直覺手術 (ISRG) 2006 Q1 法說會逐字稿

Good afternoon and welcome to the Intuitive Surgical first quarter earnings conference call.

At this time I would like to turn the call over to Sarah Norton, Investor Relations.

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

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

Marshall Mohr, our Chief Financial Officer;

Ben Gong, our Vice President of Finance and Treasurer;

Aleks Cukic, our Vice President of Business Development and Strategic Planning and [Calvin Darling], our Director of Financial Planning and Analysis.

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 Security and Exchange Commission's filings.

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

Please note 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 first 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;

Marshall will follow with a review of our first quarter's financial results; next, Aleks will discuss sales and marketing highlights; then Ben will review our updated financial forecast for 2006 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 started the year with a strong first quarter.

Highlights for the first quarter are as follows.

Total revenue grew to 77 million, up 86% from the prior year.

Recurring revenue grew to 35 million, up 72% from the prior year comprising 45% of total revenue.

We shipped 35 da Vinci Surgical Systems and 32 Fourth Arms. 27 of those systems were in the United States.

Late in the first quarter with 428 accumulative da Vinci systems installed worldwide.

Our gross profit margin before non-cash 123R stock option expense improved to 67.9% from 65.5% in the first quarter of 2005.

We generated an operating profit before stock option expense of 26.8 million, up 200% from 2005.

Our net income for the quarter before stock option expense was 17.5 million or $0.46 per share, up over 200% - using a 39.6% tax rate for both years.

EBITDA for the quarter grew to 29 million or 37.5% of revenue, up from 10.6 million in the first quarter of 2005.

For clarity, the definition we now use for EBITDA excludes non-cash stock option expense.

We ended the quarter with 221 million in cash and investments.

Up 19 million from last quarter.

We continue to grow our topline, improve our operating margins, and effectively manage our fixed cost growth.

In operations we have many successes but I will mention only two.

First quarter procedure growth.

We had excellent sequential quarter to quarter procedure growth in all specialties - including neurology, gynecology, cardiac and general surgery.

In fact it was the highest quarter to quarter growth we have achieved in the past 12 quarters.

Second, the da Vinci S system.

The launch of the da Vinci S system was flawless from engineering, manufacturing to sales, service, and training.

The response of our customers to this new product has been outstanding.

We are pleased with our ability to consistently generate significant cash while funding exceptional growth.

With that, I will pass the time over to Marshall Mohr who joined us in March as our new Chief Financial Officer.

Thank you Lonnie.

We enjoyed excellent financial results this first quarter.

Total first quarter revenue increased to 77.3 million up 86% from 41.6 million for the first quarter of 2005 and up 7% from 72.1 million for the fourth quarter of 2005.

Our outstanding first quarter revenue results were driven by a very positive market response to our new da Vinci S system and by continued recurring revenue growth.

First quarter 2006 revenue increased in all product categories.

Systems revenue nearly doubled to 42.1 -- 42.4 million from 21.3 million last year.

Instrument and accessory revenue increased to 23.3 million, up 81% compared with 12.9 million last year and up 13% sequentially from 20.6 million last quarter.

Service and training revenue increased to 11.6 million, up 56% compared with 7.4 million last year, and up 14% sequentially from 10.2 million last quarter.

First quarter demand for da Vinci Surgical Systems exceeded our expectations as we sold 35 systems during the quarter, up 16 compared with the 19 systems sold during the first quarter of last year.

As you may recall, entering this quarter we were concerned about the potential for a slowdown in system revenue as we anticipated that customers already in the purchase -- systems purchase process may have to take more time to evaluate the new da Vinci S system offering.

We are pleased to report that market acceptance for the da Vinci S was outstanding and that our customers were able to complete their system purchases within the first quarter. 25 of the 35 systems sold during the quarter were S models.

Of the remaining 10 standard da Vincis five were three arm systems and five were Forearm systems.

One of the Forearm systems was a European unit that we repurchased, refurbished, and then sold in Europe.

We ended the quarter with 428 systems installed worldwide.

We also grew systems revenue on a sequential basis by 1.1 million, despite the fact that we sold 35 systems during the first quarter compared with 40 systems during the fourth quarter.

The increase in system revenue was primarily due to higher first quarter average systems selling prices resulting from the introduction of the higher priced da Vinci S system.

Our first quarter average revenue per system - including all da Vinci models, plus Fourth Arm upgrades - was 1.19 million which is 120,000 more than the average revenue per system in 2005.

Instrument and accessory revenue of 22.3 million for the first quarter was up 81%, compared with the first quarter of 2005, and up 13%, compared with the fourth quarter of 2005.

Higher instrument and accessory revenue was driven by a larger da Vinci System installed base, and continued increase in the number of procedures performed per system.

We continued to realize between 1500 and 2000 per procedure for established da Vinci accounts.

As we mentioned in our previous earnings call, initial instrument and accessory purchases for new, newly installed systems increases our total revenue per procedure.

While total revenue per procedure remains between 2000 and 2500 during the first quarter, it declined relative to the previous quarter since the number of new system installations represented a lower percent of our expanded installed bases systems.

Total service and training revenues grew to 11.6 million this first quarter, up 56% year-over-year and 14% sequentially.

Our growth in this area was primarily driven by service contract revenue associated with additional systems sales as well as higher contract prices associated with the Forearm and da Vinci S systems.

Total first quarter recurring revenue comprised of instrument, accessory, service and training revenue increased to 34.9 million up 72% over the first quarter 2005 and up 13% over the fourth quarter of 2005.

Recurring revenue represented 45% of total first quarter revenue.

In accordance with standard -- with statements of Financial Accounting Standards No. 123R, this quarter we began to record stock compensation expense for the estimated value of employee stock options and stock purchases.

The first quarter stock compensation expense was 5.1 million of which 800,000 was charged to cost of sales, 3.2 million was charged to SG&A expense and 1.1 million was charged to R&D.

The stock compensation expense recorded in the first quarter was entirely non-cash in nature.

In this quarter's earnings release, in addition to our income statement prepared in accordance with Generally Accepted Accounting Principles, we provided a non GAAP or pro forma income statement information that excludes the impact of stock option expenses.

We believe that the pro forma information enhances the user's overall understanding of our financial performance, as it better reflects the economic performance of our business and provides investors with the tools to compare our results to prior periods.

Throughout this call we will make comparisons to both the GAAP and pro forma results.

Our pro forma first quarter 2006 gross margin of 67.9% was equal to the first -- fourth quarter as well as the full year of 2005.

In our last earnings call we indicated that we anticipated a slight decline in gross margin percentage due to the higher costs associated with the launch of the da Vinci S system.

We are pleased to report that we were able to maintain our gross margin percentage during the quarter in large part due to the excellent execution of our operations team in ramping production of the da Vinci S systems and instruments.

First quarter 2006 gross margins also benefited from a favorable regional mix of systems sales.

Total pro forma operating expenses for the first quarter of 2006 were 25.7 million up 40% compared with a first quarter of 2005 and up 2% compared with the fourth quarter of 2005.

The increase compared to the first quarter of 2005 reflects increased headcount and direct selling costs associated with higher sales volume.

The increase compared with the fourth quarter of 2005 reflects increased headcount and infrastructure costs, partially offset by a lower commission rate.

We added 38 employees during the first quarter, ending the period with 457 regular employees. 18 of the additions were to our worldwide sales and support organization.

First quarter 2006 pro forma operating income was 26.8 million or 34.7% of sales compared with 8.9 million or 21.4% of sales last year.

On a GAAP basis including the 5.1 million of stock compensation expense, first quarter 2006 operating income was 21.7 million or 28.1% of sales.

Our first quarter 2006 other income of 2.2 million comprised primarily of interest income increased 300,000 compared with the fourth quarter of 2005, primarily due to higher cash and investment balances and slightly higher interest rates.

As anticipated during the first quarter 2006, we began reporting income taxes on a fully taxed basis.

We recorded income tax at an effective rate of 39.6% for the quarter, compared with an effective rate of 5.5% for the first quarter of 2005.

Our tax provision in 2005 reflected the utilization of net loss carryforward.

We continue to utilize net loss carryforwards in 2006 and expect that our cash outlay as a percentage of pre-tax income will be less than 6%.

Our pro forma net income on a fully taxed basis was 17.5 million or $0.46 per share compared with 9.1 million or $0.25 per share on a lower tax rate for the first quarter of 2005.

Our GAAP net income fully taxed and including stock compensation expenses was 14.5 million or $0.38 per share.

Now turning our attention to the balance sheet.

We ended the first quarter of 2006 with cash and investments of 221.5 million, up 18.8 million from the previous quarter end.

We continued to generate significant cash flow throughout this period of rapid growth.

Cash provided by first quarter 2006 operations was 16.1 million, which is net of 13.5 million utilized during the quarter to fund working capital requirements.

We continue to invest in the infrastructure to support our future growth.

During this first quarter, we invested 3.2 million in a capital addition, primarily for improvements to our 210,000 square foot facility, purchased in December, and for implementation of our new ERP system.

We will begin moving into our new facility and go live with our ERP system during the second quarter.

Our accounts receivable balance increased to 57 million at March 31st, 2006, from 52.8 million at December 31st, 2005.

The increase was primarily due to higher revenue in the first quarter of 2006, compared with the fourth quarter of 2005.

Our average day sales outstanding at March 31st, 2006, were 67 days compared with 66 days at the end of the prior quarter.

Our net inventory increased to 20.4 million at March 31st, 2006, from 15.2 million at December 31st, 2005, reflecting inventory growth necessary to support two product lines - the da Vinci and da Vinci S. Our inventory turns at March 31st, 2006, were 4.9 compared with 5.4 at the end of the previous quarter.

We ended the first quarter with 27.8 million of total deferred revenue compared with 25.5 million at the end of the previous quarter.

The increase in deferred revenue is the direct effect of service contracts associated with our expanded installed base.

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

During the first quarter, we shipped 35 da Vinci systems. 25 were da Vinci S systems, five were standard Forearm da Vinci systems and five were standard Three Arm systems. 27 systems were placed in North America, seven into Europe which included three S systems and one in the rest of world market.

This brings to 428 the cumulative number of da Vinci systems worldwide - 323 in North America, 77 in Europe and 28 in rest of world markets.

Six customers purchased either second or third da Vinci systems during the quarter which brings to 37 the number of hospitals with multiple da Vinci systems.

Clinically, we had an excellent quarter.

We experienced solid sequential procedure growth - both within the U.S. and abroad - within all of our surgical specialties with urology and gynecology showing the largest sequential growth.

During the quarter, we launch the da Vinci S system, attended several trade shows and medical conferences.

In addition we had a number of da Vinci publications presented within various peer review journals.

This past month, the first annual World Robotic Urology Symposium was held at Ohio State University in Columbus.

The symposium attracted over 225 surgeons with varying levels of da Vinci experience, representing 31 states and six countries.

During the two day symposium, the participants observed four live da Vinci operations, comprised of two da Vinci prostatectomies, a radical sustectomy in neo bladder construction and a da Vinci (indiscernible) plasty.

In addition Dr. Vip Patel, the symposium chairman from Ohio State. conducted two two-day DVP training courses which took place before and after the main symposium, which were both very well attended.

The combination of new, intermediate, and advanced da Vinci participants made for a very successful educational program.

The opening remarks were given by Dr. Joseph Smith, Professor and Chairman of the Department of Urology at Vanderbilt University and the past president of the American Board of Urology.

Dr. Smith - who is widely respected as a conservative academic surgeon in the field of urologic oncology stated and and I quote "that when compared to open prostatectomy, DVP is at least as good as in every single clinical outcomes measurement and is better in some of these measurements."

He confessed to the group that he never believed he would utter those words to a large audience of his peers.

Also at the World Robotic Symposium, Dr. [Endovar Gill] from the Cleveland clinic a former DVP critic - said and I quote "we have heard the man versus machine, open versus robotic prostatectomy debate for the last time.

That debate is over.

The new focus must now be on man plus machine to see how far this combination can take patient care."

We introduced the da Vinci S system to European customers at the European Association of Urology Conference, which took place in Paris attended by over 10,000 urologists.

In addition to the several da Vinci-related scientific abstracts, posters, and podium presentations, our booth traffic and test drive schedule was busier than ever.

In the past, we've commented on a slower DVP adoption rate outside of the United States particularly in Europe.

However, over the past few quarters, we have experienced a strong pickup in the adoption of DVP outside of the United States and particularly in Europe.

And we would expect this trend to continue as more European centers increase their DVP volumes.

We featured the da Vinci S at the Annual Society of Gynecologic Oncology or SGO Conference in Palm Springs, which is attended by over 1000 clinicians.

And for the first time, we participated in both the didactic and wet lab portion of the SGO advanced laparoscopy postgraduate course.

During a general session presentation, Dr. John Bagus, program director of GY and Oncology at the University of North Carolina - Chapel Hill, presented his initial series for da Vinci Type III radical hysterectomies as compared to open radical hysterectomies.

The endpoints that he measured were number of pelvic lymph nodes retrieved, OR time, estimated blood loss, transfusion rate, and hospital length of stay.

Regarding lymph node retrieval.

Dr. Bagus retrieved an average of 37 nodes in a da Vinci cohort versus 23.4 with open technique.

Blood loss was reduced by 67% with da Vinci, leading to 0 blood transfusions versus an 8.3% transfusion rate within his open technique.

OR time was shorter using da Vinci and the length of stay was reduced from an average of 3.17 days open to one day for the da Vinci group.

Dr. Bagus concluded by saying and I quote "da Vinci radical hysterectomies is feasible, reproducible and has some distinct advantages over open radical prostectomies."

Though this series represented a single center experience, it is being viewed as a very favorable initial study.

In the post-presentation commentary, Dr. Javier Megrina from the Mayo Clinic presented similar results within his series with even shorter operating times.

During the quarter we launched a new GYN instrument, the da Vinci Tenaculum.

The Tenaculum is a device used to manipulate and control the uterus during a hysterectomy or to control fibroids during a myomectomy.

It has better grasping capabilities than other da Vinci instruments in large bulky tissue, and should serve as a very useful tool for GYNs performing da Vinci operations.

We will continue to focus development efforts toward products which will optimized GYN operations.

Within cardiac surgery and, particularly, the da Vinci mitral valve repair, we experienced strong sequential procedure growth.

The current mitral valve technique provides patients with not only the least invasive approach but also reportedly better outcomes both from a repair versus a replacement standpoint and shorter patient recovery.

This past quarter we introduced the da Vinci atrial retractor.

The da Vinci atrial retractor is an 8mm port access device that provides the surgeon with controlled dynamic retraction during mitral valve repair procedures.

The initial feedback has been very favorable; and we will feature this device at next week's double ATS conference in Philadelphia.

As a reminder the AUA or American Urology Association annual conference will take place in Atlanta, from May 21st through the 25th.

AUA is an important marketing event and includes a full agenda of da Vinci-related presentations, abstracts, and video sessions.

That concludes my summary and I will now turn the time over to Ben.

Thank you Aleks.

I will now provide you with an updated financial outlook for the balance of 2006.

Consistent with the format of our last call I will first provide you with our forecast for pro forma results excluding the impact of FAS 123R and then give you our estimate of stock compensation expenses separately.

Our first quarter results exceeded our expectations and, as a result, we are increasing our previous guidance for revenue and profits for 2006.

Regarding revenue, on our last call we indicated that we expected 2006 annual revenue to grow between 25 and 35% over 2005.

We are now targeting our total 2006 revenues to grow between 45 and 50% over 2005.

Our first quarter systems revenue was very strong, driven by the 35 units shipped.

We had previously forecasted system revenue to grow between 15 and 25% above 2005 levels.

Although our unit shipments will likely fluctuate quarter to quarter we now estimate that system revenue will grow between 40 and 45% above the 2005 total.

As Marshall mentioned we realized that blended average selling price on systems of $1.19 million during the first quarter, which benefited from favorable regional mix.

This compared to an average selling price of 1.07 million for all of last year prior to the da Vinci S launch.

The overall blended average selling price comprised of da Vinci S systems standard Three and Forearm da Vinci systems and Fourth Arm upgrades will vary based upon regional and product mix.

We expect our blended average selling price per systems to be in the range of $1.1 and $1.2 million for the balance of 2006.

Roughly speaking this has put our system ASP at about $100,000 higher in 2006, compared with 2005.

In the first quarter, we experienced solid procedure growth which likewise resulted in higher instrument and accessory revenue.

In our last earnings call we had forecasted this revenue segment to grow between 45 and 55% above our 2005 total.

We are increasing our forecast for instrument and accessory revenue to grow between 55 and 60% above 2005.

Our average service revenue per system has also been increasing due to a higher mix of installed Forearm systems in da Vinci S systems, which generate higher service contracts.

As a result we are also raising our estimate for 2006 service revenue.

We are now estimating our service and training revenue to grow between 40 and 45% above 2005 levels compared with our previous forecast of 35 to 37%.

With regard to gross profit margin, as Marshall indicated, we were able to launch the new da Vinci S system with almost no impact on our gross margins whereas we had previously forecast a slight decline in the first quarter.

Our previous forecast for full year 2006 gross margin was 65 to 67% of revenue.

We now expect our gross margin to be between 68 and 70% for the year.

Moving to operating expense, on our last call we had forecasted 2006 operating expenses to grow between 30 and 35% above 2005 levels.

Now based upon our higher revenue forecast, we plan to make additional investments in fields sales personnel and incur additional variable selling expenses.

We will continue to scale up the rest of our support organization and make additional investments in R&D.

We now anticipate great operating expenses between 35 and 40% above the 2005 levels.

Once again the forecast I have just reviewed excludes the impact of FAS 123R.

I will now provide our forecast for stock compensation expense for 2006.

On our last call, I estimated total stock compensation expense to fall between 21 and $28 million.

We are now refining that range to 21 to 25 million.

We expect to break-out to specific P&L [lines] to be about the same as what we reported in Q1.

With regard to income tax, we previously guided to an effective tax rate of between 36 and 42%.

Our actual first quarter rate was 39.6%.

During 2006 rates recognized will vary slightly quarter to quarter, based upon the timing of certain events surrounding stock option activity.

We expect that our effective tax rate will fall between 38 and 42% for the balance of the year.

Regarding shares for EPS calculations, we currently have approximately 36.6 million common shares outstanding.

We also have approximately four million option and warrant shares outstanding.

Depending upon our average stock price during the second quarter, a portion of the four million option of warrant shares will be added to the fully diluted shares calculation.

To provide you with a range on what the share count for EPS calculations may be in Q2, a 25% change in our current price will result in a share account as low as 37.6 million shares or as high as 38.4 million shares.

That concludes our prepared remarks.

We will now open the call to your questions.

(OPERATOR INSTRUCTIONS) Tim Nelson from Piper Jaffray.

Congratulations on a great quarter.

Could you give us -- ?

I was a little confused by your comments on recurring instrument pricing per procedure.

Can you amplify that a little bit?

Did you say it actually went down due to the mix of new systems and in-store stocking or -- ?

I'll take that one.

We continue to see growth in the utilization rates of the installed systems - what we call same-store sales.

Our growth in instrument and accessory revenue was driven both by more installed systems and more procedures per form per system.

As we mentioned before, for our established customers they are buying between $1500 and $2000 in instruments and accessories per procedure.

This metric is still true for those customers that have had systems and are purchasing instruments to support their ongoing needs.

Customers that have purchased their systems recently, typically by sets of instruments in advance of doing procedures which makes our average revenue per procedure higher for those customers in the short-term.

Last quarter as we mentioned that our overall revenue per procedure is between 2000 and 2500.

This is still true but as we expected this has decreased within this range sequentially compared to the fourth quarter because our ratio of new system installations to the existing systems is decreasing.

Did that clear that up a bit?

Essentially you have stocking orders in systems that drive up the recurring revenue?

Right.

Lesser impact in Q1 than it did in Q4.

As you think about it, Tim, there's two things.

One, we sold 35 systems in Q1 versus 40 in Q4 so that is already going to make it lower.

And then in terms of a ratio of the 35 versus the installed base that you started off with of almost 400, that's now a smaller ratio of new systems to install systems.

Essentially the ratio dropped from about 15.7.

You could just take 40 over 254 to about 11.6 if you take 35 or 34 over 294 since one of those was a system we repurchased, refurbished, and resold.

So there are actually 34 incremental systems installed.

Did you have any Fourth Arm in the quarter?

Yes.

We had two of those.

And those were included in the ASP calculations on the systems?

Yes.

So we are going to this blended ASP calculation.

The Fourth Arm upgrades are having less and less impact on that whole thing just because it's small in comparison with the other.

With the blended ASP we're trying to give you some guidance that year-over-year it's about 100,000 higher based off of the mix of the da Vinci S primarily.

So given that, would you expect that the S mix over the rest of the year continues to grow?

Or would you say that its initial launch enthusiasm may wane as the year progresses?

We still think it is going to be a majority of what it's going to be.

You know we did sell 10 out of those 35 were standard systems and those were with folks who had the choice of a standard or da Vinci S. Definitely the majority seem to be gravitating toward the guests.

So we will continue to see some guys going for the standard systems.

And the last - when I'm doing due diligence on the S, it seemed to me that the appeal of the S was higher in the cardiac surgery community than in other specialties.

Has that held as you progressed through the quarter?

I think we can say that what we have experienced in the first quarter is that there appears to be value to not just cardiac but also to the urologists, the general surgeons and the gynecologists.

I think the cardiac - some of the early users of the S, if you recall we sold three of them in Q4 and those were primarily the centers that did more cardiac than anything else.

So I think they had a lot of experience with it but I think what we've seen since is that it has crossed all specialties in terms of advantageous new features.

Final question.

I was a little surprised at the ASP increased only 100,000 given the - I think it's 2 to 300,000 premium on the S and the strong mix of the S in Q1.

Are you discounting it or why the only 100,000 increase?

Actually once you go back and you do the math and you take the proportion of the 25 out of 35 I think you're going to find that it probably won't surprise you too much.

Thank you.

Tao Levy from Deutsche Bank.

Fantastic quarter.

I was wondering maybe we could just back up and you could talk a little bit about how did the quarter progress with the launch of the S. system?

Clearly this is very different than what you guys were seeing at the beginning of the quarter.

Love to see, hear about the reaction out in the field and do you think you'll be -- is there any more bumpiness related to the S. or that's it?

It's out there and people have either bought or they didn't buy?

Yes.

This is a repeat of a point I think it's important.

Those folks who are interested in buying an S, they were able to make their decisions within the quarter.

So our original thought that it might take some people some time to transition from buying a standard to an S, that was much shorter that what we might have originally thought.

So that's the answer to that.

In terms of how things progressed during the quarter, we always wished that we could be more linear in our system sales - but once again it was pretty heavy on the in the third month of the quarter.

In any of this to the training process on the gynecology front, now that you have several months under your belt and you have some several thought leaders out there really doing a lot of good work there.

Has that been finetuned?

Are people coming out better prepared to go and tackle tough gynecology cases?

I think that's something that will just be a dynamic process, we will always try to improve the process.

I think over the quarter, the demand for training and proctors within GYN operations continued to increase.

I think the process is efficient but we will continue to work on making it even more efficient in the future.

And now if maybe you can update us on sort of where the utilization trends were in terms of different areas and any visibility there would be great.

I know everything did well but still be still 50+ in urology etc.?

Yes.

I think if you look at the four different buckets urology still as expected is the largest segment.

Cardiothoracic is our second largest segment.

And what is new for the quarter is that gynecology procedures are continuing to grow very quickly and now are about equal to general surgery procedures.

So having approval with -- clearance within gynecology being less than a year old, it is now - in overall procedures - about equal to general surgery.

Okay.

One of the pleasant things at least for me was that the general surgery - if you look at percentage of growth, clearly, urology is our biggest growth.

Its absolute numbers is the biggest growth but gynecology was our highest growth segment in terms of percentages this past quarter.

And general surgery was right behind it.

I don't know whether that's going to sustain but it was a pleasant surprise.

And cardiac and urology both grew very strong.

Just for the last question.

Any change in the sales cycle?

Has that shortened a lot now that there's just more systems out there and this is becoming almost standard of care in several areas or hospitals just, again, shortening their sales cycle so they can make a decision within a couple of months rather than whatever it is taking - maybe a year ago?

We definitely see examples of people who are able to move more quickly but it is kind of variable and there are some that take quite a long time.

On average, our sense that it has continued to improve a little bit in the United States.

Internationally it still varies quite a bit.

So we can have some pretty long sales cycles internationally which sometimes makes it pretty difficult to predict the international system sales.

Thanks a lot.

Mark Richter of Jefferies & Co..

Mark, in for Ryan.

Congratulations on a great quarter.

Most of my questions have actually been answered but I have a few sort of follow-ups.

Could you provide us with an update if any on the [Turumo] competitive situation or rather sort of lack thereof?

I think the latter is (indiscernible).

We have seen nothing.

We have no new information on that.

Our perception is that it's still a developmental project there.

And we don't take it lightly as any competitor if and when they arise.

We continue to build our intellectual property portfolio and will defend and use that intellectual property as appropriate.

Perfect.

Also, can you just help us understand the number of units that are going to hospitals that already have one or two units already?

Yes.

We had six new customers that purchased either a second or third system for the quarter and there are now 37 that own more than one.

How many units have you placed in China and, then, what are your expectations there going forward?

We placed, back in Q3, our first system into Hong Kong.

We have not placed any into China.

In our view China is still a developing market for us.

We are not planning any sudden increase in our overall sales stemming from demand in China.

Thanks again.

Congratulations on a great quarter.

Rick Weiss of Bear Stearns.

Good afternoon and I will add my congratulations as well.

Couple of follow-ups.

Given the better than expected -- or at least better than guided strength and systems this quarter, was there any pull forward maybe just there were initial groups of early adopters anxious to get their hands on (indiscernible) and that could have an impact on how we think about systems sold in the second quarter?

This sort of unexpectedly higher number of closures in the first quarter pulling something forward?

Any concern there?

Not that I'm aware of.

I suppose there might have been one or two people wanted to be the first with an S in their market but I don't think that it was a significant element.

I think it was just part of the decision process that they walked through and decided whether they wanted to be -- you know which system they thought was preferable.

Some were comfortable with the older system and stayed with it in the sense that one of the -- if you move to an S you are giving to different instruments because they are longer and there are some -- if you are going to have multiple systems in a site, you may want to standardize.

And that's a decision.

But I don't think there was a lot of "I want to be first with this and I've got to get my hands on it" sort of mentality.

Lonnie, how should we think about the S versus the original da Vinci?

Will S ultimately replace da Vinci?

Do we think about it as two separate markets?

How do we think about the mix going forward?

One of my beliefs is you let the market decide.

I'm not -- you can do a lot of market research until people come down and actually use it and their prices and features and make that decision.

So my own belief and I think that the consensus here is as Ben stated it, we will (indiscernible) predominantly S systems.

There are some features especially for multispecialty that are truly beneficial, especially the range of motion and the longer instruments and the reach and things that they can do with it.

The use of use for the patient side.

That whole group.

It will clearly make adoption I think of -- in terms of the ramp, the learning curve will be faster for the patient's side.

And that's important in terms of turnover and speed of a procedure.

We also believe that some of the other features in terms of the use of fiber-optic cable and elimination of the cables and things have other implications to where we are going.

And some of the vision system features.

So you know it's just -- I expect over time that the S will be the predominant system but there'll always be those and we may segment.

The market may segment with the standard serving certain markets that may be more price sensitive.

And sort of related to all this and following up on an earlier question.

Should we -- were the original da Vinci prices stable if we could see the ASPs than that first quarter versus the fourth quarter or versus the first quarter a year ago.

Were da Vinci prices flat, up, down separating out da Vinci S's now.

And should we assume that da Vinci prices are basically changed going forward as, again, given the higher price option?

You know I will let somebody else answer but we always have a mix issue dependent upon overseas and -- .

I guess I'm trying to X out geography here.

(inaudible).

(technical difficulty)

Yes I think within the regional mixes that Lonnie described I think within those markets (inaudible).

No change in the older system.

If I could pick on Ben.

I think Ben described gross margins as likely lower in the first quarter.

If you launched the da Vinci S because (indiscernible) exact language -- the higher cost of manufacturer and acquiring cost of goods or materials, I forget exactly how you phrased it and I appreciate the volumes are much higher but what happened to that issue?

That's actually a good question.

So we, first of all, had better gross margin in Q1 than we expected and, primarily, because we ramped up manufacturing production faster than we anticipated.

Therefore, we have better facility utilization and reduced cost per unit.

So there's a couple other maybe more subtle things that -- the strong euro exchange rate had an effect that made our ASPs better for sales into Europe, those [actuary] direct sales into Europe.

So those when they are direct in euro tend to be favorable in terms of ASP and gross margin.

So based on that, that's why we increased our gross margin forecast from what we thought before 65 to 67.

We're going to after reporting somewhere close to 68, we are saying, for the balance of the year between 68 and 70.

You know, Rick, there's also a scale affect here.

You know internally and you probably know this from (indiscernible).

We manage the business on a fixed and variable basis and you know whenever you ramp volume, you have -- the pleasant surprise is you amortize those fixed costs over a broader base.

And it was reflected in gross margin as well.

So there's some benefits there.

But what I will say is, our operations team, we have a group here that will do whatever is necessary.

I mean -- they are and they -- it was a Herculean task in terms of what they did this past quarter.

And it's reflected in the numbers.

It clearly is.

Last, Lonnie, just I guess somebody has to ask this -- the cash question every quarter.

I'll do it this quarter.

Cash is building.

What rainy day or happy day are you saving it for?

When?

Cash will be used for, obviously, investment in our growth but beyond that we don't have any plans.

Just let it accumulate?

(inaudible)

We will use it sometime when it's appropriate.

We are not going to -- but it's not burning a hole and our pockets.

Thanks and congratulations again.

Alan Brochstein from Piedra Capital.

I had a question if you could maybe update the long-term growth drivers in terms of your addressable market.

Just on the systems, not on the procedures.

On your addressable markets here in the United States and also your international expectations, how much growth you might get internationally over the longer-term?

I think it's -- I will do my best at answering what I think you are asking there.

As we talked about in the past when we look at targets with today's assumptions, with da Vinci's and da Vinci S's, we look for multispecialty opportunities that perform all of our operations.

And we believe that that -- that there are perhaps as many as 1000 centers like that in United States.

And we believe over time as they become mature that they -- that those targets will and can accept several da Vincis and we believe there are perhaps 500 or more like that outside of the United States.

So really nothing has changed in terms of our addressable market this quarter or any of the past quarter spares so we believe that this is still early.

That this technology has a long way to go and we will continue to do our best to get into as many centers as we can.

You know I made the comment.

I mean this is a disruptive technology that will evolve over many years and adoption of major disruptions, typically, take 20 or 30 years.

And we think we're as Aleks just said, we are at the early stage of that.

What we see today in terms of what we think we can do will be very different in two or three years.

And at least it better be.

And right now we think it's -- the opportunity is it's a multibillion dollar business.

And we believe that we can sustain that.

But it's -- the technology involves, it becomes more effective and clinical results demonstrate that effectiveness.

Clearly as I've always said this will be driven procedure by procedure.

And that is the driver.

I had a follow-up question.

Could you talk about some of the impediments to growth?

I know two of them come to my mind and you can probably go over a few others, will be able to hire the salespeople adequate salespeople?

And the other one would be developing instruments.

That seems to be one of the limiting factors when I talk to doctors that are waiting for the instruments.

To get better.

I know you are working on that.

Talk about those and any other issues (MULTIPLE SPEAKERS) you need to address?

Building an organization is always a challenge.

I mean but it's not rocket science but trying to build an organization with very high-quality people and train them and cultivate the values that we want.

That's one of our major tasks.

I don't see it as an impediment;

I just think it's work.

In terms of instruments, actually still the key is one thing that our technology does because the instruments are [risted] you don't need the same variety of instruments you need in laparoscopy.

But the challenge there is to make sure we make the right instruments.

And some of them involve technology that we need to license and that sort of thing and we work on those.

But I -- just [tips] unless we are changing to a different kind of power instrument or something like that, we do very quickly.

We have a turbo team that does that and we are able to respond quite quickly.

What we don't want to do is just proliferate instruments for one offs for a lot of surgeons.

We want to make sure we're making the best instrument for the largest number of surgeons for the application.

So that's the challenge of doing that.

But making new instruments with new tips isn't not a huge challenge.

It's when we change the architecture of the instrument that has the longer time (indiscernible).

Yes.

I would say over the past 18 months that's probably been one of our greatest successes is the number of instruments we put out.

We will continue to do that and I think we have got a very good process to address what the customers need.

One last question and I guess this is for you, Aleks.

I think we've talked before about offensive and defensive type purchases.

And how do you view the strength this quarter?

I know Lonnie kind of talked about there were maybe one or two people who wanted to be quote unquote the first in their area.

But in general are you finding the sales are moving to more defensive now that the installed base has gotten bigger?

You know, again, I think -- and then what we've got to close, we will close this up.

I think that when you look at it from a defense standpoint or offense I think the reality is that it is patient demand and the systems are being placed into the hospitals that are looking to drive patient census into their doors.

In some markets, certainly there are more da Vincis than in others but we are seeing sales that are happening - by that definition - either offensively or defensively.

And I think that's just going to continue and so there is really nothing more I can add to that particular paradigm.

That was our last question for the day.

We had a great first quarter and we anticipate that this will be another strong year.

Revenue grew to 77 million, up 86% from the prior year; recurring revenue grew to 35 million comprising 45% of total revenue.

We shipped 35 da Vinci Surgical Systems.

Our net income for the quarter before non-cash 123R stock option expense was 17.5 million or $0.46 per share.

Up over 200% using a 39.6% tax rate for both years.

EBITDA for the quarter grew to 29 million, up 174% from 2005 when we ended the quarter with 221 million in cash.

As I previously stated (indiscernible) question, we believe that the adoption of our technology is driven by surgical procedure.

And starting with those procedures where it currently provides compelling surgical capability in patient (indiscernible), we continue to work with our surgeons 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 the ever increasing number of surgical procedures.

Our success to date is a result of the dedication and hard work of an extraordinary team of highly talented, motivated, and principled individuals.

Every employee is a shareholder of our Company.

Our incentive programs of cash and stock options are directly tied to performance goals, based on the vital few things that we believe are essential to our future success and subsequent growth in shareholder value.

We believe that stock options are a fundamental element of our compensation program for all employees.

They are essential to attracting and retaining the talent necessary to continue to build a truly exceptional company.

We believe that stock options directly align the interests of every member of our team with the interests of our shareholders.

Therefore, we have no plans to modify our stock option grants or to change our stock option practices.

We will continue to target our annual stock option grants in the range of 3% of total outstanding shares each year.

We believe that the ownership of our Company is most precious, we value it highly and manage it carefully.

Finally I assure you that this management team will continue to focus on those financial and operating metrics that reflect true financial performance and drive shareholder value - such as system placements, procedure growth, marketshare by surgical procedure, topline and bottom-line growth and cash flow.

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 truly make a difference in driving future investment priorities, based upon clinical needs and economic return.

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

Second, consistent revenue and operating income growth and, third, a results-driven Company culture in which we measure ourselves by our accomplishments.

That concludes today's call.

We thank you for joining us today and we will talk with you again in three months.

Thank you.

That concludes today's conference.