直覺手術 (ISRG) 2008 Q3 法說會逐字稿

Welcome, and thank you for standing by.

(OPERATOR INSTRUCTIONS).

Today's conference is being recorded.

If you have any objections, you may disconnect at this time.

And now I would like to introduce your host for today's call, Mr.

Ben Gong, Vice President of Finance.

Sir, you may begin.

Good afternoon, and welcome to Intuitive Surgical's third 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; Aleks Cukic, our Vice President of Strategic Planning; and Jerry McNamara, our Executive Vice President of Sales and Marketing.

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

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

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

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

Please note that this conference call will be available for audio replay on our website at www.intuitivesurgical.com, on the Audio Archives 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 third quarter, as described on our press release 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 third quarter's financial results.

Next, Aleks will discuss sales and marketing highlights, and then 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.

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

Operating highlights for the third quarter are as follows: We sold 91 da Vinci surgical systems, up from 63 systems sold during the third quarter of last year.

20 of the systems were sold to existing customers.

Our international team contributed 20 of the 91 systems sold, up from 17 last year.

We passed through two significant milestones during the third quarter.

We exceeded 1,000 da Vinci systems installed worldwide, and we installed systems in Missoula, Montana, Casper, Wyoming and Albuquerque, New Mexico, and now have least one system in each of the United States.

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

In what has historically been a seasonally slow quarter, we had solid quarter over quarter procedure growth, led by GYN, with strong growth in the United States and a pronounced seasonal drop in Europe.

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, sacral colpopexy and colon resection.

Total revenue grew to 236 million, up 50% from last year.

Instrument accessory revenue increased to 76 million, up 53%.

Total recurring revenue including service grew to 110 million, up 54% from the prior year, comprising 46% of total revenue.

We generated an operating profit of 106 million, 45% of revenue before noncash, 123R stock option expense, up 69% from the third quarter of last year.

GAAP net income grew to 58 million, 24% of revenue, up 41% from last year.

We ended the quarter with 821 million in cash and investments, up 82 million from last quarter and up to 188 million in the last 12 months.

After subtracting 19 million in cash received from the exercise of stock options, and added back 28 million invested in fixed assets, purchased intellectual property and working capital during the quarter, our gross operating cash flow in the third quarter amounted to 158% of our reported GAAP net income.

We ramped up production in our new instrument plant in Mexicali, Mexico, and we are pleased with the operating performance of this new production facility.

And finally, we grew our Intuitive team by 78 members to 1,013.

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

Thank you, Lonnie.

Total third quarter revenue of 236 million increased 50% compared with 156.9 million for the third quarter of 2007, and increased 8% compared with 219.2 million for the second quarter of 2008.

Third quarter revenues by product category were as follows: Instrument and accessory revenue increased to 76 million, up 53% compared with 49.5 million last year and up 3% compared with 73.6 million last quarter.

The growth rate in instruments and accessories was a direct result of our procedure growth rates.

Procedure growth rates increased slightly more than instrument and accessory revenue, reflecting procedure mix and hospital efficiency.

Overall, as expected, procedure and instrument accessory growth rates reflect seasonality, particularly in our European business.

The amount of instrument and accessory revenue we earned per procedure declined slightly, but remains in a range of between 1500 and $2000 per procedure for established da Vinci accounts and at between 2000 and $2300 per procedure, including initial stocking orders.

Systems revenue of 126.3 million increased 48% compared with the 85.6 million last year, and increased 9% compared with 116.2 million last quarter.

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

Third quarter da Vinci surgical system revenue reflects the sale of 91 systems compared with 63 systems sold during the third quarter of last year and 85 systems sold in the second quarter of this year.

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

11 were four-arm S models, incorporating standard vision capabilities.

Two were three-arm S models, and two were refurbished standard systems.

20 of the system sales were outside of the U.S.

compared with 19 in the second quarter of 2008 and 17 in the third quarter of 2007.

Five of the system sales in the quarter involved trade-ins.

Our third quarter average revenue per system, including all da Vinci models but excluding upgrades, was 1.73 million, which is 20,000 more than the average revenue per system in the second quarter of 2008.

The higher average revenue per system primarily reflects favorable product mix.

Service and training revenue increased to 33.7 million, up 54% compared with 21.9 million last year and up 15% compared with 29.4 million last quarter.

The growth in service and training revenue is primarily driven by a larger system install base and noncontract revenue.

Total third quarter recurring revenue, comprised of instrument, accessory and service revenue, increased to 109.7 million, up 54% compared with the third quarter of 2007 and up 6% compared with the second quarter of 2008.

Recurring revenue reflects -- represented 46% of total revenue in the third quarter compared with 47% in the second quarter of 2008.

Revenue outside the United States represented 19% of total third quarter revenue compared with 20% last quarter, reflecting the strength in our U.S.

business, coupled with a seasonal slowdown overseas.

Our third quarter 2008 gross margin of 71.9% was higher than the 71.2% realized in the second quarter, primarily reflecting lower costs of service.

Total operating expenses for the third quarter of 2008 were 84.5 million compared with 77.9 million in the second quarter of 2008.

The sequential operating expense increase of 6.6 million reflects increased surgeon training activities, increased R&D activities, increased noncash 123R stock compensation expense, commissions on increased revenue, and costs associated with increased headcount.

We added 78 employees during the third quarter, ending the period with 1,013 regular employees.

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

Third quarter 2008 operating income was 85 million, or 36% of sales, compared with 78.2 million, or 35.7% of sales for the second quarter of 2008.

Third quarter operating income included 21 million of 123R stock compensation expenses compared with 19.7 million in the second quarter.

The increase of 1.3 million reflects options granted to new hires.

Our third quarter 2008 other income was 4.6 million, which is lower than the 5.7 million realized in the second quarter, reflecting exchange losses on Euro accounts as the Euro weakened against the dollar during the quarter, and lower interest rates on our investment portfolio.

Our effective tax rate for the third quarter was 35.7%, which is lower than the rate of 39% recorded for the first six months of the year.

The decrease in our rate reflects 3.1 million of 2007 R&D credits recorded in association with our 2007 tax return, which was filed in September.

I should note that in October, Congress renewed the Federal R&D credit for 2008.

We will quantify and record the benefit of this new law change in the fourth quarter.

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

Our net income of 57.6 million, or $1.44 per share increased 41% compared with 40.9 million, or $1.04 per share for the third quarter of 2007, and increased 13% compared with 51.2 million, or $1.28 per share for the second quarter of 2008.

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

Total revenue for the first nine months of 2008 was 643.4 million, up 56% compared with 411.4 million last year.

Operating income for the first nine months of 2008 was 228.1 million, up 71% compared with 133.4 million last year.

Operating income included 55.2 million of stock based compensation charges in the first nine months of 2008 compared with 26.2 million in 2007.

Net income for the first nine months of 2008 was 153.6 million, or $3.84 per share, up 61% compared with 95.4 million, or $2.46 per share last year.

Now turning our attention to the balance sheet, we ended the second quarter of 2008 with cash, cash equivalents and investments of 821 million, up 82 million from June 30, 2008.

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

The remaining cash generated is primarily related to operating activities.

Capital expenditures for the third quarter include a 13.5 million payment associated with the purchase of intellectual property from Power Medical Innovations, Inc., and 7.5 million of expenditures associated with facilities and information technology infrastructure to support our growth.

The total cost of the Power Medical Innovations purchase of 20 million will be amortized over a five-year period.

At September 30, we held 87 million of student loan backed auction rate securities.

Earlier this week, UBS offered to purchase the auction rate securities held by them at their par value of approximately 71 million any time during a two-year period beginning June 30, 2010.

If we accept their offer, we would likely have to take a charge to other income in the fourth quarter for the difference in value of the option and the unrealized loss on these securities, which was approximately 6 million at September 30, 2008.

Our accounts receivable balance increased to 173.7 million at September 30 compared with 162.1 million at June 30, 2008.

The change in receivables reflects higher revenue in the third quarter.

Our net inventory increased to 52.5 million at September 30, compared to 42.6 million at June 30.

Our inventory turns at September 30 decreased to 4.8 turns compared with 5.7 turns at the end of the previous quarter.

The increase in inventory reflects a planned increase for future growth.

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

Thank you, Marshall.

During the third quarter, we sold 91 da Vinci systems -- 71 in the United States, 12 in Europe, and 8 into rest of world markets.

A total of five system sales were part of trade-up transactions.

The net 86 new installations brings to 1,032 the cumulative number of da Vinci systems worldwide -- 776 in the United States, 171 in Europe, and 85 in rest of world markets.

15 of the 86 net systems installed during the quarter represented repeat system sales to existing customers, which brings to 122 the total number of customers which own two or more da Vinci systems.

Also as of Q3, we have placed at least one da Vinci into all 50 states.

International sales included two more da Vinci placements into the countries of Korea, China, the Czech Republic, and Greece.

Clinically, we had another good quarter.

In what is a seasonally slow quarter we delivered solid procedure growth within several of our targeted surgical specialties.

Procedure growth was led by da Vinci hysterectomy, both for benign and malignant conditions, but most notably within dVH for benign conditions.

Sacral colpopexy and myomectomy also showed excellent growth.

Within our urology business, notably our kidney and bladder business, da Vinci nephrectomy and partial nephrectomy, and da Vinci cystectomy showed excellent growth.

Our U.S.

dVP growth was steady, while our international dVP business was seasonally slower and lagged behind.

Our cardiothoracic business remains steady.

In Q3, there were over 180 da Vinci related clinical papers published within various peer review journals throughout several surgical specialties.

And within the limited Q3 medical conferences that took place during the quarter, several scientific abstracts, clinical posters and podium presentations highlighted da Vinci's clinical benefits.

There were a number of favorable highlights from these various sources, but I'll limit my review to a few.

In the September edition of the Journal of Clinical Oncology, Dr.

(Inaudible), Professor of Urology at Cornell University Medical Center, provided a rebuttal to a comparative analysis of various surgical approaches to radical prostatectomy that was published in an earlier edition.

Dr.

(Inaudible) took issue with the previous study's design and lack of clarity between traditional laparoscopic prostatectomy and dVP results, which for this particular study were blended into a single, minimally invasive radical prostatectomy category.

To address these misleading results, Dr.

(Inaudible) published his data on 1,173 dVP patients collected between 2005 and 2008.

The results provided absolute transparency between the previously reported results for open prostatectomy, minimally invasive radical prostatectomy and dVP.

The comparison was striking.

Comparing perioperative complications between the three cohorts showed open prostatectomy with a rate of 36.4%, Minimally invasive radical prostatectomy, 29.8%, and dVP, 1.64%.

Hospital length of stay was 4.35 days for open, 1.42 days for minimally invasive radical prostatectomy, compared to 1.3 days for dVP.

And finally, for anastomotic strictures, where the open prostatectomy rate was 12%, minimally invasive radical prostatectomy 15.2%, compared to a 0.54% with dVP -- the significance of which has implications to desired urinary function.

The two take-aways for me from this study are as follows: First, the addition of the recently issued robotic-specific DRG code will help to erase the misleading element of blending and reporting laparoscopic and robotic outcomes as similar.

And second, the clinical outcomes between open prostatectomy and dVP are perhaps greater than we previously thought.

The second study appeared in the August edition of Gynecologic Oncology and was authored by Doctors Gary and (Inaudible), University of North Carolina Chapel Hill.

The authors' aim was to assess the most effective minimally invasive surgical treatment for endometrial cancer operations for obese and morbidly obese patients.

Within this cohort, they compared traditional laparoscopic outcomes performed by laparoscopically skilled surgeons to their da Vinci outcomes.

Obese and morbidly obese women are at a much higher risk of developing endometrial cancer; and according to this study, represent 33% of all U.S.

women.

The results of this study were as follows: For both the obese and morbidly obese patient, robotic surgery was associated with shorter operative times -- 189 versus 215 minutes -- less blood loss -- 50 versus 150-milliliters -- increased limp node retrieval -- 31.4 versus 24 -- and shorter hospitalization.

The authors' conclusion -- and I quote -- "Robotic surgery is a useful tool for comprehensive surgical staging for obese and morbidly obese women with endometrial cancer.

As this patient population is at increased risk of death from all causes, including postoperative complications, all efforts should be made to improve their outcomes." The same University of North Carolina group also published a comparative 322-patient study on endometrial cancer treatments, which appeared in the October edition of the American Journal of Obstetrics and Gynecology.

The purpose of this study was to compare total abdominal hysterectomy, or TAH, total laparoscopic hysterectomy, or TLH, and da Vinci hysterectomy, or dVH, within all clinical areas.

When comparing periaortic node retrieval between the three groups, they reported an average yield of three nodes within their TAHs, or total abdominal hysterectomies, 6.3 nodes within their TLHs, compared to 12 periaortic lymph nodes within their da Vinci patients.

When they compared total lymph node retrievals, they reported 14.9 within their TAHs, 23.1 within their TLHs, and 32.9 within their da Vinci hysterectomies.

Estimated blood loss between the three groups was as follows: 266 milliliters for their TAH patients; 145 for their TLH patients, compared to 74 milliliters for their da Vinci hysterectomy patients.

Length of hospitalization was reduced from an average of 4.4 days for their TAH patients to 1.2 days for their TLH patients, to 1.0 days for their da Vinci hysterectomy patients, which led to the author's conclusion, and I quote, "Total robotic hysterectomy with staging is feasible and preferable over total abdominal hysterectomy and may be preferable over total laparoscopic hysterectomy," closed quote.

This is a very strong endorsement, especially so when you consider that the overwhelming majority of these procedures are performed through open incisions.

My final reference is also specific to da Vinci's value within GYN/oncology and was authored by Dr.

(Inaudible) and (Inaudible) from the Institute of (Inaudible) in [Marce], France and appeared in the August edition of the Surgical Endoscopy.

The aim of this prospective study was to evaluate the feasiblilty and outcomes GYN cancer surgery with the da Vinci S system.

The patients underwent procedures consisting of total hysterectomy, bilateral (inaudible) and/or lumbo-aortic lymphadenectomy for endometrial, cervical or ovarian cancer.

Following the analysis of their data, the authors concluded by saying, and I quote, " As suggested in the literature, the use of robotic laparoscopy leads to less blood loss, less postoperative pain and shorter hospitalization stays compared with those treated by more traditional surgical approaches.

Despite the need for extensive studies, robotic assisted surgery seems to represent a similar technological evolution as the laparoscopic approach 50 years ago," closed quote.

All of these studies discussed da Vinci hysterectomy cancer outcomes.

I think it's important to reiterate that our fastest growing GYN procedure, both in terms of absolute growth as well as percentage growth, is dVH for benign conditions.

That concludes my update, and I'll 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 noncash, FAS 123R stock compensation expenses.

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

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

Starting with procedures, our dVH procedures are the greatest contributor to our overall procedure growth.

We continue to expect our dVH procedures to grow approximately 150% in 2008 over 2007.

With regard to dVP procedures, as Aleks mentioned, our growth in dVP lagged behind our expectations, particularly in Europe.

We continue to see dVP growth, but lower than our previous forecast.

We expect our worldwide dVP growth for 2008 to be greater than 30% over 2007.

Other procedures, such as nephrectomies, partial nephrectomies, cystectomies and sacral colpopexies, are growing much faster and as a result, our Q4 procedures in total were in line with our expectations, and we continue to expect our total procedures to grow 57 to 58% this year from a base of approximately 85,000 total procedures performed in 2007.

This is a reiteration of our forecast from the previous earnings call.

Our instrument and accessory revenues are driven by procedures performed, and typically grow in unison with procedures.

As Marshall mentioned earlier, our revenues per procedure have come down slightly.

This was caused by two factors.

First, initial stocking orders continued to comprise a lower proportion of total instrument and accessory revenues as our install base continues to grow.

Secondly, as customers increased their utilization rates, they become more efficient in their use of consumable supplies.

As a result, all procedures are expected to grow 57 to 58% this year.

We are forecasting our instrument and accessory revenues to grow 55 to 56%, which is down slightly from our previous forecast of 57 to 58%.

System revenues in Q3 were stronger than we had previously expected.

We are now forecasting our system revenues to grow 45 to 46% over 2007, which is up from our previous forecast of 38 to 40% growth.

Our system ASP was approximately 1.37 million in Q3 compared with 1.35 million in Q2 and 1.32 million in Q1.

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

On a year-to-date basis, our system ASP has averaged 1.35 million, and we expect it to remain at approximately this level for the remainder of the year.

Service revenues in Q3 were higher than we expected due to service and training fees generated outside of annual contracts.

We expect total service revenues to grow 49 to 50% above 2007 levels.

Our previous estimate was 45 to 46%.

Our average annual service revenue per installed system, including fees outside of annual contracts, is approximately $140,000 per year.

In summary, we are increasing our top line revenue forecast for 2008.

We now expect revenues to grow 49 to 50% over 2007, which is up from our previous estimate of 45 to 46%.

With regard to gross profit margin, our Q3 margins were sequentially higher than Q2 due to better gross margins on service revenue.

We expect our total gross margin to be approximately 71% for the year.

This is up from our previous forecast of 70%.

Moving to operating expense, and starting with R&D, we expect total R&D expense to come in at approximately $82 million for the year, up approximately 68% from 49 million spent in R&D expense last year.

With regard to SG&A expense, we expect total SG&A expense to grow 49 to 50%, which is up from our previous forecast of 48 to 49% growth, due to higher variable costs associated with higher revenue forecasts.

W9e expect total operating expense to grow 53 to 54%.

We expect operating income to grow 53 to 54% for the year.

Last quarter, we were forecasting operating income to grow 42 to 44% for the year.

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

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

We expect to record approximately 76 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 48 million in SG&A expense.

We are forecasting other income to come in between 24 and $25 million.

This is down slightly from our previous estimate of approximately 26 million due to foreign exchange losses we recorded in the third quarter.

This forecast does not assume any foreign exchange gains or losses in the fourth quarter, nor does it include any potential charges associated with the UBS auction rate security offer that Marshall mentioned earlier.

With regard to income tax, we reported a GAAP tax rate of approximately 36% for the third quarter, down from previous quarters of 39%, due to R&D tax credits realized on our 2007 tax return.

Earlier this month, the U.S.

government approved an extension on R&D tax credits for 2008.

As Marshall mentioned, we expect to record a benefit in Q4 associated with this tax credit, though we do not have a specific estimate of the amount at this time.

Excluding this benefit, we expect to record a tax rate of approximately 39% in Q4.

And once again, we expect our effective cash tax expense to be approximately 20% for 2008.

And finally, regarding shares outstanding for calculating EPS for Q4, we expect the share count to be between 40 and 40.5 million shares.

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

(OPERATOR INSTRUCTIONS) Today's first question comes from Sean Levin.

Sir, your line is open.

Thank you.

Congratulations on another strong quarter.

Thanks, Sean.

Sure.

My first question has to do with hysterectomies.

We've done a lot of survey work here, and it seems that the simple procedures, as you said, seem to be picking up quite a bit of steam here.

In the past, you've mainly talked about malignant or complex procedures.

We were wondering if you could give a little more detail what you're seeing on the benign, or simple arena.

Well, I think I would even make a different distinction.

I don't think benign by definition means simple.

There are complex benign, and we're seeing a lot of traction within both complex benign, and I think by definition, all malignant, which is also complex.

That remains our initial target.

There's no question about it.

We had the highest value to add within those complex surgeries.

We have, however, seen centers that have flipped the majority, and in some cases all of their hysterectomies, to da Vinci; but in terms of, you know, where we are targeting, where we believe the highest value is, it really boils down to our patient value equation, and that really is in the complex hysterectomy, which by our definition is probably over -- around a quarter of a million procedures U.S.

Okay, and then just one other question.

On the Power Medical deal that you announced during the quarter, could you give us some time line on products from this and what procedures might benefit?

I'll take the second part, and then I'll turn the first part over to Gary Guthart.

The second part in terms of the procedures that might benefit from it, you know, if you look at the tools that are used throughout surgery, surgical stapling is found in many surgical specialties; and you will find general surgery, thoracic surgery, GYN, GYN, oncology, urology, so on and so forth.

So many of those procedures and many of those specialties have da Vinci within them.

However, it is just not a perfect choreography between the stapling application and the general dissection and reconstruction and visualization.

So the answer is, we think it will potentially have a place in multiple specialties.

Colorectal is an area where there's a lot of stapling.

Lung resections, a lot of stapling.

And we will see ultimately when we get it, but there are plenty of targets, we believe.

Now, as far as the actual development, I'll let Gary comment on that.

On the development side, it's not a simple integration.

It's a fairly complex product, and so we don't have a shift date to share with you, but don't anticipate it in the next 12 to 18 months.

All right.

Thank you very much.

Our next question comes from Tao Levy.

Your line is open.

Good afternoon.

Hi, Tao.

Hey.

So I guess obviously the prerequisite question, obviously great, great quarter here, but what's the economic crisis, credit environment?

How do we factor, or how do you guys factor that into your fourth quarter and 2008 thinking?

Seeing much, or any impact?

Thanks.

Well, Tao, I wish I had a crystal ball.

I'm sure you do, too.

Me too, yes, exactly.

You guys probably more than we do.

You know, clearly it's not a positive for anyone.

I -- we haven't seen a significant impact yet -- and that's all I can say, is yet.

We are -- in some ways, we are in an excellent position in that our procedures are not procedures that you just casually do.

These are procedures that people need to have.

I think we offer a compelling value to the patient, and therefore they will seek this, especially -- in any time; and I guess the other point, I think, is that, you know, this is the time when I'm delighted that we're not a levered Company.

We don't have a bunch of debt.

We have a lot of cash, and I think that gives us flexibility.

I think that in this -- in ugly times, and this is certainly one of them, there are also opportunities.

And so, you know, and those will -- I can't get specific and I'm not sure that we've seen them yet, but we are certainly -- we'll be thoughtful to the things that will help us to build the franchise -- our franchise in robotically-assisted surgery.

So the answer is, I don't know any better than you do.

I mean, I look at the volatility of the market -- incredible highs, incredible lows.

Clearly, the market isn't valuing fundamentals anymore, but running on emotion.

And so until that settles down and the market settles down, we'll see.

But I think that we -- most of our hospitals, we haven't seen a ton of them -- and Ben and Aleks can deal with this better than I can -- in terms of doing leases, but I suspect that that may increase.

Our leasing companies still have an appetite for these devices, and so we'll see how it plays out.

In the meantime, we will manage the business in as prudent and thoughtful way as we can and be in a position to do as well as we can during these times, and hopefully very well, and be in position long-term to continue to build this franchise in the marketplace.

Tao, just to comment on the last part of your questions, from what we see today, we expect Q4 to be again a sequentially higher quarter than we had in Q3.

Again, Q4 tends to be our strongest quarter of the year.

And that is reflected in our guidance.

And in terms of feedback from the sales force and in terms of like sort of, you know, cancellations or delays in orders, anything that's different than what you may have seen, you know, call it three months ago?

Or, you know, it's always challenging?

Well, let's get Jerry to give you his thoughts on that.

Well, we're reservedly optimistic.

We came off a good quarter of a pipeline closing and pipeline development, and the reports back from the field suggest that that's continuing.

You know, we're in a dynamic time.

We're just going to work through it.

Great, and just -- I have one question also, my final question, on procedures.

You know, now that you're adding more systems, and it seems like that the procedure number came in line with expectations, maybe a little bit slower internationally.

It seemed like maybe that seasonally adjusted.

As you place more systems in this quarter obviously, you know, exceeded expectations there, is the idea that you'll -- you know, obviously as these hospitals have more systems, you know, more cases being done robotically, is that kind of the right way to think about it, that you'll see automatic growth from -- on the procedure front because there are more systems out there?

You know what, I would say there is -- generally speaking, yes; but in terms of following some linearity, I think that's where it becomes difficult.

To say that a system is placed here, therefore procedures should grow by some fixed percentage is just an algorithm that doesn't work out.

And there is a lot of -- as you know, in our key procedures, the patients are very important in terms of determining where they are going to have their surgery done.

So how things happen in a particular market is just not a perfect science yet.

Great.

One other thing I would just point out, Tao, and I think I've mentioned this to a couple of people before, you got to remember, we have over a thousand systems out there -- you know, 1,030 or so; and if we place two or three more than what somebody thought, I mean, that math mathematically does not turn into a significantly different metric that you're going to calculate in terms of procedures.

Know what I mean?

Yes, no.

Okay.

Thanks a lot, guys.

Thanks, Tao.

Our next question comes from Mr.

David Lewis.

Sir, your line is open.

Good afternoon.

One question here.

I just -- strategically, we think about the last couple quarters.

I don't know if you broke it out specifically, but this quarter was around 50 greenfield or version systems Is that about right, Aleks?

Actually, it will be higher than that.

15 out of 86 went to individual customers, so it was probably closer to 70.

Yes.

So there was a lot -- for whatever reason--

Globally speaking.

Yes.

I was saying just U.S.

But the point, is two straight quarters in the U.S.

market received 40 to 50 new systems.

I'm trying to understand this reacceleration, which is exciting and positive.

Can you give me a sense of the size of these hospitals, these last sort of 90 U.S.

boxes versus kind of the repeat customers?

Or give me a flavor for what transition is happening in your business.

Is this a proxy for the sales force additions you made back half '07, new business strategy, or just simply going down market or there was sort of a lot of underpenetrated customers that are roughly the same size as your old customers?

Well, it's interesting.

We do, as you know, look at those statistics; and I can say within the United States market, we had 71 placements.

So if you backed out the 15 -- and I believe all of the repeats were U.S.

denominated.

So that would give you 56 greenfields.

Now --

51.

Yes.

It would be --

51, I'm sorry.

And so when you look at the makeup of those hospitals, we had 33 of them that were over 325 beds.

We had 28 of them which were in what we would call a middle tier, which is 200 to 325 beds, and we had 10 that were in hospitals below 200 beds.

So, you know, again, I think it falls in line with our thinking that, you know, as -- da Vinci will find the procedures, and as you expand GYN, you tend to see procedures -- those procedures that are done in smaller hospitals.

So it might surprise some people that 10 of those placements went to hospitals less than 200 beds.

You know, it's a dynamic situation; but I think across the board, that spread is pretty good and I think it speaks to its value -- da Vinci's value -- in hospitals regardless of size.

Okay.

So clearly the technology is broadening, maybe to the second inflection point.

In terms of downstream implications here, I mean, number one, should we expect that utilization for this new -- these new systems is slightly lower than old systems, just by sheer hospital size?

And do we think these new hospital customers are more or less insulated from any type of credit cycle crunch, if it were to materialize?

I'll take a shot at utilization.

So far, we haven't seen any difference in utilization.

It's -- on average worldwide, it's about 150 procedures per system, and everyone who is buying a system has a clinical plan for utilization of that system.

So it -- it's not looking -- as far as we can tell so far -- that a new buyers are using it any less than let's say the average buyers from before.

And I would also just remind you of the fact that the hospital size does not directly correlate to our utilization numbers.

I can think of two hospitals, one being City of Hope Cancer Center, which is one of the busiest in the handful of hospitals we have -- is one of the busiest we have anywhere in the world, as is the hospital in Celebration, Florida, which is also about 130 beds.

So it doesn't directly relate, but it is something we, again, continually go through the data.

Okay.

That's very helpful.

And just one last question and I'll hop.

At the risk of being sort of globally insensitive here, I wonder, the European slowdown -- not slowdown, but the European traction that looks like it's a little less active than we would have expected, is this simply a European thing, where we're seeing classic medical device laggered effect overseas, or is there something that you did not anticipate that --

Well -- you want to answer it, Jerry?

Yes, I -- you know, we manage a pipeline and we have put variability quarter to quarter.

We have a very strong pipeline in Europe and, you know, our quarter was what it was and we still have strong expectations going forward.

You know, I guess my comment is, is that Europe -- Europe's impacted both in procedures and just getting deals done during the summer, because they take so much time off during the summer.

I think we saw most -- more of it directly in Europe, not the rest of the world.

And it -- so I really -- looking at the pipeline, as Jerry says, now we'll see.

We also find that we're a little less capable of predicting the exact time of a close in Europe than we are here.

It tends to be a little more bureaucratic in the process -- and I don't want to be insensitive here either -- but it does tend to be a little more bureaucratic in the process.

And so it can get snagged and moved over into next quarter pretty easily.

And so that's kind of the nature of the beast.

And I will say from a procedure adoption standpoint, what we have experienced in some of our procedures -- and this continues also within GYN -- is that it does trail the United States in terms of its uptick of, you know, steepness on adoption curves.

We saw it in dVP.

We saw it in some of the other procedures.

We're seeing it in GYN.

The U.S.

uptick of GYN is significantly steeper than the European.

Now, that isn't alarming -- and probably for someone like yourself who has followed these things over the years, that's almost to be expected.

So I think the combination of all of that in a pretty slow summer in Europe led to a little lagging behind.

Great.

Well, thanks for the color.

Yes.

Our next question comes from Rick Weiss.

Your line is open, sir.

Hi, Rick.

Hi, how are you doing?

Good.

Just wanted to touch on utilization.

I mean, maybe you can expand a little more on the dVP weakness in Europe, and just beyond seasonality -- and I'm not sure I remember seasonality in the past.

Can you --

We've always had seasonality in the past, always.

Okay, so that's not unusual.

But utilization per instrument still seemed a little -- a tad lighter.

Any other color or anything else we should understand?

I think if you take a look back at third quarter of last year, you would probably calculate that the utilization per system also was flattish, if not slightly down.

So what we saw in third quarter of this year is actually pretty similar to what we saw in third quarter of last year.

That said, you know, we're -- we are watching it.

It -- particularly in Europe and as Lonnie mentioned, out in other parts of the world we saw somewhat pronounced seasonality.

Yes.

Although not in terms of placements, clearly.

No, but fact, I would say that the seasonality in the United States was less this year than it was last year.

Yes.

But clearly stronger in Europe.

And it always becomes harder for us to use international as a single body of land.

So it was in countries we saw it more pronounced and in others we saw it less pronounced.

So it's -- and we saw some pretty good strength in non-European, specifically some of the Asian markets.

So it's hard to lump into one -- into sort of one stereotype.

Okay.

And, again, maybe just reflect a little more, Lonnie or Aleks, just the whole capital spending trends, just -- where do you think we are over the next 6 to 12 months?

And we keep -- I keep reading the Times, and we're doing surveys and we're really getting a lot of conflicting messages -- just again, your larger picture.

Well, you know, as I said -- as I started out, and when I talked to Tao, I wish we had a crystal ball.

We don't.

I think, you know, this thing is from day to day, you know, whether it will -- I mean, the one thing we have is we have a very -- you know, the governments throughout the world are taking very, you know, aggressive interventional action, as you saw today in Switzerland.

And, you know -- and trying to learn from what went wrong in prior situations like this, and I think that, you know, the exact timing of how this will play out over the next few months.

I guess, Rick, you once asked me -- you came here and you said, "What's the next quarter look like?

And do you remember my response?

If you're buying this stock for the next quarter, don't.

Lonnie--

And my point is, I understand, I don't know that this is a one-quarter deal or it's a two-quarter deal or it's a year or two; but we will come out stronger and we'll deal with the performance near-term as best we can, and in the long-term, we will come out stronger.

That's -- but I just don't have -- I wish I knew.

I just don't know.

I mean, I think it's just -- it's so situation-specific.

You know, Rick, specific to the hospitals rather than sort of the macro space --

Sure.

I mean, even listening to the debates last night and listening to two candidates that were talking about healthcare and healthcare spending and reducing system-wide cost, when you look at our value proposition, which is, you know, in directed capital expenditures, I think from a hospital standpoint in micro economics, we sit in a pretty good position in that the procedures that we have are focused on are necessary.

They are not elective procedures; and for the most part, very complex, and a lot of our business is cancer-specific.

The value proposition for the hospital, I think, is pretty well documented on being able to increase flow, and in many instances decrease costs of the procedure and overall costs in their expenses.

So when it comes to how they are going to allocate their capital dollars, you know, I think we're in pretty good position; but as far as really taking a guess at what the macroeconomics looks like, your economist and your resources are going to be better at that than we are.

Hey,Rick, there was one other thing I'll mention.

I'm putting this in because you and others have asked me this and Lonnie touched on it.

There's this question about leasing, and it's connected with the availability of capital to buy systems; and there is something that we can probably shed some light on, is historically we've said about 15 -- you know, 1-5% -- of our systems have been leased.

That has actually increased a little bit over the past couple of quarters to closer to 20% and, you know, according to our leasing partners, it appears that the credit crunch is causing an increase in financed system purchases because hospitals are turning to these leasing companies more since their other sources of funding have gotten a little bit tighter.

Now, those leasing companies, they tell us, have plenty of capacity, and we get calls from them all the time.

So just to address the series of questions we've had about financing and availability of capital, just want to say that there's certainly, from our perspective, availability from a leasing standpoint.

Thank you for that very thorough response.

Appreciate it.

Our next question comes from Mimi Pham.

Your line is open.

Hi, good afternoon.

I guess you sort of touched on this already, but would you say that 100% -- or what percent of your total procedures done this year to date would you consider elective procedures?

I wouldn't say that it's 100.

The way I would think about it is, you know, if -- let's take a noncancerous procedure like hysterectomy -- benign hysterectomy.

So if a woman is suffering from multiple fibroids, endometriosis, some combination thereof, and she's going through some very sever pain, theoretically, could she put up with that pain longer?

Probably.

I mean, she's making some election that she could push it out a little bit, but it isn't as -- let's say on the other side of the coin, elective in the context of cosmetic procedures.

So there is some -- there is some variability to when it absolutely has to be done; but by and large, most of them are of that serious condition; and the cancer operations I think speak for themselves.

So it -- I wouldn't say that it's 100%, but it's the lion's share of our business plan.

Mimi, you know, just one comment.

You know, this is an observation, not a statement.

But in prior lives, I can remember that when we went through significant recessions and people had potential to be laid off from their jobs, we actually saw an acceleration of where people were moving things forward while they were still insured.

And I don't know that will be the case this time, but we did in terms of hospital stays and specific treatment.

So, you know, we'll just kind of have to see how this plays out.

Okay, and then in terms of CapEx spending potentially being just a tougher decision for the hospitals, are you expecting longer lead times and generally more people -- administration being involved in the purchase decision going forward?

At the present time, we don't have any indicators that tell us that that's the case, that anything has changed.

But we're early into this.

And then last, I guess, I know we have to wait till next quarter to get 2009 guidance, but just looking at how you are approaching it, do you think you'll be using sort of -- when you look at your systems pipeline, will you be using a little more conservative conversion rate than you've done in past years, just given the economy?

No, no.

There's too much uncertainty at this point for us to predict that.

I think the base of our business -- the core of our business is procedures, and that's very healthy.

As Aleks was coloring up what's going on in dVH, it's pretty clear that we're on a growth path on dVH.

Okay.

Thank you very much.

Our next question comes from Ben Andrew.

Your line is open, sir.

Good afternoon.

It's actually Matt in for Ben.

I'll add just two real quick ones.

The services gross margin in the quarter was obviously very good on absolute basis in terms of the cost over the last three quarters -- it's been coming down.

Should we expect a big catchup in Q4, or can you just give us a little color of what's going on there?

Yes, you're right.

You've noticed in the past two quarters we've had better leverage, if you will, on our service, so couple things are going on there.

We've got higher service revenues and we've been keeping our fixed costs pretty stable there, so we've had better leverage on our fixed costs.

And the other thing is, we're seeing the benefits of reliability improvements that we've been working on pretty much continuously.

So what reliability improvements translates into is a reduced number of spare parts we need for repairs, a reduced number of service calls we have to make; and that's all being reflected in that better gross margin line.

Okay, and then on your sales force expansion, can you -- just real quick housekeeping -- tell me the number again?

I missed that when you gave it in terms of the field sales force increases in the quarter.

So roughly speaking, I think we added about 20 people to the field; and there's a few metrics that I think we report on for you guys, and there's about a total of 340 people now in the field.

And roughly speaking, about 60 of those folks are focused in on selling systems.

We've got over 210 people that are focused in on procedure growth.

We've got about -- I think 65 people that are service engineers and about 15 people that are in field training.

Okay.

Would you say that the allocation between the two in terms of placing systems and driving utilization has been changing recently, or is that pretty much steady state?

No, we run that by a set of metrics.

It's pretty much steady state.

Okay.

And then just lastly, given the scare that we saw in the stock with Miro recently, is there any update on the competitive front?

Really, I'll let Gary answer the question on any changes in the competitive front.

Nothing -- nothing really big on that front.

We continue to watch companies in Asia and in Europe, but I think nothing that really looks eminent.

Okay.

Thank you.

Our next question comes from Ed Shenkan.

Your line is open.

Thanks.

We recently surveyed 60 CEO and CFOs of hospitals about the da Vinci, and one thing they were anxious for is incremental reimbursement when they use da Vinci.

Just wondering where we stand with insurers and CMS to get incremental reimbursement.

Yes, Ed, so as a reminder, I think we might have mentioned this before.

So CMS -- starting October 1, so literally about 15 days ago, they have implemented these new ICD 9 codes.

And what that does is now allow hospitals to now record specifically when a robotic procedure has been performed; because, remember, before the DRG codes were pretty much the same for whether it was done open or da Vinci or laparoscopic -- or laparoscopic and da Vinci would be using the same code.

So the idea here is for them to capture that data on robotic surgery.

And what we expect's going to happen is over the next few years, they are going to collect data; and then after that, we'll see what they do with that data.

Now, I think those administrators that you're referring to, I suspect -- and in fact we've already seen some signs of this -- where in -- aside from Medicare patients, they will use that -- this data to try to seek higher reimbursement from some of their third party payers, and now they have a vehicle to do that.

Whether and how successful they are going to be is going to depend on the various plans; but at least we're in the point now where they can literally give pure transparent data and make a case for why they may deserve higher reimbursement.

So that's the first step.

And with regard to mitral valve repair, da Vinci's getting used more here and makes -- as we're talking to docs -- repairs easier.

When will we get closer to an inflection point when we'll start to see even more utilizations in mitro valve?

You know, that's a little harder to predict; and specifically, I think if you were to ask me about -- ask that same question within any cardiac procedure, I think it is just difficult for us to say.

I think you're right on in that there are a lot of doctors who are now aware of the patient value and the physician sort of friendliness of da Vinci within those complex operations.

Mitral valve -- it's not just that they are becoming easier; they are able to do more complex repairs and are seeing fewer replacements required.

So that word is really starting to get out.

It's been a slow, steady growth for us, and there's some really key centers -- and we've talked about them in the past.

Places like the Mayo Clinic and Cleveland Clinic, very -- generally speaking -- conservative places that have really adopted this, and we will expect that to continue.

But to predict what the inflection point looks like is really hard for us to do.

But, you know, this is, again, viral; and as we -- as awareness builds -- and as Aleks said, places like the Cleveland Clinic and others that are doing it -- really do help that.

But we constantly find situations where patients -- and we just -- there's a fellow who just wrote a book -- I picked it up on the internet -- that was on his mitral valve.

He's asymptomatic, a runner, real athletic guy; and we've connected with him and already, you know, patients have come to him that, that they go to their first cardiologist and they tell them they don't know anything about it and their first response is kind of, "well, you're not a candidate for this", rather than saying, "I don't know much about it".

But as that awareness grows, I think you'll see it.

And I think it will be true also with the -- with revamp, especially with some of the data that's coming out, both for stents and the data that's coming out for revamp.

We have time for one more question.

Yes, sir.

Our last question today comes from Amit Hasan.

Thanks very much.

I just have a couple, if you'll bear with me.

First of all, on prostate -- just on prostate, both questions.

I'll ask my first one.

I think -- you were talking about, if I recall, on the second quarter, 35% growth during the first half of the year for prostate procedures; and so now as we look at the 30%, that implies, of course, a much bigger slowdown than we anticipated.

In fact, if we run the numbers, that's about 3,000 to 5,000 procedures decline versus the last time that you gave guidance.

And so I'm wondering if you can focus on the U.S.

in particular, because I'm guessing that has to come a little bit from the U.S., and let us know what is going on there that's coming in below your expectations.

Well, let me make a comment on that.

And you're right -- but, you know, as we plot the adoption curve, we clearly are now, you know, on the upper quadrant of the adoption curve.

If you assume, you know, kind of the open procedures, that we're taking all the open procedures.

And so with that, growth will slow.

I mean it's just the nature of an adoption curve, is it slows as you reach up into it.

Now, as we penetrate -- or the next phase of dVP will largely depend on how successful we are at penetrating alternative treatment modalities.

And those will be tougher.

The adoption will be slower, because you have entrenched competitors who are going to fight hard to resist.

You don't have an organized competitor in open to resist.

So I think that will slow a bit; but I think it's a -- that it is a function -- and I've just recently updated all of our adoption curves -- and, you know, we're not -- we always have this seasonal drop in the third quarter, and we'll see what the fourth quarter looks like.

But if it comes back online, it will be -- which I suspect it will, because every third quarter, it's off line.

It comes right back.

We've got a very -- I mean, a very -- consistent adoption curve going.

Now, that said, that is -- I believe, is primarily for the open procedures and the next segment we'll be penetrating I think will be slower and at higher resistance.

But we'll see -- time will tell.

The other thing I'd throw in there is, we've always talked about international -- and we've probably fallen into this ourselves -- is that we tend to characterize international as one big group.

It's really not.

It's a lot of different places.

And so it's kind of hard to predict what that growth rate is country to country.

It's still definitely growing, so, you know, we're, again, forecasting over 30% growth year-over-year on the 55,000 procedures we did last year.

So it's still significant growth.

I'll tell you another thing -- another point -- is we've got such growth in GYN that the field resources are being sucked right into GYN; and quite frankly it's part of our strategy.

As we look at the adoption curve, on the lower portion of the adoption curve -- the lower half -- that is primarily push.

It's sales-driven.

I mean, sales has got to get the systems placed, we've got to get the surgeons trained.

We've got to build the infrastructure that can support the procedure.

In the latter part of the adoption curve, we believe that it's a marketing-driven, because it's -- we are now -- we now have hospitals with the system.

We have surgeons who is are trained, and now we need to help continue to build awareness and to help them draw patients into -- to be -- for those surgeons to perform surgery on.

And so I think that it's also a shift, and this is -- dVP is our maiden voyage in many ways in terms of the first major procedure to drive to standard of care.

Thanks.

And if I can ask actually the question in a different -- from a different angle just to kind of get your thoughts on this, with regard to your clinical sales force -- and if you can remind us how much you've increased them by this year -- but if you're not hitting the procedure number and you've increased them by as much as you have and the dVH guidance that you've given for procedures hasn't really increased this year, how do we think about the clinical sales force or the procedure per sales force, or how do you think about that?

And is there something there that you're thinking about doing differently?

Or just color around that would be great.

Couple of clarifications for you, Amit.

So one is, actually from a total procedure standpoint from the beginning of the year, we've increased our guidance.

So in fact, when we started off the year, we thought we might be growing somewhere around 50 or so percent on total procedures.

We now think we're growing 57 to 58%, and the clinical sales force that you were talking about, and Lonnie was talking about, they go after all procedures, not just dVPs.

So anyway, we're -- we have been adding people in the field; and in terms of the metrics that Jerry were talking about before, we're pleased with the productivity of those clinical sales people.

Okay.

Thanks very much, guys.

Thank you.

That's our last question for today.

As I've said in prior -- on prior calls, we believe the adoption is driven by a significant shift in patient value, which is a function of improved surgical outcomes and reduced surgical trauma.

It is our goal to deliver value in the following order.

First, to the patients, which we discussed.

Second, to the surgeon.

Third, to the hospital.

Fourth, to our employees.

And if we do these four things, we believe we'll bring value to our shareholders.

And by the way, every one of our employees is a shareholder.

Two weeks ago, I met with surgeons in several large East Coast university medical centers; and during this trip, with two chiefs of gynecology that had become two major da Vinci users.

I mention these two because of their contrasting perspectives.

One is in his late forties, and a highly skilled laparoscopic surgeon.

He said that he had converted to da Vinci surgery for two reasons.

First, he had seen -- he said that he had seen a dramatic reduction in pain and improvement in the speed of recovery of his patients.

Even patients he operated on at the very end of the day and early evening, he said were ready to go home at 11:00 the next morning.

The second reason he said is he experienced a major reduction in his own muscular and skeletal pain associated with performing surgery day after day with conventional laparoscopic instruments.

The second surgeon is in his mid to late 50s -- probably closer to his late 50s.

He describes himself as a very fast and effective large incision surgeon, with no interest in laparoscopy.

At least, that was the case until he was diagnosed with prostate cancer, which he had removed with the da Vinci system.

He was so amazed with the speed of his recovery that he began to reconsider the benefits that da Vinci might bring to his own patients.

And he says he is now a very fast and effective small incision robotic surgeon.

The last story kind of relates to the question that was raised about cardiac and mitral valve adoption.

The last story is a sister of one of our engineers who was diagnosed with asymptomatic mitral valve disease.

She's a physically fit runner living in Southern California.

She asked her cardiologist about the possibility of a robotic repair and was told that she was not a candidate and sent to a surgeon who planned to perform the surgery through a large incision -- a sternotomy.

Her brother suggested that she get a second opinion.

So she spoke with Alfredo Trento, who is the Director of the Division of Cardiovascular Surgery at Cedar Sinai Medical Center in Los Angeles.

He repaired her mitral valve with the da Vinci system.

She had a great outcome and returned to her cardiologist a few weeks later.

He was surprised to learn that she had already had the surgery.

He was so impressed with the result that he said he would refer all future patients to Dr.

Trento at Cedar Sinai.

You know, it's always great to hear these patients stories, but even better when it's someone close to a member of our Intuitive family.

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're committed to focusing on the vital few things that truly make a difference as we strive to take surgery beyond the limits of the human hand.

That concludes today's call.

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

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

This concludes today's conference.

You may disconnect at this time.