直覺手術 (ISRG) 2007 Q2 法說會逐字稿

Welcome to the Intuitive Surgical second quarter earnings call.

Following today's presentation, there will be a formal question-and-answer session.

At that time, instructions will be given.

Until that time, all the lines will remain in a listen-only fashion.

At the request of the call leader today's conference will be recorded.

Any objections, you may disconnect at this time.

I would now like to turn the call over to Ms.

Sarah Norton.

Ma'am, you may begin when you're ready.

Thank you.

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

With me today, we have Lonnie Smith, our Chairman and CEO; Marshall Mohr, our Chief Financial Officer; Ben Gong, our Vice President of Finance; 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 website at 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 second quarter as described in our press release announced earlier today, followed by a question-and-answer session.

First, Lonnie will present the quarter's business highlights; Marshall will follow with a review of our second quarter 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 Chairman and CEO.

Thank you for joining us today.

As you can see from our press release, we continue to drive the adoption curve for robotically assisted surgery delivering significant top-line and bottom-line growth.

Before we get into details of our operating and financial performance, I'd like to acknowledge the presence of Gary Guthart, our President and Chief Operating Officer, and Jerry McNamara, our Executive Vice President of Sales and Marketing.

Together, Gary and Jerry manage all the core functions of our company.

Gary inside, and Jerry outside.

Both have been instrumental in building Intuitive Surgical to the company it is today.

Gary is responsible for applied research, product and procedure development, engineering and design, quality, manufacturing, business development, continuous improvement, regulatory and legal.

Jerry is responsible for worldwide sales, service, customer and sales training, marketing and reimbursement.

They are both exceptional leaders and have demonstrated the necessary foresight, capacity, energy, integrity, and leadership to lead the company in the future.

We are committed to maintaining our focus on the core activities that drive our success.

Their recent promotions are part of our long-term succession planning.

We believe that the best team wins, and I believe that Gary and Jerry possess the leadership qualities necessary to ensure the long-term performance and success of our company.

If anyone is wondering, I'm not going anywhere.

I plan to remain active and involved in the business as Chairman and Chief Executive Officer.

However, I turn 63 next week, and I believe, and our board agrees, the succession planning does not begin when you turn 65.

Gary and Jerry will be available to answer any of your questions -- any questions you might have during the Q&A portion of this call.

Now turning to the highlights for the second quarter.

Total revenue grew to $140 million, up 61% from last year; instrument accessory revenue increased to $46 million, up 76%; total recurring revenue including service grew to $66 million, up 70% from the prior year comprising 47% of total revenue.

We sold 56 da Vinci surgical systems, up from 39 during the second quarter of last year.

13 of the 56 systems were sold outside the United States; 12 were second, third, or fourth systems to existing customers driven by procedure growth in those accounts.

We ended the second quarter with 656 da Vinci systems installed worldwide.

We generated an operating profit of $54 million, 39% revenue before noncash 123R stock option expense up 76% from the second quarter of last year.

GAAP net income grew to $31 million, 22% of revenue, up 84% from last year.

We ended the quarter with $448 million in cash and investments, up $63 million from last quarter.

We generated $204 million in the last 12 months.

Because of the significant noncash stock option and statutory tax expenses reflected in our GAAP net income, we believe that operating profit before noncash 123R stock option expense, is the best measure of our actual financial performance.

While we reported $31 million in GAAP net income for the quarter, our cash grew -- our cash and marketable securities grew by $63 million including $11 million received from stock options exercised during the quarter and $5 million invested during the quarter in fixed assets and working capital.

We continue to see solid sequential quarter-over-quarter procedure growth led by gynecology and followed by urology.

We believe that procedure growth continues to be the primary driver of our business.

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

The da Vinci S continued to dominate our systems mix accounting for 55 of the 56 systems sold.

High-definition vision systems dominated in the United States.

35 or over 80%, of the 43 systems sold in the U.S., were high definition.

We launched high-definition vision system in our international markets at the end of the quarter.

Two of the OUS systems sold were HD.

We completed the move of our European headquarters to France -- from France to Switzerland and grew our Intuitive team by 173 members in the last 12 months to 659 at the end of the second quarter.

With that, I'll pass the time over to Marshall Mohr, our chief financial officer.

Thank you, Lonnie.

Total second quarter revenue increased to $140.2 million, up 61% from $87 million for the second quarter of 2006 and up 23% from $114.2 million for the first quarter of 2007.

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

Da Vinci hysterectomy and prostatectomy continue to be our fastest-growing procedures.

Second quarter revenues by product category were as follows -- instrument and accessory revenue increased to $45.8 million, up 76% compared with $26.1 million last year and 14% compared with $40.3 million last quarter.

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

The amount of instrument and accessory revenue we earn per procedure remained relatively unchanged at between $1,500 and $2,000 per procedure per established da Vinci accounts.

Including the impact of initial orders completed with new system purchases, instrument and accessory revenue continues to be between $2,000 and $2,500 per procedure.

Systems revenue increased to $74.1 million, up 54% compared with $48.1 million last year and increased 32% compared with $56.1 million last quarter.

The increase in systems revenue reflects increased unit sales as well as an increase in the average revenue per system.

Second quarter da Vinci Surgical System revenue reflects the sale of 56 systems, two of which involved trade-ins compared with 39 systems sold during the second quarter of last year and 44 systems sold in the first quarter.

37 of the systems sold during the quarter were our latest S model incorporating high-definition vision capabilities; 18 were S models incorporating standard vision capabilities; one was a refurbished four-arm standard system; 12 of the systems represented repeat sales compared to 13 repeat sales in the previous quarter.

Our second quarter average revenue per system including all da Vinci models but excluding upgrades was $1.3 million, which is $50,000 more than the average revenue per system in the first quarter of 2007.

The higher average revenue per system primarily reflects a higher proportion of our sales being comprised of our new HD model, which has a list price of $120,000 more than our da Vinci S standard vision model as well as lower proportion of our sales being comprised of da Vinci standard systems.

Upgrades, including fourth arms and HD, accounted for $1.1 million of the current quarter systems revenue compared with $1 million last quarter.

Service and training revenue increased to $20.3 million, up 59% compared with $12.8 million last year and up 15% compared with $17.8 million last quarter.

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

Total second quarter recurring revenue comprised of instrument, accessory, service, and training revenue increased to $66.1 million, up 70% compared with the second quarter of 2006 and up 14% compared with the first quarter of 2007.

Recurring revenue represented 47% of second quarter revenue compared with 51% in the first quarter, reflecting the significant increase in system sales.

Our second quarter 2007 gross margin of 67.1% was consistent with the 67% realized in the first quarter.

Total operating expenses for the second quarter of 2007 were $49.1 million compared with $42.2 million in the first quarter of 2007.

Operating expenses include $7.8 million of noncash -- stock option expense in the second quarter compared with $6.9 million of stock option expense in the first quarter.

The sequential increase of 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 $6.1 million reflects increased commissions associated with increased sales, increased spending on R&D, which included a minor amount to third party development costs, increased headcount, and increases in other costs associated with the growth in our top line.

Operating expenses for the second quarter also included $1.2 million of expense associated with the move of our international headquarters from France to Switzerland and the establishment of our new tax structure.

Our new international headquarters is now fully operational in Aubonne, Switzerland.

We added 44 employees during the second quarter ending the period with 659 regular employees.

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

Second quarter 2007 operating income was $45 million or 32.1% of sales compared with $34.3 million, or 30.1% of sales for the first quarter of 2007.

Our second quarter 2007 other income of $5.2 million increased compared with $4.6 million in the first quarter of 2007.

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

Our effective tax rate for the second quarter was 39%, which is consistent with the first quarter.

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

Our international tax structuring activities are proceeding on schedule but will not generate a reduction in our global tax rate until after 2008.

Our net income increased to $30.7 million, or $0.79 per share, up 84% compared with $16.7 million, or $0.44 per share for the second quarter of 2006 and up 29% compared with 28.0 million, or $0.62 per share for the first quarter of 2007.

Let me quickly summarize our results for the first six months of 2007.

Total revenue for the first six months of 2007 was $254.5 million, up 55% compared with $164.3 million last year.

Operating income for the first six months of 2007 was $79.4 million, up 72% compared with $46.2 million last year.

Operating income included $17.5 million of stock-based compensation charges in the first six months of 2007 compared with $11.6 million in 2006.

Net income for the first six months of 2007 was $54.5 million, or $1.41 a share, up 75% compared with $31.1 million, or $0.82 per share.

Now turning our attention to the balance sheet -- we ended the second quarter of 2007 with cash, cash equivalents, and investments of $448 million, up $63 million from the previous quarter-end and $117 million from December 31, 2006; $11 million of the cash generated in the quarter and $20 million of the cash generated in the six-month period was associated with stock purchase activities.

The remaining cash generated is primarily related to operating activities.

Our accounts receivable balance increased to $105.6 million at June 30, 2007, from $90.5 million at March 31, 2007.

The increase in accounts receivable is attributable to increased sales.

Our net inventory decreased to $24 million at June 30, 2007, from $26.3 million at March 31, 2007.

Our inventory turns at June 30, 2007, of 7.4 times per year improved compared with 5.6 turns at the end of the previous quarter.

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

Thank you, Marshall.

During the second quarter, we shipped 56 da Vinci systems; 44 systems in North America; eight into Europe; and four into rest-of-world markets.

55 of the 56 shipments were da Vinci S systems, and one was a standard four-arm system.

Of the 55 S systems sold, 37 were high-definition, or HD systems.

In addition, we sold eight HD upgrades to existing da Vinci S customers.

The 56 systems sold during the quarter minus the two trade-ins brings to 656, the cumulative number of da Vinci systems worldwide -- 504 in North America; 108 in Europe; and 44 in rest-of-world markets.

Twelve of the 56 systems sold during the quarter represented second, third, or fourth system sales.

Three hospitals, Memorial Hermann in Houston, Clarian North in Indianapolis, and Hartford Hospital in Hartford, Connecticut, purchased third systems during the quarter while Yonsei Medical Center in Seoul, Korea, purchased their third and fourth systems.

Clinically, we had another very good quarter with strong sequential procedure growth across all major surgical specialties, both U.S.

and internationally.

Our gynecological procedure business, paced by da Vinci hysterectomy, registered the largest sequential percentage growth for the quarter followed by urology.

Our cardiothoracic and general surgery procedure business, which are approximately the same size, showed strong, steady sequential procedure growth.

Ben will provide you with updated procedure guidance during his review.

During the quarter, we had 42 da Vinci-related clinical papers published within various peer-review journals and in June we launched the da Vinci HD vision system to international customers.

We participated in 11 conferences within urology, gynecology, general surgery, and cardiothoracic surgery.

However, our review highlight is from only two, beginning with the American Urology Association, or AUA.

Our AUA presence this year was exceptional.

The program included 78 moderated da Vinci abstracts, 41 on dVP alone, along with three AUA-sanctioned post-graduate robotic courses, five live da Vinci telesurgery broadcasts, and two AUA-sanctioned robotic lunch programs.

Our two da Vinci HD demo systems were running nonstop throughout the conference while our salespeople were busy writing leads.

Also encouraging was the fact that there were 37 non-dVP-moderated abstracts at this year's program, which included da Vinci nephrectomy, radical cystectomy, pyeloplasty, sacral colpopexy and various pediatric urology procedures.

A key observation from this year's AUA has to do with the procedure leverage dVP has established for us throughout the entire specialty of urology and perhaps beyond.

Five short years ago when dVP was in its infancy, there were a handful of urologists talking about it and almost no one presenting case data.

At this year's AUA, the Henry Ford Group led by Dr.

Mani Menon, presented their case data on a series of 2,632 patients.

The series included patients with T2, T3, and T4 cancers with a reported overall positive margin rate of 13%.

13% compares very favorably to Henry Ford's 2003 "British Journal of Urology" publication in which they reported a 23% overall positive margin rate in a series of 1,400 open prostatectomy patients.

The group also reported a post-operative intercourse rate of 93% in men receiving the veil of Aphrodite technique who were without any pre-operative erectile dysfunction.

On the same day, the Ohio State group led by Dr.

[Vipatel] reported on their series of 1,300 consecutive dVPs and showed an average operating time of only 95 minutes, a one-day hospitalization, with an overall margin rate of 11%, and only 4% in patients with organ-confined disease.

With large evidence-based patient series such as these becoming more common each quarter, it gives us as well as many of our customers the confidence to say that dVP is rapidly moving toward a standard of care for prostatectomy in the United States.

However, when you consider dVP adoption on a global scale, the penetration is significantly less.

We are also beginning to see our dVP momentum pull along a number of other urologic procedures.

Examples such as City of Hope Group presenting their initial 60 da Vinci radical cystectomies, or the group out of Innsbruck, Austria, reporting on their initial 26 da Vinci partial nephrectomies, or Tulane University group presenting on their data of six sacral colpopexies and so on.

We have always believed that a heavy dV focus with commensurate resourcing would ultimately be the most effective way for us to access the entire specialty of urology, which now appears to be taking place.

This year was the first time we exhibited at the American College of Gynecology Conference, or ACOG, which took place in San Diego.

We were quite pleased with the level of da Vinci activity at this conference.

On previous calls we highlighted our success at some of the specialty GYN conferences such as the Society of Gynecologic Oncology Conference, or SGO; or the Association of Advanced Gynecologic Laparoscopy, AAGL; whereas, ACOG is the predominant professional organization for the entire field of OB GYN.

In addition to the heavy test drive schedule for the HD system, our booth was filled with physicians listening to clinical lectures on da Vinci hysterectomy, myomectomy, and sacral colpopexy.

At the same time, ACOG was conducting da Vinci lectures and hands-on didactic sessions as part of their advanced laparoscopic post-graduate course in which 120 surgeons participated.

During the plenary session, ACOG featured two live da Vinci hysterectomies -- one for endometrial cancer broadcast from the University of North Carolina; and a second for benign pathology broadcast from the Mayo Clinic.

The sessions were very well attended and enthusiasm high.

Customer requests for GYN case observation, training, case proctoring, which are all early indicators to the strength of the business remains high.

In summary, we remain very bullish on our GYN opportunities.

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

Thank you, Aleks.

As in previous earnings calls, I will be providing our updated forecast on a GAAP reporting basis including stock compensation expenses.

I will also provide an estimate of the stock compensation expenses separately so that you can calculate meaningful comparisons that exclude these noncash expenses.

We reported better-than-anticipated growth in revenue and profits in the second quarter, and we expect to continue this momentum in the second half of the year.

Therefore, we are increasing our previous guidance for revenue and profits for 2007.

We have mentioned in the past that the primary driver for the company's growth is the growth in procedures performed with the da Vinci System.

Today our top two procedures are da Vinci Prostatectomy, or dVP, and da Vinci Hysterectomy, or dVH.

At the beginning of the year, we had given guidance that we expected dVP growth this year to exceed 50%.

Based on what we have experienced in the first half of the year, we now expect dVP growth for the year to exceed 65%.

With regard to dVH, we had previously given guidance that we expected dVH growth this year to exceed 150%.

We now expect dVH growth for the year to exceed 175%.

Now with regard to revenue -- in our previous call we estimated our instrument and accessory revenues to grow between 65% and 70% over 2006.

Based upon stronger procedure growth led by dVP and dVH, we now expect 2007 instrument and accessory revenue to grow between 70% and 75% over 2006.

Our system sales were particularly strong in the second quarter across new and existing customers and across domestic and international customers.

We expect to have continued year-over-year growth in system unit placements this year.

We are forecasting system revenue to grow between 30% and 35% over 2006, which is up from our previous forecast of 20% to 25%.

The majority of this growth is resulting from an increase in system units while part of this growth is also driven by higher average selling prices for systems.

Our system ASP was approximately $1.3 million for the second quarter, and $1.25 million in the first quarter.

For the balance of the year, we expect our system ASP to remain between $1.25 million and $1.3 million.

This is approximately $100,000 higher than our average ASP in 2006.

We expect service revenues to grow approximately 50% above 2006 levels, up from our previous forecast of 45%.

Overall, we now expect our total 2007 revenues to grow approximately 45% to 50% over 2006 compared to 40% previously forecast.

Please note that we typically have a seasonally softer third quarter as electrosurgeries are often postponed during the summer months, and summer vacations often disrupt our customers' buying patterns.

Therefore, we expect total revenue in the third quarter to be about the same as our revenue in the second quarter.

We should then see sequential revenue growth in the fourth quarter, which is seasonally our strongest quarter of the year.

With regard to gross profit margin, we have consistently maintained gross margins at around 67% over the past few quarters, and we expect our gross margins to remain at approximately this rate for the remainder of the year.

Moving to operating expense, there are a number of factors, which are driving our operating expenses higher than we previously forecast.

First, higher revenues are driving higher sales commissions, which are reflected in SG&A expense.

We expect our SG&A expense to grow between 40% and 44% for the year.

In the R&D expense category, we have stepped up our investment in internal projects as well as co-development projects with third-party corporate partners.

Our co-development projects with third parties are expected to increase our quarterly R&D expense by approximately $1.5 million per quarter starting in the third quarter.

In total, we expect our R&D expense for 2007 to be 48% to 52% higher than our total R&D expense for 2006.

We expect our total operating expense for 2007 to be 41% to 45% higher than our total operating expense in 2006.

These forecasts for gross margin and operating expense include the impact of FAS123R stock compensation expense.

Our second quarter operating income included $9.4 million of noncash stock compensation expenses allocated as follows -- $1.5 million in cost of sales; $5.8 million in SG&A; and $2 million in R&D.

For the year we expect the impact of FAS123R to be between $36 million and $37 million with a percentage of allocation to P&L lines consistent with Q2.

Other income expense, which is mainly comprised of interest income is expected to be approximately $21 million to $22 million for the year compared with a $20 million estimate we had previously forecast due to higher cash balances.

With regard to income tax, we continue to expect GAAP tax rate of 39% for the remainder of the year, however, we expect our effective cash tax expense to be 15% to 20% for 2007.

Regarding shares outstanding, we currently have 37.7 common shares outstanding.

We also have approximately 33.7 million option shares outstanding.

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

For calculating EPS in Q3, we expect the share count to be between 38.7 million and 39 million shares.

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

Thank you.

(Operator Instructions) Tao Levy.

Congratulations, great numbers.

I just wanted to flesh a couple of things out.

The very impressive system number -- last quarter was a little bit different where, versus our numbers, you know, the system was a little bit softer, yet utilization was really strong, and then now you had a little bit of the reverse versus our numbers here in this quarter.

You've seen in Europe before where you have greater utilization drive system placement -- is that what we're seeing this quarter versus the first quarter again?

Hey, Tao, this is Jerry.

I just wanted to point out, as you have suspected, we've experienced an increase in utilization within our installed base across all areas of the world, and it's being led primarily by the increase in GYN procedures and dVP procedures, and as hospitals reach capacity with their da Vinci systems, in many cases they evaluate the need for additional systems, and that launches second or third system sales, as Aleks mentioned.

But, overall, what we have seen is an expansion of robotic surgery programs in hospitals, and it's taking place at a very consistent and solid rate, so we're pretty pleased with that.

Great.

And maybe could you flesh out the whole -- any way to flesh out the number of systems or the percentage of systems that were purchased due to the interest in gynecology versus urology?

You know, that's always a hard thing to do, for us, Tao, because as we always said that our focus is multiple specialty, and so to kind of draw a line to say, "This one was GYN," or "That one was urology," is an imperfect science.

What we can say is that since the approval of GYN back in the May timeframe of 2005, we've seen a preponderance of second system placements, and one can conclude that there is just not enough capacity in the hospitals that have multiple specialties seeking to use the system.

So it continues to happen, but it would be hard for us to tell you exactly what percentage is due to this, but it's something we see continuing.

Okay, and then the last question maybe for Gary and Jerry -- given your new roles at the company, maybe you could talk about the challenges and opportunities that you see for robotic surgery over the next several years worldwide.

I know it's probably a tough question, but any insight there would obviously be helpful for us as we try to see where this is going, again, over the next five years.

Tao, if you've got a couple of hours -- Tao, our challenge is just to continue to drive the key procedure adoption, and I think Aleks did a really great job of pointing out that with our success in driving dVP and growing that procedure, we gain tremendous leverage, if you will, for additional procedures in the same specialty.

So we're not just moving a procedure, but we're moving the specialty of urology, and this is also what we're challenged with in gynecology.

So, simply put, we're driving a procedure business, and our customers are investing in robotics programs that are multi-specialty.

I'll add something on the development side.

I think the common theme for us on development is that we want to both enable new procedures as well as refine and improve the products for existing procedures, and so we're really structuring ourselves to do that.

Eli Kammerman.

First question is -- it looks like your average utilization is still solidly below three procedures per week per system over your installed base.

So, how do you reconcile that with a hospital's need for a second system, because they're bumping up against capacity ceilings?

Eli, this is Ben.

We definitely experienced growth in utilization during the second quarter over the first quarter.

We've continued to see increased utilization on a quarterly basis fairly steadily over the last, say, 10 quarters.

Now, keep in mind that our metric of an average of between two and three procedures per week, and it still is in that range, is an average.

And so we've mentioned we have a number of people that are over five procedures a week, which tends to be a bit of a point where they have trouble scheduling cases and then needing to buy additional systems and, at the same time, you might have newer users that are less than two procedures a week.

So the key here is that the utilization continues to grow, on average, and that means everyone is using their systems more.

Well, the other point is we're constantly bringing in new customers, right?

We've got 56 new systems.

Of those, 44 were new customers, and those ramp up.

It takes some time to ramp them up, so we're always constantly diluting on the low end and growing on the top end.

And I think one more piece of information that is always helpful is that we have 504 systems in North America, and we have 63 customers or, roughly 63 customers in North America that have more than one system.

So we have a total of 420 different centers of which 63 have more than one system.

In other words, 15% of the U.S.

base of hospitals has more than one system.

And so when you add a second system to, let's say, a hospital that's doing 300 or 400 procedures per year, their average gets cut in half and even, despite that, we're continuing to grow the overall metric.

And so I think it's important to recognize it's not exactly a linear algorithm because there's a lot of moving parts here.

The bottom line is that we have a lot of people that are requiring second systems, and we're pleased to sell them.

My next question is in the area of OB GYN, can you give us some rough idea of what fraction of procedures are for oncology-related surgeries and what fraction are for other?

What we're able to track pretty clearly is the type of surgeon that's actually performing the operation.

In other words, a GYN oncologist or a non-oncologist.

What is less of a perfect science is exactly the pathology, but it's pretty clear that the GYN oncology's practice is primarily oncologic procedures.

But I can say, at this point, again, without having an exact breakdown, that we're tracking both sides, and both sides are tracking very nicely, both complex, benign, as well as oncologic, and we see that, obviously, based on our upped guidance continuing to grow very strongly.

Tim Nelson, Piper Jaffray.

Tim Nelson.

A wonderful quarter -- the most common question I get from my clients on your growth rate is how much longer can the radical prostatectomy, dVP, procedure grow?

Can you comment on your penetration rate and where you think it tops out and maybe some comments on where you think the market size is now?

I know it's growing at the expense of some other procedures.

Well, you know, Tim, you just hit two pieces that, again, are always very difficult for us to quantify.

I'm going to add a third -- U.S.

versus OUS.

So when you look at all three of those pieces, it's hard for us to kind of answer it in the way that you formed it on where it's going to top out.

I think if you look at the way we've reported it, we've given a fixed approximation of 90,000 procedures in the United States, and we have based everything off of that.

But when you look at it on a global basis, it's a significantly larger number.

When you look at the moving parts, which you accurately called out between brachytherapy, external beam radiation, watchful waiting, et cetera, unfortunately, that's a lagging number so we really don't know what that translates into now.

So as a result we feel very strongly that we can give, with confidence, an upped guidance of a 65% annual growth rate taking it up from 50%, and that's about as clear as we can go.

I guess the other comment, longer term, I'd make is that we do track procedures against new diagnoses, and that continues to grow, and if you look at it by state, there are some states that are highly penetrated, and some that are not yet.

And we're seeing growth in all of them, even the most highly penetrated states.

So that's encouraging.

I think, also, is that if you look at -- you talked about the prostatectomy -- but there are multiple other procedures where we are now discerning a clear adoption curve with a very high correlation factor.

So I think we don't plan to stop with prostatectomy, we're following with gynecology, and as Jerry pointed out, and I think it's an important one, is we started with one procedure within a group, and pretty soon it expands in that specialty to other procedures.

And so where we bring value, and as Gary pointed out, we continue to try to drive the value add that we bring to existing procedures as well as the value add we bring to new procedures.

On the R&D front, you talked about some co-development agreements.

Can you comment on any new products that come out over the balance of the year that you're excited about on the instrumentation side, and if that -- any of those new products may help increase that ASP per procedure?

We don't announce products before they're ready to ship, so we'll announce those as they come ready.

I will say that we're accelerating our R&D activities in several areas including investments in imaging technologies of robotics, software, instruments in applied research.

In addition, we've stepped up our technical partnerships with outside third parties.

I'll tell you also we're pleased with the progress and the pace of our R&D teams, to date, and as new products come out, we'll share with you at that time.

You asked about ASPs, and we're guiding that ASPs will stay around the same range that we've seen them in the first half of the year.

This is for system sales, obviously, and it's going to be driven by things like product mix and geographic mix as it has in the past.

Okay.

I was thinking more of the revenue per procedure on the instrumentation side.

It's been flat for a long, long time, and I'm just wondering if it's ever going to break out of that range?

You know, and if you're driving adoption, we're not necessarily driving to increase -- or striving to increase the costs per procedure to our customers.

So, you know, that is not part of our strategy.

Our strategy is one of penetration, system placement, and procedure adoption.

And I think, just on top of that, it's -- we're conscious of the way our customers evaluate their costs, and as they are reimbursed on a per-case basis, it's important for us to really recognize the way their business is structured.

So I wouldn't think of that as just one that we could just continue to grow and grow through technology.

Okay, and the final question is -- back on the installed base -- it sort of relates to the utilization rate -- do you have any handle at all on the numbers of systems of theirs that are actually idle, that don't get used much, and do you see any trends in -- you know, as procedures grow and utilization grows that those older systems that maybe fell out of use are getting reused or getting refurbished or getting more active?

Tim, that's exactly what happens.

As of the success of robotic surgery and the increased adoption of the prostatectomy and da Vinci hysterectomy grows, systems that were not optimized become busier and also our field sales teams are not selling robots at this point in time, they're selling robotic surgery programs that bring the benefits of the technology to patients in multi-specialty.

So this enables us to take systems that might have been laggards or stalled systems and move them into the active state, and we do that very proactively.

And is that part of the trade-in program -- so you can keep your [products] going?

No, Tim, that's not part of the trade-in program.

Vincent [Ritchie], Wachovia.

I've got a couple of quick questions for you.

First one is do you have a split on the international and OUS revenues?

Yes, it's been tracking pretty consistently in the 80% to 85% domestic and that means 15% to 20% international.

It didn't change significantly this quarter versus previous quarters.

More on the procedural side -- have you guys been tracking residency programs that are training their residents on the system and exposing them to the them?

You know, I don't think that is an absolute metric we track.

I can say anecdotally that the awareness of robotic surgery in -- you know, starting, if you will, a little up the food chain.

In other words, fellowship programs down into residency programs starting with senior residents, fourth year, third year, second year, et cetera.

Anecdotally, I can tell you that there is more exposure there, but in terms of a number or some form of a metric, I can't give you one.

Okay, I mean that was just something that we noticed at SGO -- that there were a couple of posters about that.

I was just curious if that was something that --

Clearly, it's happening.

Yes, it's happening, but it's just a hard one to keep real time.

The five procedures per week metric you mentioned -- when you're talking about that, are you talking about a multi-specialty hospital or is that a hospital that's using it for one specialty?

Because that seems kind of low for a hospital that would be just a straight urology hospital.

Yes, that's a good point, and I'll take the opportunity to repeat some of the concepts from before.

When a system is being shared among multiple specialties, we find that the capacity of the system is lower than when it is fully dedicated to one specialty because it's just harder to schedule across different specialties.

And so we said that when there is sharing among different specialties, we've seen people buy second systems when they would hit somewhere on the order of 250 procedures a year, whereas, we would see people who are, let's say, exclusively in urology get up to 400 procedures per year on a system before they would buy their next system.

And how many of the hospitals are presently multi-system hospitals?

We have 71 worldwide, of which 63 are in North America, and the breakdown, to just give you the specifics on how many have per -- I should say, we have six hospitals that have four da Vincis, we have 15 hospitals that have three, and we have approximately 50 that have two.

And then my last question is in terms of the partnerships that you're looking at, are these for specific specialties such as general, cardio, OB GYN, or is it more just towards specific types of technologies?

It tends to be more broad than single, and I guess I would say it really depends on the partnership as well.

If there's one that is a particularly good fit, then we'll pursue it for a single specialty, but most of them are broader than a single.

Rick Wise, Bear Stearns.

Good afternoon, everybody, and truly congratulations on a terrific quarter.

A couple of things -- clearly, we saw a lot of operating leverage this quarter with operating expenses growing well below the sales rate, and, Ben, you've given us some very clear cut and excellent guidance, going forward.

But just, in general, as we think about whether it's the second half or the next two years, should we expect to see this kind of significant operating leverage just in a general way as we look out to the future?

Rick, let me take a shot at that.

I think that we do manage the business on a fixed and variable basis, and so we do understand operating leverage well.

Our longer-term goal is to bring those more in line, because we are investing in R&D and a lot of other areas.

I'm sorry, Lonnie, more in line meaning --

More in line with sales growth.

So they would be equivalent?

Yes, so they'd be more equivalent.

I think that when we have -- literally, when we have this kind of growth, it outpaces our ability to build the infrastructure.

Now, are we, all of a sudden, going to try to -- we are not going to have a culture here where we build infrastructure faster than we build sales, that just won't happen.

So there's probably some leverage, but I would not factor into a model a lot of operating leverage, going forward.

We'll be investing in infrastructure, because we're investing in the future.

I mean, we're still in the very, very early stages of this market and this technology and where it could go, and we want to remain the leader.

And so we will continue to invest heavily to do so.

Okay.

Our phone cut out for a minute, so I apologize if I'm asking a question that's been asked.

Just tell me if you have.

First quarter units were less than we expected, second quarter a little more.

And I know, Lonnie, how fond you are of focusing on quarters.

It's not so much that question as is this the kind of variation we should expect to see on randomly much stronger, randomly a little less, with continued strong procedure growth?

Again, just in a directional kind of way?

I suspect there will be a variability in that and part of it is self-induced, to be fair, in terms of our ability to hire and build our clinical sales organization as well as our area sales managers who sell the systems.

I think that we will have variability, and we know that there's seasonality to the capital purchase cycle.

We've mentioned that before, we always leave it usually on the capital side, the second and fourth quarters are the strongest -- or we see a stronger emphasis.

I suppose that's sometimes because of different budgetary cycles they're on, and procedures follow more a different cycle based upon patients and timing and vacations and a lot of other things.

So I think that there's variability there that is driven by just the structure of our health care system and individual's personal priorities.

Okay, and let me ask a really dumb question related to that -- are we now in a 50- to 60-unit range now?

Is that just where we are just given the opportunities in new procedures?

I'm not looking for a specific forecast but more have we kicked up to a new high level going forward?

Rick, for this year, you're probably in the right range.

The guidance that we've given for system revenue growth probably has us in that range.

And last, maybe a question for Aleks.

When we went to the SGO meeting, docs were -- I've asked you this before, Aleks, but just an update on this -- docs were howling that the adoption hurdles in their mind were staff training issues.

Maybe you could give us a little more color on what's going on and has that changed and evolved and maybe are docs' perceptions changing about the amount of time it might take to get their staffs up and running?

Thanks.

When you're referring to staff, I'll maybe just answer it two ways.

One is, if you mean the hospital staff, nursing, assistants, and so on and so forth, we take a great deal of responsibility for that training, and our ability to deliver high-quality training on a scalable level has been pretty strong to this point.

But I don't think, in my mind, at least, that that is going to be a limiting element to the growth of the business.

Now, if you're talking about staff in terms of other surgeons on the hospital staff, that takes on a little different complexion, and that one certainly requires the help of different physician peers and different training centers and so on and so forth.

While it is true that that could be a limiting factor, I think we're managing it very well and are not expecting it to slow us down.

Did I miss -- did you give us service revenue -- did I miss that number?

Again, our phones cut out here.

The growth in service revenue for the year is going to be 50% year-over-year.

We have time for one more question.

Mark Richter, Jefferies & Company.

Thanks, guys, and good quarter.

First question, as most of mine have been answered, I've got a couple of quick ones.

First one -- how was the procedure of volume growth in the quarter for general surgical procedures, and can you comment specifically on bariatric surgery and then maybe cardiothoracic market and how that's evolving?

If you look at cardiothoracic and general surgery, the growth rates were roughly the same for the quarter.

Both had nice, strong growth.

Specifically, within cardiac, as we've talked about in the past, our target areas are mitral valve repair and revascularization.

During the quarter we did very well with those procedures, and probably most notable in there are some of the new centers that are beginning to perform mitral valve repair; namely, the Cleveland Clinic, which, as probably most of you know, is the preeminent cardiac center -- one of the preeminent cardiac centers anywhere in the world with an enormous valve practice.

So they are up and running and doing very well with it.

Within bariatric, again, as we've sort of said in the past, we see that being a nice steady growth driver, but there isn't anything unusual about it to really report on, so I think I would classify both of those as good, solid, steady growth.

Okay, and I apologize if I missed this, I did walk out of my office for a quick second, but did you comment on dVP penetration for the quarter and where you stand now?

Well, what we've said earlier was that we've grown the guidance for the remainder of the year to be taking it up from 50% growth to 65% growth.

But we did not give a percentage or a penetration number but rather a growth target for the year.

And just curious why you're not giving penetration numbers now as you have in the past?

Well, we actually got away from that at the end of the fourth quarter of 2006.

So we have not given it in 2007, and the reason is that there are just too many moving targets and what we've heard from a number of people is that a global growth rate is probably of more value to modeling, et cetera, than is some type of penetration, especially with the market changing within radiation therapy, prostatectomy, watchful waiting, and so on.

So we made that change earlier this year, and I think it's one that we'll continue with.

Mark Richter.

The last question is -- as obviously, your cash balance continues to build, what do you plan on doing with your cash?

Thanks.

That's one of my favorite questions.

The fact is that we're -- this is a quickly evolving market.

There's a lot of technology that's being developed, and procedures that we think are opportunities, and the opportunities and the generation of cash don't always perfectly match in terms of timing.

And so we are essentially building a cash -- building our cash, and we will invest it as we find opportunities for technology and things that support robotic surgery.

We're not going to go off and buy another company because we think that's interesting.

We're going to be focused on those investments that will drive the penetration of robotic surgery and the adoption curves for the procedures we're focused on.

So, you know, we think cash is good, and we will spend it appropriately where we find opportunities.

We won't get cash happy.

It's not burning a hole in our pocket at this point in time.

That was our last question.

As I said last quarter, while we focus on the financial metrics such as revenues and profits, cash flow, during these conference calls, our organizational focus is on increasing patient value by improving surgical outcomes and reducing surgical trauma.

We believe that adoption is procedure-specific and patient-driven.

It is our goal to help the surgeon deliver a significant shift in value to the patient, and we define patient value as efficacy of the procedure divided by its invasiveness.

Dr.

Lee Siwek, who is the chief of cardiac surgery at Sacred Heart in Spokane, Washington, told us last week that the da Vinci system had enabled him to repair the mitral valves of two patients who could not tolerate a sternotomy or a minithoracotomy due to severe bone disease.

One of these was a 49-year-old with osteogenesis so severe that he cracked his ribs by merely coughing.

Dr.

Siwek repaired the man's mitral valve with a da Vinci without complication, and he was released from the hospital two days post-surgery.

The other patient was a 63-year-old with several mitral valve disease, osteoporosis, and scoliosis, and he was released three days post-surgery.

Both men are doing well and have been given a reprieve from the long-term sentence of congestive heart failure.

But Dr.

Siwek also said that he was no longer a customer only.

His wife recently had a hysterectomy performed with the da Vinci system.

She went kayaking four days after surgery and played nine holes of golf six days post-surgery.

He said that was in sharp contrast to a woman who was supposed to play in a golf tournament with one of his partners and canceled because she had a hysterectomy six weeks prior to the tournament and still did not feel well enough to play.

Patients like Dr.

Siwek's wife become our strongest advocates for surgery with the da Vinci system.

So that is the key to our success.

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

That concludes today's call.

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

We look forward to talking to you again in three months.