直覺手術 (ISRG) 2006 Q4 法說會逐字稿

[OPERATOR INSTRUCTIONS] I'd like to turn the call over to Sarah Norton.

Ma'am, you may begin.

Good afternoon, and welcome to Intuitive Surgical's four 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 Aleks Cukic, our Vice President of Business Development and Strategic Planning.

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

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

These risks and uncertainties are described in the detail in the company's Securities and Exchange Commissions filings.

Respective Investors are cautioned not to place undue reliance on such forward-looking statements.

Please note that this conference call will be available for audio replay on our website at www.intuitivesurgical.com on the audio archive section under our investor relations page.

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

Today's format will consist of providing you with highlights of our fourth quarter as described in our press release announced earlier today followed by question-and-answer session.

First, Lonnie will present the quarter's business highlights, Marshall will follow with a review of fourth quarter financial results, next, Aleks will discuss sales and marketing highlights, then Ben will provide our financial forecast for 2007 and finally we will host a question-and-answer session.

With that, I would like to introduce Lonnie Smith, our President and CEO.

Thank you for joining us today.

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

We continue to drive the adoption curve for robotically assisted surgery, delivered strong top line and bottom line growth.

Highlights for the fourth quarter are as follows.

We sold 50 da Vinci Surgical Systems, up from 40 during the fourth quarter of last year. 39 of the 50 systems were in the United States.

We entered the fourth quarter with 559 da Vinci Surgical Systems installed worldwide.

Total revenue grew to $113 million, up 56% from last year, recurring revenue grew to $50 million, up 61% from the prior year comprising 44% of total revenue.

We generated an operating profit of $42 million, 37.5% of revenue, before noncash 123(R) stock option expense.

Up 80% from the fourth quarter of last year.

EBITDA for the quarter grew to $45 million from $25 million in the fourth quarter of 2005.

For the full year, we sold 170 da Vinci Surgical Systems, up 48% from last year.

Total revenue grew to $337 million up 64% from last year.

Recurring revenue grew $167 million, up 62% from the prior year, comprising 45% of total revenue.

We generated $133 million in operating profit, 35.6% of revenue before noncash 123(R) stock option expense, up 93% from last year.

EBITDA grew to approximately $142 million from $75 million last year.

We ended the year with $330 million in cash and investments.

Up from $203 million last year, and $292 million last quarter.

One last footnote on our financials.

It appear that is the new accounting treatment for stock option and tax expense has made alchemists of us all.

Under the new accounting rules we reported $72 million in GAAP net income for 2006.

We generated $127 million in cash.

After funding, nearly $50 million in working capital and property plant and equipment, the support 64% revenue growth.

Our net cash flow for the year was 176% of our GAAP net income.

From my point of view, it appears the GAAP accounting rules now do more to obscure than to reflect actual economic performance.

Some of our operating accomplishments in 2006 include: we drove strong procedure growth in every surgical specialty that we serve with exceptional growth in gynecology.

We successfully launched the new da Vinci S Surgical System, which has become the new standard in less than a year, accounting for 87% of the 170 systems sold in 2006, and 94% of the 50 systems sold in the fourth quarter.

Procedure growth drove new systems sales worldwide.

Strong clinical benefits and patient demand drove multiple system sales in a number of current da Vinci Medical Centers, Aleks will discuss this in more detail later.

Some of the new instruments launched during the year include the Gyrus PK Dissector, atrial retractor, tenaculum, 5mm for the da Vinci S and the Mega Needle driver.

We completed the development of a new 3D high-definition vision system for da Vinci S which was introduced at STS earlier this week.

We completed our customer training center, a new service support facility and the move of a significant part of our corporate organization to our new 1266 Kifer facilities.

We grew our worldwide field sales service and training team to 205 from 143 at the end of 2005.

Our Intuitive team ended the year 563 strong, compared to 419 at the end of 2005.

We successfully took our new SAP ERP system live with minimal operational disruption.

We strengthened our executive team with the addition of several new executives to our management team.

In the spirit of real-time information, Rick Epstein joined us yesterday as our new Senior VP of Marketing.

Rick is an insightful and seasoned executive and an excellent fit with our values and our culture, and has over 15 years of executive leadership experience.

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

Thank you, Lonnie.

Total fourth quarter revenue increased to $112.6 million, up 56% from $72.1 million for the fourth quarter of 2005 and up 17% from the $95.8 million for the third quarter 2006.

Fourth quarter revenues by product category were as follows.

Instrument and accessory revenue increased to $33.3 million, up 62% compared with $20.6 million last year and 15% compared with $29 million last quarter.

Instrument and accessory revenue growth is the direct result of increased procedure adoption.

We experienced growth in all of our targeted procedures during 2006. da Vinci prostatectomy procedures grew worldwide by over 75% in 2006 and represented over half of our 2006 procedure count.

da Vinci hysterectomy is our second largest and fastest-growing procedure.

Overall, procedures grew by a greater percentage than instruments and accessory revenue, reflecting the fact that initial instrument and accessory purchases for newly installed system were stocking orders are a smaller percentage of overall instrument and accessory revenue.

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

While total instrument and accessory revenue procedure continues to be between $2,000 and $2,500 per procedure reflecting stocking orders.

Systems revenue increased to $62.9 million, up 52.5% compared with 41.3% last year, and up 20% compared with $52.4 million last quarter.

The sequential increase in systems revenue reflects an increase in the number of systems sold, an increase in the average revenue per system and an increase in the number of 4th Arm upgrades sold.

Fourth quarter da Vinci Surgical System revenue reflects the sale of 50 compared to a net of 42 systems sold in the third quarter and 40 systems sold during the fourth quarter of last year.

47 of the 50 systems sold during the quarter was S models.

One was a four arm standard system and two were 3 Arm standard systems. 16 of the systems sold were to repeat customers compared to 12 systems sold to repeat customers in the previous quarter.

With believe that repeat sales are an indication of increased da Vinci adoption and that repeat customers represent a significant element of our potential market opportunity.

Two of the standard systems sold during the fourth quarter represented refurbished units compared to three in the previous quarter.

There were no trade-in transactions in the fourth quarter.

Our fourth quarter average revenue per system including all da Vinci models, but excluding fourth arm upgrades was $1.2 million, which is 80,000 more than the average revenue per system of the third quarter of 2006.

The higher average revenue per system primarily reflects the upgrade transactions completed in the third quarter.

We sold 15 4th Arm upgrades compared to three in the previous quarter.

The average revenue for a 4th Arm upgrade is approximately $175,000.

Service and training revenue increased to $16.3 million, up 60% compared with $10.2 million last year and up 13% compared with $14.4 million last quarter.

The growth and service and training revenue is primarily driven by a larger system install base, as well as higher annual contract prices associated with da Vinci S Systems.

Total fourth quarter recurring revenue comprised of instrument, accessory, service and training revenue increased to $49.6 million, up 61% compared with fourth quarter of 2005 and up 14% compared with the third quarter of 2006.

Recurring revenue represented 44% total fourth quarter revenue.

During the first quarter of 2006 in accordance with statement of financial standards number 123(R), we began to record stock compensation expense for the estimated value of employee stock options and stock purchases.

The resulting fourth quarter stock compensation expense was $6.8 million, compared with $7 million in the third quarter. $1 million of the current quarter expense was charged to cost of sales and $5.8 million was charged operating expense.

Stock compensation expense recorded to date is entirely noncash in nature.

In addition to our income statement prepared in accordance with generally accepted accounting principles, we provide nonGAAP information in the form of pro forma income information that excludes the impact of stock option expenses as well as EBITDA data.

We believe the pro forma income statement information and EBITDA data enhances the user's 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 pro forma fourth quarter 2006 gross margin of 67.5% was higher than 66% realized in the third quarter.

Our fourth quarter gross margin improved compared to the third quarter primarily due to the impact of upgrades completed in the third quarter and the $700,000 of inventory charges recorded in the third quarter.

Total pro forma operating expenses for the fourth quarter of 2006 were $33.7 million, up 10% compared with the third quarter of 2006.

The increase reflects increased head count and direct selling costs associated with higher sales volumes.

We added 42 employees during the fourth quarter, ending the period with 563 regular employees.

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

Also, given our growth overseas, we're in the process of moving our international headquarters from France to Switzerland.

In conjunction with that move, we're implementing a tax structure that we believe will reduce our global income tax rate to the mid 30% over time.

However, the benefit of these lower tax rates will not be realized in our P&L for at least another year.

A majority of the costs associated with these moves and structuring activities will be incurred in the first half of 2007.

Fourth quarter 2006 pro forma operating income was $42.2 million or 37.5% of sales compared with $32.6 million or 34% of sales for the third quarter of 2006.

On a GAAP basis, including the $6.8 million of compensation expense, fourth quarter, 2006 operating income was $35.4 million or 31.5% of sales.

Our fourth quarter 2006 other income of $4.2 million increased compared with $3.1 million in the third quarter of 2006.

The increase is primarily the result of higher interest rates earned on greater cash and investment balance.

Our effective pro forma tax rate for the fourth quarter was 39.5%, which is consistent with the rate we recorded in previous quarters.

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 5%.

Our pro forma net income on a fully taxed basis was $28.1 million or $0.73 per share, compared with $21.7 million or $0.57 per share for the third quarter of 2006.

Our GAAP net income fully taxed and including stock compensation expense was $23.6 million or $0.62 per share compared with $17.3 million or $0.45 per share for the third quarter of 2006.

Let me quickly summarize our results for 2006.

Total revenue for 2006 was $372.7 million, up 64% compared with $227.3 million last year.

Pro forma operating income for 2006 was $132.6 million, up 93% compared with $68.8 million last year.

Pro forma net income for 2006 was $88.3 million or $2.32 per share, down 8% compared with $94.1 million or $2.51 per share last year.

Note that the results for 2005 included a one-time benefit of $22.2 million to recognize certain deferred tax assets and that this year's pro forma results include a full tax rate.

Now turning your attention to the balance sheet.

We ended the fourth quarter of 2006 with cash, cash equivalents and investments of $330.3 million up $38 million from the previous quarter end.

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

EBITDA excluding stock option expense was $45.1 million for the fourth quarter and $142.4 million for the year.

Our accounts receivable balance increased to $94.7 million at December 31st, 2006, from $71.7 million at September 30, 2006.

Accounts receivable continue to fluctuate with the timing of systems revenue while we continue to realize good collection results.

Our net inventory increased to $24.3 million at December 31st, 2006, from $22.3 million at September 30, 2006.

Our inventory turns at December 31, 2006, of six times per year exceeded the 5.8 turns at the end of the previous quarter.

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

Thank you, Marshall.

During the fourth quarter, we shipped 50 da Vinci systems, 47 of the 50 total systems shipments were da Vinci S systems.

One was a standard 4 Arm da Vinci Systems and two were standard 3 Arm da Vinci Systems. 39 systems were placed in the U.S., six into Europe and five in rest of world markets.

There were zero trade-ins during the quarter.

The 50 systems sold during the quarter brings to 559 the cumulative number of da Vinci Systems worldwide. 429 in North America, 92 in Europe and 38 in rest of world markets. 16 of the 50 systems sold during the quarter were sold as second, third, fourth, or fifth system sales.

Good Samaritan hospital in Cincinnati, Ohio, purchased their third, fourth, and fifth da Vinci System during the quarter.

Establishing it as the first hospital with five da Vinci systems.

The [inaudible] Clinic in New Orleans, and the University of California, San Diego, both purchased their second and third da Vinci Systems.

And Henry Ford Hospital in Detroit purchased their third system.

These centers have laid out plans to become major multispecialty robotic centers on a regional level with programs in your urology, GYN, cardiothoracic and general surgery.

Outside the U.S., we had an excellent quarter, with 11 systems shipped, which included our second da Vinci to Young State Hospital in Seoul, Korea, our fifth system into Taiwan, and our third into china.

Clinically, we had another strong quarter with excellent sequential procedure growth both U.S. and internationally.

We participated in several key conferences and had 47 da Vinci related clinical papers published in various peer reviewed journals.

Of the conferences in which we participated, four were devoted exclusively to robotic surgery.

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

Growth in procedure volume is a key driver for multiple da Vinci System placements.

And in the past few quarters, we've seen this trend expand.

Particularly so in Q4.

We've always believed that multiple da Vinci placements would be key to the success of our long-term business model and we are pleased with the rate at which it is taking place.

Within urology, there were three conferences devoted solely to robotic: The International Robotic Urology Symposium, or IRIS, [inaudible] in Spain, and the U.K.

Robotic Urology Symposium in London.

IRIS, which took place in Detroit, featured several live da Vinci prostatectomies, a nephrectomy and for the first ever a broadcast of da Vinci extended pyelothotomy procedure performed for failed percutaneous nephrectomy.

In Barcelona, Spain, 750 urologists attended the 51st urology course at [inaudible] which has the largest urologic case volume of any hospital in Spain.

Attendees were primarily from Europe, Asia, and Latin America.

The course was devoted exclusively to robotic surgery and included six live 3D da Vinci broadcasts.

In addition to the three live DVPs, the audience observed a da Vinci pelvic lymph node dissection for testicular cancer, a pelvic -- da Vinci -- and a da Vinci pyeloplasty and a da Vinci extended pyelothotomy.

At the U.K. robotic symposium sponsored by Guise Hospital, participants reviewed several DVP presentations, as well as da Vinci nephrectomy, cystectomy, pyeloplasty and pyelothotomy.

The repeating theme we have here is that Urologic societies and symposia are expanding on a global scale.

The programs are very well attended, full of quality content and the procedure presentations are beginning to expand beyond just da Vinci prostatectomy.

Procedurally, global growth of DVP continues to be strong and the pull-through of other urologic applications is increasing.

And within the U.S., we are pleased to report that exiting 2006, we achieved our objective of capturing at least 35% of the estimated 90,000 prostatectomies.

Earlier, I noted that 47 da Vinci related papers were published in peer-reviewed journals during the quarter.

However, what might be the most significant paper published this quarter at least in our view, was not among these 47.

The paper I'm referring to appeared in December's edition of the "Gold Journal of Urology" and never directly referenced da Vinci.

Dr. Ash Tewari from Cornell University Hospital in New York, along with a group from Henry Ford Hospital in Detroit, published a study comparing the long-term survival rates for prostate cancer patients undergoing radical prostatectomy, radio therapy and conservative therapy also known as watchful waiting.

The study looked at 3,159 patients with a biopsy confirmed localized prostate cancer.

The groups were adjusted for age, race, tumor grade, co-morbid disease, income status and year of diagnosis.

The overall survival rate at 15 years was reported as follows.

Conservative therapy, 35%.

Radiotherapy, 50%, and for radical prostatectomy, 65%.

The corresponding prostate-specific cancer related survival rates were 79%, 87%, and 92% respectively.

The increase in survival duration for radiotherapy over conservative management was reported to be 4.6 years.

The increase in survival duration for radical prostatectomy over conservative management, 8.6 years.

This is significant.

Several of our customers have reported large shifts of their practice away from radiotherapy toward DVP.

The magnitude is difficult to quantify and will always be difficult to quantify but with healthcare trends supporting earlier diagnosis, we believe it will continue.

As I noted earlier, da Vinci hysterectomy was again the fastest-growing procedure and GYN was our fastest-growing surgical specialty.

Earlier in the year we estimated our da Vinci hysterectomy run rate in the U.S. exiting 2006 would exceed 2% of our estimated target market, 250,000 patients.

I'm pleased to report that we achieved this objective.

At the recent AAGL meeting in Las Vegas, attended by over 3,500 clinicians, da Vinci GYN procedures reports were featured frequently.

There were da Vinci presentations in several scientific stations including the general program and AAGL robotic tutorial and AAGL dinner symposium, as well as a live DVH broadcast.

These sessions were very well attended while our da Vinci test drive schedule, full.

Better visualization leading to more precise dissection, reduced blood loss and quicker recovery were the common themes through the the scientific presentations.

The procedure topics within these sessions included DVH, da Vinci [inaudible] and da Vinci myomectomy.

Dr.Javier Magrina from the Mayo Clinic performed a live da Vinci hysterectomy with a perimetral uritral dissection for early-stage cervical cancer, which is broadcast into the general session.

This is only the second time we've attended an AAGL conference with a da Vinci system.

So we don't have a lot to compare it to.

But with all of the AAGL-sponsored robotic presentations and activity at this year's program, it's safe to say the AAGL has begun to embrace robotics.

Next month, we will take part in a society of gynecologic oncology annual conference which will take place in San Diego.

The members the SGO represent the strongest GYN target profile so we would expect this to be a strong conference for us.

Our cardiac business continues to expand.

We had a strong quarter procedurally as well as a good showing at the society of thoracic surgery or STS conference which took place in San Diego earlier this week.

The focus of the robotic discussions continues to be da Vinci mitral valve repair and da Vinci revascularization procedures.

The da Vinci test drive schedule and booth traffic was busier than in years past.

The demand da Vinci products and procedure training continues to be strong which serves as a good leading indicator to the strength of the business.

In Q1 we began offering for sale the da Vinci 3D high definition vision system.

We believe this to be the medical industry's first commercially available 3DHD vision system.

The new 3DHD system will acquire and display an image with approximately twice the pixel count as the current system.

We've always believed that improved visualization leads to improved surgical outcomes and with that as our objective, we set out to improve upon an already exceptional vision system.

All da Vinci S Systems are upgradable to the new da Vinci 3DHD systems.

In all future customers will have the option of purchasing it as part of their da Vinci S System or upgrading to it at a later time.

The new 3DHD vision system upgrade will have a list price of $120,000, Ben will provide you with the forward-looking assumptions as it pertains to this exciting new product offering.

This concludes my update, and I'll now turn the time over the Ben.

Thank you, Aleks.

As previously mentioned, we recorded excellent financial results in 2006 and we expect to carry this momentum into 2007.

I will now provide our guidance for the full year 2007 financial results and provide additional comments on our first quarter.

Beginning with 2007, we will provide our guidance on a GAAP reporting basis including stock compensation expenses and we will provide our comparisons to our prior periods also on a GAAP basis.

In addition, we will provide an estimate of the stock compensation expenses separately.

So you can calculate meaningful comparisons that exclude these noncash expenses.

Starting with revenue, we expect significant growth driven by the continued adoption of da Vinci surgical procedures.

The largest impact to our growth in 2007 will continue to come from da Vinci prostatectomy and da Vinci hysterectomy.

In 2007, we expect DVP procedures to grow at least 50% worldwide and we expect DVH procedures to grow at least 150% worldwide.

Our instrument and accessory revenues, which correlate with procedures performed, are expected to grow between 50% and 55% above our 2006 total.

We expect this growth to result from procedures performed on new system placements as well as increased utilization of existing installed systems.

System utilization has steadily increased and currently averages between two and three procedures per system per week across the installed base.

We expect year-over-year systems revenue growth of 20% to 25%.

System sales are also driven by procedure adoption, however, our growth and system placements is somewhat tempered by our expectation that system utilization across the installed base will also increase.

Overall, we expect higher unit sales while realizing a modest increase in average sales price due to the introduction of the 3DHD vision system.

On average, we expect system ASPs for the year to be approximately $1.2 million, and will vary between $1.15 million and $1.25 million on a quarterly basis.

As a reminder, our system includes all da Vinci system sales but excludes 4th Arm upgrade sales.

Our service revenues continue to build from our growth and system placement.

And modestly higher average annual fees from service contracts.

As a result, we expect service revenues to grow approximately 45% above 2006 levels.

Overall, we expect our total 2007 revenues to grow approximately 35% over 2006, which would bring us to approximately $500 million in revenues.

We expect Q1 revenues to come in slightly lower than Q4, 2006, revenues, then grow sequentially each quarter throughout 2007.

With regard to gross profit margin, we expect a small decline in gross margin percentage in the early part of the year, related to the introduction of the 3DHD vision system.

Our initial purchases of HD product are at higher cost and therefore our initial sales of HD systems will be at lower margin.

As a result, we expect gross margins to decrease sequentially in Q1 by 1% to 1.5% points from Q4 2006.

By the end of the year, we expect our costs on HD components to decrease and our gross margins should recover back to similar levels as we saw in Q4 2006.

For the year, we expect average gross margin to be between 65% and 66%.

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

Without the FAS123 stock option expense, our gross margins of 2007 higher by approximately 1% point.

Moving to operating expense, we plan to increase our annual operating expenses by 32% to 36% over 2006.

This includes certain expenses which are worth pointing out.

As Marshall mentioned earlier, we have initiated moving our international sales office to Switzerland and implementing a tax strategy designed to reduce our income tax rate from 40% in 2007 to the mid 30% over the following several years.

We expect to incur approximately $2 million in expense-related to these activities.

We also expect to record approximately $30 million in the operating expense line for noncash FAS123(R) stock compensation expense in 2007 as compared with $21.4 million in 2006.

Finally, we expect to incur higher legal expenses in the area of intellectual property protection.

For the year, we expect operating expense as a percent of revenue to be between 37% and 38% of revenue which is similar to what it was in 2006.

However, in the first quarter, we expect it to be between 39% and 40% of revenue due to the nature of the expenses I just mentioned.

For example, most of the $2 million expense related to the international office move and the implementation of the tax strategy will occur in the first quarter.

Also, we expect to record approximately $6.8 million in the operating expense line for stock option expense in the first quarter.

Which is up from approximately $5.8 million in Q4, 2006.

EBITDA, which excludes the impact of stock option expense, is expected to come in between $185 and $195 million for the year.

Up from $142 million in 2006.

We expect to report total 123(R) noncash stock compensation expense of approximately $36 million in 2007, $6 million which of will be recorded in the cost of goods sold line and $30 million in the operating expense line.

As compared with a total of $25 million in 2006.

Other income and expense, which is mainly comprised of interest income will grow during 2007 as our cash and investment balances increase.

We are earning approximately 5% on our cash balances and we expect interest income for the year to come in the between $19 million and $20 million.

With regard to income tax, we expect that our recorded tax rate will remain at about 40% for the year, while our effective cash tax expense will be less than 20%.

Regarding shares outstanding, we currently of $37.1 million common shares outstanding.

We also have approximately $3.5 million option and warrant share outstanding.

Depending upon the average stock price during the first quarter, a portion of the $3.5 million option and warrant shares will be added to the fully diluted shares calculation.

The calculating EPS in Q1 we expect the share count to be between 38.3 million and 38.7 million shares.

That concludes our prepared remarks.

We will now open the call to your questions.

[OPERATOR INSTRUCTIONS] First question comes from Mimi Pham, your line is open, state your affiliation, please.

Hi, HSBC.

On your high definition system upgrades, the 150 or so households that have the da Vinci S, can they immediately upgrade to the system during the first quarter?

The answer is anybody with a da Vinci S can upgrade to an HD vision system.

Will they all upgrade in the first quarter?

Probably not.

As you might imagine, there is a capital expenditure involved so that over time, we may expect some upgrades but it will probably happen over a period of time.

For those that don't have -- sorry.

Resources at this point in time, HD systems, we could not if they all wanted to be upgraded today, we could not do so.

So anyone who has one of your older systems, which is the rest of the 150 out there, they can't, they don't have high D unless they do a trade-in program or some sort of trade-in?

Yes, that's a good clarification.

The standard da Vinci system is not upgradable to HD, only the da Vinci S is upgradable to HD.

And on the gynecology side or for hysterectomies the 1,000 or so procedures you did, da Vinci hysterectomy procedures you did during the quarter, can you give us a breakout, what percent was for cancer and what percent was for complex benign procedures?

It's very difficult for us to get that data, that specifically.

What we are trying to get better information on is the surgeons who were GYN oncologists versus GYN surgeons.

We're getting better information on that but we don't have a very clear view of that.

So, as you remember, GYN oncologists do some operations which are not for cancer, they do some that are benign, but I would say that for general matter the GYN oncologists is our primary target market and there are procedures in both the oncologic, as well as nononcologic that have been done.

And last question, on your guidance for systems, I guess it translates to over north of 200 system sales, should we be thinking about it in terms of 30 to 35 new accounts per quarter and then the balance coming from hospitals that want to order multiple system?

It's a good question, Mimi.

I'm not sure what mix of new placements versus repeat sales will have.

Certainly there's been a trend of having quite a few repeat sales, which we're excited about and we'll continue to see those.

But I think we'll definitely continue to see accommodation of new placements and repeat sales.

Okay.

Thank you very much.

Our next question will come from Tao Levy, your line is open, state your affiliation.

Yes, Deutsche Bank.

Thank you very much for taking the questions.

A couple of quick with.

Any reason you guys lost so many fourth arm upgrades this quarter?

Yes.

The truth is, we think everybody who has the three arm system would benefit from having a fourth arm upgrade.

In fact, a lot of the procedures like DVP and DVH significantly from the fourth arm.

But honestly speaking, we think that just due to the fourth quarter being typically a high capital quarter for us, it translated into those higher number of fourth arm sales.

And, Tao, I think as time goes on, your surgeons with 3 Arm systems are seeing more and more presentations and reports of the value of the fourth arm and I think it's just taken some accounts longer to see that and accommodation of it being a fourth quarter probably set out well for us.

Okay, great.

And I noticed that when you start your steering away from, or maybe just forgot to provide sort of some an outlook on the penetration and process robotic prostatectomies and hysterectomies, like you've done in the past.

But if I do the math and I use the same numbers that you guys have used in the past, basically means about 5% penetration in hysterectomy and about 50% prostatectomy assuming, using the same denominators that you used to use in the past, is that right?

Tao, what we've looked at is and it's our belief that a number that's probably more representative of the business is a number that expands beyond just the U.S.

And secondly, when you look at, for example prostatectomy there is a lot of shifting that's going on between the different categories of of watchful waiting, radiotherapy, prostatectomy and so rather than trying to take a number and fix it and base a number off of a U.S. number, we thought it was, was probably more appropriate to give you an overall growth rate that represented bodies U.S. and overseas.

Okay.

And so, and I think and that's what we attempted to do there.

So it's just becomes more difficult to balance that number over time.

Great.

And this last question, any as we look at 2007, any big upcoming milestones, data releases, important papers, like the one from Dr. Tewari in December?

Anything of that nature we should pay attention to as the year progresses?

Again, some of those things are outside of our control and as you know, the process, there's a manuscript that's written, submitted, it's reviewed.

And sometimes we don't, I mean we really don't know until it actually hits the wire.

But then there are times when we know that people are collecting data and we would expect something in time.

So I think in '07, we are aware of people that are doing work within the gynecologic area, some series that are starting to get more substantive.

DVP, I mean, there's just a constant flow, every quarter, in DVP.

And there's a nice flow in cardiac.

So, as far as any milestone papers, I can't point you to a month or to a number and tell you what it's going to look like.

But we would expect more in those areas in '07.

Great.

Thanks a lot, very good quarter.

Thanks.

The next question will come from Timothy Nelson, your line is open, state your affiliation, sir.

Piper Jaffray.

Nice quarter, guys.

Lonnie, you mentioned that you couldn't supply, might be a little bit so I can train on the high definition vision systems.

Demand for all installed Ss and they were all instantaneous and they all wanted upgrade, how long would it take you to do it?

Well, there's a pipeline here in terms of our source of the high-definition camera heads.

And it would take us, it would take us, I'd say, through somewhere in the first six to nine months of -- we want to provide them on the new systems.

And we'll capacity constrained for a little while as we ramp up our supplier on those.

And so we want to manage this well.

And so we'll be very quality conscious here early on.

Tim, I think it's also important as a general reminder is, we introduced the fourth arm upgrade I think it was the fourth quarter of 2002 and here we are in 2007, and there's still a pretty substantial number of upgradable accounts that are still on three arms.

Things like this don't tend to move overnight.

So I don't think you want to set an expectation for yourself that that's the case.

And I think that it's important to know, we really have an incredible vision system without HD.

HD does take it to a new level.

There's no question about it.

But for many surgeons, they're going to say, hey, what we have is good enough.

And for others, say, this takes me to a new level and I want to move there quickly.

And so I think it will be the process that Aleks describes.

Others will buy into it a little more slowly and some will just be satisfied with where they're at.

Just to be clear on the pricing, new Ss, there is an upcharge for, with the HD system, there is an upcharge, and it's the same whether you upgrade or whether you order it?

Yes.

That's correct, Tim.

There's an upcharge for that.

And the margin, I would assume, is about the same either way, with the gross margin on these upgrades, $150,000, is it?

So, further clarification on that.

It's $120,000 is the upgrade price?

Okay.

Our gross margins on the HD upgrade are lower than our gross margins on our product in general.

And that's what I was trying to point out in terms of the potential impact to our gross margins, at least in the first half of the year.

Okay.

All right.

Keep in mind that we do make money when we sell it.

It's just at a lower gross margin percentage.

Okay.

It's field upgradable, right?

You don't have to take your system down?

Yes, it's field upgradable.

Okay.

Any sense on the capital purchase cycle, your pipeline?

Is that lengthening or shortening?

Still around nine months or so from start to --

The last quarter, Tim, we did mention it seemed like it was less than nine months in the United States.

In fact starting to approach six months and we still feel that way.

That generally speaking, it has been shortening in the United States.

Internationally, it's still longer.

But generally speaking, it is shorter than it was, let's say a year or two ago.

Okay.

Great.

And then just to follow on the paper question specifically at the sgo meeting, anything or hysterectomy in terms of new data series?

I know that there are some presentations that are being given.

I don't know the date that they're going to be presented.

But I believe Dr. Bagas from UNC, University of North Carolina, has an accepted presentation.

I think there's a few other things but I'll be honest with you.

I don't have all the details of that as to what's being presented, other than the few that I've mentioned.

Okay.

And then finally, a financial question.

The, on the tax rate, you say your cash tax rate is going to 20%.

Next year.

Or 2007.

Can you see at this point when the NOLs will finally be gone and your cash tax rates will approximate your accrued tax rates?

The NOLs are a combination of net operating losses from years past, as well as benefits from stock option exercises.

So, the amount of NOL actually will fluctuate because over time when people exercise options, you get additional benefits.

At this point, the reason we're projects 20% cash rate is that we do think that some limitation is next year on utilization of some of those benefits.

So, but subsequent years, there's probably always going to be a delta between accrued tax rates and your cash tax rates?

There would be some difference, yes.

Theoretically, all the benefits you get from the stock compensation expense is always going to be a difference, permanent difference.

Right.

Okay, great.

Back to you.

Good quarter.

Our next question will come from Rick Wise, your line is open.

State your affiliation, please.

Good afternoon, everybody.

Maybe turn to sales guidance if I remember you were saying 35% for '07 versus '06.

While appreciating that you all have a history of being conservative in your guidance, perhaps you could share with us your thoughts about why that number -- I mean, given your excitement, given your momentum one could certainly imagine a larger number why you comfortable with that number as opposed to whatever higher or lower.

But maybe as well, help us understand where the upside could come from. doing better.

Is it procedures, is it the 3DHDV just take us through that as well so we can just get a little flavor.

I think what we've give you is our best estimate at this time.

We look at a number of factors and come up with that.

I'm not, I don't think we're in a position to speculate where upside is coming from.

I'm not asking to you speculate.

That would be very foolish for me to do.

But I mean clearly the procedure growth is strong the market seem to be barely penetrated.

What might drive upside?

Clearly there's a range of any single number maybe you could talk about, is it marketing issues, is it adding more sales?

What's the limiting factor maybe is another way to approach it.

Rick, this will be driven as we've said before, procedure by procedure.

And as, and -- we'll have stronger growth and procedures than we estimate, we'll sell more systems.

But to get more specific than that, I think, is imprudent.

I know you'd love to know more information and as I've said before, if I had a crystal ball, I'd be happy to tell you.

But we take our best shot.

Our goal is to give you our best guess and if we can do better, we will sure do better.

But, it seems to me the market -- you're so concerned about projecting what people might do, and we could, we could make all kinds of promises.

We'll promise what we can deliver.

And if we can do more, we'll do more.

That I trust and, of course, naturally it's my job ask these kind of questions.

I understand.

You never stop.

And I appreciate it.

That's your job.

Okay.

Turning to utilization, again, it would be great if we could understand a little better.

Maybe excluding systems placed in the last 12 months, can you give us any flavor of utilization per instrument or, again in more established accounts, any updates there?

Again, basis growing, I keep wondering whether we're going to, as training goes on, as you see all these papers, whether we might see again, an explosion in, in procedures at some point.

Rick, I don't think we're seeing an explosion of procedures.

I mean, the constraints are, a couple things driving it.

One, we've got to have surgeons that are trained and capable of delivering a very quality procedure.

And, two, it's really driven more by patient demand.

And patients coming -- actually, the medical community is often very conservative.

And the few surgeons, the surgeons that start out, have a few that start out, they start building demand.

Other surgeons start to follow.

It follows the adoption curve very predictably.

And it's different by procedure.

So I don't expect all of a sudden, that it's going to explode.

I think it's growing at a one incredible rate.

And we will work hard to continue to do that.

And over time -- and the last thing we would like to see happen is all of a sudden, people doing it who are ill prepared and have bad outcomes.

That would be a disaster for us.

And so, we're going to manage this business, don't expect, I don't want an explosion is, if you looked at our growth curve, I guess some people could call that an explosion.

It's very high, but consistent growth.

And that's what we will manage for.

The only thing I would add, the first part of your question was on utilization and pretty much every quarter you go back many quarters, and we've had increased utilization per system per week.

And that's part of the metric that we put out there between two and three procedures per week.

And we do expect that to continue to increase over time and that's embedded in our guidance for 2007.

Great.

Two last quick ones.

Gross margins on the 3DHDV, I understand the initial comments.

Ben, do they get to the corporate average at this point?

Or is it always because of the OEM purchase, always going to be a bit below?

The point that I was trying to make is by the end of the year, we expect our gross margins for HD to be in line with the rest of the product.

And then gross margins in total should give back to what we've seen in the past.

Okay.

And last, it was a New England Journal article on embolization versus surgery.

And I didn't, I wasn't sure whether that related to Intuitive.

If it does, it seemed to, there are arguments on both sides.

Just wonder if there are any implications for Intuitive.

There are a number of reasons, a number of conditions that lead to a hysterectomy.

Some benign, some malignant.

Embolizing fibroids is something that's been talked about and been done for some time.

The implication to Intuitive is again if you look at the reasons why someone does a DVH, and you look at endometrial cancer, cervical cancer, potentially ovarian malignancies, they do difficult abnormal uterine bleeding when there is presence of endometriosis and so on and so forth.

There are some subsegments are procedures that are obviously fibroid-related and myomectomy specifically.

But the implication right now, I don't think we can say clearly what it might be or what it is in the future.

There are many procedures to be done surgically and we think that will be the case for a long time.

Thank you very much.

Next question will come from Michael Matson, your line is open, sir.

State your affiliation, please.

Wachovia.

This is Vincent Richie on for Mike Matson.

Thanks for taking our questions.

First question, just following onto what Rick was talking about, the embolization does that affect more of a myomectomy situation than a hysterectomy situation?

That's our at least our understanding.

Yes, probably so.

If you're looking at it, a myomectomy is the removal of a fibroid and the preservation of the uterus, so in that again, if there's a hysterectomy done for fibroids as opposed to embolizing them, they can take the entire unit out.

Or rather just embolizing them from myomectomy.

There would be some implication there.

But again, I don't know that I can put my arms around it and size it for you.

Okay.

You guys usually target a certain number of procedures in an overall procedure volume like 250 out of the 600,000 hysterectomies done that you think are attainable.

In terms of the myomectomy, can you kind of give that to us or have you given it to us in the past?

Again I think the numbers that have been estimated out there for myomectomy are on the order of 40,000 to 50,000.

That's the number that we look at.

And that's about as close of an estimated available market force as we have U.S. Okay.

And all the numbers that you've mentioned use the 250 is obviously U.S.-based as well.

Also we saw in a presentation you had done that you suggested even though 90,000 is your prostatectomy that it could be as high as 120,000.

Could you talk to us a little bit about that?

Yes.

And this is, this is part of the reason for getting away from a fixed number of U.S prostatectomy market.

If you look at the incidents of prostate cancer in the United States in 2006, it was around 235,000.

The best guess of those patients, 90,000 would have been prostatectomy, 90,000 or so in the radiotherapy area.

And then some remainder, 55,000 or so watchful waiting.

It's our belief, based on our customers' comments and what they're seeing in the changes from the patient, that patients are moving out of, moving at some level out of the categories of either watchful waiting or radiotherapy into prostatectomy.

In support of that I think are papers like Dr. Tewari and his group as well as the Henry Ford group have brought to light that people are getting diagnosed earlier.

There's some date that that is suggesting that long-term survival rates favor prostatectomy and we think that that combination, with a minimally invasive radical prostatectomy lead to a very nice story for minimally invasive prostatectomy to take over some of that market.

We think that will take place.

We know it's taking place.

We don't know how big it will grow to, but the 120,000 was an estimate that we've used in the past.

And we will judge it on a real-time basis to see what it looks like going forward.

Okay.

So then just to clarify, the 50% you gave us for DVT was a growth rate and not a penetration rate?

That's right much that was a growth rate.

And that included a worldwide number.

That was no longer a U.S.-based number.

Okay, great.

And then just one last question.

With your sales force additions, can you give us a more detail on were they skewed more towards domestic or then international, Europe or Asia?

I would say that they're pretty well balanced, actually.

We've had excellent growth in Europe and the rest of the world.

And we have with that, that we've been encouraged and invested more.

So I think while there's a slight difference, the percentage growth is not dramatically different between Europe and that, and the U.S. or even, some of the ads we're making in the rest of the world.

Okay, great.

And this is Mike Matson, I just have one quick question that kind of relates to that question.

Just the dynamics of the market and the procedures of the robots being used for and is all that, I mean, are there any real differences out of the, in the international market kind of versus what, the trends you're seeing in the U.S. market?

Go ahead.

I was going to say, not in terms of the procedures themselves.

The rate of adoption is going to vary.

Europe varies, even within Europe, country to country will vary.

Outside of Europe, and you look into the Asian market, it will vary.

The, there are a lot of, we have a lot of FDA clearances already in the U.S.

So it really hasn't been an issue as of late of what can be done outside the U.S. versus, within the U.S.

So I would say in general, just the rate of adoption and market specific.

I think we have time for two more calls.

Okay, thanks, that's all.

Our next question comes from Eli Kammerman and your line is open.

State your affiliation, please.

Yes, Cowen & Company.

Thank you.

My first question is, have you been tracking the length of time between purchase of a first unit and purchase of a second unit, and how has that time changed between last year and this year?

Well, I would say that it is significantly different between -- we have hospitals still have the first system.

And we have others that have, have had such success and see this as a differentiator to build volume as we've mentioned many times before, is that hospitals tend to be very fixed cost based, and incremental volume, patient volume, either incremental growth or incremental decline have a huge effect on their bottom line.

Those who have seen the growth, and have more visionary leadership, both clinically and administratively, are the ones that seem to say, okay, I've had the experience, the experience is good.

And I want to build on that.

But I don't know that we can tell you that there's a time from first to second system, some have been fairly quick and others, as we just mentioned, you've seen some that we've added, that have been going at this for a long time and had added very increment tale.

And some invest in the patient awareness campaigns more than others, which drives volume.

The volume tends to be the driver of necessity of the second and third system.

So you see it vary market to market.

So it's hard for us to get much more detailed than that.

Once it's one year, I'm not sure that there's a differentiation between someone who's had it for one year or two or three years.

Okay.

Can you tell us how many hospitals now have three systems or more?

I believe the number now is, we have 13 hospitals that have three systems.

One that has five.

Last quarter, we announced that one hospital was U Penn, had the purchased their third and fourth system and during the quarter, they had moved one of those systems to a sister hospital, which they owned, so they moved some of the practice over to that hospital.

So that da Vinci follow.

So, the answer is 14 that have three or more right now.

Okay.

Thanks for that.

And then, as you look out over the opportunity for a hysterectomy, do you expect that procedure to be driven more by physician decision making or by patient request?

It's, I think the answer is probably some of both.

And I think when you look at hysterectomy, again it's a little bit more complex because there are a number of reasons to do a hysterectomy.

Hysterectomies for cancer will follow and those patients will follow a certain regimen in a certain path, whereas for benign conditions, it may be a little bit less predicted.

But at the end of the day, I think the answer is both.

We're already hearing from from customers, you're seeing patient awareness campaign that is they're putting on within their local markets.

You're seeing more on the Internet.

There's just more awareness of it.

So probably both.

All right.

Thanks very much.

Thank you.

Our next question will come from Mark Richter, state your affiliation, your line is open, sir.

Hi.

Jefferies & Company.

Hi, guys.

Good evening and nice quarter.

Most of my questions have been answered.

I guess my last two are just on the potential Cal Tech litigation.

First, is there anything new to report on that front?

Mark, no, I think we said it all in the press release and I have nothing else to say at this point in time.

Do you have any, I mean maybe could you give us some sense of why or your hypothesis of why they chose now to do this?

There was a quote in the press release I still feel that way.

It's better I not say anything else.

Okay.

I understand.

Thanks, guys, and good quarter.

Thank you.

Okay.

That's our last question for the day.

We appreciate your joining us.

While these calls focus on financial and operating numbers, I just want you to know that our organizational focus is on bringing superior surgical outcomes and reduced complications and reduced surgical trauma to surgical patients worldwide.

On these conference calls, we discuss financial metrics, such as, revenues, profits and cash flow.

But I wish we could somehow measure and communicate the difference our products are making in the daily lives of thousands of people facing serious medical problems and physical and emotional trauma.

The company -- our metrics reflect the faces of the patients whose stories I have the fortunate opportunity to hear, my course of daily activities.

Few people have the opportunity to experience the kind of growth that we've enjoyed this past few years.

Even fewer have the opportunity to do so while doing something that clearly benefits the quality of people's lives.

And often touches our own lives, the lives of those we love in a very personal way.

I think I can say that I speak for nearly every individual at Intuitive when I say I feel very fortunate to be part of a group of this great team, as we take surgical precision and surgery beyond the limits of the human hand.

In doing so, we remain committed to focusing on the vital few things that truly make a difference.

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

Consistent revenue and operating income growth and results driven company culture in which we measure ourselves by our accomplishments.

That concludes today's call.

We thank you for your participation and support on this extraordinary journey.

At this time, that would conclude today's conference.

You may disconnect.

Thank you for your attendance.