直覺手術 (ISRG) 2005 Q3 法說會逐字稿

Good afternoon and thank you for standing by. And welcome to the Intuitive Surgical Third Quarter 2005 Earnings Conference Call. (Operator Instructions). Now I will turn the meeting over to Mr. Ben Gong, Vice President 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 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 not to place undue reliance on such forward-looking statements. Please note that this conference call will be available for audio replay on our Web site 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 Web site.

Today's format will consist of providing you with highlights of our 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. Calvin will follow with a review of our third 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 another strong quarter. Highlights for the third quarter are as follows. Total revenue grew to $60.9 million, up 72% from the prior year. Instrument and accessory revenue grew to $18.1 million, up 76% from the prior year. Total recurring revenue grew to $27.3 million, up 66% from prior year, comprising 45% of total revenue.

We shipped 30 da Vinci Surgical Systems and 27 fourth arms -- 23 of those systems were in United States. We ended the third quarter with 354 systems installed worldwide. Our gross profit margin improved to 69.2% from 64% in the third quarter of 2004. We generated an operating profit of $21 million, compared to 5.5 million last year. Our net income for the quarter was $20.7 million or $0.55 per share, compared to $6.1 million or $0.17 per share last year. EBITDA for the quarter grew to $22.6 million from 7.5 million in the third quarter of 2004. We ended the year, or ended the quarter, with $189.4 million in cash and investments, up $30.9 million from last quarter.

We had positive results in every area. System sales were strong worldwide. Procedure growth also continued to be strong, particularly considering the seasonal slowdown that occurs each summer during the vacation months. Our business model continues to demonstrate extraordinary capital efficiency, with our capacity to generate significant cash while funding high revenue growth.

We signed a co-exclusive cross licensing agreement with Hansen Medical. This agreement gives Hansen Medical the right to apply or practice Intuitive Surgical's patent portfolio in the field of intravascular approaches for the diagnostic -- diagnosis or treatment of cardiovascular, neurovascular or peripheral vascular disease.

In exchange, Intuitive Surgical receives the right to apply or practice Hansen's patent portfolio in endoluminal surgery, or surgery through natural body orifices for gastrointestinal, respiratory, ENT, urologic, gynecologic surgery, as well as in our current fields of use of endoscopic, laparoscopic, thoracoscopic and open surgery. Intuitive Surgical will also receive royalties on Hansen's products sales and equity in Hansen. Each party retains full rights to practice their own technology for all purposes. With that, Calvin Darling, our Director of Financial Planning, will now take you through our third quarter financial results. Calvin?

Thank you, Lonnie. We again enjoyed excellent financial results this third quarter. Total third quarter revenue increased to $60.9 million, up 72% from 35.5 million for the third quarter of 2004. Higher third quarter sales were driven by higher da Vinci Surgical System and fourth arm unit sales as well as continued recurring revenue growth.

Third quarter 2005 sales increased in all product categories. Compared to last year, systems revenue increased 77% to $33.6 million from 19 million. Instrument and accessory revenue increased 76% to $18.1 million from 10.3 million. Service and training revenue increased 48% to $9.2 million from 6.2 million. Third quarter demand for da Vinci Surgical Systems exceeded our expectations as we shipped 30 systems during the quarter, up 12 compared to 18 shipped during the third quarter last year.

Third quarter demand for fourth arms was again strong as we shipped 27 da Vinci fourth arms during the quarter compared to 15 during the third quarter last year. Instrument and accessory revenue grew 76% for the quarter, driven by higher da Vinci Surgery volume at our customer sites and at the macro level the ongoing adoption of Robotic surgery. In addition to higher surgical procedure volume, third quarter instrument sales were also bolstered by the successful launch of our Monopolar Scissors or Hot Shears during the quarter. Sales of this highly anticipated energy-based instrument exceeded $1 million during the quarter and this new instrument launch favorably impacted third quarter instrument sales.

Total revenue for the nine months ended September 30, 2005, was $155.2 million, up 66% compared to 93.6 million last year. Our third quarter 2005 gross profit percentage increased to 69.2%, compared to 64% for the third quarter of 2004. Our higher third quarter 2005 gross margin percentage was driven by leveraging manufacturing overhead costs across higher revenue and the impact of a higher base da Vinci System average selling price.

The higher Q3 2005 System ASP reflects the dollar impact from direct system sales into Europe priced in European currency. In addition, four of the 30 Systems sold in Q3 2005 were to our distributors, compared to four out of 18 systems sold in Q3 2004. Since sales to distributors are a lower ASP, this richer mix of direct sales also led to an overall higher ASP this quarter. Finally, our higher Q3 ASP also reflects the impact of a system price increase implemented in January of this year, which has worked its way through the six-to-nine-month selling process.

Total operating expenses for the third quarter 2005 increased 23% to $21.2 million compared to 17.2 million during the third quarter of 2004. Third quarter 2005 operating expenses were 35% of sales compared to 49% last year. Selling, general and administrative expenses for the third quarter 2005 were $16.5 million compared to 12.6 million for the third quarter last year. Higher third quarter 2005 SG&A expenses were driven by additional field sales cost required to support higher 2005 sales volume. Compared to last year, we have grown the sales and service organization by nearly 50%. We've also grown our marketing and corporate support organizations.

Research and development expenses for the third quarter 2005 were $4.6 million, roughly equal to the third quarter last year. Operating income for the third quarter of 2005 was $21 million or 34.5% of sales, compared to 5.5 million or 15.5% of sales last year. These results exceeded our expectations and resulted primarily from higher than planned revenue while we continued to grow the organization and corporate infrastructure in a controlled manner.

We added 29 employees during this third quarter, ending the quarter with 397 employees, 17 of the additions were in the sales and customer service organization and 10 were in manufacturing. Our third quarter of 2005 other income of $1.4 million comprised mostly of interest income, increased by 700,000 compared to the third quarter of 2004, primarily due to higher interest earned on higher 2005 cash and investment balances. Our third quarter of 2005 income tax expense was $1.7 million or 7.7% of pre-tax income, compared to a $66,000 provision taken during the third quarter of 2004. Our third quarter 2005 provision brings our year-to-date tax provision to 7.8% of pre-tax income. Ben will provide more detail regarding our tax status later in this call.

Our third quarter 2005 net income was $20.7 million or $0.55 per diluted share compared to 6.1 million or $0.17 per diluted share in the third quarter of 2004. We reported 38 million diluted shares outstanding for our EPS calculation. This quarter we again strengthened our balance sheet. We were $30.9 million cash flow positive during the quarter, ending the period with 189.4 million in cash and investments. Our $30.9 million third quarter cash flow was driven by our $20.7 million net income and 12.3 million of option and warrant exercise proceeds, offset primarily by working capital required to support third quarter growth.

Our accounts receivable balance increased to $43.8 million from 39.6 ending the second quarter. The increase was due to higher third quarter 2005 sales compared to the second quarter. We improved our average day sales outstanding to 65 days compared to 68 ending the prior quarter. Our net inventory increased to $12.2 million from 8.8 ending the previous quarter, reflecting the growth in our business.

Finally, we ended the third quarter with $20.9 million of total deferred revenue compared to 18.7 million, ending the previous quarter. This continued build-up is an indication of the growth in our service 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 an update of our business forecast for the rest of 2005.

Thank you, Calvin. As we mentioned earlier, our third quarter results were higher than we expected and we continued to see positive momentum entering the fourth quarter. 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 between 40 and 45% over 2004. We are now targeting our 2005 revenues to grow between 55 and 60% over 2004 with Q4 revenues totaling between 62 and $67 million.

In the third quarter we experienced solid procedure growth which likewise resulted in higher Instruments & Accessories sales. In our last earnings call, we had forecasted this revenue segment to grow between 65 and 70% above our 2004 total. We are now increasing our estimate for Instrument & Accessory revenues to grow between 75 and 80% above 2004 with Q4 totaling between $19 million and $20 million. As Calvin mentioned earlier, we believe the third quarter Instrument & Accessory revenue benefited from the loss of the Hot Sheers during the quarter.

As we have mentioned before, 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 at about 55% above 2004 instead of 45 to 50% as indicated on our previous call. We expect total fourth quarter 2005 service and training revenue to total about $10 million.

Our system revenue, which includes da Vinci Systems, fourth arms and Aesop Systems may fluctuate quarterly as it is more difficult for us to project how many units we will ship each quarter. On our last call, we forecasted 2005 system revenue to grow at 30% or more above 2004. We now see 2005 system revenues approaching or slightly exceeding 50% growth above 2004. The average revenue we recognized per system in Q3 was approximately $950,000 and average revenue for each fourth arm was approximately $170,000. We would expect the Q4 system ASP to slightly decrease due to regional mix.

With regard to gross profit margin, we indicated on the last call that we expect 2005 margins to average between 65 and 67% of sales. Based on the higher average selling prices we have experienced and our continuing efforts to leverage our manufacturing costs, we now anticipate full-year 2005 gross profit margin to be between 67 and 68% of sales.

Moving to operating expense. On our last call we forecasted 2005 operating expenses to grow between 25 and 30% above 2004 levels. We will remain in that range with Q4 operating expenses expected to fall between $25 and $26 million. This range represents a $4 to $5 million sequential increase compared to the third quarter and reflects anticipated step function increases in operating expenses related to organizational growth, infrastructure additions and variable compensation.

Our sales compensation plan commission sales at a higher rate once annual targets are met. Based on our higher than planned 2005 sales, much of the fourth quarter sales will be commissioned at the higher rate. Based upon our revised 2005 sales and operating margin forecast, we expect our 2005 net operating income to grow close to 200% compared to a range of between 100 and 125% indicated on our last call. Regarding stock option expenses, as mentioned on our last call, we do not anticipate adding stock option expense to our income statement until next year.

With regard to income tax, as we have mentioned previously, we continue to use our net operating losses to pay reduced taxes, and we continue to pursue the use of the NOLs that we acquired from Computer Motion. As a result, we reported an income tax rate year-to-date of just below 8%. While we still have a significant portion of unused NOLs, which we will continue to utilize for cash taxes, we anticipate converting to reporting fully taxed earnings on our GAAP P&L sometime next year. During the fourth quarter 2005, we expect to recognize a portion of our deferred tax asset, resulting in a negative tax expense, benefiting the fourth quarter's P&L. Next year we anticipate reporting a tax rate between 35 and 40%.

Regarding shares outstanding, we currently have 35.4 million shares outstanding and 4.2 million shares that could be added to the diluted share formula depending on our average stock price. To provide you with the range on what the diluted share count for EPS calculations may be in Q4, a 25% change, plus or minus, in our current price -- current stock price -- would result in a diluted share count as low as 37.8 million shares or as high as 38.6 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 30 da Vinci Systems; 23 in the United States, four to Europe and three to rest of world locations. This brings to 354, the cumulative number of da Vinci Systems worldwide; 265 in North America, 64 in Europe and 25 to rest of world markets. We consider every sale important. However there were several in the quarter that are worth calling out.

We placed da Vinci's at the University of Texas Southwest in Dallas; the University of Utah in Salt Lake City; Thomas Jefferson University Hospital in Philadelphia; and Greater Baltimore Medical Center. In addition, we sold da Vinci Systems to Northwestern University Hospital in Chicago and the National Institute of Health, or NIH, in Bethesda, Maryland. Outside the US, we also had key system placements with our second placement into Sweden, at Lund University Hospital; our fifth system into the UK to a London clinic; and our first da Vinci into China to Prince of Wales Hospital, which is the teaching hospital for Chinese University in Hong Kong.

Our fourth arms sales continue to be strong. During the quarter we shipped 27 of them, 25 as initial fourth arm da Vinci Systems and two as upgrades to existing da Vinci customers. This brings to 175 the overall number of fourth arm systems within our installed base. Clinically we had an excellent quarter. We experienced solid procedure growth, both within the US and abroad, with urology and gynecology showing the largest sequential growth. We participated in several trade shows and medical conferences. We launched a key new instrument, the Monopolar Curved Scissors, and we had several da Vinci publications presented within various peer review journals.

The Annual World Congress event on urology took place in Amsterdam in August, and our presence was especially strong. There were 77 moderated da Vinci presentations, abstracts and other scientific exhibits that highlighted dVP, da Vinci pyeloplasty and da Vinci cystectomy operations. In addition there was a plenary session entitled "Man versus Machine," where Dr. Raju Thomas from Tulane University and Dr. Tom Erling (ph) from the University of California, Irvine presented their data supporting dVP, while Dr. Inderbir Gill from the Cleveland Clinic presented his data on standard laparoscopic radical prostatectomy or LRP. The debate was spirited, but in the end the data supporting dVP was extremely compelling when compared to traditional open surgery or standard LRP.

This year's conference also featured a da Vinci prostatectomy satellite symposium in which a panel of experienced da Vinci users presented data associated with their dVP series and their technique. Perhaps the most impactful presentation was the one given by Prof. Thierry Piechaud from Bordeaux, France, who is a senior member of the world's most experienced laparoscopic prostatectomy group. Prof. Piechaud who will be publishing his outcomes data in mid-2006, described to the audience the reasons his group moved away from traditional LRP in favor of dVP, which were improved tissue plane dissection and neurovascular bundle identification, enabled by da Vinci's superior visualization, and their ability to increase daily throughput of prostatectomy patients due to the shorter operating times and the reduced fatigue factor associated with da Vinci. The ability to increase capacity without physically increasing hospital infrastructure is of high value to a busy center such as the center of Bordeaux.

During the quarter we also participated in the Western Section AUA Meeting, which is the largest section meeting in the AUA with professional attendance this year approaching nearly 500. There were several da Vinci related presentations ranging from dVP to pyeloplasty, cystectomy for bladder cancer and urinary diversion operation. Perhaps the most enlightening presentation of the meeting was given by Dr. Timothy Wilson from City of Hope National Medical Center in Los Angeles, entitled "Are all laparoscopic prostatectomy is created equal?" Dr. Wilson and his team began performing traditional LRP in December of 2000. And from December 2000 to September 2003, they have performed about 500. They began the transition from LRP to dVP in late 2003, and to-date have performed around 1,000 dVPs.

At the Western Section Meeting, they compared the two techniques, specifically in the area of continence and operating time. They reported that their operating times dropped by an hour with da Vinci versus LRP and the time to complete continence dropped from 118 days for LRP patients to an average of 41 days for their dVP patients. Increasing case throughput, while improving continence are just two of the reasons why they have standardized to dVP.

Within cardiothoracic surgery, we had a solid quarter. Procedures grew sequentially and we had a strong da Vinci showing at the European Association of Cardiac and Thoracic Surgery or the EACTS meeting. EACTS was attended by nearly 2,500 cardiothoracic surgeons who this year had the opportunity to observe two live da Vinci operations, which were transmitted into the general session of the conference. The first, a da Vinci Cardiac Ablation Operation performed by Dr. Jean Luc Einsen (ph) from our Astra Medical Centre in Brussels, and the second, a complex double-valve repair along with a cardiac ablation performed by Dr. Doug Murphy from Atlanta's St. Joseph's Hospital and Dr. Mike Smith from Samaritan Hospital in Cincinnati.

In the Cardiac Ablation Operation, Dr. Einsen used the Guidant Flex-10 microwave ablation catheter in conjunction with da Vinci to isolate the pulmonary vessels in a patient suffering from chronic Atrial Fibrillation or AF. The operation was successful and took only 90 minutes to complete. The second case was extremely complex and included a mitral-valve repair, a tricuspid valve repair, as well as, a cryoablation for AF.

Following a transesophageal echocardiogram which showed no valve regurgitation the operation was deemed successful. This operation was clear testimony to the ever expanding limits of da Vinci in the hands of an experienced surgeon. Also at EACTS, a moderated session entitled "Robotics In Everyday Practice" featured a number of da Vinci presentations encompassing several different operations.

Dr. Frank Van Pratt(ph) from Aalst, Belgium, gave the first presentation, in which he shared his MVST experience which consisted of approximately 100 operations. He concluded that the MVST is an excellent treatment option for patients with multi vessel coronary disease. The second presentation featured the initial experience out of Innsbruck for a hybrid revascularization operation. Dr. Johann Benadi (ph) a cardiac surgeon and Dr. Guy Frederick a cardiologist teamed up to perform what some have described as the optimal multi vessel close chested revascularization operation.

In a hybrid approach, the cardiac surgeon performs a da Vinci LIMA-to-LAD bypass, nd in the same setting, the cardiologist places multiple drug-coated stents in the remaining occluded vessels. The benefit to the patient, a complete coronary revascularization, front and back side of the heart, through small punctures rather than a large incision.

Dr. Mike Smith then presented his experience of over 130 cardiac and thoracic operations with da Vinci. The essence of his talk was da Vinci's value in everyday practice for procedures which included micro valve repair, ASD repair, biventricular lead placement, da Vinci revascularization, thymectomy, lobectomy and medium spinal master section (ph). He stated that as he became more experienced with the system, he found more and more natural extensions for its use within his everyday practice.

In gynecology, our newest target market, we saw strong initial demand for da Vinci training as well as for da Vinci case observations and proctors. We also experienced an early surge with both da Vinci hysterectomy and myomectomy operations within the US. Our initial leverage within this target group is threefold. First, for the most part the specialty is already laparoscopically trained. Second, several complex GYN operations remain difficult to perform laparoscopically and may be enabled by da Vinci. And third, we now have a base of 354 installed da Vinci's from which to build initial procedure momentum.

We believed that the combination of these three factors will drive additional GYN interest in da Vinci surgery as well as increase procedure volume. And as a footnote we will be marketing da Vinci at the upcoming AAGL conference in Chicago, which runs from November 9 through the 12. This will represent the first time we will have attended a GYN conference with a da Vinci system post FDA clearance. This concludes my update. And now I will not turn the time back over to Lonnie.

Thanks Aleks. That concludes our formal presentation. We'll now open the conference call for any questions you may have.

Thank you. (Operator Instructions). Our first question comes from Thomas Gunderson from Piper Jaffray. Sir, your line is open.

Good afternoon. That was the summer slowdown, huh?

Yes. But some summers are stronger than others.

All right. The -- as you burst through some of these goals that you have and continue to do well, remind me again -- I heard you have increased inventory. Is there any worry at all, is there any flow-through on manufacturing that would slow you down if this pace continues for the next couple of quarter?

No. Manufacturing will not be a barrier. And part of what we're doing is ramping production and trying to be prepared for whatever the demand is. But we've got an excellent manufacturing organization. And we continue to improve our processes, reduce our cost and improve our efficiency. So I don't see it as a problem at all.

Okay. And then of the 23 da Vinci's sold in the United States, can you make an estimate as to how many of those were for urology?

Aleks is counting right now.

Yes, I would say that it's pretty to safe to say, Tom, that urology had a role in every one of them that I can see across the 23 that we sold. And as a reminder our strategy still remains multi specialty in focus, and that includes urology, cardiac and general surgery, and most recently gynecology. And I would this quarter is pretty representative of that strategy.

Aleks did you have -- since gynecology is kind of a new front sharing you're going to AAGL, did you have any units in Q3 that you could directly say the gynecologist was the decision maker there and he or she will get first crack at using it?

No. I can't say that we did, Tom. I think that what we've experienced thus far is that gynecology is weighing in more today than they ever have before. And we see that continuing, but no individual or independent units because of gynecology solely.

Okay. And then I'll switch back to urology real quick. People talk about a tipping point. And you've gone from zero to five to 10 to over 20% of RPS at least in this country now done robotically. Do you see this accelerating? Can you get to a point where this gets to over 50% in the not too distant future?

Tom I think it's hard to say what the tipping point is and what the time will be to get to the 50%. As a reminder, the percentage that we had indicated earlier this year and we remain true to is that we will finish this year with at least 20% of the US market. Beyond that, we really haven't commented and I don't think it's appropriate to do so at this stage.

And then, Aleks, as long as you and I are having this conversations, let me just ask on that, I think it was a - was it City of Hope presentation where they can reduce the operative time by an hour? What would you estimate they would say is a learning curve there? How many do you have to do before you can reduce it by an hour?

Well, what's interesting here and just as a reminder that particular presentation compared their laparoscopy. This particular account is not done in open prostatectomy in some years now. They were one of the early adopters to laparoscopic prostatectomy. And the comparison that they presented was between my laparoscopic and da Vinci. And now their learning curve in interesting because they were so laparoscopically astute when they purchased their da Vinci. They now own three and do all of their operations this way. What has been reported in the past is roughly around 20 cases for a learning curve but that is not to be confused with someone doing it an hour faster after 20 cases.

Got it. Okay. Thanks. Good quarter.

Thank you.

Our next question comes from Tao Levy from Deutsche Bank. Sir, your line is open.

Thanks. Good afternoon. Thanks for taking the questions. And I guess you know now we know why Susan wanted to stay for the third quarter. So just a couple of quick questions here. I mean if I give the math quickly, we're looking in the fourth quarter for roughly a repeat of a similar number of systems. Is that accurate?

Yes. I think the guidance that we're giving is that we believe we'll sell at least as many units in the fourth quarter as we did in the third quarter. And historically, fourth quarter has been our strongest quarter from a revenue standpoint, and we expect this fourth quarter also to be the strongest quarter for the year.

And in turn -- I always ask this question. But the pipeline you guys commented last quarter was very strong. Obviously it remains strong. As you start planning for 2006, do you still over the long term expect system growth of at least 10%?

We're going to give our specific guidance for 2006 next quarter. With regard to pipeline, I think we'll pretty much say the same as we've had in the past three months is that the pipeline is as strong as it ever has been. But again the unit sales are probably the toughest thing for us to predict. The recurring revenues we see steadily increasing sequentially every quarter.

Perfect. And then on the gynecology front, Aleks, do you need any new instruments, or you can you pretty much use already what's out there to get the procedure done?

It's -- if you look at any of our target procedures, we've required some instrumentation development to really optimize the operation. Now that was prostatectomy, cardiac continues and gynecology does have a couple of instruments that would round out the set nicely. I think we have a very functional set and our users have been making up for some of the energy based instruments that they normally use in laparoscopic surgery that they might use to in auxiliary port. But we are definitely -- the R&D team is focused on optimizing this operation for us. And we have a lot of those things in the works.

And just a last question here, you normally don't talk about the -- this metric, but number of new surgeons trained on da Vinci -- I was just wondering if you could comment on that. If you're seeing a big inflow of surgeons that are attending training sessions that are doing their first live human cases? And also are you seeing surgeons start to do repeat cases that were just trained maybe a quarter ago?

Yes. It is a number and, again, as a reminder, it's a number we used to comment on, but it didn't have a clean metric to reconcile to in the business -- in the business metrics. But we have seen and continue to see strong demand for training across all specialties that we are in, gynecology, certainly, being the newest. We have the most training to do there. We have a lot training to do, since it's such a new area for us. But, yes, more cases, more first cases. That continues and I think that it will continue for sometime.

Fantastic. Thanks a lot. And awesome quarter.

Thanks

Thank you.

Our next question comes from Rick Wise with Bear Stearns. Sir, your line is open.

This is Mike Bailey for Rick. Question for you --

Hi Mike.

Thanks Ben. My question for your procedures. Looking at the non prostatectomy procedures - I don't know if it's possible to break that out and get a look at that. Any type of idea into the growth rate of non-prostatectomy procedures? We were looking for a little bit of a slowdown in the third quarter to maybe 20% growth. And just our quick math suggested maybe at 30% growth, roughly in line with the second quarter for the non prostatectomy. Any detail you can give us on that?

Just one reminder that we talked about in our script is we pointed out that we launched a new instrument in the third quarter. It's a great instrument called the Hot Shears. And we pointed out that we sold in excess of $1 million worth of that instrument. And we wanted point that out even though we don't normally go to that level of detail, we wanted to make sure that you realize that could be something we're not going to repeat quarter-after-quarter. That said we definitely had growth in all of our procedure categories in the third quarter. And maybe Aleks, you might have little more color on that?

Yes. I don't think we've broken it out to the percentage of prostatectomy or non prostatectomy in the past. But I think the -- again, what we did say is that our two fastest growth categories in terms of percentage were urology and gynecology and, certainly, we're starting with a smaller base in gynecology. But we're very pleased with that growth.

Thanks Aleks. And sort of pursuing that comment there, it sounds like we're seeing more information, more news flow on the gynecology procedures. Is that sort of taking more of a front burner position compared to some of the cardio procedures? Or how are you approaching gynecology versus cardio at this point?

One of the -- one of the challenges of being as fluid as we are through different surgical specialties is focus. And gynecology, with its approval -- with our approval being granted at the end of April this year gave us another ball that we can go to and develop more procedures and get some adoption. We remain focused on the vital handful of procedures that we talk about. That is hysterectomy and myomectomy within gynecology, microvalve and revascularization within cardiac surgery and then prostatectomy. We remain focused there and we're very careful not to cannibalize one at the expense of the other. And so, we believe we're doing that pretty well and we'll hope to do that in the future.

Thanks. And looking at procedures per week or per month, however you guys look at it. I mean I missed earlier, but can you remind us what procedures per week were this quarter and maybe you compare to the second quarter?

Yes, Mike, that's not a metric that we report. I think that is a metric that various folks are calculating, and they're doing so by taking the instrument and accessory revenues. And one thing that we have mentioned in the past is if you take a look at the growth rate of the instrument and accessory revenues from time period to time period that approximates the growth in the procedures that we're also experiencing in those time periods. And then you can simply just take the number of systems as a denominator in any of those time periods and do your own trending.

Great. And just thinking about the sort of capacity for each hospital using the system. I know we've spoken to some physicians who have indicated that for a prostatectomy, for example, sometimes three procedures a day might some type of a maximum. Can you give us any idea for gynecology or cardio, any type of capacity there, maybe three a day or four a day? What type of experience do you have with that?

In our early experience with gynecology, I am aware of at least one center that has performed three hysterectomies in a day. I don't know that that is something that you can trend out and say is the absolute capacity. It's just too early to say. But I am aware of at least one situation. Within cardiac, as you know, the disease that they're managing is very complex and often involves more than the surgeon initially thought. So, it's rarer to see more than one case, a cardiac case, in any given day.

So I don't know what -- how you're defining it in terms of actual capacity, but that is typically what we're seeing in terms of the most operations in those specialties. And within prostatectomy, we have had a situation we had -- where I am aware of one hospital that has done four on a da Vinci system and they did it twice. They did a total of eight in a single day, four off of each of their two systems.

Great. And just one last quick question, I'm not sure if you mentioned it earlier, but number of hospitals that have two da Vinci's and the number that have three da Vinci's?

The number with two, I believe, is 23 and the number with three is three. So a total 26 that own more than one.

Great. Thanks so much.

Our next question comes from Charles Olsziewski with Oppenheimer & Company.

Good afternoon.

Hey, Charlie.

How are you?

Good.

I guess you're fine. Aleks, question for you. The last two quarters you had a sharp uptick in boxes relative to the equipment, relative to the forecast. And you and I in the past have talked about sites that are either offensive in acquiring technology to capture share or patients and sites that are more defensive in nature trying to keep their business. With 265 sites in the US now, are you starting to see more defensive purchases by hospitals or are there still markets that are just really kind of opening up for robotic surgery?

The answer is probably yes to both. We are seeing more defensive purchases. And again, I guess, just for a level set of that definition, defensive meaning that patients are shifting from one hospital to another in a particular market looking for this type of disease management or da Vinci prostatectomy in most cases. That is happening more and more. And I think that will -- just will continue.

As far as fertile new markets, I don't think there's any market that's fully -- in my opinion at least that's at full capacity. But you have some markets that are still in their infancy. And so I think that there's opportunity in any market across the United States and certainly, worldwide. And I think we're seeing both defensive and offensive purchases still.

As far as, when you think about a placement in hospital, have you noticed any acceleration of adoption among multiple surgeons within a site compared to, say, a year ago? In other words, are more surgeons within a hospital availing themselves of the technology than they might have a year ago? Or are they getting there more quickly if you know what I'm trying to ask you?

Yes. I can't give any specific metrics. But I can tell you that --

Anecdotally is fine.

... yes. It seems -- it absolutely seems that way. And it would stand to reason if there's a hospital that is the second or third or fourth in a market to get a da Vinci, and offer a da Vinci prostatectomy, then it probably stands to reason that they've lost some patients and their motivation to get through training to their first case is higher today than it was a year ago.

And Charlie, honestly, that's something that we internally focused a lot on. And we've focused a lot on spreading our best practices out there in terms of training multiple specialties at each hospital.

Okay. Two more questions. As far as -- clearly in the case of urology, Dr. Menon was one of the first physicians to get his data out there -- data was what really accelerated the adoption in urology, and it's happening in cardiac. Aleks, with so many of the gynecologists laparoscopically trained, is data going to be as important in the specialty for adoption as it was in the others?

Again anecdotally, I think if you back over the history of medical device, data is an accelerator for any adoption. So I think the answer is yes. And if you look at the procedures that we're focusing on initially within gynecology, a lot of the hysterectomies that we're focused on are being performed open today. So being able to perform them safely and efficaciously and moving the operation from open to close is a very significant piece.

Now, if you focus on -- then cancer control and some of the other potential endpoints, I think there's a lot there to study. And it would be my expectation to see people that are going out to prove this. And so yes, I do think data will be important, but I don't think it will be limiting our growth at least in the near term.

Are there one or two sites that are clear leaders in using your technology in the space whether it be myomectomy or hysterectomy?

I think in that area -- in fact the group out of Michigan, at the University of Michigan led by Dr. Vincula (ph) did a live myomectomy Web cast --

That was back in September, right?

Yes. That was this quarter. And I would say that group is probably the most experienced in that operation. And I believe the Mayo Clinic in Rochester -- not in Rochester, excuse me -- in Scottsdale is probably among the leaders is not a leader in the hysterectomy for cancer.

Okay. Thanks.

We have time for one more question.

Our final question comes from Noah Blackstein with Goodman and Company. Sir, your line is open.

Hi, thanks a lot guys. Congratulations. Just a quick question in terms of obviously in some of the hospitals, cardiologists tend to be a big hoggish of the machines in terms of booking them. But I'm wondering given sort of urology, cardiology and gynecology, what your sort of feelings are out there - what do your leads look like for second machines in some of these higher volume hospitals given -- Just trying to, you can only run so much on one machine per hospital and some of these guys book these things for the day either way. Thanks

Yes Noah, this is Ben. We do see some of what you're talking about and actually have experienced some of that in the past, where the capacity of the system or systems that they have are reached earlier than they would have if they only specialized in one specialty. So for example, if cardiac surgery has the system allocated to them for two days, urology for two days, and general surgery for one day, they reach their capacity faster than someone who has, let's say, a system dedicated to urology all five days. And so we have had that situation in the past where someone buys a second system. And we are working on second systems in places like that.

And just very, very quickly, I know you have a number of hospitals with machines in Louisiana. Is it possible you could quantify the impact of those hospitals being closed on this quarter? What would it have added if those hospitals been open?

That's a good question. We have three hospitals that are still closed in Louisiana and one hospital that's closed in Port Arthur in Texas, though the three in Louisiana were impacted by Katrina and the one in Texas was impacted by Rita. So those four sites are not doing any procedures at this time. And quite honestly, we don't have a prediction of when those hospitals are going to be reopening.

But do you have any idea what it might have cost you in terms of revenue this quarter?

I think the ratio of those four sites versus somewhere around 240 in the US is probably the right ratio to think about.

I don't think it's worth a lot of effort to try to calculate that number.

Okay. Thanks very much.

Thank you. That was our last call. And as I mentioned this is my last conference call. I just wanted to end by saying a few words. I have had the privilege of being with Intuitive Surgical from its early days as a development stage company, through its emergence as a strong profitable company. It has been a rare and rewarding experience. When you are part of a company going through these stages, you get to know the true character of your colleagues.

I know that there have been times when we've frustrated you, with our inability to predict the future or a lack of attempt to do so. But we have tried to answer your questions and communicate in as honest and a straightforward way, as humanly possible. This honest and direct manner is part of the character, the management team and those values are deeply embedded in the culture of the company. It has been an honor for me to be a part of it. And now for the numbers.

Total revenue grew to $60.9 million, up 72% from the prior year. We shipped 30 da Vinci Surgical Systems and 27 fourth arms. Our gross profit margin improved to 69.2%. Our net income for the quarter was $20.7 million or 0.55 per diluted share. EBITDA for the quarter grew to $22.6 million. And we ended the quarter with $189 million in cash.

Thank you, Susan. As I've previously stated on another calls, and I will repeat here, we believed that the adoption of our technology larger than surgical procedure, by surgical procedure, starting with those procedures where it currently provides compelling surgical benefits, capabilities to both surgeon and to the patients. We continue to work with our surgeons to develop and drive those procedures. We're expanding the surgical capability of our products, so that their use is compelling for the patients, surgeon and hospital in an ever increasing number of such 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 and driving future investment priorities based upon clinical need and economic return. We plan conservatively, execute aggressively and focus on those things -- those operating and financial metrics that we believe reflect true economic performance and shareholder value, such as system placements, procedure growth, market share by surgical procedure, revenue growth, operating efficiency and effectiveness, operating profit growth and cash flow.

As we conclude this call, I would like to acknowledge that this is the last quarterly conference call which Susan will join us. As Susan mentioned, she joined the company in May of 1997. She has played an important role as we've taken the company from a start-up with a product concept to a successful company that is both -- that is profitable, with over $200 million in annual revenue and more than 400 employees. We thank her for her contribution. We want to know -- want her to know that we will miss her. We wish her health, happiness and great success in all of her future endeavors.

That concludes today's call. We thank you for your participation and we'll talk with you again in January of 2006.

Thank you for participating in today's conference call. You may disconnect at this time.