直覺手術 (ISRG) 2004 Q3 法說會逐字稿

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Now I'd like to turn the call meeting over to Mr. Ben Gong, VP of Finance and Treasurer.

Sir, you may begin.

Hello, and welcome to Intuitive Surgical's Third Quarter Conference Call.

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

Susan Barnes, our CFO, and Aleks Cukic, our VP 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 SEC filings.

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

Please know 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 third 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 review our business forecast for the rest of 2004.

Next, Aleks will discuss sales and marketing highlights, and finally we will host a question-and-answer session.

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

Thank you, Ben.

Highlights for the third quarter are as follows.

During the quarter, total revenue grew to $35.5 million -- up 52 percent from prior year.

Recurring revenue grew to $16.5 million -- up 110 percent from the prior year -- comprising 46 percent of total revenue.

We shipped 18 da Vinci Surgical Systems and 15 Four [Files], ending the quarter, with 261 cumulative systems shipped.

Our gross profit margin improved to 64 percent, from 51.6 percent in the third quarter of last year.

We generated an operating profit of $5.5 million, compared to a third-quarter loss of $3.7 million last year.

Our net income for the quarter was $6.1 million, compared to a loss of $3.4 million last year.

EBITDA for the quarter grew to approximately $7.4 million, from a negative 1.5 million last year.

We ended the quarter with a little over $121 million in cash and cash equivalents -- up $14.8 million from last quarter.

Turning to operations -- our engineering and marketing teams released several new instruments during the quarter that enhance the surgical capability of the da Vinci Surgical System.

Our operations team continued to drive consistent improvement in the quality and reliability of our products, as well as the labor productivity and asset efficiency of our operations.

Finance is on track to fully comply with all Sarbanes-Oxley requirements.

Our sales organization met both our system and procedure objectives for the quarter.

Procedure growth in the quarter was led by Urology, and the da Vinci prostatectomy DVP procedure continued to be the major growth driver in that segment.

As I mentioned last quarter, [Doug Murphy], a cardiac surgeon in Atlanta, defines the value equation of a surgical procedure from the patient's point of view as, "Patient value equals efficacy of the procedure divided by the invasiveness of the procedure."

In other words, the value of the procedure to the patient increases as efficacy increases and as invasiveness decreases.

The da Vinci prostatectomy affects 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 are dramatically reduced.

Examples of improvements in cancer control, continence and potency were presented at the Western Section meeting of the AUA last month, and at the IRUS meeting earlier this month.

At the AUA meeting, Dr. Thomas [Saury] and a team from the University of California Irvine reported superior outcomes and positive margins for T2A and T2B cancers.

At the AUA and IRUS meetings, Drs. [Mark Calachi] and Tim Wilson from the City of Hope National Cancer Center in Los Angeles presented data comparing their extensive laparoscopic prostatectomy experience with their da Vinci prostatectomy experience.

They found a significant reduction in the time to complete continence, defined as no pads -- improving from 118 days with laparoscopic prostatectomy to only 41 days with a da Vinci prostatectomy.

At the IRUS meeting, Dr. Manny Mena and the team at Henry Ford presented preliminary results that demonstrated dramatic improvement in post-operative potency when the neruostructure they referred to as the Veil of Aphrodite is preserved in addition to the conventional preservation of the neurovascular bundle.

Results like these continue to demonstrate a significant increase in the relative value of this procedure, for men suffering from prostate cancer.

The market effect of this value shift will be similar to that of other significant value shifts driven by new and disruptive technologies.

Consumers will migrate to the new, high-value alternative.

This migration will generate both risk and opportunity for healthcare providers, as market share shifts and the market consolidates to those medical centers offering the highest-value proposition to the patients.

There'll be winners and losers.

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

We believe this shift will continue to create a significant market opportunity for our company.

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

Using demographic prevalence rates and the US Census data, this number will grow to approximately 320,000 new patients annually in 10 years.

Assuming an average of 230 DVPs per system, a 7-year system life, and market penetration of 50 percent of prostate cancer patients in the United States, this presents Intuitive Surgical a US market opportunity of approximately 450 million annually, and a significantly larger opportunity worldwide for this procedure, alone.

As I have previously stated, 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 continue to work with our surgeon customers, to identify and drive those procedures while expanding the surgical capability of our products -- so their use is compelling for the patient, surgeon and hospital in an ever-increasing number of surgical procedures.

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

Thank you, Lonnie.

As Lonnie mentioned, we enjoyed outstanding third quarter results.

Summarizing this quarter's key financial metrics.

We realized total revenue of $35.5 million -- up 52 percent compared to our third quarter 2003 revenue -- up $23.4 million.

We grew recurring revenue to $16.5 million -- up 110 percent over last year.

We improved gross margin -- 64 percent, compared to 51.6 percent last year.

We earned record net income of $6.1 million, or $0.17 per diluted share, compared to a net loss of $3.4 million -- a loss of $0.12 per share last year.

We increased cash operating income or EBITDA to $7.4 million -- up from a negative $1.5 million last year.

And we ended the quarter with $121.2 million in cash -- generating $14.8 million during the quarter.

Now, going into the details.

Although the third quarter is typically our slowest, we were able to achieve record sales during the quarter.

Higher third-quarter sales were driven by higher da Vinci Surgical System unit sales and continued recurring revenue growth.

Third quarter 2004 sales increased in all product categories.

Compared to last year, systems revenue increased to $19 million, from $15.5 million.

Instruments and accessories increased to $10.3 million from $5 million.

And service-and-training increased to $6.2 million from $2.9 million last year.

We shipped 18 da Vinci Surgical Systems during the quarter -- up 3 compared to 15 shipped during the third quarter last year.

We shipped 15 da Vinci Fourth Arms during the quarter, compared to 16 during the third quarter of 2003.

We shipped 8 Aesop Systems during the quarter, compared to 5 during the third quarter of last year.

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

Recurring revenue, comprised of insulin accessory service and training revenue grew to $16.5 million -- up 110 percent from $7.9 million during the third quarter of 2003.

Recurring revenue comprised 46 percent of total third quarter 2004 sales -- up from 34 percent during the third quarter of 2003.

We are delighted with our recurring revenue growth.

In fact, we have grown recurring revenue in each of the last four quarters by over 100 percent compared to the same quarter of the previous year.

This rapid and consistent growth reflects the ongoing adoption and utilization of the da Vinci surgical platform.

I would like to point out that our third-quarter recurring revenue benefited by approximately $1 million due to orders carried over from the second quarter, and some that would normally have occurred during the fourth quarter.

This quarter, we recorded $1.2 million of sales from Computer Motion products.

We recognized between $1 million and $1.5 million of sales of Computer Motion products during each of the 5 quarters since the acquisition was completed last year.

Third quarter 2004 gross margin percentage increased to a record 64 percent, compared to 51.6 percent for the third quarter of 2003.

Note that our third quarter 2003 margin was impacted by Computer Motion integration costs, and would've been approximately 55.8 percent, excluding the impact of these costs.

Our 65 percent gross margin also improved nearly a point sequentially, compared to our second quarter 2004 margin of 63.2 percent.

Our improving gross margin primarily reflects stable pricing and continued leverage of manufacturing, service and training overhead costs across a higher revenue volume, and lower system and instrument materials costs.

Total operating expenses for the third quarter 2004 were $17.2 million -- up $1.5 million compared to the third quarter of 2003.

The third quarter of 2003 operating expenses included approximately $2.7 million of computer integration costs -- mostly in SG&A.

Excluding these costs, operating expenses were up approximately $4.2 million compared to last year, and up $2 million sequentially, compared to the second quarter of this year.

SG&A expenses for the third quarter 2004 were $12.6 million compared to $11.3 million for the third quarter last year, and $11.5 million sequentially compared to the second quarter of this year.

The increase compared to Q3 2003 was driven by sales organization headcount growth to support higher sales, higher incentive compensation associated with achieving higher revenues and profitability, 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.

These expenses were offset by the elimination of the Computer Motion integration costs described previously.

Research and Development expenses for the third quarter 2004 were $4.6 million compared to $4.4 million for the third quarter last year, and $3.6 million in the second quarter of this year.

The increase from the previous quarter was driven by timing of project expenses sitting more heavily in the third quarter 2004, and higher incidence of compensation.

Other income -- comprised mostly of interest income -- was $692,000 for the third quarter 2004 -- up $66,000 sequentially, compared to the second quarter of this year -- primarily due to higher third-quarter average cash balances.

Our third quarter 2004 net income was a record $6.1 million or $0.17 per diluted share.

Our $6.1 million bottom line continued to build upon our $4.8 million net income posted last quarter.

We continue to execute our business plan, making more progress toward our steady state income statement profile.

This quarter, as a percentage of sales, gross profit was 64 percent, and operating expenses were 49 percent -- resulting in an operating profit of 15 percent of sales -- improving upon our Q2 result of 14 percent of sales.

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

We are quite pleased with the progress we continue to make toward these targets.

Now, in regards to our balance sheet.

We again strengthened our balance sheet metrics during the quarter.

We were $14.8 million cash flow positive during the quarter, ending the period with $121.2 million in cash and cash equivalents.

Our $6.1 million net income and $1.9 million of non-cash expenses drove our favorable third quarter cash flow.

We also received about $4.5 million from stock issuance proceeds, primarily resulting from employee stock option exercises.

Our quarter-end accounts receivable balance increased to $26.4 million -- from $24.7 million ending the second quarter.

The increase was driven by higher third quarter sales.

We did, however, reduce our average days sales outstanding to 67 days -- improving 5 days compared to the 72 days we had at the end of Q2.

Ending third quarter net inventory was $6.6 million -- down $600,000 from the previous quarter end balance of $7.2 million.

This quarter was our fifth consecutive quarter in which we have reduced our net inventory balance -- accomplished during a period of significant sales growth.

Inventory turns have improved to 7.7, from 6.4 ending the previous quarter.

Finally, we ended the third quarter with $15.2 million of deferred revenue -- up $600,000 compared to $14.6 million at the end of last quarter.

This buildup is an indication of the growth in our service-contract business, and continued expansion of our installed base.

With that, I'd 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 third quarter financial results, and we expect to see continued growth for the balance of the year.

Regarding revenue, on our last call we indicated that we expected 2004 sales to grow approximately 35 percent above our 2003 total.

Our Q3 revenues exceeded our expectations, and we now anticipate total sales for the year to come in between 40 and 45 percent above our 2003 annual sales.

Based upon encouraging system utilization results, instrument and accessory revenues are running above our previous forecasts.

Taking into account the orders we received in Q3, we now expect our annual instrument and accessory revenue to grow at approximately 90 percent above 2003 levels -- compared to 80 percent indicated on our last quarter's call.

Service revenues have also run higher than we expected -- as we have been earning some additional fees outside of normal service contracts.

We now anticipate that our annual service-and-training revenue will grow about 100 percent over the 2003 total -- compared to 90 percent indicated on our previous call.

In the third quarter, our gross margin improved to 64 percent, as we maintained pricing on system and instrument sales, while leveraging fixed overhead costs across higher revenues.

Our average selling price for da Vinci Systems was approximately $880,000 in Q3, compared to $870,000 in Q1, and $810,000 in Q2.

Our pricing has not changed, and we expect gross margins to hold near our current level, through the balance of 2004.

As for operating expenses, on our previous call, we indicated that we expected annual operating expenses to be approximately 15 percent higher than our total for 2003.

Based on higher variable costs associated with higher sales, we now anticipate operating expenses to grow between 15 and 17 percent above our 2003 levels.

With regard to income tax, we expect to report a tax rate of approximately 3 percent for both Q4 and for the Year 2004.

Last quarter, we estimated Q3 average fully-diluted shares for EPS calculations to be approximately 34.4 million shares.

In fact, the actual number of diluted shares for EPS calculation came in at 35.3 million, due to the impact of our increased stock price.

We currently have about 34 million shares outstanding, and about 4 million shares that can be added to the diluted-share formula, depending on our average stock price.

To provide you with a range of what the diluted-share count will be in Q4, a 30 percent change in our stock price would result in a diluted-share count as low as 34.5 million shares or as high as 36 million shares.

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 third quarter we shipped 18 da Vinci Systems -- 13 in the US, 1 in Europe and 4 to rest-of-world locations.

This brings to 261 the cumulative number of da Vinci shipments worldwide -- 184 in North America, 52 in Europe, and 25 to rest-of-world markets.

Of the 18 systems shipped this quarter, 14 were to community hospitals.

All of our sales are important.

However, there are several that were notable.

The systems sales to Christus Schumpert Hospital in Shreveport, Louisiana and Baptist in San Antonio, Texas represented second-system placements.

While the sale to Memorial Herman in Houston, Texas, represented their third da Vinci placements.

This now brings to 25, the number of centers with 2 or more da Vinci Systems.

We placed a da Vinci at the University of Pittsburgh Medical System this quarter.

Which in addition to being a world-class medical facility also represents the first of two da Vinci placements into the greater Pittsburgh market -- with the VA Hospital representing the second.

In addition, we're seeing solid growth outside the US.

During the quarter, we placed our third da Vinci in Saudi Arabia and our fourth into the Singapore/Malaysia market.

Overall, we shipped 15 Fourth Arms -- 13 as initial Four-Arm da Vinci Systems and 2 as upgrades to existing da Vinci customers.

This brings to 78, 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 new Four-Arm da Vinci Systems over Fourth Arm upgrades.

Clinically, we had another robust quarter.

We experienced solid growth in our procedure volumes, and we completed an excellent trade show and medical conference season -- having participated in the European Association of Cardiothoracic Surgery or EACS meeting.

Carolina's Valve Symposium.

The American College of Surgery, or ACS.

The Western Section AUA Conference, and the International Robotic Urology Symposium, IRUS.

Regarding our clinical progress.

We continue to experience excellent growth with DVP.

Several factors are contributing to this rapid growth, with the most important being improved clinical outcomes data.

Over the past few months, several leading clinicians have reported on their results with DVP.

At the Western Section Meeting of the AUA held last month in San Diego, Dr. Thomas [Allering] and his team from the University of California Irvine reported on their clinical outcomes for cancer management -- which, among other things showed positive margin rates of zero percent for their T2A cancers, and only 4 percent for their more advanced T2Bs -- which is an improvement over the 9-10 percent figures which are consistently reported with traditional open prostatectomy.

This paper has been submitted to the Journal of Urology and is awaiting publication.

The UCI paper was one of 8 da Vince-related papers, videos or poster presentations at this year's Section meeting.

But perhaps the most compelling was the state of the art lecture in which Dr. Tim Wilson from City of Hope National Cancer Center presented data comparing 3 cohorts of patients, which included their traditional open prostatectomy patients, their laparoscopic prostatectomy patients, and their da Vinci prostatectomy patients.

Dr. Wilson and his team at City of Hope have performed over 500 prostatectomies -- open prostatectomies, that is -- as well as nearly 500 standard laparoscopic prostatectomies -- and as of late, have switched their entire practice to da Vinci prostatectomies.

Dr. Wilson and his group have now performed nearly 500 da Vinci prostatectomies, and have objectively evaluated their data -- which found improved continence, shorter catheterization periods, and reduced blood loss, when comparing da Vinci prostatectomies to a standard laparoscopic radical prostatectomy.

It's clear that the City of Hope Cancer Center has found minimally invasive prostatectomy to be superior to open prostatectomy, and has found DVP to be the most effective operation among the three.

This study was also presented at this year's IRUS meeting, which took place in Dearborn, Michigan earlier this month.

Participants at this year's IRUS observed 6 live procedures -- 5 DVPs which were performed by Dr. [Mennen] and his group at Henry Ford, and 1 Pyeloplasty, which was performed on a 7-year old patient by Dr. Craig Peters from Boston Children's Hospital.

This is the third year that IRUS has been in existence, and each year the meeting has grown substantially over the previous year.

There were nearly 250 registrants at this year's meeting.

Some attended to evaluate the purchase of a da Vinci, while others who already own a da Vinci attended to learn new da Vinci techniques and tips.

The da Vinci presentations were abundant -- but perhaps the most impactful was Dr. [Mennen]'s presentation on post-DVT potency -- which suggested a 97 percent potency rate at 12 months for his first 35 patients who had undergone DVP -- incorporating his current Veil of Aphrodite technique.

Dr. [Mennen] will collect this data as patients anniversary, and he will report on a larger series in upcoming meetings.

And as a footnote, during this third quarter, the Henry Ford group celebrated their 1,000th DVP procedure.

Now, moving our attention to cardiac surgery.

At this year's IACs and Technocollege Conference, which was held in Liebstein, Germany in September, the da Vinci MVST was front-and-center.

Dr. Roxanne Newman of Meriter Hospital of Fargo, North Dakota performed live an MVST bypass procedure in the Liebstein Heart Center, which was broadcast to the general session of the conference.

Her operation featured Intuitive's new microbipolar forceps.

Her technique -- the microbipolar forceps, as well as the procedure, were well received.

A number of our early European da Vinci users commented on how impressed they were with the progress that their US colleagues were making with the MVST procedure.

Later that month, the First Annual Carolinas Valve Symposium was held in Greenville, North Carolina at East Carolina's University, and was chaired by Dr. Randolph Chitwood.

The symposium ran for three days and was attended by more than 100 cardiac surgeons.

The meeting focused on advances in mitral valve disease management, and featured da Vinci prominently.

The highlight of the meeting was the live complex anterior leaflet repair and technique review, which Dr. [Chitwood] performed.

This complex repair further illustrated Dr. [Chitwood]'s position on da Vinci's role within all mitral valve repairs -- from simple to complex.

He further emphasized this point during his presentation, in which he reviewed the clinical results of his first 150 da Vinci mitral valve repair operations.

It was made clear that this procedure, its indications and the techniques to performing it have evolved tremendously since our FDA approval 20 months ago.

The symposium concluded with a hands-on robotic wet lab, where over 30 surgeons participated in da Vinci mitral valve repair procedure setup and robotic suturing skills with intimate models and porcine tissue.

We continue to see our surgeons make progress with both the MVST and the da Vinci mitral valve repair procedures.

Earlier this month, we attended the ACS conference, which was held in New Orleans.

On the opening day of the meeting, a 3-hour general session entitled, "Clinical Advancements in Robotic Surgery," featured multiple presentations outlining da Vinci's role within general cardiac and urologic surgery.

Attendance was excellent, and the content was substantive.

The presentation topics included DVP, da Vinci Mitral Valve Repair, MVST da Vinci gastric bypass and da Vinci colon resections.

This was the first time that the ACS had sponsored a general session forum on surgical robotics.

And with the growing adoption of da Vinci, we would expect to see similar events in future meetings.

One final note from the ACS.

A new surgical organization named MIRA -- which stands for Minimally Invasive Robotics Association -- convened for their first inaugural meeting.

The organization was established for the advancement of robotics within the field of surgery.

The objectives set forth by the president, Dr. [Garth Valentine], and First VP Dr. [Santiago Jorgen], were far exceeded, both in content and attendance -- evidenced by the 100 surgeons who had traveled to New Orleans a day early to participate in this inaugural meeting.

Presentations during this 8-hour meeting included da Vinci pancreatectomy, da Vinci esophagectomy, da Vinci colon resection, DVP and da Vinci kidney transplantation and mitral valve repair.

We see MIRA as an organization which will serve to facilitate the collaborative exchange of information between da Vinci surgeons trained worldwide.

That concludes my update.

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.

Thank you.

We will now begin the question-and-answer session. [Hal Levy], Deutsche Bank.

Congratulations on a great quarter.

Just a couple quick questions.

How should we start thinking about the number of procedures that were performed this quarter and the third quarter versus the second quarter?

Because of the disposables and how those got placed.

Well, I think we saw some nice growth in the instrument orders from Q2 to Q3.

And as a reminder, we had mentioned last quarter that we had some timing issues on some of those placements of instrument orders.

The procedure growth -- the underlying procedure growth -- has been pretty steady, quarter-over-quarter and year-over-year.

So we didn't see anything that was significantly different in terms of procedure growth in Q3 versus prior quarters.

Could you guys possibly provide the number of procedures that were performed with da Vinci?

Excluding sort of this lumpiness?

You know, I'll tell you, we have not reported the numbers of procedures in the past, and we're not ready to do that now.

Looking going forward -- with this great number of systems that were placed -- how should we think about that for the fourth quarter?

Typically, it's your strongest quarter.

Should we be looking for something sequentially up?

Typically, fourth quarter is our strongest quarter.

But we don't give guidance on the number of unit placements.

We do give guidance on the revenues, and we gave an upward guidance of 40-45 percent growth year-over-year.

And we also gave some guidance on some of the different pieces -- like instruments, accessories and service.

And if you assume similar pricing that we've had in the past, I think you'll probably come up with a reasonable estimate for Q4.

This is the last question.

Do you guys ever comment on where these systems went?

Which department?

You know -- the 18 -- went into -- were they primarily urology departments?

Cardiac surgery?

We do comment on that in general terms.

I think the way you want to think about that -- the majority of the 18 systems that were placed had some element of multiple specialties that were participating in the buying decision.

Certainly we're getting a lot of growth out of the DVP procedure, and DVP is a big source of driving the sales.

But cardiac and general surgery are also participating in those buying decisions.

Are you seeing other departments now renew their interest in the system, now that they're seeing the success of the urology departments, both in terms of being able to attract patients and profitability for the hospital?

Yes.

I think you're seeing that on a case-by-case basis.

But I don't know that I can make blanket statements that we're seeing that in every particular instance.

But we're seeing some systems that were predominantly cardiac or urology that are now having general surgery participation.

And then we're seeing it on different levels at different hospitals.

Great quarter!

Tim Nelson, Piper Jaffray.

Nice quarter!

Now you have to start worrying about comps here in another year.

A couple of follow-ons to those questions.

Procedure mix.

Could you?

You haven't commented on that in the past.

It's -- well, you don't know the total number.

Is it more than 50 percent now, DVP?

Yes.

I think the last public comment we made on urology was that it had crossed over the 50 percent threshold.

So yes, it is over 50 percent.

And again, the majority of the remaining procedures are broken up between cardiac, general surgery and some pediatric surgery, as well.

Is cardiac the next?

The number 2?

Yes.

You know, I think we've always looked at those -- cardiac and general -- as about equal, and I think that remains the case.

You had commented on your goal of 10 percent penetration for [inaudible] procedure by the year end.

It seems like it might be there, now.

And Lonnie's comments talked about possibly 50 percent, at some point.

Could you give us an idea of the -- are you thinking of a time frame for that?

Or is it both near- and long-term?

Well, the percentage of the 230 that are prostate -- treated as like prostate surgery -- we've got numbers everywhere from 70,000 a year to 100,000 a year.

And you know we are certainly on track to be 10 percent, if we aren't already -- depending upon which number you choose.

In terms of how fast that'll take place -- if we had a crystal ball, we'd be happy to share that with you.

I think that we seem to be following a pretty predictable curve, and you know there's always -- you always run into on all those curves another barrier you have to break through.

So we feel good that we're on a solid growth curve there, and we'll continue to do so.

But we're not predicting that we'll have a number -- it -- actually, as you approach the top of the curve, it slows pretty dramatically.

So hopefully by that time, we will have other procedures that are growing just as fast, and we will continue to generate significant growth in that.

I had a lot of questions during the quarter of -- what is the best or minimum account size or hospital size, in terms of radical prostatectomies that could justify a da Vinci?

Do you have any comments on that?

I think if I'm not mistaken, at our Quarter Results last quarter, we had indicated that we had the smallest hospital to date purchase a da Vinci System, and it was a hospital outside of Omaha, Nebraska.

Actually in Fremont, Nebraska.

And it was a 90-bed.

And that is still the smallest hospital that owns a da Vinci.

And how many radical prostatectomies do they do a year?

I don't have those numbers.

I can say this -- that in that particular market, there's a lot of turbulence.

There are four systems in the Omaha general market.

And so there's a lot of patient shifting that's going on.

But I don't know their statistics.

My comment would be -- assuming it's not totally dedicated -- that a hospital makes a very, very nice return if they're doing 200.

They make a nice return well below that, but...

So, you know, where this will all level out is a little hard to predict.

But I -- it's kind of my assumptions, I assume.

And these are back-of-the-envelope numbers.

The hospital's going to be happy if they're doing 200 prostatectomies a year.

I don't know whether that's conservative or optimistic.

The fact is that early stages of a market like this -- you know -- analysis of those kinds of things are a little bit loose.

But in fact, we have a range.

We have the Henry Fords and the City of Hopes and others that are doing much, much more than that.

And we have some that are doing less than that.

But on average, they're all -- they're all progressing up and growing.

And when they exceed a certain point, they buy a second system.

And we do believe that this will consolidate.

Term centers will be doing most of these prostatectomies.

Because in fact, the late-movers -- while they ultimately move -- find themselves in a difficult position.

A lot of that is that the market shifted and they're late into it.

And those, we will have to find other procedures for them to [consign].

Aleks did a great job of talking about some of the market development activities going on during the quarter.

I've also spent a chunk of the day reading this supplement to the American Journal of Surgery that I believe you help fund.

A lot of interesting activity going on beyond radical prostatectomy.

Do you have any comments on what you think the leading horse is to be the next big thing?

I think we've indicated in the past that we are going to focus our resources in a very targeted approach.

We have picked da Vinci prostatectomy, obviously, as the lead horse.

We have given a lot of color to da Vinci Mitral Valve Repair and the revascularization procedures.

That is still going to remain the recipient of most of our resources.

At the ACS, there was more activity than we've seen in past procedures like gastric bypass -- and some interesting work coming out of Europe, with respect to colon and rectal surgery -- and certainly the esophagus and some of those procedures.

It's too early to tell you what those are going to look like in the near future.

But we are very close to all of those stories.

Last question -- I promise.

I missed the comments on pricing.

You said that they're stable both on the instrument side and the box side?

Yes.

Prices have been very stable on both systems and instruments.

On both instruments is about $1,200?

And the way you would know that, Tim -- it's Susan -- you don't generate a 64 percent gross margin if you have any sort of pricing discount going on out there.

Oh.

Things that might be going up.

But, no.

So the boxes are still -- what did you say they were? 850?

Prices.

Average selling price for the systems this quarter was 880.

And by the way.

For the Fourth Arm, it's been pretty stable at $170,000.

And the other area, Tim.

We do use 1,500 per procedure -- not your 1,200 you just said.

Charlie Jones, KeyBank Capital Markets.

Another impressive quarter.

A couple of quick questions about gross margins, going forward on the study states.

Any comments?

On if you think that's going to be above the 65 percent goal?

The 65 percent goal assumes a steady state -- which means half system and half instruments and recurring revenue.

If it shifted over more to a recurring, the margins would be slightly higher.

But we -- management -- believes that we will see a 50/50-like blend for quite some time in the future.

As far as taxes -- what caused the lower tax rate this quarter, and then any idea what it's going to look like next year?

We were doing an estimate for the year of about 5 percent, going into this quarter.

We've refined that estimate to 3 percent for the adjustment this quarter, as reflecting that year goal of 3 percent.

Next year at some point in time, when we will report on a fully-taxed basis, that basis if it's fully-taxed would be somewhere between 35 and 40 percent.

The timing of that we will discuss more in detail on the fourth quarter call.

Is there any way to convince you to give us some more -- some harder numbers as far as the percentage of MVST and mitral valve repairs -- as a percentage of your total procedures?

Not at this point in time, because we don't think you can draw a pattern enough of adoption to make that a meaningful number to keep releasing to you.

Or another way to look at it -- How long before -- do you think that it will be 1 year? 2 years?

Just best-guess here.

Or more like 4 or 5 years when you start to see the ramp that we've seen with the prostatectomy.

In the next procedure.

You know, if I had a crystal ball, I'd be happy to answer that question for you.

Since I don't have one, I think we will not do so.

Did you want to add anything?

No.

That's very well.

[Brian Mehta] of Candlewood Capital.

I get so excited talking about da Vinci.

Now you've mentioned that 8 Aesop systems replaced this quarter.

Could we talk a little bit about that business model?

What the sales prices for those systems and any kind of recurring revenue model that comes from that?

And if you're planning on pursuing that aggressively?

The answer is, it's not a great business model.

It's mostly capital.

There's not a large recurring revenue stream.

We continue to provide it because there is demand in the market.

But it is not a product that's probably going to provide a significant growth opportunity for the company.

And [Brian], you can see that when we talk about the size of Computer Motion revenue range.

Even with the Aesop systems, it's still in that $1 million to $1.5 million range.

[Rick Lyons], Bear Stearns.

My congratulations, as well.

A couple things.

I probably missed just the beginning of the call and some of Susan's comments.

I apologize if I'm asking again, but...

Maybe if you could -- I realize you're not ready to give longer-term guidance, but...

Don't take this as a criticism.

I might've [inaudible] poor operating leverage this quarter, given the revenue strength in the mix.

I mean clearly, you're still investing.

Do you have a target operating margin?

You know, when you're looking out on this a couple of years...?

Yes.

Rick, we have a 20 percent operating margin -- SG&A at 35 percent and R&D at 10 percent.

Realize that a lot of what's driving this is variable compensation, based upon the higher revenue targets that we hit this year.

Those targets and those variable comp elements are set every year as we set our numbers.

So you may not see the volatility that you saw this year, since we're now in the 40-45 percent year-over-year growth rates.

That leads me to some other issue, which is visibility.

Obviously, visibility is a tough thing for us on the outside of the Company.

Maybe inside.

Intra-quarter.

Susan, something you said earlier just sort of suggested that you all feel very good about -- and I think it's clearly the [Sarbanes-Oxley] comments -- very good about the state of the business.

And all the marketing initiatives and the marketing development issues and the response.

How much visibility do you have?

Should we be as anxious as we've been about the quarter-to-quarter fluctuations over the next couple quarters?

Could you give us any color or perspective on that? [inaudible / crossing]

I would give you two, and Ben can give you a little more.

When you're 46 percent of your sales are recurring and then we do have the guidance on what's on the balance sheet on the deferred income of service.

Those are the most predictable.

The recurring is the second.

The instrument-accessories second.

And then the last, of course, is the capital side of the business, which is becoming less and less.

On top of that, a single unit is less and less material to the Company as we get bigger.

So the answer is, you're feeling pretty comfortable, if I had to put words in your mouth.

I guess the answer is that even though there's still seasonality, Rick, in the quarters -- and in fact -- you know, there was probably a little bit of seasonality at the beginning part of Q3 that we saw.

But that's been muted, since the recurring revenues have become a much-larger percentage of our total revenues.

Rick, one thing -- you know -- comfort is a relative term.

We're certainly more comfortable than we were a couple of years ago.

But you know --

On the other hand, it's a bigger company and the stakes get higher.

So...

Clearly, as well, urology is driving things in a very powerful way, right now.

Can you comment on -- or again kind of characterize cardiology usage as sort of the procedure volume that -- for more dedicated cardiology units.

Are you seeing the trend there that you want to see?

Again, any perspective you can give us, I'd appreciate it.

Well, you know, I think that we're making progress.

But you know, it's...

That's the various aspects of cardiac surgery.

We just got approval for the bypass.

That's mostly single-vessel.

That's a small part of the market.

But we've got a lot of development to do, there.

And it'll take some time.

As you know, I'm a big believer that you listen and watch and look for those early signals of procedures.

And we're still working on all -- on many procedures.

Some of them look like they could be another DVP, and yet until you have enough of a base to really give you confidence in that, I think it's...

We remain cautious.

And so we feel good about the people working on it.

We think we're making significant progress.

We're not ready to start predicting numbers or sharing that information.

I don't think it's...

And quite frankly, as we get more and more systems into the broader markets -- into the rest of the world and other markets -- our ability to gather that data is a little more diluted than it used to be, in terms of procedures done in some of those markets.

Would it be too much to -- I'd appreciate a little further light.

I mean did cardiology usage grow, as best you could track it?

Is it growing double-digit?

Any...?

Rick, [inaudible / crossing] I'll answer your question, Rick.

I'm not going to -- we're not going to get into...

This is a path we just keep getting deeper and deeper.

We're just not ready to give specific guidance or information on that at this point in time.

Yes.

My job is to push you.

I know.

I know.

And you do a good job at that.

Yours is to say no, and you do a good job of that.

No!

The last one, and maybe Susan will say no to me this time.

Again, Susan -- you already said you don't want to give specific system placement, and you haven't.

But I don't know how many quarters ago it was that you all suggested sort of a 15-plus-or-minus a couple a quarter was the right place for us to be thinking, in terms of sort of averages.

Now we seem to be bumping up more to the upper teens.

I mean is that a sustainable range?

You know when we're thinking in general terms?

Are we more in the now 18-plus-or-minus a few in any given quarter?

Again -- any help would be appreciated.

Rick, this is Ben.

I think to achieve the guidance that we gave for Q4, you're probably going to have to be in that range for Q4.

And going forward into 2005, we're going to do our best to give you some guidance for that in our next quarter's call.

But I think you're probably not far off in saying that we've gotten some momentum here, going.

And also, we might sort of footnote in there that geographically we've been expanding a bit in the rest-of-the-world markets.

And that has also been giving us some additional system placements.

And another thing, Rick, I would say, is that we still want to grow this company on a top line -- 20 to 30 percent every year.

So we've been -- we've [boosted] stayed at 50/50.

So we still are very bullish about this business.

It really was a wonderful quarter.

We are about out of time, here.

We'll take one more question and then close.

[Henry Bernstein], [Gagnum] Securities.

Again, echoing everyone else's comments.

Just a wonderful quarter.

Very pleased with the numbers.

As you continue to build your cash balances, and this is more directed to Susan, I guess.

Have you given any consideration to the possibility of leasing these units to hospitals that might be a little less anxious to get a capital authorization in excess of about $1 million, but could find it a lot easier to either lease one on a -- possibly on a long-term basis?

You know Henry, that may become an option at some point in time.

My own belief is that at this stage in the market, I'm not sure that's the right thing to do.

I like the fact that a hospital commits.

Makes a significant commitment, here.

That means when we talk to them and we're not talking about, "Hey, this is an easy thing to get into," and you kind of make it partial...

No.

We'd rather have them commit both resources, training -- all the things it's going to take to make a -- to make a successful adoption of a new technology.

So I think that the purchase price causes them to pause.

It makes them think about this in terms of a major strategic initiative for the hospital.

And to think about the resources that are required to make that a success.

But as the market matures, there maybe will come a time when that makes a lot of sense for us.

And I'm [inaudible] my IBM where we were in the leasing business.

But I think at this point in time, I think it would be pretty [intuitive] to do that.

Right.

We don't think that our growth rates need that right now, and that the appetite for capital and the investment by the hospitals is still very strong, out there.

That's the best answer I could possibly get.

I think that's wonderful.

Again, my congratulations on a fantastic quarter.

Thank you so much.

That's the last question for today.

Again, to summarize the highlights for the third quarter.

This is getting a little redundant, but -- when numbers are good, we like to say them.

Total revenue grew to $35.5 million -- up 52 percent from prior year.

Our recurring revenue grew to $16.5 million -- up 110 percent from prior year. [inaudible] that Susan mentioned that 46 percent of total revenue.

We shipped 18 da Vinci systems and 15 Forth Arms.

Our gross profit improved to 64 percent, and our net income for the quarter was $6.1 million.

EBITDA $7.4 million.

And we ended the quarter with $121 million in cash.

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

Our priorities remain -- first -- superior products and customer service for the hospitals we serve.

Second, profitability.

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

That concludes today's call.

We thank you for your participation.