直覺手術 (ISRG) 2007 Q1 法說會逐字稿

Good afternoon and thank you for standing by.

At this time, all participants are in a listen-only mode.

(OPERATOR INSTRUCTIONS).

I would like to turn the call over to Ms.

Sarah Norton.

Ma'am, you may begin.

Thank you.

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

With me today, we have Lonnie Smith, our President and CEO; Marshall Mohr, our Chief Financial Officer; Ben Gong, our Vice President of Finance and Treasurer; 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 detail in the Company's Securities and Exchange Commission filings.

Prospective 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 web site at IntuitiveSurgical.com on the audio archive section under our investor relations page.

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

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

First, Lonnie will present the quarter's business highlights, Marshall will follow with a review of our first quarters' financial results; next, Aleks will discuss sales and marketing highlights, then Ben will provide our updated 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, solid quarter.

We continued to drive the adoption curve for robotically assisted surgery, delivering top-line and bottom-line growth.

Highlights for the first quarter are as follows.

Total revenue grew to $114 million, up 48% from last year.

Instrument and accessory revenue increased to $40 million, up 73%.

Total reoccurring revenue, including service, grew to $58 million, up 66% from prior year comprising 51% of total revenue.

We sold 44 da Vinci Surgical Systems, up from 35 during the first quarter of last year.

33 of the 44 systems were in the United States.

We ended the first quarter with 602 da Vinci systems installed worldwide.

We generated an operating profit of $42 million, 37% of revenue before non-cash 123R stock option expense, up 58% from the first quarter of last year.

GAAP net income grew to $24 million, 21% of revenue, up 65% from last year.

We ended the quarter with $385 million in cash and investments, up $163 million from last year and $55 million from last quarter.

Because of the significant non-cash stock option statutory tax expenses reflected in our GAAP net income, we sincerely believe that operating profit before non-cash 123R stock option expense is a better measure of our actual financial performance.

While we reported $24 million in GAAP net income for the quarter, we grew cash and marketable securities by $55 million.

That included $10 million in cash receipts from stock option exercise -- stock options exercised during the quarter.

Some of our operating accomplishments in the first quarter include excellent sequential quarter-to-quarter procedure growth, led by gynecology and followed by urology.

We believe the procedure growth continues to be the primary driver of all revenue components of our business and the best lead indicator of future performance.

It indicates the rate of procedure adoption and drives new systems sales to both new and existing customers.

Procedure growth drove additional system sales at 12 existing customers in the first quarter.

Four of those medical centers bought their fourth da Vinci System during the quarter.

The da Vinci S continued to dominate our systems mix and we will launch a three-arm da Vinci S System this quarter.

We launched da Vinci S High-definition Vision System in the United States this quarter and 21 or two-thirds of the 33 systems sold in the United States were high-definition.

We intend to launch the High-definition Vision System in Europe at the end of this quarter.

We launched the Suture Cut Needle Driver, made significant progress in the move of our European headquarters from France to Switzerland and grew our Intuitive team to 615 from 563 at the end of the year.

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

Thank you, Lonnie.

Total first quarter revenue increased to $114.2 million, up 48% from $77.3 million for the first quarter of 2006 and up 1% from the $112.6 million for the fourth quarter of 2006.

Our revenue growth is driven by procedure adoption and we experienced growth in all of our targeted procedures during the quarter.

Da Vinci hysterectomy and prostatectomy continue to be our fastest-growing procedure, and based on our first results we continue to believe that da Vinci prostatectomy procedures will grow by more than 50% in 2007 compared with 2006 and that da Vinci hysterectomy procedures will grow over 150%.

First quarter revenues by product category were as follows.

Instrument and accessory revenue increased to $40.3 million, up 73% compared with $23.3 million last year and 21% compared with $33.3 million last quarter.

The growth rates in instruments and accessories is comparable to and a direct result of our procedure growth rates.

The amount of instrument and accessory we earned per procedure remained relatively unchanged, between 1500 and 2000 per procedure for established da Vinci accounts.

Including the impact of initial orders completed with new system purchases, instrument and accessory revenue continues to be between $2000 and $2500 per procedure.

Systems revenue increased to $56.1 million, up 32% compared with $42.4 million last year and decreased 11% compared with $62.9 million last quarter.

The sequential decreased in systems revenue reflects expected seasonal trends and system sales, partially offset by an increase in average revenue per system.

First quarter da Vinci Surgical System revenue reflects the sale of 44 systems compared with 35 sold during the first quarter of last year and 50 systems sold in the fourth quarter.

21 of the systems sold during the quarter were our latest S model, incorporating high-definition vision capabilities.

17 were S models incorporating standard vision capabilities, three were four-arm standard systems and three were three-arm standard systems.

13 of the systems sold were to repeat customers compared to 16 systems sold to repeat customers in the previous quarter.

We believe that repeat customers represent a significant element of our potential market opportunity and validate increased usage trends.

Our first quarter average revenue per system, including all da Vinci models but excluding upgrades, was $1.25 million, which is $50,000 more than the average revenue per system in the fourth quarter of 2006.

The higher average revenue per system primarily reflects sales of our new HD model which have a list price of $120,000 more than our da Vinci S standard vision model.

Upgrades, including fourth arms and HD, accounted for $1 million of the current quarter systems revenue compared to $2.6 million last quarter.

Service and training revenue increased to $17.8 million, up 53% compared with $11.6 million last year and up 9% compared with $16.3 million last quarter.

The growth in service and training revenue is primarily driven by larger system installed base as well as higher annual contract prices associated with da Vinci S models.

Total recurring revenue, comprised of instrument, accessory, service and training revenue increased to $58.1 million, up 66% compared with the first quarter of 2006 and up 17% compared with the fourth quarter of 2006.

Recurring revenue represented 51% of total first quarter revenue.

Our first quarter 2007 gross margin of 67% was higher than the 66.6% realized in the fourth quarter.

The increase in our gross margin is primarily due to improvements in the cost of service and lower instrument costs, partially offset by lower margins on our HD product.

Total operating expenses for the first quarter of 2007 were $42.2 million compared with $39.5 million in the fourth quarter of 2006.

Operating expenses included $7 million of non-cash stock option expense in the first quarter compared with $5.8 million of stock option expense in the fourth quarter.

The sequential increase in stock option expense primarily reflects the annual grant to employees made in February.

Excluding the effect of stock option expense, the sequential operating expense increase of $1.5 million reflects costs associated with increased headcount and the move of our international operations from France to Switzerland.

We added 52 employees during the first quarter, ending the period with 615 regular employees, the majority of the additions, which were worldwide sales and support and manufacturing organizations.

First quarter 2007 operating income was $34.3 million, or 30.1% of sales, compared with $35.4 million, or 31.5% of sales for the fourth quarter of 2006.

Our first quarter 2007 other income of $4.6 million increased compared with $4.2 million in the fourth quarter of 2006.

The increase is primarily the result of increased interest earned on greater cash and investment balances.

Our effective tax rate for the first quarter was 38.9%, which is lower than the 40% we provided in our guidance call in February.

The decreased reflects R&D credits computed under the IRS renewed regulations and other manufacturing credits.

We continued to utilize net loss carryforwards in 2007 and expect our cash outlay as a percentage of pre-tax income for 2007 will be between 15% and 20% of pre-tax income.

The implementation timetable for our new tax structure, which includes the move of our European headquarters from France to Switzerland, is on target but will not generate a reduction in our global tax rate until after 2008.

Our net income increased to $23.8 million, or $0.62 per share, up 65% compared with $14.5 million, or $0.38 per share for the first quarter of 2006 and up 1% compared with $23.6 million, or $0.62 per share for the fourth quarter of 2006.

Now turning our attention to the balance sheet.

We ended the first quarter of 2007 with cash, cash equivalents and investments of $385 million, up $55 million from the previous quarter end.

$9.7 million of the cash generated in the quarter was associated with stock purchase activities.

The remaining cash was generated primarily related to operating activities.

Our accounts receivable balance decreased to $90.5 million at March 31, 2007 from $94.7 million at December 31, 2006.

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

Our net inventory increased to $26.3 million at March 31, 2007 from $24.3 million at December 31, 2006.

Our inventory turns at March 31, 2007 of 5.6 times per year declined slightly relative to the fixed turns at the end of the previous quarter.

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

Thank you Marshall.

During the first quarter, we shipped 44 da Vinci systems.

33 systems were placed in the U.S., nine into Europe and two in rest-of-world markets.

38 of the 44 system shipments were da Vinci S Systems.

Three were standard four-arm systems and three were standard three-arm da Vinci systems.

Of the 38 systems sold, 21 were HD systems.

The 44 systems sold during the quarter brings to 602 the cumulative number of da Vinci systems worldwide -- 461 in North America, 101 in Europe and 40 in rest of world markets.

13 of the 44 system sold during the quarter were sold as second, third or fourth system sales.

Four hospitals -- St.

Joseph's Atlanta, City of Hope National Cancer Center in Los Angeles, Hackensack Medical Center in New Jersey and Centennial Medical Center in Nashville -- all purchased their fourth da Vinci Systems during the quarter.

The University of Michigan in Ann Arbor purchased their second and third systems and the University of California Irvine purchased their third da Vinci system.

Outside the U.S., we had an excellent quarter with 11 system sales, which included our second da Vinci to Lund University Hospital in Lund, Sweden, as well as our second system to Onze-Lieve-Vrouw Medical Center in Aalst, Belgium.

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

and internationally.

We launched two new products -- the da Vinci HD Vision System, which we've talked about, and the da Vinci Suture Cut Needle Driver.

The Suture Cut Needle Driver is a multifunction instrument which will streamline procedures and reduce OR time.

We participated in several key conferences in the quarter and had 36 da Vinci-related clinical papers published in various peer reviewed journals.

Gynecology, paced by da Vinci hysterectomy and sacral colpopexy, showed the largest sequential procedure growth, followed by urology, most notably DVP.

Our general surgical procedure business, led by da Vinci gastric bypass, also showed very strong growth, and general surgery is now approximately the same size as our cardiothoracic business.

All of the targeted surgical categories showed sequential procedure growth.

We've participated in eight conferences within urology, gynecology and cardiothoracic surgery.

However, our review highlights from only three, beginning with the European Association of Urology, or EAU.

At this year's EAU, where attendance was estimated at 12,000, our presence was stronger than ever.

For the first time, the EAU featured live da Vinci surgery in its plenary program.

In fact, the EAU featured three live nerve-sparing DVP broadcasts.

In addition, there were 20 da Vinci-related presentations and abstracts, which represented twice as many as last year.

But, the strongest endorsement probably came out of the distinguished plenary lecture entitled The Future of Robotics in Urology.

The distinguished plenary lecture was delivered by Dr.

Manin Menon, Chairman of the Vattikuti Urology Institute at Henry Ford Hospital.

Dr.

Menon's group has performed over 3000 da Vinci operations to date and are active publishers of da Vinci-based outcomes research.

In his lecture, Dr.

Menon showed data supporting a decrease in overall complication rates and a significant decrease in medical complication rates when comparing DVP to both laparoscopic radical prostatectomy and open radical prostatectomy.

The literature reports medical complication rates following open radical prostatectomy to be between 13% and 20%; for traditional laparoscopic radical prostatectomy, 11%; and Henry Ford's DVP medical complication rates, 0.9%.

He concluded, and I quote -- "the less invasive the surgery, the greater the physiologic benefit, the fewer the medical complications.

The future of robotics may be in making complex, minimally invasive surgery safer across multiple surgical disciplines".

At the EAU, the Journal of Robotics Surgery was launched by Springer Publishing.

The Journal of Robotics Surgery is a peer-reviewed journal that will issue quarterly and focus specifically on robotics surgery within adult and pediatric urology, gynecology, cardiac surgery, general surgery and ENT.

We are pleased that the critical mass of robotics surgery has reached a point to support its own peer-reviewed journal.

At the Society of Gynecologic Oncology, or SGO Conference, da Vinci was prominently featured in several venues.

The SGO conducted robotic didactic sessions, robotic postgraduate courses and several da Vinci podium and poster presentations.

In addition, the Intuitive booth featured clinical speakers and da Vinci HD test drives.

Early data comparing da Vinci hysterectomy to open hysterectomy and laparoscopic hysterectomy was superior when comparing lymph node retrieval counts, blood loss, hospital length of stay, complications and operating time.

The presentations given by Doctors John Boggess and [Schaefer] from the University of North Carolina showed that when comparing DVH to traditional laparoscopic hysterectomy for endometrial cancer staging in their first 61 patients, lymph node counts were up nearly 30% within the robotic cohort.

Blood loss was cut in half, OR time was 60 minutes less and complications were approximately a third.

A comparison of obese patients undergoing DVH versus open surgery for cancer showed lymph node counts of 38.4 versus 22.3, blood loss of 119 versus 562 milliliters, length of stay of one day versus 3.5 days, all while reducing complications.

We are pleased to see that these early results are getting attention at the various society meetings.

At the World Robotic GYN Symposia, which took place last week at the University of Michigan in Ann Arbor, the presentations and procedures focused on da Vinci hysterectomy, myomectomy and sacral colpopexy.

One of the most telling presentations was delivered by Dr.

Thomas Payne from the Oschner Clinic.

Dr.

Payne compared his last 100 consecutive hysterectomies prior to robotics to his first 100 da Vinci hysterectomies.

He compared the overall laparotomy, or open incision rate, blood loss, hospital stay and operative times.

Dr.

Payne reported that his overall laparotomy rate dropped significantly from 20% to 4%, as did blood loss, hospital stay and operative times.

In his conclusion when asked -- why adopt robotics in GYN -- he listed a number of compelling reasons which could be summarized as follows.

Regardless of the pathology found intraoperatively, surgeons can successfully complete the case with robotics, which he believes has the potential to lead to fully endoscopic or vaginal practices that minimize or eliminate the need for total abdominal hysterectomies.

This is a pretty powerful conclusion with the potential to reshape the GYN's clinicians' practices.

Lastly, I would like to give you a second-quarter product note.

We will begin shipping the three-arm da Vinci S System later this quarter.

The three-arm S System will have a list price of $1.29 million and will be configured with a standard 3-D vision system.

The three-arm S System will accept a fourth arm or HD Vision system upgrade.

That concludes my update and I'll now turn the time over to Ben.

Thank you, Aleks.

As mentioned on last quarter's call, we're now providing guidance on a GAAP reporting basis, including stock compensation expenses.

We will provide an estimate of the stock compensation expenses separately so that you can calculate meaningful comparisons that exclude these non-cash expenses.

Based on our first with results, we're increasing our previous guidance for both revenue and profits for 2007.

Starting with revenue, in our previous call, we estimated our instrument and accessory revenue to grow between 50% and 55% over 2006.

Now based upon stronger procedure growth led by DVP and DVH, we expect 2007 instrument and accessory revenue to grow between 65% and 70% over 2006.

We continued to expect system revenue to grow between 20% and 25% over 2006.

We expect the majority of this growth to come from an increase in unit shipments.

As Marshall mentioned, our system average selling price was approximately $1.25 million for the first quarter.

For the balance of the year, we expect our higher priced HD systems to compose a majority of overall systems.

However, we're launching the lower-priced three-arm da Vinci S System this quarter which will temper any further growth in ASP.

As a result, we expect system ASPs for the balance of the year to vary between $1.2 million and $1.25 million.

This is up from the $1.15 million to $1.25 million range we had previously forecast.

We continue to expect service revenues to grow approximately 45% above 2006 levels.

Overall, we now expect our total 2007 revenues to grow approximately 40% over 2006 compared to 35% previously forecast.

With regard to gross profit margin, on our previous call we estimated our full-year gross profit margin to be between 65% and 66%.

We are increasing our forecast by 1 percentage point and we now expect to achieve 2007 gross profit margin of 66% to 67%, which is about the same gross margin percentage we reported for 2006.

Moving to operating expense.

On our last call, we had forecast to increase our annual operating expenses by 32% to 36% over 2006.

Based upon higher variable selling costs associated with our higher revenue forecast, we expect to finish the year in the higher end of this range, namely 35% to 36%.

Included in this forecast are the costs associated with moving our international sales office to Switzerland.

We incurred approximately $600,000 of costs associated with those activities in the first quarter and continue to expect incur an additional $1 million to $1.5 million this year.

Again, these forecasts for gross margin and operating expense include the impact of FAS 123R stock compensation expense.

Our first quarter operating income included $8.1 million of non-cash stock compensation expenses, $1.2 million in cost of sales and $6.9 million in operating expense.

We continue to anticipate the full-year impact of FAS 123R to be approximately $36 million with a percentage allocation to P&L lines consistent with Q1.

Other income expense, which is mainly comprised of interest income, is expected to be approximately $20 million for the year compared with the $19 million to $20 million range we had previously forecast.

With regard to income tax, based upon the impact of R&D tax credits and manufacturing credits that Marshall described earlier, our Q1 tax rate was 38.9%.

We believe the impact of these factors will continue through 2007, and therefore we expect the full-year 2007 tax rate to be approximately 39% compared to the 40% forecast previously.

We expect our effective cash tax expense to be between 15% and 20% for 2007.

As Marshall mentioned, we do not expect to realize any of the tax rate benefit related to our international reorganization during 2007.

Regarding shares outstanding, we currently have 37.5 million common shares outstanding and we also have approximately 4 million option shares outstanding.

Depending upon our average stock price during the second quarter, a portion of the 4 million option shares will be added to the fully diluted shares calculation.

For calculating EPS in Q2, we expect the share count to be between 38.5 to 38.7 million shares.

That concludes our prepared remarks and we will now open up the call to your questions.

(OPERATOR INSTRUCTIONS).

Michael Matson, Wachovia.

Hi, this is actually [Vincent Ritchie] on for Michael.

Just a couple of quick questions for you.

You mentioned sacral colpopexy.

Could you give us the size of that market?

The overall market for the suspension procedures is in the couple-hundred-thousand, about 200-some-odd-thousand.

However, the actual complex sacral colpopexies by our estimates is probably somewhere in the order of 60,000 to 100,000.

And when you're talking about your general procedures that you're targeting, obviously you mentioned bariatric surgery.

Are there any others that you're targeting?

That's the one that's probably receiving the most attention from general surgery and is one that has shown the most growth, but we certainly have a really good value proposition in a number of esophageal procedures, Heller myotomies, and even some of the complex biliary procedures.

But I think the one that really presents some materiality at this point is gastric bypass.

And when you're saying that, are you referring to all bariatric surgeries, or just the Y procedure?

Right now, we're used in a number of them, but the one I think that has the strongest value proposition, or at least we're being told is, the double-layered suture anastomosis versus a stapled anastomosis in the anastomosis in the Roux-en-Y procedures.

But there's -- in fact, this week, the SAGES conference is taking place and I think there are a number of presentations that actually address that too.

Okay, and then just a last quick question.

What's the philosophy behind having a three-arm S System?

I think that we're still (technical difficulty) today and this gives an upgrade path for those that come in at a little lower price point to be able to move up to all the features of the S and move up to -- also into HD and to a fourth arm.

So this provides a path that if you buy a standard three-arm, you can move to a fourth arm, but you don't have the other options of moving to HD and all of the features that will promise longer term.

Tao Levy, Deutsche Bank.

A couple of questions from me.

It was an interesting quarter because this is one of the first quarters where we have seen sort of the recurring part of the business come above the systems sales.

Do you think going forward and based on the growth rates that you're providing, that this is going to be a continuing trend going forward?

If we continue to see this trend in instruments and accessories grow by 65% to 70%, then yes, we believe that it will continue to be more than 50% of our sales for recurring versus the capital.

And we had predicted that there was going to be a crossover at some point in time and what's really driving this it seems at this point is the procedure growth which was actually very, very good this past quarter.

We have always -- or model has always anticipated that procedures will outgrow systems because -- actually, our model we have growing procedures per system and if we're growing procedures per system at the same time we're adding systems, we will build strength and continue to build the recurring revenue stream.

And I think in the last -- in the fourth quarter call, you had mentioned just on utilization again two to three per week per system, I think that was the metric you provided.

It seems like -- are you guys slightly ahead of that in this quarter, or is it difficult to back into the sales number?

So we continue to make progress on the utilization.

We're still within that range of two to three procedures per system per week.

As you can imagine, you can make incremental changes and it has a pretty dramatic impact on the business when you take that across the 600 systems that are installed worldwide.

So yes, we continue to make gradual improvements in that metric.

And just, lastly, on the HD contribution, and maybe I'm not understanding the technology properly, but is it easy to upgrade the standard S System to the HD?

Because I did not hear that number called out in the call.

No, and in fact, it's not possible to upgrade it to HD without (MULTIPLE SPEAKERS).

Yes, the standard S.

Talking about the standard S System, it's not -- we do not have an upgrade pathway from a standard S System to HD.

So let me -- so you can't (MULTIPLE SPEAKERS)

Standard S, sorry.

Sorry -- da Vinci S, not the standard (MULTIPLE SPEAKERS)

Wrong answer.

So yes, there's an upgrade pathway, and in fact, we upgraded two existing customers from a normal Vision System to an HD Vision System this past quarter.

Do you think that's -- was that on the lower end of your expectations in the quarter, just given how well the gross margins trended?

Again, you had highlighted the fact that HD would have brought the gross margins down, and in fact the gross margins went up.

I think the -- it's always going to be not a large number.

Upgrades in general was about 1% of our revenues this quarter, and probably that's the right order of magnitude that we will expect on both fourth-arm upgrades and HD upgrades perhaps the rest of this year.

The thing to remember is that for people to make that purchase, there's still a capital acquisition process, and so it's just not an automatic thing for them to go ahead and spend that money and make that upgrade.

And we also have some capacity -- we're not pushing upgrades at this point in time because we need the HD systems we have for our new shipments.

Tim Nelson, Piper Jaffray.

You just were talking about upgrades, so let's finish that.

How many fourth-arm upgrades were there in the quarter?

There were five this past quarter.

That was down sequentially from a pretty big number last quarter?

Yes, the fourth quarter was probably, of all of the quarters, the most unusual quarter.

I think five is probably more consistent with what we have seen in other quarters.

In your experience, when you can upgrade like this, is it an old third-arm customer that maybe wasn't as active getting more active; or, is it a very active system just trying to increase their capacity and get more -- be able to do more procedures?

From a third to a fourth arm?

Yes.

I think what you're starting to see, and you have seen it actually for some time now, is that the different clinical presentations that are given really highlight the value of a fourth arm in reduced need for patient-side assistant, better retraction and so on and so forth.

I think it's just becoming more of a standard issue and it's just people taking the necessary steps through their capital acquisition process to get to the fourth arm.

I think it makes a lot of sense in a lot of operations, and I think the broader public now sees that.

And the new three-arm S System -- did you give a price point on that?

The list price of $1.29 million, and again, that is without an HD System.

It's a standard 3-D Vision System and they can upgrade to that later and they can upgrade to a fourth arm at anytime.

You provided on the procedures now back on hysterectomy and DVP, you said 50% growth in prostatectomies and 150% in gynecologic procedures.

Would you care to give kind of a range of the baseline on that?

When you look at the growth part of the instrument and accessory guidance where we're giving you updated guidance, I think it's pretty safe to assume that we are growing all of our procedures, including DVH and DVP.

I don't think we're looking to update that guidance every quarter, but I think if you just do the math, you will see that we're probably safely within that range.

Eli Kammerman, Cowen.

Thanks very much.

First, a tax question.

Did you say the tax rate for this year is going to be 38 to 39, and is it reasonable to expect it to begin to drop off in the second half of '08?

Just to clarify, we said it would be 39% for this year, which is consistent with what we saw in the first quarter.

And we said we do not expect the revised tax structure we're establishing in Europe to have impact until after 2008.

Okay.

Eli, one thing that we'll point out is, we will get benefits from a cash tax basis from this restructuring earlier and we will be reporting that in the P&L.

So we will gain benefits from this even as early as this year from a cash standpoint.

That's from the Switzerland-France manufacturing?

It's not manufacturing.

We're basically moving our international headquarters and the responsibility for customers, systems sales and relationships from France to Switzerland -- actually, from the U.S.

to Switzerland.

My next question is -- what is the list price for the highest-priced version of the S System with HD and four arms?

The list price of that is $1.65 million.

Okay.

And then my last question is, which procedure uses the highest-cost instrument package?

It's hard to say with absolute consistency because there's even differences between doctors and procedures.

But if you wanted to look at, let's say da Vinci mitral valve repair, it's pretty high and some of the revascularization.

But again, it can vary from center to center, doctor to doctor.

But I think the cardiac procedures probably have a little higher piece.

Rick Wise, Bear Stearns.

Going back to Tao's question, again, ask it a little differently, do you all feel like we were at an inflection point in terms of procedure growth?

It sounded like you all -- I don't know whether you were pleasantly surprised or pleased or -- I'm sure you're pleased -- to see the huge uptick, but we saw a really dramatic sequential increase in the instrument use procedures.

Are we actually at an inflection point in your view, not just as a mix of your sales?

Rick, that is a good question and I think these inflection points are different by procedure, as we have said, the -- [adoptionally], procedure by procedure.

But I do believe that as we get more established in multiple procedures that the cumulative effect is that there is broader acceptance of the technology.

Geoffrey Moore wrote in "Inside the Tornado" describes that pretty accurately and we're kind experienced at that.

I don't know -- what we see in patterns is that our -- that systems are strongest in the fourth quarter, drop in the first quarter, up in the second quarter, it's a little soft in the third quarter, strong in the fourth quarter again.

And procedures tend to be strong in the first and second, soften in the summer in the third quarter, and then are strong again in the fourth quarter.

So, again, maybe quarter to quarter sequentially, we will see some variation.

I think when we see year-over-year, we will continue to see very strong differences.

I don't know whether we're at an inflection point at this point in time that is significantly different than what we've experienced in the past.

I suspect it will be.

It will continue to build each procedure and we are feeling pretty good about some procedures that if they can -- well, I think mitral valve is about to give us -- it's a smaller segment, but it's an important one in terms of visibility and exceptions to the technology.

So I wouldn't count on a major shift here yet.

I think we expect to continue to drive it and I don't see a -- we are very pleased with what happened in this quarter.

Give us a few more quarters, we'll tell you whether there's an inflection point or not.

One data point is not an inflection point, I don't think.

As long as we're on philosophical questions, one more larger picture one.

Clearly, some of the papers and comments that Aleks was telling us about from medical meetings this quarter suggests that robotic therapy truly is helping patients, there are clinical benefits to society.

Where are we in the march toward robotic therapy being this standard of care in your view, Lonnie, and (inaudible)?

Again, I think it depends on the procedure.

I do think that we're getting close in prostatectomy surgery.

I find people calling that I talk to that are not -- it's not a question whether it's going to be robotic, now there's just a question of who they're going to go to and I think we're getting to that point.

I think we are long way away from it in the others, and I think it depends on the region and the market where it's being offered.

I think in some centers, it's -- the other procedures are becoming pretty much standard of care.

If you went down to Atlanta, you're going to have a mitral valve, you are probably going to have it done with a robot at St.

Joe's.

But we are -- so these things, they are a little messy in terms of how they happen, but I think that we are -- as prostatectomy becomes standard of care, then that, people start looking around saying, well gee, if it can happen there, it can happen in our area, and there's the cumulative base of knowledge and data, supports it.

You start to move from early adopters to the early majority and then to the majority and it's just a consistent process.

We now have at least a model with prostatectomy and we're seeing the pattern follow in other procedures.

I think, Rick, the important note there is that we have seen tremendous growth -- let's just stay with prostatectomy for a second -- from literally 2001 on, and every year it has been tremendous growth.

One of the lagging effects; it can grow without it, but it's certainly a lagging effect, is this peer-reviewed data and the debates that go both directions.

I think before you can be emboldened to call something truly standard of care, I think the medical community certainly weighs in on that.

Not to say that the patients aren't going to weigh in with their desires as to how they're going to have it done, but I think it's more than just a mathematical number.

I think to be really standard of care in any of these operations is a huge, huge thing, and we are moving very, very rapidly in prostatectomy and the others are showing really nice growth.

A couple more questions.

Did I miss it that you comment on DSOs, Marshall, first quarter versus fourth quarter -- any change in sales cycles, shorter or longer, anything -- did I miss that?

I didn't give a specific DSO number, but generally it fluctuates in a range of about 10 days, and it has to do with the pattern of systems sales.

But what I did say was that accounts receivable were down and that collections were good.

Last, we attended the SGO meeting and somebody sensed there was a lot of excitement.

Aleks, can you talk a little bit about sort of training and adoption, or time to adoption?

We sensed that the doctors are ready to go, but it might take longer to train their staff than maybe we had appreciated.

Is that a correct perception?

I don't know, longer to train their staffs.

I think, again, a lot of that is just an algorithm -- how many people you're trying to train and how many training centers do you have.

The pathway is pretty well laid out, and I think perhaps reaching all of GYNs in a training event is going to take longer just because the numbers are bigger.

But I think in general, a good leading indicator for us are people who are looking to be trained, who are requesting proctors to be there for their first or second case, and all of those things remain very positive.

So I'm not sure in terms of a metric on longer, shorter is -- give you a clean answer.

We have pathway, it's working and we have a lot of people who want to get into that pathway.

Mimi Pham, HSBC.

For the four centers that bought their fourth system, could you give us more color on what prompted those purchase decisions?

Did they all reach capacity with their current systems?

If you look at them, they are interesting in that they are -- you could classify them or stratify them a little bit differently.

So for example, City of Hope is a national cancer hospital, St.

Joe's Atlanta is a large community hospital, Hackensack has a University and residence and a medical school associated with it, and the fourth one, Centennial, is a premier HCA sort of flagship hospital, so a for-profit center.

I think what you can say consistently is that they have very comprehensive programs, they have a lot of demand for system coming from multiple specialties and it's becoming clearer that the ability to treat those patients has value if you can treat them immediately, as opposed to trying to schedule them over a longer period of time and potentially losing those patients.

So, yes, I would say capacity is a big part of it.

I think the growth of some of the other procedures we've talked about it a big part of creating that capacity issue.

Thanks.

And given the 21 high-def systems sold in the first quarter, does this mean that most new accounts are looking at high-def as a must-have versus a nice-to-have?

And for technical reasons, do some divisions or surgeons value high-def more than others?

I thank that it's too early for us to say what's a must-have, because it -- literally, it's the first quarter that we've had it out.

I would say that the people who have at least to this point noticed it the most are the people who are doing very, very delicate dissection or tissue identification.

We see it a lot and we hear it a lot from the mitral valve side, from the revascularization and around the nerve identification for DVP.

So to say it's a must-have, it would be hard for us to say that because we've done tens of -- well, over hundreds of thousands of procedures without it up to this point.

So people have been able to do it pretty well.

But I think it's an improvement and it will help them do what they already do well, perhaps a little bit better.

Thanks.

And then the last question, across your 600-system installed base, can you give us a rough estimate of what percentage used your system for prostatectomies and for hysterectomies in the first quarter?

It's not a number that we have.

I would just say that it's -- you will find that prostatectomies are done across a very large percent of that number and hysterectomies across a fast-growing piece of that number.

But we don't have a number specifically that we're sharing at this stage.

But for a prostatectomy, something maybe near 100, and for hysterectomy, something less than a quarter?

It's hard to say this point, Mimi.

Charles Olsziewski, Oppenheimer.

Quick question, Ben, regarding gross margins.

You had been expecting and forecasting a sequential decline of 100 to 150 basis points in the quarter.

Did that not transpire largely because there were less HD upgrades than you expected and the fact that instrumentation was so strong?

Well, I think those were definitely factors.

There's a few moving parts that impact gross margin.

Cost reductions were pretty good this quarter.

Marshall mentioned that, in particular in the service area, we did pretty well there.

We did have some HD sales which are at lower gross margin than others, and then you always have the mix of where you're selling the systems and when you sell direct in Europe, you have a higher ASP and the cost isn't that different.

So, we know that the gross margin and ASPs have the capability of moving around by a point here or there, and we were pleased with how it came out in Q1 and that's why we went ahead and upgraded our forecast for the year to be -- not a decline from last year, but actually equivalent to last year.

And then Aleks, two quick questions.

Obviously it's great to see the pickup in the instrumentation side and I am wondering if that's a function of just the fact that you have been obviously shipping a lot of boxes over the last several quarters, or are you seeing an appreciable difference in initial uptake or utilization at a new account today relative to a year ago?

And then my second question is -- just how many OB/GYN have you trained so far?

The answer to the first question, we look at a lot of metrics as I think you know, and I think one very important one is the number of procedures done per system, per week, per month, per quarter, and that is a number that, as Ben has indicated, is going up.

So a small pickup -- there's a lot of leverage from a small pickup across the broader base.

So that does imply that there is an increase, not just a couple of sites or a region, but it's happening U.S., O-U.S.

equally.

And so I think if you look at the second part of that first question with the uptick, another metric that we look at is the first case, if you will metric as to somebody buys it, when they're doing their first cases, how fast they're moving up, and we follow all of that, and that is a metric that we've put some resources on and are always trying to improve.

So I think we're pleased with the way that's been going over the past few quarters.

As far as the GYNs, I don't think that that again is a number that we have managed -- we put out in the public domain.

It is something that we track, but again in the past, we used to give the overall number of people trained in any given quarter and it became hard to reconcile back to anything.

There would be some quarters where it might be 80 and the revenue would be X, then there would be some quarters where it would be 100 and the revenue would be look a little less than X.

So it's not something that we think is a number that we're going to put out there in the public domain.

But I can say that the -- it's a very busy part of our training regimen and the people getting into that or desiring to get into that continues to go up.

You know, I think there's another dynamic as we sell second and other third systems into a hospital, there's already pent-up demand there, there are people who have been trained and their time to first procedure is shortened.

And so that probably gives us a little bit of a boost.

Okay, super, thanks.

We have time for one more question.

Mark Richter, Jeffries & Company.

A couple of quick questions.

First, how many total clinics O-U.S.

have purchased multiple units to date, and how does that compare to U.S.

in terms of total numbers and ramp?

Outside the United States, there's eight accounts that have two systems, and in total, we have -- I think we have five sites that have four, 12 sites that have three, and including those eight internationally, we have 44 that have two.

And then the second part of your question, can you remind me?

Yes, it was just in terms of just ramp and uptick O-U.S.

versus U.S.

in multi-unit purchases?

I think we're at an earlier stage with the international market and people tend to think of the international market as one cohesive market, but it really isn't.

There's a lot of different markets.

And if you kind of take a look at what we have in Italy, it would be quite different than what we have in Korea as an example where in Italy, we have 30 systems and in Korea we have two.

So I think, again, we're at the earlier stages of international business.

We have certain pockets where we have a lot of utilization, in particular in these places where we have sold the second systems, in Sweden and in Belgium.

They have programs that are really active, especially with prostatectomy, and that's what drove some of these second-system sales.

And I think that always, and this really hasn't changed since we've been in business, certainly is the availability of cash for capital purchases is going to vary even more so between the United States, which is fairly homogenous, and Europe where if you get into a tender process for a EUR1 million acquisition, it could take some time.

Perfect.

Thanks.

And I guess this is a question to ask -- a question has been asked multiple times, this is yet another way of asking it.

What is the main driver in your view of new multiple unit purchases?

Is it overflow of prostatectomy, is it hysterectomy?

Just a little insight there would be helpful.

I think the answer is yes to all that.

I think you have, again, it becomes access to the system balanced with multiple people's surgical schedules.

So if somebody is operating Tuesdays and Thursdays and their particular specialty only gets the da Vinci on Wednesdays and Fridays, then you're going to have a long jam.

And as you build more and more demand for new procedures and more people wanting to do those procedures, it just becomes very difficult to make sure that you capture the patient in your system without having these long waiting lists.

And so I think people have recognized that the sooner they can break up that log jam, the more profitable it will be for them by keeping those patients in their system.

Sites that have four systems and to some extent the sites that have three, they are really trying to dedicate certain systems to those specialties to be more efficient in the scheduling of their patients for those specialties.

I think on an even broader sense that these centers, after they -- when they have clinical success and economic success and they look forward to where things are going to go, and there are very few hospitals that won't tell you that one of their strategic initiatives is minimally invasive surgery.

As they see that occur and they see the benefits, the confirmation of the data, then they move forward more aggressively and with greater confidence, as we all do.

Perfect, thanks.

And then last question.

Any data releases, papers or anything else of significance that we should keep our eyes out for in the current quarter?

Again, I think there will be -- in the current quarter, you have a lot of I think favorable events for -- that have been historically favorable events for us, and the biggest is AUA.

So at the AUA, you're going to have a lot of different podium presentations.

I have not counted up the accepted papers and presentations and the like, but that in and of itself is a really powerful driver, it has been.

As I said, going on as we speak, I'm headed there later tonight, is the SAGES conference within general surgery, we have the AATS, we have ACOG -- it's going to be a really busy second quarter, and so we'll take a look at those presentations and we'll certainly report on what we think is very material.

Perfect, thanks guys, and nice quarter.

That was our last question.

We have always said that our goal is to enable surgeons to perform complex surgery through small incisions, and Dr.

Menon's evidence-based analysis, which was presented at EAU, at that meeting in Berlin and mentioned earlier by Aleks supports the medical validity of that goal.

Dr.

Menon concluded, as Aleks mentioned, that less invasive the surgery, the greater the physiological benefit and the less the medical complications, and we see that over and over and over again.

And physiological benefits -- he goes onto say -- if physiological benefits are more evident for complex procedures than simple procedures; therefore, his conclusion is the future of robotics may be in making complex MIS safer across multiple surgical disciplines.

We believe that that is true and that was what drives -- the answers to many of the questions that have been asked today.

As I said last quarter, when we focus on -- when in these meetings we focus on the financial metrics, such as revenues, profits, cash flow during these conference calls, however, our organizational focus remains on bringing superior surgical outcomes, reduced complications and reduced surgical trauma to surgical patients.

As I also said, I wish that we could somehow measure and communicate the difference our products make in the daily lives of thousands of people facing serious medical problems.

I would prefer metrics to reflect the stories and faces of our patients, and to that end let me share one of the stores with you.

A couple of weeks ago, Usha Kreaden who is our Senior Director of Clinical Affairs, had stopped at a stoplight when a man got out of his car, walked over and started knocking on the window of her car.

She was surprised and more than a little frightened.

But opened the window just slightly to hear what he was saying, and the first thing he said is he assured her that he was not a nut.

He said that he had seen her ISRG license plate and just had to tell her that his life had recently had a myomectomy performed with a da Vinci at the Stanford Medical Center, and that she was now pregnant.

He said, I just had to thank you.

As we strive to take surgery beyond the limits of the human hand, I assure you that we remain committed to focusing on the vital few things that truly make a difference.

That concludes today's call.

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

We will talk with you again in three months.

Thanks.

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