直覺手術 (ISRG) 2008 Q2 法說會逐字稿

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(OPERATOR INSTRUCTIONS).

Today's conference is being recorded.

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I would like to introduce your speaker for today's call, Mr.

Ben Gong, Vice President of Finance.

Sir, you may begin.

Good afternoon, and welcome to Intuitive Surgical's second 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 & Exchange Commission filings.

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

Please note this conference call will be available for audio replay on our website at intuitivesurgical.com on the audio archive section under our Investor Relations page.

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

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

First, Lonnie will present the quarter's business highlights.

Marshall will follow with a review of our second quarter's financial results.

Next, Aleks will discuss sales and marketing highlights, then I will provide an update for our financial forecast for 2008.

And finally, we will host a question-and-answer session.

With that, I'd like to introduce Lonnie Smith, our Chairman and CEO.

Thank you for joining us today.

This past quarter, we continued to drive and broaden the adoption of robotically assisted surgery, resulting in significant top and bottom line growth.

Operating highlights for the second quarter are as follows, we sold 85 da Vinci Surgical Systems up from 56 sold during the second quarter of last year.

24 of the systems sold were to existing customers.

Our international team contributed 19 of the 85 systems sold, up from 13 last year.

We ended the second quarter with 946 da Vinci Surgical Systems installed worldwide.

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

We sold -- we had a solid quarter-over-quarter procedure growth in all significant specialties again lead by GYN.

Based upon our numbers, da Vinci Prostatectomy has now become the number one treatment for prostate cancer in the United States.

Among our fastest growing procedures in terms of percent sequential quarter-to-quarter growth were, nephrectomy and partial nephrectomy for kidney cancer, radical cystectomy for bladder cancer, hysterectomy, myomectomy, and sacrocolpopexy.

Total revenue grew to $219 million up 56% from last year.

Instrument and accessory revenue increased to $74 million, up 61%.

Total reoccurring revenue, including service, grew to $103 million, up 56% from the prior year, comprising 47% of total revenue.

We generated an operating profit of $98 million, 45% of revenue before non-cash 123R stock option expense, up 80% from the second quarter of last year.

GAAP net income grew to $51 million, 23% of revenue, up 67% from last year.

We ended the quarter with $740 million in cash and investments, up $40 million from the last quarter, and up $292 million in the last 12 months.

After subtracting $8 million in cash receipt for an exercise of stock options and adding back $54 million invested in fixed assets, purchased intellectual property, and working capital during the quarter, our gross operating cash flow in the second quarter amounted to 168% of our reported GAAP net income.

Our new instrument plant in Mexicali, Mexico came online for production in Q2 -- in Q3, and we grew our Intuitive team by 76 members to 935.

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

Thank you, Lonnie.

Total second quarter revenue of $219.2 million increased 56%, compared with $140.2 million for the second quarter of 2007, and increase 16% compared with $188.2 million for the first quarter of 2008.

Second quarter revenues by product category were as follows.

Instrument and accessory revenue increased $73.6 million, up 61%, compared with $45.8 million last year and 19% compared with $61.9 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 $2,000 per procedure for established da Vinci accounts.

And 2,000 to $2,300 per procedure if you include initial stocking orders.

Systems revenue of $116.1 million, increased 57%, compared with $74.1 million last year, and increased 17% compared with $99.1 million last quarter.

The increase in systems revenue compared with first quarter -- compared with the first quarter of 2008, reflects increased unit sales as well as an increase in the average revenue per system.

Second quarter da Vinci Surgical System revenue reflects the sale of 85 systems, compared with 56 systems sold during the second quarter of last year, and 74 systems sold in the first quarter.

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

Seven were 4-arm S models incorporating standard vision capabilities.

Four were 3-arm S models and four were refurbished standard systems.

19 of the system sales were outside of the United States, compared with 20 in the first quarter.

Six of the system sales in the quarter included trade-ins.

Our second quarter average revenue per system including all da Vinci models, but excluding upgrades was $1.35 million, which is $30,000 more than the average revenue per system in the first quarter of 2008.

The higher average revenue per system primarily reflects a favorable geographic mix and to a lesser extent a higher proportion of our sales being direct sales to European commerce which are denominated in Euros.

Upgrades including 4th arms and HD, accounted for $1.5 million of the current quarter system's revenue, compared with $1.6 million last quarter.

Service revenue increased to $29.4 million, up 44%, compared with $20.4 million last year, and up 8% compared with $27.2 million last quarter.

The growth in service revenue is primarily driven by larger system install base.

Total second quarter reoccurring revenue comprised of instrument, accessory and service revenue increased to $103 million, up 56% compared with the second quarter of 2007, and up 16%, compared with the first quarter of 2008.

Recurring revenue represented 47% of the total revenue in both the second and first quarters of 2008.

Revenue outside the United States represented 20% of total second quarter revenue, compared with 23% in the first quarter, reflecting higher revenue growth in the US relative to outside the US.

Our second quarter 2008 gross margin of 71.2% was higher than the 69% realized in the first quarter, reflecting higher average selling prices for systems, reduced costs associated with certain system component, and increased absorption.

Operating costs, included initial start-up costs for Mexico, which began production in July.

In the current year, these start-up costs will be more than offset by the otherwise lower costs -- or will be more than offset the otherwise lower costs of production in Mexico.

Total operating expenses for the second quarter of 2008 were $77.9 million, compared with $64.9 million in the first quarter of 2008.

Sequential operating expense increase of $13 million reflects non-cash 123R stock compensation of $4.5 million.

Increased commissions on increased revenue, costs associated with increased headcount, and costs associated with increased R&D activities.

We added 76 employees during the second quarter, ending the period with 935 regular employees.

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

Second quarter 2008 operating income was $78.2 million or 35.7% of sales, compared with $64.9 million, or 34.5% of sales for the first quarter of 2008.

Second quarter operating income included $19.7 million of 123R stock compensation expense, compared with $14.6 million in the first quarter.

The increase of $ 5.1 million, reflects the full quarter impact of our annual stock grant made on February 15, compared to a partial impact in the first quarter.

Our second quarter 2008 other income was $5.7 million, which is significantly lower than the $8.5 million realized in the first quarter, reflecting lower interest rates on our investment portfolio.

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

We continue to utilize carry forward tax benefits and employee stock-related tax benefits in 2008 and expect our cash outlay for income taxes will be approximately 20% of pre-tax income for 2008.

Our net income of $51.2 million or $1.28 per share increased 67%, compared with $30.7 million, or $0.79 per share for the second quarter of 2007, and increased 14% compared with $44.8 million or $1.12 per share for the first quarter of 2008.

Let me quickly summarize our results for the first six months of 2008.

Total revenue for the first six months of 2008, was $407.4 million, up 60% compared with $254.5 million last year.

Operating income for the first six months of 2008 was $143.1 million, up 80%, compared with $79.4 million last year.

Operating income included $34.3 million of stock-based compensation charges in the first six months of 2008, compared with $17.5 million in 2007.

Net income for the first six months of 2008 was $96 million or $2.40 per share up 76%, compared with $54.5 million or $1.41 per share last year.

Now turning your attention to the balance sheet.

We ended the second quarter of 2008 with cash, cash equivalents and investments of $740 million, up $40 million from March 31, 2008.

$8.3 million of the cash generated in the quarter was associated with stock purchase activities.

The remaining cash generated was primarily related to operating activities.

The $40 million is net of $45.1 million of capital expenditures, which included $17.4 million associated with the purchase of property in Sunnyvale, where we are building a new 154,000 square foot manufacturing and engineering building.

$20 million associated with the purchase of intellectual property rights, and expenditures associated with facilities improvements, and information technology infrastructure to support our growth.

Our accounts receivable balance increased to $162.1 million at June 30, compared with $135.7 million at March 31, 2008.

The change in receivables reflects a higher revenue -- reflects higher revenue in the second quarter and the timing of customer purchases relative to our quarter cutoff.

Our net inventory increases to $42.6 million at June 30, compared with $38.8 million at March 31, 2008.

Our inventory turns at June 30, 2008, of 5.7 times was comparable to the 5.85 turns at the end of the previous quarter.

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

Thank you, Marshall.

During the second quarter we sold 85 da Vinci systems, 66 in the United States, 14 in Europe, and five in rest of world markets.

A total of six systems were part of sales trade-in transactions.

The net 79 new system installs brings to 946, the cumulative number of da Vinci systems worldwide.

710 in the US, 159 in Europe, and 77 in rest of world markets.

18 of the 79 net systems installed during the quarter, represented repeat system sales to existing customers, which brings to 110, the total number of customers, which own two or more da Vinci systems.

70 of the 85 total systems sold were da Vinci S HD systems.

Internationally, we had another solid quarter, I included three more da Vinci placements in to Switzerland, two in to Sweden and our first da Vinci placements into the countries of Argentina, Cyprus and Qatar.

Additionally we were notified by the state food and drug administration in the People's Republic of China, that da Vinci S has been granted regulatory clearance, which allows us to begin marketing the S system throughout China.

Clinically we had an excellent quarter.

A quarter which we experienced strong sequential procedure growth within all our our targeted strategic specialties.

Both in the US and internationally.

And for the first time, our overall gynecologic procedure business registered both the largest sequential percentage growth as well as the largest absolute procedure growth for the quarter.

This growth was lead by da Vinci Hysterectomy, and sacrocolpopexy.

Our urology business showed solid growth, exceptionally so within our kidney and bladder business, namely da Vinci Nephrectomy and partial Nephrectomy and da Vinci Cystectomy.

We also saw solid growth within our dVP business, particularly so internationally.

Our da Vinci cardiac revascularization and mitral-valve repair business were also strong.

In Q2, there are approximately 100 da Vinci-related clinical papers published within various peer reviewed journals, throughout several surgical specialties.

In addition, there were multiple scientific abstracts, clinical posters and podium presentations delivered been the various conferences we attended.

The Annual American Urology Association conference, or AUA, took place in May and it was attended by nearly 13,000 neurologist from around the world.

da Vinci imprint on the AUA has grown over the years to the point where dVP is now the most popular treatment for men with prostate cancer in the United States, and arguably the most enabling product us used within all Urologic cancers, prostate, kidney, and bladder.

At the AUA conference, 76 da Vinci presentations, abstracts and posters were featured, 40 of which focused on dVP alone.

The remaining 36 reported on da Vinci Nephrectomy and partial nephrectomy, cystectomy, pyeloplasty, as well as sacrocolpopexy for your uro-GYN conditions.

In parallel with these presentation were five AUA da Vinci post graduate or instructional courses.

A pre-AUA advanced robotics course, a da Vinci satellite symposium and an international robotics cystectomy consortium program.

Two of our fastest-growing procedures are da Vinci partial Nephrectomy and da Vinci cystectomy.

Through they are relatively new opportunities, multiple presentations focused on these complex cancer procedures.

Due to the technical challenges traditional lacroscopic approaches within these procedures are rarely performed.

Therefore, the gold standard remains open surgery.

The group headed by Dr.

Raul Parra from Coopers Medical Center in New Jersey presented their initial 20 patients comparing da Vinci partial nephrectomy to open nephrectomy.

The author's introduction was as follows, and I quote, "Laparoscopic partial nephrectomy requires experience and a lengthy learning curve to successfully accomplish tumor excision.

The advent of robotic-assisted laparoscopic surgery, has proven successful in prostate cancer surgery, encouraging a growing number of centers in adapting this technology in complex renal surgery."

The study compared blood loss, operating time, pathologic outcomes, and length of hospitalization.

In their result, they reported that OR time was a bit longer in their initial da Vinci cases, but their blood loss was reduced by over 50%, and hospitalization was reduced by 43%, with similar pathologic results.

It's important to note that these were the group's initial cases, learning-curve cases, but through their learning curve, they showed strong clinical results.

Two of the cystectomy presentations at AUA caught our attention and both were by Dr.

Doug Scherr and his group our of Cornell University Hospital in New York.

The first study prospectively compared peri-operative and pathologic outcomes in 70 consecutive parents undergoing open radical cystectomy and da Vinci Cystectomy.

The study compared operating time, blood loss, transfusion rates, length of hospitalization and cancer outcomes.

The authors had this to say about their results, and I quote, "Our initial experience with robotic cystectomy suggests potential advantages compared to standard open approach.

Although operative duration was greater in the robotic group, blood loss, transfusion requirement, and hospital stay were all decreased, compared to the open cohort.

The robotic method also demonstrated comparable early pathological outcomes."

Their second prospective study measured cost differences, both direct and indirect between open cystectomy and da Vinci Cystectomy.

Their study compared costs within three distinct urinary diversion procedures.

First a cystectomy with an ileal conduit.

Second, a cystectomy with an Indiana pouch, and third, a cystectomy with an ileal neo-bladder.

Despite the increase materials cost, da Vinci Cystectomy was shown to be less expensive than the open cystectomy across all three groups.

Their da Vinci ileal neo-bladder procedures registered an 8% cost savings compared to open.

da Vinci Indiana pouch, a 32% savings.

And for da Vinci ileal conduits, a 42% cost savings.

The largest cost driver in the study was hospital length of stay, where da Vinci patients systematically demonstrated shorter length of stay compared to open patients.

The author's conclusion, and I quote, "Robotic cystectomy appears to be more cost efficient than open cystectomy as a treatment for muscle-invasive bladder cancer at a high volume tertiary care referral center, despite an increase in materials cost.

The cost benefit obtained from reduced length of stay with robotic cystectomy is significant."

On June 26th and 27th, the first worldwide robotic renal symposium was held at Washington University in St.

Louis.

115 surgeons from around the world attended this first-ever event, exclusively devoted to da Vinci renal surgery.

The course was dedicated to offering practical techniques to enable surgeons to incorporate da Vinci renal surgery into their practice and included lectures and cases on a wide range of renal applications for robotics in radical nephrectomy, partial nephrectomy, pyeloplasty, and adrenalectomy.

The course featured four complete live surgery broadcasts, and during one of them, Dr.

Sam Bhayani, the course director performed a da Vinci partial nephrectomy with warm ischemia time of only 13 minutes.

The patient left the hospital in two days, and reported to have gone dancing one week later.

And also reported to have used no pain medication once sent home.

On the advantages of da Vinci renal surgery, Dr.

Sam Bhayani had this to say and I quote, "Robotic renal surgery offers so many advantages over open and laparoscopic approaches.

We are able to do more complex surgery and with fewer side effects such as shorter ischemia times and quicker return to normal activity.

It is a revolution."

As many of you know sacrocolpopexy is a procedure performed by gynecologist uro-gynecologists and urologists to correct vaginal vault prolapse.

The condition is very common and the gold standard corrective procedure is an open sacrocolpopexy.

The group out of the Mayo Clinic Rochester, lead by Drs.

Chow and [Sediquy] presented data on their first 42 da Vinci patients.

35 patients in their study had a minimum of a 12-month follow up, with a mean follow-up period of 36 months.

All but one were released on postoperative day one and one was released on post-op day two.

This compares very favorably to the open sacrocolpopexy published literature, which suggests a two to three-day hospitalization.

More important than hospitalization is procedure durability, which is one of the reasons that traditional laparoscopy is infrequently performed.

The Mayo series showed that the da Vinci sacrocolpopexy is not only less invasive, but also highly durable.

The author summarized by saying, and I quote, "The robotic assisted laparoscopic sacrocolpopexy is a minimally invasive technique for vaginal vault prolapse repair, combining advantages of open sacrocolpopexy with the decreased morbidity of laparoscopy."

"We are found a decreased hospital stay, low complication rates, and high patient satisfaction with a minimum of one-year follow-up.

But most importantly, the long-term results of the robotic repair mirror those of the open repair, with significantly less morbility." In last month's addition of the Journal of Minimally Invasive Gynecology, Dr.

Payne and Dauterive from the Oschner Clinic, published a study comparing outcomes of total laparoscopic hysterectomy to da Vinci Hysterectomy or dVH for benign conditions.

The construct was a 200 consecutive retrospective analysis of their 100 most recent hysterectomies, prior to establishing the robotics program, compared to their first 100 hysterectomies following the establishment of their robotic's program.

I referenced Dr.

Payne and Dr.

Dauterive's work in the past, but until now it has not been published within a leading clinical journal

Their seven-page paper detailed some very key findings.

For example, the number of patients that required an exploratory laparotomy with a total abdominal hysterectomy was 11 in the pre-robotic cohort, and zero in the da Vinci cohort.

These 11 were patients that upon initial review could not be treated either laparoscopically or vaginally.

This resulted in exploratory laparotomy and subsequent abdominal hysterectomy.

There were zero similar events within a da Vinci cohort.

In addition, intraoperative conversions were significantly reduced, 9% laparoscopically, 4% with da Vinci.

Worth noting is the size of the uterus within the conversions.

In the 20 laparoscopic conversions, the average uterus weighed 359 grams.

Whereas the four da Vinci conversions had average uterine weights of 1,387 grams a pretty significant different.

The authors offered a number of perspectives in their study that supported the following findings, a significant decrease exists in operative time with surgeons and teams experienced with robotic cases.

A two-fold decrease in blood loss exists among robotic hysterectomies, compared to laparoscopic hysterectomies.

After implementation of a robotics program, hospital stay may be short ended by half a day.

They went on to say, and I quote, this difference may seem trivial, but when one looks at the overall exploratory rate combined with intraoperative conversion rate in the pre-robotic cohort, it is five fold higher than the robotic cohort.

"Also, the average hospital stay for an abdominal hysterectomy is two to three days, with an associated recovery time of six to eight weeks.

When one considers the 600,000 hysterectomies performed in the United States, up to 63% of these cases are done as total abdominal hysterectomies.

The societal impact of virtually eliminating the abdominal approach translates in to an annual reduction of 800,000 in-patient hospital stays.

Additional benefits would include a decrease in hospital complications." This is certainly a long-term and a large view, but it is a view driven by the results within their own practice, which speaks to why our da Vinci hysterectomy adoption is growing such a rapid rate.

This concludes my overview and I'll now turn the time over to Ben.

Thank you, Aleks.

I'll be providing our updated 2008 financial forecast on a GAAP-reported basis including non-cash FAS123R stock compensation expenses.

I will also provide an estimate of our stock-composition charges separately, so you can calculate meaningful comparisons that exclude these non-cash expenses.

Based on our second quarter results, we are increases our previous guidance for revenue and profits for 2008.

Starting with procedures, we are seeing higher growth rates across a number of different procedures, and we expect our total procedures to grow 57 to 58% this year, up from our previous forecast of 55% growth.

da Vinci Hysterectomy continues to be one of our fastest growing procedures, and we continue to expect this procedure to grow at least 150% this year from a base of approximately 13,000 procedures performed last year.

da Vinci Prostatectomy has continued to grow strong, but has been growing less than our previous forecast of 40%.

We now expect our dVP procedures to grow between 35 and 39% this year from a base of approximately 55,000 procedures performed last year.

At the same time, our newer emerging procedures, such as nephrectomies, vastectomies, and sacrocolpopexies, are growing much faster than we previously expected, and therefore we have increased our overall procedure growth estimate for the year from 57 to 58% from a base of approximately 85,000 total procedures performed in 2007.

We are increasing our top line revenue guidance for 2008.

We now expect revenues to grow 45 to 47% over 2007, which is up from our previous estimate of 42%.

We had strong sequential growth in instrument and accessory revenues during Q2, and we are increasing our estimate for annual growth.

Instrument and accessory revenue is expected to grow 57 to 58% this year.

This is up from our previous estimate of 55% growth.

System revenues in Q2 were also stronger than previously expected, driven primarily by our overall procedure growth.

We are now forecasting system revenue to grow 38 to 40% over 2007, which is up from our previous forecast of 33 to 35% growth.

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

Our system ASP was approximately $1.35 million in Q2, compared with $1.32 million in Q1.

As we have mentioned on previous calls, our system ASP fluctuates quarter-to-quarter as a result of geographic and product mix.

We continue to expect our average ASP to be approximately $1.33 million for the remainder of the year.

We expect service revenues to grow approximately 45 to 46% above 2007 levels.

Our previous estimate was 45%.

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

With regard to gross profit margin, our Q2 margins were sequentially higher than Q1, due in large part to the higher selling systems in the quarter.

Gross margins have varied between 69 and 71% over the past few quarters, and we expect our total gross margin to be approximately 70% for the remainder of the year.

This is up slightly from our previous forecast of 69 to 70%.

Moving to operating expense, starting with R&D, we expect total R&D expense to come in between 81and $82 million for the year, up approximately 67% from $49 million spent in R&D expense last year.

This is higher than our previous forecast by approximately $4 million.

The increase stems from additional internal development projects we have planned, purchases of an intellectual property, and co-development arrangements with industry partners.

With regard to SG&A expense, we expect total SG&A expense to grow 48 to 49%, which is up from our previous forecast of 47% growth, due to higher variable costs associated with our higher revenue forecast.

We expect total operating expense to grow 52 to 53%, and operating income to grow 42 to 44% for the year.

Last quarter, we were forecasting operating income to grow 37%.

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

These forecasts include the impact of FAS 123R stock compensation expense.

We continue to forecast approximately $75 million in stock-compensation charges for the year broken down as follows, $11 million in cost of goods sold, $17 million in R&D expense, and $47 million in SG&A expense.

We are lowering our estimate on other income for 2008, due to the significant drop in interest rates.

We expect other income for the year to be approximately $26 million.

Our previous estimate was 33 to $35 million.

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 approximately 20% 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 38.8 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 our EPS for the year, we expect the share count to be between 40 and 40.5 million shares.

Before closing, I would like to remind you that our third quarter results are typically impacted by seasonally slower growth in revenues due to vacation schedules.

This may result in lower sequential revenue growth and likewise lower sequential profits in the third quarter.

However, we typically have strong sequential growth in revenue and profits in the fourth quarter.

That concludes our prepared remarks.

We will now open the call to your questions.

Thank you.

We will now begin the question-and-answer session.

(OPERATOR INSTRUCTIONS).

One moment, please, for the first question.

Our first question comes from Eli Kammerman.

Sir, your line is open.

Thanks very much.

My first question is related to one of the procedures that you didn't talk about, and that's head and neck surgery.

There was a notable training course at the international surgeon's meeting this past week.

Is that on the radar as contributing significantly to procedure increases this year?

It is not on the radar to be a significant contributor this year.

It is, as you've called out -- it is definitely on the radar of our customers, and there has been some work that has been done on the procedure, but as a reminder, we do not have FDA clearance for that indication.

But -- but what we hear from people that have -- there IDEs in place is that there are some potentially high-value adds for the patient value in that application.

So we're definitely watching it, but it is not going to be a significant contributor this year.

Okay.

And my other question is there was a higher than usual number of trade-ins this quarter at six units.

Did you run a special promotion which encouraged trade-ins, or how do you account for this sudden spike in trade-ins?

There wasn't a quote "special promotion".

There certainly were more this quarter than in previous quarters.

Over the past four quarters it has ranged between zero and two, so six this quarter was probably a high water mark.

We think it's going to vary, and it really depends on what customers out there are looking to have that kind of transaction.

We think we will have some in the future, but is hard to say how many quarter-to-quarter.

Well, and if you all look at the standards -- I mean the standard has been out there since '99 in Europe, and -- and when a hospital decides to buy a second system often they're thinking about also standardizing.

So we will -- this is part of our -- our long-term plans is that we will have more trade ins, and people will move to -- to the more capable and later versions of the system.

Okay.

Then on a related note, what is your average revenue capture per trade-in?

We do sell in that transaction, the new system will net a little bit less than we would if you didn't have a trade-in.

But all in all it's not significantly different and as you can tell from our average selling price for the quarter, it didn't have a significant impact.

All right.

Thanks very much.

Tao Levy, your line is open.

Good afternoon.

Hi, Tao.

Maybe you could comment a little bit more on Mexico now that that manufacturing facility is up and running.

What is going to be made there?

And what type of impact do you expect to occur on the P&L going forward?

I'll answer the made side.

It'll start off making instruments for us, and it will be needle drivers and energy instruments and things like that as we go forward.

Marshall I'll let you take the financial.

From a financial statement impact perspective as I said earlier, there are some start-up costs associated with bringing the facility up.

Those costs will more than offset the labor savings, and labor is really where we will achieve some savings.

But frankly when you look at the total cost of -- of an instrument, labor is not large portion of it, so we're not talking about a huge impact on the financials in the future.

Okay.

And on the R&D, that obviously increased a lot.

And you commented on that in the prepared remarks.

But the reality is, over the last -- call it year, year and a half, we have seen R&D go up, but we have seen a couple incremental new product disposables come out, which is obviously important.

Where is all of the extra R&D going in to?

And are there future systems that are being developed, which are expected longer term?

We take the R&D expense and we put it in really four buckets.

And the first bucket is really instruments and accessories and improvements for our existing products, and those are coming out all the time, every quarter.

We also put it in imaging systems, optical imaging and other things that will increase our ability to see in the da Vinci system.

We -- we work on software improvements and patches for ease of use, and those continue.

And then we work on different architectures, things that are a little bit further out.

And then when we look at that, we also do internal funding as well as work with external partners, and there has really been an increase in all four of those areas as we go forward.

Then we have the longer term.

And we do research looking further out.

And last question, on the guidance front, Ben, you talked about sequentially being down Q3 because of seasonality, and then up in Q4, but historically that hasn't been the case with the strong number here in the second quarter, do you think, seasonality will become a more felt and that's kind of how we should be thinking in our models?

Well, we have had seasonality in previous third quarters in that the growth in procedures has always been lower, so we would anticipate the same kind of lower procedure growth, and it was a pretty strong quarter for system placements in Q2.

We are forecasting that Q3 system placements in Q2/ We are forecasting that Q3 system placements might be relatively flat for Q3 from Q2, and then again higher in Q4.

So there's always going to be variability in that.

We just want to caution you that there's typically seasonality in Q3.

But systems you said sequentially flattish?

Is that the way to look at it?

That's what we're forecasting.

Okay.

Great.

Thanks a lot.

Great quarter.

Our next question comes from Mr.

David Lewis.

Your line is open.

Good afternoon.

A few quick questions.

I guess first off, Lonnie or Ben.

We saw a different mix of box contribution this quarter, it was similar in international, relatively similar on repeat systems but obviously an acceleration in new systems or version placements.

Can we draw any conclusions about these mix shifts quarter-to-quarter, or are they going to remain erratic throughout the remainder of the year?

I guess my comment is I don't draw a lot of conclusions on anything quarter-to-quarter, other than am I -- are we trending properly in terms of procedure growth and that sort of thing.

I think that -- in terms of -- of the mix from green field to -- to second, third, fourth, fifth systems.

I think that is just matter of timing and of course anybody we sell the first system to longer-term we certainly hope they will have such an experience that they want to buy second, third systems.

So longer timer, in the longer term I would expect that -- that -- that the repeat systems sales will grow to larger and larger percentage of total systems sales.

Now, in the meantime, we have got lots of land and lots of places to concur in terms of green field yet.

So that's not an eminent thing, but it is something that in the time horizons that we look at, and I'm talking about five, ten years, and longer -- that it will shift as we get larger and larger install base.

Okay.

That's very helpful.

And then, Aleks on procedures.

I wonder, your dVH obviously is growing as well as it was last quarter.

As you penetrate more into the gyno procedure and the complex benign procedures across the different procedures or different physician sets, are you learning anything more about the 250,000 complex benign procedures, or the 50,000 [onc] and 200,000 complex benign?

Given than myomectomy is growing and you're dealing with these physicians more often.

Are you still as confident in this 50 and 200 number as you were -- let's say -- six months ago?

We haven't learned anything that would cause us to be less optimistic than we have been in the past.

And if anything I think there's probably more evidence of more optimism.

And that is that the patient value, as we've always talked about it, on either improving the invasiveness -- reducing invasiveness or improving efficacy of the procedure is really proving out in both of those cohorts.

From the GYN ONC, you are starting to hear more about it at the different society meetings, and you are starting to hear about -- from authors of manuscripts that are being sent in for publications.

There is just more and more of that, which is always a good sign, but most importantly you are hearing it from patients who are having these experiences and helping to lead to proliferation of more patients.

So we are as encouraged as we have everybody been if not more so.

I think from the specialty itself there's more reason to be encouraged on sacrocolpopexy for the same reason.

You are showing improved -- at least as efficacious as a gold standard, very invasive open procedure, being done minimally invasively.

And those are on early cases, so all of that is very positive for us.

Great and then I had just one last question here.

It sounds like new procedures are doing much better than you thought, and dVP obviously giving it sort of victim of your own success there.

But maybe there's three procedures, nephrectomy, cystectomy and maybe it's myomectomy, but can you give us an update on the new procedures?

What do you think the total market opportunity is, number one.

And number two, the ability to penetrate those new procedures, would you see it as faster than the turn line on prostatectomy or slower?

I would say this.

I don't know about the velocity, it's hard for us to tell the velocity.

But I would look at the -- let's start with the nephrectomies and partial nephrectomies.

So , in the US you are looking at roughly 54,000 new renal cancers per year.

Now not all of them line up for this application, but a good portion, and those are US numbers alone.

In the -- I would go to sacrocolpopexy, because the condition affects many more women then the actual sacrocolpopexy.

In other words there are other procedures that are less invasive for less severe cases, but we are -- we believe in the numbers that we see, and what we hear is that that opportunity might be 50 to 60 and as high as 70,000 in the United States, and -- and if you look at myomectomy, again, that number is probably around 50,000 to 60,000 in the United States.

Those are US numbers, and those are, big numbers.

As far as our ability to penetrate it, that will really depend on the patient value, and the early indications are very, very

And Aleks across all of these procedures you are seeing positive length of stay data.

Is it time to pull some of this data together either in a registry form or a true trial and try to pursue that as a claim and seek higher reimbursement?

Thank you.

We haven't done that.

And now -- again, we leave a lot of that up to our customers, and -- and I think the data that we that we are expecting to see and -- the -- the number of -- of people who are doing this procedure will positively be impacted in the future.

So we will revisit certain publication strategies from time to time, but at this point it's growing pretty rapidly.

Thank you.

Our next comes from Ben Andrew.

With William Blair, thank you for taking the question.

Can you talk a little bit about the efforts in the field with the sales organization, because you added I think it was 57 people in Q1 and 76 in Q2.

How is the productivity of the new hires in Q1 coming along?

And are any of those new hires in Q2 going in to field sales?

Ben, let me just do one quick clarification, there are 57 field people added in Q1.

There were 76 total people added to the company in Q2.

About 17 of those 76 in Q2 were in the field.

So we -- we do hire a lot of people -- tend to hire a lot of field people in the first quarter as we, basically, resize territories and fill them up.

So -- second part of your question is -- in terms of the productivity of the new hires.

There is usually a ramp-up period.

That said, we are seeing, we are seeing, we believe, the affects of some of the recent hiring and some of the growth in our procedures this quarter, and we're encouraged by that.

Just coming back to the question on prostatectomy.

Was there any change in sort of physician behavior uptake that lead to the very small change in guidance?

And it's a victim of your own success sort of thing.

But was there anything of note there?

Not really.

I think if you look at where you are, draw a line between the US and the OUS.

OUS is growing at a rate, obviously significantly higher than the rate than we have given for our guidance, but if you look at the US, you are now in the early -- you are in the majority, the late majority, so that by definition is going to be just a little slower go in picking up those incremental case us.

Our push now in the US is certainly expanding throughout the -- the -- the indications of prostate cancer, in other words trying to convert brachey therapy patients and some of the radiation patients and perhaps even watchful waiting.

But we still are very bullish on dVP, as you can tell, it was just a modest change in the mix of our procedure.

Sure.

We've certainly seen at the recent robotic conference there is a lot of interest in nephrectomy generally.

Is that something that can be tens of thousands of procedures in a couple of years?

Or do you think it is going to be slower than that, Aleks.

Again, I don't think we're going to give any forward-looking projections on that.

The -- could it be in the tens of thousands?

Well, the indication, again, 54,000 new renal cancers in the United States, globally, it is significantly higher than that, so it a very large market.

And we are very encouraged by the patient value and some of the early reports that are taking place.

In addition, he macro view on nephron sparing surgery is also very positive, and that is it used to be that you would just take out the kidney and leave the healthy kidney, but now there's plenty of data that suggests that saving the healthy kidney is going to lead to more kidney function for that patient.

All of this is happening at the same time and we think it's very positive.

Great.

Just turning to international markets for a second.

You got the approval in China, is there anything else you need there to be effective on the sales side?

Do you need reimbursement approvals, separately?

And then that is the next kind of one or two international markets that maybe you are looking at?

So for China, there is not a required -- let's say second approval needed for reimbursement, so now, just starting earlier this month, we were able to market the da Vinci S in China, and just as a reminder for some folks who have been asking there, we could not market that product until after we got that clearance.

So with the sales cycle in place, you wouldn't expect that you that you are going to have sudden -- let's say boost of sales in China, but we do believe it's an attractive market, and we will see sales coming out of China going forward because of that.

As far as other markets, as we said in the past, we are in the process of trying to secure approval in Japan, and there's no new update there.

Okay.

Thank you.

Our next question comes from Mr.

Rick Wise.

Sir, your line is open.

Good afternoon, everybody.

Hi, Rick.

Rick Wise, Leerink Swann Your procedure growth seemed exceptionally strong to me against I think the faster-growth quarter of year ago.

And if our calculation is correct it suggests something like weekly utilization of 2.9 per week, versus 2.7 in the first quarter.

Again, does that sound directionally correct, and are we likely to see that accelerate from here, it has sort of been stuck in a bit of a range for a while?

Rick, this is Ben.

You are directionally correct.

We had certainly a growth in utilization from Q1 to Q2 due to the strong procedure growth that we had.

I think on average, we're somewhere a little bit north of three procedures per week on the installed systems, and again, sometimes it depends on what you choose as your denominator, we typically choose the ending install base from the previous quarter.

So you have that right, and quarter-to-quarter, you are going to definitely have certain fluctuations, but year-over-year is how we take a look at it, and year-over-year, we have significant improvement on system utilization.

So it's something we could expect to see in -- gradually increasing going forward, likely.

The -- the 18 of the 79 systems to current accounts.

Maybe just give us a little color on why that, second third or forth system was bought.

Was it for the new procedures, was it higher volume in da Vinci Prostatectomy?

Any clear trend there, Alex?

Well, I think the answer is probably yes in some instance to all of those questions.

To what Lonnie had said earlier, our model is pretty clear, and that is to drive da Vinci surgery through -- through a market and through a hospital, et cetera, et cetera, to the point where the demand for more than one system, becomes pretty obvious.

So at the core of all of those peptures, or certainly most of those purchases is that the hospital sees that they cannot satisfy the needs of the parents with one system, or two or three or whatever it is that their denominator was before they bought the additional system.

In other words you are running low on capacity and you have supply that is growing of patients.

So those procedures, GYN procedures specifically, if you go back to the GYN approval that we received back in '05 and you sort of map this out over that period, you'll see that the addition of those procedures has required a lot of hospitals to get, third, and fourth systems.

And we see that continuing.

Sounds good.

Obviously it was a great quarter, but help us, Aleks, if you would on the da Vinci Prostatectomy, sort of slightly lower guidance.

Obviously these are small numbers, but just wanted to understand how you are looking at it.

Does this suggest in any kind of way that you have hit a market penetration ceiling, if you will, in da Vinci Prostatectomy, or -- or that -- but clearly offset by all of the emerging procedures?

How are you thinking about it?

Well, we don't think we have penetration ceiling.

Two, as -- as Aleks mentioned, in the adoption curve, you go through that early majority to the majority and now surgery in the US, we're in the late majority.

So that, by nature, there -- in surgery, growth is going to slow.

And -- and then, now the challenge is, do we -- we have got to pick up the rest of the surgery, and then we would like to add other alternative treatments.

Take market share from those.

Now internationally, we're growing much faster because we're lower on the curve.

We there either at the innovators early majority, and so it's a faster growth rate but it is off of a faster base.

So the dynamics of this always will cause, until that larger base gets more penetrated, you'll have some dynamics in growth.

But we are -- this is the nature of adoption, and so there's nothing -- no surprises here.

It's just a matter of -- of -- of moving through the adoption curve, and doing it in different markets at different times, so --

I think the other thing worth mentioning, Rick, is if you look at it from a sales organization.

Our sales organization certainly are very incented to get new business, and if you look at just the new procedures that we talk about.

We talked about da Vinci Hysterectomy, it's a market of 250,000 or more procedures in the United States alone.

Potentially renal cancer is another 50,000.

Sacrocolpopexy, the number just really grows.

So you -- you're really -- I mean, struggling to get full attention in every one of our opportunities, which is a nice high class problem, but they are making tradeoffs as well.

So do we -- do we think -- that, the remaining procedures are going to come our way?

We do?

So we are going to go out and plant some new seeds in other parts -- or their going to go out and plant seeds in other parts of their territory and we think it's natural.

There's a lot of just natural demand.

No, I hear you.

Two quick last ones, I think you said -- whatever that was 77 people added in the quarter.

Whatever the right number is, any -- when you are adding these people last quarter, this quarter, probably the next couple of quarters, any particular areas that you are focussed on expanding, sales you are expanding, is it R&D, manufacturing?

Any perspective there?

All of the above.

(Laughter).

All of the above, and it has been consistent and more than half have been in the sales organization and manufacturing organizations.

It's not -- I think you sort of emphasized international growth and expansion.

It's not -- just wondering if you are particularly adding there or anything?

Literally, we are growing everywhere, and it's -- and so I mean -- that's really it.

It's all of the above.

We've got -- and I have explained this before.

First place we allocate resources are in to our sales organization because that drives revenue, and since we fund our fixed-costs based upon revenue growth, that makes -- creates larger umbrella to fund all of the other activities.

And so we -- we have a process that 1 To Drive revenue growth, and then to support the engineering and the development of new products and manufacturing to support the -- et cetera, et cetera.

So it does does -- it -- it -- it drops down to the whole organization, and -- and we -- the -- the support organizations are the ones that we fund at a rate necessary to be support to be as sufficient as possible.

Rick, we're going to have to take another question.

Thank you very much.

Operator, next question, please.

Amit Hazan.

Sir, your line is open.

Thanks very much.

Good afternoon, guys.

Just another follow-up on the procedure side.

This time on dVH, again, maybe a little bit of a victim of your own success, but we are all used to you guys increasing your guidance pretty regularly, and here we are with dVH even though you talk about it optimistically you have not increased your guidance again.

I think about this relative to the systems that you are installing, which you are installing at a greater pace than many of us are estimating here, at least for the last three or four quarters.

And so I'm wondering with an increased level of installations based on what you are guiding to, why aren't we seeing that drive hysterectomy beyond what you are guiding to?

Amit this is Ben.

So philosophically we believe that procedures drive everything.

Once you are in a territory, placing an additional system doesn't necessarily drive -- let's say a higher number of procedures.

You have a number of procedures out there that are growing, and -- and we -- we use the saying that these are procedures looking for a system, and it's going to find a system that is existing or a new system that is going to be placed.

So just because we place 85 systems versus you modelling 80 doesn't necessarily mean you are going to ratchet up your procedures.

The dVH is growing incredibly strong.

150% growth, we're certainly not complaining.

Is it growing at least as strong as we thought it would at the beginning of the year?

Yes, it is, and we're very pleased with it.

Maybe you could just follow up.

I understand that.

But are you seeing any challenges that you can point to or some of the bigger challenges with dVH, because -- and just kind of following up on what you said.

If you increase your number of systems, you should be generating revenue off of those systems that comes off of procedures, so your procedure growth should be faster, am I not correct?

To answer the question, we're not seeing anything that is any hurdle that we haven't expected, or I mean it's just -- dVH is growing very, very well and as fast or faster than we thought.

Okay.

Great.

A second question for me.

Just on the system side, it does look like the second half of the year is going to grow slower in terms of system sales.

In the first half know you had tough comps in the second half of last year.

I was just wondering, because we get the question all of the time, if you can answer again the question about changes in hospital spending patterns on capital equipment.

Have you seen any of that?

Or if your guidance at all implies any slowdown that you have seen?

Certainly not.

We have actually not seen any impact on let's say credit crunch on the buying patterns of your customers.

We get that question often, we've had it for the past six months and the answer is still the same.

We have not seen any impact on the buying patterns.

I think you have hit on the right thing there in terms of there are higher comps in the second half of the year in terms of revenue growth, and even though we are take up our overall guidance for the year from 42% top-line growth to 45 to 47% growth.

We do believe that the growth rate in the second half will not be quite as high as the growth rate that we saw in the second half.

I think we'll take one more question.

And one more -- and -- and move on.

Mimi Pham, you may ask your question.

Hi, good afternoon.

For your few centers add so far this year, yare you getting broad interest from urology and gynecology, cardiology and training, or is it coming from, one dominant specialty?

And are there any capacity issues with proctors that might increase the time line for -- to get the centers up and running.

I would say, Mimi that -- all of the above.

I mean, we are seeing mostly -- we're seeing new systems that are being brought in, certainly with the support of urology.

Gynecology is weighing pretty heavily, and cardiac -- we haven't spent much time talking about cardiac on this call only because we just didn't have enough time, but that is actually helping drive a lot of systems as well.

So I would say in general, all of those things are happening.

As far as training as we have talked about in the past, we have a very developed dVP proctorship network, because it's a little more mature.

We are always -- we have got a night model, we know how to add proctors and we can do that I think pretty efficiently through our training organization and there are a lot of people that would like to be proctors for us.

So we will continue to develop those other areas.

GYN we're certainly getting more proctors, there are more courses, there's more demand, both supply and demand, so I would say all in all that's all happening.

What is the normal time line -- you haven't seen any changes in that time line to get new centers up and running, have you?

Not that I can point at materially, no.

Then on the international system sales, you got a few placements in some new countries.

Can you remind us when you first entered those countries?

Again, all three of those were through distributors, they're non-direct sales.

And these are the first placements.

So when we entered those, I can't really be specific, because I don't know when the first sales call was made in those countries, but those are brand new initial placements.

Last, do you just have a ballpark number for how big the potential China systems market is?

We really don't, China is a pretty complex market, as you might imagine as most developing nations are.

But there are a lot of large Tier-1 hospitals, and a lot of Tier-2, Tier-3 hospitals.

How big do we think it is?

When is robotic surgery going to really penetrate it, we really don't know.

Give us some time to sort of understand that market.

We just got clearance this month, and -- we will see.

Okay.

Thank you.

That was our last question.

As I have said in prior calls we believe adoption is driven by a significant shift in patient value which is a function of improved surgical outcomes and reduced surgical trauma.

Dr.

Robert Poston and his colleagues at the University of Maryland, confirmed the value for parents suffering with coronary artery disease.

When he presented their results for 100 consecutive da Vinci off-pump mini-CABG hybrid procedures performed using internal mammary artery graphing, plus coronary stinting, compared with a match group with 100 sternonomy-CABG patients using internal mammary artery graft and [saffness] veins.

And he presented that at the American Surgical Association meeting this last April, and it's been accepted for publication in the October issue of the Annuals of Surgery.

Anyway their findings were as follows, the da Vinci mini-CABG patients had 99% patency at one year, versus 80% with open surgery.

Three to seven fewer days in the hospital, and an 85% reduction in mace, which is major cardiac or cerebral vascular vents, one year post surgery.

They had an 83% reduction intubation time and found no increase in cost and a cost savings with patients with major core morbidities.

As we have said also in the past that da Vinci patients are the strongest advocates of surgery with da Vinci Surgical System.

A patient, [Liz McGregor], a patient of Arnie [Avincula's] at the University of Michigan -- Liz could not conceive, so her doctors put her on fertility drugs, and when she was diagnosed with uterine fibroid tumors, she was told that they were not the cause of her infertility.

Liz began to research fibroid tumors on the Internet and read by the robotic GYN program, for surgery program, at the university of Michigan.

She had a da Vinci myomectomy to remove the fibroid tumors and made the following comments.

"I was in and out of any hospital in one day.

"My recovery was very quick, and within a week I felt like myself again.

"Following surgery I conceived in three months.

"I now have two children, Ian who is two and Sarah, who just turned one.

"I look at them knowing that they might not be here if it weren't for the University of Michigan."

I guess the question is what greater motivation than stories of patients like these could anyone ask for?

It is certainly a motivation here for us to drive the technology and our capabilities even further.

In closing, we remain committed to delivering exceptional value in terms of improved surgical outcomes and reduced surgical trauma for our patients, and exceptional operating performance for our shareholders.

We are committed to focusing on the vital few things that will 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 on this extraordinary journey.

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