直覺手術 (ISRG) 2004 Q1 法說會逐字稿

Hello, and welcome to today's conference.

All participants will be on listen-only until the question and-answer section.

If you would like to ask a question, please press star 1.

This conference call is being recorded by the request of the company.

Now I would like to turn the conference over to your host, Mr. Ben Gong, Vice President of Finance and Treasurer.

Sir, you may begin.

Thank you.

Hello and welcome to Intuitive Surgical's first 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, www.intuitivesurgical.com on the audio archives section in our Investor Relations page.

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

Today's format will consistent of providing you highlights of our first quarter as described in our press release released earlier today followed by a question and answer session.

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

Susan will follow with a review of our financial results.

And I will follow with the financial forecast for rest of 2004.

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

And thank each of you for taking the time to join us for today's conference call.

Highlights for the first quarter is as follows.

During the quarter, total revenue grew to $27.1 million, up 41% from the prior year.

Recurring revenue grew to $12.5 million, up 125% from the prior year, comprising 46% of total revenue.

We shipped 14 da Vinci Surgical Systems and 11 fourth arms and ended with 224 cumulative systems sold worldwide.

While we were disappointed in our U.S. da Vinci system placements in the quarter, we are pleased with our revenue growth.

Our gross profit margin improved to 58.5% from 50.6% in the first quarter of last year.

We generated net income of approximately $900,000, or 2 cents per share, compared to a net loss of $2.3 million, or 12 cents per share last year.

Cash operating income, or EBITDA, which is operating income plus noncash expenses for the quarter grew to approximately $2.1 million, compared to a negative $1.9 million in the first quarter of last year.

We ended the quarter with approximately $116 million in cash, up from $113 million in the December 2003.

During our last conference call, we reported that we would close down all operations in Galeda by the end of first quarter.

We completed the shut down in March and took a charge in the quarter of $700,000.

This should be the last nonreoccurring charge related to our acquisition of Computer Motion.

Turning to procedures, we continue to experience excellent growth in procedures led by urology and cardiac surgery.

The da Vinci Prostatectomy, DVP, procedures again came in above our projected growth curve.

As we mentioned last quarter, this procedure has become an attractive treatment alternative for men with prostate cancer, a career practice builder for surgeons, and a revenue generator for hospitals.

We are finding that when patients are aware of this minimally-invasive option, it is their procedure of choice.

In the cardiac segment, we continue to see steady and significant growth in da Vinci mitral valve repair and da Vinci multi-vessel small (inaudible) by pass, MVST procedures.

The growth pattern in both mitral valve repair and MVST procedures continue to mimic the adoption curve we've seen for DVP.

It is still early, but the numbers continue to be encouraging.

Similar to DVP, these are very attractive procedures for the patient in terms of pain, complications, length of hospital stay, cosmesis and recovery time.

As we had previously stated, we believe adoption of our technology and products will be driven surgical procedure by surgical procedure, starting with those procedures where it currently brings and provides compelling surgical capability.

We are committed to identifying and driving those procedures while expanding surgical capabilities so that its use is compelling for the patient, the surgeon, and the hospital in an ever larger number of surgical procedures.

We continue to focus the majority of our field resources on procedure support and growth.

We believe that long term, system growth will be driven by procedure growth.

Jerry McNamara, our Senior Vice President of Worldwide Sales, and his sales team are focused on driving our high value procedures and reinvigorating U.S. systems sales growth.

Their efforts to date have been focused heavily on people, process, and sales force incentives.

We have seen increased strength in overseas markets, and we continue to qualify and add distributors to support markets outside the U.S. and Europe.

In Japan, we have moved to a direct sales organization.

We are now directly pursuing regulatory approval in Japan, and while we do not anticipate many sales in Japan in the near future, we did sell our first direct system in Japan during the first quarter.

I am pleased to announce that tomorrow, Frank Wynn [phonetic] will join our company as VP and General Counsel.

Mr. Wynn comes to us from Microvision where he served as Director of Intellectual Property and Patent Counsel and brings nearly two decades of robotic engineering and legal experience.

We remain committed to managing within realistic financial constraints, focusing on the vital few things that will truly make a difference, and driving future product investment priorities based upon clinical need and economic return.

Our priorities remain, first, superior products and service.

Second, profitability.

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

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

Thank you, Lonnie.

As Lonnie has mention, we enjoyed strong first-quarter 2004 financial performance, particularly in the area of recurring revenue growth.

Summarizing this quarter's key financial metrics.

We realize total net revenue of $27.1 million, up 41% compared to our first-quarter 2003 revenue of $19.2 million.

We grew recurring revenue to $12.5 million, up 125% over last year and up $2.4 million, or 24% sequentially, over the fourth quarter of 2003.

We return to profitability this quarter with net income of $900,000 or 2 cents per diluted share, compared to a net loss of $2.3 million, or 12 cents per share last year.

Intuitive generated approximately $2.1 million in cash operating income, or EBITDA, for the quarter, versus losing $1.9 million for the first quarter last year.

We ended the quarter with $115.8 million in cash, up $2.9 million from December, 2003.

Going into more detail, first-quarter revenue increased to $27.1 million, up 41% from $19.2 million for the first quarter of 2003.

Higher sales were driven by continuing recurring revenue growth and force surgical arm shipments.

First-quarter 2004 sales increased in all product categories compared to last year.

System revenue increased from $13.7 million dollars to $14.6 million.

Instruments and accessories increased from $3.6 million to $7.9 million.

And service and training increased from $1.9 million to $4.6 million.

During this first quarter, we enjoyed another period of strong recurring revenue growth.

Recurring revenue growth comprised of instruments, accessories, service and training revenue grew to $12.5 million, up 125% from $5.6 million during the first-quarter 2003.

Recurring revenue exceeded our expectation and jumped another 24% sequentially over our $10.1 million fourth-quarter 2003 total.

Recurring revenue comprised 46% of total first-quarter 2004 sales up from 29% during the first quarter of 2003.

We are pleased with our recurring revenue growth.

It reflects the fact that our customers are using our da Vinci system on a regular and increasing basis.

First-quarter 2004 system revenue was again bolstered by contributions from our da Vinci fourth arm sales.

We shipped 11 fourth arm units during the first quarter.

Nine of these units went out with new system shipments while two were upgrades to the install base.

This quarter we recorded $1.4 million in sales from Computer Motion products.

Essentially flat compared to $1.5 million, recognizing the fourth-quarter 2003 and $1.3 million during the third quarter of 2003.

We shipped 7 ESOP systems during the first quarter 2004.

First quarter 2004 growth margin percentage increased to 57.8% compared to 50.6% for the first quarter of 2003.

Improved 2004 growth margin was driven by lower product material costs, improved product reliability, and continued leverage of the service and training organizations across the larger base of installed systems.

We had only one Zeus trade-in during the first quarter, compared to five during the fourth quarter.

Total operating expenses for the first-quarter 2004 were $15.6 million, up $2.7 million compared to the first quarter of 2003, and up $400,000 sequentially, compared to the fourth quarter of 2003.

Fourth-quarter 2004 operating expenses included $700,000 charge to R&D for cost to close down the former Computer Motion site in Galeda, California.

These costs included employee severances and costs to exit the leased facility.

We have now completely closed down all former Computer Motion sites and have consolidated all operations into existing Intuitive facilities.

Also contributing to the increase in 2004 operating expenses were additional resources we added to support higher sales volume and to implement Sarbanes Oxley requirements.

We have also had higher product developments and sustaining engineering expenses due in large part to the cost of supporting products acquired from Computer Motion.

We ended the quarter with with 312 employees, down 13 from 325 in the end of 2003 reflecting the rolloff of Galeda-based employees.

Our total number of 312 employees is up 31, compared to 281 at the end of the first-quarter 2003.

Other income comprised mostly of interest income, was approximately $600,000 for the first quarter of 2004, compared with $800,000 for the first quarter of 2003.

First-quarter 2003 interest income included $500,000 of gains, realized on sales of securities.

Excluding the first quarter 2003 gains, higher first-quarter 2004 interest income was the result of interest earned on a larger cash balance.

This larger balance was due to our fourth-quarter 2003 stock offering.

Our net income was $900,000, or 2 cents per deluded share, compared to a net loss of $2.3 million, or 12 cents per share, last year.

We are very pleased with our first-quarter bottom-line result and our profitability momentum.

Now in regards to our balance sheet.

We ended the quarter with $115.8 million in cash, up $2.9 million from our year-end balance of $112.9.

The increase resulted largely from our net income plus noncash expenses of $2.7 million.

And $4.1 million of proceeds realized from option exercises and our employee stock purchase plan, offset by net reliability reductions of $3.8 million.

Our quarter-end accounts receivable balance of $27.3 million was up slightly from our year-end balance of $26.8.

We ended the quarter with average day sales receivable outstanding of 91 days, up about 4 days from the previous quarter.

Ending first-quarter net inventory was $8 million, down $800,000 from our year-end balance of $8.8 million.

This reduction reflects improvements in materials and production planning.

Finally, we end the quarter with $14 million of deferred revenue, up $1.5 million compared to $12.5 million at the end of last year.

This build-up is the result of growth in our service contract business.

And with that, I would like to turn it over to Ben who will provide a summary of our financial forecast for the remainder of 2004.

Thank you, Susan.

We were encourage couraged by our strong first-quarter financial results, and we expect to see continued growth through the balance of the year.

Regarding revenue, on our last call we indicated that we expected 2004 annual sales to grow between 20% and 30% over 2003.

Based upon our strong first-quarter recurring revenue results, we are now targeting our 2004 revenues toward the high end of this range.

On our last call, we also mentioned that we expected instrument and accessory revenue to grow at approximately 50% above 2003 levels.

We now expect instrument and accessory revenue growing by 80% over 2003, reflecting our strong growth in system utilization.

We continue to target service and training revenue growth at about 80% as indicated on our previous call.

Regarding gross margin percentage, our first quarter growth margins were only slightly impacted by Zeus trade-ins as we only had one for the quarter.

As we previously indicated, the Zeus trade-in program was available to customers through the first quarter.

We have officially put an end to the program.

There are, however, a few customers who are well into the trade-in process, but were unable to secure the necessary funding to complete their purchase during the first quarter.

We will honor the agreed-upon terms of the program and drive to completion these transactions during the second quarter.

We expect the second-quarter gross margin percentage to be about equal as the first quarter and we continue to expect margins to slightly exceed 60% by the end of this year.

As for operating expenses, we expect a slight decline in operating expenses from first quarter to second quarter since our first quarter included a nonrecurring charge of $700,000.

For the year, we continue to expect total operating expense to be approximately 12% higher then our total for 2003.

We expect to be profitable during each quarter of 2004.

We anticipate an effective tax rate of 7%, compared to 10% estimated on our last call.

Since we are now reporting net profits, our EPS calculations are based on fully diluted shares outstanding.

We estimate second-quarter average diluted shares for EPS calculations to be approximately 34.5 million shares.

And will increase approximately 200,000 shares per quarter for the balance of the year.

Finally, we made the decision to buy the building we are currently leasing as our main office and manufacturing facility here in Sunnyvale.

At this point we expect to close this transaction within the next few days at a purchase price of approximately $20 million.

Our current lease on the building was scheduled to expire April, 2007.

This purchase takes advantage of a relatively low real estate market today while eliminating future risks and distractions at the time our lease would have expired.

We take pride in our facility.

It is a great working environment and represents a showcase for our customers.

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

Thank you, Ben.

As mentioned earlier, during the first quarter we shipped 14 da Vinci systems, ten in North America, two in Europe, and two to rest of the world locations.

This brings to 224 the cumulative number of da Vinci placements. 158 in North America, 49 in Europe, and 17 to the rest of the world markets.

Of the systems placed this quarter, 12 were sold to community hospitals, while two were placed within University Medical Centers.

Of these placements, several were notable.

Included were the Mayo Clinic Scottsdale, the National Cardiovascular Center of Japan in Tokyo and State University of New York in Syracuse.

The sales to the Mayo Clinic in Scottsdale represent the second da Vinci system within the Mayo Clinic network and the sale to the National Cardiovascular Center to Japan represents the first direct placement of a da Vinci within Japan.

During the quarter, we had three additional second system placements.

St. Joseph's in Atlanta, Methodist Hospital in Indianapolis, and Aziendo Hospital in Grazendo, Italy.

The second unit to Aziendo is of strategic value as it represents a first dedicated da Vinci training center in the important Italian market, which to date has 19 da Vinci placements.

This now brings to 20 the number of centers with two or more da Vinci systems.

During the first quarter, we shipped 11 fourth arms.

Nine is preconfigured four arm da Vinci systems and two is upgrades to existing customers, bringing the total number of fourth arm systems to 48.

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

Now turning to procedures.

As you can see from the instrument and accessory revenue line, Q1 was Intuitive's most substantial clinical quarter to date.

The growth rates within our target procedures, most notably the da Vinci Prostatectomy or DVP, multi-vessel small thoracotomy by pass or MVST and the da Vinci multi-valve repair procedure continues to exceed our expectations.

With regard to DVP, our growth is being fueled by both new da Vinci sites that are focused on DVP and strong growth within existing DVP accounts.

We are experiencing growth within all customer segments.

Within university centers, community hospitals, domestic and international hospitals.

We are pleased with our continued progress within DVP.

It is our expectation that DVP market penetration as measured as a percentage of all prostatectomies will approach double-digit figures by year end.

Our leading indicators, which are same-store sales, new accounts opened, and demand for DVP training and proctors, remain strong.

Further, we anticipate additional momentum from DVP from this year's AUA Conference, which begins May 9th and will be held in San Francisco.

At this year's meeting, there will be a live DVP procedure transmitted from City of Hope National Cancer Hospital in Los Angeles to the show floor in San Francisco.

Also, for the first time, the AUA will be conducting three separate accredited robotic post graduate programs entitled, Introduction to Robotics, Robotics and Your Logic Oncology and Robotic Prostatectomy.

Over 10,000 surgeons are expected to attend this year's AUA, and we look forward to reporting on the highlights during our next call.

Now shifting to cardiac surgery.

The growth trends within our target procedures, MVST and da Vinci mitral valve repair remain strong.

As I indicated during the last earnings call, the awareness within the community for these two procedures continues to increase.

In this month's edition of JAMA, the results from the surgical management of arterial revascularization trial, also known as the smart trial, were published.

The studies showed compelling benefits for off-pump or beating heart surgery when compared to traditional on-pump (inaudible).

The trial was conducted as a prospective, randomized blinded study that included nearly 200 patients.

At the AATS, which was held in Toronto earlier this week, Dr. John Puskus of Emory University and the lead investigator of the smart trial, presented the results.

In this study, the Emory group concluded that off pump (inaudible) patients experienced less blood loss, less heart damage, and resumed normal activity sooner than the patients who had undergone traditional on-pump surgery.

In addition, graft patency and blood flow to the heart proved to be equivalent in the two-patient cohorts.

We believe this to be a step forward in the adoption of MVST, and we believe this for a couple of reasons.

First, the target surgeons for the MVST procedure is the surgeon who is performing off-pump (inaudible) procedures.

Secondly, as the pool of off-pump surgeons expands, so, too, will the demand for a less invasive method to perform an off-pump (inaudible) procedure.

MVST may prove to be the procedure that most aptly fulfills this objective.

Following Dr. Puskus' clinical study presentation, Dr. (inaudible), Chairman of the Department of Surgery at New York's Lennox Hill Hospital, presented his early experiences with the MVST procedure which concluded that half of their MVST patients were discharged from the hospital within 24 hours of surgery.

Seventy percent were discharged within 36 hours.

And all patients left the hospital in less than 72 hours.

We look forward to hearing more from the Lennox Hill group as their patient series expands.

One additional note from the AATS.

Dr. Camp Kerstein from the University of Iowa presented his da Vinci series, Minimally Innovative Oncological Section of the Esophagus.

Dr. Kerstein is among a growing number of (inaudible) surgeons to find da Vinci to be very enabling in the treatment of (inaudible), most notably cancer.

Earlier this month at the Advance Cardiac Techniques Symposium, or ACTS, in New York, both the MVST and the da Vinci valve repair procedure were featured promenantly.

The cardiac team at Lennox Hill Hospital, led by Dr. (inaudible), performed a live MVST procedure in front of a full auditorium followed by a presentation of Lennox Hill's most recent MVST results.

Both the live surgery and the accompanying clinical presentation were excellent.

Following the MVST procedure, Dr. Randolph Chitwood, Chairman of the Department Surgery at East Carolina University performed a live da Vinci mitral value of repair.

Dr. Chitwood, who is one of the world's most respected valve surgeons continue to praise the growing indications for da Vinci within complex mitral valve repairs.

Overall, we remain encouraged about the growing acceptance and clinical adoption of da Vinci within the cardiac surgery community.

The leading indicators, which I referenced during my DVP, are the same indicators we look for engaging cardiac surgery growth.

Our same-store sales within our existing da Vinci cardiac sites continues to grow, as does the number of new cardiac sites, but what may be the most telling indicator, demand for training, continues to be robust.

Last quarter, I reported that Lennox Hill was establishing the first MVST training program.

During the first quarter they ran six MVST training programs.

The increase demand for both MVST and da Vinci mitral valve repair training has led to the need for the establishment of additional training sites.

We have identified a number of potential sites and are working diligently to bring them up as quickly as possible.

We look forward to expanding da Vinci's role within cardiac surgery and will report on our progress in the upcoming conference calls.

With regard to the FDA, and specifically our arrested heart T-CAP trial, there is very little new to report at this time.

As you may recall, we filed a 510-K in Q1 and await comments from the FDA.

We hope to have more to report during our next call.

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

That concludes our presentation.

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

Thank you.

If you'd like to ask a question, please press star 1.

To cancel your question, please press star 2.

Once again, that's star 1 to ask a question and star 2 to cancel.

You will be prompted to record your name.

And our first question comes from Sheetal Mehta of Bear Stearns.

Good afternoon, guys.

Good afternoon.

A couple of questions.

I will try to keep them brief.

Can you talk a little bit about what's going on in the United States?

You said you were disappointed by the United States, I think, similarly in the fourth quarter we saw much more of a stronger -- a stronger contribution from the International market.

So can you talk a little bit about the dynamics you are seeing in the U.S. market and why you are disappointed with them?

Well, we are disappointed because we would like to see -- see better growth obviously.

I think that -- I think we are in the process now -- if you use Jeffrey Moore's model of an adoption curve, we are moving from the early adopters to the early majority.

And with that transition, a larger number of our systems are coming through the traditional capital budgeting process -- cycle.

That requires a transition for our sales organization as well in terms of -- of -- of how we sell and our focus on that cycle and driving the process.

The bad news is the transition is a little bumpy.

The good news is -- is that once you are in that cycle, it becomes more predictable and -- and you get a little better visibility and certainty in terms of the selling process.

I think that the other thing which I mentioned last quarter is we have also did a pretty major reorg in the Eastern part of the country.

So a lot of those people we've hired -- are in the process of hiring -- and continue to be in that process of hiring are just coming on.

A class of salespeople just graduated actually today from our sales training class, and, you know, then there is a process of somewhere between three and six months before they are really -- really producing.

So we've got some of that we are dealing with.

And time will tell just how effective our -- our selection process has been.

We have been very pleased with a couple of the new hires as -- were brought on and went through the last training class and have already started delivering results.

One the things that happens a little bit and this is not new but we are seeing more of it, possibility of leveraging them to the quarter in terms of looking for special deals and what we have done is shift into future quarters than to compromise the integrity of our pricing structure.

So we have, you know, we're are building this business for the long-term.

Right.

As we stated earlier, we fundamentally believe procedure growth will ultimately drive system growth, and so our focus is there.

We aren't anxious to place a bunch of systems and have them not used.

That's the worst thing that can happen to us because then we have -- we don't have decent reference site.

You run into -- into a brick wall.

So I have been -- everybody knows here -- [ LAUGHTER ] -- there is no question in this company that I expect us to continue to grow our system sales in the United States and in the rest of the world.

So if the team is heavily focused as I mention before on the people, the hiring process in terms of selecting really high performers that will deliver the results and removing those that will not deliver the results, and just providing the proper process in terms of refining the process and ensuring that once you have a process you are living -- you are following the discipline of that process.

Step by step.

And as I mentioned as we move from these early adopters to the early majority and then on to the later majority, we have got to constantly refine our processes to meet the needs of our customers.

Of course, the last is incentives, and we are focusing the organization heavily on what we call "high value" or "high value procedures."

Those are primarily prostatectomy, MVST, and mitral valve repair.

Okay.

Following up on that, as some of these new hires come on line do we expect to see reacceleration in the U.S. portion of the business or are you expecting that international will probably be a bigger contributor of system placements for this year?

Well, you know, Mya, that is certainly the reason we're doing this.

We expect to see growth in the U.S. market.

We also expect to see growth in the rest of the world.

So expect to drive growth in both areas.

Okay.

Just a couple of quick follow-ups.

First, can you assess what you think the steady straight growth is going to be on the service side -- on the service revenues.

We are going to anniversary later on the year the change in accounting.

So what do you think that study of growth is going to be?

And my last question for Aleks.

Can you just remind us what you think DVP penetration is currently?

And I think you said you will get into the double digits.

Are you talking about low double digits, mid-double digits.

Can you be a little more specific?

Thanks.

I will do the first part of the question.

Sheetal, this is Ben.

The good news about the service revenue is it is really predictable, and that's why when we predicted that it would be 80%, you know, growth year-over-year last year and we're seeing it again this quarter, it is very predictable.

No surprises there.

And, you know, I would expect we are going to give you reconfirmation again next quarter.

Sheetal, as far as DVP, I believe at the end of 2003, we had indicated we are at about -- at or about 3% penetration, and as of today, I don't think we are in a position to tell you -- tell you what that number is.

But the double digit that we are seeking is the very low end of double digits.

It is not to be interpreted at anything but that.

Sheetal -- let me -- have a little more clarity on that.

If we look at an adoption curve and the curve we are on trending right now, and (inaudible) S-shape curve and we have a very high correlation with that curve at this point in time.

It is about a seven-year adoption curve to take us into the 90% range.

Now, you never know the quick question in all these adoption curves is where is saturation, and, you know, assuming the saturation though that most open prostatectomies will move to minimization prostatectomies.

I believe that is a safe assumption.

That is the curve we are on.

The acceleration of most of that -- you are slow on the front end and slow on the back end and most of acceleration occurs in the mid-range of that.

I think that the question as we drive -- as we move open prostatectomy to minimization prostatectomy, the next step is, of course, is what we hope will happen, and we will start to broaden the -- essentially to drive into other treatment modalities in that area.

So that larger percentage of the patients are done surgically and done through a minimization approach.

Doug Murphy, a cardiac surgeon down in Atlanta, has a little what he calls the "patient procedure value equation."

And that equation is conceptual, but it essentially says is that the value to the patient is equal to the efficacy of the procedure,, divided by its invasiveness perhaps squared.

And we think that is really true, and, of course, as we move these procedures from -- I don't think anybody will question a prostatectomy is the most effective way of removing the cancer and ensuring longevity to the degree that we are able to and we have been demonstrated so far in we both increase its efficacy in terms of cancer removal and in terms of potency and in terms of (inaudible) and we move it to a minimally invasive procedure then that drives its adoption.

And so we are -- you know this is -- currently we anticipate that it would take -- that this is the kind of curve -- we are on about a seven-year curve.

Now, then as you start to drive into the other modalities, we will see what happens.

But -- so that's -- so it starts off slow and it will accelerate and it should, then as we start to reach saturation, we will see it decelerate and then of course we will depend on other surgical procedures to drive our growth.

Okay, great.

Thank you very much.

Our next comes from Tim Nelson of Piper Jaffray.

Nice quarter.

Thanks.

Given the fact that you were a tad disappointed in your U.S. system placements, can you update us on what you now expect for the rest the year there in terms of placements?

I think the, you know, the guidance that we gave, Tim, in terms of the over-all revenue growth for the rest of the year.

You can probably extrapolate off of that we still maintain that we are going to be growing at least, you know, on the high end of our 20% or 30% range and if you kind of model it out with the growth on the recurring revenues, I think you can tell that, you know, there is still going to be some good growth in systems as well as in recurring revenues.

You don't have a target in mind you want to share?

No.

This is Susan.

We started giving guidance a while ago because when you don't have that kind of crystal ball.

How about the Computer Motion revenue?

Is that is relatively stable?

Do you expect that to continue for the year?

Are we going to see some point where that trails off?

Right now it is very stable, about $1.4 million for every quarter since we acquired Computer Motion.

We are doing a couple of things to try to grow that segment.

And trying to get some more leverage, primarily in the ESOP business, but it is still too early to tell if that is going to be growing or not.

Okay.

And then finally, is there any way you can get a little bit more granular on the procedure of growth rates you have experienced or you expect?

You mentioned a lot of different metrics, but didn't give us any quantitative feel for how they are doing other than like words like "robust" and "strong".

I think one thing we have said in the past and is still true on this, Tim, that the instrument and accessory revenue directly related to our procedures.

So when we talk about 80% growth on instrument and accessory revenues, that's mimicking what is happening in our procedures.

Okay.

That's good to know.

And no changes in pricing during the quarter or da Vinci systems, fourth arms or disposals?

No, no changes.

Good.

Thank you very much.

Thank you.

Once again, that's star 1 to ask a question.

If we don't have any other questions --.

Wait a minute, one more?

Our next question comes from Brian Gangnon from Gangnon Securities.

Hi folks.

Nice quarter.

Hi, Brian.

On the sales force, how many people do you have on sales force now and how many do you expect to have by year end?

Hold on just a second there, Brian.

Thanks.

We have over 100 folks in our sales force.

That's both field -- that is a combination -- I'll remind you we have folks that are in the field that are doing selling activities, support activities and service activities.

And so combined, we have over 100.

We are trying to grow that number during the course of the year, and as Lonnie mentioned, we have some turnover recently, but we are not giving out the number in terms of what we are trying to get to by the end of the year at this point.

But you do expect to have some growth there?

Absolutely.

And a better quality sales force by the end of the year?

Yes.

Okay.

Can you give us an idea, with probably $100 million of cash after you buy the building, what you might do with it?

Keep it.

Brian, it's Susan.

We don't have any specific plans for it at this point in time.

And when we do, we would be glad to share them with you, but right now there is nothing on the radar screen.

We don't see anything -- any acquisitions that would make any sense or anything that necessarily other than focusing on improving the technology and driving the field -- you know, the installation growth and procedure growth.

Obviously, we are alert and we do make investments in I. P. that make some sense and continue to do that, but we don't see any significant thing that would stand out or consume any significant amount of that cash.

Okay.

Specifically on your R&D plans, can you give us any idea what you guys are doing on the R&D side?

I know we have 5 millimeter instruments coming.

Have you thought at all or are working at all on tactile feel?

You know, Brian, we have done some work in tactile field.

Quite frankly, that is only an issue with people who don't use the system very much.

We haven't had much of a -- anybody who uses the system a lot, you know -- I hear that from surgeons who have not used it or used it very little, but as we say, the vision has been such a huge improvement, and the ability to see the tension of tissue and everything works very well.

Now, longer term, tactile feel will have to come through some sort of thin film sensors.

It is not going to come -- and those are still in pretty early development stage.

And for us to spend a lot of money on that, we are going to be dependent upon other people who produce those and we are going to be dependent on high volume in other applications to get the cost down to somewhere it becomes attractive.

But it will come.

In the meantime, I can't think of anybody who really uses the system a lot who says, you know, boy, I have got to interest tactile feel because I can't --.

Now, there are some things that we can do, and will do, in terms of sensors for identifying, you know a calcified vessel and where to put the (inaudible) and that sort of thing and those come through ultrasound and other probes and devices that are not specific to tactile feel but provide the same kind of thing when you are trying to determine specifically where to do cardiac surgery to locate the nastomosis.

That is not a product we are going to be announcing anything like that.

We continue to advance things on a lot of fronts and obviously does not serve our purpose to publicly announce things prior to introducing them.

Understood.

Or anybody any good.

Right.

On fourth arms, you have 48 systems with fourth arms out of 224.

So about 22% of your systems.

Where do you see that number going over the next -- well, by the end of this year and maybe by the end of '05?

Brian, I think what we are seeing here is that probably, you know, 50% or more of our new systems are going out with fourth arms on them.

And then what we are seeing is in the installed base, just as we did this past quarter, we will have two, or possibly three, upgrades from the installed base and that's actually kind of what we see, you know, for this year.

You know, each quarter, I mean.

Okay.

So if we think about it, by the end of '05 you might have 120 or so with fourth-arm systems.

It really depends on what you want to calculate the unit number to be.

You don't want to see my unit numbers. [ LAUGHTER ]

Okay.

Good.

Well, congratulations.

Looks like the DVP procedure is going great and the docs I spoken with on the MVST and the mitral value of are very excited about where you are going to go.

Especially the younger docs.

Thanks, Brian.

Operator, I think we have time for one more question.

Our next question comes from Brian Multzer of Candlewood.

Hi.

I am always curious about the rationale behind second system placements.

Can you just discuss the two placements this quarter in Atlanta and Indianapolis and what might have been the driving force behind those?

Yeah, they were actually different driving forces, I should say different surgical specialties, that drove those second systems.

In Indianapolis, it was primarily a very active first system that they had, which they were devoting almost exclusively to urology for DVP.

It is a situation which the hospitals experienced tremendous growth in their radical prostatectomy business, and it has warranted a second system.

And it is going to be used for urology as well?

It will.

It will be used for other things not exclusively urology but urology was definitely the driving factor.

Whereas in Atlanta, at St. Joe's, it was primarily cardiac to this point; however, the hospital is also going to begin doing radical prostatectomy and urology and warranted a second system.

So that was the situation with those two accounts.

And the third one in Italy is actually more of a general surgery account and one the busiest general surgery accounts we have anywhere in the world and is also going to serve as a training system, which I think you can anticipate the demand for training in a market that has now almost 19 da Vinci systems.

You see that demand for training going up.

Okay.

Thanks.

Great job, guys.

Thank you.

That was our last question for today.

Begin to summarize our highlights for the first quarter.

Total revenue grew to $27.1 million, up 41% from prior year.

Recurring revenue grew to $12.5 million, up 125% from prior year and comprising 46% of total revenue.

Our gross profit margin improved to 58.5% from 50.6% in the first quarter of last year.

We generated net income of approximately $900,000, or 2 cents per share.

Cash operating income, or EBITDA, grew to $2.1 million.

We ended the quarter with approximately $116 million in cash.

We experienced excellent procedure growth led by urology and cardiac surgery.

And we continue to focus on procedure growth, system placements, and profitability.

That concludes today's call.

Thank you for your participation.