直覺手術 (ISRG) 2009 Q3 法說會逐字稿

Welcome and thank you for standing by.

All participants are in a listen-only mode.

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

If you have any objections please disconnect at this time.

I'd like to turn today's call to Ben Gong, Vice President of Finance.

Thank you, 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, and Aleks Cukic, Vice President of Strategic Planning.

Before I begin I'd like to inform you that comments mentioned on today's call maybe 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.

Respect investors are cautioned to not 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 under the audio archive section in the 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 results as described in our press release announced earlier today followed by a question and answer session.

First, Lonnie will present the quarters business highlights.

Gary will follow with operational highlights.

Marshall will provide a review of our third quarter financial results.

Aleks will discuss Marketing and clinical highlights and I'll provide an update on our financial forecast for 2009.

And finally we'll host a question and answer session.

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

Thank you for joining us today.

Despite the challenging and uncertain economic environment, nations, surgeons and hospitals continue to recognize the value our products bring to surgery and surgical outcomes.

Before reviewing our operating highlights for the third quarter, I'd like to remind you that we took a $20 million revenue deferral in the first quarter, associated with our offer to customers that purchase the da Vinci S system in the first quarter to upgrade to the new Si system.

We recognize the remaining $6 million of that $20 million deferral this past quarter.

I excluded the impact of the revenue deferral and reversal in my summaries of our first and second quarter financial performance and will exclude the $6 million reversal in my summary of our third quarter performance.

With that background, operating highlights for the third quarter were as follows.

Procedures grew approximately 49% over the third quarter of 2008.

We sold 86 da Vinci surgical systems, down from 91 sold in the third quarter of last year and 14 of 86 systems were sold to international customers.

We ended the third quarter with 1308 da Vinci systems installed worldwide.

Total revenue grew to $274 million up 16% from last year.

Instrument accessory revenue increased to $101 million up 33%.

Total revenue grew to $144 million up 31% from prior year comprising 53% of total revenue.

We generated an operating profit of $123 million before non-cash, stock option expense, up 16% from the third quarter of last year.

and we ended the quarter with $1.24 billion in cash and investments, up $122 million from last quarter and up $203 million from this time last year after spending $150 million to repurchase stock earlier this year.

With that I'll pass the time over to Gary Guthart, our President and Chief Operating Officer.

Thank you, Lonnie.

As a whole, Q3 has been a productive quarter for our organization with strong progress across a wide variety of activities.

In the quarter, we generated $106 million in gross cash from operations which is 165% of our reported GAAP net income and $2.71 per fully diluted share as compared with GAAP net income of $1.64 per fully diluted share.

Our significant cash outlays during the quarter totaled $5 million invested in property, plant and equipment and we benefited from a $1 million change in working capital.

In addition, we grew our global ISI's team by 64 members in Q3 bringing our total employee count to 1188.

We have seen steady adoption of our Si system in regions in which it is approved representing 81% of sales in these markets.

The introduction of the Si has also catalyzed trade-in transactions for da Vinci standard systems.

Architectural improvements in the S and Si have lead to procedure throughout increases on these platforms relative to the standard.

And with the standard now at two generations behind current products, customers have been motivated to replace standard systems with Si units.

We continue to invest in manufacturing efficiencies with regard to our SI systems and are realizing Si improving system margins.

Second consoles were included in 16% of Si sales and early reports of training efficacy with Si second consoles are encouraging.

Several of our customers are evaluating training pathways using the dual console with an eye towards analysis of efficiency and efficacy of training.

Our development teams continue to make progress across several fronts, in new instrumentation we are investing in robotic stapling and multi function delivery instruments and other instruments and accessories that facilitate teachable and repeatable procedures.

We are currently piloting training technologies including distance mentoring using the internet as well as surgical simulation for da Vinci as a way to shorten learning curves and standardize training pathways.

With regard to imaging we are working closely with our technology partners to bring to market realtime contrast based imaging capabilities to supplement the 3D view.

These imaging technologies will allow surgeons to highlight anatomical areas of interest within the console endoscopic view.

Lastly our teams are making progress in researching and commercializing mechanisms that will allow for single port robotic surgery.

We are in discussion with regulatory agencies worldwide seeking approvals for new products and new indications for our da Vinci system.

We've seen some positive steps regarding approval in Japan though we have much yet to accomplish before full commercialization can begin including wanting over approval and import licenses and establishing the payment pathway for relevant procedures.

We believe Japan will be an important market for ISI in the medium and long term and are there for focused on successful first approval and import licensing followed by building well trained and successful robotic programs with our early customers.

With that I will turn the time over to Marshall for our financial review.

Thank you, Gary.

As previously reported we offered certain first quarter customers the opportunity to upgrade their da Vinci S systems to da Vinci Si systems at a discount to the otherwise list price for such an upgrade.

As a result we deferred a total of $20.1 million of revenue in the first quarter comprised of $18 million of system revenue associated with system upgrade offers and $2.1 million of accessory revenue.

In our second quarter we recognized $13.8 million of the total $20.1 million originally deferred.

In our third quarter we recognized the remaining first quarter deferred revenue of $6.3 million as we completed the 13 remaining upgrades in the third quarter.

To provide listeners with comparable information, I will now walk through our revenue results excluding the deferrals.

Our third Quarter revenue was $274 million, up 16% compared with $236 million for the third quarter of 2008 and up 11% compared with $247 million for the second quarter of 2009.

Quarter to quarter revenue and procedure growth reflected a seasonal slowdown particularly outside the United States.

Third Quarter revenues by product category are as follows.

Third Quarter instrument and accessory revenue was $100 million up 32% compared with $76 million for the third quarter of 2008 and up 6% compared with $94 million in the second quarter of 2009.

The increase is compared with the prior quarters are driven by procedure growth, specifically, procedures have increased 49% compared to the third Quarter of 2008.

Also impacting instrument and accessory growth are both the number of initial stocking orders and the lower impact that initial stocking orders have on a higher base of instrument and accessory usage.

The amount of instrument and accessory revenue we realized per procedure including initial stocking orders was approximately $1,920 per procedure, down approximately $250 per procedure compared to last year and up approximately $30 per procedure compared to the second quarter.

The decline in revenue per procedure compared to the third quarter of 2008 reflects the lower impacted initial stocking orders have on an increased install base and customer efficiency.

The increase from last quarter reflects increased initial stocking orders.

Third Quarter 2009 systems revenue of $130 million was $4 million higher than the $126 million of systems revenue for the third quarter of 2008 and $19 million higher than the $111 million of systems revenue for the second quarter.

Despite the increase in systems revenue we continue to feel the impact of curtailed hospital spending for capital equipment in the ongoing economic recession.

We sold 86 systems during the third quarter 2009 compared with 91 systems last year and 76 systems last quarter.

72 systems were sold in the US during the quarter compared with 71 systems last year and 56 systems last quarter.

14 systems were sold outside the United States compared with 20 last quarter and 20 last year.

70 of the 86 were 81% of the units sold in the quarter were da Vinci Si systems.

20 of the systems sold in the quarter involve trade-ins of da Vinci standard systems compared to five in the third quarter of 2008 and five last quarter.

We've encouraged trade-ins as we believe that the Si system provides clinical and user benefits over da Vinci standards and increased system usage.

Third quarter system revenue also included $10 million of upgrade revenue compared to $1 million in the third quarter of 2008 and $2 million in the second quarter of 2009.

$3 million of the upgrade revenue represented the incremental revenue on the 13 first quarter upgrade offers completed in the third quarter.

The remainder of the upgrade revenue was primarily associated with 10 da Vinci S, Si upgrades sold and installed in the quarter.

Our third quarter average sales price per system including all da Vinci models but excluding upgrades and the revenue deferral was $1.39 million, a decrease from $1.43 million realized in the second quarter and increase from the $1.37 million realized in the third quarter 2008.

The decrease from the second quarter reflects credits provided to customers on the 20 trade in transactions in the lower mix of European direct sales.

Service revenue increased to $44 million, up 30% compared with $34 million last year and up 6% compared with $41 million last quarter.

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

Total third quarter recurring revenue comprised of instrument, accessory and service revenue increased to $144 million up 31% compared with the third quarter 2008 and up 6% compared with the second quarter 2008.

Recurring revenue represented 53% of total third quarter revenue compared with 46% in the third quarter last year and 55% last quarter.

Moving on to gross margins, there were no costs deferred in conjunction with the $20.1 million revenue deferral and there for all of the $20.1 million first quarter deferral, all of the $13.8 million second quarter recognition and all of the $6.3 million third quarter recognition had an equal impact on revenue, gross profit, operating income, and pre-tax income.

Excluding the impact of the deferral activities gross margin in the third quarter was 70.4% compared with third quarter 2008 gross margin of 71.9% and Second Quarter 2009 gross margin of 71.5%.

The decrease in gross margin reflects inventory reserves recorded to write down certain da Vinci standard inventory as well as lower system ASPs.

Third quarter operating expenses of $95 million were up 12% compared with the third quarter of 2008 and up 4% compared with the second quarter.

The quarter-over-quarter increase reflects commissions associated with higher revenue, costs associated with 64 employees added during the quarter and increased research and development costs.

In addition, patent amortization expenses increased to $3.6 million for the quarter compared with $2.5 million during the third quarter 2008 and $3.8 million last quarter.

Excluding the impact of deferral activities, third quarter 2009 operating income was $98 million or 36% of sales compared with $85 million or 36% of sales for the third quarter 2008 and $86 million or 35% of sales for the second quarter of 2009.

Third quarter 2009 operating income reflected $25 million of non-cash compensation expense compared with $1 million for the third quarter of 2008 and $25 million last quarter.

Our third quarter 2009, other income of $4.4 million was approximately the same as the third quarter 2008 and approximately $800,000 less than the second quarter of 2009.

The sequential quarter decrease primarily reflects lower interest declining interest rates on investments.

Our effective tax rate for the third quarter of 40.7% was slightly higher than our anticipated rate of 40% due to higher state tax rates.

Our effective tax rate for the third quarter of 2008 was 35.7% reflecting R & D credits recorded in the third quarter of 2008 relating to our 2007 tax return.

Our net income was $65 million or $1.64 per share compared with $58 million or $1.44 per share for the third quarter 2008 and $62 million or $1.62 per share for the second quarter of 2009.

Excluding the impact of deferral activities, Third Quarter net income was $61 million or $1.55 per share compared with $58 million or $1.44 per share for the third quarter of 2008 and $54 million or $1.40 per share last quarter.

Let me quickly summarize our results for the first nine months of 2009.

And I'd like to point out that since all of the upgrades associated with the Q1 offers were completed by September 30, 2009, the two periods are comparable.

Procedures grew by 53% for the first nine months of 2009 compared to 2008.

Total revenue for the first nine months of 2009 was $729 million, up 13% compared with $643 million last year.

This included recurring revenue growth of 33% and a decrease in systems revenue of 4%.

The decrease in systems revenue reflects the impact of curtailed hospital spending for capital equipment.

Operating income for the first nine months of 2009 was $249 million, up 9% compared with $228 million last year.

Operating income included $72 million of stock based compensation charges in the first nine months of 2009 compared with $55 million in 2008.

Net income for the first nine months of 2009 was $155 million or $3.97 per share compared with $154 million or $3.84 per share last year.

Now moving to the balance sheet.

We ended the third quarter of 2009 with cash and investments of $1.024 billion up $122 million from both June 30, 2009 and December 31, 2008 amounts.

The increase during the quarter reflects cash flow from operations and $22 million from the exercise of stock options partially offset by $5 million of capital expenditures.

Since December 31, cash flow from operations of $269 million and stock option exercises of $34 million was partially offset by IP purchases and capital expenditures of $46 million and the $150 million used to buyback and retire 1.4 million shares of common stock.

Our accounts receivable balance increased to $187 million at September 30 from $175 million at June 30.

The increase in receivables reflects increased revenue.

Our net inventory decreased to $57 million at September 30 from $59 million at June 30.

Despite growth in revenues our inventory declined during the third quarter, primarily due to the utilization of material built up to support the da Vinci Si product launch.

And with that I'd like to turn it over to Aleks who will go over our sales Marketing and clinical highlights.

During the third quarter we sold 86 da Vinci systems, 72 in the United States, eight in Europe and six into rest of world markets.

We traded in 20 standard da Vinci systems during the quarter.

The net 66 additions to the installed base brings to 1308, the cumulative number of da Vinci systems worldwide, 968 in the US , 229 in Europe, and 111 in rest of world markets.

37 of the 86 installed systems represented repeat system sales to existing customers, which included a sixth system to Methodist Medical Center in Houston, a fifth system to Ohio State University Medical Center a fourth system to Memorial Herman in Houston and third systems to USC Medical Center, Johns Hopkins and Baptist South Florida.

Internationally we placed three more da Vinci systems into Germany.

Clinically we had another strong quarter in what is traditionally a slower procedure quarter.

We had excellent sequential growth within several of our targeted procedures.

Demand for da Vinci hysterectomy, both for benign and malignant conditions continues to lead the way.

Also, showing strong sequential growth were sacrocolpopexy, myomectomy, partial nephrectomy thyroidectomy and da Vinci low rectal resections.

In Q3, over 300 da Vinci related clinical publication and abstracts were published within peer review journals.

90 within the GYN specialty alone which speaks volumes when you consider that for all of 2008 there were a total of 50 GYN publications.

In the traditionally slower third quarter our participation within the various domestic and international medical conferences was abundant and Q4 is off to a rapid start.

During previous calls, I've highlighted the growing volume of literature that discusses the benefits of DVH for treatments of endometrial cancer and this quarter I will highlight da Vinci's growing role within cervical cancer.

The results of a multi-center study examining the perioperative results of DVH for treating early stage cervical cancer was published in the journal gynecologic oncology.

The study emanated out of Northwestern University, the University of Tennessee Chattanooga, the University of Wisconsin School of Medicine and Public Health and the University of Tennessee Health Sciences Center in Memphis.

Five GYN oncologists, who at the time of their publication had documented the results under an IRB of 835 DVH procedures.

From this set of patients, they identified 42 women who required type two or type three radical hysterectomy for early stage cervical cancer.

10 of these patients had undergone a type two radical DVH and 32 had undergone a type three radical DVH procedure.

The results were impressive.

The overall average blood loss was only 50ccs, not a single patient received a blood transfusion.

The medium lymph node yield was 25.

The average operating time was 215 minutes, with only one patient being converted to a laparotomy.

The average hospitalization for these complex radical hysterectomies was one day.

The authors conclusion, and I quote, "Robotic radical hysterectomy is associated with minimal blood loss, a shortened hospital stay and few operative complications.

Operative time and lymph node yields are acceptable.

This data suggests that robotic radical hysterectomy may offer an alternative to traditional radical hysterectomy."

As you know, our greatest market opportunity resides within the benign GYN patient segment.

And last quarter, the Journal of robotic surgery reported a collective series from a GYN group Rochester General Hospital in Rochester New York.

The study is entitled.

Robotic Assisted Gynecologic Surgery in a Community Setting.

The authors review the outcomes of 110 GYN procedures, 74 patients underwent a DVH with bilateral Salpingo-oophorectomy, 18 da Vinci sacrocolpopexies, 15 da Vinci Myomectomies and three da Vinci Oopharectomies.

The patient group studies had undergone procedures between June of 2005 and April of 2008.

All of the procedures were completed robotically without the need to convert to an open approach.

The average procedure time was 135 minutes with an average blood loss of 160 CC's.

There was only one intra-operative complication which was repaired robotically and the mean hospital stay was one day.

With over half of the patients being discharged within a 24 hour time period, post operative pain levels ranged from zero to six on a 10 point scale and relieved by non-steroidal anti-inflammatory drugs.

The overall complication rate for their hysterectomy patients including intra-operatively and post operatively was 7% which is very low when compared to the reported 26% and 22% complication rate for abdominal and laparoscopic hysterectomy respectively.

In their conclusions the authors wrote, "Robotic assisted laparoscopy for benign surgical procedures are feasible techniques in a community setting.

Robotic assisted laprascopy has a promising future in minimally invasive surgery as it has proved beneficial for our patients who experienced low complication rates and overall fast recovery when compared to other approaches." Da Vinci partial nephrectomy is rapidly emerging as an alternative to both open partial nephrectomy and laparoscopic partial nephrectomy.

The largest multi center experience to date comparing 129 consecutive da Vinci partial nephrectomies to 118 consecutive laparoscopic partial nephrectomies was recently published in the Journal of Urology.

The study represented the experiences from Washington University in St.

Louis, the Vattikuti Institute at Henry Ford Hospital in Detroit and NYU Medical Center.

Comparison of the operative data revealed no significant differences in the overall operative time collecting system entry, pathologic tumor size, and positive margin rates between the two cohorts.

Intra-operative blood loss was less in the robotic cohort, as was the length of hospital stay, but most importantly, warm ischemic times were significantly shorter in the da Vinci series, 19.7 minutes versus 28.4 minutes.

Subset analysis based on complexity revealed that tumor complexity had no effect on operative time or estimated blood loss in the da Vinci series, although complexity did affect these factors in the laparoscopic partial nephrectomies.

There were no intra-operative complications in the da Vinci group compared to one intra-operative complication in the laprascopy group.

The authors concluded by saying, and I quote, "Robotic assisted partial nephrectomy is a safe and viable alternative to laparoscopic partial nephrectomy providing early equivalent oncologic outcomes and comparable morbidity to traditional laparoscopic approach.

Moreover, robotic assistive partial nephrectomy appears to offer decreased hospitalization as well as significantly less intra-operative blood loss and shorter warm ischemic time.

The latter which may help to provide maximal preservation of renal reserve.

In addition, operative parameters for robotic assisted partial nephrectomy appear to be less affected by tumor complexity compared to laparoscopic nephrectomy.

Interestingly, while the advantages of robotic surgery have historically believed to aid laparoscopic naive surgeons, these data indicate that robotic assisted partial nephrectomy may also benefit experienced laparoscopic surgeons."

Last week, JAMA published a study entitled "Comparative Effectiveness of Minimally Invasive Prostatectomy versus Open Radical Prostatectomy" which claimed that minimally invasive radical prostatectomy was associated with higher rates of incontinence and erectile dysfunction than open radical prostatectomy.

While we don't take issue with the studies data it's easy to question the studies design, written conclusions and the media's interpretation of these conclusions.

To summarize the study evaluated the results of three distinct surgical techniques.

Traditional laparoscopy prostatectomy which has a history of higher rates of incontinence and erectile dysfunction, robotic prostatectomy, and open retro pubic prostatectomy between the years of 2003 and the first part of 2006.

Here is the challenge: Without differentiating between lap and robotic techniques the study blended them into a single minimally invasive radical prostatectomy cohort and reported it as such.

There was no way to determine the ratio between laparoscopic and robotic cases since at the time in question, CPT code 55866 Incorporated both lap and robotic techniques.

Moreover, there was no baseline established for the patients pre or post operative condition using any validated quality of life instrument since all the information was extracted from CPT data.

When you consider the facts associated with the study, it is perplexing that someone could conclude that DVP was associated with more incontinence and erectile dysfunction than open prostatectomy.

Be that as it may, I suspect the greater urologic community has recognized the inconsistencies and fault between the study design and its conclusion.

But it is the patient in our opinion that has been done a great disservice by the medias portrayal of this in conclusive JAMA report.

In any given quarter, peer review of the urologic journals address this very topic and last quarter was no different.

In the British Journal of Urology, Dr.

Ficarra Vincenzo and his team from the Department of Oncologic and Surgical Sciences at the University of Padua in Padua, Italy published their results from a prospect ever non-randomized trial comparing robotic assistive radical Prostatectomy to retropubic radical Prostatectomy the study enrolled 208 men, 105 received open retropubic radical prostatectomy, and 103 received a da Vinci Prostatectomy, when comparing blood loss and blood transfusions between the two cohorts the da Vinci group experienced 40% less blood loss and 86% fewer transfusions than the open group.

Complication and positive surgical margins were similar.

But the most significant difference between the two groups was in the area of post surgical incontinence and erectile function.

For urinary continents, 41% of the open patients and 68% of the da Vinci patients were continent at catheter removal.

The 12 month continent rates were 88% for open patients and 97% for the da Vinci group, with a meantime to continent being 75 and 25 days respectively.

At the 12 month follow-up, 49% of the men having a bilateral nerve sparing open procedure and 81% of the men having a da Vinci bilateral nerve sparing procedure had recovery of erectile function.

The conclusion and I quote, "Robotic assisted radical prostatectomy offers better results than retro pubic radical prostatectomy in terms of urinary continent and rectal function recovery with similar positive surgical margins." That concludes my remarks and I'll now turn the time over to

Thank you, Aleks.

I'll be providing an update on our forecast for 2009 based on our results in Q3.

Consistent with the previous two quarters, I'll provide a forecast for procedure growth but I will not be providing specific guidance on system or total revenues.

Procedures are strong in the third quarter despite the seasonal slowdown we see every summer particularly in Europe.

Procedures grew approximately 49% in the third quarter compared to last year.

In our last earnings, call we forecasted procedures to grow more than 45% for the year.

Given our current run rate, we should exceed 200,000 procedures for the year which is more than 47% higher than the 136,000 procedures we completed last year.

This will continue to drive significant growth in our total instrument and accessory revenues this year.

However, as we mentioned in our previous calls, variations in initial stocking orders and customer ordering patterns can cause our instrument and accessory revenues to fluctuate on a quarterly basis.

In the longer term, instrument accessory revenue growth should more closely match our growth in procedures.

Our service revenue model has been very consistent and we expect it to remain as it has in the past.

We are generating an average of about $140,000 in service revenue per system per year.

With regard to gross margin, we have been consistently recording about 71% over the past two years.

While gross margin can fluctuate quarter to quarter due to product and geography mix, we expect it to remain at about 71%.

Moving to operating expense, we are reiterating a forecast of growing our GAAP operating expense by approximately 19% in 2009.

We are continuing to hire resources in the field to drive procedure growth in the near term and we are continuing to invest in new and existing R & D projects to drive growth in our long term business.

Other income which is mainly comprised of interest income has been decreasing slightly due to lower interest rates on our cash investments.

We expect other income to remain at approximately $4 million for the fourth quarter.

With regard to income tax, we have recorded a tax rate of 41% year-to-date and it is likely to remain at approximately this rate for 2009.

We are working on setting up processes that would allow us to start reporting a lower tax rate some time in 2010.

Our share count for calculating EPS increased from Q2 to Q3 by approximately 700,000 shares primarily due to the recent increase in our stock price.

We ended the quarter with approximately 38.2 million shares outstanding and approximately one million shares were added to the dilutive share count for calculating EPS in Q3.

For the fourth quarter we expect our share count for calculating EPS to be between 39.5 and 39.8 million shares.

Finally regarding our cash flows, we continue to generate significantly more cash than our reported net income.

We generated $96 million in cash from operations in Q3 compared with our net income of $65 million.

Year-to-date we generated $269 million in cash flow from operations compared with our reported net income of $155 million over the same period.

The largest contributor to this difference was a recording of approximately $72 million of non-cash stock compensation expense year-to-date and as we mentioned last time we expect to record another $25 million in the fourth quarter.

As a result our cash flow win continue to be significantly higher than our reported net income.

That concludes our remarks.

We'll open the call to your questions.

(Operator Instructions) David Lewis, your line is open.

Good morning guys.

This is actually James Frances calling in for David.

Hi, James.

So it looks like the OUS results you had were the weakest we've seen in some time.

What else can you tell us about the source of the sequential decline from Q2?

Is there a specific country or orders that didn't materialize or are you seeing seasonality in the EU?

Is the CapEx spending cycle bottoming out?

Do you have a lag in the U.S.

cycle?

James, I think a little of everything you said has probably affected our Q3 numbers.

First off Q3 is historically slow in Europe.

There are a lot from vacation both from a patience side.

Although our procedures remain strong.

Just putting deals together is always more challenging but I think on top of that is without question, there is some recessionary activity being felt in Europe.

And I don't think that it's the same in any country as evidenced by Germany having three systems, for example, this quarter while other countries did not contribute.

So I think we attribute it to nothing really structural other than forces that work against us or that will work against us in Q3.

Okay, and on a different topic getting back to the JAMA study if you think about the clinical data published an da Vinci, it's not been sponsored by the company and much tends to evaluate the single center experience.

After the JAMA study came outlast week how much sense does it make for Intuitive to sponsor clinical work particularly larger more multi centered trials that can demonstrate the real value of the technology?

Again I think our position has always been that the data will come and it will probably come in forms that people become accustomed to meaning multi center trials and surgeons working together to put together multi center trials.

In fact we're seeing some of that and you saw some of that actually I referenced it in the GYN oncology side.

One of the challenges of a rapid multi-center trial is going to the source of the information.

For example, you could do a retrospective analysis and observational study using CPT codes but the medical community doesn't really look at that as really good solid evidence based medicine.

And so I think what you're asking for will happen.

And perhaps there's some things we can do to help it but I think that it's always been our belief and remains our belief that staying out of good clinical evidence is probably not a bad position for us to take.

Okay, great.

And then just finally on the hysterectomy market.

You mentioned you've been seeing doctors that sometimes may start out doing more complex cases on the robot, than gravitate towards using the robot exclusively.

Are you starting to think maybe the initial market will be identified for hysterectomy is maybe the 250,000 oncology and complex benign might be bigger or could it be closer to all practicing GYNs oral operating GYNs?

I think the way we really looked at that and the way we've sized it is, you have heard us not waiver from our position where we talk about patient, we talk about the surgeon value equation.

And we know that the highest surgeon value equation that we can help contribute comes from those very complex cases.

And that's where we're going to start.

Does that mean that we can't get to all of the hysterectomies?

It really doesn't.

There are non-complex cases that people have gravitated to with da Vinci and I think that's great.

But we feel very strongly about the patient value that we contribute to the open hysterectomies when we can convert them to minimally invasive and we'll see where it goes.

It may turn out that we were wrong and the market could be significantly larger but I think that it's early for us to say that.

Okay, great.

Thanks guys.

I'll jump back in queue.

Our next question comes from Tao Levy.

Your line is open.

Hi, Tao.

Back on the replacements, that happened or the upgrades that happened in the quarter, the 20 systems, can you maybe walk through the benefits for Intuitive of a hospital converting from a standard to an Si, maybe you could walk through the different segments within I guess within your P & L, the benefit on the systems side and then any impact on disposable service.

how do those metrics change?

Well I'll start off and let Ben sum up the metrics but as Gary mentioned with the announcement of Si, those old standards are now two generations behind and there's a dramatic difference between that first system we came out with, standard to the Si.

And the ease-of-use is dramatically different in terms of changeover, but just the whole feature set.

And what we've seen is we track procedures persistent even going from standards to S', we see that S' are more heavily used than standards and we believe Si will follow that pattern.

And so as I look at it I kind of assume a replacement market.

U.S.

domestic, I kind of assumed about an eight year life and then after eight years those things will start to be turned in and that's I think that's not far off.

It's a little longer for international.

So we have, we clearly would like to get, and hospitals want to standardize too.

They want to buy a second system so when they buy the second system they prefer to have one consistent with the other so that they can easily move surgeons can move from one to the other, because actually the interface is a bit different.

So our own personal view and my personal view and I think our view of this organization is that this is a good thing for us, and good thing for the hospitals as they move to a more capable easier to use system that is consistent from one OR to the next.

In terms of the metrics, in terms of disposables or accessories, I don't think there's a lot of difference.

but I'll let Ben answer that.

Yes, and so on a recurring revenue basis on the instruments and accessories they're very similar to a standard system to an Si but as Lonnie mentioned on average, we think that we're getting higher utilization in general on the newer technology than the other ones.

There's a small increase in the service revenue on the Si's versus the standard.

So we're going to benefit from that, but it's not a terribly large amount but it is beneficial.

Okay, thanks.

And on Japan, is there anything else that you can tell us in terms of like the next steps that you're waiting for before final approval?

And also what's the process for the import licensing that you're waiting for after approval?

Thanks.

Yes, this is Gary.

We need a few things.

We need to receive the Shonen, which we think is in process but has not been done yet.

And then there are import license restrictions that you have to clear so you have to get an import license.

And there's some supplier audits and other internal things that have to be completed before you can shift into the country.

And then we're working on what the payment pathways are for various procedures.

So those are really the big chunks that have to be done.

How long are the import part?

I'm not really able to give you an exact timeline on each of these steps.

They're kind of in line.

And the last question, historically when the dollars been weak, Ben, is there any correlation with increases in international sales because theorically you're getting a system for a little bit cheaper, if you're paying in foreign currency?

So remember when we were selling direct into Europe we're selling into local currency.

So from the customer standpoint they may not see that much different.

But it's true when we're selling to distributors that we do sell in dollars.

So it could help in some way with distributors perhaps being more able to sell systems at a different price.

Ok, great, thanks.

Our next question comes from Tycho Peterson.

Your line is open.

Good afternoon.

Maybe following up on the last questions on Japan.

Understanding there's a lot of uncertainties in the near term and timeliness can you just give us a sense larger term how you're thinking about the market opportunity.

Is there any potential mix shift here.

Would it be larger for dual console versus the U.S.

opportunity.

And also how you're thinking about pricing, obviously they tend to reimburse but typically at a higher level.

So how you're thinking about the SP opportunity out there.

It would be helpful.

Let me answer the first part and then Ben can answer the next.

The system is going through approval in Japan, the S, not the Si.

And that just has to do with the timing of the whole process and how long it's taking to go through our approval process.

So no dual consoles there.

And in terms of pricing and mix, I think Ben can speak to it more than I.

Well, yes, as Gary mentioned the da Vinci S we're waiting to get approval on.

So you might want to think in terms of the historical price that we've been getting on S it is probably what we're going to be getting over there.

And then I'm sorry the second part had to do with the market size?

The segmentation.

And I think the way we're thinking about segmentation again, based on the earlier comments there isn't going to be a lot of system segmentation but the procedure that you look at when you look at the Japanese market that perhaps are a bit different tha you're used to seeing in the U.S.

has to do probably with more GI surgery including gastric cancers and a high Esophogial and colorectal cancers and probably fewer Prostatectomies on a per capital basis since prostate cancer does not affect Asian men at the same level it does European and Americans.

So it will be interesting to see how all of that unfolds because it is going to be a little bit different than let's say the United States market or the European market in terms of those patient targets.

We think collectively it represents a big opportunity and we will see how it unfolds and how we segment our resources.

One thing I didn't mention is we do plan on selling through a distributer in Japan.

So again the pricing that we'll be getting is going to be consistent with the kind of distribution pricing we've had in other places.

That's helpful.

On the R & D priorities, Gary in your comments you talked a little bit about realtime imaging capabilities.

I'm wondering if you can elaborate a little more.

Is there an effort to bring on consumable stream into the mix with imaging agents.

And then can you also just talk about some of the initiatives to move up and down the value chain.

I think you've talked about Handheld instruments with the Surgi Quest deal earlier this year.

Just wondering if you can update on those partnerships.

On the imaging side, we don't think there will be a substantial change in terms of the consumable mix with regard to imaging.

We think that it will give us better clinical outcomes by allowing surgeons to see through tissue plains that they otherwise can't see through.

Things like vasculature and lymphatics and things like that.

So it really is a value add relative to the instrumentation that's there already.

With regard to Surgi Quest, we're not getting into handheld instrumentation.

That isn't part of our strategy.

And so in all of the partnership deals we've been doing it really has been bringing into robotic surgery technologies we think are complimentary and can lead to better outcomes or faster procedure.

So we continue to do that.

And our teams are working well with our technology partners.

And those are complex programs but I think they are high value.

Ok.

And then just lastly on the inventory management issues.

Have we from your sense worked through the worst of it?

Obviously it looks like the revenues per procedure are up this quarter reflective of inventories coming up but what's your sense going forward as to where we are from a management perspective from your customers?

That's a hard one to tell.

One thing that stood out to us was in Q1 was there seemed to be active inventory management among our customer base and in Q2 and Q3 it seemed to be less so.

But I think that's something that's just going to be subject to fluctuation.

Okay, thank you very much.

And our next question comes from Rick Weiss.

Your line is open.

Hello.

Congratulations on another outstanding quarter.

It's actually Mira Slava for Rick today.

A couple of questions.

We recently had a very short survey that seemed to indicate a little bit more interest in upgrades meaning the current S system being upgraded to the Si.

And certainly you do have some upgrades this quarter.

Is this a real opportunity that we should think about and is there a way to handicap that?

Yes, I would say that we were pleasantly surprised with the number of upgrades we had.

Again to review the 23 that we had, 13 of them pertain to the first quarter offers.

But the other 10 or other upgrades and that was a pretty fair chunk of revenue, I think that it's hard for us right now to judge how many we're going to get on a quarterly basis.

We probably want to monitor a little bit more.

I think the place you'll often see is when somebody buys a new Si, they have an S, and they would like to make it consistent between for surgeon use and for the OR staff, so that's the ideal time to upgrade an S to an Si.

Lonnie is right.

Of those 10 a fair number of those were at the same time that an existing customer was buying another system and they wanted to upgrade their existing system at the same time.

Okay, thank you so much.

And I know you're not ready to comment on the timeline in Japan but is it feasible to think at this point that we're going to see placements in Japan some time in 2010 or is it more of a longer term opportunity?

Well, we're working it down.

I don't think you'll see an explosion in 2010 but we're hopeful we can get some systems in.

Maybe later in the year rather than earlier?

Time will tell.

Okay.

And on the JAMA study that just came out, I appreciate the feedback and certainly there's a lot of, you can certainly question the methods and conclusion for the study.

But curious to note, do you expect any impact on procedures?

I know a lot of times it happened, when patients read the paper that's what they see and they don't actually read the actual study or look at the actual data.

Do you expect to see any impact on the volume of Prostatectomy you currently get because of this study?

I think you're right.

I think patients read headlines and make conclusions.

But thankfully what we have found thus far is that the urologic community which I think is ultimately the strongest source for these patients as they're conversing with their doctors and their doctors and their physicians are aware of sort of the faults if you will of the conclusions.

And I think as the data disseminates I think that it will ultimately help influence the patients decision.

I will say that I don't know exactly how to answer your question with any definitive position because it is forward-looking but our belief is that the people that we have spoken to the clinicians did not put a lot of weight into that study.

And I think their impact on the patients decision is going to be important.

That's great feedback, thank you.

And congratulations again on the quarter.

Thanks.

Thank you.

Our next question comes from Sameer Harish.

Your line is open.

Hi, thank you, can you guys hear me?

Yes.

Perfect.

Just wanted to follow-up a little bit on the investments that you're making in R & D, Sales and Marketing.

Just in general terms, can you talk a little bit about the sort of duration, the longevity of these investments?

Do you expect to be continuing these as increasing as a percentage of revenue into next year or is it likely to be completed this year?

I think on the R & D side, we'll expect to continue to increase investments in revenue at a pace about what you've seen and as a percentage of revenue.

And we invest on multiple time horizons from things we expect to be out in months to things we'll take many years to develop and come to fruition.

Ben you want to answer on the SG&a side?

Yes, on the SG&A side particularly with the field, we added 30 people into the field this past quarter and we have not really slowed down in our hiring.

Again as we place more systems out there and we have this 49% procedure growth year-over-year, it requires us to have a lot more people out there in the field.

So we plan to continue to hire people in the field at a pretty good pace.

Great.

And I don't think you guys gave an update on the share buyback but could you talk a little bit about use of cash going forward?

So, it's not changed from what we said in the past.

The cash is there for growth opportunities and flexibility.

We're glad we've got it and we have not made a decision to your question.

We've not made a decision on what we'll do with the remaining authorization we've gotten from the Board, but we keep it in mind.

And over time if we believe that the cash is excess to our needs we'll return it to shareholders similar to what we've done in the past.

Is there more interest in licensing or acquisitions in the future and if there is could you talk about potential areas?

We continue to enjoy the flexibility that the cash gives us to license things that we think are a good fit to us.

And we'll continue to do that.

On the other hand it's not burning a hole in our pocket to go invest it when we're not ready to do so.

And it's particularly useful to telecast the things we're looking at or interested looking at.

Great, thank you.

The next question comes from Sean Lavin.

Your line is open.

Hello, congratulations on a good quarter.

Thank you.

Thanks, Sean.

Just a couple quick questions or help with modeling.

And those are, can you tell us what the average price was on the Si upgrades.

What push these upgrades had a second console and how much of a discount you give to hospitals trading in an old non-S system?

Even though we don't give you specifics on that Sean, maybe I can help you a little bit.

So the $10 million we had in upgrade revenue, think of $3 million that had to do with those $13 million that were from Q1.

The remaining $7 million was primarily the other 10 upgrades, but we also had some fourth arm and HD upgrades, something on the order of $1 million dollars of that.

And there were actually as you point out there were a couple of second consoles that people bought a la carte let's say in that extra $7 million.

Ok.

Any help on what kind of discount you give on the people trading in the old systems?

We're not specific on that.

We do give them a credit and you notice when you have a large number like 20 of them, that in combination with fewer direct sales into Europe caused our ASP to go down by about $40,000 from last quarter to this quarter.

And then my last question was if you could quantify the inventory write down that you talked about affecting margins.

It was a little less than $2 million.

Alright, perfect.

Thank you very much.

Thank you.

We have time for one more question.

And that question comes from Vincent Ricci.

Your line is open.

Hi.

Thanks for taking my question.

My first question is, I guess probably most appropriate for Aleks, but anyone wants to answer it.

Generally speaking the procedures you have been most successful for, these are open procedures you're converting to minimally invasive such as Prostatectomy, or the on could logical hysterectomies, you're targeting colorectal and general surgery.

You've talked about it on and off as being a good procedure but also Kovidien and Epicon have discussed these as well.

Maybe you could differentiate if these are different procedures you're looking at and if there's a different strategy for attacking this area?

Well I can't comment on their strategy but I would say this, that if my history is right the first laparoscopic colon procedures were reported on in the early 90s I recall when some of them were being done then, and here we are 17 or so, 16 years later, and there is a light penetration in overall colorectal procedures.

And for many reasons that the Prostatectomy business had gone really unpenetrated with general laparoscomy.

It's difficult to do.

And so what I think you see in today's laparoscopic colorectal is you see a light of right colon and perhaps transverse and you start getting less penetration as you go down the colon and get into the low rectal procedures.

It's not by coincidence that that's probably one of our fastest areas of growth because it's very difficult to do laparoscopicly and some of the early adoption in da Vinci is starting there.

So that is fairly similar is that we are starting in the more difficult places where I would say that .laparoscopy is started in some of the easier places.

So we'll see where that ultimately goes.

I think that when you look at improving visualization, you can improve the necessary suturing, manage vascularity differently, and do more precise surgery which tends to go with robotics overlap laparoscopy and intuitive motion and motion scaling and everything else, you tend to put yourself in good position to get those procedures.

So we know we need a few extra instruments.

We're working on those instruments and we'll see where that goes.

As long as you're talking about those instruments, Gary quickly mentioned the stapler.

Can you talk a little bit about the progress there?

We're working down the heart of the development pathway here.

So we know what we want to do and we're in the middle of doing it.

And that's about what I can tell you right now.

I think so far so good.

And then just last quick question, maybe just looking at this from slightly different standpoint of metrics that you guys have given in the past.

Could you possibly talk to us about kind of what your clip is on training docs, historically say over the last couple quarters?

The rate of training doctors?

New doctors, yes.

Yes, that has been pretty consistent, generally pretty high.

I'll just add a piece that's perhaps valuable to you or not.

But I think you should think of our training initiatives as think of it in one big bucket but within that bucket there is going to be a mix.

In other words you can imagine that 2004 and 2005 and 06 had a huge urology focus in that training whereas 2007, 2008, 2009 probably has more GYN, and so on and so fourth.

I think that that will be the nature of our training programs as procedure targets change and procedure opportunities grow, you'll see that change.

But overall, training is very very important to us, it's very important to our customers and we plan to do as much as we can in the area of training.

Okay, great.

Thanks for taking my questions.

That was our last question.

As I previously said, while we focus on financial metrics such as revenues profits and cash flow during these conference calls, our organizational focus remains on increasing patient value, by improving surgical outcomes and reducing surgical trauma.

One of our metrics for patient satisfaction is a survey of patients who have contacted da Vinci surgeons through our physician locator.

This is a blinded survey so we don't know the identity of the patients or their surgeons.

But of the patients who responded as having had a da Vinci procedure 93.2% were either extremely satisfied or very satisfied.

And when asked if they would recommend the procedure to other people in the same situation as themselves, 100% of the GYN and general surgery patients and 98.1% of the prostate cancer patients responded yes, they would recommend it to others.

I hope that the following patients personal stories will give you some sense of what this means in the lives of our patients.

I'll start with John.

John is a 65 year old engineer from Ascott in the United Kingdom.

Said he was shocked when he received his PSA score and set out as most typical engineers would, to read everything he could about prostate cancer including Dr.

Walsh's book.

Having looked at all the competing therapies, including radiation, he came to the conclusion of having the cancer removed was the most definitive option.

But was concerned about urinary constance.

He believed that finding the right surgeon was key to minimizing potential risks.

The result, even though the cancer was wide spread than originally thought, all post operative risk tests have come back negative.

And urinary control returned eight days post operation.

For John, the final benefit of da Vinci Prostatectomy was he was able to compete on one of his many motorcycle's in an event two and half weeks after his surgery.

The second patient, Craig required major surgery to treat pancreatic cancer.

Surgery which the pancreas, the gall blatter, (inaudible) and the lower part of the stomach removed followed by major reconstruction.

It's call the Repal procedure.

Craig chose to have the surgery at the Cleveland Clinic because they would perform it minimally invasive with the da Vinci surgical system.

A few weeks after surgery Craig visited Detroit and met another patient who had the same procedure with open surgery.

He committed on their stark contrast of their individual experiences post operation.

Six month after surgery the other patient still not had returned to work.

In contrast, Craig said two weeks after his surgery, he was walking through a mall and visited a book store.

Patience like these are the strongest advocates for surgery with the da Vinci system.

And a very foundation of our operating performance.

In closing, I assure you we remain committed in focusing in the (inaudible) few things that truly make a difference, as we strive to take surgery beyond the limits of the human hands.

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.

Thank you.

This concludes today's call.

You may disconnect at this time.