直覺手術 (ISRG) 2004 Q2 法說會逐字稿

Good afternoon.

Welcome to the Q2 2004 Intuitive Surgical Inc conference call.

All participants will be in a listen-only mode until the question and answer session of the conference.

At that time if you would like to ask a question you may press star then one.

This conference is being recorded.

If you have any objections you may disconnect at this time.

I would now like to introduce your first speaker for today, Mr. Ben Gong, Vice President of Finance and Treasurer.

Sir, you may begin.

Thank you.

Hello and welcome to Intuitive Surgical second 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.

Perspective 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 of the second quarter as described in our press release announced 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.

Then I will follow with a business forecast for the rest of 2004, and next Aleks 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.

Thank you, Ben.

Highlights for the second quarter are as follows: during the quarter total revenue grew to 31.1 million, up 45% from prior year.

Recurring revenue grew to 13 million, up 102% from prior year, comprising 42% of total revenue.

We shipped 19 da Vinci surgical systems and 15 fourth arms, ending the quarter with 243 cumulative systems shipped.

Our gross margin improved to 63% from 59% in the second quarter of last year.

We generated an operating profit of 4.5 million, compared to 500,000 in the second quarter of 2003.

Our net income for the quarter was 48 million compared to 900,000 last year, EBITDA or cash operating income, for the quarter grew to approximately 6.2 million from 1.9 million last year, and we ended the quarter with a little over 106 million in cash.

We continued to experience excellent procedure growth led by urology.

This quarter the da Vinci Prostatectomy DVP procedure continued to followed our projected growth curve.

This procedure has become a major driver in our business.

Dr. Doug Murphy, a cardiac surgeon in Atlanta, defines the value equation for a surgical procedure from the patients point of view as patient value equal efficacy divided by invasiveness.

In other words, the value of a procedure to the patient increases as the clinical outcomes improve and as invasiveness decreases.

The da Vinci prostatectomy effects both value drivers of this equation in a very positive way.

Efficacy in terms of cancer removal, continence, potency, blood loss, complications and recovery time are significantly improved.

While morbidity or invasiveness is reduced.

This results in a dramatic increase in the value of this procedure relative to alternative treatment options for men suffering from prostate cancer.

The market effect of this value shift is similar to that of other dramatic value shifts.

There will be significant market disruption as consumers migrate to the new high-value offering.

This migration will generate both risk and opportunity for healthcare providers as market share shifts from those clinging to the status quo to those offering improved value.

So how large is the opportunity?

American Cancer Society estimates that there will be 230,000 new patients diagnosed with prostate cancer in the United States alone this year.

Using democratic prevalence data and U.S. census data, this number is projected to grow to approximately 280,000 annually in five years and 320,000 in ten years.

We believe that the market will consolidate to those medical centers that offer the highest value proposition to the patient.

There will be winners and losers.

Barring some unforeseen new treatment alternative, the winners will be those centers offering the highly effective and minimally invasive da Vinci prostatectomy.

In the cardiac segment we continue to see steady and significant growth.

The da Vinci mitral valve repair and multi-vessel small thoracotomy or MVST procedures.

With the recent FDA clearance of the da Vinci system for cardiac revascularization we've taken another significant step in building patient value with a minimally invasive surgical alternative.

As I've stated previously, we believe that the adoption of our technology will be driven surgical procedure by surgical procedure, starting with those procedures where it currently provides compelling surgical capability and patient value.

We are committed to identifying and driving these high-value procedures while expanding the systems surgical capability so that it's use is compelling to the patient, the surgeon and the hospital in an ever larger number of surgical procedures.

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

Thank you, Lonnie.

As Lonnie has mentioned, we enjoyed outstanding second quarter results.

Summarizing this quarters key financial metrics, we realized total revenue of $31.1 million, up 45% compared to our second quarter, 2003, revenue of 21.5 million.

We grew recurring revenue to $13 million, up 102% over last year.

We improved gross margin, to 63.2%, compared to 59.1% last year.

We earned record net income of $4.8 million or 14 cents per share, compared to $900,000, or 5 cents per share last year.

We increased cash operating income, or EBITDA, to 6.2 million, up 4.4 million over last year, and we ended the quarter with $106.4 million in cash, up 10.6 million during the quarter, excluding the impact of our $20 million building purchase.

And now for the details.

Total second quarter revenue increased to $31.1 million, increasing 45% from the 21.5 million for the second quarter of 2003, higher second quarter sales were driven by higher da Vinci Surgical System unit sales and continued recurring revenue growth.

Second quarter, 2004, sales increased in all product categories.

Compared to last year, system revenue increased from $15 million to 18.1 million and (inaudible) and accessories increased from 4.2 million to 7.8 million.

And service and training increased from 2.3 million to 5.2 million.

We shipped 19 da Vinci surgical systems during the quarter, up five compared to the 14 shipped during the second quarter of last year.

Last quarter we mentioned that we moved to a direct sales organization in Japan.

As part of the transition from our previous distributor, we purchased five da Vinci systems that were being used for demonstration and clinical trial purposes in Japan.

During the second quarter we refurbished and sold three of these systems to other rest of world distributors.

These three systems are included in the 19 da Vinci Surgical System sales we recorded in Q2.

We sold these units at a discount from our normal prices.

We have kept the other two systems for internal use.

We shipped 15 da Vinci fourth arms during the quarter up 6x from the 9 shipped during the second quarter last year and we shipped two Aesops this quarter.

During the second quarter we enjoyed another period of strong recurring revenue growth.

Recurring revenue comprised of instruments, accessories, service and training revenue, grew to $13 million, up 102% from the 6.4 million during the second quarter of 2003.

Recurring revenue comprised 42% of total second quarter, 2004, sales, up from 30% during the second quarter of 2003.

Total revenue for the first half of 2004 was $58.1 million, up 43% compared to the 40.7 million during the first half of 2003.

The increase was primarily driven by a 13.5 million, a 112% increase in recurring revenue.

This quarter we recorded $1.1 million of sales from Computer Motion products.

We have recognized between 1 million and 1.5 million in sales of Computer Motion products during each of the four quarters since the acquisition last year.

Second quarter, 2004, gross margin percentage increased to a record 63.2%, compared to 59.1 for the second quarter of 2003.

Our relatively high second quarter 2004 gross margin was driven by several factors.

As I discussed earlier, we sold three da Vinci systems that we had repurchased from our previous Japanese distributor.

Although these systems were sold at a discount they also had a lower cost basis.

Without the sale of these systems our total gross margin percentage would have been approximately one percentage point lower.

Second quarter 2004 gross margin also benefited by a lower product material cost, improved product reliability, continued leverage of the service and training organizations across the larger base of install systems and lower overhead costs derived from our building purchase.

Total operating expenses for the second quarter 2004 were $15.2 million, up 3 million compared to the second quarter of 2003.

SG&A expenses accounted for all of the $3 million year-over-year increase, growing to 11.5 million this quarter from 8.5 million last year.

Higher SG&A expenses were driven by higher incentive compensation associated with achieving higher revenues, incremental patent costs associated with maintaining the Computer Motion patent portfolio, and additional accounting personnel consulting and auditing resources added to support Sarbanes-Oxley compliance.

After having closed the former Computer Motion Goleta site at the end of the first quarter of this year our second quarter 2004 R&D expenses have now returned to a level equal to the second quarter last year, the last quarter prior to our acquisition.

Other income comprised mostly of interest income was approximately $600,000 for the second quarter of 2004, roughly equal to our first quarter, 2004 total.

Our second quarter net income was $4.8 million, or 14 cents per share.

Our $4.8 million bottom line was by far the most profitable quarter in our history.

Prior to this quarter our highest quarterly net income result was the $900,000 recorded during the second quarter last year, our last quarter prior to completing our acquisition of Computer Motion.

Our second quarter EPS of 14 cents was to drag off our $14.8 million net income and an average of 34.2 million diluted shares outstanding during the quarter.

We earned 5 cents per share for the second quarter 2003 based upon net income of $900,000 and 19 million diluted shares outstanding.

The increase in the number of shares outstanding resulted primarily from shares issued in connection with our June, 2003 Computer Motion acquisition and our fourth quarter, 2003, follow on stock offering.

We continued to execute or business plan, making significant progress toward our steady state income statement profile.

This quarter as a percentage of sales gross profit was 63%, SG&A 37%, and R&D 12% resulting in an operating profit of 14% of sales.

We continue to target gross margins of 65%, and operating profit of 20% of sales for our business model.

We are quite pleased with the progress we have made towards these targets.

We also improved many of our balance sheet metrics during the quarter.

We ended the quarter with $106.4 million in cash and investments.

As mentioned earlier during the second quarter we completed our purchase of our Sunnyvale, California, facility for approximately $20 million.

Excluding the impact of this investment we were over $10 million cash flow positive for the quarter.

Our $4.8 million net income and 1.9 million of non-cash expenses drove positive second quarter cash flow.

In addition, reduced our accounts receivable by $2.6 million and inventory by 800,000.

Our quarter end accounts receivable balance decreased to $24.7 million from $27.3 million ending the first quarter.

We ended the quarter with an average days sales receivable outstanding of 72 days improving 19 days compared to the previous quarter.

Ending second quarter net inventory was $7.2 million, down 800,000 from the previous quarter end balance of 8 million.

Inventory turns have improved to 6.4 from 5.6 ending the previous quarter.

Finally, we ended the second quarter with $14.6 million of total deferred revenue, up another 800,000 compared to 13.8 million at the end of last quarter.

This build up is an indication of the growth of our service contract business.

With that I would like to turn it over to Ben who will provide a summary of our business forecast for the remainder of 2004.

Thank you, Susan We are encouraged by our strong second quarter financial results and we expect to see continued growth and profits for the balance of the year.

Regarding revenue, coming into 2004 we indicated that we expected 2004 annual sales to grow between 20 and 30% over 2003.

During our last call we said that we anticipated sales to come in on the higher end of that range.

Based on our recent performance we have increased our revenue forecast.

And currently anticipate that 2004 annual sales will come in approximately 35% above our 2003 total.

We continue to expect instrument and accessory revenue to grow at approximately 80% above 2003 levels as indicated on our last quarter's call.

Service revenues have been higher due to higher contract revenues on fourth arm sales and from addition service fees outside of normal service contracts.

We now anticipate that service and training revenue will grow nearly 90% over the 2003 total compared to 80% indicated on our previous call.

In the second quarter we experienced a jump in our gross margin percentage.

Many of the key drivers Susan mentioned for this increase will be ongoing in nature while the margin benefit realized from the sale of the three repurchased units from Japan, only benefited the second quarter.

In our previous call we indicated that we expected gross profit to exceed 60% by the end of the year.

We have already reached that level and we expect gross margins to remain in the low 60' to the end of 2004.

As for operating expenses, on our previous call we indicated that we expected operating expenses to be approximately 12% higher than our total for 2003.

Now, based upon variable costs tied to higher revenue we anticipate operating expenses to be about 15% higher than 2003.

We expect our effective tax rate to be between 5 and 7%.

On our last call we had estimated approximately 7%,.

We estimate third quarter average fully diluted shares for EPS calculations to be approximately 34.4 million shares and will increase approximately 150,000 shares per quarter for the balance of the year.

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

Thank you, Ben.

As mentioned earlier, during the second quarter we shipped 19 da Vinci systems, 13 in the United States, 2 in Europe and 4 to rest of world locations.

This brings to 243 the cumulative number of da Vinci shipments worldwide. 171 reside in North America, 51 in Europe, and 21 to rest of world markets.

Of the 19 systems shipped this quarter 14 were to community hospitals, including Fremont Area Medical Center, a 90 bed hospital in Fremont, Nebraska.

Fremont Area Medical Center is one of a growing number of hospitals located in small or middle markets which is establishing a DVP program to better serve it's community.

Also this quarter we had 2 additional second system placements, UCLA Medical Center and City of Hope National Cancer Center located in Los Angeles.

The sale to City of Hope represented their second system devoted exclusively to their expanding DVP program.

This brings to 22 the number of hospitals which own 2 or more da Vinci systems.

During the second quarter we shipped 15 fourth arms.

All of these were shipped as new da Vinci systems.

This brings to 63 the number of fourth arm systems within our installed base.

We foresee a strong appetite for fourth arm systems going forward with the mix continuing to favor four arm da Vinci systems over three arm systems.

Regarding our clinical progress.

During the quarter we experienced very good growth within our target procedures, namely DVP, MVST and da Vinci Mitral Valve Repair.

We also completed an excellent trade show and medical conference seasons.

And finally, we achieved an important cardiac milestone with our recently announced FDA clearance.

Beginning with urology.

During our last call I indicated that Intuitive would be well represented at this year's AUA conference which was held in San Francisco.

However, the reception we received was even greater that we anticipated.

During the conference there were 32 different abstracts, presentations, poster sessions that featured da Vinci prominently.

In addition, there were three post graduate courses sponsored by the AUA which were devoted exclusively to da Vinci's role within the treatment of urologic disorders, including but not limited to the DVP procedure.

Our booth was reported to be the busiest one on the trade floor.

We were pleased with the favorable clinical content of our podium presentors, which was derived from several large patient series.

The highlight of our booth activity was probably the standing room only crowd that gathered for nearly 2 hours to observe the live broadcast by Dr. Tim Wilson from City of Hope National Cancer Hospital, performing a DVP procedure.

Also at our booth, Drs.

Hollinsby and Scott from Methodist Hospital in Indianapolis presented their series of 170 DVP patients, most of which were performed using a four arm da Vinci system.

The value of the fourth arm within their procedures translated into additional surge and control resulting in shorter operations.

Their data was compelling and we believe will lead to further interest in four arm da Vinci systems.

It was apparent to all who attended this year's AUA that the DVP is reshaping traditional thinking and traditional treatment options for attacking prostate cancer.

Also during the quarter the Gold Journal of Urology, the preeminent journal within the field of urology, featured it's second publication on a DVP series.

The paper, entitled "Robot Assisted versus Open Radical Prostatectomy" and authored by Dr Tom Allerin, Chief of the Division of Urologic Oncology at the University of California, Irvine, concluded that the DVP is equivalent or better than traditional open prostatectomy for oncologic and urinary outcomes while providing the benefits of minimally invasive surgery, such as less pain and shorter recovery time.

We continue to see peer reviewed scientific data such as this make its way into even the most conservative urologic publications.

Moving to cardiac surgery.

In the May edition of the Annals of Thoracic Surgery, Drs.

Pappas and Totolis(ph), from Advocate Christ Hospital in Chicago, authored a paper entitled "Minimally Invasive Mitral Valve Repair using da Vinci Robotic System".

The authors reported on the results of their first 25 da Vinci Mitral Valve Repair operations.

The results were excellent and included the following: There were no incisional conversions, deaths, strokes or re-operations for bleeding. 21 of the 25 patients were extubated in the operating room rather than the intensive care units.

When comparing their first 10 patients to their last 15 patients, the overall length of hospitalization was reduced from 4.2 days to 1.6 days with 8 patients being discharged home in less than 24 hours.

For comparison, the STS Database indicates that the average length of hospitalization for a patient undergoing a traditional mitral valve repair is 8 days.

As with any new cardiac procedure, good clinical data is an integral component in driving adoption and goes a long way toward challenging conventional thinking in the management of mitral valve disease.

At the International Society of Minimally Invasive Cardiac Surgery meeting, or ISMICS, which was held in London last month, there were a total of 15 abstracts, presentations and posters on MVST, da Vinci mitral valve repair, da Vinci by-ventricular lead placement and da Vinci for thoracic surgery.

Drs.

Misour(ph) and Chitwood from East Carolina University were awarded top honors for their clinical presentation entitled "Complex Mitral Value Arterial Leaflet Repairs Using the Da Vinci System".

During the second quarter we helped to establish a second MVST training center, Centennial Medical Center in Nashville, Tennessee.

Centennial, along with Lenox Hill Hospital in New York City, will be offering MVST procedure training going forward.

This additional training site will help to address the growing demand for training with this exciting new procedure.

Earlier this month we announced that the FDA granted clearance for da Vinci, for da Vinci's use for coronary anastomosis during cardiac revascularization procedures.

Prior to this clearance da Vinci's role within cardiac revascularization procedures in the United States was limited to the dissection of the grafting vessels, the internal mammary arteries.

With this clearance da Vinci can be used to actually suture the IMA to the target vessel, most often the LAD, completing the bypass graft.

We believe this clearance to be a significant step forward in the advancement of minimally invasive coronary surgery.

I think Dr. Murphy, Doug Murphy, Chief of Cardiac Surgery at St. Joseph's in Atlanta, summed it up best when he said, "this clearance provides better surgical options for our patients while advancing the frontiers of minimally invasive cardiac surgery".

This concludes my update and I will now pass the time over to Lonnie

That concludes our presentation.

Now we will open the floor to any questions you might have.

Thank you, Mr. Smith.

At this time we would like to begin the question and answer session of the conference.

If you would like to ask a question please press star then one.

You'll be announced prior to asking your question and you will be prompted to record your first and last name.

To withdraw your question you may press star then two.

Once again, if you would like to ask a question please press star then one.

The first question comes from Mr. Rick Wise with Bear Stearns.

Sir, you may ask your question.

Good afternoon, everybody.

I feel like before I ask a question I have -- I hate analyst who say congratulations to companies but if it was ever deserved I think I have to do it now.

Congratulations on a great quarter.

Thank you.

A couple of questions.

First, help me understand a little more clearly what was happening on the recurring revenue side, particularly with systems.

Obviously up a 100% is wonderful but how do we think about it relative to the second quarter, relative to the first quarter?

It's down slightly from -- and both service and recurring world a little below our numbers, whether they were right or wrong.

Can you help us to understand a little bit what's happening there?

Yeah, Rick, this is Ben.

In the second quarter we did have some timing issues on orders that got cut off at the end of the quarter.

But, you know, we are still very confident with our forecast of instruments and accessories growing at 80% year-over-year.

And just to answer maybe that question you had, the procedure growth which is tied to those instruments and accessories was definitely excellent for the second quarter.

Okay.

So if I could truly see --you know, had access to every number and could see what's called same store sales, are procedures flat, up, down, sideways, sort of second quarter versus first and just sort of the recent quarterly trends?

Yes.

So sequential procedure growth definitely up quarter-over-quarter, and same store sales, as we call it, also definitely up.

Sequentially.

Yes.

Can you -- a couple other things.

Can you update us on the -- the system ASPs, any change in average selling price to any of these -- on any of these systems that we should be sensitive to?

Yeah, the one thing that we wanted to point out is if you did a calculation on the ASP for the quarter, it would have been lower than say the previous quarter because of the three repurchased units which we sold at a discount.

If you pulled those things out, you know, not only would the gross margin have come down by a point but the ASP on their other units would have been about the same as in the first quarter.

Okay.

The -- I got a bunch of questions, I am juggling a couple thing.

Seasonality, first off, when I look at, you all touched on this, it sounds like some sales were pulled, system sales were pulled out of the second quarter or sell into the second quarter from the first quarter, I mean, do we -- do we -- excluding the three Japanese units and assuming the real number was 16 this quarter, how do we think about the flow in the next couple quarters?

Is it sort of 15 plus or minus one?

How do we think about it?

This is Susan, Rick.

We don't give you guidance on that but if you look at trying to get to 35% year-over-year growth you are going to see some unit growth in the third and fourth quarter.

How you cut it is really up to you at this point.

Okay.

And last and then I'll circle back for some more, you were kind enough to give us some targets, Susan, about 65% gross margin and 20% operating margin.

Just in your mind how soon do we get there?

Is that something -- are we there, almost there on the gross margin?

Those are the kinds of numbers we should be thinking about in general terms for '05?

You know what we are trying to tell you, Rick, is we are close.

We are clearly not by our guidance going to get there this year and obviously the kind of jumps you are see year-over-year aren't going to be as great as we get to the top end of that curve.

So we will see progress towards that and when we give all 5 guidance we will be glad to clear it up how close we will get to in '05.

I lied.

I have one last quick one here.

Just throwing the numbers into the model, I don't know if I've done it right, I'm coming up with something like 40, 45 cents in EPS for this year, is that, you know, just taking some of your growth and profitability comments quickly, is that the kind of range that you're comfortable seeing investors think about for '04?

You are probably taking it a little on the high-end but you are in the range.

Thanks a lot.

Thank you.

The next question comes from Mr. Jason Robbins with Deutsche Bank.

Sir, you may ask your question.

Great, thanks very much, guys.

Quick question for Alex.

I know in the past you talked about potentially achieving a 10% penetration rate within the prostatectomy market for the DVP procedure.

Are you still confident you can sort of achieve those level?

We are.

Okay.

Then sort of looking beyond DVP so sort of the cardiac surgery center, a lot of the same value propositions that Lonnie discussed at the beginning of the call would seem to apply to areas specifically, such as cardiac surgery.

I was wondering if you could maybe provide us even some sort of anecdotal updates, where you are on the adoption curve within cabbage procedures and potentially sort of where you see that going and maybe when it would potentially get to a point when you could discuss sort of some penetration rates in greater detail?

Jason, I think the way we look at it is that the revascularization procedures and the mitral valve repair procedures are at earlier points in their adoption curve.

They are certainly following similar growth patterns.

However earlier, much earlier in their adoption.

I don't think that we are at a point where we can tell you definitively what that penetration rate is going to be or when it's going to take place.

But I think the take away message is we are pleased with the growth.

We continue to see the growth sequentially quarter-over-quarter and certainly on a year-over-year basis it's impressive.

Where would you say they are in that adoption curve, behind sort of DVP, could you maybe say are they two years behind, three years behind, a year behind?

Jason, this is Lonnie.

When you're down -- at the very beginning of an adoption curve, the noise level is a little higher and it's a little harder to predict.

We are seeing consistent growth, that's really encouraging.

The mitral valve piece is looking good, it's a little slower adoption curve than we are seeing DVP.

MVST is moving well but quite frankly that's a more difficult procedure.

We're still -- we will be working through over the next while refining the procedure but the real compelling piece of what starts to drive the adoption is published clinical data.

And, you know, that's going to take a little while.

That's a pretty conservative group and, you know, I think we just need, for us to start to try to forecast off data points this early would be a mistake, I think.

We would be -- we wouldn't be appropriately conservative in terms of our estimates.

So let's -- let's give it sometime and when we get more comfortable with the data we will be happy to -- to share it with you.

Okay, fair enough.

And just one more financial question if I may.

Are there any more trade-ins that you see potentially coming in from the old Computer Motion systems going forward?

Or has that basically sort of transpired at this point?

You know, there might be one or two more out there, Jason.

As we mentioned even though we have officially stopped that program, you know, to the extent that there is some carryover from people who put it into their budgets, we are definitely going to try to work with those customers.

Okay, great.

Thank you very much, guys.

Thank you.

The next question comes from Mr. Tim Nelson with Piper Jaffray.

Sir, you may ask your question.

Hi, guys, great quarter.

Just to follow on some of the previous questions, I know it's hard to give guidance on your procedure volumes by type of volume but could you just sort of update us on where you think the mix is now?

It's a number you provided in the past, between urology, cardiac and general surgery?

Yeah, Tim, this is Alex.

The growth of the DVP procedure is both in percentage as well as the overall numbers has shifted the mix so that the urology procedures are now over 50% of the procedures, the total procedures.

That's followed by cardiac, which is the second largest bucket, and then the third being sort of general surgery and other associated procedures.

So it's definitely moved north of 50% at this point.

And cardiac, is that still 20, 25ish?

It's in that area.

Okay.

You haven't talked at all about the general surgery applications.

Could you give us an update on what kind of market development activities are happening there and what looks promising over the long-term?

I would say that when looking at the market development activities, the focus both of the field as well as of the Company's resources is certainly geared toward urology and cardiac surgery.

We are doing some market development within the general surgery area but I think the way we are resourced cardiac and urology is getting the majority of those resources.

Tim, as I stated the adoption of this will be procedure by procedure.

And we clearly have a winner with the DVP procedure and it would be a mistake for us not to fully develop that to our shareholders.

As I pointed out it's going to grow just because of the aging population and, man, if you live long enough, you are going to get prostate cancer.

And so both because of the markets taking it and also because it's a very large opportunity, we need to drive that.

Now that's the beachhead.

That gives us a great opportunity to place it in a hospital where they are going to have great success, it's going to be good for their patients, it's going to be good for the docs and it's going to be financially attractive to the hospital.

Cardiac will come right behind that.

You know, general surgery, a lot of surgeons are already laparoscopically trained.

Our focus there will be on cancer treatment but, you know, it's -- it's not clear that we provide as compelling a story there yet and -- and it would be a mistake for us to divert resources to it until we are ready, that we do have a compelling case in a specific procedure that will drive it, that's really worth our investment.

But we are going to take -- I just say we are not going to leave something on the table.

We are going to go after the prostate business.

We will build that.

There are two levels of adoption we need to take.

One is to convert those procedures that are being done openly to minimally invasively.

And then there's the whole other segment that's being treated with some other treatment other than the prostatectomy.

And both of those, so far as I'm concerned, are prime candidates for da Vinci prostatectomy.

And with this cardiac clearance and with the very consistent growth we are seeing in mitral valve repair we will focus there.

Okay.

Okay, if I can turn my attention to just a couple of financial items.

You mentioned a number of, I think the number of Aesop systems sold, but did you give a financial or revenue number in terms of all the robot, the old Computer Motion sales.

Yes.

We said it was $1.1 million for the quarter.

For the total systems and recurring revenue?

Yeah, total revenue.

There really isn't much recurring revenue, but yes.

Okay, great.

And then on the fourth arms, were any of those 15 retro fits or did they all go on new systems?

All on new systems.

Okay.

In terms of procedure revenue per case shall we still think about it in a thousand, $1,500 range.

Is there anything happening on pricing in recurring revenue?

There hasn't been any changes in that area.

Okay.

And then two more questions.

One you mentioned that R&D levels have now fallen to pre-acquisition levels.

Is that the level you anticipate going forward?

No.

We have guided that the year will be up, total expenses will be up 15% over last year.

Some of that will be in R&D as well as SG&A.

Okay.

So we shouldn't expect that to be level, right.

And then finally on the tax rate, what would the tax rate be without the loss carryforward if we were to apply a fully loaded tax burden to you guys?

Is it, you have a five, 10% now, but is it.

Well, you take 4.8 million in profits and take it at the corporate rates.

38.

And we have state rates as well so you're probably up in the 40.

Okay.

That's great.

That's all I needed.

Thanks.

Thank you.

The next questions comes from Mr. John Smith with Deerfield Management.

Sir, you may ask your question.

Thank you.

Susan, could you just review for a moment the policy regarding sales to distributors?

I'm focused on the three that were sold this quarter to other distributors.

Were they not counted in earlier shipment numbers when they were first sold to the Japanese distributor?

They were counted in earlier shipment numbers, John, and those tie to the revenue recognition of the Company.

Intuitive sold those units.

Several years ago we got full cash payment on them.

And then as part of the distribution agreement, because they had them in their clinical trial inventory and their demo inventory part of the agreement and shut down of that distributor we had the chance to buy that inventory back for a very small amount of dollars.

So we took advantage of that.

Okay.

That's rather unusual that would you see that significant an investment at a distributor to have that much demo and clinical trial inventory in their hands.

That was somewhat related, well, was related to -- to the work they were doing on the clinical trials in Japan, the Shonen(ph) approval which they didn't do a very good job of so we are still working on that.

So when I -- when we look at the cumulative shipment numbers, the 243, are we counting those three twice.

Yes, you are in a sense that we tie cumulative shipments and why we reported it as cumulative shipments, we tie that back to the revenue of the Company on a quarterly basis.

And the reason we gave it to you, if you wanted to break those out for your own install base calculations, we tried to color that up for you, of the three that were resold out there included in the cumulative revenue as well as the two that we've kept internally so it's up to you to calculate it the way you want to.

Okay.

And this is the only time this has occurred.

Yes.

Yes.

Okay.

Thanks.

Thank you.

This is totally related to our shut down of the distributor in Japan.

The next question comes from Mr. Neil Gagnon with Gagnon securities.

Sir, you may ask your question.

Thank you.

Good morning, everyone.

Good morning.

Hi, Neil.

On the Japan distribution, what are you doing and how far along are you picking up distribution there?

We have a direct, as we announced last quarter, we have a direct group in Japan and we are slowly working through the issues with administrative health on Shonen approvals and we shipped a unit last quarter based on a direct sale of our group over in Japan.

So they did get one new sale out the door in Q2?

No, that was in Q1.

Q1.

These three systems that got remarketed somewhere, where did they go?

They actually -- Ben, you want to go ahead, I'm sorry?

They actually went to other rest of world distributors.

The thing about that is, you know, as you know, Neil, the sale of a system really requires like hands-on demonstration.

And we have other distributors out there who don't have that capability of providing that.

So, you know, the other distributors actually in both cases, in all three of these cases were in the Far East.

And they wanted to buy these systems and we found an opportunity to do that for them so that they can use them for demonstration and training purposes.

So they got a starter set at a bargain price so they have an on-site demonstration unit?

That's one way to look at it.

That's a fair summary.

And then you've seen our mobile system, maybe, or we talked about the mobile system?

And this allows them to have a mobile system as well in their markets.

Good.

On the 10% DVP, I think that's a number that the Company was shooting for at 12/31/04?

And we are still shooting for that.

Okay.

As a run rate.

Good.

What can it be?

Is 10% the end of the game and you can't go any higher?

No, that's -- it better not be.

No, I think that, what can it be?

Well, you know, we don't have a crystal ball of where you hit saturation.

I guess right now you'd say that of the 230,000 prostatectomy in the United States, about half of those, of the cancer cases, about half of those are treated with surgery, we think.

And we don't have a really great number on that.

Back of the envelope would be fine here.

Approximate, I think, a fair number is probably about half.

And so we certainly plan to, you know, to displace those.

Now, the question is, as the efficacy of this procedure and its invasiveness are both going in positive directions, can we take away from the brachytherapy and other treatment options?

I mean, clearly, for a patient one of the first things they want, they just -- to have the cancer out is an attractive thing.

And then to have a high confidence it's out as well as a high confidence of being continent, potent, and back to your -- to your daily activities.

The word of mouth on this is a very, very powerful story.

And I know a lot of people and I have referred them, a lot of associates and friends who had it done and are just absolutely delighted.

And so, I think that the -- it's certainly our goal to take it all.

Neil, I will just add to it for comparison, in 2002 our estimates were that we did less than 1%.

In 2003, about 3%.

And our objective in 2004 is 10% of the overall market so you can -- ..

10% run rate by year end.

That's correct.

But this number could be some multiple of that in the future?

We're not going from 10 to 12, 10 to 15.

Our goal is to continue to drive it up the adoption curve.

Where we see ourselves, Neil, is right at the knee of the curve, of a S shape curve, where it's really now starting to move into the mainstream.

We are moving from the early adopters to the majority.

Okay.

The Japan direct, just remind me one more time, what's happening with the Shonen there.

We are working with the Ministry of Health to understand what data they need to get a Shonen.

Any idea - estimate of time, Susan?

No.

If we had one we would give it to you, Neil, but we don't at this point.

Okay.

Good.

Thanks, folks.

That's, we have time for one more question.

Thank you, sir.

The last question comes from Mr. Rick Wise with Bear Stearns.

Sir, you may ask your question.

I just had a follow up.

A couple things.

First, you had talked in the first quarter about your disappointment in the U.S. sales numbers in the first quarter for systems.

And you talked about some sales force changes.

Have they been completed?

Maybe just in general you might want to update us on the sales force and could we logically expect, given the changes and additions you've made in recent months, we might possibly see some acceleration actually in the second half or next year?

Well, what I'd say that a lot of progress has been made in our sales organization.

And we will never be done in terms of the state we are at now in terms of expanding the organization and building that organization to exactly they way you're saying, to drive and support the sales that we need to support the procedure growth.

So I mean it's -- but I am very pleased with the progress we are making and we are at.

Are we done?

Hopefully we will continue to build that organization both here and in the rest of the world to drive the system placements so we can then drive the procedure growth.

So, but I am -- I'm pleased with the status as it is today in terms of the progress we are making.

Can you be a little more concrete, Lonnie, just in terms of what's changed since the first quarter, and maybe the --

No, Rick, to get into it we would be talking about individuals and things like that.

I don't know if that's appropriate for a call.

But we've got -- we can -- we have -- we are really pleased with the recruitment we've made.

We have a sales training class going through right now.

You know, we are trying to build a very, very strong and capable sales organization, both at the systems sales level and with the area sales managers, and with the account managers.

And do we have a perfect hiring record?

No, we do not.

And some of these guys come in and we - they don't make it through our training class.

We have -- we've kind of followed the U.S. surgical model on that.

You get hired, first thing you've got to do is get through the training class and demonstrate that you have the skill level, then once you're out there you have to produce the results.

We use kind of GEs metrics on people which is we measure them one, they believe the beliefs, are committed to our values and do they deliver the results.

Those that believe the beliefs and deliver the results are very easy.

Those are our keepers.

And those that don't believe the beliefs and don't deliver the results, those are also very easy.

Those that believe the beliefs and don't deliver the results we give them a second chance.

Ones that don't believe the beliefs and deliver the results, those we have to phase out.

And so we are -- this is a -- it's part of our daily management.

It's part of the way we plan.

We continue to build organization.

As we go forward we have to work on infrastructure in all areas.

But whatever there is we will have to invest in in the coming years as we build the -- our system infrastructure and everything to make sure we are support and sustain the growth that we are seeing now and anticipate seeing in the future.

This is Susan, too.

I think if you look at -- start to model out at 35% year-over-year growth you will see some momentum in the organization in terms of units for the second half of the year.

Thanks a lot.

I guess that's really the question you were asking.

That's our last question for the day and we certainly appreciate everyone's participation.

Again, to summarize the highlights for the second quarter, total revenue grew to 31.1 million, up 45% from prior year.

Recurring revenue grew to 13 million, up 102% from prior year and composing 42% of total revenue.

We shipped 19 da Vinci systems and 15 fourth arms.

Our gross profit margin improved to 63%.

Our net income for the quarter was 4.8 million.

EBITDA was 6.2 million and we ended the quarter with 106 million in cash.

We want you to know we are committed and we remain committed to managing within realistic financial constraints.

As we've gotten above breakeven with a strong contribution margins we expect to finally continue to generate strong profits.

We will focus on the vital few things that will truly make a difference and we will drive future investment priorities based upon clinical need and economic return.

Our priorities still remain superior products and services for our customers and our patients, improved profitability, and results driven Company culture in which we measure ourselves by our accomplishments.

That concludes today's call.

Thank again for your participation and we will see you in a quarter.

This concludes today's conference.

Thank you for your participation.

You may disconnect at this time.