直覺手術 (ISRG) 2005 Q2 法說會逐字稿

Hello and welcome to the Intuitive Surgical second quarter earning call.

Following today's presentation there will be a formal question-and-answer session. [OPERATOR INSTRUCTIONS.] I will now turn the call over to Mr. Ben Gong.

Sir, you may begin.

Hello, and welcome to Intuitive Surgical's second quarter conference call.

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

Susan Barnes, our Chief Financial Officer;

Calvin Darling (ph), our Director of Financial Planning; and Aleks Cukic, our Vice President of Business Development and Strategic Planning.

Before we begin, I would like to inform you that comments mentioned on today's call may be deemed to contain forward-looking statements.

Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties.

These risks and uncertainties are described in detail in the Company's Securities and Exchange Commission filings.

Prospective investors are cautioned to not 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 our 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.

Calvin will follow with a review of our second quarter's financial results.

Then, I will review our business forecast for the remainder of 2005.

Next, Aleks will discuss sales and marketing highlights.

And, finally, we will host a question-and-answer session.

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

Thank you for joining us today.

As you can see from our press release, we had a very second quarter.

Highlights for the quarter are as follows.

Total revenues grew to 52.8 million, up 70% from the prior year.

Recurring revenue grew to 24.3 million, up 88% from the prior year, comprising 46% of total revenue.

We shipped 26 da Vinci Surgical Systems and 27 fourth arms, 21 of those systems were in the United States.

We ended the second quarter with 324 systems installed worldwide.

Our gross profit margin improved to 67.5%, from 63.2% in the second quarter of 2004.

We generated an operating profit of 15.3 million, or 29.1% of revenue, compared to 4.5 million, or 14.4% of revenue last year.

Our net income for the quarter was 14.8 million, or $0.40 per share, compared to 4.8 million, or $0.14 per share last year.

EBITDA for the quarter grew to 16.9 million, from 6.2 million in the second quarter of 2004.

We ended the quarter with 158.5 million in cash and investments, up 9.1 million from last quarter.

We continued to grow our top line, improve our margins, and effectively control our fixed-cost growth.

We had positive results in every area.

Our o-U.S. system shipments were strong, with five new systems shipped to international customers.

As we previously stated, international performance in the first quarter was a timing issue.

Procedure growth continued to be very strong.

We received two new FDA clearances during the quarter for the da Vinci Surgical System for the use in general gynecology and pediatric surgery.

We relaunched the Curved Scissors we recalled last quarter, and their field performance has been excellent.

We continued to improve both quality and productivity in our manufacturing operations.

We completed a 20,000square-foot expansion in manufacturing and office space with our Sunnyvale facility.

Our business model continues to meet our expectations.

During the second quarter we funded 70% revenue growth and grew our cash position by over $9 million.

With that, I'd like to introduce Calvin Darling, our Director of Financial Planning.

Calvin has very capably manage our financial planning processes for the last five years and is now taking a more active role with our Investor Relations.

Calvin will now take you through our second quarter financial results.

Thank you, Lonnie.

It's a real pleasure to begin my participation on these calls with such an outstanding quarter.

We enjoyed excellent second quarter results.

Total second quarter revenue increased to $52.8 million, up 70% from 31.1 million for the second quarter of 2004.

Higher second quarter sales were driven by higher da Vinci Surgical Systems, and the fourth arm unit sales, as well as continued recurring revenue growth.

Second quarter 2005 sales increased in all product categories.

Compared to last year, systems revenue increased to $28.5 million, from 18.1 million, driven by both the increase in the number of da Vinci Systems sold and the number of fourth arms sold.

Instrument and accessory sales increased 109%, to $16.2 million, from 7.8 million.

And service and training revenue increased to $8.1 million, from 5.2.

We shipped 26 da Vinci Surgical Systems during the quarter, up 7, compared to 19 shipped during the second quarter last year.

Second quarter demand for Fourth Arms was again strong, as we shipped 27 da Vinci Fourth Arms during the quarter, compared to 15 during the second quarter last year.

Recurring revenue, comprised of instrument, accessory, service, and training revenue grew to $24.3 million, up 88% from 13 million during the second quarter of 2004.

Recurring revenue comprised 46% of total second quarter 2005 sales, up from 42% during the second quarter of 2004.

Higher instrument and accessory revenue was driven by higher procedure volume.

In addition to this, with our introduction of new instruments and the continuing trend towards more complex procedures being performed with the System we have been generating more revenue per procedure from instrument and accessory sales.

Many of our customers are now averaging between 1,500 and $2,000 in da Vinci consumable products per procedure.

I would also like to point out that second quarter 2005 instrument and accessory revenue benefited by approximately $1 million, from a higher concentration of endoscope and Vision System accessory sales during the quarter.

This $1 million impact can be attributed to timing, and we don't anticipate that this will repeat in the upcoming third quarter.

Total revenue for the first half of 2005 totaled $94.4 million, up 62% , compared to $58.1 million for the first half of 2004.

Our second quarter 2005 gross profit percentage increased to 67.5%, compared to 63.2% for the second quarter of 2004.

Our higher second quarter 2005 gross margin percentage was driven by leveraging manufacturing overhead costs across higher revenue.

Total operating expenses for the second quarter of 2005 increased 34%, to $20.3 million, compared to 15.2 million during the second quarter of 2004.

Second quarter 2005 operating expenses were 38% of sales, compared to 49% last year.

Selling, general, and administrative expenses for the second quarter 2005 were $15.9 million, compared to 11.5 million for the second quarter last year.

Our higher second quarter 2005 SG&A expenses were driven by additional field sales costs required to support higher 2005 sales volume.

We have also grown our marketing organization and our administrative infrastructure.

Research and development expenses for the second quarter 2005 were $4.4 million, compared to 3.6 for the second quarter last year.

The increase in R&D spending was also due to investments in additional headcount, as well as higher prototype and other project expenses incurred this year.

We ended the second quarter 2005 with 368 employees, up 23 from the end of the first quarter. 16 of our second quarter additions were in our worldwide sales and service organization.

Operating income for the second quarter of '05 totaled $15.3 million, or 29.1% of sales, compared to 4.4 million, or 14.4% last year.

These results exceeded our expectations and resulted primarily from higher-than-planned revenue.

We are committed to growing our organization in an efficient, controlled manner.

This quarter we grew operating expenses by nearly $2 million sequentially.

However, our revenue results outpaced our infrastructure growth.

Other income of $1 million was comprised of 1.2 million of interest income, partially offset by foreign exchange losses resulting from euro-based transactions.

Other income increased by 400,000, compared to the second quarter of last year, primarily due to higher interest earned of 600,000, offset by higher foreign exchange losses.

Our second quarter 2005 income tax expense was $1.5 million, or 9.3% of pre-tax income, compared to a 5.2% provision taken during the second quarter of 2004.

Our second quarter 2005 provision brings our year-to-date provision up to 7.9% of pre-tax income.

Ben will provide more detail regarding our tax status later in the call.

Our second quarter 2005 net income was $14.8 million, or $0.40 per diluted share, compared to 4.8 million, or $0.14 per share in the second quarter of 2004.

We reported 37.2 million shares for our EPS calculation.

Now turning to the balance sheet.

We, again, strengthened our balance sheet metrics during the quarter.

We were $9.1 million cash flow positive during the quarter, ending the period with $158.5 million in cash and investments.

Our $9.1 million second quarter cash flow was driven by our $14.8 million net income, $3.1 million of non-cash operating and income tax expenses, and 2.5 million of option of warrant exercise proceeds, offset primarily by $3.6 million of fixed asset additions and 8.2 million higher accounts receivable.

Our accounts receivable balance increased to $39.6 million, from 31.4 ending the first quarter.

The increase was due to higher second quarter 2005 sales compared to the first quarter.

We improved our average days sales outstanding to 68 days, compared to 70 ending the prior quarter.

Our net inventory increased to $8.8 million, from 7.6 million ending the previous quarter.

This increase reflects the growth in our business.

Inventory turns also improved slightly, to 7.8, compared to 7.6 ending the last quarter.

During this quarter we invested $3.6 million in fixed asset additions, related primarily to our facilities expansion, lab equipment, and IT infrastructure.

Most of the costs related to our facilities expansion were incurred during the second quarter.

We do intend to continue to make further IT and other capital investments during the year.

We would anticipate full year 2005 capital investments to total between 8 and $10 million.

Finally, we ended the second quarter with $18.7 million of total deferred revenue, compared to 17.3 million ending the previous quarter.

This continued build up is an indication of the growth in our surface contract business and the ongoing expansion of our install base.

And with that, I would like to turn it over to Ben, who will provide you an update of our business forecast for 2005.

Thank you, Calvin.

As we mentioned earlier, our second quarter results were higher than we expected.

And we continue to see positive momentum going into the second half of this year.

As a result, we are increasing our previous guidance for revenue and profits for 2005.

Regarding revenue.

On our last call we indicated that we expected 2005 annual sales to grow on the higher end of a range between 20 and 30% over 2004.

We are now targeting our 2005 revenues to grow between 40 and 45% over 2004.

We expect Q4 to, again, be our seasonally strongest quarter, and Q3 to be seasonally weaker.

As a result, we anticipate that our third quarter 2005 total revenues will be sequentially lower than those realized in this past second quarter.

In the second quarter we experienced strong procedure growth, which likewise resulted in strong instrument and accessory sales.

In our last earnings call we had forecasted this revenue segment to grow between 50 and 55% above our 2004 total.

This is our fastest growing segment, and we are increasing our estimate for instrument and accessory revenue to grow between 65 and 70% above 2004.

As Calvin mentioned earlier, we believe the second quarter instrument and accessory revenue benefited approximately $1 million from the timing of certain purchases.

As we have mentioned before, our service -- our service revenues are highly predictable because they are primarily driven by annual contracts.

Now, based upon higher System revenue forecast and a higher mix of fourth arm systems, which generate higher service contracts, we are also raising our estimate for 2005 service revenue.

We are now forecasting our service and training revenue to grow between 45 and 50% over 2004, up from the 40 to 45% range indicated on our previous call.

Our System revenue which includes da Vinci Systems, fourth arms, and Aesop Systems may fluctuate quarterly, as it is more difficult for to us predict how many units will ship each quarter.

We are pleased with the number of units we shipped during the second quarter, and we see continued momentum for the balance of 2005.

On our last call we forecasted 2005 System revenue to grow between 10 and 15% over 2004.

We now expect 2005 system revenue to grow 30% or more above 2004.

The average revenue we recognized per system in Q2 was approximately $890,000, and average revenue for each fourth arm was approximately 170,000.

We expect System average selling prices to remain consistent for the remainder of the year.

With regard to gross profit margin, we have indicated in the past that we expect 2005 margins to average approximately 65% of sales for the year.

We have been able to leverage our manufacturing cost to improve our gross margin, and we now anticipate full year 2005 gross profit margin to be between 65 and 67% of sales.

Moving to operating expense, on our last call we forecasted 2005 operating expenses to grow between 15 and 25% above 2004 levels.

We are committed to investing in the future growth of the Company, and we now plan to grow total operating expenses by 25 to 30% above 2004.

We now target total operating expenses to be between 42 and 44% of sales for the year.

Based upon our revised 2005 sales and operating margin forecast, we expect our 2005 net operating income to grow between 100 and 125% over 2004.

This is an increase from our previous estimate of 60% or more, indicated on our previous call.

As you probably know, the SEC postponed the implementation date for Statement of Financial Accounting Standards 123R, which requires companies to recognize stock option expense on their income statement.

As a result, we do not anticipate adding stock option expense to our income statement until next year.

With regard to income tax we mentioned on our last call that in order for us to take full advantage of the NOLs that we acquired from Computer Motion, we would begin to record tax expense at a rate of between 10 and 25% in order to shelter these amounts from actual cash tax payments in the future.

Our actual second quarter tax rate recorded was 9.3% of pre-tax income, bringing our year-to-date reported tax rate to approximately 8%.

We anticipate our third quarter 2005 tax rate to be between 5 and 15%.

We're still predicting that toward the end of this year we will recognize a large portion of our deferred tax asset as a negative tax on our income statement.

When that occurs, the tax rate for that particular quarter will likely be a large negative number, or a benefit to the P&L.

And in quarters thereafter we anticipate reporting a tax rate between 35 and 40%.

Regarding shares outstanding, we currently have approximately 34.9 million shares outstanding and a 4.5 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 count for EPS calculations may be in Q3, a 25% change in our current price would result in a diluted share count as low as 37 million shares, or as high as 38 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 second quarter we shipped 26 da Vinci systems, 21 in the United States, 4 to Europe, and 1 to rest-of-world locations.

This brings to 324 the cumulative number of da Vinci systems worldwide, 242 in North America, 60 in Europe, and 22 to rest-of-world markets.

We consider every sale important.

However, there were several in the quarter that were notable.

The System sale to City of Hope National Medical Center in Los Angeles represented their third da Vinci purchase.

We also placed da Vincis at Baptist Health Systems in Jacksonville, Florida and the University of California, San Diego, which represent seconds System placements into these large, underpenetrated metropolitan areas.

We also placed our second da Vinci System into the State of Alaska, to Providence Alaska Medical Center in Anchorage.

In addition we placed a da Vinci at the Children's Hospital of Philadelphia, which is widely recognized as one of the world's premiere children's hospitals.

Outside of the United States, we also had several key placements, including our first placement into Korea, to Yonsei University Hospital; our first placement into Spain, to Pujolvere (ph) Hospital in Barcelona; and our first placement into the Czech Republic, to Holmolce Hospital in Prague.

Our fourth arms sales continue to be strong.

During the quarter we shipped 27 fourth arms, 22 as initial Four Arm da Vinci Systems and 5 as upgrades to existing da Vinci customers.

This brings to 148 the overall number of fourth arms systems within our installed base.

Clinically we had an excellent quarter.

We experienced solid growth within our key surgical specialties, both within the U.S. and abroad, with urology, specifically, dVP pacing the way.

We participated in several trade shows and medical conferences within the areas of urology and cardiac surgery during the quarter, and we had another dVP clinical publication presented in the Journal of Urology.

During the first quarter earnings call we noted that we were preparing to attend the Annual American Urology Association conference, or AUA, which took place in San Antonio in May.

Our presence at the AUA was very strong on several levels.

There were approximately 40 da Vinci presentations, posters or other scientific exhibits, as well as four da Vinci-based postgraduate courses, which were fee based, accredited programs, and conducted by the AUA.

Topics of the AUA presentations ranged from pyeloplasty to cystectomy, nephrectomy, and, of course, dVP.

Dr. Raju Thomas, Professor and Chairman of the Department of Urology at Tulane University presented a comparative study between standard laparoscopic pyeloplasty and a da Vinci pyeloplasty, where he concluded and I quote, The 7 degrees of motion of the da Vinci Robotic System greatly enhanced the precision in dissection and suturing of the UPJ.

This has led to decreased operative times, even in patients who require pelvic tailoring or have had previous endopyelotomies or open pyeloplasty.

The reduced learning curve associated with robotics should foster widespread dissemination of this minimally invasive technique.

Close quote.

Also during the conference, two live dVP operations were broadcast into the Intuitive booth.

First Dr. Randy Fagin from St. David's Hospital in Austin, Texas, performed a four arm, bilateral, nerve-sparing dVP in just under 75 minutes.

And later, Dr. Vip Patel from St. Vincent's Medical Center in Birmingham, Alabama, performed a complex three arm, nerve-sparing operation in just under 80 minutes.

Dr. Fagin and Dr. Patel are often reporting dVP procedure times in the 60-minute range.

During the AUA Intuitive sponsored a dinner symposium, which was led by Drs.

Mark Kawachi and Tim Wilson from City of Hope National Medical Center, who are among the nation's most experienced laparoscopic prostatectomy surgeons.

Drs.

Kawachi and Wilson, clearly, showed that dVP is statistically favorable to laparoscopic radical prostatectomy, or LRP in both continence outcomes and total operating times.

From their series of over 700 operations, they concluded that a dVP takes approximately one hour less to complete than does an LRP using standard laparoscopic instrumentation.

They also shared their continence data, which showed dVP patients returning to normal continent function in one half the time of their LRP patients.

These improvements to patient quality of life are without question, significant.

They also went on to present their initial data for both da Vinci radical cystectomy and urinary diversion procedures, which is early, but very promising within their practices.

In a July edition of the Journal of Urology Dr. Vip Patel from Birmingham, Alabama published the results of his initial 200 dVP procedures.

The study focused on the outcomes for his cancer control through positive margin rates and his continence rates.

With respect to his positive margin rates, Dr. Patel reported that within his T2 cancers, which translates to organ-confined disease, his positive margin rate was a mere 5.7%, and his overall positive margin rate within all classifications of cancer was 10.5%.

For comparison, Dr. Patel estimates that in his open procedures, his positive margin rate is between 10 and 15% for T2 disease and between 15 and 25% for all disease classifications.

With respect to continence, Dr. Patel reported that at three months 82% of his dVP patients were continent, requiring 0 pads, and 98% were continent at 12 months.

In his open procedures, Dr. Patel estimates that the continence rates were 50 and 90%, respectively.

I think it's worth noting that Dr. Patel estimates that his initial dVP learning curve was between 20 and 25 cases.

And as of this date, he has performed nearly 600 dVPs.

And while his outcomes continue to improve, his procedure times continue to drop and routinely approach 60 minutes.

As data like this make its way into the public domain, patients will undoubtedly seek out those centers that can deliver these favorable results.

As we exited 2004 we estimated that our dVP run rate was at least 10% of all prostatectomy surgery in the United States.

We now estimate that we will exit 2005 with a run rate of at least 20%, in what we believe is a growing category.

In the area of cardiothoracic surgery we had another solid quarter.

We saw continued sequential actual growth in our procedure volumes and our clinical visibility at both the ISMICS, or International Society of Minimally Invasive Cardiac Surgery, and the OLV-College Valve Symposium was strong.

The ISMICS conference was highlighted by two general session da Vinci live surgery broadcasts.

The first case featured Dr. Doug Murphy, Chief of Cardiovascular Surgery at Atlanta's St. Joseph's Hospital, who performed a complex mitral valve repair.

During the procedure Dr. Murphy demonstrated his technique for chordal transfer, whereby he transfers the chordae from the receptive portion of the leaflet of the mitral valve to the anterior leaflet to restore normal valvular function.

This level of repair is considered difficult to perform by any standard.

However, it is a repair that Dr. Murphy and others are performing routinely with da Vinci.

The ability to substitute would-be mitral valve replacements with minimally invasive mitral valve repairs is one of the key drivers to our early success with this procedure.

The second live broadcast was performed by Dr. Sudhir Srivastava, a cardiac surgeon from Odessa, Texas, who performed a closed-chested, beating-heart coronary artery bypass graft.

Dr. Srivastava later presented the results of his series of da Vinci closed-chested, beating-heart bypass procedures, which now numbers over 100.

Also during the quarter we had the opportunity to participate in the OLV-College Valve Symposium in Brussels, Belgium.

This meeting is one of the world's premier valve meetings, and is chaired by Dr. Hugo Vanermen.

This year the college invited two U.S.-based cardiac surgeons with da Vinci mitral valve repair experience to perform live complex mitral valve repairs.

Dr. Michael Smith from Samaritan Hospital in Cincinnati and Dr. Doug Murphy from Atlanta each performed a mitral valve repair, which included chordal transfers.

The procedure techniques -- technique that Dr. Smith and Murphy exhibited was highly praised by the surgeon panel, as well as the audience members, and their patient outcomes were excellent.

We are pleased with the growing awareness of da Vinci's contribution to the field of minimally-invasive cardiac surgery, and especially in the area of complex cardiac valve surgery.

Finally, with respect to our gynecology clearance we are pleased with the quick uptake in the procedure volumes we experienced during the second quarter, specifically, in complex hysterectomy procedures.

It is, however, important to note that we are very early in our market development efforts within this specialty, but we like what we see so far.

That concludes my update, and I'll pass the time back over to Lonnie.

That concludes our formal presentation.

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

Thank you. [OPERATOR INSTRUCTIONS.] And our first question comes from Tao Levy of Deutsche Bank.

Hi, good afternoon.

Way to come back, fantastic quarter.

Just a few questions on my end.

Was interesting, the pricing of the disposable is 1,500 to $2,000 now per procedure.

Is there any way that you could you help us fine-tune that a little bit?

It just seem a little wide and, obviously, it's going to affect our models greatly there, Susan.

Right, Tao, this is Calvin here.

We have been steadily generating more instrument and accessory revenue per procedure over the last year, and we attribute that to having more four arm systems in the field.

As you might imagine having more arms, there are more arms to put tools on.

We've also introduced a lot of new instruments over the last year, specifically, higher-value, energy-based instruments, such as bipolar and the harmonic shears.

So as a result of these things, we've seen this trend developing over the last year, and a lot of or customers are in 1,500 to 2000 range at this stage.

But for modeling purposes, what's a good number to use?

Is there anything else in between, 1,750, I guess, is that -- ?

Yes, Tao, we're going to leave that up to you.

All the fun work.

In terms of placements, how is that funnel of new orders looking?

With last quarter, no international placements this quarter, we're back to normal rates.

As we look down the road over the next, say, six months, is there a, let's say, a bunch of new hospitals who before weren't interested in robotic surgery now coming in and needing the system or looking to purchase a system?

Yes, this is Lonnie.

I think that our pipeline is very strong, as strong as we've seen it.

There is a lot of interest, and, obviously, as the systems get placed and used a lot, and as competition increases that also increases demand.

Well, the pipeline is very strong.

The timing in the individual sale can -- or hospital, can shift around a bit.

We track it very carefully.

We manage it on a weekly -- on a daily basis, but we all review it on a weekly basis.

And I feel like it's very solid, both in the U.S. and internationally.

Okay.

And just lastly, with the higher cost per procedure now, given the additional disposables, any thoughts in going after specific robotic surgery reimbursement?

Obviously, the clinical data is starting to be there.

Any work on that front?

Nothing specific to talk about at this time.

Thank you, very much.

Great quarter.

Thank you.

Our next question comes from Tim Nelson of Piper Jaffray.

Hi.

Amazing.

Can you talk a little bit more about the business model you previously talked about being steady state.

Obviously, it's not as you grow.

Is it -- are these margins going to continue to increase from here, or are we going to see a leveling off?

Tim, this is Ben.

On gross margin we do have a little bit of movement in gross margin based off of the mix.

And so sometimes it can be a point or two higher or a point or two lower depending on our mix of sales in each different geography.

I think the 65 to 67% gross margin range that we've given for the balance of the year is kind of our best estimate of what it's going to be at this time.

Before I --

Tim, just a comment.

In the past, as we've move from being unprofitable to profitable, we've been very careful to control our fixed costs and grow revenue as fast as we grown fixed costs.

Those two will begin to merge more closely together as we invest for future growth.

So I think that we are approaching -- and there are areas that we have not invested in as heavily as we'd like, and we will invest in as we go forward.

So there will be some movement back and forth as we go forward.

Okay.

Can you give me just a little help on the robot revenue, the old Computer Motion revenue, quantify that for us or ballpark it?

Sure.

The -- we sold eight Aesop Systems, and the ASPs on those tend to move between 80 to $100,000 and it pretty much is in the same range this past quarter.

Okay.

I would add to that, we've been between 1 million and 1.5 million in Computer Motion sales in most of the quarters since the acquisition, and we were again this quarter.

Okay.

And -- that's great.

In terms of urology mix, I know you quantified a 20% share.

But, given the denominator of that number being pretty loose, just ballpark the percent of your revenue that's urology versus cardiac versus general?

Tim, we've stated, and the rank has not changed, in that cardiac is -- excuse me, urology is the largest segment, followed by cardiac and general surgery, with gynecology creeping up.

But as far as the overall percentage of urology, I don't think we've stated yet publicly that anything different than urology is over half of the business and it continues to be the fastest growing segment.

Great.

Thanks, a lot.

I'll get back in queue.

Our next question comes from Rick Wise of Bear, Stearns.

Hi, this is Mike Bailey, in for Rick Wise.

Just a first question for you, looking at the mitral valve repair procedures, any sense as to where we are there relative to sort of prostatectomy?

Can you give an idea sort of where the penetration rate is there?

Or, perhaps, are you a year or two behind compared to prostatectomy?

Thanks.

I think -- I think it's probably early to say what any penetration rate is or to really throw a dart at how far behind prostatectomy are with that.

I would say that it is continuing to grow in the cardiac community.

We have moved, both the training side of the business along further, optimize of the procedure technique, and I think it is really starting to really be recognized within the cardiac community.

But I think, Mike, it would be too early for me to say what percentage it is and/or what -- how far we are behind prostatectomy.

But it has continued to grow and continued to add a lot of value, both to the practice of the surgeon as well as to the patients.

The comment I'd make on that is I think that Doug Murphy and Mike -- Michael Smith have both -- have really, have taken it to a -- and several other surgeons, actually, have all improved, taken the procedure to another level.

And we saw that in Belgium, and the response to the procedures there, again, there'll be U.S. surgeons over at EACTS, which is the European Association of Cardiothoracic Surgeons, performing these procedures.

And so I do think that it's -- that procedure is getting more and more refined and as it does so, is -- we're seeing a broader acceptance of it.

So time will tell exactly where it ends up, but if we have -- it is becoming a better and better procedure.

Great.

Thanks.

And, then, just a couple of quick follow-ups there.

Can you give us a rough split between, sort of, the system placements in academic versus community hospitals?

And, then, just the last follow up, any reason why the tax rate guidance has come down a little bit for the rest of the year compared to the last earnings call?

Thanks a lot.

With respect to the break down in academics it really has been following about a 70, 30 mix.

And I don't think that it's gone materially different from that.

And if you remember, the number of cardiac -- or, excuse me, number of academic medical schools in the United States is about 150.

And the overall number of hospitals is around 5,000.

So as far as we can tell, the mix is about 70, 30, community hospitals to academic.

And then on your question on taxes.

We have a set amount of CMI NOLs that we can use.

And as we're more profitable, that percentage of the total has a different number, and, therefore, we use less of it to calculate the tax rate.

We're giving you our best guess for Q3 when we give you that range of 5 to 15%.

Great.

Thanks, very much.

Okay.

Our next question comes from Mike Davidoff of Sidoti & Company.

Hi, guys.

Can you tell us how many hospitals now have two or more da Vincis?

I believe the number is 26.

Okay.

And it's either 26 or 27, but I believe it's 26.

Okay.

Do you know what that number was at the end of last quarter?

We only did one system sales to an existing site that had a da Vinci Systems, and that was City of Hope, and they bought their third system.

Okay.

And do you have a number for how many hospitals have three?

Or even more?

That makes three hospitals with three.

Okay.

Thanks.

And can you talk about the, maybe during the quarter, just trends that you are seeing?

The new systems you're selling, are they any more weighted towards -- are they still mostly in urology, or are you seeing more cardiac general, or are you seeing the hospitals, kind of, the different practices coming together to buy a machine, just a little bit about what you're seeing?

Yes, it has always been the model to really elicit a multi-surgical approach to selling a system and that has not changed.

We have cardiac surgery, urology, and general surgery, and now gynecology that's weighing in on those purchases.

I think what, there is something that we've seen probably more recently is that urology has moved quicker onto that system, and I think you're finding that their first case is to their next -- their first ten cases are probably happening quicker than they did in the past.

So I would say that urology is key, but all of the specialties are, typically, included in the purchasing process.

Okay.

And, then, just last question, your R&D pipeline, how should we be thinking about that?

Is it more instruments and accessories or are there other things you're looking at?

Well, we don't pre-announce products.

We continue to develop all aspects of the system.

The system we sell today is considerably different than the system we sold two or three years ago.

But we continue to have a significant R&D effort, and we don't announce products until we're ready to ship them.

Although, we have said before, and we continue to say, we do one to two instruments every quarter, and we did so this quarter as well.

Actually, three.

Three.

Two and a relaunch.

Okay.

Fair enough.

Thank you.

Our next question comes from Mike Smith of Treehouse Capital.

Hi, guys, I guess I had just one question where I was curious if you could -- at the beginning of the call you talked a little about the manufacturing capacity that was expanded.

And I wanted to see if you could talk a little bit more in detail about that and any plans to continue that expansion or how that came along?

Well, we have lots of capacity in the sense that we're constantly improving the operations and the space utilization.

But we have -- we had 20,000 square feet of unused space when we bought this building, and we expanded into that, moved some of our office space over there and took what was office space and created additional manufacturing space.

I don't know that there's anything specific to talk about there, other than we will -- it's part of what we will constantly do in terms of relaying out the plant, driving for greater efficiency.

And we are still at one with the capability of moving to multiple shift operations.

But we still -- we still drive a continuous improvement process that continually reduces our tack time, which, therefore, if the process increases capacity.

So operations is in good hands, well led, and highly efficient.

And you saw that from the gross margin improvements that we've been producing as our revenue increases.

Okay.

Thanks, very much.

Our next question comes from Tim Nelson of Piper Jaffray.

Just one more follow up on the pricing end or utilization rates that I'm trying to decipher here.

I know you brought a lot of new products to market, in particular, the scissors that cut and coagulate and the harmonic scalpel and those come in at much higher prices.

Can you help me quantify the present price per procedure, the average selling price of disposable, and how that changed over the quarter as a result of these new products?

Yes, Tim, this is Ben.

So we've been introducing a lot more energy-based instruments, lately, bipolar instruments and harmonic shears.

And those instruments, since they have higher content, higher value to them, they are more expensive than some of the, let's say, run-of-the-mill graspers.

So that has certainly contributed to some of the higher revenue per procedure than we've seen in the past four quarters.

And it's Susan.

The fourth arm is another piece, and the last piece is the fact that the surgeons are moving their mix to more complicated surgeries.

And all three are drivers into that higher per procedure cost.

Given the big bolus in -- or the bigger placement levels than a lot of with us expecting this quarter, I would assume that that might come down a bit as these systems take some time to get productive.

What do you think about in your planning as to how long a system takes now to get up to the average in terms of its revenue per quarter, or whatever?

It varies a lot from site to site.

But we certainly have seen hospitals that are ready to go as soon as they get their system.

And we've seen others that will take some time to get up and running, say, a quarter or so.

But I don't think things have changed significantly, in that respect over the past couple quarters.

We -- of the 26 that we shipped, we'll probably have -- are ranging from people who've already done procedures and are up and running, versus some that are still getting some of their teams trained.

And that's where you see that 65 to 70% increase in the instrument accessory line.

Yes.

And just remind me what the average stocking order of disposables is when you place it in the system?

I don't know that we've ever given that number out.

But just to give you a flavor, you're right in thinking that when we sell a system, it does not have any clinical instruments that come with it.

And so, typically, a site will go ahead and buy at least one set of instruments so that they can go ahead and start doing procedures.

And we typically would want them to buy enough instruments to do, say, the first 20 procedures.

Okay.

That's helpful.

That was our last question for today.

To recap, we had a great quarter.

Total revenue grew to $52.8 million, up 70% from the prior year.

Recurring revenue grew to $24.3 million, up 88% from the prior year; comprising 46% of total revenue.

We shipped 26 da Vinci Surgical Systems and 27 fourth arms.

Our gross margins improved to 67.5%.

Our net income for the quarter was $14.8 million, or $0.40 per share.

EBITDA for the quarter grew to $16.9 million, or 32% of total revenue.

And we ended the quarter with $158 million in cash and cash equivalents.

In closing, 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 surgeons to identify and drive those procedures, while expanding the surgical capability of our products, so their use is compelling to the patient, surgeon, the hospital in an ever-increasing number of surgical procedures.

As we talked today, a large part of that is instrumentation and some of these powered and energized instruments.

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

We remain focused on the vital few things that would truly make a difference, and driving our investment priorities based upon clinical need and economic return.

Our priorities have not changed.

The first is superior products, customer service, and patient outcomes.

The second is consistent revenue, and operating income growth.

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

We are focused on those operating and financial metrics that we believe reflect true economic performance and shareholder value -- system placements, procedure growth, market share by procedure, revenue growth, operating efficiency and effectiveness, operating profit growth, and cash flow.

That concludes today's call.

We thank you for your participation.

And we will talk with you in three months.