ASP of the da Vinci systems without the fourth arms, was 810,000 and that is after taking into account the EITF impact.

Thanks.

The final question I have before I get back in queue is future of fourth arm.

These are always difficult for us to predict, also for you, but you are getting a little bit of sense of the demand out there.

Nine, 16, are we peaking or does the demand keep going up?

What percentage -- maybe another way to ask it -- what percentage of the existing base do you think eventually gets a fourth arm?

I think clearly what we are expecting is on the new sales, we are seeing a large percentage of those going out with fourth arms.

So we think a lot of the new sales are going to be with fourth arms.

In terms of the existing installed base it continues to be a capital approval process.

So it is a little hard for us to predict that.

We are just encouraged by the number that have been able to do that upgrade thus far.

Six out of 15 got the fourth arm on the new ones, right?

And you are expecting that percentage to stay fairly close for the next couple of quarters?

Actually we think that is going to increase in terms of percentage of new systems going out with fourth arms.

Okay, thank you.

Brian Gagnon with Gagnon Securities.

It is Brian and Neal (ph) on the phone.

If I take what appears to be the onetime charges in the quarter and taking the 3.7 million and then also assigning the 1.7 million deferred a gross margin of 900,000 and if I added it all back to the way you might have calculated before the merger, I should add back roughly 4.6 million?

You can do that.

We do report on a GAAP basis.

Going forward, I know that you'll have again some transition expenses in Q4 and you'll always have this EITF going forward but that anniversary in a year.

Yes, EITF 0021 in a year could, if we were flat, would then have a zero effect, but if we continue to grow of course there is a lag on that revenue.

Anniversary is in a year, then you get some growth.

Will there be any transition cost going forward starting in '04?

We will continue to have the amortization of the intangibles.

There is roughly about $400,000 of that.

How far along will that go forward then?

I think it goes on for quite a bit of time.

There are two components to that.

One of the components is about 200,000 which goes on for a number of years.

The other component of that is actually as we sell the Computer Motion product, we amortize what is called the profit and inventory on that.

So you'll have that going forward.

Yes.

The other thing that you didn't really lay out -- by the way you're all to be congratulated on the amount of detail you gave out this quarter.

This is excellent because it just answers a lot question we all have, thank you.

You didn't talk about the actual effect of the discount from Zeus, but you said there were three machines.

Could we guesstimate that maybe that could have cost you $1 million had you been able to sell those all at full price?

I guess we will answer the question this way.

The ASP question that we answered before --.

Three da Vinci's, I apologize.

The ASP question that we answered before, it was 810 and Susan had mentioned that the EITF has an impact of about $100,000 to $125,000 on the ASP.

Now in the second-quarter we had an ASP of about $955,000.

So this decrease was due to the trade-in program with Zeus.

The six out of 15 -- actually I thought that was a little low.

I thought you might have sold more with arms going out the door with new systems?

I would say that we talked about a sales cycle between three and nine months and we just introduced this last quarter, so that is why some of these -- that is why we were guiding up in future quarters.

I see.

So the orders that were in process for three arms systems have progressed?

Good, thank you.

Myra Leigh (ph) with Seligman.

I just wanted to see if you can just provide more color on the procedure growth?

You had mentioned the key thing is that with your current installs, you have one procedure, but if you can get more procedures obviously it justifies the ROI and also (indiscernible)?

I will try to answer it this way.

We are seeing exceptional growth in the DVP procedure that has probably exceeded even some of our expectations, and right behind that we are seeing the mitral valve procedure within cardiac as well as the MVST.

Within the general surgery category, gastric bypass remains a very important procedure there.

If you look at the things that we are probably most encouraged, is that there are marquis procedures within each one of the categories that will end up help to drive other procedures within those specific categories.

As far as the DVP, we continue to be very encouraged by that and it is driving a lot of our growth in overall procedures.

Okay, great.

(OPERATOR INSTRUCTIONS).

Sheetal Mehta with Bear Stearns.

On the fourth arm are you launching that worldwide or was there a breakout between U.S. and the rest of the world?

We are launching it worldwide but we didn't break it out.

Okay.

Do you have any sales outside of the U.S.?

We did not, for the third quarter.

Okay.

Just regarding the swap-in or the trade-in program, I think somebody asked this before.

You had three trade-ins in the quarter, is that right?

That is right.

Can you remind me or remind us what the installed base for Zeus is and how much longer the trade-in program will go or how much time, how much longer these hospitals have to trade-in?

And then just thinking about -- could we see a nice little bump up in gross margins after that program is done?

If we look at the number of Zeus’s that were sold and upgraded and that is really the base that we work off of, there are in our estimation around 40 of those systems that were out there.

If you look within that universe there are probably a third that were fairly active, a third that were somewhat active and a third that were not.

We really target that first third of those procedures -- of those systems, call it between 13 and 15 systems, that the momentum is still very active in robotics and we are really focused on trying to convert those systems over.

One has to remember that even with a discount and the purchase of let's say a new fourth arm da Vinci, four arm da Vinci system, you are talking about a list price of $1.255 million and you may be receiving a credit on the order of $300,000.

There is still $900,000 that that account has to come up in order to make this transition or transaction take place.

We're looking to try to clean up as much of that as we can this year, but in reality there is probably some leak over that will take place in the first-quarter due to capital budget requests, but we're looking to try to clean it up as soon as we can and our internal target is to try to get them all out this quarter and that is what we are staying firm on.

That is (indiscernible) our external target as well.

People who want to change need to know that there is a cutoff date here and we put that cutoff date as of the end of this year.

As Aleks said we may get a little bit of leak over but we want to put a deadline to this and get it behind us.

What we are doing is we're essentially taking the purchase price that they paid for their system and then amortizing over a five-year period of time and giving them a trade-in value for that with a maximum from a certain amount so that -- and as a whole it's gone fairly well.

There are a few customers that are not happy but others that we have worked through quite effectively and we continue to try to do so.

Could you remind me, I think you mentioned it in your prepared statements, what the gross margin impact was from the trade-in?

Just kind of remind you of our guidance on the gross margin, we mentioned that there was about $1 million that hit the quarter in terms of the purchase accounting and the Zeus write-offs, and then the Zeus trade-in also impacted the gross margin and that is how we ended up with 56 percent.

That is to be compared against the 63 percent that we had in the prior quarter.

Just as an aside, the EITF did not impact the gross margins very much because again we withheld costs in addition to revenue.

In terms of tax, paying taxes, when do you think -- how long will NOLs last and when do you expect to pay taxes going forward?

You start paying taxes when you make a profit for a whole year and so just given where we are for year-to-date, it doesn't look like we will need to make a tax provision for this year.

Next year there will probably need to be some sort of tax provision, however it is going to be mitigated quite a bit by the NOL.

There is always a portion that you are not allowed to sort of offset.

We will be giving guidance on tax effective rate at the end of our fourth quarter call and because of the limitations the NOLs will state tax issues.

Okay, great.

Thank you.

Brian Gagnon with Gagnon Securities.

Sheetal his most of my questions, but what is the total NOL that you bought from Computer Motion?

On a combined basis we had about $130 million and NOL from 2002.

So that is the amount that will be amortized let's say in future periods and as I mentioned before there are certain limitations on how much you can take each quarter.

On the gross margin side, is there any reason we shouldn't be thinking about mid to low 60s going into 2004 once you get these trade-in programs out of the way?

We have a targeted gross margin over time of 65 percent, but give us a little bit of time to step into it.

In the five millimeter arms, you said you have just started sampling those?

The 5 millimeter instruments?

Yes, I'm sorry.

We have started shipping them primarily to selective pediatric centers, but we are shipping them and they are not samples, they are purchased products.

Can you give us an idea on the pricing on those?

These have 20 uses and so the price is higher, up around 3,000 and they have 20 uses -- 3,000 and a little above that but 20,000 per.

Can you give us a breakout of the inventory between raw, whipped and finished?

Hold on one second.

Brian, I don't have it right with me.

It is going to come out on the 10-Q.

I hate to do this to you, but it is going to come out on the 10-Q probably around the middle of November.

Okay.

Great, thanks guys.

That is our last question.

Again to summarize the highlights for the third quarter, we recorded revenue of 23.4 million, up 37 percent from prior year.

We shipped 15 da Vinci Surgical Systems ending the quarter with 192 da Vinci systems installed worldwide.

We grew recurring revenues to 7.7 million, up 98 percent from prior year and we improved our gross margin to 55.9 percent from 51.2 percent last year.

We completed the heavy lifting portion of the merger integration process and still continue to drive procedure growth and improved nearly every functional element of our business in the process.

We absorbed 3.7 million in merger transition expenses and purchase accounting charges in the quarter.

We lost 3.4 million compared to 6.5 million last year.

We paid off 7.1 million in accounts payable and severance expenses associated with the CMI merger and ended the quarter with 35.4 million in cash, down 7.4 million from last quarter.

That concludes today's call.

We thank you for your participation.