直覺手術 (ISRG) 2007 Q4 法說會逐字稿

Welcome to the Intuitive Surgical Inc.

fourth-quarter 2007 earnings conference call.

(OPERATOR INSTRUCTIONS).

Today's call is being recorded.

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

I would now like to turn the call over to Sarah Norton, Investor Relations.

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

With me today we have Lonnie Smith, our Chairman and CEO; Marshall Mohr, our Chief Financial Officer; Aleks Cukic, our Vice President of Business Development and Strategic Planning; Ben Gong, our VP of Finance, and Gary Guthart, our President and Chief Operating Officer.

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 reply 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 the fourth 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 the fourth quarter's financial results.

Next, Aleks will discuss sales and marketing highlights.

Then Ben will provide our financial forecast for 2008, 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.

2007 was our third consecutive year of over 60% topline growth.

We grew total revenue to $601 million for the year and $189 million in the fourth quarter.

Operating highlights for the fourth quarter are as follows.

We sold 78 da Vinci Surgical Systems, up from 50 during the fourth quarter of last year.

20 of those systems were sold to existing customers.

Our international team had an excellent quarter, contributing 26 of the 78 systems sold.

We ended the fourth quarter with 795 da Vinci systems installed worldwide.

Total revenue for the quarter was up 68% from last year.

Instrument and accessory revenue increased to $56 million, also up 68%.

Total recurring revenue, including service, grew to $81 million, up 63% from the prior year comprising 43% of total revenue.

We generated an operating profit of $83 million, 44% of revenue before non-cash 123R stock option expense, up 98% from the fourth quarter of last year.

GAAP net income grew to $49 million.

26% of revenue, up 108% from last year.

During the full year of 2007, we sold 241 da Vinci Surgical Systems, up 42% from prior year.

Total revenue grew to $601 million, up 61%.

Recurring revenue to $276 million, up 66% comprising 46% of total revenue.

We generated $243 million in operating profit, 40.5% of revenue before non-cash 123R stock option expense, up 83%.

GAAP net income grew to $145 million, 24% of revenue, up 101%.

We ended the year with $635 million in cash and investments, up $102 million from last quarter and $305 million from last year, which after excluding $56 million in cash received from the exercise of stock options and adding back 22 million invested in working capital and plant, property and equipment during the year accounts for 188% of our reported GAAP net income for the year.

This is a reflection of a significant non-cash stock option and statutory tax expenses reflected in our GAAP net income and is the reason that we continue to believe that operating income before non-cash 123R stock option expense remains the best measure of our actual financial performance.

Adoption of surgical robotics is procedure-specific and patient-driven.

We continue to drive the adoption curb for robotically assisted surgery procedure by procedure.

So with our higher growth procedures, high-growth defined as over 50% for the year including gastrectomy, pulmonary lobectomy, prostatectomy, radical cystectomy, myomectomy, nephrectomy, hysterectomy and Sacrocolpopexy.

Some of these were measured off a relatively small prior year basis, but we've learned from past experience that that is how new adoption curves begin.

The da Vinci S continued to dominate our systems mix in 93% of systems sold.

High-definition vision systems accounted for 74% of the systems in the quarter and 66% of the systems for the year.

We continue to make significant progress in terms of innovation and efficiency in every area of our business.

Some 2007 data points you might find of interest include, we added 201 employees during the year, ending the year with 764 employees.

Revenue per employee grew to $905,000 in 2007 compared to $756,000 in 2006.

Instrument accessory revenue per system was up 21.8% to $302,000 from $248,000 in 2006.

Cash generated before cash received from stock option exercise and cash invested in working capital property, plant and equipment was $6.96 per share.

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

Thank you.

Total fourth-quarter revenue increased to $189.4 million, up 68% from $112.6 million for the fourth quarter of 2006 and up 21% from $156.9 million for the third quarter of 2007.

Fourth-quarter revenue by product category were as follows.

Instrument and accessory revenue increased to $56.1 million, up 68% compared with $33.3 million last year and 13% compared with $49.5 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 earned per procedure remained relatively unchanged at 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 $108.6 million, up 73% compared with $63 million last year and up 27% compared with $85.5 million last quarter.

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

Fourth-quarter da Vinci Surgical System revenue reflects the sale of 78 systems compared with 50 systems sold during the fourth quarter of last year and 63 systems sold in the third quarter.

Two of the system sales in the quarter involved trade-ins where a customer upgraded two of his four systems from da Vinci standard systems to da Vinci S systems with HD.

58 of the systems sold during the quarter were our latest S model incorporating HD vision capabilities.

12 were 4 arms incorporating standard vision capabilities, two were 3 arms models and six were standard systems.

26 of the systems sales were outside of the US compared with 17 in the third quarter.

Our fourth-quarter average revenue per system, including all da Vinci models but excluding upgrades, was $1.38 million, which is $50,000 more than the average revenue per system in the third quarter of 2007.

The higher average revenue per system primarily reflects a favorable geographic and product mix, including a higher proportion of our sales comprising HD systems and a higher proportion of our sales being direct sales to European customers, which are denominated in Euros which strengthened relative to the dollar this quarter.

Upgrades included fourth arms in HD accounted for $1 million of the current quarter systems revenue compared with $1.6 million last quarter.

Service revenue increased to $24.7 million, up 52% compared with $16.3 million last year and up 13% compared with $21.9 million last quarter.

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

Total fourth-quarter recurring revenue comprised of instrument, accessory and service revenue increased to $80.8 million, up 63% compared with the fourth quarter of 2006 and up 13% compared with the third quarter of 2007.

The current revenue represented 43% of total fourth-quarter revenue compared with 45% in the third quarter, reflecting the significant increase in systems sales.

Revenue outside the United States represented 26% of total fourth-quarter revenue compared to 22% in the third quarter.

The growth in international revenue reflects 26 systems sales compared with 17 in the third quarter.

Our fourth-quarter 2007 gross margin of 71.4% increased compared with 69.1% realized in the third quarter.

The increase in gross margin reflects higher average system ASPs, material cost reductions and productivity gains.

During the fourth quarter, we established a legal entity in Mexico and entered into a three-year building lease for 34,000 square feet in Mexicali, Mexico.

We expect to begin producing certain instruments in Mexico by the end of 2008.

Costs associated with these activities were not significant in the fourth quarter of 2007.

Total operating expenses for the fourth quarter of 2007 were $61.8 million compared with $54.5 million in the third quarter of 2007.

The sequential operating expense increase of $7.3 million reflects increased costs associated with the growth in our topline, particularly commissions, costs associated with patents acquired or licensed, increased spending on R&D, increased non-cash 123R stock compensation expense and increased headcount.

We added 67 employees during the fourth quarter, ending the period was 764 regular employees.

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

Fourth-quarter 2007 operating income was $73.4 million or 38.7% of sales compared with $54 million or 34.4% of sales for the third quarter of 2007.

Our fourth-quarter 2007 other income of $8.4 million decreased compared with $12.2 million in the third quarter of 2007.

Our third-quarter 2007 other income included a $4.1 million gain on the sale of Hansen stock.

In addition, we realized 900,000 more of foreign exchange gains in the third quarter compared to the fourth quarter.

The impact of these gains was partially offset by increased interest income of $1.2 million, resulting from interest earned on greater cash and investment balances.

Our effective tax rate for the fourth quarter was 39.9%, which brings the annual tax rate to 39%, which is consistent with our overall guidance.

We continue to utilize net loss carryforwards and employee stock-related tax benefits in 2007.

The amount of employee stock-related tax benefits increased in the fourth quarter such that we now expect our cash outlay as a percentage of pretax income will be less than 6% for 2007.

Our net income increased to $49.2 million or $1.24 per share, up 108% compared with $23.6 million or $0.62 per share for the fourth quarter of 2006 and up 20% compared with $40.9 million or $1.04 per share for the third quarter of 2007.

Let me quickly summarize our results for 2007.

Total revenue for 2007 was $601 million, up 61% compared with $373 million last year.

Revenue growth was driven by procedure adoption, and total procedures grew 74% in 2007 to approximately 85,000.

Da Vinci prostatectomy, our largest procedure, grew to approximately 55,000 procedures in 2007, exceeding our target growth of 65%.

And da Vinci hysterectomy, our fastest-growing procedure, grew to over 13,000 procedures in 2007, exceeding our target growth of approximately 175%.

Instrument and accessory revenue for 2007 was $191.7 million, up 72% compared with $111.7 million last year.

Systems revenue for 2007 was $324.4 million, up 58% compared with $205.9 million last year.

Operating income for 2007 was $206.7 million, up 93% compared with 107.4 million last year.

Operating income included $36.3 million of stock-based compensation charges in 2007 compared with $25.3 million in 2006.

Net income for 2007 was $144.5 million or $3.70 per share, up 101% compared with $72 million or $1.89 per share last year.

Now turning our attention to the balance sheet, we ended the fourth quarter of 2007 with cash, cash equivalents and investments of $635 million, up $102 million from the previous quarter end and up $305 million from December 31, 2006.

The $14 million of the cash generated in the quarter and $56 million of the cash generated during the year was associated with stock purchase activities.

The remaining cash generated is primarily related to operating activities.

Our accounts receivable balance increased to $130.4 million at December 31 from $120.5 million at September 30, 2007.

The increase in accounts receivable is attributable to the increased sales.

Our net inventory increased to $32.4 million at December 31 from $26.8 million at September 30, 2007.

Our inventory turns at December 31 of 6.5 times per year were slightly lower than the seven 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 fourth quarter, we shipped 78 da Vinci systems, which, as Marshall mentioned, included a two system trade-in.

Geographically 52 systems were sold in the United States, 17 in Europe and nine into rest of world markets.

72 of the 78 system shipments were da Vinci S systems, and the remaining six were standard da Vinci systems.

Of the 72 S systems sold, 58 were high-definition or HD systems.

We finished 2007 with 795 cumulative da Vinci systems worldwide.

595 in the US, 136 in Europe and 64 in rest of world markets.

Independent of the trade-ins, 18 of the 76 systems sold during the quarter represented repeat system sales to existing customers.

International systems sales were strong, and included four da Vinci systems into France, three into Belgium, three into Germany and three more into Korea.

Clinically we had an excellent quarter, a quarter in which we experienced strong sequential procedure growth in all four targeted surgical specialties both US and internationally.

Of particular note was the strength of the international procedure growth, most notably within dVP.

Our gynecologic procedure business paced by da Vinci hysterectomy and da Vinci Sacrocolpopexy registered the largest sequential percentage growth for the quarter, whereas urology registered the largest absolute procedure growth.

We also experienced significant growth within our kidney business, specifically da Vinci nephrectomy and partial nephrectomy.

And with the addition of several key cardiac centers during 2007, we saw a strong growth in our da Vinci Mitral Valve Repair business.

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

In Q4 we had 110 da Vinci related clinical papers published within various peer reviewed journals across multiple surgical specialties.

We also launched two new instruments, a new atrial retractor and the dual-blade retractor, which is targeted for kidney procedures.

Neither of these products will significantly boost our topline, but each will offer our resurging customers added utility, leading to a more optimized surgical procedure.

Optimizing each of our target procedures through the development of new products and product enhancements remains an important priority.

We participated in multiple conferences within urology, gynecology, general surgery and cardiothoracic surgery during the quarter.

However, I will limit my review to only a few.

The First Annual International Gynecologic Oncology Robotics Symposium was held at the University of North Carolina, Chapel Hill, with professional attendants estimated at 175.

The program covered several da Vinci procedures and included live surgery transmissions.

During one of the live cases, a Type III radical hysterectomy performed by Dr.

John Boggess, demonstrated how the most complex and demanding open cancer operations can be performed through minimally invasive techniques.

This very demanding procedure to the audience's surprise was completed in less than three hours.

During the Ask the Experts panel, Dr.

Boggess reported that of his 300 plus da Vinci cases, he has aborted only three radical hysterectomies due to metastatic disease, converted one oncologic patient due to severe fibroids and converted only one patient due to an unforeseen excessively large ovary.

He concluded by saying, and I quote, "Contraindications are disappearing as are complications.

But it takes time to ramp up." We came away from this symposium with an even stronger positive impression of Intuitive's market position within the field of GYN Oncology.

At the 36th Global Congress of the AAGL held in Washington D.C., da Vinci procedures were featured prominently on several fronts.

The AAGL put on two postgraduate robotics courses, as well as a robotics breakfast symposium.

All of these programs were very well attended.

In addition, the general AAGL program featured several abstracts, posters, presentations, summarizing clinical experiences with da Vinci hysterectomy, both benign and malignant, myomectomy and Sacrocolpopexy.

[Dr.

Rick Austapa] from the University of Miami presented a review of his first 26 da Vinci radical hysterectomies compared to his last 10 laparoscopic radicals and his last 20 performed through an open techniques.

He compared blood loss, operating time, lymph node yields, length of hospitalization and pain management regimens within each cohort.

Regarding blood loss, for da Vinci patients, it was 90 millimeters, laparoscopic 320 millimeters, open procedures 840 millimeters.

Operating time was 142 minutes for da Vinci patients, 212 for laparoscopy and 122 for open.

Lymph node yields in the da Vinci procedure was 34 compared to 21 in the lab case and 32 in his open procedures.

Length of stay was similar for both da Vinci and laparoscopic patients, 1.3 and 1.4 days.

However, for patients undergoing open radical hysterectomy, 3.7 days.

And finally, pain medication.

Patients undergoing a da Vinci hysterectomy or a lap procedure were on pain medications for an average of eight days compared to 22 days for patients subjected to an open radical hysterectomy.

Again, these were his first 26 patients.

He went on to say that as da Vinci operating times are now consistent with his open times.

When you overlay all the data he presented, it is pretty clear to see why he and others have chosen the da Vinci approach for their oncologic procedures.

Dr.

Maria Bell from Sanford Medical Center in Sioux Falls, South Dakota, presented cost data from her facility that measured both the direct and indirect costs associated with open hysterectomy, da Vinci hysterectomy and laparoscopic hysterectomy.

Her data showed that the total hospital costs for an open hysterectomy was $8763, which compared to $6388 for her da Vinci hysterectomies, and $5873 for her lap hysts.

The average length of stay for an open hysterectomy was 3.69 days compared to 1.19 days for a da Vinci hysterectomy and 1.37 days for a lab hysterectomy.think it is important to note that it is estimated that almost two-thirds of the 600,000 or so hysterectomies performed annually in the US are still being performed with conventional open surgical technique.

And when evaluating this data on a cost and performance basis, it becomes pretty clear why she and her group have converted the overwhelming majority of their hysterectomies, both benign and oncologic, to da Vinci.

One of the emerging da Vinci procedures in 2007 was da Vinci Sacrocolpopexy, which had a similar growth rate to da Vinci hysterectomy.

Though the opportunity is smaller than our da Vinci hysterectomy opportunity, perhaps 50 to 60,000 US cases, the patient value is tremendous, which we believe sets up well for patient consolidation.

standard therapy for advanced vaginal vault prolapse has always been Sacrocolpopexy performed through an open laparotomy incision.

However, the procedure is highly invasive and carries with it a long recovery period.

These patients are typically hospitalized for three days and experience postsurgical morbidity lasting four to eight weeks.

At the AAGL pre-Congress robotics course, Dr.

Patrick Culligan from Atlantic Health Systems in Moorestown, New Jersey, a surgeon who has performed over 50 da Vinci Sacrocolpopexy procedures, reported that his patients are experiencing significantly less blood loss.

Approximately 50 milliliters versus 265 milliliters for his open technique and are being released from the hospital in 23 hours.

Postoperative morbidity within his patient base has ranged from one to two weeks.

He has also reported a decrease in complication, which is a da Vinci theme that repeats from procedure to procedure, surgical specialty to surgical specialty.

Capping off the Congress was a live transmission of a da Vinci sacrocolpopexy performed by Dr.

Anthony Visco from Duke University Medical Center.

The interest from GYNs and Euro gynecologists performing sacrocolpopexy is strong.

This matched with the patient's desire for a gold standard operation performed minimally invasively sets up well for hospitals seeking to expand their women's health initiative.

The World Congress of Endourology was held in Cancun and was attended by nearly 1300 urologists.

There were multiple dVP presentations made at this meeting by both US and non-US surgeons.

But to me perhaps the key takeaway from this year's Congress was this sheer volume of da Vinci based moderated presentations and abstracts.

145 in total.

In addition to dVP, many of these presentations were focused on da Vinci nephrectomy and partial nephrectomy for kidney cancers, cystectomy and urinary diversions for bladder cancers, pyeloplasty and other urologic disorders.

The patient value that da Vinci brings to the treatment of all of these corresponding diseases is substantial, and as da Vinci prostatectomy grows toward the standard of care for prostate surgery in the US and other countries, it is clearly pulling with it several da Vinci opportunities within the vertical of urologic surgery.

This year's World Congress was further validation of this cumulative pull-through.

And within our procedure business, we experienced it more in Q4 than in quarters past and would expect it to continue.

In closing, I would like to bring your attention to an important paper that was featured in the November edition of the American Cancer Societys' publication, Cancer.

As many of you know, the last remaining criticism for performing dVP was the absence of longer-term published results.

It certainly has not slowed acceptance of the procedure, but it was out there nonetheless.

The Cancer journal published five-year dVP outcomes emanating out of the Vattikuti Urology Institute at Henry Ford Hospital in Detroit.

The series compared the results of Henry Ford's first 200 patients to the results of their last 200 patients between the years of 2000 and 2006.

The total population of their dVP series was 2766 patients.

The patients were operated on by three different surgeons.

This comprehensive review compared cancer control, functional outcomes such as sexual health and urinary continence, length of hospital stay and several other key variables.

The authors stratified their metrics by age, cancer grade, PSA and Gleason score, body mass index and other criteria.

There is far too much data to go into on this call, but by almost any measure the five-year data was used as very positive.

The author's conclusion is as follows, and I quote, the results of this large series of 2766 patients confirms the promising outcomes reported in earlier robotic-assisted prostatectomy series.

Perioperative complications remain low, and long-term outcomes are favorable.

Continued experienced and technical refinements of the procedure demonstrate improvements in operative parameters and functional results.

Robotic-assisted prostatectomy remains a safe and reproducible treatment for men with clinically localized prostate cancer."

This concludes my overview, and I will now turn the time over to Ben.

Thank you.

I will be providing our 2008 financial forecast on a GAAP reporting basis, including stock compensation expenses, and I will also provide an estimate of our stock compensation expenses separately so that you can calculate meaningful comparisons that exclude these non-cash expenses.

Starting with procedures, we continue to expect dVP and dVH adoption to drive the growth in our 2008 recurring revenues.

For 2008 we expect dVP procedures to grow approximately 40% from a base of approximately 55,000 procedures performed in 2007.

And we expect dVH procedures to grow approximately 150% from a base of approximately 13,000 procedures performed in 2007.

In addition, as Aleks mention, we expect to have continued growth in other procedures, particularly in the GYN specialty.

Overall we expect total procedures to grow at least 55% in 2008 from a base of approximately 85,000 procedures performed in 2007.

With regard to revenue, we expect our total 2008 revenues to grow approximately 40% over 2007.

Instrument and accessory revenues, which are specifically driven by procedures performed, are expected to grow approximately 55% over 2007.

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

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

System revenues have continued to grow strongly, and we expect to see continued growth in system placements throughout 2008.

We are forecasting system revenues to grow approximately 30% over 2007.

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

Our system ASP reached a high of $1.38 million in Q4 2007 and averaged approximately $1.33 million for all of 2007.

As a reminder, our system ASP can fluctuate quarter to quarter as a result of geographic mix and product mix.

For 2008 we expect our average system ASP to be approximately the same as last year, which was $1.33 million.

We expect service revenues to grow approximately 44% above 2007 levels with an average annual service revenue per installed system of $135,000 per year.

With regard to our first-quarter 2008 revenue, please note that the fourth quarter is seasonally our strongest quarter for system sales, and we typically place more systems in the fourth quarter than the following first quarter.

a result, we expect Q1 2008 revenues to be sequentially lower than the fourth quarter of 2007.

Then we expect to grow revenue sequentially each quarter throughout 2008.

With regard to gross profit margin, we expect to have modest year-over-year improvement in gross margin, driven primarily by improvements in manufacturing efficiency.

Much of the improvement we experienced in Q4 2007 came from favorable product mix, geographic mix and exchange rate changes.

These factors are difficult to predict and can fluctuate quarter to quarter.

Therefore, we are forecasting gross margins to be between 69 and 70% for the year.

Before moving to operating expense, I will provide a forecast on stock compensation expenses to explain clearly how these non-cash charges will likely change in 2008.

As you know, our stock price has appreciated significantly since this time last year.

And, as a result, we expect charges to income for stock compensation expense to be significantly higher in the coming year.

To review in 2007, we recorded approximately $36 million in stock compensation expense distributed as follows -- $6 million in cost of goods sold, $8 million in R&D, and $22 million in SG&A.

For 2008 assuming our present-day stock price, we expect to record approximately $60 million in stock compensation expense distributed as follows -- $10 million in cost of goods sold, $13 million in R&D, and $37 million in SG&A.

This would represent approximately a 67% increase in stock compensation expense for the year.

Now on a GAAP basis, I will describe our forecast for operating expense growth in 2008.

In the R&D expense category, we are continuing to invest in the development of new products internally as well as codevelopment with third parties.

We expect our R&D expenses to grow approximately 52% in 2008.

Many of our R&D program expenses are planned in the first half of the year.

As a result, we expect R&D expense to grow sequentially from Q4 2007 to Q1 2008 and then remain relatively flat for the remainder of the year.

In the SG&A expense category, we are continuing to expand our field sales organization to drive the growth of procedures, as well as system placements.

As Aleks mentioned, with several new procedures emerging, this presents opportunities for us to increase the number of procedures performed for installed systems.

To drive this growth in procedures, we are planning to increase our ratio of coverage of clinical salespeople per account.

We believe this will be instrumental in driving the continued adoption of existing and new procedures.

We are also continuing to add systems salespeople to drive the 30% growth in system revenues for 2008.

For the year we expect our SG&A expenses to grow approximately 40%.

Since a significant portion of our field sales headcount is being added in the first half of the year, we expect SG&A expense as a percent of sales to increase sequentially in Q1.

For the year we expect SG&A expense as a percent of sales to be about the same as it was in the full-year 2007.

We expect total operating expense, including FAS 123R stock compensation expense, to grow approximately 43% for the year.

We expect operating income to grow approximately 40% for the year.

For Q1 2008 we expect operating expense to grow approximately 10% sequentially from Q4 2007.

Other income and expense for 2008 is expected to come in between 36 and $40 million, driven primarily from interest income on cash and investments.

With regard to income tax, as mentioned in the past, we expect to report a GAAP tax rate of approximately 39% for the year.

However, we expect our effective cash tax expense to be less than 25% for 2008.

We expect to start reporting the benefits of our international tax strategy in the form of a lowered GAAP tax rate in 2009.

Regarding shares outstanding, we currently have 38.5 million common shares outstanding.

We also have approximately 3.1 million option shares outstanding.

Depending upon our average stock price during the year, a portion of the 3.1 million option shares will be added to the fully diluted shares calculation.

For calculating EPS in 2008, we expect the share count to be approximately 40 million shares in Q1 and growing to approximately 40.8 million shares by the end of the year.

Finally, with regard to capital investments, we have acquired property next to our corporate headquarters, and we plan to construct a 154,000 square foot manufacturing and engineering building on this property over the next two years.

This will translate into higher capital expenditures than we have had in recent years.

For 2008 we expect to spend approximately $60 million in capital expense, which is up from approximately $20 million spent in 2007.

That concludes our prepared remarks.

We will now open the call to your questions.

(OPERATOR INSTRUCTIONS).

Tao Levy, Deutsche Bank.

Congratulations on a very strong quarter and year.

Just a couple of questions on my end.

In terms of gynecology, given the strength and given all the comments you have made regarding the clinical benefit, is there any way that you guys are now comfortable sort of comparing it to the progress that we saw in the past with neurology?

You know, I think the place we are comfortable comparing it really is not in the metrics as much as it is in the patient value.

We are continuing to see more and more patients that are again looking for facilities that are performing these operations.

We continue to see physicians and professional societies that are making it a bigger part of their agendas at their meetings.

It becomes difficult to compare when you look at the number of systems we had installed at the time versus the number of systems we have today and the general acceptance of robotic surgery today.

So I don't think we're ready to tell you it is going to look -- the growth curve is going to resemble dVP.

Ironically it is fairly similar today.

In fact, dVH is probably a little bit bigger, but I don't think we can say that going forward.

Faster.

Faster I should say and bigger in overall procedures.

Okay.

And also on the manufacturing side with this what you're doing in Mexico, the gross margin guidance that you are giving.

Should we expect that to hit initially?

Is it also more of the S systems?

Is it the Euro?

Any better sense there?

We incorporate all of those factors in coming up with our estimate of the 69 to 70% gross margin for the year.

There is some startup costs with the Mexico operation.

However, we are continuing to bring down some costs just in our normal manufacturing efficiencies, and that is going to sort of balance that out.

And, as we said in the past, we really don't try to forecast what is going to happen with exchange rates.

Okay.

When you look at the new system sales that are taking place today, obviously in the past urology was still the driver.

It is probably still one of the big drivers.

How does gynecology fall into that selling process today?

Well, you know each day it becomes a bigger and bigger part of that process.

I would say that we're still focused on -- our salespeople are still focused on developing robotics initiatives within the hospitals, which include multiple specialties.

Gynecology plays a bigger and bigger role each day.

I would also say that the uptake of gynecology has in many instances put stress on hospitals that only have one system.

And I think you have seen again this quarter probably being the strongest side of that and a total of 20 systems that went to repeat customers.

So gynecology is a big player in that, and I think will continue to be and continue to expand.

Just lastly, I could not -- obviously the guidance that you are providing on the sales line of 40% is the highest level that you have ever started the year are off.

Any -- what is the thinking behind the big number that you're putting out there this early in the year?

What is giving you the confidence that 2008 looks like it is going to be potentially even better than -- last year this early?

If I take you back to last year, if you remember, hysterectomy was even earlier on in the adoption process.

And with the history that we have had this year with hysterectomy and how it has adopted, as well as continued progress in some of the other procedures and some of the pull-through procedures that we were identifying earlier, we feel more confident right now.

Eli Kammerman, Cowen & Co.

The first question is, as you look at the growth for prostatectomy, can you tease apart what fraction of the growth is related to additional market penetration for radical prostatectomy as a strategy, and what growth -- what is the component of growth from replacing open surgery?

You know, I don't know that we will ever be able to tell you that exactly.

It is just not a metric that has reliable data behind it and being trapped by agencies, etc.

I can tell you anecdotally when we speak to our physicians, more and more we're hearing that patients who would have been candidates and would have seeked out radical -- excuse me, brachytherapy specifically are now seeking out da Vinci prostatectomy.

We know that is taking place.

On top of that, we know that on a geographic expansion basis, we're seeing tremendous strength outside of the United States.

So when you put all of those factors together, it brings us a level of confidence where we look at 2008 growing by at least 40%.

So it is hard for us to tell you exactly what it is going to look like and from what bucket we're going to take.

But we do measure it both in terms of our estimates of prostatectomy market, as well as new cancer new prostate cancer patients.

Okay.

Thanks for that answer.

One more question, please.

For your guidance you said you expect to see revenues grow by 40% and operating income grow by 40%.

So it seems strange that you're not expecting to see any gains in operating leverage despite higher utilization of the systems for more procedures.

How do you explain that?

So keep in mind that that is on a GAAP basis, and even though the operating expenses are going 40%, it is handicapped by this growth in the non-cash FAS 123R expenses.

And so if we were to take that out, then the operating income that Lonnie has talked about is certainly going to grow more than 40% year-over-year.

So you have that.

And we did mention that there's a little bit of improvement in the gross margin, which is I think one of your points in terms of better utilization.

Amit Hazan, Oppenheimer.

This is actually Michael Tu in place of Amit Hazan.

I just have a couple of questions for you guys.

The first one is, it appears that you're at least about 33% penetrated into the Tier 1 hospitals, mostly in major Metropolitan areas.

So on a go forward basis, how should we think about US placement system placement growth?

A couple of things.

Again, I think it is important to note when you look at however you want to stratify hospitals in large hospitals or Tier 1 or Tier 2 or Tier 3 that when you're talking about the largest hospitals, our view is that those -- and we see it more and more every quarter -- that those become very strong candidates for multiple systems.

So I would probably push on that math that you had did there a little bit.

Secondly, when you look at what we did this quarter.

Specifically of the 52 US hospitals that I should say -- of the 52 systems sold in the US, eight of those systems went to hospitals less than 200 beds, which are not stratified in any of those measures.

So what we begin to see more and more each quarter, as the procedures become proliferated, the number of hospitals, or I should say the number of beds in those hospitals, is probably less important than it was in the past.

So we look at the US market, and we think that again evidence of raising that guidance throughout the year and giving I think strong guidance in '08, that we're very, very bullish on it.

Okay.

And my next question is related to that in terms of purchasing.

This has been a topic that has been discussed for a lot of capital equipment manufacturers, and I wanted to find out if you're seeing any sort of slowdown or pressure in terms of the overall credit crunch market and anything that is affecting financing, and what are the percentages of your customers who are financing, and are they financing through you or a third party that you are arranging?

The answer to that is no.

We talk to -- we have about half of our sales force right now meeting going through their pipeline, and I had Jerry McNamara ask them if they are seeing any delay because of the credit crunch, and the answer, no one responded with any kind of positive experience there.

So no one has seen any deals delayed because of it.

We have third-party financing in about 15% of our sales.

We believe that hospitals will prioritize their investments where they believe it brings the greatest value to them in terms of incremental patients and revenue, and we think we place very well in that.

Okay.

And two last questions.

One is the impetus behind the CalTech IP settlement, do you think that opens a door for a competitor to come in?

And my last question is, how do you view the o-US units in terms of utilization?

Do you think they will be able to reach the same levels as in the US?

On the CalTech question, we do not see any door opening from the point of view of the settlement with CalTech.

It was just a few patents.

The resolution does not leave us weakened in any way in terms of our defensive position on patents.

The utilization of systems o-US, it actually varies region by region.

We certainly have some regions that are even higher utilization than in the United States.

But you know we would expect that overall as the adoption of dVP and dVH and other procedures gets greater internationally, that we're going to see growth and utilization o-US, as well as the United States.

Just a closing comment on that, we have and we have talked about this in the past, dVP o-US lagged the US, and we have talked about '07 where it has come up very rapidly and it grew tremendously in '07.

dVH is the same way.

It is early in the United States, and it is even earlier outside the United States.

So there is a nice step function there the I think when all procedures are caught out, there is really no reason to suggest that it should be any different.

But there's going to be a lag effect.

So when do you think you will be able to start quantifying the growth for dVP and dVH internationally, or can you give us some sort of range as far as where you see international procedures going for 2008?

I don't think we have given that guidance.

It is hard for us to tell you what and project with accuracy what that is going to look like in '08.

We can just say that in '07 it was -- I mean you can look at the system placements, and what that tells you that is that procedures are in demand outside of the United States because procedures drive systems sales.

So it was very, very strong in '07.

Yes, just to repeat we think procedures would grow approximately 55% or more worldwide, and it's going to be strong both domestically and internationally.

Ed Shenkan, Needham & Co.

Congratulations on a great year.

Our question stems from a survey that we did of 157 physicians, and we found that over 50% of the current da Vinci users are interested in buying additional systems in the next three years.

Additionally we found 80% of the systems are being used by multiple groups within a hospital.

We are just wondering, are you expecting in the future that groups are going to have dedicated machines for their specialty, or are they going to be doing more sharing across the departments than they are already doing?

You know, if you look at some of the larger da Vinci customers across the da Vinci customer base, you will find both.

You will find that in some instances you will have dedicated cardiac systems, you will have dedicated urologic systems, and you will have dedicated gynecologic systems.

Now when you -- if you look at your data and just overlay it to the actual numbers that we just reported, we had roughly 24% or 25%, a quarter of the systems, placed in the fourth quarter were second systems.

And I don't think that -- second, third or fourth systems, repeat systems.

So I don't think it is far off of the entire year.

So I would just say that we believe that fully developed robotics initiatives will require multiple systems, and at what rate that happens within an individual hospital will be difficult to tell and vary from place to place.

A couple of questions on cardiac surgery.

We're hearing feedback from cardiologists that there is a system lag time with regards to beating heart surgery.

Will be you be able to address this with new technology integrations in the future, or is this going to require significant system improvements?

Just a great area, I'm wondering how soon we are going to be able to get there.

Let me comment on that.

We just came from STS, and there may be some other comments.

But we have currently some products for review with the FDA that I talked with a hospital that does a lot of beating hearts in Belgium.

They just bought a S last year, and the Chief of Surgery, Chief of Cardiac Surgery there told me that the S has made a huge difference in terms of these.

That on beating hearts he can certainly do a double and a single and double vessels very easily with that and our new stabilizer.

And on arrested heart with a stabilizer, he can get to all vessels of the heart.

It was just -- he just said it had made a huge difference in terms of the --.

So we have developed a couple of products.

We have a fourth arm stabilizer that is not cleared yet in the United States.

And we have the atrial retractor that is -- this is for mitral valve repair, but the atrial retractor that is approved and is also a fourth arm instrument.

Both have made the control and the ease of use doing these procedures have taken a long way, including the capabilities that we brought with the S system.

So with those improvements, how far are we from becoming more of a standard of care in cardiac surgery?

Just to sort of put in perspective, is this two, three years, and what kind of development must occur for that to really happen?

You know, I don't know that it is -- I cannot predict that.

I will say that we have a clear adoption on mitral valve.

That curve is real, and you have got to get someplace.

And the other thing that we are seeing a lot of, we saw a good growth in TECAB or endoscopic bypass this year.

But lobectomies for lung cancer for thorasic surgeons are -- I have run into several at STS that were just enormously enthusiastic about it.

So you build credibility.

We will build credibility with mitral valve, and we will see.

The recent New England Journal of Medicine article comparing stems and bypass was favorable.

But you know, there's a lot of these cardiac surgeons are very, very conservative.

They will come -- they will not come early.

They come in -- mitral valve, a big event, was a big move here is not only that we have multiple centers doing it, but when the Cleveland Clinic takes a major role in it, and we will see.

But I am not going to put a timeframe on it.

We have got enough procedures.

We've got not only what we're seeing with prostatectomy and now cystectomies, nephrectomies, what you're seeing on hysterectomies, sacrocolpopexies and myomectomies, and we're seeing these other procedures.

So we have got a good pipeline of procedures building growth.

So our growth will come from both penetrating a procedure, adding additional procedures and geographic growth.

And those are the drivers of the growth for the foreseeable future.

And for cardiac, there's not one specific tool that you need to make it massively more -- you know easier to do?

It is not about -- in a revasc procedure specifically, it is not about one thing.

It started with stabilization.

I mean in the old days when we had a three-arm system with good stabilization, there were still people that were able to get through that operation.

And we continue to address those things organically where we can and partner with other people where we need to.

And so we have done that in the past with Medtronic.

There is a lot of adoption of the U-CLIPs that they have, and the procedures is evolving.

It is evolving pretty well.

But we are not going to paint the picture that it is just one thing missing, and you're going to throw a switch and all of a sudden everybody is going to do revasc.

It is growing.

It will continue to grow.

But that is about as far out I think as we can say.

We have time for two more questions.

I think that is one or two.

Rick Wise, Bear Stearns.

It is actually [Mira Slava] speaking for Rick today.

I guess my first question is, of the 20 systems that you sold to repeat customers in the US this quarter, can you just give us some more insight as to did these additional place -- you know getting an additional system, does it have to do with growth in the current procedures, or is it more related to new procedures that they may be experimenting with or adopting?

You know, I would say that it goes across the entire spectrum, but the big driver is that they are expanding the capacity they had on their single system or their second system and required a third or a fourth system now.

The Mayo Clinic in Rochester, Minnesota, which is of very busy center in urology and other areas, purchased a third and a fourth system.

But at the same time, we have a small hospital outside of Orlando, Celebration Hospital, which is a 122-bed hospital that bought their first and their second.

And so I think you're going to see that it is going to go for a number of different reasons.

At the core of that message is that people need extra capacity to do all the procedures that they are stacking up.

Great.

Thanks for the color.

And also in your 55% procedure growth guidance for the year, you mentioned that there are several new procedures emerging.

Maybe if you could give us a little bit more color, which exactly are these procedures?

I know you kind of talked about a lot of procedures, but the top ones among them would actually be very helpful.

So if you look within the verticals, and we will just keep it in verticals of, let's say, gynecology, sacrocolpopexy for vaginal vault prolapse is on that list.

It is something that is continuing to grow rapidly at the same pace really as hysterectomy.

Below that, you have myomectomy -- removal of the fibroid but preservation of the uterus.

It also has nice growth.

In the urology side of it, you're looking at the kidney operations, removal of the kidney or removal of part of the kidney, partial nephrectomies.

Both of those are showing very nice promise and very nice growth, as is the work around bladder cancers, prostatectomies and urinary diversions.

So when we look out through those verticals, those are definitely on that list.

And I would say within cardiac, we continue to talk about mitral valve repair, and it is becoming more and more of a meaningful part of that cardiac story.

I think we have time for one more caller.

David Lewis, Morgan Stanley.

Thanks guys for letting me bring up the rear here.

Just one quick question, a couple of quick questions here.

On new accounts, is it a safe assumption that, as we look at the US business replacements, on a go-forward basis, the opportunity in the US is really for existing customers, and we've safely peaked out in terms of new account generation in the US?

No.

Actually there were a lot of new system placements, David, this past quarter as there are every quarter.

As Aleks mentioned before, we had eight of those new system placements were in hospitals that have less than 200 beds.

And really the opportunity here to place systems at hospitals that don't have any is still very, very large.

Okay.

So the growth in your mind in '08 is still pretty balanced between new US systems, existing US systems and then your o-US expansion?

That is correct.

Okay, very helpful.

And then gross margins and I know margins have been an area of conservatism here throughout 2007, but, Marshall, can you just tell us of the 250 point intra-year gross margin improvement, how much of that do you think was currency?

It was less than half.

Less than half of that was currency.

Okay.

And then so the other 150 or so bps, is there any reason to not assume that we would see another 100 or 150 bps in 2008?

No, because part of that was also system makes mix, and we think we have been writing some favorable system mix geographically.

We sell through distributors at lower prices, and we don't believe that that mix will continue at the same level.

We are predicting a slightly different mix.

And then we have built into the model some level of increase, but again, as Ben mentioned earlier, there are some costs to sort of balance that out in terms of investments in Mexico and so forth.

Okay.

And just last quick question.

The Mexican investment towards the back half of '08, is that going to be instruments or systems, and what percent of manufacturing capacity do you think you would have online by the end of the year?

It is primarily instruments, and it will be a small percentage coming online at the end of the year.

Less than 10%?

Less than 10%.

All I want to comment on this, on the margin expansion and then, you know we -- it is always a balance for us to try to manage and make sure we're investing enough in the future to sustain growth as well as drive margins.

Our margins are excellent.

We are going to invest -- and now sometimes, quite frankly, growth outpaces our ability to hire the quality people we want.

And so we will get -- you will get some of that.

But we're trying to manage it pretty closely, being conservative, not going to overinvest in people.

But we are going to invest and are investing heavily in future products, and we will continue to do that.

And if that means flat margins or even a decrease in margins, we will take that.

Thank you for the color.

I think we are -- do we have time for one more?

Well, let me close then.

As I said previously, we focus on financial metrics such as revenues, profits and cash flow during these conference calls.

But our organizational focus remains on increasing patient value by improving surgical outcomes and reducing surgical trauma.

But I would like to attempt to put a human face on what this means in the lives of three different patients.

First, a letter written by one of Dr.

William Schwab's patients at University of Pennsylvania.

This is dated January 23, 2008.

This patient says, "I have been blind for one year, and I was scheduled to get a guide dog in early February.

Last Tuesday I was diagnosed with a cancerous tumor on my left kidney.

The doctors at the University of Pennsylvania Health System pulled out all the stops for me.

Today, eight days later, I'm cured of cancer and still able to go to boot camp in two weeks to get my new guide dog.

My primary care physician, [Dr.

Robert Catto], called me Tuesday afternoon with the news.

I had a cancerous tumor on my left kidney.

It was not an emergency, but it had to come out very soon.

Recovering from this surgically curable cancer normally takes at least six weeks and will involve a partial removal of the rib and the lower back just to reach the kidney.

My problem was that in less than three weeks I was going to the Guiding Eyes School in Yorktown Heights, New York to meet my new service dog and learn how to navigate without my cane.

Dr.

Catto contacted Dr.

William Schwab, a doctor of urology who specializes in minimally invasive robotic surgery.

Dr.

Catto thought that Dr.

Schwab's technique might be best for my situation.

The e-mails started flying.

Last Thursday I saw Dr.

Schwab with my wife Joanna.

He explained that my tumor was small enough and in a place fairly accessible for his robotic surgical method.

He showed my wife a short video so that she could see how it worked.

The most important news was that if he performed the surgery the next day, I would be ready and able to go to guide dog school as scheduled.

Even though Dr.

Schwab did not normally perform surgery on Fridays, he said he would arrange it all for me and get me to guide dog school on time.

Dr.

Schwab performed surgery last Friday.

The procedure called a microscopic robotic partial nephrectomy.

He removed the tumor and some adjoining tissue from my left kidney.

I spent the weekend recovering at Presbyterian Hospital.

I came home Monday morning.

Today is Wednesday.

I walked for 45 minutes on a treadmill this morning and another 45 minutes this afternoon around the city.

I feel very good, and I am now cured of cancer of cancer.

Wow!

I'm still scheduled to go to Guiding Eyes on February 4 to get my companion and start my new life.

Hurray!

I was lucky to have the benefit of this robotic procedure.

The physicians at PEN went the extra mile for me.

Thank you everyone at UPHS who helped make this possible for me."

And earlier this week at STS I talked Dr.

Michael Smith, a cardiac surgeon in Cincinnati, and he described his experience with a 40-year-old woman who had recently -- who had already undergone six sternotomies for a recurring tumor in the left atrium of her heart referred to him for a seventh procedure.

The woman broke down in tears when he told her that could remove the tumor with the da Vinci system without performing a sternotomy.

And finally, Dr.

James Porter, a urologist at Swedish Hospital in Seattle, who has had a da Vinci prostatectomy himself, performed a da Vinci prostatectomy on a very fit 55-year-old man and CEO of a company in the Seattle area.

The patient said, less than two weeks postop, one week after the catheter was removed, he ran a six mile loop around Lake Union.

He felt so good that he ran another 6.5 mile loop the next day.

A week later he ran a 10-K race at Bridal Trails Park in Belleview.

The next week he ran a triathlon in Bellingham with his son, consisting of a half mile swim, a 22-mile bike ride and a five-mile run.

And the following week he ran the 26.2 mile Seafair Marathon.

Patients like these are the strongest advocates for surgery with the da Vinci system and are the very foundation of our operating performance.

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

That concludes today's call.

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

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

This concludes today's conference.

You may disconnect at this time.

Thank you.