直覺手術 (ISRG) 2003 Q4 法說會逐字稿

Thank you for holding at this time.

I would like to inform all parties that your lines will be in a listen-only until the question-and-answer segment of today's call.

Also, I would like to inform all parties that today's is being recorded; if you do have any objections you may disconnect at this time.

I would now like to turn the call over to Mr. Ben Gong, Vice President of Finance and Treasurer.

Thank you sir you may begin.

Hello and welcome to Intuitive Surgical's Fourth 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 website 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 website.

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

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

Susan will follow with the review of our fourth quarter and full year 2003 financial results then I will follow with the financial forecast for 2004, next Aleks will discuss sales, marketing and clinical affairs and finally we will host a question-and-answer.

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

Thank you, Ben, and we thank each of you for taking the time to join us for today's conference call.

Highlights for the fourth quarter as follows.

Total revenue grew to $27.6m up 30% from prior year and 18% from prior quarter.

Recurring revenues grew to $10.1m up a 107% from prior year and 28% from prior quarter comprising 37% of total revenue.

We shipped 18 da Vinci Surgical Systems and 11 fourth arms ending the quarter with 210 systems worldwide.

Our financial metrics continued to very strong.

Aesop, the $6.1m non-recurring charge we took in the quarter related to write off and impaired assets associated with the Computer Motion merger and the settlement of the Brookhill-Wilk patent litigation.

Our gross margins improved 5.2 percentage points over the fourth quarter of 2002 before these non-recurring charges.

We generated net income before non-recurring charges of $1.2m compared to the fourth quarter loss of $2.6m last year.

We ended the quarter with $114m in cash.

This cash position included net proceeds of approximately $78m from our follow on offering this past November.

In the fourth quarter, we essentially completed the consolidation of the Computer Motion acquisition, transferring information, knowledge and know-how, moving people, products, and operations, communicating our direction to our customers and working to find situation specific solutions.

We transitioned a significant number of people out of the organization, and continue to grow and sustain the performance of our company while continuing to control operating costs.

We met our goal to complete most of the heavy lifting in the third quarter and complete the remaining work in the fourth quarter.

We've significantly exceeded the 18m annual operating cost savings we estimated in [S4].

Susan will give you additional details later.

In fact, total full year 2003 operating expenses including incremental Computer Motion expenses and integration costs were up just 3% compared to 2002.

We will close all remaining Computer Motion operations in Goleta by the end of this quarter.

We continue to experience excellent procedure growth.

As I mentioned last quarter, the da Vinci Prostatectomy, DVP is fully classic and predictable adoption curve driven by clinical outcomes and patient demand.

Henry Ford Hospital in Detroit purchased the second system to meet the growing demand for minimally invasive prostate surgery at the Vattikuti Institute.

Dr. Menon estimates that their DVP annual run rate will approach 800 within 12 months of opening the second robotic operating room.

But this is not just the Henry Ford story.

This procedure has become an attractive treatment alternative for men with prostate cancer, a career and practice builder for surgeons, and a significant revenue generator for hospitals.

I'll share just two examples, at St. Vincent's Hospital in Birmingham, Alabama Dr. V. Patel performed 30 DVPs this past December.

While the most impressive things about this accomplishment is Dr. Patel is a very young surgeon, just 18 months out of his fellowship and he is already one of the leading prostate surgeons, if not the leading, in the Birmingham market.

He is quite confident that he is not only taken market share with the DVP procedure, but believes that he has also expanded the surgical market by attracting patients that would have selected radiation therapy if a minimally invasive surgical option had not been available.

He says the younger patients who are highly concerned about potency, are opting for this surgical approach.

Surgeons in Methodist Hospital in Indianapolis reported that their DVP volume grew by 70 patients in the first year, ending the year with an annual run rate of just under 200.

Length of stay was reduced by more than one day.

Blood transfusions were nearly eliminated.

Full patient care costs were reduced by just under $140,000 and hospital revenue increased by approximately $800,000.

This procedure is now being performed at community hospitals across the country as well as large academic centers.

In the Cardiac segment, the early growth pattern of MVST, coronary artery bypass.

MVST is short for multi-vessel small thoracotomy, which is performed under our thoroscopic clearance, is very similar the one we saw in early stages of the development of the DVP procedure.

It's still too early to predict that we have other classic adoption curve underway, but the early numbers are encouraging.

This is a very attractive procedure for the patients in terms of pain, length of stay, cosmetics, and recovery time.

At The Society of Thoracic Surgeons meeting in San Antonio this month, Dr. Mani Subramaniam, Chairman of the Department of Surgery at Lenox Hill Hospital in New York City made a presentation entitled robotically assisted multi-vessel bypass paving the way to our outpatient [carriage].

His results were excellent and Aleks will cover them in more detail later in this presentation.

This procedure has significant momentum beyond the academic centers.

Dr. Roxanne Newman in Fargo, North Dakota and Dr. Sudhir Srivastava in Odessa, Texas, have demonstrated the potential of MVST in small and more rural markets.

Both Doctors Newman and Srivastava are drawing patients well beyond their traditional market boundaries.

Mitral valve repair continues to show very steady triple digit growth over prior year.

And centers offering this procedure are also drawing patients across multi State boundaries.

We believe the adoption of our technology will be driven procedure by procedure.

Starting with those procedures in which we currently provide compelling surgical capability.

We are committed to identifying and driving the full adoption of those procedures while expanding the surgical capability of our products, so that their use becomes increasingly compelling in an ever larger number of surgical procedures, for the patient, for the surgeon, and for the hospital.

We completed a 83.4m follow-on offering in November netting $78m to our balance sheet.

We continued to grow our sales organization focusing most of those resources on procedure support and growth.

We deeply believe that long term system growth, is dependent upon procedure growth.

We have seen increased strength in Europe and other overseas market and we are in the process of qualifying new distributors to service unserved markets outside the United States, and Europe.

Product operations continued to drive cost and cycle time reductions during the quarter, while achieving product quality, delivery and service performance goals.

In January, we filed our cabbage 510(K) and announced that we had settled the Brookhill-Wilk patent suit.

This settlement brings to closure our last outstanding patent dispute and adds several patents to our portfolio at a price that is approximately equal to or less than the cost of going to trial.

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

Thank you, Lonnie.

As Lonnie has already mentioned Intuitive had a strong fourth quarter particularly in recurring revenue performance.

Summarizing this quarter's key financial metrics, we realized record revenue of $27.6m, up 30% from our fourth quarter of 2002, and up 18% sequentially from the third quarter of 2003, our previous record high quarter.

We grew recurring revenue to $10.1m, up 107% over last year, and up $2.2m or 28% sequentially over the third quarter of this year.

Our fourth quarter net loss totaled $4.9m without the ease up in Wilk charges of $6.1m we earned fourth quarter net income of $1.2m compared to a net loss of $2.6m reported during the fourth quarter of 2002.

We have significantly exceeded the anticipated annualized Computer Motion integration cost reduction synergy of $18m.

We ended the quarter with $113.8m in cash up $78.4m from last quarter reflecting the proceeds from our recent follow on stock offering.

Total fourth quarter revenue increased to $27.6m increasing 30% from the $21.1m for the fourth quarter of 2002.

Higher sales were driven by continued recurring revenue growth and fourth surgical arm shipments.

Fourth quarter 2003 sales increased in all product categories.

Compared to fourth quarter 2002, system revenue increased from $16.3m to $17.5m, instruments and accessories increased from $3.1m to $6.1m and service and training increased from $1.7m to $4m.

Our recent quarters have enjoyed consistent growth in our recurring revenue comprised of instruments, accessory, service and training revenue.

However, this fourth quarter recurring revenue really broke out with a unprecedented $2.2m or 28% sequential growth compared to the third quarter of 2003.

We reached a milestone during the quarter as recurring revenues surpassed the $10m mark.

Fourth quarter 2003 recurring revenue totaled $10.1m up 107% over the prior year.

Recurring revenue comprised 37% of total sales up from 23% during the fourth quarter of 2002.

We are delighted with our recurring revenue growth and in fact our recurring revenue continues to increase as a percentage of our total revenues.

This is a confirmation that our customers are utilizing our da Vinci system on a regular and increasing basis.

We shipped a record 18 da Vinci Surgical Systems during the quarter, 12 in North America, 3 in Europe and 3 in the rest of the world.

The 18 [units] shipped were up one compared to 17 units shipped during the fourth quarter 2002.

We now have cumulative placements of 210 da Vinci systems, 148 in North America, 47 in Europe and 15 in the rest of the world.

Fourth quarter 2003 system revenue was again bolstered by contribution from our fourth term upgrade to the da Vinci platforms.

We shipped 11 fourth arm units during the fourth quarter, 9 of these fourth arms went out with new system shipments, about 2 were sold as upgrades to previously installed systems.

During the quarter we recorded $1.5m of sales from computer motion products compared to $1.3m during the third quarter of 2003.

We shipped 11 Aesop systems during the fourth quarter.

Our full year 2003 sales totaled $91.7m up 27% compared to $72m for the fiscal year 2002.

Higher sales were again driven by continued recurring revenue growth and fourth surgical arm shipments.

During the 2003, the company launched and sold 37 fourth arm. 2003 recurring revenue increased 90% to $29.9m from 15.7m in 2002 representing 33% of 2003 total revenue compared to 23% in 2002.

Regarding the non-routine charges, during the fourth quarter we recorded certain non-routine charges associated with the CMI eSoft related assets and the Wilk settlement.

Specifically, we fully impaired to cost of sales the remaining $3.2m in intangible asset balance related to the eSoft developed technology.

We charged 2.2m to cost of sales for excessive eSoft inventory and we fully impaired to SG&A the remaining $200,000 intangible asset related to eSoft trademark.

The eSoft related charges resulted from lower revenue forecast for the eSoft business compared to those assumed at the closing of the acquisition on June 30, 2003. eSoft will continue to be a part of the Intuitive product offering going forward and we are currently looking at ways to improve upon our forecast with cost effective methods to market, sell, and service these products.

Regarding Brookhill-Wilk, we are pleased to settle this ongoing lawsuit and remove this distraction and risk from our business.

The overall settlement was $2.6m, which we paid in January 2004, based upon the expiration dates of the patterns involved, we charged $600,000 to fourth quarter 2003 cost of sales and will amortize the remaining $2m into cost of sales on a straight line basis over the next 6 years.

Full fourth quarter 2003 impact of the eSoft and Wilk charges was $6.1m, with 5.9m to cost of sales and 200,000 to SG&A.

As indicated in today’s press release, cost associated with customer training, previously captured in SG&A have been moved to cost of sales.

Although there is no change to the net income of prior period's financial results, these items have shifted classifications.

Fourth quarter 2003 cost of sales included $1m of customer training cost that would have been charged to SG&A under previous treatment and our prior accounting periods are now being presented on a basis consistent with this treatment.

The amount shifted between SG&A and cost of sales were 911,000 in Q4, 2002, 755,000 in Q1, 2003, 859,000 in Q2, 2003, and 923,000 in Q3, 2003.

As a result, gross margins now being reported are about 4% lower than originally reported in each of the previous fourth quarters.

Reclassified quarterly income statements will be published in our upcoming 10-K.

We have thoroughly analyzed our revenue elements based upon EITF 00-21 guidelines and we believe that this reclassification is the correct accounting for our current business practices.

Excluding the impact of the eSoft and Wilk charges, fourth quarter 2003 gross margins percentage increased to 55.9% compared to 50.7 for the fourth quarter of 2002.

Improved 2003 gross margin was driven by lower product material cost, improved product reliability, and continued leverage of the service organization across a larger base and installed system.

In addition, gross margin in the fourth quarter was favorably impacted by euros denominated sales as the euro strengthened considerably against the U.S. dollars.

Total operating census for the fourth quarter 2003 was $15.1m, up 1.4m compared to the fourth quarter of 2002 and down 600,000 sequentially compared to the third quarter of 2003.

On a full year basis, total operating expenses increased just 3% to 56.3m in 2003 from the 54.1m in 2002.

I am pleased to remind everyone that this is a very modest 2003 increase, was achieved by absorbing incremental Computer Motion cost, merger transition cost, intangible asset amortization, and growing sales of 27%.

This performance evidences our company's outstanding job in integrating CMI and overall increase productivity across the organization.

Upon closing the Computer Motion acquisition, we set a target of 18m and analyzed cost reduction synergies.

As a point of reference CMI's first quarter 2003 annualized operating expenses without litigation cost was $33.6m.

Our annualized operating expenses have increased approximately 5.6m over last year.

Based on this analysis we have eliminated approximately $28m from the combined operating expenses of both companies.

We ended the year with 325 employees, down 34 from the previous quarter and reflecting roll off of Computer Motion transition employees during the fourth quarter.

Other income was approximately $800,000 for fourth quarter 2003 compared to 400,000 in fourth quarter 2002.

The increase was due in large part to favorable foreign exchange rate gain realized on transactions denominated in euros.

Excluding the non recurring Aesop and most charges I described earlier, our fourth quarter 2003 net income was $1.2m or 4 cents per share compared to a net loss of $2.6m or 14 cents per share during the fourth quarter of last year.

On a GAAP basis including all known non-recurring charges and CMI integration costs our fiscal year 2003 net loss was $9.6m or 41 cents per share compared to $18.4m or $1.01 per share for 2002.

We know however, that the non-recurring charges and transition charges related to the Computer Motion acquisition in the third and fourth quarters of 2003 exceeded our total $9.6m GAAP losses.

We ended the quarter with $113.8m in cash up $78.4m from the previous quarter-end.

The increase resulted from the proceeds of our follow-on stock offering closed during the quarter.

Apart from this transaction we were cash neutral during the fourth quarter 2003.

Our quarter-end accounts receivable balance of $26.8m was up $3.2m from the previous quarter-end primarily reflecting higher fourth quarter sales.

We ended the quarter with an average day sales receivable outstanding of 87 days about equal to the previous quarter.

Ending fourth quarter net inventory was $8.8m down $4m from the previous quarter-end.

The decrease was due in large part to the $2.2m Aesop charge I described earlier plus reductions resulting from higher fourth quarter sales.

Our year-end 2003 inventory balance is approximately equal to our year-end 2002 balance. [inaudible] it's increased quarterly revenues our annual inventory turns improved to 5.5 from 3.3 ending the previous quarter.

Finally we ended the fourth quarter with $12.5m of differed revenue compared to $10.1m ending the third quarter 2003 and $4.8m ending 2002.

This build-up is an indication of growth in our service contract business and overall business momentum.

That said I'd like to turn over to Ben who will provide us summary of our financial forecast for 2004.

Thank you Susan, here our view for 2004.

First of all, we expect to be profitable for the year.

Regarding revenue we expect overall sales to grow between 20-30% over 2003 levels.

The current revenue will continue to grow at a faster rate than system sales.

Specifically, we expect instrument and accessory revenue will increase approximately 50% over 2003 and we expect service and training revenue will increase approximately 80%.

Regarding gross margin as Susan described earlier customer training cost are now being classified as cost of sales.

As a result our gross margin are approximately 4% less than we had previously modeled.

We do expect continued quarterly improvement in gross margins throughout 2004, steadily increasing from our current level of 56% up to approximately 60% in Q4 of 2004.

We forecast full year operating expenses to increase by 10-12% over 2003 operating expense of $56m.

In addition as Lonnie described earlier we plan to shutdown the Goleta facility at the end of the first quarter.

As a result we expect to book a charge of approximately $500,000 during the first quarter of 2004 to reflect, employees severances and cost to exit for the leased facility.

All ongoing intangible asset amortization and remaining purchase accounting charges are included in our 2004 forecast.

The following is a summary of our anticipated 2004 amortization, CMI core technology, inventory valuation, and the Wilk royalty will impact cost of sales by approximately $300,000 per quarter.

Our Hartford patents, other CMI intangible assets, and deferred compensation will impact operating expenses by about $300,000 per quarter as well.

In addition, we expect to record, approximately $1m in depreciation per quarter.

Again these items were all included in the overall forecast for 2004.

Once again we expect to be profitable in 2004.

Our short-term investments currently earn 2-3% per year.

We anticipate a 10% effective tax rate for 2004.

We estimate first quarter average shares for EPS calculation to be approximately 33.2m shares, and increasing approximately 100,000-200,000 shares per quarter.

Finally we expect to be cash flow positive in 2004.

And 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, Ben.

As mentioned earlier during the fourth quarter, we shipped 18 da Vinci systems, 12 in the US, 3 in Europe, and 3 to rest of the world locations. 11 systems were sold to community hospitals, while seven were placed within University Medical Centers.

Of these 18 placements, several were notable, included were the University of Washington, UCLA, University of Minnesota, University of Kentucky, and Henry Ford Hospital.

The sales to the University of Minnesota and Henry Ford Hospital represented second system placements.

This brings to 17 the number of centers with 2 or more da Vinci systems.

Also the University of Minnesota will become the newest multi-specialty da Vinci training center in the United States.

During the quarter, we shipped 11 fourth arms, 9 as pre configured four arm da Vinci systems and 2 as upgrades to existing customers.

Bringing the total number of fourth arm systems to 37.

We anticipate solid demand for fourth arms going forward with the mix for new four arm da Vinci systems continuing to outpace the demand for upgrades to existing systems.

In the fourth quarter we completed 5 Zeus da Vinci conversions.

This makes a total of 8 Zeus trade outs over the past 2 quarters.

To take advantage of funds available in the new capital budget cycle, we anticipate continuing with the Zues trade out program through the first quarter.

It would be our expectation to trade out an additional 3-5 Zeus systems during the quarter.

Now to procedures as you can see from the instrument and accessory revenue line, Q4 was a very robust clinical quarter.

Our overall procedures continue to grow at a very brisk rate, but more impressive is the growth within our target procedures, most notably the da Vinci Prostatectomy, DVP, multi-vessel small thoracotomy bypass or MVST, and the da Vinci mitral valve repair.

As far as DVP we currently have over 85 medical centers performing it worldwide, with at least one new center being added each week.

And our same store sales led by both neurologist gaining access to existing systems and existing physicians expanding their prostate cancer practices is impressive.

During the quarter we had another urology only customer purchased a second system specifically for DVP.

Henry Ford Hospital in Detroit, Michigan, which performed over 360 DVPs in 2003, anticipates performing over 500 in 2004.

This level of increased usage has made the acquisition of a second da Vinci necessary.

We continue to see impressive growth in most of our hospitals across the country, for example, City of Hope National Medical Center located in Los Angeles, California has performed over 125 DVPs for first six months of only of da Vinci.

What makes this number so impressive is that City of Hope is one of the nation’s busiest LRP or traditional laparoscopic prostatectomy centers.

Since the purchase of their da Vinci, City of Hope has moved a good deal of their would be LRPs to DVPs.

Dr. Timothy Wilson, Director of the Department of Urology and Urologic Oncology, described how operating with da Vinci is far more ergonomic and comfortable than operating with traditional laparoscopy.

So much so that Dr. Wilson can now perform as many as 3 DVPs in a single day rather than the two LRPs, which he performed in the pre da Vinci era.

He is optimistic about da Vinci’s ability to create additional capacity within this very busy department.

Two leading indicators for the vitality of DVP are surgeon request for procedure training and request for physician [practors].

During the fourth quarter the demand for both was at an all time high.

We remain encouraged that this trend will continue in upcoming quarters.

Now turning to cardiac surgery, we continue to show strong momentum within our target procedures, MVST and the da Vinci mitral valve repair.

The awareness within the cardiac community is beginning to expand.

We recently attended 3 cardiac conferences, New Era in Cardiac Surgery, Society of Thoracic Surgery STS and the STS Tech-Con.

There were several da Vinci presentations during the scientific sessions at these meetings.

At the New Era meeting Dr. Randolph Chitwood, Chairman of the Department of Surgery at East Carolina University, presented his most recent data on complex mitral valve repairs using the da Vinci surgical system.

Dr. Chitwood highlighted how he has evolved this technique to include even the most complex mitral valve repairs.

As these valves that 9 short months ago, would not have been candidates for endoscopic repair, are now becoming routine within his practice.

As Dr. Chitwood put it, there is very little that cannot be done with da Vinci when it comes to repairing the mitral valve.

Also at the New Era, were presentations given on totally endoscopic CABG, cardiac tissue ablation, and lead placement for biventricular pacing, all incorporating to da Vinci system.

At the STS Tech-Con, the first half of the morning session was devoted specifically to robotic procedures.

Dr. Roxanne Newman, a cardiac surgeon from MeritCare Hospital in Fargo, North Dakota, presented the results of her first 30 MVST patients.

During her presentation she described how she initially performed small thoracotomy procedures on only selective patients with one and two vessel disease.

As she moved down the learning the curve, she began performing MVST on three and four vessel disease.

The [inaudible] patency equivalency rates between her MVSTs and her sternotomy based beating heart bypass patients.

What makes this even more impressive is that Dr. Newman is an experienced OPCAP surgeon who has performed over 700 beating heart procedures through a sternotomy incision.

The early MVST data is encouraging.

Also at the STS Tech-Con, Dr. Gerhard Wimmer-Greinecker from Frankfurt, Germany presented the world’s first totally endoscopic beating heart bypass using da Vinci in conjunction with an automated Anastomotic Device, in this case the da Vinci magnets.

The promise of automated anastomotic devices has been slow to form, however there appears to be clinical progress within this category and we look forward to working with both the surgeons and the company’s within this emerging area.

One of the highlights of the STS was the General Surgeons presentation entitled Robotically Assisted Multi-Vessel bypass, paving the way to outpatient cabbage, which was presented by Dr. Mani Subramanian from New York’s Lennox Hill hospital.

Dr. Subramanian presented the results from his first MVST -- his first 30 MVST patients.

Half of these patients were released from the hospital in less than 24 hours. 70% were released within 36 hours and all were released in less than 72 hours.

These results are truly impressive.

Needless to say the audience response to this presentation was extremely positive.

The results of this study were also accepted for publication in an upcoming edition of the General of Thorasic and Cardiovascular Surgery.

At our exhibit booth we featured a number of surgeon presentations focused on da Vinci mitral valve repair, MVST, and TECAB.

The attendance during this presentation was excellent.

With respect to the MVST, there were similar presentations within the Medtronic booth, which you may recall has partnered with Intuitive to drive MVST procedure adoption.

Intuitive and Medtronic are also working closely with the surgeon's at Lennox Hill who have established an MVST training program at their hospital.

The program kicks off this week and should help to drive this exciting new procedure.

We look forward to reporting on our progress with MVST during the upcoming calls.

With regard to the FDA, as Lonnie mentioned earlier, we recently filed our Form 5 10-K following our arrested heart TECAB trial.

As a reminder our trial was designed as a single vessel arrested heart totally endoscopic procedure.

At this point, there is very little to report.

We will await the questions from the FDA and hope to have more report in the near future.

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 might have.

At this time we are ready to begin the question and answer segment of the call.

If you do wish to ask a question, you may press "*""1" on your touchtone phone.

Again, that is "*""1" on your touchtone phone.

First question comes from Tom Gunderson with Piper Jaffray, your line is open sir.

Hi, this is Tim Nelson for Tom.

Could you talk about pricing for your components for da Vinci systems for the quarter, either the system or the fourth arm going to hold, was it higher or lower?

Hi, this is Ben.

The pricing for the da Vinci systems has been very stable.

We did have five trade-in, Zeus system trade-in and those did impact the average selling price.

So the five Zeus systems were included in 18, is that correct?

18, that's correct.

So we sold da Vinci Systems and in five of those cases we traded-in the Zeus system.

Okay.

If we think about 2004 can you help us think about how the -- seasonality may affect the year, will quarter -- will Q1 be light for instance or will Q4 be light?

So we expect the seasonality to be similar to what we've seen in the past and typically Q4 is our strongest quarter.

Q3 is usually our weakest quarter.

So we typically see you know Q1 is a little bit lower than Q4 and then Q2 is a little bit above that and then Q3 is a little bit below that.

Great.

That’s helpful.

Any sense at this point whether the capital environment in hospitals is translating to a tougher sale, or longer selling cycles for you guys?

A lot of our companies are struggling with -- there are equipment selling capital to hospitals these days;

I am wondering what you are thinking about that, and whether your selling cycles are like thing?

We hear a lot of that and clearly there is a lot of pressure on the hospitals.

We haven’t seen a huge difference.

Partially as -- you know -- as the products maturing a little bit out there, you know it's in the -- capital planning process, and two when the hospitals are prioritizing capital, they see this as, you know, minimally invasive surgery and driving further, further into minimally invasive surgery has been a key part of their future strategy to -- just to maintain if not grow market share and so we are positioned pretty well within their strategic priorities and we haven’t seen a significant amount -- I mean things are always shifting over quarter for us back and forth, but we also see a fair amount of donations, sharable [inaudible] supporting some of the acquisitions.

Great, and then finally was there any impact from the weaker dollar in the quarter, the overseas sales with that higher prices result?

Yes.

So what we saw our euro denominated sales that certainly helped and that I think, we mentioned that helped the gross margins a little bit by about a point actually, because we put our price quotations out there, and you know, the selling cycle is -- let's say could be 6 months and so when it comes through, it still comes through as that same euro price.

Right, so gross margin is probably up 1%.

Okay, great that’s helpful and then I guess the last question, as you think about 2004 and your recurring revenue stream, primarily instruments, is radical prostatectomy still going to be the big ticket item, the big driver or when we start to see meaningful mixes from the other procedures you talked about?

I think the outlook for 2004 would be to continue to see radical prostatectomy really climbing up the adoption curve, so it will be a strong driver in 2004, and I think that’s safe to say.

That’s right.

You can think about [F] shape curve, you know, we are just coming off the knees, so we are starting to see accelerated growth.

Yeah.

So that’s going to be 80-85%, would you guess?

No.

I would not guess.

We have, you know, we serve 3 principal markets; urology, cardiac surgery, and general surgery.

We are experiencing growth in all of them, but the fastest growth rate is definitely urology, and I think, that’s going to continue in 2004.

Okay great.

I will get back in queue.

Good quarter thanks.

Thank you.

Our next question comes from Bruce Jacobs.

And please state your company name.

Thanks.

It's Bruce Jacobs from Deutsche Bank.

I appreciate you have taken my question.

The first question is to follow on the last one.

Would you be willing to give us any data on how that procedure is broken down in the last quarter, among that 3 different pockets, your revenue?

Yeah.

I think that this is Aleks, Bruce.

The numbers were broken out if you looked at the 3 different pockets with urology, probably approaching 40%, and the cardiac and general surgery making up about pretty close to equal shares between them.

And then other specialties that make up the small remaining portions.

Okay.

That’s helpful.

Another question, if I could, the fourth arm sales, I think, this quarter, if I am thinking about it right, were about half of the systems that went out, had fourth arm, is that a reasonable expectation for systems shipment penetration in terms of fourth arms for 2004, was anything that made that number higher or lower?

Hi Bruce, this is Ben.

I think that’s pretty fair as in terms of what we expect to see in 2004.

Okay.

That helps okay.

And the -- you had been asked a question on the procedure -- on the ASPs and on the systems, I think, you said it was flat, is that true as well on the procedures also?

Yes, so maybe another way of saying that is, you know the growth that we saw in our recurring revenues, the instruments and accessories that’s directly in proportion to the growth that we're seeing in our procedures.

Okay that’s helpful and then Ben or Susan [whether] -- can you just remind us or at least remind me of how the economics on the robot trade out programs are working in terms of what you guys are getting and what benefits were given to customers doing the trade in?

We talked about before Bruce that we look at the purchase price of Zeus, we amortize it over 5 year period and we give that as a trade in.

We said that was about a 300 basis point average, get to margin and we’re right in that same zone.

Okay that’s helpful and then kind of and little bit of [inaudible] question, there was a study out just recently that was looking at beating heart procedures and it talked about the outcomes potentially being worse in terms of the longer term patency and I know, you know, right now you guys are looking at a rested heart, but presumably down the road the hope is that we have a totally endoscopic approach, which perhaps is on a beating heart.

I am just wondering if you have any comments on that study and I now forgotten which publication it showed up in but.

In the New England Journal.

Right.

No we did see that and I think the discussions that I’ve had with physicians that also read that study, quickly reminded me that were number of other studies that had been published out there that had different outcomes to their study.

So I don't know how we feel about it at this point, I think, there are a number of studies out there and we will continue to work closely with the cardiac community on that.

And if you notice in the New England Journal it did talk about our learning curve issues there that they are highlighting that over time when learning curve you might see different data.

Okay and last question just any update on the 5-millimeter instrument update before I leave you here?

For the quarter we expanded a few sites with the 5 millimeter and we are right now looking at a number of different sites in gaining our data, clinical data trying to optimize tip configurations but they are out there and they are being tested but there isn’t anything of financial materiality I think that we should look for in the 5 millimeters at this point I think.

Yeah the initial roll out was in pediatrics and we are expanding that a bit into [inaudible] surgery and spots just to – and we’d rather take just a step at a time.

There are some margin differences to the product early on and we are trying to pace that and understand and refine the product.

Okay, great.

Nice quarter guys, thanks a lot for taking my questions.

Our next question comes from Sheetal Mehta from Bear Stearns.

Your line is open.

Hi guys good afternoon.

Hi.

Wanted to push you guys a little bit on the unit sales.

You had 12 in North America, 5 were actually from trade-ins, can you talk to me a little bit about what’s going on in North American geography, you know are we seeing something substantially different than what you were previously seeing in that market place, because it seems like the rest of the world really kind of accelerated dramatically but North America was actually a little bit light if we strip out the trade ins.

Well you know I guess I’d make a couple of comments.

Yeah it's been flat and you know are we pleased with that?

No.

I don’t think though that we are seeing anything significantly different.

One the trade outs take just as much time if not more to -- in the selling process than there with a new sale partially just because they have a system, they paid money for it and this is a bit of a decision to now spend more money to have a system and so we go through a fairly extensive process in those trade outs, but the demand we believe as I said is going to be driven by procedure growth and as the credibility citizens are pretty conservative group and as data gets published showing the benefit both to the patient as well as the surgeon in the hospital you know adoption grows.

We have the pipeline, I’d say you still its looks very strong; we’ve got a good deep pipeline.

We did make some changes in the eastern part of the United States in terms of our sales organization and I believe those were, that there is a bit of cost to that, we have some young, we just had a class graduate of sales people who are expanding sales organization, a lot of them are young, it will take a little time for them to get on the street and build the leads, but it’s a -- the pipeline look solid and I don’t really see anything fundamentally different than its been in the past.

We would -- we do want drive growth in the U.S. as well as in the forward market zone.

Sure.

The only thing I would say on that Sheetal in terms of fundamentals is that, this 50% fourth arm configuration that we talked about earlier that this has an ever-increasing growth and partly in the fourth arm business as well into those markets.

So while the units in North America are flat, you have to [inaudible] growth.

Just quickly following up on that.

How large is your sales force now and how many are you adding and what do you think the learning curve is for these young new go-getters?

Good, I'll give you some rough numbers.

I think that’s the way we kind of described in the past.

We have about 17 let’s call them Sales Managers out there and in the United States and those folks are focused on selling systems and then we talk about the folks that are Account Managers who are supporting those systems out there and just about twice as many Account Managers, as there are the system sales folks and in addition to that, we have other folks in the field who are providing this service for the systems and training.

And how many are you adding in the learning curve?

It takes about six months to get effective in the territory.

Okay.

We will fill the Area Sales Managers in incremental numbers, they won’t double over the next year, they will add a few a quarter and their growth will be as Lonnie mentioned earlier we the coverage once our system is sold to help drive procedures is where two-thirds or more on the sales field is focused.

Organizationally if we split the country into two in the East and West and created a Vice President Sales for the East and the West.

Okay.

As well and we do continue to expand you know our distribution networks as well.

Okay.

But -- the class this time I mean [inaudible], major chain.

I don’t have that on the top of my head.

To make sure clinical or account managers and area sales managers.

In U.S. and [O.U.S.], distributors [O.U.S.] too.

I know you guys recently made some changes to your European sales efforts, and they seem to have really shown through this quarter, are you expecting this type of strength as we go into the -- as we are into 2004 now as well?

We expect 2004 strength in Europe, our historically the fourth quarter in Europe has always been our strongest.

But we expect it to be clearly, the pipeline is good there and static and we got a [continuity] that we did not have in the past and just had it at German sales manager, we didn't, we had an open territory there.

Okay great.

Couple of quick questions to follow up, first, can you talk about your share account, why is it going up so much sequentially, you are adding about 3m shares per quarter which was --?

No.

I am sorry.

But let me clarify.

Okay.

For EPS purposes, you have to remember that Q4 was a mix quarter in terms of the added shares came in, in November, so EPS purposes may be it was only less than 31m shares, but we actually end up with something closer to the 33m.

So, when I say that we have for EPS purposes for Q1 around 33.2m shares, that just kind of reflects that where we are today.

Okay, that's great.

And then finally you guys reported a pretty good profitability in fourth quarter shipping out to one timer, are you expecting that profitability will continue in the current quarter, i.e., first quarter.

Well, did you get some guidance that we are going to be profitable for the year and you are going to have to factor in some of that seasonality that we talked about earlier.

Okay, alright thanks so much.

Okay.

We will take one more question and then close.

Your next question comes from Charles Cerankosky (ph.).

Please state company name, sir.

Yes McDonald Investments, good afternoon.

Hi, Charlie.

Couple of things.

Ben, during your last conference call you talked, you mentioned that in the fourth quarter you are going to have $1m in merger related costs and I am sure at that time you weren't envisioning, you did the Brookhill-Wilk or eSoft write-downs.

Was that 1m that you are anticipating related to closing Goleta in the fourth quarter and that just slipped into the first quarter?

No those are, Charlie, it's Susan -- those are just the amortization costs that Ben was talking about earlier.

Okay.

We accelerated some of those amortization by the 5.9m write-off in the 200,000 write-off.

But most of those were just things that as he talked about on a go forward basis where you see some of that going into COGS and in the next year as well.

Okay as far as, I think, it was also the last conference call we were talking about looking Zeus trade ins, I think that the number was something in the neighborhood of 40 Zeus systems in the field.

You know a third of which were what we call active, a third of which were somewhat active, and a third of which were not active.

Of these 8 trade ins that have occurred so far, can we assume that most if not all those were active sites meaning that the trade ins will probably taper off as we go into '04?

Yeah that’s absolutely correct and as we rolled out of Q4 into Q1, and I think Lonnie indicated earlier the Zeus trade out I think the way you want to view that is, it is an absolute selling activity that takes a lot of time and requires on the hospital's part a fair amount of money and so Q1 opens up a new capital budget cycle and we see running through Q1 this program, and we would probably anticipate the same 3-5 number for Q1 and all of those forward in the active bucket.

Okay.

But we are getting, I think, we are getting down to the last ones that are likely to trade out and we did -- and we will end the program.

Okay.

So if they don’t get on now, they won't get on.

When you talk about trend [inaudible] by year end and in the capital budget cycle and their availability made it that's extended a little longer than we want it, but it's not going to continue.

And one final question I guess, Tim, started off with the question regarding the capital equipment in the hospitals and their willingness to purchase, etcetera, if it's got more difficult.

I am curious if now that Computer Motion and the noise associated with them being in the marketplace now that’s kind of gone, are you seeing a different complexion in the market actually that’s favorable for you that there is not that incremental noise from a competitor or is that not really had that much of an impact favorably.

I think its cuts both ways, one there was another sales force out there creating awareness and driving system sales and quite often as history shows, we ended up getting that sales so we have lost that.

On the other hand there is not confusion in terms of different messages and so that’s a benefit.

I would say net it's pretty neutral.

Okay.

That’s all I had thank you.

Thank you, Charlie.

That’s our last question.

Let me just close with a summary of the highlights.

We did record 27.6m up 30% from prior year.

We shipped 18 systems ending the quarter with 210 systems installed worldwide, ship for 11 fourth arms.

We experienced strong procedure growth, we recorded recurring revenue of up $10.1m up a 107% from prior year, we improved our gross margin by 5.2 percentage points over the fourth quarter of 2002, we generated net income before non recurring charges of $1.2m compared to the fourth quarter loss of $2.6m last year, we completed an follow on offering, that netted $78m and closed the quarter with a $114m in cash, we completed the integration of Computer Motion and eliminated $28m in operating expenses, we settled the last outstanding patent dispute, and we continued to improve nearly every major element of our business, in the process.

We want you to know, that we remain committed to growing our business, within realistic financial constraints focusing on the vital few things that will truly make a difference in driving future products investment priorities based upon clinical need and economic return.

Our priorities remain, number one, superior products and service; two, profitability, and three, results driven company culture, which major ourselves by accomplishments.

That concludes today's call.

We thank you for your participation.