直覺手術 (ISRG) 2005 Q4 法說會逐字稿

Welcome, and good afternoon, to the Intuitive Surgical fourth quarter earnings conference call.

At this time, all lines have been placed on a listen-only mode until the question-and-answer session of today's conference.

I would also like to inform everyone that the conference call is being recorded.

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

Now at this time, I would like to turn the conference call over to your speaker, Ms. Sarah Norton of Investor Relations.

Thank you, ma'am.

You may begin.

Good afternoon, and welcome to Intuitive Surgical's fourth quarter conference call.

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

Ben Gong, our Vice President of Finance and Treasurer;

Calvin Darling, our Director of Financial Planning;

Aleks Cukic, our Vice President of Business Development and Strategic Planning; and Rick Runkel, our Senior Vice President and General Counsel.

Before we begin, I would like to inform that you 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 Security and Exchange Commission filings.

Prospective investors are cautioned not to place undo 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 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, Calvin will follow with review of fourth quarter's financial results, next Aleks will discuss sales and marketing highlights, then Ben will review our financial forecast for 2006, and finally we'll 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. 2005 has been an extraordinary year for Intuitive Surgical.

Highlights for the fourth quarter are as follows: We sold 40 da Vinci surgical systems, up 25 -- up from 25 in the fourth quarter of last year. 31 of those systems were in the United States.

We ended the fourth quarter with 394 cumulative da Vinci systems installed worldwide.

Total revenue grew to 72.1 million, up 69% -- or 60% from Q4 last year.

Recurring revenue grew to 30.8 million, up 70% from the prior year, comprising 43% of total revenue.

We generated an operating profit of 23.5 million, 32.6% of revenue, up 116% from $10,900,000 in the fourth quarter of last year.

EBITDA for the quarter grew to 25.3 million, from 12.6 million in the fourth quarter of 2004.

For the full year, we sold 115 da Vinci surgical systems, up from 76 last year.

Total revenue grew to 227 million, up 64% from 139 million last year.

Recurring revenue grew to 103 million, up 70% from the prior year, comprising 45% of total revenue.

We generated 69 million in operating profits, up 225% from 21 million last year.

EBITDA grew to approximately 75 million, from 25 million last year.

We ended the year with 203 million in cash, and short-term investments, up from 132 million last year, and 89 million last quarter.

The 14 million increase from last quarter was after a cash outlay of $20 million to purchase a nearby 3 building complex comprising 210,000 square feet from Hewlett-Packard.

In 2005, we continued to drive the adoption curve for robotically-assisted surgery, delivering strong top line and bottom line growth.

Significant events and accomplishments for the year include: Continued strong procedure growth, most notably in urology, gynecology and general surgery; strong momentum in system sales worldwide;

FDA clearance for gynecology; development and launch of new enabling instruments and accessories; significant progress in the development of our operating and information systems infrastructure; license of IBM patents related to image registration for image guided surgery; continued growth and development of the Intuitive team ending the year with a team of 419, compared to 321 at year-end 2004; completion of the development, testing, validation and shakedown of the new da Vinci S system; and finally, we tripled our operating space with the purchase of the 210,000 square feet of additional space; in anticipation of our future manufacturing, and organizational growth requirements.

Some recent additions to our team include; as mentioned earlier, Rick Runkel, as Senior Vice President and General Counsel.

Rick received his law degree from UCLA, and was the managing partner of the San Francisco office of Sheppard, Mullin, Richter & Hampton, and the General Counsel for VISX for the last 4.5 years.

Heather Hand has joined us as Vice President of Human Resources.

Heather has headed Human Resources at City of Hope Hospital, a healthcare provider, with 2,700 employees, and multiple labor unions.

She served as Vice President of HR for Biosense Webster, a J&J company, and until a few days ago, was Senior Vice President, Global Human Resources, at Sunrise Medical.

Miriam Curet, Dr. Miriam Curet, Assistant Professor of Surgery at Stanford, who has joined our team on a part-time basis as Chief Medical Advisor.

Miriam received her medical degree from Harvard, her medical training at the University of Chicago and the University of New Mexico.

With that, I will pass the time over to Calvin Darling, our Director of Financial Planning.

Thank you, Lonnie.

We again enjoyed excellent financial results this fourth quarter.

Total fourth quarter revenue increased to $72.1 million, up 60% from 45.2 million for the fourth quarter of 2004.

Higher fourth quarter sales were driven by higher da Vinci Surgical Systems and 4th Arm unit sales, as well as continued recurring revenue growth.

Fourth quarter 2005 sales increased in all product categories.

Compared to last year, systems revenue increased 52%, to $41.3 million from 27.1 million.

Instrument and accessory sales increased 77% to $20.6 million from 11.6 million, and service and training revenue increased 58% to 10.2 million, from 6.4 million.

Fourth quarter demand for da Vinci Surgical Systems exceeded our expectations, as we sold 40 systems during the quarter, up 15 compared to 25 sold during the fourth quarter last year.

We sold 33 da Vinci 4th Arms during the quarter, compared to 24 during the first quarter last year.

Our base da Vinci system average selling price was about $890,000 for the fourth quarter, which was less than the 950,000 realized last quarter, but about the same as what we had in the second quarter 2005.

Our pricing remains steady, with our ASP fluctuating within this range, reflecting primarily changes in regional mix.

Net revenue realized on 4th Arm sales has remained fairly constant, averaging around $170,000 per unit.

Instrument and accessory revenue grew 77% for the quarter, driven by higher da Vinci surgery volume at our customer sites.

We continue to realize between 1,500 and $2,000 per procedure for established da Vinci accounts.

However, keep in mind, that when customers are early on in their robotics programs, they tend to make their initial instrument and accessory purchases prior to completing many procedures.

This has had a more recent impact of increasing our average revenue per procedure to a range from between 2,000 and $2,500.

Our full year 2005 sales totaled $227.3 million, up 64%, compared to 138.8 million for 2004.

We sold 115 systems and 106 4th Arms in 2005, compared to 76 systems and 65 4th Arms in 2004.

For the year, recurring revenue increased 70%, to 102.8 million, from 60 million in 2004, growing to 45% of total revenue, compared to 43% in 2004, and 33% in 2003.

Our fourth quarter 2005 gross profit percentage of 67.4% was 1.5 points higher than the fourth quarter 2004, primarily due to leveraging manufacturing overhead costs across higher sales volume, and lower material costs.

Our gross profit margin was 1.8 points sequentially lower, primarily due to the lower base da Vinci System ASP I previously mentioned, and the impact of some additional costs related to the da Vinci S. For the full year 2005 gross profit percentage was 67.6%, compared to 63.4% last year, primarily reflecting again, the leverage of manufacturing overhead costs across higher sales volume, and material cost reductions.

Total operating expenses for the fourth quarter 2005, were $25.1 million, up 6.2 million or 33% compared to the fourth quarter of 2004.

Selling, general and administrative expenses for fourth quarter 2005, were $20.8 million, compared to 14.6 million for the fourth quarter last year.

The increase was driven by sales organization head count growth to support higher sales, and higher commissions, as our sales compensation plan commissioned sales at a higher rate, once annual targets are met.

Based on our higher than planned 2005 sales, much of the fourth quarter sales were commissioned at the higher rate.

Research and development expenses for the fourth quarter 2005, were $4.3 million, roughly equal to the fourth quarter last year, as higher 2005 personnel costs were offset by lower prototyping, and other project-related costs.

We added 22 employees during the fourth quarter, ending the period with 419 regular employees.

For the year, we grew total head count by 30%, adding about 100 employees to our organization, including 54 to worldwide sales and service, and 24 to manufacturing.

On a full year basis, total operating expenses grew 27% to $84.8 million in 2005, compared to 66.8 million in 2004.

Operating expenses were significantly leveraged in 2005, as we were able to hold operating expense growth to 27% as we grew sales 64%.

Fourth quarter 2005 operating income was $23.5 million, or 32.6% of sales, compared to 10.9 million, or 24.2% last year.

Full year 2005 operating income grew 225% to $68.8 million, or 30.3% of sales, compared to 21.2 million, or 15.3% of sales in 2004.

Our fourth quarter 2005 other income of $1.9 million, comprised mostly of the interest income, increased by 800,000, compared to the fourth quarter 2004, primarily due to higher interest earned from higher 2005 cash and investment balances, and higher 2005 interest rates.

As anticipated, during the fourth quarter 2005, the Company reversed a valuation allowance on its deferred tax asset, resulting in a negative income tax expense of $24.1 million for the quarter, and a negative income tax expense of $20.3 million for the full year.

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

Including the impact of the tax event that I just described, our fourth quarter 2005 net income was $49.5 million or $1.31 per diluted share, compared to 11.7 million or $0.32 per diluted share in the fourth quarter 2004.

We reported 37.7 million diluted shares outstanding for our fourth quarter EPS calculation.

This quarter, the number of shares added into our diluted share count was reduced by nearly 1 million as a result of the reversing of the valuation allowance on a deferred tax asset.

Our full year 2005 net income was $94.1 million, or $2.51 per diluted share, compared to 23.5 million, or $0.67 per share in 2004.

This quarter, we again strengthened our balance sheet, while investing in additional facilities, IT infrastructure, and intellectual property to support future growth.

As Lonnie mentioned, in late December, we invested approximately $20 million to acquire an additional 210,000 square foot facility, which is located about 1 mile from our current Sunnyvale site on the same road.

We will continue to maintain operations in our existing Sunnyvale site.

This acquisition of this property triples our square footage in Sunnyvale, and provides us with the necessary capacity to maintain all of our corporate functions, including manufacturing, together here in Sunnyvale for several years to come.

We are also investing in IT infrastructure, as we have embarked on a project to upgrade our general ledger and manufacturing systems to a new SAP system.

We anticipate to complete implementation of this new system around the middle of 2006.

Total capital expenditures for 2005, including the purchase of the new facility, was nearly $30 million.

Even as we made these significant investments in our future, we were $13.3 million cash flow positive during the quarter, and 71 million cash flow positive for the year, ending the year with 203 million in cash and investments.

Our positive fourth quarter cash flow was driven by our $25.4 million net income, excluding the tax events, $12.2 million of option and warrant exercise proceeds, offset primarily by our capital investments that I just described.

Our accounts receivable balance increased to $52.8 million, from 43.8 million ending the third quarter.

The increase was due to higher fourth quarter 2005 sales, compared to the third quarter.

Our average days sales outstanding was 66 days, compared to 65 ending the prior quarter.

Our net inventory increased to $15.2 million, from 12.2 million ending the previous quarter, reflecting the growth in our business and the buildup for the da Vinci S launch.

Our annual inventory turns now stand at 6.3, compared to 6.1 ending the previous quarter.

Finally, we ended the fourth quarter with $25.3 million of total deferred revenue, compared to 20.9 million ending the previous quarter.

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

And with that, I would like to turn it over Aleks, who will go over our sales, marketing, and clinical highlights.

Thank you, Calvin.

As mentioned earlier, during the fourth quarter we sold 40 da Vinci Systems, 3 of which were da Vinci S Systems placed into U.S. training centers. 31 systems were placed in North America, 7 into Europe, and 2 in rest of world markets.

This brings to 394, the cumulative number of da Vinci Systems worldwide. 296 in North America, 71 in Europe, and 27 to rest of world markets.

Of the 40 systems placed this quarter, 5 were to existing da Vinci customers as second or third systems.

Which brings to 31 the number of hospitals with multiple da Vinci Systems.

Our 4th Arm sales continues to be strong.

During the quarter,we shipped 33 4th Arms. 30, as initial 4th Arm da Vinci Systems, and 3 as upgrades to existing da Vinci customers.

This brings to 208 the overall number of 4th Arm systems within our installed base.

Clinically, we had an excellent quarter.

We experienced solid procedure growth, both within the U.S. and abroad, with urology and gynecology showing the largest sequential growth.

We participated in several trade shows and medical conferences.

We completed the development of the da Vinci S System.

In addition, we had several da Vinci publications presented within peer reviewed journals.

This past month, we took part in the combined ART and Pac Rim conferences, which was held in Anaheim, California.

ART, or Advanced Robotic Techniques, is a urology specific conference, which focuses on the latest clinical advancements in the field of robotic urologic surgery.

Whereas Pac Rim, a multispecialty conference, featured robotic cardiac surgery, general surgery, gynecology and urology.

Over 300 participants, representing 13 countries, attended the combined robotic conferences, which were chaired by Dr. Ralph Clayman, Chairman of the Department of Urology, at the University of California, Irvine.

There were several highlights from these conferences specifically relating to outcomes data.

At the ART conference, several physicians presented dVP outcomes data on cancer control, continence, and potency rates.

Included was a presentation by Dr. Ash Tewari, an Associate Professor of Urology at Cornell Medical Center.

Dr. Tewari presented his cancer control data for his last 100 dVP patients, which showed a T2 positive margin rate of only 2%.

This is a significant improvement over the best in class open prostatectomy outcomes reported to date.

Then Dr. Tom Ahlering, from the University of California, Irvine, reported his dVP continence outcomes.

Continence, as defined by zero pads required.

He showed a continence rate of 50% at 1 month, 75% at 3 months, and 95% at 12 months.

These outcomes compared very well against the best in class open prostatectomy results.

And finally, Dr. Mani Menon, from Henry Ford Hospital, presented potency data from his recent study which was also published in the December edition of the "The Gold Journal of Urology."

Dr. Menon studied 2 specific end points for a patients undergoing a prostatic fascia-preserving da Vinci prostatectomy, which were first, the ability to perform intercourse at 12 months post-op.

And second, the ability to achieve a normal pre-op quality erection.

Regarding the first end point, Dr. Menon reported a 97% success rate.

And with the second end point, an 86% success rate.

Dr. Menon stated, and I quote, "Patients undergoing a prostatic fascia preserving prostatectomy had significantly better erectile function outcomes than patients undergoing a traditional bilateral nerve sparing surgery, without compromising cancer control.

To our knowledge, our potency outcomes with this technique are the highest reported to date."

The Pac Rim conference was comprised of robotic surgery presentations, specialty specific workshops for cardiac, urologic, gynecologic, and general surgery, as well as 6 live da Vinci surgical transmissions.

The live surgeries consisted of 2 da Vinci general surgery procedures, 2 urologic procedures, a da Vinci mitral valve repair, and from the Mayo Clinic in Scottsdale, a da Vinci hysterectomy.

I could go into great detail about all of these live cases, but I will just summarize by saying, our surgeon customers have advanced their techniques and their clinical outcomes a great deal in a very short period of time.

The techniques displayed in the mitral valve repair, gastric bypass, da Vinci prostatectomy, and da Vinci hysterectomy were all state-of-the-art and very impressive.

In Q4 we participated in our first 2 GYN conferences.

AAGL, which took place in Chicago, and the Mayo Clinic GYN symposium, which took place in Maui.

As we have stated in the past, da Vinci's role in gynecology is early, since we had received FDA clearance less than 9 months ago.

But we are pleased with our momentum, and the progress we are making in addressing this large market opportunity.

Dr. Javier Magrina, from the Mayo Clinic Scottsdale, delivered a presentation at AAGL, where he concluded that da Vinci is a better surgical tool for lymph node dissection for cancer-related hysterectomies, providing better access to, and removal, of more lymph nodes compared to open and laparoscopic techniques.

The 2 end points for cancer-based hysterectomies are margins and the number of lymph nodes removed.

Lymph node dissections are integral to hysterectomies for endometrial cancer in order to accurately stage the disease, as well as in radical hysterectomies for cervical cancer, in order to remove the spread of cervical cancer into the pelvic lymph nodes.

In addition, Dr. Magrina reported that his da Vinci patients leave the hospital the day following their surgery, as compared to a 3 or 4 day length of stay for patients undergoing a traditional open cancer operation.

At the Mayo Clinic GYN course in Maui, nearly 1 full day of a 3.5 day program was devoted to da Vinci procedures for complex benign hysterectomies, oncologic hysterectomies, myomectomies, and pelvic floor reconstructions.

And for those of you interested in observing a da Vinci hysterectomy, Dr. John Boggess, Program Director for the Division of GYN Oncology, at University of North Carolina, Chapel Hill, will be performing a da Vinci hysterectomy for cancer, live on the web, on February 22nd at 4 p.m.

Eastern time.

And also of note, we will be attending the annual Society of Gynecologic Oncology Conference, which will be held in Palm Springs, California, on March 22nd through the 26th.

Earlier this week we attended a joint conference of the Society of Thoracic Surgery, or STS, and Tech-Con, which was held in Chicago.

During Sunday's general session at Tech-Con, Dr. Wiley Nifong, from East Carolinas University, presented the results of ECU's first 250 da Vinci mitral valve repairs.

There were several favorable findings in their review, but perhaps the most favorable, was the relationship between mitral valve repairs versus replacements within their practice.

ECU has been known for their experience in valve surgery for a long time.

But over the past few years, their repair versus replacement rate has moved up tremendously.

In 2002, ECU was repairing approximately 65% of their mitral valves, and replacing 35%.

In 2005, their repair rate was nearly 90%. 62 of the 250 repairs were either bileaflet or anterior leaflet repairs, which are considered to be very difficult repairs, and often result in replacements.

Dr. Nifong concluded by saying, "robotic mitral valve repair may become the standard way to repair mitral valves in the futures."

This concludes my update, and I will now turn the time over to Ben.

Thank you, Aleks.

I will be giving you guidance for our full year, 2006 financial results, as well as some indications for what we expect in the first quarter.

Our 2006 financial results will be impacted by our implementation of FAS 123R, or option expensing, which will make comparisons to previous years more challenging.

I will first provide a forecast, which excludes the impact of FAS 123R, and then give you our estimate of stock option expenses separately.

Starting with revenue, we continue to see growth in overall demand for our products, driven by the growth in procedures performed by the da Vinci system.

We expect total revenue to grow 25 to 35% above our 20005 revenue.

Recurring revenues are expected to grow faster, with instrument and accessory revenues increasing 45 to 55% above 2005 levels.

Service revenues are expected to grow 35 to 37%.

System revenues are the most difficult to predict; however, we are estimating that system revenues will grow 15 to 25%.

With regard to the first quarter, total revenues are expected to be seasonally lower than the fourth quarter of 2005, as it has been in previous years.

Furthermore, with the introduction of the new da Vinci S System, we expect some delays in purchasing decisions among our customers, leading to lower system sales.

Nevertheless, we continue to expect sequential growth in recurring revenues, driven by procedure growth, and growth in service revenues.

Moving on to gross profit margin, we expect our gross margins to decrease in the near term, as we have not yet produced our da Vinci S Systems and instruments in volume.

And we need to invest in service parts for the da Vinci S line.

Overall, gross margin percentage is expected to come in at 64 to 65% in Q1, and steadily increase throughout the year, recovering to the high 60s by the end of the year.

For the year in total, we expect gross margins to average between 65 and 67%.

With regard to operating expense, we are continuing to build the organization in all areas, emphasizing growth in our sales and support functions.

For the year, we are planning to grow total operating expenses 30 to 35%.

As we have done in the past, we will modulate our operating expense growth, depending on how our revenues grow during the course of the year.

For the first quarter, we expect total operating expenses to be about the same as they were in the fourth quarter of 2005, with increases in R&D spending, offset by decreases in SG&A expense.

Once again, the forecast I have just reviewed excludes the impact of stock option expenses.

Starting in Q1, we will be reporting stock option expenses within our income statement.

Based on our current stock price, we estimate our 2006 stock option expense to be between 21 million and $28 million, which is broken down as follows: 4 to $5.5 million of this expense will be booked as cost of sales, decreasing our gross profit margin by 1 to 2%. 4 to 5.5 million of this expense is expected to be booked in R&D expense.

And 13 to 17 million is expected to be booked as SG&A expense.

As a reminder, these will all be non-cash expenses.

As we report our results in 2006, we will break out the stock option expense from the rest of our income statement.

With regard to income tax, we recognized a large gain related to our deferred tax asset in the fourth quarter, which resulted in a negative tax rate for 2005.

I would like to remind that you this $24 million benefit is a non-recurring, non-cash accounting entry.

Going forward, we anticipate reporting a tax rate between 36 and 42% on our income statement.

It is important to note that our reported tax rate for 2006 will be significantly different than our actual cash tax expenditures.

For tax payment purposes, we will continue to use our previous net operating loss carry forwards, to offset the majority of our income taxes incurred in 2006.

The difference between what we report on our income statement and what we actually pay, will be reflected on our balance sheet and cash flow statements.

Regarding shares outstanding, we currently have 36.2 million shares outstanding, and 4 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 Q1, a 25% change in our current stock price would result in a diluted share count as low as 38.7 million shares, or as high as 39.1 million shares.

With regard to certain cash flow items, we expect depreciation and amortization to be approximately $10 million in 2006, and capital expenditures to be approximately $15 million.

In addition, all FAS 123R stock option expense will be added back in our cash flow statement.

Finally, I would like to update you on 1 additional item.

Our goal for da Vinci prostatectomy penetration going into 2005 was to exit the year with a penetration run rate of at least 20% of all prostatectomies performed in the United States, based on our estimate of 90,000 prostatectomies in the U.S.

We did in fact meet this goal.

Our objective for 2006, is to exit the year at a run rate of at least 35%.

That concludes my update, and I will now turn the time back over to Lonnie.

That concludes our prepared remarks.

And we will now open the call to your specific questions.

Thank you. [OPERATOR INSTRUCTIONS] Thom Gunderson, Piper Jaffray.

Hi.

I guess the first question is on da Vinci and da Vinci S. I understand -- I believe I understand how this is working out in the near term.

But Lonnie, do you expect that you would have dual inventories, 2 to 3 years from now, or does everything switch over to da Vinci S over time?

Well, it's the current plan to produce both systems and we have a very large install base out there of the standard da Vinci.

And I suspect that both demand for that product, as well as our need to support it will exist for a long time.

And we continue, and plan to continue, to develop and provide enhancements to that system to our current install base, as well as new customers.

Yes, I think also Thom, it's just important to point out that our install base is nearly 400 systems in da Vinci.

So the majority of our recurring revenues are going to be derived from this system for at least the next few years.

And with respect to instrument development, and continued enhancements, it is very important for us to continue to make those operations as surgeon and patient friendly as we can, so our plans are to continue to do that.

And, I'm sorry, every instrument is different for the S from the standard?

The instrument and the factors in terms of the actual grasping, cutting, et cetera, are the same.

But one of the features of the new system is it has longer instrumentation, which should provide for better access to hard-to-reach places.

But in terms of the instruments themselves, in terms of their functionality, they will be very similar, between one system and the other.

Okay.

And then Aleks, you mentioned gynecology, along with urology, to the exclusion of a lot of the others.

Is gynecology -- are we at a position now where gynecology is the next big app, or is it still too early to tell?

It is still too early to tell.

What we can say is that we are increasing the user base within gynecology, and learning a great deal about it.

It is a very attractive market in terms of its size, and we are starting to get some early reports on -- especially from the oncology groups, in terms of da Vinci's benefits to certain cancer operations.

So we will continue to support and follow that very closely.

But it's too early to tell, what that overall size will be.

But today we -- since approval, we have seen excellent growth in that area.

Absolutely.

Okay.

And then last question in this group.

Cash, you told us about CapEx, and some of the other.

But do you have any sense of a use of cash going forward as you start to generate more and more, short of buying a share of AOL or something?

Well, I think that we'll continue to use the cash to build the business.

And we're not ready to run out and buy something that will divert us from what is a huge market opportunity, in terms of penetrating and building the -- in this space.

But, as we mentioned, we licensed some new patents from IBM.

We will continue to do licensing, and we bought the building, which gives us expansion room for both manufacturing, engineering, as well as the rest of our operations.

And so, right now, our focus is totally on developing robotic surgery, and penetrating each of the specific applications as deeply as we can.

So, we are very circumspect in terms of what technology will assist in doing that, and that's the way we'll use the money.

Okay.

Thank you.

Rick Wise, Bear Stearns.

Good afternoon.

Lonnie, a couple of things.

First of all, can you talk a little bit more about your guidance for '06?

You guys have done a good job of being conservative over the years, and I would assume that that's still the case.

Maybe -- especially in terms of systems placements, which I suspect some will be disappointed it's not even more aggressive.

Can you talk a little bit about your more restrained growth guidance there?

Is this -- do you think it's going to take 3 to 6 months for folks to make a decision, or push that decision on da Vinci S?

Is this just you have a larger base?

Just help us understand where the numbers came from.

Well, I will let Ben answer that.

But, we don't have -- you know, as I have said on other calls and I will say on this call again, we don't have a perfect crystal ball.

We didn't anticipate the kind of growth we had last quarter.

Demand is, the pipeline is strong.

We feel good about things, but when it happens, we'll be fully -- we'll be fully comfortable describing it.

But right now, we would rather guide you to what we think is a realistic number, rather than promise pie in the sky.

So I will let Ben go further on this, but -- .

Yes.

My comments on that, Rick, is as we've said in the past, the recurring revenues are something that we are very comfortable in predicting, and so those ranges are much more solid.

As you have already singled out, what is harder for us to predict is the system revenue growth.

And as I mentioned, there is going to be some delays on some purchasing decisions in the near term, because as a reminder, a lot of our buyers have a 6 to 9 month buying cycle.

And by inserting now a new system that they potentially now want to buy at a higher price, it could delay some of those purchasing decisions.

But as Lonnie said, we set expectations based off of what we realistically think we can achieve.

And as a reminder, I think at this time last year, we had predicted a 20 to 30% growth, and now we certainly recognize that we have come off a pretty high growth year, and are forecasting a 25 to 35% growth for this year.

Okay.

And in terms of, Ben, gross margins.

Again, can you give us a little more color, on the mix factors, both in the quarter, and in going forward, and the role in your guidance that the da Vinci S plays?

I mean, it is higher priced.

Is it just manufacturing initial -- some optimal manufacturing issues that are -- that are part of the variance here?

Yes, I guess there are 2 things to point out. 1 is, as Calvin was mentioning, the ASPs are mix dependent, and we tried to explain as best as we could that it was 890,000 ASP this quarter, versus 950 in the prior quarter, but it was also 890 in the second quarter, and pricing was pretty constant throughout that time period.

So, regional mix can also have some impact on it.

But in terms of the da Vinci S, the gross margin percentage on the da Vinci S, not surprisingly, is going to be lower than the standard da Vinci System, at least in the near term.

And as we are ramping up volume, we have not yet been buying materials in large quantities, and also we have not been producing in large quantities.

So it's going to take us a little while to get those efficiencies that you saw us achieve with the standard da Vinci System.

And 1 last one, maybe this is for Aleks.

Can you give us some flavor of what the number of gynecology procedures in the quarter, or what kind of mix gynecology represented as a percentage of the whole.

How do we think of the contribution?

Or from new indications generally, perhaps Aleks?

Yes, if you look at the overall mix, urology remains the largest segment, followed by cardiothoracic and general surgery, and then gynecology.

But if you look at the growth rates, gynecology is coming up pretty quickly.

So, it is something that we are watching very closely but it is -- it is as we speak, the fourth segment, but the fastest growing in terms of percentage.

Thank you very much.

Tao Levy, Deutsche Bank?

Good afternoon, everyone.

Just a couple of quick questions here.

I was wondering if you could help me understand, how do you get the sales force motivated?

You just came off a monster quarter and a monster year, and these guys just made a lot of money in the fourth quarter.

How do you get them excited to go and attack a new year with probably higher targets, especially, heading into the first quarter?

Well, I think that there are 2 aspects.

There's the systems side and there's the procedure side.

But the primary motivation is the same thing that motivated them this year.

And that is, it's both a motivation to really take something forward that is -- that changes surgery, and changes people's lives.

And the other one is significant financial reward.

One of the things that we have done this year, is that we have -- the sales we had Max World, which a lot of [inaudible] is around.

And those that are in the top categories will get a Porsche -- a leased Porsche for a year.

So it's a very visible -- these are highly motivated people, highly goal-oriented.

But I don't want to ever diminish just how strongly this entire organization feels about what we're doing, in terms of improving the surgical outcomes for patients.

And that motivation has nothing to do with -- we are coming off a great year or -- I mean, clearly it makes them feel great that we are making huge progress.

But they are motivated to serve their customers and to serve the patients that we -- that our customers care for.

So I think that we are not -- we don't have a problem with motivation around this organization.

The other one is, if you don't perform, you won't be here very long.

Fair enough.

And Aleks, I was wondering if you can maybe again touch on gynecology.

I mean if we go back a couple of years ago when prostate was just -- when the dVP was just developing.

How -- and you look back and you are looking at gynecology now, are there similarities that you are seeing, in terms of enthusiasm by the folks that are just recently getting trained on the system in gynecology?

Tao, this is what I can say, as a reminder, the urology approval from the FDA came in May of 2001.

And it wasn't really until the middle of 2003, where we really hit a growth spurt.

And why that day, or why that period?

And it was really the peer reviewed data that was just starting to come out, and a couple of seminal papers and probably Dr. Menon's paper of note.

And so when you look at the similarities, you see a lot of people that have been operating with a similar technique for a long time, that are looking to take this procedure, minimally invasive.

And then you start to dissect down the end points that they are trying to manage, and in the case of oncology, it might be margins or total lymph nodes, and as people start to build case experience, these things tend to present themselves in a favorable light.

And then they start collecting data and move it towards peer-reviewed journals, et cetera, et cetera.

We are aware of people who are working on these things.

But it's too early to say what the overall comparison will be between this specialty and urology.

But there are some similarities, and there are some of the same challenges, optimizing instruments, making sure we have the procedure in a teachable, repeatable manner at our training centers, and the right proctor network.

We have been through it before, we learned a lot, and I think it will be very helpful this time through.

Okay.

And Ben, on the R&D side, this fourth quarter, it came actually a tad lower than what we were looking for.

Going forward, I know you guys want to spend a little bit more in R&D and there's a lot of neat projects that you guys can do.

But is this, between the 4 and 5, is that the right level?

I mean, I don't know how easy it is to really ramp up R&D?

Well, let me address that a little bit first.

You can measure R&D by the amount of money you spend, or you can measure it by what you accomplish.

And I think we've talked about this before.

We run it -- I mean, there are a lot of companies that spend a lot money on R&D, and nothing comes out.

We run small teams.

There's no place to hide all of those teams.

We have exceptional people.

We prioritize the things we do and the things we focus on.

And, we, I think, get extraordinary efficiency and extraordinary performance out of our engineering and R&D group.

So I don't measure it.

I don't know whether we spend x percentage of revenue.

I really don't believe in averages of industry, because we are not an average company, nor do we ever intend to become one.

The only thing I would like to add to that, Tao is I did indicate earlier that there's going to be some additional investments in R&D, and so we are definitely going to be making some investments there.

So you can expect that those expenses will increase in 2006.

Okay.

Great.

Thank you very much, guys.

Great quarter.

Ryan Rauch, Jefferies & Company.

Yes, good afternoon.

Great quarter.

Just a handful of quick questions.

Maybe Aleks, did you sell any units to any subspecialty group outside of urology, meaning that actually made the purchase decision themselves?

I know you do a lot of sort of joint decisions between urology and cardiology.

But was there any subspecialty that made a decision outside of urology, and do you expect more of that going forward?

You know, Ryan, I think the challenge there is to really dissect out the influencers.

In other words, I would answer it this way.

That we continue to have different groups as the leaders of the purchase, but it is very hard to exclude any of the groups these days, because there is so much interest from other groups.

And so yes, we did have cardiac groups that were the leaders and call it urology, perhaps, as a supporting group, and you have had the reciprocal of that.

And now with gynecology and even some of the general surgery people weighing in heavier, that mix continues to be the way we want it, and that's a multisystem sale -- a multispecialty sale.

I mean, what's been the initial feedback on the da Vinci S?

I mean we've talked to a few cardiac surgeons who seem really excited about it, based predominantly on the range of motion.

And we have spoken to a few smaller hospitals who think that it could actually help them purchase the device where they couldn't before, because the setup time is greatly reduced, and they think it will be more cost effective.

Just generally or anecdotally, what is the feedback from the field you are getting from the da Vinci S?

Are they similar to sort of those couple of comments that I made?

You know, it's really early.

We have limited experience, since we only have a few systems in our training centers.

But I can say that the early results of the features that were reviewed by the surgeons, let's say at STS last week, where we really featured it, were favorable, for many of the reasons you called out.

There is an easier setup.

There is instrument exchange advantages, and the multiquadrant access seems to be important to certain groups, as does the interactive video displays.

But it's really early with respect to anything concrete that we can add to that.

We will be watching it, and are watching it very closely, and are very encouraged about what we have seen thus far.

Okay.

Great.

And then you usually don't give a specific number, but what was the ASP per procedure?

I think, I mean, was it roughly sort of in that 1,700 range again, or how should we look at that?

Yes, we -- this is Calvin.

We don't give a specific number on that, but we have seen that steadily growing through the course of the year.

And as we have placed a large number of systems this year, when you throw in the initial orders, related to the system purchases, we're in the 2,000 to 2,500 range, all in at this stage.

Okay.

Great.

Congratulations, again.

Have a good afternoon.

David Kim, Citadel Group.

Hi, good afternoon, guys.

Congratulations on a nice quarter.

Hey, I just wanted to clarify the da Vinci S placements.

If I heard you correctly, I think you mentioned that 3 systems were placed in training centers.

Can you just -- what what kind of training systems were those, and how are those revenues recognized?

From the training centers, those were, to my knowledge, multispecialty training.

But in terms of the revenue, I will sort of defer that to Ben, but it's -- [ Inaudible ] Ben, with regard to the revenue recognition on da Vinci S.

There's actually nothing special about revenue recognition on da Vinci S. It, by and large, it is treated the same way as the standard da Vinci System.

The installation is actually no different.

But specifically the fact that they were sold to training centers, what does that mean exactly?

And how are those selling prices or sales treated differently, if at all?

The thing you want to keep in mind, David, is when you go into a launch, which we are doing this quarter with the da Vinci S, you need to get a few placements out there to help in the training that is going to be required after this quarter.

And so, getting those out there was our objective in a very limited base, to build that experience base, so we can have some assistance in the training of more customers, after we get into a full launch.

So aside from that, there's really nothing different to note on this one.

Yes, and we don't actually -- just for confidentiality reasons, expose the sales price of any of our particular sales.

Okay.

Thanks, guys.

That's the last question for today.

We thank you for joining us.

As I said before, we had a strong quarter.

We shipped 40 da Vinci Surgical Systems, up from 25 in the last year.

Total revenue grew to 72.1 million, up 60 % from the fourth quarter of 2004.

Recurring revenue grew to 30.8 million, up 70% from the prior year.

And we generated an operating profit of 23.5 million, up 116% from the fourth quarter of last year.

EBITDA for the quarter grew to 25.3 million, or 35.1% of total revenue.

And we ended the quarter with 203 million in cash.

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

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

We believe that the da Vinci S is a significant step in that process.

We are dedicated to taking surgical precision and technique 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.

Our priorities remain, first, superior products, customer service and patient outcomes.

Second, consistent revenue and operating income growth.

And third and finally, a results driven company culture in which we measure ourselves by our accomplishments.

That concludes today's call.

We thank you for your participation.