直覺手術 (ISRG) 2004 Q4 法說會逐字稿

Good afternoon and welcome to the Intuitive Surgical's Fourth Quarter Earnings conference call.

At this time, all participants are in a listen-only mode.

After the presentation, we will conduct a question-and-answer session.

To ask a question, please press star, one.

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 Fourth Quarter 2004 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 fourth quarter as described in our press release announced earlier today, followed by a question-and-answer session.

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

Susan will follow with a review of our fourth quarter and full year 2004 financial results.

Then, I will review our business forecast for 2005, followed by Aleks, who 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 for joining us today.

As you can see from our press release, we had an excellent fourth quarter.

When I say we are delighted to share these results with you, I really mean it.

Two thousand and four was an extraordinary year for our Company.

Highlights for the fourth quarter are as follows.

Total revenue grew to 45.2 million, up 64 percent from the prior year.

Recurring revenue grew to 18.1 million, up 79 percent from the prior year, comprising 40 percent of total revenue.

We shipped 25 da Vinci surgical systems, and 24 fourth arms.

Twenty of those systems were in the United States.

We ended the fourth quarter with 286 cumulative da Vinci systems shipped.

Our gross profit margin improved to 65.9 percent from 34.6 percent in the fourth quarter of 2003.

We generated an operating profit of 10.9 million, compared to a fourth quarter loss of 5.6 million last year.

Our net income for the quarter was 11.7 million, or 32 cents per share, compared to a loss of 4.9 million, or 16 cents per share last year.

EBITDA for the fourth quarter grew to 12.6 million, from 265,000 in the fourth quarter of 2003.

For the full year, total revenue grew to 138.8 million, up 51 percent from the prior year.

Recurring revenue grew to 60 million, up 101 percent from the prior year comprising 43 percent of total revenue.

We shipped 76 da Vinci surgical systems and 65 fourth arms.

Our gross profit margin improved to 63.4 percent from 48 percent in 2003.

We generated 21.2 million in operating profits, compared to a loss of 11.9 million last year.

Our net income for the year was 23.5 million, or 67 cents per share compared to a loss of 9.6 million, or 41 cents per share in 2003.

EBITDA grew to approximately 28.5 million from a negative 1.2 million last year.

We ended the year with 132 million in cash and cash equivalents, up 10.8 million from last quarter, and 19 million from last year.

In 2004, we decisively turned the corner to become a profitable company.

We did this by growing our top line, improving our margins, and effectively controlling our fixed cost growth.

We made significant progress in every functional area.

We launched a significant of new instruments, including our 5 mm instrument line, and our 8 mm microbipolar and Maryland bipolar instruments.

We have an excellent pipeline for 2005.

We received FDA clearance for cardiac revascularization, as well as cardiac ablation.

We opened several new overseas markets and made significant organizational progress overseas as well as in North America.

We completed the final consolidation of the Computer Motion acquisition.

We expect to be deemed fully Sarbanes-Oxley compliant at the end of our audit.

I sincerely believe that we are significantly -- a significantly better company today than we were one year ago.

With that, I'll turn the time over to Susan Barnes, our chief financial officer.

As Lonnie has mentioned, we enjoyed outstanding fourth quarter results exceeding our expectations.

Going into detail, total fourth quarter revenue increased to $45.2 million, up 64 percent from 27.6 million for the fourth quarter of 2003.

Higher fourth quarter sales were driven by higher da Vinci Surgical System and Fourth Arm unit sales, as well as continued recurring revenue growth.

Fourth quarter 2004 sales increased in all product categories.

Compared to last year, Systems revenue increased to $27.1 million from 17.5 million.

Instruments and Accessories increased to 11.6 million from 6.1 million, and Service and Training increased to 6.5 million from 4 million.

We shipped a record 25 da Vinci Surgical Systems during the fourth quarter up 7, compared to 18 shipped during the fourth quarter last year.

Fourth quarter demand for fourth arm sales was strong, as we shipped 24 da Vinci Fourth Arms during the quarter compared to 11 during the fourth quarter last year.

We shipped 5 Aesop Systems during the quarter compared to 11 during the fourth quarter last year.

During this fourth quarter, we continued to drive significant recurring revenue growth.

Recurring revenue comprised of instrument, accessory, service and training revenue grew to $18.1 million, up 79 percent from 10.1 million during the fourth quarter of 2003.

This rapid and consistent growth reflects the ongoing adoption and utilization of the da Vinci Surgical System.

Our full year 2004 sales totaled $138.8 million, up 51 percent compared to 91.7 million for 2003.

We shipped 76 Systems and 65 Fourth Arms in 2004, compared to 61 Systems and 37 Fourth Arms in 2003.

For the year, recurring revenue increased 101 percent to $60 million from 29.9 million in 2003, representing 43 percent of 2004 total revenue compared to 33 percent in 2003, and 22 percent in 2002.

Fourth quarter 2004 gross margin percentage increased to a record 65.9 percent compared to 34.6 percent for the fourth quarter of 2003.

Note that last year our fourth quarter 2003 gross margin was impacted by non-recurring Computer Motion integration and patent royalty costs totaling 5.9 million, and would have been 55.9 percent excluding these items.

Our higher fourth quarter 2004 gross margin was driven by leveraging service and manufacturing overhead across higher revenues, material cost reductions, and the impact of euro-denominated sales as the euro strengthened considerably against the U.S. dollar.

Total operating expenses for the fourth quarter 2004 were $18.9 million, up 3.7 million compared to the fourth quarter of 2003.

On a full year basis, total operating expenses grew 19 percent year-over-year to $66.8 million in 2004, compared to 55.9 million in 2003.

Operating expenses were highly leveraged in 2004, as we were able to hold operating expense growth to 19 percent, while we grew sales 51 percent.

Breaking down these expenses, SG&A expenses for the fourth quarter 2004 were $14.6 million compared to 10.4 million for the fourth quarter last year.

The increase was driven by sales organization head count growth to support higher sales, higher incentive compensation associated with achieving higher revenues and profitability, and additional accounting personnel, consulting and auditing resources added to support Sarbanes-Oxley compliance.

Research and development expenses for the fourth quarter 2004 were $4.2 million compared to 4.7 million for the fourth quarter last year.

The decrease was driven by the elimination of Computer Motion R&D costs incurred during the fourth quarter 2003.

Other income of $1.1 million was comprised of $800,000 if interest income and $300,000 of foreign exchange gain resulting from euro-based transactions.

Other income increased by $300,000 compared to fourth quarter 2003, primarily due to higher interest earned on higher fourth quarter average cash balances.

Our fourth quarter 2004 net income was a record $11.7 million, or 32 cents per diluted share compared to a net loss of 4.9 million, or a loss of 16 cents per share in the fourth quarter of 2003.

As we mentioned last year, the fourth quarter 2003 was negatively impacted by $6.1 million of non-recurring Computer Motion integration and patent charges.

Our full year 2004 net income was $23.5 million, or 67 cents per diluted share, compared to a net loss of $9.6 million, or losing 41 cents per share in 2003.

We continue to execute our business plan and have attained our planned steady state income statement profile.

This profile cut its gross margin to 65 percent, and operating margin at 20 percent of sales.

In the fourth quarter we exceeded these metrics with a gross margin of 66 percent and operating margin of 24 percent due to stronger than expected sales ahead of our planned head count growth.

For the full year 2004 gross margin was 63.4 percent, and operating margin was 15.3.

Now in regard to our balance sheet.

We again strengthened our balance sheet metrics during the quarter.

We were at $10.8 million cash flow positive during the fourth quarter, ending the period with $132 million in cash and investments.

In addition to our $11.7 million in net income, we had $1.7 million of non-cash operating expenses and $3.8 million of proceeds from stock option and warrant exercises.

These positive cash flows were partially offset by a growth in accounts receivable resulting from higher sales.

Our year-end accounts receivable balance increased to $35.4 million from 26.8 ending 2003.

While our accounts receivable balance grew as a result of higher fourth quarter 2004 sales, we were able to reduce our average day sales outstanding to 71 days compared to 87 ending the prior year.

Our year-end net inventory decreased to $6 million from 8.8 million ending last year.

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

Inventory turns have increased throughout this period and now stand at 10.3 turns per year.

Finally, we ended the year with $15.9 million of total deferred revenue compared to 12.5 million ending last year.

This buildup is an indication of the growth in our service contract business and continued expansion of our install base of da Vincis.

With that, I'd like to turn it over to Ben, who will provide a summary of our business forecast for 2005.

Thank you, Susan.

Overall, we are very pleased by our 2004 results and anticipate further growth in 2005.

With regard to revenue, for the year we expect total sales to grow between 20 and 30 percent over 2004.

We anticipate the quarterly distribution of sales to follow a similar seasonal pattern as in previous years, with Q4 being the strongest.

Consequently, we are expecting Q1 of 2005 revenues to be sequentially lower.

However, we expect revenues in each quarter of 2005 to be higher than the comparable quarter in 2004.

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

Specifically, we expect instrument and accessory revenue will increase between 40 and 50 percent over 2004, and we expect service and training revenue will increase between 35 and 40 percent.

Based upon our service contract model, we anticipate that service and training revenue will run between $24,000 and $25,000 per quarter per System installed ending the previous quarter.

Regarding gross margin, as Susan mentioned, we have essentially arrived at our city/state business profile model.

While gross margin in individual quarters will vary depending upon our volume and mix of revenues, we expect 2005 gross margin percentage to remain at approximately 65 percent for the full year.

As for operating expenses, we expect full year 2005 operating expenses will increase 15 to 25 percent from 2004.

We continue to target our operating expenses at 45 percent of total sales.

Based upon these anticipated 2005 sales and operating margins, we expect our 2005 net operating income to grow 50 percent or more compared to 2004.

Please note that our operating expense forecast does not include the potential impact of expensing options.

We will wait for financial pronouncements from the Financial Accounting Standards Board before factoring option expensing into our forecast.

With regard to income tax, we expect to convert to reporting fully taxed earnings late in 2005.

After this change occurs, we expect our reported tax rate to be between 35 and 40 percent.

Upon making this change, we expect to record a one-time P&L benefit to recognize a significant portion of our $80 million deferred tax asset.

Until we convert to reporting fully taxed earnings, we expect to continue reporting a tax rate of approximately 3 percent.

With regard to shares outstanding, we currently have about 34.2 million shares outstanding, and about 4.3 million shares that could be added to the diluted share formula depending on our average stock price.

To provide you with a range on what the diluted share for EPS calculations may be in Q1, a 30 percent change in our stock price from the beginning of the quarter will result in a diluted share count as low as 35.8 million shares, or as high as 37.2 million shares.

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

As mentioned earlier, during the fourth quarter we shipped 25 da Vinci systems, 20 in the U.S., 4 in Europe, and 1 to rest-of-world location.

This brings to 286 the cumulative number of da Vinci shipments worldwide, 204 in North America, 56 in Europe, and 26 to rest-of-world markets.

All of our sales are important; however, there were several that were notable.

The system sale to Trinity Mother Frances Hospital in Tyler, Texas, represented a second system placement, which brings to 25 the number of centers with two or more da Vinci systems.

Also, we had initial da Vinci placements into two large, unpenetrated metropolitan markets, namely, San Diego with a sale to Sharp Memorial, and Louisville, Kentucky, with a sale to North Hospital.

We also placed systems into several other prestigious medical centers including Loma Linda Medical Center in Southern California, Oshner Clinic in New Orleans, and the Boston Medical Center.

We showed strength outside of the United States with our fifth da Vinci placement into Australia, and our second into Romania, and our first into the country of Norway, with a placement to the Norwegian Radium in Oslo, which is recognized as one of the most advanced medical centers in all of Scandinavia.

Our Fourth Arm sales were strong.

During the quarter we shipped 24 Fourth Arms, 20 as initial Four-Arm da Vinci Systems, and four is upgrades to existing da Vinci customers.

Of the 76 da Vincis sold in 2004, 57 were sold as Four-Arm da Vinci systems.

This brings to 102 the overall number of Fourth-Arm Systems with an installed base, which is approximately one-third of our overall base.

We foresee a strong appetite for Fourth-Arm Systems going forward, with a mix continuing to favor Four-Arm da Vinci Systems over Fourth-Arm upgrades.

Clinically, we had another strong quarter with solid growth in our procedure volumes.

We participated in a number of trade shows and medical conferences in both urology and cardiac surgery.

We also had a number of DVP papers published within period journals.

We launched three new instruments in the fourth quarter, the new curved scissors, the Risano (ph) forceps, and a new Endopath delivery instrument.

Also during the quarter we reached an agreement with Ethicon Endo-Surgery to collaborate on the development of a new product, the Intuitive Harmonic curved sheers.

The product, which will be controlled by the da Vinci System, will incorporate the base technology of the Ethicon Endo-Surgery Harmonic scalpel.

The Harmonic curved sheers are expected to launch in the first half of this year.

During the quarter, we received FDA clearance to use da Vinci in combination with microwave ablation catheters for cardiac tissue ablation procedures, which I will describe later in my comments.

Regarding our clinical progress in urology, we experienced excellent growth within DVP for the quarter.

One of the key drivers for DVP momentum is the greater visibility of DVP clinical outcomes within the academic societies.

At the World Congress of Endourology held in Lumbai, India in November, 47 different presentations, abstracts and videos were centered around the da Vinci Surgical System, 28 were specific to DVP.

This is a significant increase to years past.

Some of the notable presentations included a presentation from the group at the Vadicode (ph) Institute in Detroit entitled "A Modified Technique of the Vadicode Institute Prostatectomy After 1150 Cases," which concluded that even with 1150 procedures under their belt, they continue to make modifications in their technique, which have improved patient outcomes even further.

Dr. Carr (ph) from St. Joseph's Hospital in Orange, California, gave a presentation entitled "Robotic Radical Prostatectomy in a Community Hospital," which concluded, "Robotic prostatectomy is a procedure that can be performed by community urologists with minimal laparoscopic skills."

The content of Dr. Carr's presentation was derived from his experience after only 25 DVP procedures.

In addition to the multiple da Vinci presentations at the conference, there was a live 3-D transmission of a DVP performed by Dr. Manny Mennan in Detroit piped into the main session of the conference in India, where Dr. Ralph Klaman, chairman of the Department of Urology at University of California-Irvine, served as the moderator.

At the American Urology Association, or AUA, postgraduate course held in Washington, D.C. last month entitled "Carcinoma of the Prostate," over 100 surgeons had the opportunity to test-drive a da Vinci System, as well as hear DVP outcomes presentations by Drs.

Jay Smith, chief of the Department of Urology at Vanderbilt University, and Dr. Manny Mennan from Henry Ford Hospital.

It was the first time that Intuitive participated in this AUA postgraduate forum.

Over the past few months, several da Vinci-related publications have appeared in some of the urology professions leading purview journals.

In the September edition of the Journal of Endourology, the publication entitled "Vadicude Institute Prostatectomy, a Technique of Robotic Radial Prostatectomy Experienced in More Than A Thousand Cases," and authorized by Dr. Manny Mennan and his team from Henry Ford, reported their patient results, which included blood loss of less than 100 mL, zero blood transfusions, zero intraoperative complications, zero conversions to open surgery, and an average operating time of 140 minutes.

In last month's edition of the British Journal of Urology, Dr. Shandrusen Darom (ph) and his team from Indiana University had the first publication on a Fourth-Arm DVP appear in the journal.

The paper entitled "Utility of the Fourth Arm to Facilitate Robotic Assisted Laparoscopic Radical Prostatectomy," outlined several advantages to the Four-Arm da Vinci System in a DVP.

The author said, "Its use facilitates greater control by the operating surgeon, enabling the surgery to be conducted with less experienced assistance."

Providing greater surgeon control and system capability, while allowing the less experienced assistants were the goals we set out to achieve with the development of the Fourth Arm, and we would expect this to continue as the Fourth-Arm population expands.

Within cardiac surgery, we continue to make progress with the da Vinci mitral valve repair and the da Vinci revascularization procedures.

At the winter meeting of the International Society of Minimally Invasive Cardiac Surgery, or ISMICS, which was attended by over 450 surgeons, there were three da Vinci-related scientific presentations.

Dr. Sadere Shavastava (ph) from Odessa, Texas, presented the results of 72 da Vinci revascularization operations, which showed almost all of his patients being discharged from the hospital in under three days and returning to normal activity in under two weeks.

Drs.

Subramanian and Patel from Lenoxville Hospital in New York City, delivered a presentation on the da Vinci multi-vessel small thoracotomy procedure, or MVST.

And Dr. James Edgerton from Medical City in Dallas, gave an overview of his results with the da Vinci biventricular lead placement procedure.

There were also two live surgery transmissions at this meeting.

First, Dr. Randolf Chitwood from East Carolina University performed a complex da Vinci mitral valve repair procedure on a patient with ischemic mitral valve disease.

During his commentary to the audience, Dr. Chitwood stated that his cross-clamp times for his da Vinci repairs are comparable to that of his open procedures.

Also, Drs.

Subramanian and Patel performed live a two-vessel MVST procedure on a patient with advanced coronary artery disease.

Last month at the Annual Society of Thoracic Surgery Conference, or STS, was held in Tampa, Florida, and attended by over 2,000 cardiac and thoracic surgeons.

A number of scientific presentations featured da Vinci prominently, including Dr. Mike Regenziano from New York Columbia Presbyterian Hospital, and the principal investigator of our coronary artery bypass trial, presented the results of this FDA-sanctioned revascularization trial.

You may recall, this trial led to our revascularization approval this past July.

Also, Dr. Sadere Shavastava gave a presentation entitled "Bilateral Internal Thoracic Arteries in Coronary Artery Bypass Graft" facilitated by a da Vinci robotic system.

In his presentation, Dr. Shavastava provided a technique overview of his grafting strategy, which has resulted in excellent patency over his 150 patient series.

As we stated before, the da Vinci cardiac revascularization procedures are early within their development.

We are pleased with the progress that some of our customers are making with these procedures, but the procedure is still in its early phases.

During the conference, we hosted several booth presentations which included da Vinci mitral valve repair, MVST, da Vinci-assisted cardiac tissue ablation, ASD repair, and da Vinci-assisted lobectomy.

All of these presentations were well attended.

After normal show hours, Intuitive, along with Edwards Life Science, Cardiovation and Sign Pharmaceuticals, cosponsored an educational event entitled "Growing and Protecting Your Valve's Business."

The event was attended by over 150 surgeons and included da Vinci case reviews by Dr. Doug Murphy from St. Joseph Hospital in Atlanta, an Dr. Michael Smith from Good Samaritan Hospital in Cincinnati.

There were several important comments made by the presenters, but the one that may have resonated the loudest was regarding the relationship between mitral valve repair and mitral valve replacement within their individual practices.

The speakers had had similar experiences in this area.

More specifically, prior to incorporating da Vinci into their practices, they were both replacing and repairing mitral valves at an equal rate.

Said another way, roughly 50 percent of their percents that presented mitral valve disease would receive a mitral valve replacement, and 50 percent would receive a mitral valve repair.

However, since they have incorporated da Vinci into their practices, both have shifted their practices to nearly 100 percent da Vinci mitral valve repair.

Dr. Murphy stated that on his last 98 mitral valve cases, 97 were da Vinci repairs, and one was a replacement.

The one mitral valve which he replaced, he replaced using the da Vinci System.

The patient benefits associated with a repair versus a replacement are significant.

A repair uses the patient's natural tissue, which eliminates the need for lifelong anticoagulant therapy, such as Coumadin, and repair is much more durable than a replacement.

Since this disease generally presents itself in younger patients, these benefits become even more desirable.

Drs.

Murphy and Smith also described the positive impact that da Vinci has had within their referral network.

They are seeing patients that would normally be referred elsewhere, and the impact to their practices has been tremendous.

Our customers continue to report a da Vinci's role in expanding their patient's reach.

This was evidenced clearly in East Carolina University's live da Vinci mitral valve repair webcast, which took place last month.

East Carolina University reported that over 14,000 people logged in to view the da Vinci mitral valve repair procedure, and within the first 24 hours following the webcast, they received nearly 500 e-mail inquiries from prospective patients, family members of patients, and other interested parties.

The power of patient awareness campaigns in today's connected society is strong, and we believe the procedures we have targeted set up well to benefit within this paradigm.

Finally, we are pleased to report that the FDA has granted us clearance to perform da Vinci cardiac tissue ablation using microwave-based catheters, such as Guidance Flex-10 catheter.

This clearance provides our customers the ability to further develop a minimally invasive procedure within this emerging area of surgery.

Although we are pleased with this clearance, we do not expect it to have a material impact on our near-term revenues.

That concludes my summary, and I will now pass the time back to Lonnie.

That concludes our presentation.

We would now be delighted to answer any questions you might have.

We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS).

Mr. Levy, you may ask your question.

Yes, hi.

Can you hear me?

We sure can.

Just a couple of quick questions over here.

The placement of the systems -- can you characterize where they went in the quarter, in terms of cardiac, general, uro --

No.

We really haven't characterized them by specific specialty, only geographics.

I think it's still the case and will remain the case that most of our systems include a multi-specialty approach.

We have cardiac surgery that weighs in; we have urology that weighs in; and in many cases general surgery, and that still is the case and we see that continuing.

Okay.

I thought before you'd given some percentage as to the procedure and so forth, and I was wondering if that sort of still held to around 55 percent within urology, and the rest was split between cardiac and general.

Yes.

Actually, I apologize to you.

I was answering a different question and maybe you were asking a different question.

We -- I was specifically talking about the placement.

As far as the procedures, we have indicated in the past quarter, I believe it was the last quarter, that urology has extended beyond the 50 percent mark and, yes, that still holds true.

Perfect.

And in terms of -- if I look at the guidance that you provided, did I get it correctly that you report a net income growth of 50 percent?

Yes, if you take all of the guidance that we gave for revenue and gross margin operating expense growth, then -- if you just take a look at the low and high ranges, the operating profit is likely to grow 50 percent or more.

Not net income, though, operating profit.

That's just the operating profit.

The reason why we do that is, as I was trying to explain with the tax rate.

During 2005, it is likely that we will have an event where the tax rate may be very unusual.

Okay.

And just finally, in terms of the new product that you mentioned, the Harmonic scalpel, can you maybe provide a little more insight as to what that -- how that's currently used in the marketplace in terms of open procedures, and how that's going to work with the robotic system?

Yes . the Harmonic scalpel is probably one of the most utilized laparoscopic products in a number of different surgical specialties led by general surgery, gynecology, and some thoracic work as well.

The system -- I should say the product will be attached to da Vinci.

We will be manufacturing the product and incorporating the base technology from the Ethicon Harmonic scalpel, and it will become one of our instruments that we will control the distribution of.

We will sell it and we will supply it to our customers.

Perfect.

Great.

Thanks, guys.

Mr. Shusky (ph), you may ask your question.

Good afternoon.

Good afternoon.

I must echo those comments.

Fantastic quarter.

A couple of things.

As far as the guidance -- maybe this is for Ben or Aleks, I'm not sure, probably Aleks.

Aleks, what kind of targeted '05 or year-end '05 penetration run rates do those guidance comments refer to, as far as DVP, for example.

Did you achieve kind of the 10 percent number you were looking for at the end of '04, and what are you looking for in '05?

Yes.

We have indicated throughout '04 that we would end the year at roughly 10 percent of all prostatectomies being performed with -- would be performed with da Vincis, and we believe we've reached or exceeded that number.

We have not given guidance for '05, and it becomes difficult to give that forward-looking guidance, so we have chosen not to give that guidance going into this year.

And I'm assuming that mitral valve and MVST are insignificant as a percentage.

Yes, we haven't given that percentage.

Okay.

Second question, on competition or potential competition.

As you read and look at the various initiatives that are being undertaken either by universities or robotics labs, or Richard Wolf, or other companies, it seems that they kind of fall either into the neuro category, the orthopedic category, or products that are similar to Aesop, in the sense that an arm that holds and moves a laparoscope.

Are there any other initiatives that are targeted directly at you that I'm not aware of?

And if there are not, is it really a function of your intellectual property position having been solidified with the acquisition of Computer Motion and the elimination of that lengthy litigation that you were undergoing?

This is Lonnie.

I'm not sure -- you've asked a lot of questions. -- I'm not sure we can get inside the head of all those who are doing research in this area, but I think your assessment is essentially correct, that the places we have seen, development efforts have been primarily in orthopedics or neurology or neurosurgery, and controlling -- again, Aesop kind of wannabes -- there are a lot of different programs throughout the world in Europe and in Asia, and all of those are not necessarily forthcoming with what they're doing.

So we are preparing to ensure that if we do have someone enter the market, we are prepared to meet with them and compete with them.

We do believe that we continue to build a very, very significant intellectual property barrier, and we will aggressively use that if someone treads on our intellectual property.

Okay, thanks.

Mr. Lyons, you may ask your question.

Hi.

Congratulations as well.

A couple of questions .

First, you've given us for 2005, you've given us a wide sales growth range, 20 to 30 percent, something like 167 to 180 million.

While I appreciate the variability and -- associated with making that kind of forecast, can you perhaps just share with us sort of the thought behind the upper and the lower end of the range, maybe some of what the driver is.

Is it product-related, is it mix-related, geography?

Maybe just help us appreciate some of the variables.

Sure, Rick, this is Ben.

The reason why we also gave some guidance on the different components of revenue, such as the instrument accessories and the service and training is, some of those items are more predictable than others.

I think we mentioned in the past that the service component is more predictable, because they're under service contracts, and so you'll note that we gave a brief -- a smaller range on that.

Right.

On the instruments and accessories, we feel pretty confident just because of the repeatability and predictability of that, even though there have been some quarters where in the past it's been a little bit higher just due to some of the timing of some of the orders.

I think we've been pretty open in the past about the predictability of when a system sale comes in, it is the hardest part for us to predict.

As an example, in the fourth quarter, I don't think that we predicted that we would sell 25 systems.

So, again, that's probably where most of the variability is stemming from for us.

Okay.

On the last point, clearly something has changed in a very wonderful way that has bruised the fourth quarter placement levels.

What changed?

Has it been driven by the breadth of procedures or -- maybe you can help us understand how you -- it sounds like you got a little surprised -- that's driving more of the da Vinci placements.

Rick, I think we're still on a pretty traditional adoption curve.

We are -- I think we're beginning to move into early majority.

The technology is now at least in prostatectomy and in urology, and in some other procedures, it's clearly being accepted as -- this is potentially going to be a standard of care.

We believe it will become -- I mean, the marketplace is starting to recognize that.

And so I think we're moving away from this being, at least in many people's eyes, an experimental device, and so I think we're just going through the natural acceptance process, and I think we saw some growth.

But, this will -- our intention is to have very steady and consistent growth year over year, and in the process to build a very effective and high performing company.

Thanks, Lonnie.

Two more quick ones.

You've had such a wonderful quarter, I feel like it's okay to quibble about something.

I'd be disappointed if I didn't.

R&D in spending and dollars was sequentially less than the third quarter and a little less than we looked for.

When I look at the quarters last year, it went up each quarter of the year.

Just a little more color as to what's going on.

I realize a lot of this is timing.

And last, Lonnie, as the cash builds you've got a great balance sheet.

Again, I feel obliged to ask when, where, how are you going to spend that cash?

Thanks.

Well, I guess on the R&D, I'll sort of remind -- when you're looking at some comparisons, in any comparison to 2003, especially in the third and fourth quarter, might not be the best comparison because those are the quarters in which we had Computer Motion activities in there, and so we sort of highlighted.

There were some comparisons there that are different.

And then I think historically, just sequentially quarter-to-quarter, we have had historically in our R&D spending some ups an downs, because there is some variability in certain kinds of expenses, prototypes, and so forth, and so on average for a year, it probably comes in around where you might expect, but quarter-to-quarter, you might have some timing issues.

Rick, let me comment, too, and I'll take a little different perspective.

Ben's answer is absolutely correct.

But R&D shouldn't be measured just in absolute dollars.

I think we are getting more effective and efficient in the way we spend it, and also in just productivity.

We've now got -- on the prototype side, we have in-house our own machine shop.

We build prototypes and components here.

It's a dramatic cost reduction from what we've done in the past going outside.

We have -- on the instrument side we have a separate team of engineers that focus only on that, and their productivity has been very, very significant.

So we're seeing something below the dollars in terms of -- you know, we have a very strong culture here that we'd better be better today than we were yesterday, and better tomorrow than we are today.

We drive continuous improvement very, very hard, and I think we're seeing some of that in -- a significant part in literally the product development area.

On the second issue of cash, when you've been unprofitable and raising money and trying to fund, it's quite nice to have cash and to be generating it.

I view it and the team here views it as a strategic asset, and not something that we -- it's not burning a hole in our pocket.

We will use it if and when there is a major strategic opportunity that fits with what we're doing.

But a large part of what we do is really -- we're not anxious to go out and make an acquisition of a traditional company or a company that makes commodities, but we are -- we're going to build around the technology we have today and the space we have today, and we believe that's a huge opportunity.

Where there's an opportunity to acquire either intellectual property or to invest in heavier R&D projects and things, that's what we'll spend the money on.

Thanks, Lonnie.

This is Susan.

I would just add that you may see -- we were fairly light in our capital spending in 2004.

We may spend a little more on some of our own infrastructure, our information systems, as we continue to invest in Sarbanes-Oxley compliance and the cost of doing business as we get larger.

Thanks, Susan.

Mr. Nelson, you may ask your question.

Hi. [inaudible].

Is there anything fundamentally different about the selling cycle you experienced in this quarter or that you see for next year?

Are these things going faster, or were all these sales sort of in the mill and you just had a greater percentage hit right in the normal amount of time?

Tim, this is Ben.

I don't know that we've got any accelerated sales cycle than we've had in the past.

I think the fourth quarter is always seasonally our strongest, and we actually did have a number of customers who took advantage of capital budget dollars that they had available at the end of the calendar year this time around.

So I think I mentioned that we do expect it to be sequentially down from Q4 to Q1, and that shouldn't be any surprise.

I think it's definitely been the case in the past.

Did I answer your question?

To answer your question, we do not see any major change in the selling cycle.

We have some that come very quickly and some that came this quarter that we've been working on for a year or two.

And you can see that, Tim -- we will be investing in the operation expenses in business, we'll be putting more people on the street, because it's not a magic transaction; you need to work it.

Great.

Can you talk about the sales force expansion you're going to do in the coming year, how many people are you going to add?

Well, the expense growth rate is going to be 15 to 25 percent, and in terms of the people that we plan on adding, Tim, it's going to be at least half of that growth is going to be in the field.

So, historically, we have always invested more in the field, and we're going to continue that trend in 2005.

Actually, when we go through the budgeting process at the beginning of the year, we look at anticipated growth, the rate we want to grow our fixed costs, as well as the rate we're growing revenue, and we allocate those based upon strategic focus, and as Ben said, this year, half of our fixed cost assessment will go into field support, both sales and clinical support, as well as service.

Okay.

Can't go by without asking about pricing.

Did pricing hold during the quarter and in your guidance for next year, are you assuming pretty level pricing, both systems and recurring revenue?

Yes.

The ASP, actually in Q4 was pretty steady.

In fact, it was a little bit higher than in Q3.

The ASP just for comparability was 900,000 on the system versus 888 in Q3, and we anticipate our pricing to be steady in 2005 on systems.

And your average procedure costs, is that still around 1500, and do you expect that to continue?

We haven't seen any material changes in procedure costs for our customers.

Okay.

As you bring out all these new products and upgrade the range and quality of the components on the recurring side, those will come in at comparable pricing.

Yes.

And then, finally, can you tell us what the revenue associated with the Computer Motion products was?

Yes, it was a little less than a million dollars in Q4.

And similar rates anticipated throughout '05?

Yes, no material change for this year.

Okay, great.

Thanks.

Great result.

Thanks, Tim.

(OPERATOR INSTRUCTIONS)

If there are no other calls, why don't we just close it.

Again, let me summarize the highlights for the fourth quarter.

Total revenue grew to 45.2 million, up 64 percent from the prior year.

Recruiting revenue grew to 18.1 million, up 79 percent from the prior year, comprising 40 percent of total revenues.

We shipped 25 da Vinci Surgical Systems, 24 Fourth Arms.

Our gross profit margin improved to 65.9 percent.

Our net income for the quarter was 11.7 percent, or 32 cents per share.

EBITDA for the quarter grew to $12.6 million, or 27.9 percent of revenue.

We ended the quarter with $132 million in cash.

As I previously stated, we believe 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 capabilities of our product, so that their use is compelling for the patient, the surgeon, and the hospital in an ever-increasing number of surgical procedures.

We are dedicated to taking surgery beyond the limits of the human hand.

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 are, first, superior products, customer service, and patient outcomes; second, consistent revenue and operating income growth; and third, a results-driven company culture in which we measure ourselves by our accomplishments.

That concludes today's call.

We thank you for your participation.

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