直覺手術 (ISRG) 2008 Q1 法說會逐字稿

Welcome to the Intuitive Surgical, Inc.

first quarter 2008 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 Mr.

Ben Gong, Vice President of Finance.

Good afternoon.

Welcome to Intuitive Surgical's first-quarter conference call.

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

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

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

These risks and uncertainties are described in detail in the Company's Securities and Exchange Commission filings.

Prospective investors are cautioned not to place undue reliance on such forward-looking statements.

Please note that this conference call will be available for audio replay on our Web site, at IntuitiveSurgical.com, on the audio archive section under our investor relations page.

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

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

First, Lonnie will present the quarter's business highlights; Marshall will follow with a review of our first quarter's financial results; next, Aleks will discuss sales and marketing highlights; and I will provide an update of 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.

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

Operating highlights for the first quarter are as follows.

We sold 74 da Vinci Surgical Systems, up from 44 during the first quarter of last year.

27 of the systems were sold to existing customers.

Our international team had another solid quarter, contributing 20 of the 74 systems sold, up from 11 last year.

We ended the first quarter with 867 da Vinci systems installed worldwide.

We had solid quarter-over-quarter procedure growth in all significant specialties, led by GYN, with strong growth in urology, particularly in Europe.

Procedure adoption continues to be procedure-specific, patient-driven, and the primary growth factor or driver of our business.

Total revenue grew to 188 million, up 65% from last year.

Instrument accessory revenue increased to 62 million, up 54%.

Total reoccurring revenue, including service, grew to 89 million, up 53% from prior year, comprising 47% of total revenue.

We generated an operating profit of 79 million, 42% of revenue, before non-cash 123R stock option expenses, up 87% from the first quarter of last year.

GAAP net income grew to 45 million, 24% of revenue, up 88% from last year.

We ended the quarter with 700 million in cash and investments, up 64 million from last quarter, and up 315 million from last year.

After subtracting 15 million in cash received from the exercise of stock options, and adding back 30 million invested in fixed assets and working capital during the quarter, our gross operating cash flow in the first quarter amounted to 167% of our reported GAAP net income.

This is a reflection of the 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 profit before non-cash 123R stock option expense remains the best measure of our true financial performance.

We launched several new instrument accessory products.

We received FDA clearance for the da Vinci-driven EndoWrist cardiac stabilizer, and removal of the beating heart warning language in the FDA-approved instructions for use for both the da Vinci and the da Vinci S systems.

And we grew our Intuitive team by 95 members to 859.

57 of those were in field sales and service.

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

Thank you, Lonnie.

Total first-quarter revenue of 188.2 million increased 65% compared with 114.2 million for the first quarter of 2007, and decreased 1% compared with 189.4 million for the fourth quarter of 2007.

First-quarter revenues by product category were as follows.

Instrument and accessory revenue increased to 61.9 million, up 54% compared with 40.3 million last year, and up 10% compared with 56.1 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 has remained relatively unchanged at between 1500 and $2000 per procedure for established da Vinci accounts.

Our average revenue per procedure, including initial stocking orders, has been gradually decreasing as the ratio of new systems to our installed base declines, and is between 2000 and $2300 per procedure.

Systems revenue of 99.1 million increased 76% compared with 56.1 million last year, and decreased 9% compared with 108.6 million last quarter.

The increase in systems revenue compared with the first quarter of 2007 reflects increased unit sales, as well as an increase in the average revenue per system.

The decrease in systems revenue compared with the fourth quarter of 2007 reflects seasonality overseas, as well as the decrease in the average revenue per system.

First quarter da Vinci Surgical System revenue reflects the sale of 74 systems, compared with 44 systems during the first quarter of last year and 78 systems sold in the fourth quarter.

Two of the system sales in the quarter involved trade-ins, where two customers upgraded one of their existing da Vinci standard systems while purchasing two da Vinci S systems with HD.

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

10 were [4RMS] models incorporating standard vision capabilities.

Three were [3RMS] models, and one was a standard system.

Our first-quarter average revenue per system, including all da Vinci models but excluding upgrades, was approximately 1.32 million, which is 60,000 less than the average revenue per system in the fourth quarter of 2007.

The lower average revenue per system primarily reflects a higher proportion of our fourth-quarter sales being direct sales to European customers, which are denominated in Euros, and an otherwise favorable geographic mix in the fourth quarter.

Upgrades during the fourth -- including fourth arms and HD accounted for 1.6 million of the current quarter systems revenue, compared with 1 million last quarter.

Service revenue increased to 27.2 million, up 53% compared with 17.8 million last year, and up 10% compared with 24.7 million last quarter.

The growth in service 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 first-quarter recurring revenue, comprised of instrument, accessory and service revenue, increased to 89.1 million, up 53% compared with the first quarter of 2007, and up 10% compared with the fourth quarter of 2007.

Recurring revenue represented 47% of total first-quarter revenue, compared with 43% in the fourth quarter.

Revenue outside the United States represented 23% of total first-quarter revenue, compared to 26% in the fourth quarter.

The decrease reflects business seasonality as we placed 20 systems in the first quarter compared with 26 systems in the fourth quarter.

Our first quarter 2008 gross margin of 69% decreased compared with 71.4% realized in the fourth quarter.

The decrease in gross margin reflects lower average system ASPs and higher operating costs over similar revenue levels.

The increase in operating costs includes expansion of manufacturing operations in Sunnyvale, as well as initial start-up costs for Mexico.

Total operating expenses for the first quarter of 2008 were 64.9 million compared with 61.8 million in the fourth quarter of 2007.

The sequential operating expense increase of 3.1 million reflects increased non-cash 123R stock compensation expense costs of 3.8 million, and costs associated with increased headcount, partially offset by lower costs associated with R&D activities that are expected to occur in the second quarter.

We added 95 employees during the first quarter, ending the period with 859 regular employees.

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

First quarter 2008 operating income was 64.9 million, or 34.5% of sales, compared with 73.4 million, or 38.7% of sales for the fourth quarter of 2007.

I should point out that 123R stock compensation expense included in operating income was 14.6 million for the first quarter, compared with 10.1 million in the fourth quarter.

The increase of 4.5 million reflects the impact of our annual stock grant made on February 15th, coupled with the increase in our stock price.

Our first quarter 2008 other income was 8.5 million, which is approximately the same as we realized in the fourth quarter of 2007.

Our effective tax rate for the first quarter was 39%, which is consistent with our rate for 2007.

We continue to utilize carryforward tax benefits and employee stock-related tax benefits in 2008, and expect that our cash outlay for income taxes will be less than 25% of pre-tax income for 2008.

Our net income of 44.8 million, or $1.12 per share, increased 88%, compared with 23.8 million, or $0.62 per share, for the first quarter of 2007, and decreased 9% compared with 49.2 million, or $1.24 per share, for the fourth quarter of 2007.

Now turning our attention to the balance sheet.

We ended the first quarter of 2008 with cash, cash equivalents and investments of 700 million, up 64 million from December 31, 2007.

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

The remaining cash generated is primarily related to operating activities.

Our accounts receivable balance increased to 135.7 million at March 31st from 130.4 million at December 31st.

The change in receivables reflects the timing of customer purchases and payments relative to our quarter cutoff.

Our net inventory increased to 38.8 million at March 31st, from 32.4 million at December 31st.

Our inventory turns at March 31st of 5.7 times per year were lower than the 6.5 turns at the end of the previous quarter as we build inventory for future growth.

And 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 first quarter we shipped 74 da Vinci systems, which included two trade-ins.

Geographically, 54 systems were sold in the United States, 12 in Europe, and eight in rest-of-world markets.

73 of the 74 systems shipments were da Vinci S systems, and one was a standard da Vinci system.

Of the 73 S systems sold, 60 were high-definition, or HD, systems.

The net 72 systems sold during the quarter brings to 867 the cumulative number of da Vinci systems worldwide -- 647 in the US, 148 in Europe, and 72 in rest-of-world markets.

27 of the 74 systems sold during the quarter represented repeat systems sales to existing customers, which brings to 94 the number of hospitals which own more than one da Vinci system.

Within these 94 hospitals, 69 own two, 17 own three, seven own four, and one owns five.

I think it's relevant to note that we often experience da Vinci S's being purchased at a facility that already owns a standard system, or perhaps several standard systems, only to transfer the standard system to a sister facility that does not own one.

We've excluded these transfer units from the multiple system calculation that I just referenced.

Outside the US we had a strong quarter, which included three more da Vinci systems into Korea, three into the Netherlands, three into Italy, and our first three into Brazil.

Clinically, we had another good quarter, a quarter in which we experienced solid sequential procedure growth within all four of our targeted surgical specialties.

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 growth.

Worth noting is the tremendous growth we experienced within our kidney and bladder cancer businesses, specifically da Vinci nephrectomy and partial nephrectomy, and da Vinci cystectomy.

Within our cardiac business, da Vinci Mitral Valve Repair also showed strong sequential growth.

During Q1 we had 117 da Vinci-related clinical papers published within the peer review journals, across multiple surgical specialties.

We also launched four new products and received FDA 510-K clearance for a fifth.

The fourth-arm upgrade for the three-arm da Vinci S system, the 8.5 mm stereo endoscope, the balloon camera cannula, and the da Vinci instrument trays were launched during the quarter.

We also received 510-K clearance for a da Vinci-controlled cardiac stabilizer product, and had a beating heart warning language removed from the instructions for use for both da Vinci and da Vinci S systems.

Although these products will assist our customers in optimizing targeted procedures, none of them is expected to immediately impact our top or bottom lines.

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

However, I will limit my review to only a few, beginning with the Society of Gynecologic Oncology, or SGO.

This year's SGO took place in Tampa, Florida and was attended by over 1000 GYN oncologists.

As we have mentioned in the past, SGO members are key target customers for us, since they are the group that perform hysterectomies for both malignancies and complex benign conditions.

We have now presented da Vinci at three SGO conferences, and this year's event clearly confirmed da Vinci's clinical role within the treatment path for complex hysterectomy.

This year the SGO offered a postgraduate course on robotic radical hysterectomy for cervical cancer, featured several oral presentations on robotic hysterectomy for both cervical and endometrial cancers, and highlighted several clinical posters comparing da Vinci Hysterectomy to both open and laparoscopic techniques.

During the SGO postgraduate course, Dr.

John Boggess from the University of North Carolina shared his outcomes data for da Vinci radical hysterectomy, in which he compared 50 radical dVHs for cervical cancer to 50 radical hysterectomies performed through traditional open incisions.

His comparisons were pretty telling, beginning with OR time, which was 210 minutes for his dVHs, compared to 247 minutes for his open hysterectomies.

Blood loss for his dVHs was 95 ml and 416 ml for his open hysterectomies.

dVH lymph node yields of 32 -- excuse me -- 33.8 compared to 23.3 for his opens.

And hospitalization of one day for his dVHs versus 3.2 days for his opens -- all while reducing complications by 50%.

Dr.

Lynn Kowalski, a surgeon from Nevada Surgery and Cancer Care in Las Vegas, presented a similar comparison on her radical hysterectomies, with the addition of transfusion rates, and published her results in an accepted clinical poster.

In Dr.

Kowalski's series of 31 patients, she reported blood loss to be 182 ml with zero transfusions within her dVH cohort, as compared to 415 ml and three transfusions for her open procedures, dVH lymph node yields of 20.7 versus 16 for open, and dVH hospitalizations of 1.4 days versus 6.1 days for her open radical hysterectomies.

All in all, we were pleased with the increase in da Vinci surgery awareness and clinical outcomes data presented at this year's SGO conference.

At the World Robotic Urology Symposium, which took place in Orlando, the three-day agenda was devoted exclusively to da Vinci, and the presentations were nonstop.

The program was attended by over 600 urology professionals.

In addition to the oral presentations, panel discussions and poster reviews were 10 live surgery broadcasts featuring dVP, da Vinci nephrectomy and partial nephrectomy, da Vinci cystectomy, and pyeloplasty.

I've selected one abstract which I believe capsulates da Vinci's value to not only the urologists, but to surgeons across multiple specialties.

The team at the University of California Irvine, led by Dr.

[Leslie Dean], presented their initial series on da Vinci partial nephrectomy, comparing it to laparoscopic partial nephrectomy performed by expert laparoscopic surgeons within their facility.

Similar to laparoscopic radical prostatectomy, laparoscopic partial wedge nephrectomy is a technically challenging procedure that is performed by a limited number of expert laparoscopic surgeons.

This analysis compared the outcomes of an initial experienced with robotic partial wedge nephrectomy performed by an experienced open surgeon, to that of a standard laparoscopic partial nephrectomy being performed by two experienced laparoscopic surgeons.

Their initial clinical results were as follows.

The mean tumor size was 3.1 cm for the da Vinci partial nephrectomy patients and 2.3 cm for their laparoscopic patients.

Mean total procedure time was reduced by an hour using da Vinci, to 228 minutes versus 289 minutes during their laparoscopic procedures.

Estimated blood loss was 115 ml with da Vinci versus 198 ml during laparoscopy.

The mean warm ischemia time was 32.1 minutes in the da Vinci group and 35.3 minutes in the laparoscopic group.

The authors concluded, and I quote --

"Introducing a robotic interface for laparoscopic partial wedge resection allows a fellowship trained urologic oncologist with limited reconstructive laparoscopic experience to achieve comparable results for laparoscopic partial wedge resection performed by experienced laparoscopic surgeons.

In this regard, the learning curve appears truncated, similar to that with robotic-assisted laparoscopic prostatectomy."

It's important to mention that the field of nephron-sparing surgery is growing rapidly worldwide, and for good reason.

In the near past, urologists have come to agree that preserving healthy kidney tissue contributes to improved kidney function for patients with renal tumors.

The partial nephrectomies are difficult to perform, so the standard operation for patients with renal tumors has been the removal of the entire kidney.

Today the urology profession is rapidly moving towards sparing as much healthy tissue as possible, and da Vinci's role within these procedures is being recognized early.

Some of the leading academic centers around the world have begun to make da Vinci a standard within these procedures.

Later this quarter, the first annual Worldwide Robotic Renal Symposium will be hosted by Washington University in St.

Louis, and chaired by one of the leaders in the field, Dr.

Sam Bhayani.

And it will include an international faculty of prominent renal surgeons.

The European Association of Urology conference was held in Milan and attended by nearly 12,000 urologists.

This year's program included multiple dVP presentations, abstracts, posters and live surgery, as well as presentations on da Vinci nephrectomy, partial nephrectomy and cystectomy.

One of the most interesting initial series on radical cystectomy was given by the group out of Guy's and St.

Thomas Hospital in London, led by Dr.

Prokar Dasgupta.

The study compared their first 10 da Vinci radical cystectomies to 10 laparoscopic and 10 open radical cystectomies at various time intervals.

Their first comparison performed -- measured intraoperatively, reported that patients undergoing open radicals experienced 325-minute procedures with 1300 ml of blood loss and 60% complication rates.

Their laparoscopic procedures averaged 345 minutes, with 350 ml of blood loss and 50% complication rates.

Whereas their da Vinci cystectomy patients underwent a 365 minute procedure with only 150 ml of blood loss, with complication rates of only 20%.

Since these procedures are performed to eradicate cancer, the long-term disease-free rates are a primary concern.

Their experiences for lap and robotic were not as seasoned as their experiences with open surgery, so they measured each patient at different intervals.

They stated that 60% of the open radical patients were disease-free at five years, while 60% of the lap patients were disease-free at four years, whereas da Vinci patients were 100% disease-free at three years.

It's too early to declare a complete victory, but the significant reduction in blood loss and complication rates, along with the three-year disease-free rates, are very encouraging.

In addition to some of the exciting presentations in nephrectomy, partial nephrectomy and radical cystectomy at this year's EAU, were dozens of presentations and posters for da Vinci prostatectomy.

It's becoming pretty clear that dVP is rapidly expanding around the globe.

In fact, in the feature presentation to the joint session of the EAU and the Chinese Urology Association, entitled Is Robotic Radical Prostatectomy the Future?, Dr.

Richard [Gaston] of the [Clinique St.

Augustine] in Bordeaux, France, the chairperson, and the surgeon often credited with performing the first laparoscopic prostatectomy in Europe, concluded, and I quote --

"The overall data indicates that robotic prostatectomy is the future, and the future is now."

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

Thank you, Aleks.

I will be providing our updated 2008 financial forecast on a GAAP reporting basis, including non-cash FAS 123R stock compensation expenses, and on a pro forma basis, which excludes the stock compensation expenses.

Based on our first-quarter results, we are increasing our previous guidance for revenue and pro forma profits for 2008.

On a GAAP reporting basis, we are not increasing our forecast for profits, because stock compensation expenses are greater, due largely to our higher stock price.

I will provide details of our stock compensation expense later in the call.

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

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

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

With regard to revenue, we expect our total 2008 revenues to grow approximately 42% over 2007, which is up from our previous estimate of 40%.

Instrument and accessory revenue, which is specifically driven by procedures performed, is on track to grow 55% this year.

During Q1, procedures grew in line with our previous estimates.

And therefore, we are maintaining our forecast for 55% growth in instrument accessory revenues for the year.

System revenues were modestly stronger than we expected in Q1, and we are increasing our forecast for the year.

We are forecasting system revenue to grow 33 to 35% over 2007, which is up from our previous forecast of 30% growth.

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

Our system ASP was $1.32 million in Q1, which is similar to our average for all of 2007.

As we mentioned in our last call, we expect our average system ASP for the year to be about the same.

However, our system ASP may fluctuate quarter-to-quarter as a result of geographic and product mix.

We expect service revenues to grow approximately 45% above 2007 levels, which is slightly higher than our previous estimate of 44%.

Our average annual service revenue per installed system is approximately $135,000 per year.

With regard to gross profit margin, our Q1 results were in line with our expectations, and we are continuing to forecast gross margins to be between 69 and 70% for the year.

Moving to operating expense and operating income, I will start with our forecast on a pro forma basis, excluding the impact of non-cash stock compensation expense.

Excluding stock compensation charges, we expect R&D expense to grow approximately 40% over last year, SG&A expense to grow approximately 37%, and total operating expense to grow approximately 40%.

We expect pro forma operating income to grow approximately 47% for the year.

Last quarter we were forecasting pro forma operating income to grow 43%.

Improvement in our pro forma operating income is being driven by our higher revenue forecast, coupled with only a modest increase in pro forma SG&A expense.

Now, on a GAAP basis, the largest change to our forecast relates to our estimate of non-cash stock compensation expense.

During our last earnings call we had forecasted these charges based on a stock price of $250, which was approximately what the stock was trading at the time.

As you know, our stock price [depreciated] significantly over the past three months.

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

Based on the current stock price, we are now estimating a total of $75 million in stock compensation charges for the year, which is up from our previous forecast of 60 million.

Our new estimate of 75 million is distributed as follows -- 12 million in cost of goods sold, which compares with 10 million previously forecast; 17 million in R&D, which compares with 13 million previously forecast; and 47 million in SG&A, which compares with 37 million previously forecast.

This would represent an over 100% increase of stock compensation expense for the year, compared with the 36 million total stock compensation expense recorded in 2007.

Therefore, on a GAAP basis, our total operating expenses are expected to be higher than we previously forecast.

In the R&D expense category, our spending in Q1 was lower than expected due to timing of some planned expenditures.

We expect to incur those expenses during the second quarter.

For the year, we expect R&D expense to grow approximately 59%.

This is up from our previous forecast of 52% growth due to the increase in stock compensation expense.

In the SG&A expense category, we made progress expanding our field sales and service organization by adding 57 people, bringing our total field organization to approximately 320 people.

We are continuing to hire field personnel at a rapid pace.

For the year, we expect our SG&A expenses to grow approximately 47%.

This is up from our previous forecast of 40% growth, primarily due to the increase in stock compensation expense, and to a smaller extent, due to the growth in our revenue forecast.

We expect total operating expense, including FAS 123R stock compensation expense, to grow approximately 50% for the year.

We expect operating income to grow approximately 37% for the year.

For the second quarter 2008, we expect our stock compensation expense to grow approximately $5 million from Q1.

Other income expense for 2008 is expected to come in between 33 and $35 million for the year.

This is down from our previous estimate of 36 to 40 million, due to lower interest rates on our cash 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 lower GAAP tax rate in 2009.

Regarding shares outstanding, we currently have 38.7 million common shares outstanding.

We also have approximately 3.9 million option shares outstanding.

Depending upon our average stock price during the year, a portion of the 3.9 million option shares will be added to the fully diluted shares calculation.

Calculating EPS in 2008, we expect the share count to be approximately 40.2 million shares in Q2, and growing to approximately 40.8 million shares by the end of the year.

That concludes our prepared remarks.

We will now open the call to your questions.

(OPERATOR INSTRUCTIONS).

Eli Kammerman, Cowen.

A couple of questions here.

First question I have is, with the very small sequential decline in systems that you had for the quarter, what do you think this says for the pattern of seasonality that you expect to see this year?

Are you expecting to see relatively level system sales through the year, or do you think we'll see the same kind of thing as we saw in '07, where the fourth quarter was significantly higher than the first?

I think the seasonality is going to be similar, as far as we know.

It was sequentially down in Q1 this year, as it has been in previous years.

We expect Q4 to be our highest quarter.

But, that said, we think the total number is going to increase year-over-year by between 33 and 35%.

My next question is, can you make some comment about the expected launch date for the new visualization technology that's going to integrate anatomical radiology images into the viewer?

I'm not sure what you're referencing there.

I thought I read that you are developing some type of integration function where you can put volumetric imagery into the view screen, so that a physician can see, for instance, MRI images at the same time that they're performing the surgery.

That capability exists today in the S system.

The S system -- part of the system allows you to bring other information sources into a picture within a picture on the screen.

And so, that is not -- that capability was launched when we launched the S, the da Vinci S.

Do you plan to upgrade that functionality to allow for image-guided surgery, where certain parts of the anatomy will be structured as off-limits to dissection for safety purposes?

We have some research programs ongoing, internally and with external partners, exploring how those types of things can be done.

I guess I would not characterize them as product development at this time.

So, there are some significant hurdles in base technology that will have to be overcome to make that kind of no-fly zone repeatable in soft tissue areas as we go.

Thanks very much.

Tao Levy, Deutsche Bank.

Just following on Eli's comment, this is the first time I think in the last few years that sequentially in the US you had more systems placed in Q1 than in Q4.

Does that say anything about the capital spending environment and any issues there?

Obviously, we get that question all the time, and you read about it in the papers every day.

It was slightly higher in Q1 versus Q4, but I think we feel that it's within the realm of the normal fluctuation we might have quarter-to-quarter.

System sales are strong; that's true, and that's why we took up our guidance for the year.

But, I think our forecast captures what we're currently seeing.

Anything on capital equipment spending that you're hearing from your sales reps?

No, we're not hearing anything there.

I know over the quarter we've had various questions as to whether or not there's been an impact due to credit issues.

And as far as we can tell, we haven't had any impact to our system sales.

I think during the prepared remarks, someone commented that urology in Europe was strong.

I was wondering if you could further elaborate on that point.

Is that why you're seeing -- feel like at least in the Netherlands, every quarter they're buying three or four systems.

Is that what they're using it primarily for, for example, there?

I think it's safe to say that da Vinci prostatectomy is being adopted outside the United States, and at different rates in different countries.

Urology specifically, including nephrectomy, cystectomy and the like, were strong both US and OUS, but particularly strong in the OUS market.

So I think, as we've always said, outside of the United States, Europe and rest-of-world markets tends to trail the United States.

So the growth that we have seen over the last several years in da Vinci prostatectomy within the US is now starting to really play out in Europe, Middle East, Asia, and so on.

Thanks a lot.

David Lewis, Morgan Stanley.

Open-ended question here, just on new customer growth in the US marketplace.

I think this is the second quarter in a row where we've seen it decline on a box basis.

Is there any chance that new or virgin customers in the US would reaccelerate in 2008?

The second part of the question would be, is the focus in the US market -- specifically with some of Lonnie's comments on new rep adds -- is it really shifting from driving aggressive utilization, and less about virgin customer or new customer placement?

I think there's a -- and we've commented at different times over the last seven or eight quarters -- there have been some quarters where the percentage of repeat purchases was high, followed by quarters where it was low.

I don't know that we can say that it's going to follow this trend or that trend.

And quite honestly, we're pleased to see recurring customers coming back and buying more systems.

One of the things that is something that perhaps you don't have great visibility into it, are for example a customer like St.

Joe's in Atlanta.

This quarter they bought another system.

That was a repeat customer.

In fact, they would have bought their fifth system.

But they moved one of their earlier systems to a customer that -- a sister hospital that did not have a da Vinci.

So there's a lot of things that are going on and we think all positive.

So is it possible that in some quarters it will reaccelerate?

Yes, it is possible.

I think the confirmation of the value add of the system is really reflected in repeat purchases.

And those that have bought and have found success and then buy a second system, that's a confirmation of their satisfaction with their purchase and the willingness to do it again.

Long-term, in terms of adoption of the technology, that's a good sign.

That's a positive.

The worst-case for us is everybody buys one, and they don't buy another one because they weren't satisfied with their investment.

And that is not the case.

We're seeing people who buy these systems and develop excellent programs, come back and buy a second, third or fourth system, as Aleks has pointed out.

And we expect that to continue.

The volatility, the change in that dynamic from quarter-to-quarter -- I think Aleks is right on the money.

That's very helpful.

It's hard to be negative about box placements, it's just interesting that in two more quarters it looks Europe could even eclipse new placement growth or new box growth in the US, which obviously isn't a bad thing.

I appreciate the color.

The second thing is on surgical volumes.

I may have missed in the commentary -- it was flying fast and furious -- but there was little mention of myomectomy or sacral colpopexy, but there was some mention, obviously, of nephrectomy, cystectomy, as well as some mitral valve.

Is that simply just giving us a flavor for new procedures that are out there, or did you see trends in myomectomy and sacral colpopexy that flattened a bit in the first quarter?

Both have grown.

Actually, I did mention sacral colpopexy with hysterectomy.

So those were the two leaders within gynecology, which the category being the fastest-growing as a percentage, were led by hysterectomy and sacral colpopexy.

And I think the added color on some of the other procedures were really in line with the color that those procedures are getting at the various conferences that we've attended during the quarter.

And they're coming on pretty strongly.

So I think it was a way to kind of call out some endpoints that people are looking at, and really let you know that these things are arriving within the clinical community and at the clinical conferences.

I'll jump back in queue, but last question.

Could you provide us an update on any discussions you've had or any progress with Japan, or to a lesser extent China?

On the Japan front, we continue to make progress with the government.

We are going back and forth on kind of the form of our submission.

We're not in the window where we're predicting the end date, but I'm happy with our progress to date.

I'll turn that back over to Lonnie.

China -- there really is no new -- really nothing new to mention there with regard to China.

And for the quarter --

We didn't have any placements this past quarter in China.

Thank you very much.

Rick Wise, Bear Stearns.

Gross margins.

Again, you talked about the pressure or drag on gross margins from the Sunnyvale expansion and the Mexico start-up.

Can you just remind us either -- I'd be happy to hear you quantify the amount of that drag, and just remind us again when that goes away.

Actually, the biggest impact on gross margins is probably the product and geographic mix, which made the ASPs lower by $60,000 quarter-over-quarter on the system sales.

So, there were some modest things.

Revenue was relatively flat quarter-over-quarter, but we continue to build our team.

So, you have a higher fixed cost there over about a similar number of revenues.

And the point here is not that there's a big drag there, and the 69 to 70% forecast that we have for the rest of the year is right in line with where we thought we hit Q1.

As always, Ben, you anticipated where I'm going.

Again, slightly higher revenue -- I'm sorry -- roughly equal revenue volumes.

So you're saying most of that sequential shift was that geographic mix element?

Absolutely.

The 71% that you saw in Q4, if anything, was standing out a little bit among all the other quarters around it.

And that was a quarter where we had a pretty high mix of direct sales into Europe and a lower mix of distribution sales.

I apologize for asking this question again; it was already well asked by Tao and well answered, but let me ask it differently.

The anxiety over cap spending and hospital credit.

I don't know if it's a question for Lonnie or Marshall, but -- when you look at the environment, or your conversations with hospitals or decision-makers, is there anything in the external environment that makes you incrementally more concerned as you look out over the next 12 months in the US versus where you might have felt six months ago, just in that external environment?

On the external side, I'll try to answer that.

I don't get any -- I'm still not getting any feedback from the sales organization that there's pressure.

Some hospitals are in better shape than others.

But there's always a decision within a hospital of how do they prioritize their capital investment.

And I think we come up typically fairly high on that priority list.

As you know, in the financial markets, we keep waiting for the next shoe to drop.

And you are familiar with it more than probably anyone.

We aren't hear anything that causes us any significant concern.

I've got lots of concerns about other things we ought to be running or (inaudible) but that one has not yet looked like it's a real issue.

So, I don't have any different news than we had; no change from last quarter, I guess, is the simple way to state it.

I would just add one thing.

To underscore Lonnie's point on the priorities at hospitals, the way they will prioritize, if you compare the purchase of a da Vinci to some other piece of technology, let's say, in the seven-figure range, number one, our system does not require any sort of a room fit.

So it doesn't have to be staged with new operating rooms or a series of new operating rooms, which tend to be very, very expensive.

Our systems are installed by one person in a morning.

So they're delivered, uncrated and installed, as compared to some of the other things that are out there that require room refits and bricks and mortar, that may end up being part of major OR refits, that may be supported by a bond or some form of debt vehicle.

So we're not really in the same category with a lot of those decisions.

So thus far, we haven't seen it, but we're certainly not going to predict the velocity of the broader credit markets.

Given the strength in complex hysterectomies and nephrectomies, partial nephrectomies, can you remind us the opportunity?

And given the uptake, is this where -- as you know, I'm always looking for upside -- is this where upside could come in the next six, 12, 18 months?

We're hearing a lot of great things about use in these areas as well.

Thanks.

I would just caution on a timeline for the following reason.

What we have learned thus far -- let's start with da Vinci prostatectomy.

It was cleared by the US FDA in 2001.

And it took pretty significant commitment for the first two years to really get that to what at the time was a material number.

And so it's not going to be -- I doubt we stumble across a procedure that is like throwing a light switch that everybody just comes running to it immediately.

It's going to take a lot of work.

So when you define upside, not having the benefit of what you're calling upside, we are very bullish on it.

We will grow it over the next 18 to 24 months.

But, whether it meets the "upside" definition, I'm just not sure what that is.

But we are very bullish on it.

Thank you.

Vincent Ricci, Wachovia.

My first question is going to be on option rate securities, but not on your customers, rather yourselves.

How much cash and investments on your balance sheet are in option rate securities?

We have a par value of about $94 million worth of option rate securities.

Those are all student loan-backed and guaranteed by the federal government, so we don't believe there's a credit risk there.

Having said that, we did evaluate those.

And given the liquidity issues that exist today, we did record a $4.4 million reserve that only runs through the balance sheet.

Because we believe this is a temporary impairment, if you will.

Switching over to more of a therapeutic view, can you can give us a perspective on your -- maybe compare and contrast ASCR with SGO?

Could you repeat that question?

Kind of qualitatively characteristics about ASCR with SGO, in terms of kind of a concentrated group of surgeons having a very focused kind of perspective on a different practice.

I'm still not following.

What's ASCR?

The colorectal, American Society --

Compare and contrast (multiple speakers).

I would say that there are -- in raw numbers they're very, very similar.

I believe there are 1100 registered GYN oncologists in the United States, and there are roughly 1500 board certified colorectal surgeons.

And they both are subspecialties within a very large group; as SGO is to gynecology, colorectal is to general surgery.

So I think there are definitely some easy things to compare and contrast there.

I would say that in terms of the development within -- or I should say the early adoption thus far within gynecology as compared to colorectal surgery, it hasn't quite been on that level.

Nor at this stage are we saying that it's going to be.

But, there are a lot of things within that society, within that disease state, that we believe set up well for da Vinci; it just hasn't materialized yet.

But it's a procedure we're focusing on, and time will tell.

My last question is on [notes].

This is a topic of conversation among surgeons.

About a year ago you guys expressed some modest but conservative interest there, and then one of the sessions at SGO also discussed possibly some robotic applications.

Do you think this is an area of interest?

What's your perspective on it, because it's a very controversial topic?

As we look out at it, we look at both single port surgery and notes, and we're exploring those fields.

I think they're a little bit different, and single-port may be a little sooner than notes.

I think it will be a little while for real patient value to be understood in those two.

I guess our strongest statement is that if there's patient value to be had there, we think robotics will play a significant role in pursuing that value.

We're in the exploration phase, we take it's seriously, and we'll see where it takes us.

We have time for two more questions.

Amit Hazan, Oppenheimer.

This is Michael Tieu calling in for Amit.

My first question is related to both how you set guidance and your visibility on hospital spending trends.

Can you just remind us of how long it typically takes for an initial lead to become a system sale?

We know it's a general question, but any color you can give us would be helpful.

For the sales cycle on systems, we've said in the past that the full cycle averages maybe three to six months in the United States.

And that's probably still the case.

We will occasionally get some that sell pretty quickly, in less than three months, but we also have some that will take longer than six.

But on average it's still looking the same.

Internationally is definitely longer.

You can have some territories that are clearly over a year, but there's actually some signs in Europe with some of our direct sales that that's definitely shorter.

So maybe some are closer to six months in some of those territories, and we take that all into account when we give our forecast.

Thank you.

Next question is related to the macroeconomic issues.

Wanted to know currently what is the percentage of US system sales are financed?

Roughly speaking, about 15% of our system sales are financed.

And how about in Europe or rest-of-world?

There is actually maybe a similar percentage in Europe that are financed.

The rest-of-world ones, they vary quite a bit, actually.

It can be very different in Brazil as you might see in, say, Korea.

My last question is, what is the average utilization on a system before you're seeing a second and third system purchase from the same customer?

How should we think about the second or third system purchases as they relate to hospital spending, if there is really contraction in terms of capital expenditures?

A couple of things there.

I don't know there's a perfect algorithm for when a second or third or fourth system is purchased.

What we have seen that I think is pretty unanimous is that the larger the cohort of specialties -- in other words, if urology and gynecology and cardiac surgery and general surgery are all engaged in robotic surgery, that the capacity of that system is reached much sooner, and the requirement for a second system happens much sooner than, let's say, a system that has a really strong urology focus and they are the dominant specialty.

So what we have seen in the past is that in multiple specialty purchases, we tend to sometimes see those around 250 to 300 procedures per year, when they're trending at that rate.

And you'll probably see, again, in some situations where it's actually higher than that, where there aren't as many specialties.

It's not a perfect algorithm.

And depending on the commitment that the hospital is making to its overall MIS program, which is starting to become very apparent, they will often get systems dedicated to each specialty to avoid that logjam.

One quick follow-up as well to your sales for the quarter.

I wanted to know what was the overall FX impact?

FX impact.

On a year-over-year basis, we had $1.1 million of FX gain greater than last year.

And what we haven't yet done is how much impact was there on the overall business.

23% of our sales were international for the quarter.

But, you're right.

There was only six systems that were sold directly into Europe this past quarter.

Thank you very much.

Steve Ogilvie, ThinkEquity.

I wanted to dive in a little deeper on the SG&A spend, specifically the 57 new hires.

If you could maybe give us some color on where that is in Europe versus US.

And as a follow-up to that, talking about concentration of procedures, does it make more sense from your perspective to invest in the recurring revenue type of sales rep?

Because you're getting these areas where all the robotic procedures are going to one area, versus hiring someone who's going to sell capital equipment and drive that into a new hospital where they may just see their patients leaving.

Thanks.

Last quarter we mentioned that we were investing a lot more on the procedure-driven sales force.

And this -- we strongly believe that we can drive more procedures by having people focus on fewer sites but going deeper.

So it's our goal to get to a metric where one salesperson covers four systems instead of five.

And we're well on our way to doing that, and that's where some -- a large portion of those 57 new hires went.

As far as the mix between domestic and international, we did have adds in both territories.

I don't have the split-out exactly.

But it's also important to note that we have -- even in international, there's a mix between direct and indirect employees.

So the distributors are also committing resources and people to sell.

So the international number is not going to necessarily parallel the US numbers growth, because we do have that secondary sales org there, too.

But we will continue to invest in both capital salespeople who sell the system, as well as the sales force that supports the ongoing procedure development and procedure use of the system.

I think a way to think about it also is that a few years ago, when we were really predominately in urology and some cardiac, and a little bit of general surgery, it was a handful of procedures that really were being focused on.

Today, we're talking about a host of new procedures that we were not talking about a couple years ago.

As that list grows, and we hope it grows and continues to grow for a long time, the dependency of the person in the operating room goes up, because there are new procedures that require their attention; there are more and more surgeons that they re trying to get trained.

And as that wheel turns, that is really accretive to the business.

So I would expect that number to continue to be -- that role to be a really important role in the overall strength of the business.

That was our last question for today.

As I have said on prior calls, we believe that adoption is driven by significant shift in patient value.

And we are focused on increasing that patient value by improving surgical outcomes and reducing surgical trauma.

While the FDA clearance of the da Vinci-driven EndoWrist stabilizer, and the removal of the beating heart warning language may not have a significant near-term impact, we do believe it will have a significant long-term positive impact in the adoption of robotic coronary artery surgery.

Professor Didier de Canniere, who is the Chief of Cardiac Surgery at Erasme Academic Hospital and Tivoli University Hospital in Belgium, uses the da Vinci S and the EndoWrist stabilizer for coronary artery bypass surgery.

And he says that it provides, and this is a quote, rock solid stabilization for coronary vessel on the beating heart, enabling the avoidance not only of the thoracic incision, but also of the cardiopulmonary bypass system.

The advantage for the patients, he says, are obvious.

Avoiding cracking the chest is not only a matter of cosmesis, it corresponds to a much lower injury to the patient, much less inflammatory reaction, much less blood air interface, leading to a significant decrease in complications such as infections and stroke, which means shorter length of stay and a faster return to normal life and work.

One of his patients, a 40-year-old man, wrote us a letter.

I'm going to kind of summarize that.

He says, ladies and gentlemen, good day.

What a wonderful world.

I have endured my first hospitalization, and it was not a little intervention, but a bypass operation.

This meant at least three months out of my job, surely one year of unpleasant and tormenting physical shortcomings.

What a prospect.

Thanks to Erasme Hospital, Professor de Canniere and Dr.

(inaudible), and the entire team of the cardio unit, as well as the robot, da Vinci, my opinion has changed into, voila, what a wonderful world.

Some days later, I walked three hours with the in-laws across Brussels' Christmas market.

And on January 4, 2008, back to full-time work.

This being topped off by an eight-day ski holiday in the Alps.

Without the invention of robot, da Vinci, this would have never been in my dreams, less even a reality.

Thanks to the culmination of technical progress and human dedication, I am grateful with all my heart.

Jean-Paul.

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

In terms of our expectations of ourselves to continue to deliver exceptional operating performance, I like the story of the lion and gazelle.

Every morning in Africa, a gazelle wakes up.

It knows it must run faster than the fastest lion, or it will be eaten.

Every morning a lion wakes up and knows it must outrun the slowest gazelle or it will starve to death.

The moral?

It doesn't matter whether you're a lion or a gazelle, when the sun comes up, you better be running.

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.

And you can count on the fact that when the sun comes up, we will be running.

That concludes today's call.

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

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