直覺手術 (ISRG) 2006 Q3 法說會逐字稿

Hello.

Welcome to the Intuitive third quarter earnings Conference Call.

All lines will be in a listen-only fashion until the question and answer session. [OPERATOR INSTRUCTIONS] Today's teleconference is being recorded.

If anyone has any objections, you may disconnect at this time.

I would now like to turn the meeting over to today's host, Ms. Sarah Norton of Investor Relations.

Ma'am, you may begin.

Good afternoon.

Welcome to Intuitive Surgical's third 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 that this conference call will be available for audio replay on our website at www.intuitive surgical.com on the audio archives 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 third quarter as described in our press release announced earlier today, followed by a question and answer session.

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

Marshall will follow with a review of our third quarter 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.

Highlights for the third quarter are as follows.

Total revenue grew to $96 million, up 57% from the prior year.

Recurring revenue grew to 43 million, up 59% from the prior year, comprising 45% of total revenue.

We shipped 46 da Vinci surgical systems.

Four of those sales involved an upgrade from a standard da Vinci to a da Vinci S for a net of 42 systems added to our worldwide install base.

We ended the third quarter with 509 da Vinci systems installed worldwide.

Our gross profit margin, before non-cash 123R stock option expenses, declined to 66% from 69.2% in the third quarter of 2005 as a result of (1) a write-off of obsolete instrument inventory; (2) a step-up in overhead expenses associated with expansion of our manufacturing facility and added headcount; and (3) the system upgrade transactions.

We generated an operating profit before stock option expense, of 33 million, up 55% from 2005.

Our net income for the quarter, before stock option expense, was 22 million, or $0.57 per share, up 59% using a full tax rate for both years.

EBITDA grew to 35 million for the third quarter and 97 million year-to-date or 37% of revenue.

EBITDA excludes non-cash stock option expense.

We believe that EBITDA is the best indicator of our actual economic performance.

We ended the third quarter with 292 million in cash and investments, up 48 million from last quarter and 90 million year-to-date.

Urology and gynecology continue to be our primary growth drivers with the growth of the da Vinci hysterectomy procedures continuing to demonstrate a high correlation with our adoption curve model.

Our international team continued to deliver excellent performance with nine systems shipped to customers outside the United States.

Twelve of the 42 incremental system shipments went to existing da Vinci accounts as second, third, or fourth systems.

We completed the expansion of our manufacturing operations at 950 Kifer Road and are not in the process of expanding our product development and engineering space at that facility.

Our new customer training facility at 1266 Kifer will become operational this quarter.

The true economic horsepower of our business is demonstrated by our ability to increase cash by $90 million, while funding 68% revenue growth year-to-date.

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

Thank you Lonnie.

Total third quarter revenue increased to $95.8 million, up 57% from 60.9 million for the third quarter of 2005 and up 10% from 87 million for the second quarter of 2006.

Third quarter revenues by product category were as follows.

System revenues increased to 52.4 million, up 56% compared with 33.6 million last year and up 9% compared with 48.1 million last quarter.

Instrument and accessory revenue increased to 29 million, up 60% compared with 18.1 million last year and 11% compared with 26.1 million last quarter.

Service and training revenue increased to 14.4 million, up 57% compared with 9.2 million last year and up 13% compared with 12.8 million last quarter.

Third quarter da Vinci surgical system revenue reflected 46 total systems placed, including four da Vinci S systems upgraded from da Vinci standard systems.

Net of the upgrades, the 42 systems sold in the quarter compares with 30 systems sold during the third quarter of last year and compares with 39 systems sold last quarter. 41 of the 46 systems placed during the quarter were S models.

The remainder were 4-Arm standard systems.

Twelve of the systems were to repeat customers compared to six to repeat customers the previous quarter.

Three of the 4-Arm standard systems sold during the quarter represented refurbished units.

The upgrade transactions were individually negotiated as an accommodation to our customers provide incremental revenue to the Company.

We also have been able to sell refurbished standard systems to price-sensitive customers without sacrificing new product revenue.

We continue to see demand for da Vinci standard systems and some repeat customers utilize both standard and S systems.

Systems revenue increased on a sequential basis by 4.3 million reflecting the increase in the number of systems placed.

Our third quarter average revenue per system, including all da Vinci models, but excluding 4thArm upgrades was 1.12 million, which is approximately 80 less than the average revenue per system in the second quarter of 2006.

The lower average revenue per system reflects the upgrade transactions for refurbished units sold.

We also sold three 4th Arm upgrades compared to six in the previous quarter.

The average revenue for our 4th Arm upgrades is approximately $175,000.

Instrument and accessory revenue increased on a sequential basis by 11% driven by a higher install base of da Vinci systems and a continued increase in the number of procedures performed per system.

Growth in procedures masked what is otherwise a seasonally slow quarter.

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

Total service and training revenue increased on a sequential basis by 13%.

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

Total third quarter recurring revenue comprised of instrument, accessory, service and training revenue increased to 43.4 million, up 59% compared with the third quarter of 2005 and up 12% compared with the second quarter of 2006.

Recurring revenue represented 45% of total third quarter revenue.

During the first quarter in accordance with statement of financial accounting standards number 123R, we began to record stock compensation expense for the estimated value of employee stock options and stock purchases.

The resulting third quarter compensation expense was 7 million compared with 6.5 million in the second quarter. 1.1 million of the current quarter expense was charged to cost of goods sold. 4.4 million was charged to SG&A expense and 1.5 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 GAAP, we provide non-GAAP information in the form of pro form income statement information that excludes the impact of stock option expenses as well as EBITDA data.

We believe that pro forma income statement information and EBITDA data enhance the users overall understanding of our financial performance as they better reflect the economic performance of our business and provide investors with a tool to compare our results to prior periods.

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

Our proforma third quarter 2006 gross margin is 66%, lower than the 68.9% realized in the second quarter.

The decrease primarily reflects a $700,000 charge for obsolete inventory as we continue to improve our instruments to step-up the fixed costs, which we predicted in our previous earnings call, and the impact of upgrades previous mentioned.

Total proforma operating expenses for the third quarter of 2006 were 30.7 million, up 6% compared with the second quarter of 2006.

The increase reflects increased headcount, infrastructure costs, and direct selling costs associated with higher sales volume.

We added 35 employees during the quarter ending the period with 521 regular employees.

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

Third quarter 2006 proforma operating income was 32.6 million or 34% of sales compared with 31 million or 35.6% of sales for the second quarter of 2006.

On a GAAP basis, including the 7 million of stock compensation expense, third quarter 2006 operating income was 25.7 million or 26.8% of sales.

Our third quarter 2006 other income of 3.1 million decreased compared with 3.3 million in the second quarter of 2006 as the second quarter included approximately $700,000 of foreign exchange gains, which are partially offset by interest earned on higher cash and investment balances.

Our effective proforma tax rate for the third quarter was 39.4%, which is consistent with the rate recorded to date in 2006.

However, we continue to utilize net loss carry-forwards in 2006 and expect our cash outlay, as a percentage of pre-tax income for 2006, will be less than 6%.

Our proforma net income, on a fully taxed basis was 21.7 million or $0.57 per share compared with 21.1 million, or $0.55 per share for the second quarter of 2006.

Our GAAP net income, fully taxed and including stock option -- stock compensation expense, was 17.3 million or $0.45 per share compared with 16.7 million or $0.44 per share for the second quarter of 2006.

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

Total revenue for the first nine months of this year was 260.1 million, up 68% compared with 155.2 million last year.

Proforma operating income for the first nine months of this year was 90.4 million, up 100% compared with 45.3 million last year.

Proforma net income for the first nine months of this year was 60.3 million or $1.58 per share, up 35.2% compared with 44.6 million or $1.19 per share last year.

As indicated earlier, this year's proforma results include a full tax rate.

Finally, GAAP net income for the first nine months of this year was 48.4 million or $1.27 per share compared to 44.6 million or $1.19 per share last year.

Also, as indicated earlier, this year's GAAP results include stock compensation charges amounting to 18.5 million and a full tax rate.

Now turning our attention to the balance sheet.

We ended the third quarter of 2006 with cash, cash equivalents, and investments of 292.3 million, up 48.5 million from the previous quarter-end.

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

EBITDA, excluding stock option expense, was 35.2 million and 97.3 million for the third quarter and nine months ended September 30 respectively.

Our accounts receivable balance increased to 71.7 million at September 30, 2006 from 70.5 million at June 30, 2006.

The increase was primarily due to higher revenue partially offset by increased collections.

Our net inventory decreased to 22.3 million at September 30, 2006 from 24.6 million at June 30, 2006, reflecting improvements in inventory management.

Our inventory turns at September 30, 2006 were 5.8 compared with 4.4 turns at the end of the previous quarter.

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 third quarter we shipped 46 da Vinci systems.

Four of these were customer upgrades from standard da Vinci to da Vinci S systems. 41 of the 46 total shipments were da Vinci S systems and five were standard 4-Arm da Vinci systems. 37 systems were placed in the US, six into Europe, and three into rest-of-world markets.

The 42 net new systems sold during the quarter brings to 509 the cumulative number of da Vinci systems worldwide, 390 in North America, 86 in Europe, and 33 in rest-of-world markets. 12 of the 42 new systems sold during the quarter were sold as second, third, or fourth system sales.

This brings to 52 the number of hospitals with multiple da Vinci systems.

The University of Pennsylvania, an existing da Vinci customer, purchased its second, third, and fourth da Vinci system during the quarter to become the first hospital with four da Vinci systems.

The University of Pennsylvania has laid out plans to become a major multi-specialty robotics center with programs in urology, GYN, cardiac, thoracic, and general surgery.

They will also explore new surgical areas, which are today outside of our target area.

William Beaumont Medical Center, located outside of Detroit, purchased their second and third da Vinci systems to become our tenth customer with three or more systems.

Outside the US we had an excellent quarter with nine system sales, which included our seventh da Vinci in the UK and our first into both mainland China and Greece.

Clinically we had another strong quarter.

In what is seasonally a slow quarter we showed solid sequential procedure growth.

Once again, gynecology, led by da Vinci hysterectomy, showed the largest sequential percentage growth followed by urology led by DVP.

Adding to our clinical success in Q3 were 53 da Vinci related clinical publications, which appeared in various journals within all targeted specialties.

We took part in seven important conferences during the quarter, including four that were devoted exclusively to robotic surgery.

These new robotic surgical societies and conferences are a great venue from which to share clinical advancements and procedure enhancements.

The rapid expansion of these robotic societies has been impressive.

The World Conference of Endourology, which took place in August, featured 150 da Vinci related presentations compared to 34 last year.

The presentations this year included da Vinci prostatectomy, nyphrectomy, cystecomy, pyeloplasty, and ureter re-implantation.

Singling out one presentation that best captures today's DVP trend is difficult, but I'll try.

The group from Rochester General Hospital delivered a presentation entitled, "Conversion from open to robotic assisted radical prostatectomy is associated with the reduction of positive surgical margin amongst private practice based urologists".

The title may give away the conclusion.

But the result of the clinical series was impressive nonetheless.

Two surgeons from RGH compared positive margin rates between their last 50 open prostatectomies to their last 50 DVPs.

Surgeon one reported a reduction in positive T2 margins from 36.6% in open prostatectomy to 5.7% with his DVPs.

Surgeon two reported a reduction in his series from 27.5% for his open prostatectomy to 8% for his DVPs.

The significant improvement in reported cancer control within the private practice community hospital setting is a large contributor to DVPs overall success.

Our da Vinci customers continue to deliver tremendous patient value to this rapidly growing base of cancer patients.

At the Advanced Robotics Techniques conference, Doctors Michael Cook and Jay Smith reported a significant decline in positive T2 margin rates within their large academic practices.

Dr. Cook, professor and chairman of the department of urology at Indiana University report that in a comparison of his last 50 open prostatectomies to his last 50 DVPs, positive T2 margins decreased from 10.7% to 3.5%.

Dr. Smith, professor and chairman of the department of urology at Vanderbilt University compared his last 100 DVPs to his reported series of nearly 3,000 open prostatectomies and reported a positive T2 margin rate improvement from 14% to 4.9%.

Consistency in reported cancer control outcomes between academic and community hospital settings bodes very well for da Vinci's and DVP's continued expansion within all urology practice segments.

Our GYN platform continues to grow stronger each quarter.

Da Vinci hysterectomy, myomectomy, and sacral [carpal-plexy] have displayed excellent early momentum.

Leading indicators such as training requests, physician case observations, and proctored first cases remain high.

We now estimate that our da Vinci hysterectomy run rate exiting 2006 within our US target market of 250,000 will exceed 2%.

New GYN case volume at our existing da Vinci accounts leads to greater system utilization, which in turn accelerates the need for second system purchases.

This was certainly the case surrounding our strong second system sales in Q3.

We have also seen an increase in the number of women's health initiatives and GYN patient awareness campaigns that prominently featured da Vinci procedures.

Hospitals are beginning to recognize that minimally invasive therapies for complex GYN operations can be a powerful tool for attracting new patients.

We would expect this trend to continue and even accelerate in the future.

The Association of Advanced Gynecological Laparoscopy, or AAGL will be holding their annual conference in Las Vegas from November 7-9.

We are encouraged by the fact that the scientific presentations will feature several that are da Vinci related.

In the general session, the AAGL will be presenting a live da Vinci hysterectomy with parametrial ureteral dissection.

Dr. [Hobie Amergreena] from the Mayo Clinic, will be the operating surgeon.

We will also have a da Vinci system at our booth for surgeon test drives.

Within the area of cardio-thoracic surgery we continue to make progress, specifically with da Vinci mitral value repair and da Vinci revascularization procedures.

Dr. Doug Murphy, chief of cardiac surgery at Atlanta's St. Joseph's Hospital authored a paper entitled "Endoscopic Mitral Valve Surgery", which was published in the October edition of The Journal of Thoracic and Cardiovascular Surgery.

In it, he reported on his retrospective analysis of 127 da Vinci mitral valve patients with varying degrees of mitral valve disease.

In his series, he reported a 95% repair rate versus a 5% replacement rate, which is impressive when you consider that the national average for open surgery is approximately 50/50.

Dr. Murphy attributes a large part of his success to da Vinci, which provides him with improved surgical access, enhanced dexterity, and his ability to see better than he could using traditional technique.

The lateral technique he describes in his peer-reviewed paper, has now made its way into most of our da Vinci mitral valve repair programs.

Da Vinci revascularization has also been refined.

Some of you may have seen the OR Live episode where Dr. Sudhir Srivastava from Odessa, Texas completed a da Vinci LIMA to LAD revascularization procedure.

Dr. Srivastava has developed a technique that includes the use of the Medtronic U-CLIPS during his anastomosis.

The da Vinci U-CLIP combination has simplified the operation immensely while shortening the OR time.

This technique has caught the attention of several leading centers around the world that are evaluating the concept of a hybrid revascularization procedure.

There is a growing population of cardiac specialists, which include both cardiologists and cardiac surgeons, who believe a combination of an MIS LIMA to LAD bypass combined with an intravascular cardiac stetting regime, may provide the patient with the most efficacious MIS coronary revascularization procedures.

At the European Association of Cardiothoracic surgery in September, our booth was especially active with requests for da Vinci test drives as well as information surrounding Dr. Srivastava's revascularization technique.

Although this procedures concept is not new, we are pleased by the growing clinical interest that surrounds it.

That concludes my update.

I'll now turn the time 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 calls, I will first present our forecast for proforma results, excluding the impact of FAS 123R, and then give you our estimate of stock compensation expenses separately.

Based on our recent third 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 50% and 55% over 2005.

We are now targeting our total 2006 revenues to grow between 58% and 60% over 2005.

We expect all 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 48% and 52% above 2005 levels.

We now estimate that system revenue will grow between 57% and 60% above 2005.

As Marshall mentioned, we realized a blended average selling price on systems of $1.12 million during the third quarter, excluding the 4th Arm upgrades.

The impact of upgrade transactions and the sale of refurbished systems caused our average selling price for systems to decrease from earlier quarters this year.

Our ASP has fluctuated in the past and will likely continue to fluctuate in the future quarters due to regional and systems mix.

For the purpose of giving our forecast, we have assumed that the average selling price stays about the same as it was in the third quarter.

Now with regard to our recurring revenues, in our last earnings call, we had forecasted our instrument and accessory revenues to grow between 58% and 62% above our 2005 total.

We are increasing our forecast for this revenue segment to grow between 62% and 64% above 2005.

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

We are now estimating our service and training revenue to grow approximately 55% above 2005 compared with our previous forecast of 48% to 52%.

With regard to gross profit margin, our third quarter gross margin percentage was lower than in previous quarters due to a few factors including a one-time write-off of obsolete instrument inventory, the lower ASPs from upgrade transactions, and finally the addition of fixed costs in our manufacturing and training areas, which we had mentioned in our previous call.

We do not expect additional inventory write-offs this year.

As our revenues increase, we expect to leverage some of the fixed costs additions we made in the third quarter.

As a result, we expect a sequential improvement in gross margin percentage of approximately 1% during the third quarter.

For the year, we expect overall proforma gross margin to be between 67% and 68%.

As a reminder, this excludes the impact of stock option expense.

The FAS 123 stock option expense reduces our reported gross margins for GAAP purposes by approximately 1%.

Moving to operating expense, on our last call, we forecasted proforma 2006 operating expenses to grow between 38% and 42% above 2005.

With just one quarter left in the year, we are able to refine this estimate.

We now expect our proforma 2006 annual operating expense to grow between 40% and 41% above 2005.

Based on the figures I have just reviewed, we expect proforma operating income to increase from third quarter and come in between 34% and 35% of revenues for the year.

EBITDA, excluding the impact of stock option expense is expected to come in between 134 million and 136 million for the year, up from 75 million in 2005.

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

We continue to expect to record total stock compensation expense of approximately $26 million for the year, which is in line with our previous forecast for stock option expense.

Other income expense was 3.1 million in Q3, which was in line with our previous expectations for the third quarter.

We expect modest growth in interest income for the fourth quarter bringing our total other income for the year to approximately $12 million.

With regard to income tax, we expect that our total reported tax rate will fall between 39% and 41% for the year.

Regarding shares outstanding, we currently have approximately 36.9 million common shares outstanding.

We also have approximately 3.6 option and warrant shares outstanding.

Depending upon our average stock price during the fourth quarter, a portion of the 3.6 million option and warrant shares will be added to the fully diluted shares calculation.

To provide you with a range on what the diluted share count for the EPS calculations may be in Q4, a 25% change in our current stock price will result in a diluted share count as low as 38 million or as high as 38.5 million shares.

That concludes our prepared remarks.

We will now open the call to your questions.

+++ q-and-a

(OPERATOR INSTRUCTIONS) Tim Nelson with Piper Jaffray.

Another good one.

The fiscal [indiscernible] was obviously confusing with the upgrade.

Could you go through for us the average upgrade transaction.

How does that look?

How does that shape?

Will you be continuing to do those?

How should we think about that potential in the next couple quarters?

Sure, I'll give you a little more color on that.

We had four customers this past quarter who upgraded their standard da Vinci to da Vinci S. Three of those were in the United States and one was international.

We don't give any specific pricing on the transactions.

We definitely do generate positive margins on the trade-ins.

But it is lower than a sale that is without a trade-in.

So there is a lower gross margin percentage on that even though there are positive gross margin dollars associated with it.

In terms of going forward, we don't have a broad-based trade-in program, but we are going to try to be responsive to our customers' needs.

There may be some more in the future, but probably not that many at this time.

You've got to keep in mind that for someone to trade-in, there is still a price to it.

It is going to be tempered somewhat by the need to upgrade their standard to a da Vinci S at a higher price.

Okay.

So all upgrades forecast is that you took back your four for three Arm systems and generated a little incremental positive margin out of it.

Yes.

What is important to note is that it does not add an incremental system to the install base.

So even though we sold 46 systems, with the four upgrade transactions, only 42 were added to the install base.

How many of the new 42 new systems were gynecologically driven?

It's hard to say exactly.

I think the trend -- in the last quarter, I believe we called out two that were specifically gynecology dominated.

In other words, gynecology oncology stood up and said, get us a system and they were purchased.

What we're seeing now is that the added volume from gynecology operations is bringing the existing system closer to capacity and helps stimulate a second system purchase.

Exactly what percentage or how many is hard to say.

But it's a positive trend that we see going forward.

So they weren't necessarily de novo accounts, which you can identify, that they were buying gynecological systems.

If you install it, it was probably some of those 12 incremental systems that went to existing customers?

Again, if you look at the 12, the second system purchase certainly applies to that.

How heavy gynecology weighed in on the remaining 30 systems is hard to say.

They are definitely a part of the buying decision.

Whether it's a new system for a first system and they are a big contributor of using up excess capacity in the other systems.

On hysterectomy procedures, were there any clinical results, any papers, any general articles that you point to at this point that would highlight how well the da Vinci is doing?

There were three papers that showed up in journals.

But I would not point to them necessarily in the same way that I would point to a Manny Mennen paper on prostatectomy.

They were people that were describing something that they did, but it is not necessarily a seminal, data-driven large series.

When that is going to take place is hard for us to say.

We know there are some lead centers that are collecting data in case reviews.

When that happens, we'll certainly let you know.

I think we are encouraged by the fact that the AAGL has several da Vinci related presentations that will be reported on.

There will be a live da Vinci hysterectomy.

Even though it doesn't show up in the journals, the communications is definitely taking place in that specialty.

You are predicting 2% exit rate, the market share of the 250 target market.

Is that an average rate for the quarter?

The run rate exiting the year [multiple speakers].

September rate or the fourth quarter rate?

The fourth quarter rate.

Any idea how many accounts that would average over?

No.

It's not something that we have at our disposal, but it's a growing number.

Thank you.

Nice quarter.

Mimi Pham with HSBC.

Good afternoon.

The 12 centers that ordered a second, third, or fourth system, do you have visibility into what the utilization was of their first system.

Was it already hitting two cases a week or 100 cases a year before they decided to order their second or multiple system?

It varied a bit.

Consistent with what we've seen in the past, once they start getting close to one per operating day, which is 250 a year, that is when they start seeing pressure on the capacity of the system.

Depending on how much they share the system across different specialties, their capacity is actually lower than if it's dedicated to one specialty.

The third quarter systems seem to be better than your expectations given your comments about third quarter seasonality.

Were some of the third quarter system sales things that you expected to realize in the fourth quarter?

Did the pipeline just come in a little earlier?

Or are those maybe new centers that you didn't see coming your way?

That is always a hard thing to judge.

We've said before that they sales cycle, at least in the United States, has been getting a bit shorter of late.

Maybe it's around six months or so.

We also have some that sell somewhat quickly.

There are some sales that actually happened within the quarter.

You meant some of the sales that you thought would have come in the fourth quarter that occurred in third quarter?

I guess what I mean by that is some sales that are within a three-month lead time.

Lastly, how many da Vinci gynecology proctors do you have today?

How does that compare to how many proctors you have for prostatectomy?

I can say that how it compares is that we have fewer, as you might imagine, because it is not as developed a procedure.

The base is not as high.

I don't have the number.

I don't think it's a number we've ever shared.

I can say that it is a number that is growing.

The demand for their services continues to grow.

But I can't give you a raw number.

Okay.

Thank you very mucy.

Tao Levy with Deutsche Bank.

Just a couple quick questions.

Could you remind us when -- and I am sure I could look it up, but if you have it handy -- when you exited the year at 2% with prostate?

It would have been, as we've said, we were cleared in May 2001.

We exited 2002 at 1% and exited 2003 at 3%.

It would have been some point in there, somewhere in the middle.

So if I do the same math with gynecology, and I think you've said previously that this should ramp-up maybe a little bit quicker than prostate.

Is that what you are modeling or sensing?

I don't know that we've ever said that this should ramp-up any quicker than anything else.

I think what we have taken the time to do is point at some of the differences between the two specialties and why it is difficult to gage one off of the other.

Those being cervical cancer and endometrial cancer and benign conditions have different patterns for the patient to do their evaluation than does prostatectomy.

There is a gynecologist that is, in many cases, a primary care giver for the woman.

It is a number of different things to consider.

I don't think we're trying to set the expectation that one should mimic the other.

We don't have enough reason to think that's the case.

Okay, but also that could not, not happen.

Exactly.

We just can't tell you at this stage.

The adoption curves -- there are a lot of things that go into them.

They do have different slopes.

Almost every procedure we track has a bit different slope.

How sustainable that slope is when you are early,early in the data points is a little hard to -- the confidence level is not as high.

We do try to track them and compare them and try to anticipate that in terms of our planning, both for staff and how we support the procedure.

I think the purchase by Penn sounds like it's probably one of the more exciting things in the quarter.

How does that go about -- is that something that you feel could start to happen in other regions where you can develop a center of excellence with three, four, five, maybe six different systems?

In terms of the -- how many systems will ultimately be in a center of excellence, we're not really, I think, in a position to say what that might look like.

If you think of 10 centers today that have three or more, I think it is easy to come to a conclusion that that is already taking place in some form.

Penn is a very preeminent center that has very strong opinions and plans to make a super center that will include all the specialties that we are currently in.

They have the staff for it.

They have a chairman of the department of surgery who has the vision as do they have the support with all the other services required.

We are pleased.

I don't know that we are projecting anything that looks exactly like Penn anywhere else.

I think that the consolidation will lead to centers like this.

The last question is on a little bit of clarity on the upgrade, just so I understand.

Basically there are extra systems that were out.

What did you say -- four?

Yes, four systems that were bought back and then resold in the quarter.

Is that that easy way to look at it?

We sold three refurbished systems during the quarter.

Three sales of those five standard da Vinci's that we had in the quarter were refurbished systems.

They were systems that we had taken back from customers.

We refurbished them and then resold them.

So essentially three out of the four, if you want to look at it that way were sold in the quarter -- or resold in the quarter.

The one left?

That will probably resell too.

That is an in-house [multiple speakers].

If I look at the ASP that you are talking about for the fourth quarter staying roughly where it was in the third quarter -- and again the third quarter was impacted by these sales.

Should we think that is going to happen in the quarter?

Is there any reason why we shouldn't be trending up again?

There are a lot of things that impact the ASP.

If you go back over the last seven or eight quarters, you would see that our ASP will move around based on [indiscernible] system, product mix, and regional mix.

There are a bunch of factors in there.

Rather than us trying to come up with something at this point without enough visibility, we thought it would be simplest to assume a similar ASP that we've seen before to give our projections.

Just lastly.

The gross margin on one of these refurbished systems roughly?

Before, I think the new system is in the 60%, 65% range.

Is this half of that?

The gross margin dollars are going to be smaller.

In fact, the percentage is not materially different because the cost is also lower.

Perfect.

Thanks a lot.

Great quarter.

Michael Matson with Wachovia.

This Vincent.

I'm on the call for Mike.

Two quick questions.

One, on your driving procedures, I think you've said hysterectomy is growing faster than prostatectomy.

Is that correct?

That is correct.

We actually said that last quarter as well.

That's what I thought.

You had listed three other procedures that were starting to gain some traction behind that.

I think you said one was myomectomy.

One was pyeloplasty.

What was the third one?

Actually, no.

Within the GYN space, the three procedures that I mentioned were da Vinci hysterectomy, myomectomy, and sacral carpal-plexy, which is a suspension procedure [multiple speakers].

What about in cardiology.

What do we see in terms of traction?

The two procedures that we talk about and we continue talk about, are developing a little bit more each quarter.

That is mitral valve repair and revascularization.

As I touched on in the call, you are seeing more information that is available in both areas.

There seem to be refinements that are going on from the clinical side, that are creating some new interest in these operations.

We continue to move the ball forward.

It's a different slope.

It's a different challenge and it's a much more difficult procedure.

Definitely.

Which leads me to a question that came from our channel checks.

As opposed to prostatectomy, or urology I should say, there seems to be a concern that there is not as much training time for cardio-thoracic because a lot of these training programs that are done at ECU and whatnot are two-day programs and these procedures take a lot longer to get down, as opposed to say bariatric surgery, which takes five procedures and you seem to be ready to go.

How do you see attacking that problem?

Is having a center of excellence like Penn a solution to that?

Or do you have a plan towards that?

I think what you touch on is that each procedure is going to look a little bit different and so too will its training path.

If you think of cardio-thoracic procedures -- and you mentioned one program that is out there, I think it is misleading for you to think of them as ending at that point.

There is a proctor network.

There are observations that continue to go on.

There is typically more cadaver and animal work that goes on.

But you are outlining a fact, which is that cardiac procedures are more complex and will require a more complex training pathway.

We think we will continue to evolve it.

We've done, I think, a good job thus far.

But we've got room to go.

Whereas certain procedures within, let's say, gynecology -- or let's say all gynecology procedures already bring with it a surgeon that is trained laparoscopically.

There is a lot of discussion now about the training readiness for a da Vinci surgeon that came through a gynecologic training program because of their initial skills going in.

Each one is going to look different.

We think we've got a good handle on them.

But we will continue to evolve them.

Okay, great.

I have a quick question for you as well.

Just on the bariatric surgery area, I haven't heard a lot of comments on that.

Is there any kind of an update you can give us?

It's a procedure that we think da Vinci brings a lot of value to.

It has been reported at that the recent American College of Surgery conference there was a fair amount of discussion around da Vinci gastric bypass, especially around the double-layer sutured anastomosis rather than stapled anastomosis.

At the International Society of Robotic Surgery, which proceeded ACS, there was a fair amount of discussion there.

There is interest.

The procedure has been growing for some time.

We think that we bring a lot of value.

It is just on a different slope.

Perhaps it is because there is a lot of laparoscopy already infiltrated in that specialty and it is going to move a little slower pace.

Okay, that's helpful.

Thanks.

We'll take one more question, please.

Thank you.

Rick Wise with Bear Sterns.

Good afternoon everybody.

A couple things.

If I am doing my back-of-the-envelop math correctly, Ben, you are suggesting that the system sales for the year could be in the 196 to 200 million range, if I am doing the up 57% to up 60% for the year, which implies a fourth quarter in the 53 million to 57 million range for system sales, i.e., at the low end -- flat sequentially to up nicely, but maybe one could say modestly given the strong sequential growth we've seen throughout the year.

Why are you so cautious?

Or maybe help us understand what the variables are that are going into your thinking, other than your normal conservative, thoughtful approach.

That's the answer.

I didn't ask you, Lonnie.

I was asking Ben.

To be honest, we are giving it our best shot in terms of our forecast.

Today this is our forecast.

You know we don't go into any quarter with a backlog on systems.

We've said in the past, this is our hardest category to forecast.

From our perspective, we think this is what we can deliver.

So that is our best guess.

Ben told me last week that Lonnie was going to tell what you are going to do with the cash and that Aleks was going to break down the growth rate by procedure for your recurring revenues.

Any chance of either one?

The categories for percentage of procedures -- the ranking hasn't changed.

It's still urology, followed by gynecology and cardio-thoracic and general surgery.

As far as the individual growth rates, we haven't published that.

Relative to the market cap, the cash isn't that much.

Frankly we'd like to maintain the flexibility that we have.

I feel like I have to ask it every quarter.

We want to be in a position, if there is a strategic opportunity that really makes sense and fits with what we're doing that we can -- we have the means and resources to take advantage of that.

It's not burning a hole in our pocket.

We'll continue to build it.

Especially when you've built a company from scratch and you've been living on other people's money, it's nice to have some of your own.

Just a last question.

I am not quite sure how to approach it.

On the one hand, it's fabulous to hear that hospitals are buying a third and fourth system.

I think it's a real testament to the commitment and what you are doing.

On the other hand, it's 29% of the units you sold this quarter were to repeat customers.

Should we think -- do you anticipate that -- I guess two questions.

One, most hospitals are going to end up with three or four.

Should that be our thought process?

Should we be concerned at all -- and I don't want to say this in a negative way -- but that we're not seeing more new customers with new units, greenfield customers as part of the mix.

I think that's a good question.

I think what happens -- is happening, is that hospitals have bought a system.

There are lots of people out there who say, it's really expensive and how do we make a return on investment?

The hospitals that have made the investment and are having an excellent return on it, both in terms of incremental patients, in terms of the outcomes of their patients -- better outcomes, shorter length of stay, and all that.

Then they have the confidence and the willingness to invest in a second system.

So, those that have got out front and are having good experiences with it are going to drive ahead and also see it as an opportunity to preempt the market.

We will see that.

I think we will continue to see -- the option curve is all about people with various profiles in terms of when they are ready to take a step into new technology.

I think we'll see both.

I think for us, it's a very good thing and sends a signal to the market, to those that have not invested yet, that they ought to be thinking about it.

The question that was asked earlier on the systems -- we don't have total visibility.

In fact, we know the ones we're working on.

What we don't know is those hospitals out there that are already budgeting that we may not even be aware of, that are planning to buy a system for the first time.

All of a sudden they emerge and sometimes they are a lot further down the path than we thought because they have been anticipating this move or some surgeons has gotten highly inspired, primarily because they have lost business, to get involved.

It will be a combination.

Adoption of a disruptive technology like this is not a very clean process.

It tends to be a lot of things going on at the same time.

What we've got to do is be flexible enough and smart enough to respond to that.

I would be remiss not to put this out as a reminder.

There were 30 new stores that opened this quarter as well.

So you add 12, which is 29%, but 71% we're in those new greenfields.

I guess in some ways, you are damned if you do; you are damned if you don't.

We like the mix and we like the greenfields that are still out there.

We want those hospitals to have a great experience and want to buy a second system.

That sends -- that is a huge reference for us.

That's a very helpful perspective.

Thanks so much.

Thank you.

That is our last question for today.

In summary, during the third quarter, total revenue grew to 96 million, up 57% from the prior year.

Recurring revenue grew to 43 million comprising 45% of total revenue.

We shipped 46 da Vinci surgical systems, 42 net of upgrades, ending the third quarter with 509 systems installed worldwide.

Our net income for the quarter, before non-cash 123R option expense, was 22 million, or $0.57 per share, up 59% using a full tax rate for both years.

EBITDA for the quarter grew to 35 million or 37% of revenue.

We ended the quarter with 292 million in cash and investments, up 48 million from the last quarter and 90 million year-to-date.

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

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

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

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

We strive to exceed out customers' expectations everyday.

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

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

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

We are focused on the vital few things that will truly make a difference and building a results driven culture in which we measure ourselves by our accomplishments.

We're dedicated to taking surgery beyond the limit of the human hand and are committed to being better today than we were yesterday and better tomorrow than we are today.

That concludes today's call.

We thank you for joining us.

We'll talk to you again in three months.

Thank you.

Thank you.

This concludes today's teleconference.

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