直覺手術 (ISRG) 2008 Q4 法說會逐字稿

Good afternoon.

Thank you for standing by.

At this time, all participants are in a listen-only mode.

After the presentation, we will conduct a question and answer session.

(Operator Instructions) Today's conference is being recorded.

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

Now I would like to introduce today's speaker, Ben Gong, Vice President of Finance.

Sir, you may begin.

Good afternoon, and welcome to Intuitive Surgical's fourth 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 Strategic Planning.

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

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

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

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

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

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

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

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

Marshall will follow with a review of our fourth quarter and annual financial results.

Next, Aleks will discuss sales and marketing highlights.

Then I will provide our financial forecast for 2009 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.

Operating highlights for the fourth quarter are as follows.

Procedures grew 61% over the fourth quarter of 2007.

We sold 85 da Vinci surgical systems, up from 78 during the fourth quarter of last year.

Our international team had an excellent quarter, contributing 30 of the 85 systems sold.

We ended the fourth quarter with 1,111 da Vinci systems installed worldwide.

Total revenue for the quarter was up 22% from last year.

Instrument and accessory revenue increased to $82 million, up 45%.

Total recurring revenue including service grew to $118 million, up 46% from the prior year, comprising 51% of total revenue.

We generated an operating profit of $104 million before non-cash 123R stock option expense, up 25% from the fourth quarter of last year, and GAAP net income grew to $51 million, up 3% from last year.

During the full year 2008, procedures grew by 60% over 2007.

We sold 335 da Vinci surgical systems, up 39% from prior year.

Total revenue grew to $875 million, up 46%.

Recurring revenue grew to $420 million, up 52%, comprising 48% of total revenue.

We generated $387 million in operating profit before non-cash 123R stock option expense, up 59% from last year, and GAAP net income grew to $204 million, up 41%.

We ended the year with $902 million in cash and investments, up $80 million from last quarter and $266 million from last year.

Excluding $45 million in cash received from exercise of stock options, and adding back $116 million invested in intellectual property, working capital and property plant and equipment during the year, we generated $338 million in cash from operations before operating investments, $8.46 per fully diluted share, and 165% of our reported GAAP net income for the year.

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

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

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

Some of our highest growth procedures in 2008 defined as greater than 100% year-over-year growth, include nephrectomy, partial nephrectomy, gastrectomy, radical cystectomy, hysterectomy, sacrocolpopexy, thyroidectomy, and colon and rectal resections.

I should note that our gastrectomy and thyroidectomy procedures are concentrated in Asia.

While some of these procedures are measured off a relatively small number in the prior year, we have learned from past experience that these are usually the early stages of new adoption curves.

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

Some 2008 data points you might find of interest include: we added 285 new employees during the year, ending the year with 1,049 employees.

Revenue per employee grew to $965,000 in 2008 compared with $905,000 in 2007.

And instrument and accessory revenue per system was up 6.6% to $322,000 from $302,000 in 2007.

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

Thank you, Lonnie.

As previously announced, total fourth quarter revenue of $232 million increased 22% compared with $189 million for the fourth quarter of 2007 and decreased 2% compared with $236 million for the third quarter of 2008.

Procedures for the fourth quarter increased 61% compared with the fourth quarter of 2007 and 15% sequentially.

DVP and DVH growth was as expected.

Fourth quarter revenues by product category were as follows: Instrument and accessory revenue increased to $82 million, up 45% compared with $56 million last year, and up 7% compared with $76 million last quarter.

The growth rate in instruments and accessories is the direct result of our procedure growth rates.

Procedure growth rates increased more than instrument and accessory revenue reflecting lower stocking orders associated with fewer systems placed, procedure mix, strengthening of the dollar and surgery efficiency.

The amount of instrument and accessory revenue we realized per procedure including initial stocking orders, was approximately $2000 per procedure.

Systems revenue of $114 million increased 5% compared with $108 million last year and decreased 10% compared with $126 million last quarter.

The decrease in systems revenue compared with the third quarter of 2008 reflects decreased unit sales as well as a decrease in the average revenue per system.

Fourth quarter da Vinci surgical system revenue reflects the sale of 85 systems compared with 78 systems sold during the fourth quarter of last year and 91 systems sold during -- sold in the third quarter.

The decrease in systems sold reflects reduced hospital capital spending as a result of the economic and financial market issues.

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

10 were 4 arm S models incorporating standard vision capabilities.

Four were 3 arm S models and five were refurbished standard systems.

Six of the system sales in the quarter involved trade ins.

Our fourth quarter average revenue per system, including all da Vinci models, but excluding upgrades, was $1.32 million, which is $50,000 less than the average revenue per system in the third quarter of 2008.

The lower average revenue per system primarily reflects changes in product and geographical mix and the strengthening of the dollar.

Service revenue increased to $36 million, up 46% compared with $25 million last year and up 7% compared with $34 million last quarter.

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

Total fourth quarter recurring revenue comprised of instrument, accessory and service revenue increased to $118 million, up 46% compared with the fourth quarter of 2007 and up 7% compared with the third quarter of 2008.

Recurring revenue represented 51% of total revenue in the fourth quarter compared with 46% in the third quarter of 2008.

Revenue outside of the United States represented 27% of total fourth quarter revenue compared with 19% of total third quarter revenue.

International procedures and revenue increased from a seasonally low third quarter.

We sold 30 systems outside of the US this quarter compared with 20 in the third quarter, a 50% increase despite the global economic downturn.

Our fourth quarter 2008 gross margin of 71.4% was similar to the 71.9% realized in the third quarter.

Lower average selling prices per systems and the effects of the strengthening dollar were partially offset by lower operating costs and material cost reductions.

We opened our Mexico facility in July, which is now responsible for nearly half of our instrument volume,.

Although we incur lower labor costs in Mexico, the overall savings in 2008 was mostly offset by manufacturing startup costs.

Total operating expenses for the fourth quarter of 2008 were $83 million compared with $85 million in the third quarter of 2008.

The sequential operating expense decrease of $2 million reflects decreased commissions associated with lower system sales, strengthening of the US dollar, decreases in outside services, and overall decreases in spending, partially offset by increased head count.

In the fourth quarter, we purchased an additional facility in Sunnyvale which will be used for shipping and logistics beginning in February.

We also postponed the construction of the new facility next to our main campus for at least one year.

These net changes will result in lower costs in 2009 than we otherwise would have incurred, but did not impact the fourth quarter.

We added 36 employees during the fourth quarter, ending the period with 1,049 regular employees.

The majority of these additions were to our worldwide clinical sales and engineering teams.

Fourth quarter 2008 operating income was $83 million, or 36% of sales compared with $85 million, or 36% of sales for the third quarter of 2008.

We would like to point out that operating income includes 123R stock compensation and amortization charges associated with purchased IP.

Both the third quarter and fourth quarter included $21 million of 123R stock compensation expenses, and the fourth quarter included $4 million of amortization of purchased IP compared to approximately $3 million in the third quarter.

Our fourth quarter 2008 other income was $6 million, up $1 million from the third quarter, reflecting reduced exchange losses on Euro accounts and higher interest owner increased investment balances.

Given the recent volatility of the euro exchange rate, in January, we entered into foreign exchange contracts to hedge our euro balances at December 31, 2008 and a portion of our expected revenue for the first six months of 2009.

Our effective tax rate for the fourth quarter was 42.5%, which is higher than the 37.8% recorded for the first nine months of the year.

The increase in our rate reflects certain nondeductible costs partially offset by federal 2008 R&D credits.

The nondeductible costs reflected in the fourth quarter rate include adjustments related to 2007 and the first nine months of 2008.

The rate for all of 2008 was 39%.

We continue to utilize carry forward tax benefits in employee stock related tax benefits in 2008 and expect our cash outlay for income taxes will be approximately 22% of pretax income for 2008.

Our cash outlay estimate is slightly greater than our previous estimates, given lower employee stock option exercises in the fourth quarter.

As a result of a delay in the IRS's issuance of new regulations, we have postponed expenditures to implement the remainder of our tax structure.

As a result, the GAAP benefits of our international tax structure will be delayed one year.

However, in the meantime, our cash outlays for tax will continue to benefit from the international structure.

Net income of $51 million, or $1.27 per share, increased 3% compared with $49 million, or $1.24 per share for the fourth quarter of 2007 and decreased 12% compared with $58 million, or $1.44 per share for the third quarter of 2008.

Let me quickly summarize our results for 2008.

Total procedures grew 60% to approximately 136,000.

Total system sales grew 39% to 335 systems.

Total revenue for 2008 was $878 million, up 46% compared with $601 million last year.

Operating income for 2008 was $311 million, up 50% compared with $207 million last year.

Operating income included $77 million of stock based compensation charges and $10 million of IP amortization in 2008 compared with $36 million of stock based compensation charges and $1 million of IP amortization in 2007.

Net income for 2008 was $204 million, or $5.12 per share, up 41% compared with $145 million, or $3.70 per share last year.

Cash and investments grew $266 million for the year to $902 million at December 31.

Now turning our attention to the balance sheet, we ended the year with cash and investments of $902 million, up $80 million from September 30, 2008.

Cash generated from employee stock activities was $3 million for the quarter.

The remaining cash generated is primarily related to operating activities.

Capital expenditures of $23 million for the fourth quarter included $17 million associated with the purchase and buildout of a building and land in Sunnyvale and expenditures associated with facilities and information technology infrastructure to support our growth.

Our accounts receivable balance decreased to $170 million at December 31 compared with $174 million at September 30, 2008.

Despite the economic environment, collections have remained strong.

Our net inventory increased to $63 million at December 31 compared with $52 million at September 30 2008.

The increase in inventory reflects lower than expected systems revenue.

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

Thank you, Marshall.

During the fourth quarter, we sold 85 da Vinci systems, 55 in the United States, 23 in Europe, and 7 in rest of world markets.

A total of 6 system sales were part of trade up transactions.

The net 79 new system installations brings to 1,111 the cumulative number of da Vinci systems worldwide, 825 in the US, 194 in Europe and 92 in rest of world markets.

14 of the 79 net system installs during the quarter represented repeat systems to existing customers, which included 4th systems to both the Cleveland Clinic and Hartford Hospital, and 3rd systems to Cornell Medical Center, Memorial Sloan Kettering, Scottsdale Healthcare and Methodist Hospital in Rochester, Minnesota.

This brings to 131 the total number of customers which own two or more da Vinci systems.

International sales were particularly strong and included five da Vinci placements into Germany and three into the countries of France, Italy, Korea and Russia.

Clinically we had an excellent quarter, with strong sequential procedure growth within our targeted surgical specialties, both domestic and internationally.

Growth of da Vinci hysterectomy, both for benign and malignant conditions, sacrocolpopexy, nephrectomy and partial nephrectomy and da Vinci prostatectomy were most notable.

In Q4 alone, there were over 200 da Vinci related clinical publications within various peer review journals, and the medical conference season was back in full swing.

Case studies and series presentations were plentiful during the quarter, but I'll limit my review to only a few.

At this year's association of advanced gynecological laparoscopy conference, or AAGL, the agenda included robotic postgraduate courses, robotic satellite symposia and the very well attended robotic symposium.

As you might suspect, clinical procedure discussions featured da Vinci hysterectomy for both benign and malignant conditions, da Vinci sacrocolpopexy and da Vinci myomectomy.

Consistent with GYN meeting reviews, surgeons' reports of lower blood loss, lower complications, shorter hospitalization, shorter learning curves versus laparoscopy, quicker returns to normal activity and increased patient satisfaction were common themes.

What resonates with me at this point in our GYN evolution is the positive impact that da Vinci is making in surgeon practice patterns and more specifically, how da Vinci has helped to expand minimally invasive surgery treatment within a surgical specialty that is already believed to have a high penetration of minimally invasive surgery.

Dr.

Gary Donovitz, a GYN surgeon practicing at USMD Hospital in Arlington, Texas, delivered a presentation that compared his benign hysterectomy practice before and after his switch to da Vinci.

Dr.

Donovitz began performing DVH in early 2006, and he compared his pre-DVH practice of 2004 and 2005 to his post-DVH practice of 2006 and 2007.

His pre-DVH statistics were as follows: Out of 175 overall hysterectomies, 11 were performed as total vaginal hysterectomies, 115 were total laparoscopic hysterectomies and 49 were total abdominal hysterectomies.

As a highly skilled laparoscopist, his 28% abdominal incision rate was less than half the US average.

In 2006 and 2007, post da Vinci, he performed a total of 188 hysterectomies.

Four were vaginal, 180 were DVH and most importantly, only four required the total abdominal approach.

His already low 28% abdominal hysterectomy rate was reduced to 2%, meaning that after incorporating da Vinci into his practice, 98% of the women requiring a hysterectomy left the hospital without an abdominal incision, and 96% of these women received a da Vinci hysterectomy.

Similarly, Dr.

Angelo Maggionia , an accomplished GYN oncologist from Milan, Italy, delivered a presentation on 80 of his da Vinci endometrial cancer procedures at the International Gynecologic Oncology Robotics Symposium, or IGORS, where he stated, and I quote, "We have experienced an 85% increase in minimally invasive surgical procedures in our practice due to robotics", closed quote.

These examples not only speak to the change in GYN practice, but more importantly, they speak to the increased patient value that da Vinci is providing throughout the specialty of GYN surgery.

Over the past few quarters, we discussed the uptake in da Vinci's use within renal or kidney cancer surgery.

As Lonnie mentioned earlier, the growth within da Vinci nephrectomy and partial nephrectomy globally was strong throughout the year.

The renal surgery community has truly embraced the need to preserve as much healthy tissue as possible in patients suffering from renal cancers.

Da Vinci's contribution to performing minimally invasive partial nephrectomy is becoming widely known, and for good reason.

Earlier this month, the International Urologic Robotics Society convened their annual meeting in Las Vegas.

Over 500 surgeons representing 21 countries were in attendance.

Prostate, renal and bladder cancer, along with benign reconstructive procedures, were the primary topics of this year's meeting.

As you might expect, the volume of DVP material presented was abundant, to say the least.

But what really caught our attention was both the number and quality of the da Vinci renal surgery procedure presentations, and most notably, da Vinci partial nephrectomy.

Dr.

Eric Weiss, Director of Robotic Surgery at Lutheran Hospital in Fort Wayne, Indiana presented his comprehensive da Vinci partial nephrectomy data.

Dr.

Weiss, a leader in his field, began incorporating da Vinci in his renal surgery practice in 19 -- excuse me, in 2005, and he has tracked his outcomes in a diligent manner.

What Dr.

Wise showed was that the indications for da Vinci partial nephrectomy expanded significantly through his learning curve.

In his analysis, he compared both the percentage of da Vinci partial nephrectomies performed as a subset of all renal tumor patients, as well as the measured size of the tumor.

He stratified five groups into six independent -- into independent six month intervals and compared them to one another.

His results were impressive.

In his first 60 patients, he was able to perform 10 da Vinci partial nephrectomies, or 17%, and his median tumor size was 1.9-centimeters and the maximum size of 3.2 centimeters.

In his second group, he performed nine da Vinci partial nephrectomies out of 23 candidates, or 39%, with a median tumor size of 3-centimeters and a maximum size of 5-centimeters.

In his third group, he performed 24 da Vinci partial nephrectomies out of 49 candidates, or 49% with median tumors of 2.9-centimeters and a maximum of 5.4-centimeters.

In the fourth group, 30 out of 44 candidates, or 68%, median tumor growing to 3.2-centimeters and the largest being 7-centimeters.

And the fifth and final six-month group, he performed a da Vinci partial nephrectomy on 22 out of a possible 25 candidates, 88% with a median tumor size of 3.8-centimeters and the largest being 10.6-centimeters in size.

Said another way, in just over three years, he has expanded da Vinci partial nephrectomy in his patients suffering from renal tumors from 17% to 88% while the average tumor size within that period doubled.

The theme of expanding indications through one's experience is consistent with what we saw in da Vinci prostatectomy, da Vinci hysterectomy and da Vinci mitral valve repair and is a theme we would expect to continue within all of our targeted procedures.

In closing, I'll call your attention to some interesting statistics associated with the recent World Congress of Endourology meeting, which took place in Shanghai.

This year's meeting speaks volumes to how far we have come within the specialty of urology.

The World Congress of Endourology meeting is a forum where anything and everything associated with urologic disorders is discussed and presented.

The list of topics is enormous and includes everything from pharmacology to radical surgery.

The global number of da Vinci related abstracts and presentations at this year's conference was rich.

For the entire conference, 2,120 papers and abstracts were submitted and 1,847 were accepted.

Out of these, 158, or 9%, were related to da Vinci surgery.

While da Vinci prostatectomy topics contributed to half of these accepted abstracts, da Vinci nephrectomy, partial nephrectomy, cystectomy, pyeloplasty, urogynecologic procedures and da Vinci pediatric procedures contributed the rest.

The accepted abstracts were authored in a variety of countries which included the United States, France, the UK, Korea, Turkey, Australia, China, Italy, Venezuela and India.

It wasn't that long ago when we would have been pleased to have any da Vinci related abstracts accepted at this prestigious meeting, so to have 9% of all accepted abstracts relate to da Vinci surgery and having them originate from nearly a dozen countries is truly exceptional.

That concludes my summary, and now I'll turn the time over to

Thank you, Aleks.

I'll be providing our 2009 financial forecast from revenue to earnings per share on a GAAP reporting basis.

I will also provide estimates of certain non-cash expenses to provide you with visibility of our expected future cash flows.

Starting with procedures, as Aleks mentioned, we are continuing to see strong growth driven by DVP and DVH procedures, as well as other urology procedures such as nephrectomies and partial nephrectomies and other gynecologic procedures such as sacrocolpopexy.

In 2009, we expect total procedures to go 35% to 40% from approximately 136,000 procedures performed in 2008.

Our instrument and accessory revenues are driven by procedures performed.

However, we expect these revenues to grow at a slower rate than procedures in 2009.

While procedures are expected to grow 35% to 40% this year, we are forecasting our instrument and accessory revenues to grow 25% to 30%.

There are three main factors that are causing a downward trend in our revenue per procedure.

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 increase their utilization rates, they become more efficient in their use of consumable supplies.

And finally, we are seeing a higher growth in benign GYN procedures that require fewer instruments.

As our procedure counts grow into the hundreds of thousands per year, we naturally expect efficiencies to gradually bring down the revenues we generate on each procedure.

System revenues are more difficult for us to project.

In the current hospital spending environment, our ability to sell systems in the short term is less certain, and we would caution you not to place undue reliance on our forecast for system revenues.

Nevertheless, based on our projected procedure growth, we believe that customers will purchase a similar number of systems in 2009 as we saw in 2008.

Therefore, we expect system revenues in 2009 to be relatively flat compared with 2008.

Based on flat system sales for 2009 and consistent pricing on service contracts, we expect service revenues in 2009 to grow approximately 35% from 2008.

In summary, we estimate our top line revenue growth in 2009 to be approximately 15%.

With regard to gross profit margin, we averaged approximately 71% for all of 2008.

For 2009, we expect our gross margins to be slightly lower to between 70% and 71% based on the expected higher mix of service revenue and the US dollar's recent strength against foreign currencies.

With regard to operating expense, we expect total operating expense to grow approximately 20% in 2009.

Included in this estimate are some significant increases in non-cash expenses.

First, with regard to FAS 123R, in 2008, we recorded $77 million in stock compensation expense.

In 2009, assuming our stock price remains at approximately $100 per share, we expect stock compensation expense to increase 22% to approximately $93 million.

And secondly, with regard to IP amortization charges, we are scheduled to record $14 million in the R&D expense line for 2009, up 40% from the $10 million we recorded in 2008.

We plan to manage our fixed costs closely, as we demonstrated in Q4, but we will continue to add resources in the sales and R&D functions as we view these as important investments to continue driving growth in the near term and the long term.

We expect operating income to grow 7% to 8% for the year.

With regard to income tax, we reported a GAAP tax rate of approximately 39% for all of 2008, while our effective cash tax rate was approximately 22%.

For 2009, we expect to report a GAAP tax rate of approximately 40%.

Our effective cash tax rate is largely dependent on employee stock option exercises during the year.

Given the recent drop in our stock price, we expect a significantly smaller benefit than we have seen in recent years and therefore, our effective cash tax rate could reach as high as 40%.

We expect earnings per share to come in between $5.30 and $5.40, representing approximately 5% growth from 2008 to 2009.

That concludes our prepared remarks.

We'll now open the call to your questions.

(Operator Instructions) Our first question comes from Tao Levy.

Good afternoon.

Hi, Tao.

Couple questions on my end.

Strength in the quarter internationally, it seems like you get blocks of systems from countries, like five in Germany.

Are these sort of government tenders, or how does that process work?

Or is it just coincidence?

Also, if you could just comment on what you see developing internationally, just given the economic issues that they are also facing now?

Yes, Tao, this is Ben.

So you're right.

We had, for example, five different sales into Germany.

That was not part of, let's say one system sale to -- for a government.

They were actually five different individuals.

But to your point, selling three systems in Korea, and we do have probably a headwind with the exchange rate in Korea being a much weaker against the dollar, and what you saw in Q4 was certainly a strong quarter, but as we saw in Q1 of last year, international system sales sequentially in Q1 are likely to be lower than what we saw in Q4.

Got you.

And just in general, the international environment, the feedback you're getting from the sales force, has that changed just as much as you've seen here in the US?

Tao, when we look at the things that we can see, and the most important thing we can see are procedures.

And Q4 procedures, both US and OUS were really strong.

Exceptionally strong OUS.

So when we take the temperature of the individual sales people and procedure people focused on procedures, it seems really strong.

DVP, we're starting to see a little bit of nice uptick in DVH, which as we've talked about in the past, has been lagging.

The cancer procedures around nephrectomy and partial nephrectomy and as Lonnie mentioned in his summary, even some procedures that we don't see being performed in the United States in great numbers are being performed in places like Asia, mainly thyroidectomy, gastrectomy and some of the colon procedures.

I would say in general as we say in the past -- have said in the past, international's made up of multiple markets, but if I were to assess it globally, I would say that it was very strong in Q4.

Now, the individual systems, as we've talked about in years past or in quarters past, for example, when we see a spike in Belgium or Korea, that's going to vary from quarter to quarter, country to country.

Tao, in terms of visibility, the sales force in Europe seems relatively positive, but visibility, from where we sit is -- with all the news that keeps coming out, is uncertain.

And I wish I could give you an answer, but it's kind of one of those things, time will tell.

We will continue to drive hard.

Procedures will be the key to driving new system sales and we're going to have to, just like the rest of the world, we're going to have to take this a step at a time as this evolves and hopefully, we start to come out of this economic disaster.

Okay, and maybe just last question, maybe something that you guys, I guess, have a little more control on, you've announced over the last few months some R&D alliances.

You haven't spent too much time going through what those alliances bring to the table in terms of advancing robotic surgery.

If you could maybe spend just a couple of points on why they're important, why you did them, why you are spending money there and again, the benefits (inaudible).

Thanks.

Hi, Tao.

It's Gary.

As we look at the technology acquisitions we've done, there have been a few that I'll call out.

You've seen recently SurgiQuest and Novadack.

We had PMI also.

I guess what I would tell you about the grouping as a whole is that in each of these, we're looking for component technologies that when added to robotics give us better clinical outcomes, and we think those examples do that.

In the case of stapling, we think it will give us access to a different set of procedures.

In the case of Novadack, that's fluorescence imaging, we think that will drive clinical benefits in a variety of procedures.

That's what we're looking to do, and when we see those opportunities, we pursue them.

We have done that aggressively this last year, and we'll continue as opportunities present themselves.

Is there any timing you can provide us as to when we could see some of these?

Five years down the road, 12 months, two years?

We are working aggressively, but we're not ready to tell you any specific time line.

You know, Tao, something I've said over and over again, and I'll continue to say it, we truly believe that robotic surgery is going to displace a very significant part of traditional open surgery, and this is a long-term play.

And so we're trying in these kinds of investments to look out and anticipate where it's going and make sure that we have a preemptive position as we drive adoption of surgical robotics on a very, very broad scale, both in this country and worldwide.

Okay, thanks.

Our next question comes from Mimi Pham.

Mimi is from JMP Securities.

Hi, good evening.

Can you provide some more color on the fourth quarter system shortfall in the US?

Were these likely postponements or flat out cancellations?

Hi, Mimi, it's Ben.

So we went into even December with quite a few customers in the United States who are indicating that they wanted to purchase systems and in the end, they ultimately didn't.

We think these are all credible customers and they all would like to either get their first da Vinci system or an additional da Vinci system.

So they are most likely postponements.

Now, is that a postponement to next quarter or next year?

I think that remains to be seen.

Do you get a sense if the reasons why for the postponements also?

Have you talked to them in depth?

Are they just waiting for maybe the new budgets, financing, is that been an issue for any of the placements, being able to get financing?

It was pretty broad.

There was not any particular, I say one segment that we could point out, whether it was an existing customer or a new customer or big hospital or small hospital.

I guess the overriding theme was that they didn't want to spend money or did not have the money to spend at this particular time.

Mimi, I think there were several systems where given the economy, hospitals were pressing for very significant discounts and many of those we just walked away from.

Because, we -- that gets to be a slippery slope and people -- but people see an opportunity and I'm sure some of the suppliers they are talking to get a little desperate, and we're not going to do that.

Also, related to your question, Mimi, we often get asked how many systems were financed.

Correct.

And in Q4, it was between 15% and 20%, so it wasn't materially different than what we saw in Q2 or Q3.

There were certainly a lot of people who were interested in that, and those folks who were interested and wanted to follow through were able to obtain financing.

I would also point out that there were five different leasing companies out there who provided financing for da Vinci purchases during the quarter.

So there generally is financing available.

And I know the guidance for systems is based on your procedure growth, but can you at least comment on your systems pipeline heading into 2009 relative to the absolute number heading into 2008?

Can you give more color?

Is it substantially higher, a little bit higher, around the same levels?

Well, we go through our, I'll call it our bottoms-up forecast in a similar manner every year, and we do take a look at that pipeline and when we came up with our forecast for around flat systems for next year, it was in light of what we saw in that pipeline.

But even though there is a pretty healthy pipeline, it's certainly -- or I should say it's not certain as to when any of these particular systems are going to actually close and nowadays, it's less certain than it ever has been.

But can you at least provide some color.

Is it in absolute terms bigger than what you had entering 2008?

We didn't make that comparison, so, no, we're not prepared to say.

Okay.

And then last question, just your sales strategy in terms of systems and driving utilization, are you changing anything, given the more current, challenging environment?

Has that changed in any way in terms of the sales force and how they go into the accounts?

I think the recipe we have for growing procedures is pretty well baked and I think has been pretty successful, so we're certainly not going to get away from our strength.

Now, the question of allocating resources, certainly that is something that we look at and decide how we're going to spend and where we're going to spend it.

But the process of awareness and driving through education and proctorling and training, et cetera, et cetera, is a good, established process and there's no reason to get away from that.

Okay.

Thank you very much.

The next question comes from Vincent Ricci from Wachovia.

Hi, guys.

First question for you is, from listening to yourselves and some other companies, sounds like the middle to the late half of December, things got very ugly.

I was just wondering if you guys could maybe shed some light onto us, what changed in those two months that may have not been around in November when the hospitals were setting their budgets.

Well, I guess unfortunately, our third month of every quarter is always the heaviest month for selling systems.

And so March, June and September and December all are pretty big months for us.

So going into December, it didn't seem any particularly different than a March or September.

But as that month progressed and certainly toward the end there, there were a number of people who decided they weren't going to buy.

I would say also, Vince, if you were to look at the activity that the sales force goes through in closing a system, our sales force was as busy in the fourth quarter as they were at any other time.

What was different is that the signatures didn't come when you wanted the signatures to come, but the demand and people that were looking at getting involved in robotic surgery or getting second and third systems and the activity supporting that was very high.

So it isn't that it just got ugly and changed materially.

Let me take a shot at that answer as well.

I think that as I said, we were very active.

At the operational level, people were ready to buy.

They clearly see the benefits and are supportive of it, and that's the reason we saw that kind of activity.

While we don't sit in the board meetings of all these hospitals, so we're not really privy to it, but the people we have talked to, or I've talked to, will tell you that when it -- when capital decisions in general came up to the board level, people were -- all the media, everything that is happening in the economy, that some of these boards just decided to postpone the capital expenditures and -- or cut their capital budgets significantly.

So I don't think it's anything different that has happened across the economy.

It's just, when it reached that level, I think people have gotten very conservative and fearful and therefore have postponed purchases they might have planned.

And you say when they made their capital budgets, well, the world has changed since people made their capital budgets over a year ago.

Okay.

Okay, great.

Thanks, guys.

Another question for you is, could you explain a little bit better the hedging plan that you guys are putting in place?

So, again, we're entering an environment where, as you've probably watched, the euro/dollar relationship changes dramatically day to day.

In order not to be the victim of sort of those fluctuations on a P&L basis, we took out some hedges on our balance sheet position at the end of the year and as you know, we sold 30 systems and a number of those in euro, so we hedged our balances at the end of the year and will probably -- we'll evaluate each month and may take out additional hedges as those -- as the original hedges lapse and based on what we've got in the way of euro.

We also wanted to lock in, again, for planning purposes, lock in better what we would wind up realizing in the way of revenue, and so we did take out a couple of hedges to deal with revenue during the first six months of this year.

Okay, great.

And just one last quick question.

A couple of other med device companies have commented over the last couple of days that for them, being that they are in a strong financial position, which you guys have been due to your prudent use of cash, this has presented a once in a lifetime opportunity for them to kind of go out there and make strategic acquisitions.

For you guys, you've largely done a lot of partnerships and licensing agreements.

I'm just wondering, are there any assets out there, private markets, public markets, that you think can help bolster your platform, get you into newer markets that you might not have been able to get into without that technology?

Anything you see interesting?

I think the answer is not -- since we are on the forefront of robotic surgery, there's nothing out there that we would buy as a company that would provide significant near term or long term capability.

The things that we are looking at are the things that Gary mentioned earlier.

Technologies that we can develop that would either be adjunct or support, entering into new surgical procedures or surgical segments, or just enhancements of the surgical capability of the system.

But we are not out looking -- we're not seeing anything that -- we're not going to go out and buy a suture company or some manual surgical device company, because that takes us exactly the opposite direction of where we're trying to take the markets.

Okay, great.

Thanks for taking my questions, guys.

Okay.

The next question comes from Rick Weiss -- excuse me, David Lewis.

Your question is next.

Good afternoon.

Hi, David.

Rick, don't hold that against me.

I'm sure he'll be next.

(laughter) So first off on guidance, I appreciate the 15% and your prudent comments about boxes and boxed guidance.

You're guiding to 15% top line, 5 % bottom line.

Am I hearing you say that you're committed to that 5% bottom line regardless of how the macro environment changes?

Or should we assume --

No.

Okay.

So if the top line changes, the bottom line could change as well?

Certainly.

What we are committed to is continuing to invest in our future.

That's why that disparity could occur.

Okay.

Marshall, you're going to continue to spend through this.

You're not making commitments of we will not be flat year-over-year?

The fact is we truly believe -- I mean, that we have started -- this is disruptive technology.

We are well into the process, that there's enormous growth ahead.

Now, we're going through a business cycle that may cause a pause, but we're going to continue to invest in the technologies that will -- and product enhancements and everything else that will -- that when we come out of this, we will be in a position to continue to grow it and to drive the adoption of robotics in surgery.

Okay.

Understood.

And then, Ben, given your comments -- sorry?

Having said that, David, we do endeavor to control expenses to the best of our ability, where they are controllable and they don't affect our future.

Okay.

As an example, Marshall pointed out a couple things.

We've postponed building a building.

We've kind of put that on hold for a while.

We cut back on some outside services even during the quarter, in the fourth quarter, you saw that operating expenses actually in the fourth quarter were down sequentially from Q3, so we're trying to be prudent about those things that we are spending money on.

So maybe earnings won't change as fast as revenue, but if revenue changes, earnings can change?

Correct.

Very helpful.

On revenue per procedure, I think I understand the nature of optimization of procedure as well as mix.

What did you forecast, though, Ben, for 2009 in terms of how prevalent or pervasive this mix shift issue happens?

Or otherwise saying, what did you assume for revenue per procedure for 2009?

So we are forecasting a continued reduction and we took that into account in that roughly speaking, a 10% differential in the growth rate, so you have a 35% to 40% growth rate in procedures versus a 25% to 30% growth rate in the revenues.

And so what that turns into is a gradual decrease of that revenue per procedure over time driven by those three factors.

And I think what you're alluding to is do we expect more benign DVH growth as a percentage of the total?

And the answer is yes.

Okay.

You feel that assumes some trajectory on benign hysterectomy and assumes some optimization in prostatectomy and you're fairly confident that that number is unlikely to worsen more than 10%?

We, we gave a forecast of that 35% to 40% procedure growth.

We feel pretty confident in that procedure growth rate, and in order for that to get there, those big procedures like DVH and DVP have to grow.

Okay.

Understood.

Lastly, Lonnie, you made comments about not wanting to discount on price, which obviously we think is the right strategy.

You also have been sort of adverse to taking risks to your balance sheet.

You have a very large balance sheet.

Would you consider taking capital risk and balance sheet risk to promote the revenue line this year?

I'm not sure what you mean, but you mean by using our capital to --

Extending financing.

Doing lease terms, sales type lease terms with your customers.

We've looked at that and right now, we have lenders who are quite ready to provide that service.

We've had no, no problem with it.

If it came to that, then we certainly would consider it.

I think it's certainly an option.

We have, as you say, a large asset on the balance sheet.

It's not giving us a very attractive return.

On the other hand, it gives us enormous flexibility and in this market, as was mentioned earlier, there are opportunities that we will -- we want to be in a position to take if and when they come.

But it is an asset that doesn't give us very good return, and if there are better ways to utilize that asset, we will do so.

Okay.

Last question, I'll jump back in queue.

I can honestly say I never thought I would be asking this question.

But with 22% for 25% of your market cap in cash, is there any point at which buybacks become a useful return on capital?

Well, we do manage the business for long term and with that said, I didn't think we would be asking this question either, and it's a board decision, not a management decision.

It's something we would have to bring to the board.

But at the current prices, I would certainly consider that as a possible use of a portion of the cash.

Okay.

Thank you very much.

That was David Lewis from Morgan Stanley.

The next question is from Rick Wise, Leerink Swann.

Thank you very much.

Couple of questions, and I apologize for the sort of what-if nature, but trying to just assess the sort of near to medium term risk and outlook here.

Is it possible, does it seem realistic as we think about gating the quarters, metering the quarters throughout the year, that first half 2009 is a lot tougher than the second half or the fourth quarter of '08 or a lot weaker than the second half of '09?

And so that this sort of basically flat outlook, we're going to have to wait until we get to the fourth quarter of '09 to really see that all play out, if you see where I'm going, Ben?

Well, a lot depends on the general market conditions and I think that's the broader economy that Lonnie is referring to.

So if we're in here -- in this situation in terms of capital spending for a long period of time, then we're just going to be in this series -- or a period of uncertainty for that long.

I don't know that you could say that we're going to have more clarity in the second half of the year versus the first half of the year, other than you're closer to the end, so are you going to be able to predict the finish a little bit better?

I guess so.

Well, let me try it a different way.

It seems to me that just coming up next, I know you're not inclined to give quarterly guidance, but that the first quarter -- I just don't know what would change from the sort of tone and mindset of the hospitals that you saw in December.

I see.

What I should say is our guidance assumes a same or similar seasonality as we've seen in the past, meaning sequentially down in Q1 from Q4.

Right.

And so what's the metric?

I think in Q1 of 2008, we had revenues of about $188 million.

We had 74 systems that were sold.

So, the comparisons that we're going to be making are against that first quarter, not against the fourth quarter.

Of course.

No, I understand that.

Can you give us any color on -- I mean, could this be an exceptionally weak -- the weakest quarter of the year in a more profound way than the normal, usual, seasonal pattern?

We said we don't have a lot of clarity on the pipeline, Rick.

It's really hard to predict at this point in time.

I think what Ben told you is probably the best we can do at this point, which is just to point to that we will see seasonality.

Okay.

Let me ask a related question, but in a different way.

If the -- I appreciate the uncertainties.

If it turns out, as we see through the year that 2009 is materially worse than that flat outlook, how would you manage the business differently, appreciating that you have this desire, and an appropriate one to invest in the long term development of robotics?

How quickly and where could you adjust?

So we look at costs very carefully and we're very prudent about where we spend money.

However, as we said earlier to an earlier question, we will continue to invest in our future.

You know, Rick, we focus, we try to focus on what we call a vital few.

Now, in this environment, we will put -- we will focus on our resources on those things where we think we can get the greatest leverage.

In the sales organization probably we will invest more heavily in the clinical side, driving procedures.

But this is going to be something you manage literally on a very, very tight time horizon, depending upon how things start to evolve.

We really don't have, and I don't think anybody does, I mean, pick up the financial times every morning and just look at what's on the page and go, oh, wow, the announcement's today, Microsoft, Intel.

So we're -- this is something we will manage on a very short leash.

Now, in terms of procedures, we won't cut out things that we think are fundamental to driving adoption, but we will focus our resources on those things and some other things we may have to not -- to postpone, those things that -- so depending upon how it rolls out, we will, we will continue to adjust and move.

One of the things of being on unexplored territory is that we've had to be, from the beginning, pretty agile.

I mean you -- there's lots of new information coming.

There's not a tried and proven path that everybody goes down.

This is new territory, and, and so I think we're well equipped to be responsive to the uncertainties of the financial markets that we haven't had before, because we've been dealing with the same kinds of things with adoption and the technology.

So, but if we had -- if anybody could predict what the end of 2009's going to look like and what 2010, like we can run a lot of different scenarios, one thing we know is we've got a strong cash position, cash and investments, and so we're financially in a good position to endure that.

And in this market, there are a lot of companies that are not and so our prudence -- this is not a -- we tend to be fairly conservative and prudent about those things that we believe are fundamental to our long term strategy of driving this adoption, but we can't -- you would have to be -- you're going to have to ride alongside of us.

We're in this together, and we will respond to the market as it comes, and if all of a sudden we start to see it's coming out of it, we will move resources to do it.

If it tends to move down, we will adjust resources within, to adjust to that as well.

Okay.

No, thank you for that.

Couple of other things.

Mexico, you talked about, Marshall, I think you were speaking about it, the initial cost savings offset by the startup costs.

Can you give us any flavor for what kind of incremental annual savings in any way, shape or form you want to describe it, that that could benefit '09 and be an offsetting counterbalance to some of the things that are going on?

So what we -- where you save money in Mexico is on labor.

The material costs, which frankly, is the majority of the costs of our instruments, is the same, whether you're operating in Mexico or here, because the suppliers are the same.

So you basically look at the labor content, which is not a significant portion of the overall cost, and then you have to think about,, you're, talking about instruments and instruments is only a portion of our overall revenue.

So from an impact on gross margin, it is not going to be very impactful.

But it's certainly worth our while.

Okay, and last, these are two sort of related things.

The weakness that you saw in December, is it possible to say just making generalizations about large hospital, small hospital, urology, was more deferred or gynecology?

Sorry.

I answered that question earlier, Rick.

I didn't hear you.

There wasn't any one particular segment, if you will, that was seemingly impacted.

Operator, based off of where we're at in time, I think we would like to take maybe two more questions and then bring the call to a close.

Okay, certainly.

Our next question comes from Tycho Peterson of JPMorgan.

Hi, good afternoon.

Thanks for taking the call.

Just a question on pricing and what you're assuming in terms of ASPs.

You talked a little bit about the pricing drop you saw this quarter, and I guess you commented it was a combination of geographic mix and then people migrating maybe toward lower priced systems.

Can you give us a sense as to what you are assuming for ASPs for '09?

Similar to '08, and so there was a range during all of '08 and quite coincidentally, it came out to be on average about the same as '07.

I mean, as exchange rates and different mixes change during the year, you saw it go up and down.

But in the end, it turned out to be about the same.

Okay, and then just on the margin issue, as system placements have slowed but procedures and service start picking up, can you just remind us what the relative margins are between the three and you gave overall margin guidance for the year, but just give a little more granularity on the three pieces?

Yes.

The gross margins on systems is similar to that of instruments and accessories.

The gross margins on service is a little bit lower.

And service is going to be growing, let's say, faster than, for example, systems.

Therefore, that could cause the overall gross margin to be a little bit lower, but not much, just a little bit for next year.

Okay.

Thank you very much.

Thank you.

Our final question comes from Amit Hazan from Oppenheimer.

Hi, good afternoon, guys.

I'll try to make it quick.

I know it's been a long call.

On the procedure side, I want to get a confirmation first that hysterectomy actually grew 150% and prostatectomy actually grew above 30%, is that correct?

It is.

It is.

And roughly speaking, I think we ended up with about 73,000 prostatectomies and something around 34,000 hysterectomies.

Okay, great.

A year.

That's very helpful.

And in terms of hysterectomy, are you modeling or expecting or thinking about or have you seen yet any sensitivity to the economy in that procedure in particular?

Interestingly, all the procedures grew pretty strongly throughout the fourth quarter.

We ended up 60 % year-over-year growth, 61% Q1 to Q4.

And benign versus malignant hysterectomies, again,both of them grew at a very good rate with benign growing faster.

Both, both have been -- have remained on our curves.

So we have not seen at this point in time.

We do see some quarter-to-quarter deviation on and off the curve, but only -- the curves have a very high correlation, so it's not been significant enough other than noise.

And it's fair to say in terms of the guidance that you are modeling along that curve and not expecting any economic issues to hysterectomy?

Well, we're watching it.

We'll take it a month, a day, a quarter at a time.

So far, we have not seen a significant shift.

We just haven't.

And I think what surprised a lot of people throughout the year is that the actual, both the rate and the size growth, actual growth of benign over malignant was greater.

Yes.

Okay.

Fair enough.

And just one follow-up on gross margin.

I'm trying to get to your guidance kind of a follow up on maybe what Tycho was asking, but I'm thinking the mix probably shifts to OUS in 2009 a little bit, like we saw in the fourth quarter, and then as you said, you have the service component.

77 -- 70 to 71, like you said, is not far off from what you did in '08.

With that mix shift to OUS, are we -- am I missing something?

Is there something else that you're counting on, or did OUS gross margins actually come pretty close to the US?

How do you get there, or is that shift not going to happen?

Or am I wrong on that?

So when we sell through distributors, it's a lower gross margin.

When we sell direct, it's a little bit higher.

So there's mix shift even within the international.

We're taking, I think, a reasonable estimate as to what that mix is going to be, but even saw, for example.

a product mix in Q4 that was a little bit less strong than what you saw in Q3, so there's definitely going to be some fluctuations in there, and we would probably be fooling you if we would say you could call it any closer than what you just said.

All right.

Appreciate it.

Have a nice afternoon.

Thank you much.

That was our last question for the day.

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

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

Two brief examples of what this means in the lives of our patients, the first is a patient of Thomas Randall, a GYN oncologist at the University of Pennsylvania.

This woman was brought to the office by her daughter for treatment of recurrent uterine cancer.

One year earlier, she had undergone radiation therapy to the pelvis following open hysterectomy with bilateral uterectomy for treatment of uterine cancer involving the vagina.

During her visit, she had seen -- before this, prior to her visit, she had seen two other GYN oncologists.

The first had recommended further chemotherapy and although this only had about a 20% chance of working, the second recommended a total pelvic sweep, or surgical removal of the entire vagina, bladder and rectum, because after radio therapy, it becomes virtually impossible to dissect the vagina free from the surrounding structures using traditional surgical techniques.

With the da Vinci system, Dr.

Randall was able to perform a complete removal of the vagina, including the recurrent tumor without injury to the bladder, uterus, or rectum.

Surgical margins were negative for the cancer, for cancer.

And four months later, she is without evidence of recurrence, nor of surgical complication.

So this is a pretty significant change, improvement in what her life would have been like if she had not had a da Vinci -- surgery with a da Vinci system.

The second patient is a sister of one of our clinical sales managers.

and I would like to read a message that she sent to me.

She said Stephanie is 36 years old, married with three children, the youngest is 2 years old.

Her husband is a fireman and she works part-time as a hospice nurse.

She has struggled with pelvic pain and abnormal bleeding most of her adult life.

After having children, Stephanie's OB/GYN recommended a hysterectomy.

But after performing an exam and completing an ultrasound, was not sure he could perform the procedure minimally invasively.

Because of prior open abdominal surgery to remove one of her ovaries when she was 16 years old, Stephanie feared having a hysterectomy because she vividly remembered the pain, discomfort and downtime from her previous experience.

Daily care requirements of her three children and the financial implications of an extended recovery period were also serious considerations.

As a part-time employee, she did not qualify for compensation during her medical leave.

She had scheduled a surgery with the OB/GYN because she trusted his opinion.

She goes on to say after hearing my sister's situation, I immediately called Dr.

Cohen at Ohio State.

He shared with her the advantages of robotic surgery and why he would be able to overcome the limitations that may cause other surgeons to perform a total abdominal hysterectomy.

She -- he performed the robotic procedure two weeks later.

The result, Stephanie was out of the hospital within 23 hours, Christmas shopping four days later, and did 20 minutes on elliptical trainer one week post-op.

Then she goes on to say, PS, my mother had a TAH 20 years ago and was in the hospital for seven days.

We are making a difference.

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

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

That concludes today's call.

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

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

The call has ended.

Please disconnect.