直覺手術 (ISRG) 2006 Q2 法說會逐字稿

Good afternoon.

And welcome to the Intuitive Surgical Second Quarter Earnings Conference Call. [OPERATOR INSTRUCTIONS]

I will turn the meeting over to Miss Sarah Norton, Investor Relations.

Ma’am, you may begin.

Thank you.

Good afternoon.

And welcome to Intuitive Surgical’s Second 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 and Alecks Cukic, our Vice President of Business Development and Strategic Planning.

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

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

These risks and uncertainties are described in detail in the company’s Securities and Exchange Commission filings.

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

Please note this conference call will be available for audio replay on our website at www.intuitive surgical.com on the all year archived section under our Investors Relations page.

In addition, today’s press release has been posted to our website.

Today’s format will consist of providing you with highlights of our second quarter as described in our press release announced earlier today, followed by a question and answer session.

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

Marshall will follow with a review of our second quarter’s financial results.

Next, Alecks 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 our President and CEO, Lonnie Smith.

Thank you for joining us today.

As you can see from our press release, we had another strong quarter.

Highlights for the second quarter are as follows.

Total revenue grew to $87 million, up 65% from the prior year.

Recurring revenue grew to $39 million up 60% from the prior year, comprising 45% of the total revenue.

We shipped 39 da Vinci Surgical Systems. 32 of those systems were in the United States.

We ended the second quarter with 467 da Vinci Surgical Systems installed worldwide.

Our gross profit margin before non-cash 123R option expense improved to 68.9% from 67.5% in the second quarter of 2005.

We generated an operating profit before stock option expense of $31 million, up 102% from 2005.

Our net income for the quarter before stock option expense was $21 million or $0.55 per share, up 110% using a full tax rate for both years.

EBITDA for the quarter grew to $33 million or 38% of revenue, up from $17 million in the second quarter of 2005.

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

We ended the quarter with $244 million in cash and investments, up $22 million from the first quarter.

We continue to see excellent procedure growth in urology, exceptionally strong growth in gynecology and strong procedure growth overall.

The da Vinci prostatectomy procedure continues to follow the adoption curve.

And while it is still very early, the first procedure volume data points for da Vinci hysterectomy almost precisely matched those predicted by our adoption curve model.

We launched a new sewing instrument in partnership with Gyrus, ACMI and a new mega-needle driver.

We successfully took our SAP ERP system live on May 1st, with minimal operational disruption.

Those of you who have been personally involved in the implementation of a major software system will understand the magnitude of that accomplishment.

We moved our finance, customer service, sales opps, business development and legal teams to our new offices at 1266 Kifer Road in Sunnyvale, California, just down the street from our 950 Kifer Road operations.

We are currently in the process of expanding our manufacturing operations into the vacated space at 950 Kifer Road.

Our new customer training facility at 1266 Kifer Road will be completed by the end of this quarter.

The efficiency of our operating model continues to generate significant free cash flow while funding exceptionally high revenue growth.

Our exceptional performance is the result of the dedication, hard work of an extraordinary team of highly talented, motivated and principled individuals, and our commitment to our operating priorities which include first, superior products, customer service and patient value.

We define patient value as surgical efficacy divided by surgical invasiveness or trauma.

Second, consistent revenue, operating income and cash flow growth.

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

With that, I’ll pass the time over to Marshall Mohr, our Chief Financial Officer.

Thank you, Lonnie.

Our financial results exceeded our expectations for the second quarter.

Total second quarter revenue increased $87 million, up 65% from $52.8 million for the second quarter of 2005 and up 13% from $77.3 million for the first quarter of 2006.

Our second quarter revenue results were driven by continued adoption of da Vinci Surgery across all of our targeted procedures.

Second quarter 2006 revenue increased in all product categories.

Systems revenue increased to $48.1 million, up 69% compared with $28.5 million last year and up 14% compared with $42.4 million last quarter.

Instrument and accessory revenue increased to $26.1 million, up 61% compared with $16.2 million last year and 12% compared with $23.3 million last quarter.

Service and training revenue increased to $12.8 million, up 58% compared with $8.1 million last year, and up 11% compared with $11.6 million last quarter.

Second quarter demand for da Vinci Surgical Systems was strong, as we sold 39 systems during the quarter, up 13 compared with 26 systems sold during the second quarter of last year, and up 4 systems compared with the 35 sold last quarter. 35 of the 39 systems sold during the quarter were S models, and the remainder were four-arm standard systems.

Systems revenue increased on a sequential basis by $5.8 million reflecting both the four additional systems sales, as well as higher average revenue per system as the mix of da Vinci S versus da Vinci standard systems increased.

Our second quarter average revenue per system including all da Vinci models but excluding fourth arm upgrades was $1.2 million, which is $20,000 more than the average revenue per system in the first quarter of 2006.

We also sold 6 fourth-arm upgrades compared to 2 in the previous quarter.

The average revenue for a fourth-arm upgrade is approximately $175,000.

Instrument and accessory revenue increased on a sequential basis by 12%, driven by higher installed base of da Vinci Systems and a continued increase in the number of procedures performed per system.

We continue to realize between 1,500 and 2,000 per procedure for established da Vinci accounts, while total instrument and accessory revenue per procedure continues to be 2,000 to 2,500 per procedure, reflecting initial instrument and accessory purchases for the newly installed systems.

Total service and training revenue increased on a sequential basis by 11%.

This growth is primarily driven by additional service contract revenue associated with additional system sales, as well as higher annual contract prices associated with da Vinci S Systems.

Total second quarter recurring revenue comprised of instrument, accessory, service and training revenue increased to $38.9 million, up 60% compared with the second quarter of 2005 and up 11% compared with the first quarter of 2006.

Recurring revenue represented 45% of total second quarter revenue.

During the first quarter, in accordance with Statements of Financial Accounting Standards No. 123R, we began to record stock compensation expense for the estimated value of employee stock options and stock purchases.

The resulting second quarter stock compensation expense was $6.5 million, compared with $5 million in the first quarter.

The increase reflects the full impact of our annual option grant which was completed in February. $1 million of the current quarter expense was charged to costs of goods sold, $4.1 million was charged to SG&A expense, and $1.4 million was charged to R&D.

Stock compensation expense recorded to date is entirely non-cash in nature.

In addition to our Income Statement prepared in accordance with Generally Accepted Accounting Principles, we provide non-GAAP or pro forma income statement information that excludes the impact of stock option expenses.

We believe 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 a tool to compare our results to prior periods.

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

Our pro forma second quarter 2006 gross margin of 68.9% was higher than the 67.5% realized in the second quarter of 2005 and the 67.9% realized in the first quarter.

The increases primarily reflect additional leverage obtained through higher volumes.

Total pro forma operating expenses for the second quarter of 2006 were $29 million, up 43% compared with the second quarter of 2005 and up 13% compared with the first quarter of 2006.

The increase is compared with prior periods reflect increased headcount, infrastructure costs and direct selling costs associated with higher sales volumes.

We added 29 employees during the second quarter, ending the period with 486 regular employees.

The majority of the additions were to our worldwide sales and support and manufacturing organizations.

The second quarter pro forma operating income was $31 million or 35.6% of sales, compared with $15.3 million or 29.1% of sales in the second quarter of 2005 and $26.8 million or 37.7% of sales for the first quarter of 2006.

On a GAAP basis, including the $6.5 million of stock compensation expense, the second quarter 2006 operating income was $24.5 million or 28.2% of sales.

Our second quarter 2006 other income of $3.3 million increased compared with $1 million in the second quarter of 2005 and $2.2 million in the first quarter of 2006.

The increase is compared with prior periods reflect interest earned on higher cash and investment balances and approximately $700,000 foreign exchange gains.

During the first quarter of 2006 we began reporting income taxes on a fully taxed basis.

We recorded income tax at an effective rate of 39.9% for the second quarter compared with an effective rate of 9.3% in the second quarter of 2005.

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

We continue to utilize net loss carry forwards in 2006 and expect our cash outlay as a percentage of pretax income for 2006 will be less than 6%.

Our pro forma net income on a fully taxed basis was $21.1 million or $0.55 per share compared with $17.5 million or $0.46 per share for the first quarter of 2006.

Our GAAP net income fully taxed and including stock compensation expenses was $16.7 million or $0.44 per share, compared with $14.5 million or $0.38 per share for the first quarter of 2006.

GAAP net income for the second quarter of 2005 was $14.8 million or $0.40 per share, which excluded stock compensation expense and reflected the utilization of tax benefits.

Let me quickly summarize our results for the first 6 months of 2006.

Total revenue for the first half of this year was $164.3 million, up 74% compared with the $94.4 million in the first half of this year -- or last year.

Pro forma operating income for the first half of this year was $57.8 million, up 138% compared with $24.3 million last year.

Pro forma net income for the first half of this year was $38.6 million or $1.02 per share, up 61.5% compared with $23.9 million or $0.64 per share last year.

As indicated earlier, this year’s pro forma results include a full tax rate.

And finally, GAAP net income for the first half of this year was $31.1 million or $0.82 per share compared to $23.9 million or $0.64 per share last year.

Also as indicated earlier, this year’s GAAP results include stock compensation charges amounting to $11.5 million and a full tax rate.

Now turning your attention to the balance sheet.

The end of the second quarter of 2006, cash, cash equivalents and investments of $243.8 million, up $22.3 million from the previous quarter end.

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

Cash provided by second quarter 2006 operations was $19.7 million, which is net of $5.7 million utilized during the quarter to fund working capital requirements.

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

During the second quarter, we invested $6.8 million in capital additions for improvements to our 210,000 square foot Sunnyvale, California facility purchased in December last year and for implementation of our new SAP ERP system and for systems for training centers.

We moved a portion of our administrative functions into our new facilities in June and went live with SAP in the beginning of May.

Our accounts receivable balance increased to $70.5 million at June 30, 2006 from $57 million at March 31, 2006.

The increase was primarily due to higher revenue in the second quarter of 2006 compared with the first quarter of 2006 and increased number of system sales being completed in the last month of the quarter.

Our average day sales outstanding utilizing a count back methodology at June 30, 2006 were 51 days, compared with 49 days at the end of the prior quarter.

Our net inventory increased to $24.6 million at June 30, 2006, from $20.4 million at March 31, 2006, reflecting inventory growth necessary to support the introduction of a second product line.

Our inventory turns at June 30, 2006 were 4.4 compared with 4.9 turns at the end of the previous quarter.

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

Thank you, Marshall.

During the second quarter, we shipped 39 da Vinci Systems. 35 were da Vinci S Systems and 4 were standard four-arm da Vinci Systems. 32 systems were placed in the U.S., 1 into Mexico, our first ever, 4 into Europe and 2 in rest of world markets.

This brings to 467 accumulative number of da Vinci Systems worldwide, 356 in North America, 81 in Europe and 30 in rest of world markets.

Fixed customers purchased second da Vinci Systems, which brings to 43 the number of hospitals with multiple da Vinci Systems.

Clinically, we had another excellent quarter.

We experienced strong sequential procedure growth, both within the U.S. and abroad.

All 4 of our surgical specialties were up sequentially with gynecology and specifically da Vinci hysterectomy showing the largest percentage growth.

During the quarter, we released 2 new instruments, established key European training center and attended several trade shows in medical conferences, and had a number of da Vinci clinical series published within various journals.

The new instrument releases consisted of the da Vinci EndoPK Dissector and a da Vinci Mega Needle Driver.

The EndoPK Dissector was developed in cooperation with Gyrus ACMI, an industry leader in both tissue management technology and endoscopy.

The EndoPK Dissector is a fully articulating coagulator and dissector, which is patterned after Gyrus’ successful Lyons dissector.

The EndoPK Dissector addresses several needs for da Vinci users within a single instrument.

As a dissector, it allows for highly precise dissection, while delivering excellent coagulation performance, as well as providing grasping capabilities.

Multiple functions within the same da Vinci instrument should lead to fewer instrument exchanges, while providing greater clinical value to the surgeon and the patient.

The EndoPK Dissector is targeted for use within gynecology, urology and general surgery.

The da Vinci mega needle driver was designed specifically to handle larger needles, which are often required in GYN surgery, specifically da Vinci hysterectomy, as well as in general surgery.

The combination of these new instruments should serve our customers well within our targeted procedures.

In May, the American Urology Association, AUA, held their annual conference in Atlanta, which was attended by nearly 15,000 urologists.

The AUA program included nearly 3 dozen da Vinci presentations which consisted of da Vinci prostatectomy, pyeloplasty, cystectomy and bladder reconstruction.

In addition, the AUA offered 4 separate accredited da Vinci post-graduate courses.

It attracted approximately 320 fee-paying participants.

Participants reviewed surgical techniques, reviewed data and received general instruction regarding da Vinci Surgery.

The Intuitive booth, we hosted hundreds of urologists during the 3 live da Vinci prostatectomy broadcasts.

The operations all took between 70 minutes and 2 hours.

But perhaps what resonated most with the viewers was the 6 minute anastomosis which Dr. [Vipatel] performed during his 90 minute bilateral nerve-sparing DVP.

In the past, the anastomosis phase of a DVP had always been considered one of the more challenging aspects of the operation.

But what was once challenging has now become routine.

We had 28 new da Vinci related papers published in urology journals during the second quarter.

The focus within the urology community is now more than ever about refining DVP techniques to deliver more effective patient outcomes, more effective than was ever available through previous surgical techniques.

We are also beginning to see more attention aimed at specific patient subsets, such as overweight or obese patients.

Dr. Arieh Shalhav and his team from the University of Chicago conducted a 150 patient study to assess the outcomes of da Vinci prostatectomy in overweight and obese patients.

The study was published in the May edition of the Gold Journal and the authors concluded and I quote “Robotic laparoscopic radical prostatectomy is safe in overweight and obese patients and might be the surgical management of choice in this subset of patients.” Close quote.

Also, for those of you interested in attending the Advanced Robotic Techniques of Prostatectomy or the ART conference, it’ll take place next week, August 4th and 5th, at the Weill Medical College of Cornell University in New York City.

The ART conference will feature several of the most experienced da Vinci users from around the world who will be presenting their latest technique advances in da Vinci prostatectomy, as well as their current clinical data.

Within GYN, we continue to see rapid adoption for the da Vinci hysterectomy.

And on a percentage basis, it was our fastest growing procedure in Q2.

As a category, GYN was our second largest segment.

For the first time, we saw second system placements, which were largely motivated by the GYN department, and specifically the GYN oncology department.

We are encouraged by the early inclusion of da Vinci procedures within our hospital customers, women’s health initiatives.

Providing women with minimally invasive surgical alternatives to traditional surgical approaches, provides tremendous patient value and fits very well within a hospital’s broader women’s health strategy.

We also experienced strong growth within da Vinci hysterectomy for benign conditions.

At the American College of Obstetrics and Gynecology, or ACOG, which held its annual meeting in Washington, DC, a one-day post-graduate course on advanced laparoscopy featured da Vinci in both the didactic sessions and the hands-on portion of the course.

During the general session presentation, ACOG featured a live da Vinci hysterectomy transmission from the University of Michigan.

Dr. Arnold Advincula performed a da Vinci hysterectomy on a post-menopausal patient for benign disease, which was viewed by an audience estimated at 400.

We’re pleased with da Vinci’s expanding visibility within this large professional society.

At the American Association of Thoracic Surgery, or AATS, held in Philadelphia, Dr. Michael Smith, from Samaritan Hospital, Cincinnati, presented a study entitled “Robotic versus Open Mitral Valve Surgery, a Comparison of Outcomes.” He compared his first 51 da Vinci mitral valve procedures to his group’s last 70 open mitral valve procedures.

Even through the initial learning curve, da Vinci mitral valve repair was accomplished in 50 of the 51 patients, or 98% versus 61%, 43 out of 70 patients with the open technique.

Dr. Smith was able to conclude and I quote “despite the learning curve with the robotic procedure, patients with the robotic mitral valve procedure had a higher percentage of repairs, experienced shorter length of hospital stays, with similar operating time and cross-claim time.” Close quote.

Substituting a minimally invasive mitral valve repair for an open-chested mitral valve replacement provides tremendous patient value.

In addition to the reduction in hospitalization, pain and recuperation, a repair is most often a permanent solution which leaves no foreign bodies or requirement for post-surgical blood thinner medication, which is why it’s preferred to a replacement.

At the International Society of Minimally Invasive Cardiac Surgery meeting, ISMICS, held in San Francisco, the agenda was filled with da Vinci presentations, including da Vinci mitral valve repair and revascularization operations.

For the first time outside of the initial FDA mitral valve repair trial, we had a multi-center experience presented at a society meeting.

Drs.

Doug Murphy from St. Joe’s Atlanta, Michael Smith from Samaritan Cincinnati, and Leland Siwek, from Sacred Heart Spokane, pooled their data and presented results from 201 patients incorporating a lateral da Vinci approach.

They also showed an increase in percentage of mitral valve repair while reducing the number of replacements within their practices.

We are delighted to see multi-center cooperation aimed at improving patient outcomes.

And in closing, I’d like to comment on Intuitive’s new European training center, which will be housed at IRCAD in Strasbourg, France.

IRCAD is among the world leaders for multi-specialty training in minimally invasive surgery, training several thousand surgeons each year in traditional laparoscopy procedures.

In addition to providing da Vinci demonstrations to all of IRCAD’s visitors and training participants, we will begin training both new and existing customers at this impressive facility.

Providing system and procedure training within IRCAD’s world class facility should serve our European and rest of world customers very well.

That concludes my summary.

And I’ll now turn the time back over to Ben.

Thank you, Aleks.

I will now provide our updated financial outlook for the balance of 2006.

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

Based on our recent second quarter results, 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 45 and 50% over 2005.

We are now targeting our total 2006 revenues to grow between 50 and 55% over 2005.

We expect each of our revenue segments to grow more than we had previously forecast.

In the area of system sales, we had previously forecasted our revenues to grow between 40 and 45% above 2005 levels.

We now estimate that system revenue will grow between 48 and 52% above the 2005 total.

As Marshall mentioned, we realized that blended average selling price on systems of $1.2 million during the second quarter, excluding the fourth-arm upgrades.

As a reminder, our blended average selling price can vary based on the mix of standard versus da Vinci S Systems, three-arm versus four-arm systems and regional mix.

We believe our second quarter average selling price was a little higher than we had forecast and going forward we expect our blended average selling price for systems to be in the range of $1.15 and $1.2 million for the balance of 2006.

Now, with regard to our recurring revenues, in our last call we had forecasted our instrument and accessory revenues to grow between 55 and 60% above our 2005 total.

We are increasing our forecast for this revenue segment to grow between 58 and 62% above 2005.

Likewise, we are also raising our estimate for 2006 service revenue.

We are now estimating our service and training revenue to grow between 48 and 52% above 2005 levels, compared with our previous forecast of 40 to 45%.

Once again, we expect our total year 2006 revenues to grow between 50 and 55% above 2005.

Now a brief comment regarding the seasonality of our revenues.

In previous years, our fourth quarter has always been our strongest quarter and our third quarter has been lighter in systems sales activities and system utilization, tempered somewhat by the overall growth in our business.

We expect these general trends to continue.

However, we still expect to see modest sequential growth in revenue in the third quarter, followed by larger sales growth in the fourth quarter.

With regard to gross profit margin, our second quarter gross margins were right in line with our previous expectations.

During the second quarter, and continuing into the third quarter, we have been making significant investments in our manufacturing and training areas, such as doubling our manufacturing space, expanding our training center in Sunnyvale and establishing a new European training facility.

This may cause our gross margins to decrease slightly in the third quarter, but it should recover in the fourth quarter.

For the year, we expect overall gross margin to be between 68 and 69%.

Moving to operating expense, on our last call we forecasted 2006 operating expenses to grow between 35 and 40% above 2005 levels.

We now anticipate growing operating expenses by 38 to 42% above 2005 levels.

This expense increase is driven by the following factors.

First, based on our higher revenue forecast, we expect to incur additional variable selling expenses.

In addition, we have made significant investments recently such as our new building and ERP system, which will drive higher operating expenses starting in Q3.

Finally, we are continuing to make investments in our R&D and support functions.

Since some of these investments are made in steps, we expect our operating margins in the third quarter to decrease slightly from the second quarter, but should recover in the fourth quarter.

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, we estimated total stock compensation expense to fall between $21 and $25 million.

We are now adjusting that range to $25 to $27 million.

We expect the breakout to specific P&L lines to be about the same as what we reported for Q2.

Other income and expense, which is primarily comprised of interest income and foreign exchange gain or loss was higher than expected in the second quarter, due to FX gains tied to the stronger Euro.

We don’t try to predict FX gains or losses going forward.

Based on interest income, we expect our total other income for the year to come in between $11 and $12 million.

With regard to income tax, we continue to expect our reported tax rate will fall between 38 and 42% for the balance of the year.

Regarding shares outstanding for EPS calculation purposes, we currently have approximately 36.8 million common shares outstanding.

We also have approximately 3.7 million option and warrant shares outstanding.

Depending upon our average stock price during the third quarter, a portion of the 3.7 million option warrant shares will be added to the fully diluted shares calculation.

To provide you with a range on what the diluted share count for EPS calculations may be in Q3, a 25% change in our current stock price would result in a diluted share count as low as 37.9 million shares or as high as 38.7 million shares.

That concludes our prepared remarks.

And we will now open the call to your questions.

Yes, sir. [OPERATOR INSTRUCTIONS]

And our first question is coming from Mr. Tim Nelson of Piper Jaffray.

Sir, your line is open.

Hi.

It’s actually Tom Gunderson filling in for Tim.

How are you guys?

We ended the -- your prepared remarks on shares so I’ll start with what seems to be in the news a lot and that’s the pricing of options.

And you mentioned that you did this in February for your annual options.

Can you give us a little bit more color since there is quite a bit of variability of your stock price quarter-to-quarter, how options are priced?

I’ll take a shot at it.

We’re very consistent in our process.

We go through a -- We actually touch our employees twice a year in terms of reviews and performance.

The first of the year, we review them and give both bonuses and stock options.

The stock options are granted when the board approves them, which is -- we have our board meetings.

And I think they’re priced as of the day before that.

And we have remained consistent about that.

And then of course, we touch them again mid-year is when we do our annual salary reviews.

It’s just a -- Our process has been very consistent.

That’s a lot of news.

But it doesn’t affect us.

So we’ve evaluated our policy and practices and leave it there, consistent with what expectations would be.

In other words, there are no issues.

Okay.

Thanks.

And then, Ben, I think you hinted at this.

But I just wanted to get at it.

The training center systems, the new ones that went in the U.S. and are going in in Europe.

Those are cost of goods sold?

Actually they do get depreciated into costs of goods sold.

Okay.

Over what period of time?

Over a five-year period.

Okay.

And can you tell us how many systems were added to training in Q2?

It was on the order of 3.

Okay.

And, Aleks, maybe you’re the best on this, but I’ll leave that up to the group to decide.

But, there was some -- some of the doctors in the state universities in Germany were on strike earlier this year and settled in June.

Now the municipal doctors are doing some work stoppages in Germany and France is threatening to do the same.

Are you seeing any impact to your elective surgeries in Europe?

Or is that just too small a percentage of the overall demand?

You know, I am aware of that.

But I think that if you look at our segments, U.S., OUS and ROW, they were all up.

So I would say that it has not affected us in any material way.

Okay.

And then lastly, and I’ll get back in line, Lonnie, I ask you this every opportunity I get so I want to keep my record consistent here.

Cash.

You guys have done a tremendous job of getting return on investment.

And yet, I would argue that $240 something million in cash isn’t going to give you those same kinds of returns.

Use of cash going forward, when do you have too much?

I don’t have a specific answer to that except for that I don’t see us -- We’re a high growth company.

I don’t see us paying out a dividend at this point in time.

And nor do I see us going out buying things because we have money.

We will stay focused on robotics and those technologies that will enhance the robotic capabilities.

That primarily deals with everything associated with the robotic system, this vision, and instrumentation.

We obviously very circumspect about intellectual property and new technologies that can support us.

And if that takes investment, we obviously do it.

But I think just because you’re capable of generating cash, I think it’s a very dangerous thing for management to think that they’ve got to go out and spend it some way.

And we won’t do it either to build unnecessary overhead or if we plan to, we’ll spend it very strategically.

And when we believe that we are at a place that it ought to be given back to shareholders, that’s what we’ll do.

And just to push a little bit on one category you didn’t mention, is stock buy backs, is that an agenda items on your board of directors meetings?

It has not been to date.

Okay.

Thank you.

Thank you.

Our next question is coming from Tao Levy with Deutsche Bank.

Hi.

Good afternoon.

I was wondering if I could just clarify, does the three systems related to the training, were those part of the 37 -- or I’m sorry -- the 39 number sold?

No.

We sold 39 systems to customers, Tao.

And I think what Tom was referring to is when we talked about our capital expenditures for the quarter, we had about $6 or $7 million in total Cap Ex for the quarter as Marshall mentioned.

And part of that was us investing in some systems to enhance our training capabilities.

Okay.

So that was separate from the 39.

Absolutely.

Okay.

Perfect.

On another topic, you haven’t touched in maybe 3 quarters on your efforts in endovascular approach.

Remember a year ago, you signed that deal with Hansen Medical and I’m just wondering if anything has come out of that program yet?

Well, we don’t have a -- I mean Hansen Medical is focused on intravascular endovascular disease.

We are not focused on that at this point in time.

We do have some other development projects that we aren’t talking about a lot at this point in time.

But, Hansen is -- We still have -- We retained the right to do it ourselves if we wanted to.

But we do not have any programs right now focused on endovascular.

Okay.

And Aleks, maybe now that you have a little bit more time and experience with gynecology, maybe you can give us a sense of do we have -- do you have a good procedure number that’s applicable for the da Vinci?

In terms of a total available market?

Yes.

I mean, there are big procedures numbers out there.

But obviously not all of them are applicable for da Vinci or our robotics.

For example, if you do 80,000 prostatectomies here in the U.S.

Is there any sort of number that you can start to throw out now sort of for gynecology?

Yes.

What we’ve said in the past publicly is that if you look at hysterectomies in general, there are about 600,000 or so performed each year in the United States.

If you go to the center of our target, you will find the gynecologic operations of which we estimate to be about 50,000.

If you go then to the next ring around the target you’ve got complex hysterectomy and for benign disease.

And we estimate that the combination of those is probably, our guess at this point, perhaps around a quarter of a million, 250,000.

That is not to say that some of the others won’t fall into our total available market.

But the way we look at the market today, we size it at about 250,000.

It may prove to be larger, but that’s the best number that we have today.

And also as a reminder of the 600,000 total somewhere on the order of 65% to 70% are still being performed open.

So there is minimally invasive surgery that’s already in the hysterectomy business.

And we are primarily focusing on those that are open and perhaps even somewhat of a subset of that.

So, around 250,000.

And how about myomectomies.

The myomectomy number appears to be somewhere between 50 to 60,000.

That’s the number that we’re working with.

Okay.

And so we think that’s -- Again, these are just U.S. numbers, Mike.

It’s a worldwide demand for these operations.

Okay.

Perfect.

Thanks.

And if I can ask your financial guys, maybe a sense of what are target margins we should be looking forward to as we start to exit the year.

I know that the third quarter, a little bit of seasonality.

You mentioned some of those issues on the call.

But as we exit the year, what are some good targets to think longer term.

And again, you guys I think a year ago used to have your long term targets.

And we no longer hear about those because you’ve clearly surpassed them.

So I was wondering if there’s some new targets out there.

We don’t have a let’s say a different target out there for long term.

For this year, we think the 68 to 69% and gross margins is where we’re headed.

And in terms of operating margins, it’s probably on the 34 to 35%, which is what you’ve seen in the past couple of quarters.

Again, third quarter, you’re going to see some seasonality.

You might end up being lower.

But then it’s going to recover on the fourth quarter as we’ve seen in the past.

Okay.

And then, last question just on the same topic.

Margins for the systems?

It used to be 60 to 65%.

And then disposals were 65 to 70.

Any change there?

Actually what we have been saying recently is our gross margins on systems have been about the same as they are on our instrumentation.

And our margins on products in total is about 70%.

And so likewise for both systems and instruments, it’s about 70%.

Perfect.

Great.

Thank you very much.

Thank you.

Our next question is coming from Rick Wise with Bear Stearns.

Good afternoon, everybody.

Can we talk just to drill a little bit deeper on the instrument disposable front.

Obviously you had a good quarter growing 12% sequentially.

But given -- How do we think -- How do we line up the growth rate that you reported given the strong language you’re using about growing penetration and procedures and more placements.

To put a bottom line on it, shouldn’t we be seeing even stronger sequential growth in instruments?

Or am I not thinking about it correctly?

I think -- I’ll take a shot at that.

That’s just quarter-to-quarter.

But year-over-year, we have a forecast of growing that segment 58 to 62%.

I guess I’m looking back to the fourth quarter if I -- just hurried -- looked at it correctly, I think you were up 13% this is 12 -- the first -- We’re not seeing actually acceleration on that side.

Is that not the right way to think about it?

So accelerated --

Sequentially.

Well I guess I can maybe answer it this way.

We grew instruments and accessories by 80% from 2004 to 2005.

And we’ve give guidance that we’ll be growing instruments, our instruments business by, let’s call it 60% from 2005 to 2006.

In terms of dollars, it’s a much bigger growth, but it’s on a much larger base as well.

So from a percentage standpoint, we’re not giving any guidance that we’re increasing the percentage growth on the instruments and accessories.

But your comment, your ploy to terms of that we’re seeing strong procedure growth and why are we not seeing more instrument growth, that’s the question, right?

I don’t want to sound ungrateful.

You know what I’m driving at.

The fact is is what we’re seeing is -- and management I suppose really, we are trying to slow down any stocking orders.

We have no desire to have a lot of inventory out in the hospitals.

So we would prefer that they’re buying as they need and not in anticipation of need.

And so that we will get over time a more -- a direct correlation to our procedure growth.

So I think that we have -- we’ve seen a slow down in stocking orders which we have encouraged.

Right.

When they buy a system, they maybe buy a basic supply of instruments.

But not -- let’s not -- We’d rather they buy them -- kind of keep it lean.

Because that then avoids other kinds of problems that can come with having a lot of inventory in the field.

That’s very helpful.

The ERP system going live, I might have thought that you’d be talking about maybe a little lower expense as the cost of making it go live was expensive training, implementation.

So why aren’t we seeing a little more second half benefit and what benefits do you hope to derive from it?

I’ll take the first shot of how it comes out on the P&L.

So, as you’re developing the SAP ERP system, you capitalize those expenses.

And so part of that $6 to $7 million in capital expense that you saw in the second quarter was the work toward turning on that system.

And then afterwards, you’re going to get the depreciation on that.

So, from a P&L standpoint, you’ll have the depreciation and some ongoing maintenance in support of that system.

So that’s the P&L standpoint.

In terms of the benefits that we expect to go forward --

We’re in a high growth period of time, right?

Adding a lot of new employees, trying to -- And what this does is it starts to centralize our databases and rationalize them.

The benefit will be over time, will be in accuracy and the elimination of redundant effort and those things.

And we will see those benefits.

But they don’t occur instantaneously.

We’ve got -- These things will occur over time.

And it’s necessary for us to build that infrastructure to support the size of company we anticipate being versus where we’re coming from.

And we’re moving through that process I guess more quickly than most companies, medical device companies, just because of the rate of growth that we’re experiencing.

Okay.

I may have missed it.

I apologize if I did.

Can you update your thoughts on urology procedure penetration?

I don’t think I heard you?

Recently you’ve indicated as you exit the year, I think, you hope for 35% [inaudible]?

Am I remembering correctly, Aleks?

Yes.

Just a general reminder, we exited 2005 at a 20% run rate.

And we’ve given an estimate that 2006 at a 35% run rate and that is based off of an estimated prostatectomy market of 90,000 U.S. cases.

And as far as our progress against that, we remain solid in that projection.

I think the comment I would make is there are great numbers on -- there’s numbers in terms of the size of the number of newly diagnosed prostate cancer patients.

How that splits between surgery, seeds, oral treatment, all the treatment options including [inaudible] is unclear.

I mean, people say a third, a third, a third.

And there’s lots of cuts of that.

We actually believe that a patient looks at their options.

And we certainly see a lot of it where they examine all options.

And we believe that -- I’ll just speak for myself.

I believe that we are seeing expansion of the surgical market in the sense that now there’s a highly effective surgical option that has very low evasiveness.

And that’s when we talked about patient value.

And the patients are looking at these options and many of them are opting for da Vinci prostatectomy as opposed to other treatment options.

All right.

I wish we had a more precise number.

But there’s just not good data.

We do know that we certainly -- the parameters that Aleks has given you that we are highly confident.

And as I stated in my statement, I [inaudible] and coming from the Boston Consulting Group, we run adoption curves.

And we’re tracking.

We predict what we’re going to hit and we are pretty darn close.

More than year to year for sure.

If I could, my last question, if I could ask just a conceptual questions.

One of the challenging aspects of following Intuitive and making projections to Intuitive is the quarterly da Vinci System placements.

I’m sure it’s challenging for you all too.

I look back at ’04.

This year we’re doing in the neighborhood of 15 to 20 a quarter.

Yes.

The fourth quarter was the best.

This year it seems like we’re in the 35 to 40 a quarter.

I’m guessing the fourth quarter will -- might be above that.

As we look ahead, I’m not looking really truly at precise predictions, but how do we -- When do we settle into a sort of a steadier state quarterly placement that obviously has a long way to run as the market evolves over time.

Or should we be thinking as we look over at ’07, ’08 and beyond, that we’re going to see these kinds of significant steps or is it going to be more gradual from here?

I mean, is it clear what I’m asking Lonnie?

Yes.

It is.

I understand the question.

I don’t -- Again, this is uncharted territory.

We’re not in a mature market where we can say the average life is this divided by that and that’s the recurring market.

We are in a market that we are trying to penetrate and expand.

So we believe we’re a long way from maturity or even very deep penetration.

And the challenge for us, is again, as I say procedure by procedure.

We’ve got to drive this procedure by procedure.

The size of the market, the number of procedures done, will drive the number of system placements.

Do I think it will come in steps?

I think it always does.

It doesn’t come -- It’s never a smooth process because as each procedure gains credibility and adoption and it hits that kind of upward part of the curve, then we see a lot of placement.

So I think that this will be -- I think we’re a long way from where this will be in terms of system placements.

In 5, 10 years, I think that it will occur -- it will be a function both of capability of the systems we develop, as well as the penetration of -- which will drive the penetration because of the capability procedure by procedure.

So, yes.

We don’t have a crystal ball.

Does that tighten it up?

But I fully anticipate that different versions and different models and this thing will expand deeper and deeper.

And when it hits maturity, then we’ll be able to give you a nice -- I hope that doesn’t happen for a very long time.

I suspect it won’t.

So, steps probably ahead more than gradual.

I think you’ll see steps.

And then gradual growth within those steps.

But that’s opinion.

I hear you.

Ben promised that you were going to give us the quarterly placement number for next quarter.

Is that what you said Ben?

Oh well.

I tried.

Thank you.

Operator, I think we have time for one more call.

Thank you, sir.

Our last question is coming from Ryan Rauch with Jefferies & Company.

Just a couple quick questions.

Aleks, I think the gynecology revenues were up somewhere over 80% in the first quarter.

Was it similar to that growth rate in the second quarter?

I’m not sure we’ve ever disclosed what those numbers are.

I would just say that as I said in my script that it did become the second largest -- GYN became the second largest surgical segment for us.

And hysterectomy was the fastest growing procedure.

So, the trend there is very strong.

Got you.

And then, Ben, I haven’t pulled out the abacus.

So can you give us what the EPS guidance is now for the year, both on a GAAP and cash basis?

And then do you expect system placements to be up sequentially?

They’ve been up the last couple years sequentially.

But only by like 2 or 3.

Or if you won’t give that, just sort of anecdotally what you think for the third quarter.

On the EPS, we haven’t given an actual EPS number in the past.

But I think all of those numbers when you add them together, it certainly is going to be up incrementally from our previous guidance.

And, of course, driven by the higher revenues that we’ve given in terms of guidance.

So, we’ll let you go ahead and make that calculation yourself.

Just keep in mind that the difference between the GAAP and the pro forma is probably on the order of $0.40 because that is a number that you can actually get your hands around based off of the $25 to $27 million of expense.

And then just our number of shares and the tax rate.

Okay.

And then Aleks, when do you expect any hysterectomy data?

Is that a year-end event?

Or is it just unclear at this point?

It’s hard to say when -- I mean, as far as data, there’s data that gets presented at different meetings and that’s typically the leading indicator before something gets published in a Peer Review Journal.

The process of getting published in the Peer Review Journal as you know is just not a point and click process.

It requires submission and review, et cetera, et cetera.

I can say that there is data being accumulated.

I think there’s data being discussed at the different various meetings.

We continue to see that and will continue to see that.

But it would be hard for me to speculate in which month or which quarter you’ll see something presented in a Peer Review format in a Peer Review Journal.

And then Ben, do you care to say if you expect systems -- I mean, maybe instead of -- I mean, will you answer the question do you think systems will be up sequentially?

And then b, how is your pipeline Aleks or Lonnie?

I think some might have expected -- You had a good quarter, but maybe even a stronger system placement quarter for Q2.

Did anything happen?

Did any units get pushed into the third quarter?

And if not, how is your pipeline?

Is it as strong as ever?

Sure.

There are systems moving back and forth all the time.

And our pipeline we feel good about it.

And that’s what we’re going to say about it.

And we’re running this business, and we’re going to run the business to build the business.

And build it effectively and competitively, and financially responsibly.

So, we feel very good about things.

We cannot control what people who have nothing to do with the business anticipate or dream that might happen.

We will build the business.

And it continues to build very well.

And we’re pleased with the rate of growth we’re growing.

And it’s what we can manage well.

And it’s what we’ll continue to manage well.

And that’s -- that was the last question for today.

We had a strong second quarter.

We anticipate that this will be a very strong year.

In fact if you look at it, we did in this quarter approximately what we did in all of 2003.

Total revenue grew to $87 million, up 65% from the prior year.

Recurring revenue grew to $38 million -- to $39 million comprising 45% of total revenue.

We shipped 39 da Vinci Surgical systems.

Our net income for the quarter for non-cash -- before non-cash 123R options expense was $21 million or $0.55 a share, up 110% using full tax rate for both years.

EBITDA for the quarter grew to $33 million or up 95% from 2005.

We ended the quarter with $244 million in cash.

And as I previously stated and we discussed just with Rick now, 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 certainly see that in prostatectomy and hysterectomy as well as mitral valve.

We continue to work with our surgeons to identify and drive those procedures.

We’re expanding the surgical capability of our products so that their use becomes compelling for the patient, surgeon and hospital and in every increasing number of surgical procedures.

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

We are committed to delivering significantly superior patient value by improving surgical outcomes and reducing surgical trauma.

We do this by providing surgeons with superior surgical access, surgical vision, instrument articulation and surgical precision through unparalleled, state of the art robotics, vision and instrument technology.

We strive to exceed our customers’ expectations every day.

We seek to delight our customers and surgeons, surgical staff and hospital administration with extraordinary products and exceptional service and support.

It is our goal to be the highest quality and the lowest cost provider of robotic surgical products, accessories and instruments.

We’re committed to delivering superior value through highly effective lean and disciplined operating processes.

We’re dedicated to being better today than we were yesterday and better tomorrow than we are today.

We remain committed to managing within realistic financial constraints, focusing on the vital few things that will truly make a difference in driving future investment priorities based upon clinical need, patient value and economic return.

That concludes today’s call.

We thank you for joining us.

And we’ll talk to you again in three months.

Thank you for your participation in today’s conference.

This concludes the presentation.

You may now disconnect.

Have a great day.