直覺手術 (ISRG) 2009 Q4 法說會逐字稿

Welcome and thank you all for standing by.

At this time, I would like to inform all participants you will be on a listen-only mode until the question-and-answer session of today's conference call.

I would also like to inform all parties that today's conference call is being recorded.

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

I would now like to turn the call over to Ben Gong, Vice President of Finance.

Thank you, sir.

you may begin.

Good afternoon and welcome to Intuitive Surgical's fourth quarter conference call.

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

Before we begin, I would like to inform that you 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 this call will be available for audio replay on our website at www.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 with you highlights of our fourth quarter results as described in our press release announced earlier today followed by a question-and-answer session.

Gary will present the quarter's business and operational highlights.

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

Aleks will discuss marketing and clinical highlights, then I will provide a financial forecast for 2010 and finally we will host a question-and-answer session.

Before we turn it over to Gary, Lonnie would like to provide some introductory remarks.

Thank you, Ben.

I would like to take a moment to acknowledge the transition that took place on January 1.

On that date, Gary Guthart became president and CEO of the Company.

It has been my privilege to serve as CEO of Intuitive Surgical for the last 13 years, and it's been a great personal blessing to work with so many gifted and dedicated people.

I sincerely thank all those past and present who have helped to build this wonderful Company.

Extraordinary men and women who conceive, design, build, sell, service, and support our effort to create products that take surgery beyond the limits of the human hand and pioneer their application to new surgical procedures.

The surgeons who are instrumental in those pioneering efforts, the hospital administrators who are willing to invest in new technology with a fledgling company, the patients who trust us and their surgeons to help them and to do no harm in the process and, finally, the early investors who provided the funding that made it possible.

I truly believe that we are still in early stages of the evolution of this technology and its application to medicine.

I look forward to my new role in supporting Gary and the entire intuitive team as they continue to advance the state of the art of our technology, delivering extraordinary value to patients, surgeons, hospitals, and our investors.

That said, I will pass the time to our President and CEO, Gary Guthart.

Thank you, Lonnie.

Against the backdrop of significant uncertainty in 2009 our team adapted well to changing environments and our procedure and capital businesses, and our operations organization remain focused on delivering quality product in the midst of financial constraints.

Our operating highlights for the fourth quarter are as follows.

Procedures grew 44% over the fourth quarter of 2008.

We sold 110 da Vinci surgical systems up from 85 during fourth quarter last year.

Our international team contributed 30 of the 110 systems sold.

We ended the fourth quarter with 1,395 da Vinci systems installed worldwide.

Total revenue was $323 million, up 40% over fourth quarter of last year.

Instrument and accessory revenue increased to $113 million, up 39%.

Total recurring revenue, including service, grew to $161 million, up 37% from the prior year and comprising 50% of total revenue.

We generated an operating profit of $153 million before noncash stock compensation expenses, up 47% from the fourth quarter of last year and GAAP net income grew to $78 million, up 53% from fourth quarter of last year.

For the full year 2009, worldwide procedures grew by 51% over 2008.

Our international procedures grew by 60% over 2008.

We sold 338 da Vinci surgical systems in the year.

Total revenue grew to $1,052 million, up 20% over 2008.

Recurring revenue grew to $562 million, up 34% and comprising 53% of total revenue.

We generated $474 million in operating profit before noncash stock compensation expense, up 22% from last year and GAAP net income grew to $233 million, up 14% year-over-year.

We ended the year with $1,172 million in cash and investments, up $148 million from last quarter and up $270 million from last year which, excluding $59 million in cash received during the year from the exercise of stock options and adding back $15 million invested in intellectual property working capital, property plant and equipment, and $150 million stock buyback during the year, amounts to gross cash generated from operations of $377 million, or $9.61 per fully diluted share and 162% of our reported GAAP net income for the year.

This is a reflection of the significant noncash stock compensation and statutory tax expenses reflected in our GAAP net income and is the reason that we continue to believe that gross cash generated by operations remains the best measure of our actual financial performance.

Adoption of surgical robotics procedure-specific and patient driven and as a consequence we continue to drive the adoption of robotic surgery procedure by procedure.

Some of our highest growth procedures, those with 100% year over year growth or higher for 2009 include history hysterectomy, partial nephrectomy, sacral colpopexy, colon and rectal resections and thyroidectomy, the latter concentrated in Asia.

Some of these procedure growth metrics are measured off relatively small base in 2008, but we have learned from past experience that the seeds of new adoptions begin with rapid growth and particular procedures.

Through 2009 we continue to invest and progress across our business.

Some highlights for the year are as follows.

We launched or Si system in Q2 of 2009 and by Q4 79% of the new system sales were our Si product.

The Si system has catalyzed trade-in sales for our first platform, the da Vinci Standard and upgrades of da Vinci S systems with 23 trade-in transactions and 10 S to Si upgrades in the fourth quarter.

Si dual consols were sold in 16% of Si system sales through the year representing an opportunity for increased training efficacy at the sites.

We obtained FDA approval for a new indication of da Vinci systems for transoral da Vinci surgery, procedures for which patient value is very high.

We added 214 new employees over the year, ending 2009 with 1,263 on our team, and we resumed construction of our new manufacturing facility at our Sunnyvale headquarters which will bring on line 155,000 square feet of space in 2011.

I will now pass the time over to Marshall Mohr, our Chief Financial Officer, to take us through our financial performance in greater detail.

Thank you, Gary.

Prior to providing with you the details of our fourth quarter results, I would like to provide you with a quick review of the deferral accounting that took place during 2009 which sets into context the proper comparables.

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.

We also offered those customers the opportunity to return da Vinci S accessories in exchange for da Vinci SI accessories.

As a result, we deferred a total of $20.1 million of revenue in the first quarter.

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 you through our revenue results excluding the third quarter recognition of $6.3 million.

Our fourth quarter revenue was $323 million, up 40% compared with $232 million for the fourth quarter 2008 and up 18% compared with $274 million for the third quarter of 2009.

Fourth quarter revenues by product category are as follows, fourth quarter instrument and accessory revenue was $113 million, up 39% compared with $82 million for the fourth quarter 2008 and up 13% compared with $100 million in the third quarter of 2009.

The increase is compared with prior quarters are driven by procedure growth.

Specifically, procedures increased 44% compared to the fourth quarter of 2008.

Also impacting instrument and accessory growth is revenue associated with initial stocking orders which was higher than the prior year.

The amount of instrument and accessory revenue we realized per procedure, including initial stocking orders, was approximately $1,960 per procedure, down approximately $70 per procedure compared to last year and up approximately $40 per procedure compared to third quarter.

The decline in revenue per procedure compared to the fourth quarter of 2008 reflects the lower impact that initial stocking orders have on a larger install base as well as customer efficiency.

The growth in revenue per procedure compared to the third quarter is primarily associated with customer buying patterns.

Fourth quarter 2009 systems revenue of $162 million increased 42% compared with $114 million of systems revenue for the fourth quarter of 2008, and increased 25% compared with $130 million of systems revenue for the third quarter.

We sold 110 systems in the fourth quarter of 2009 compared with 85 systems last year and 86 systems last quarter; 80 systems were sold in the US during the quarter compared with 55 systems last year and 72 systems last quarter.

Thirty systems were sold outside the US compared with 30 last year and 14 last quarter.

Eighty-seven of the 110, or 79% of the units sold in the quarter, were da Vinci Si systems.

Twenty-three of the systems sold in the quarter involved trade-ins of da Vinci standard systems compared to six in the fourth quarter of 2008 and 20 last quarter.

We continue to provide customers with trade-in credits as we believe the Si system provides clinical and user benefits over da Vinci standards which we believe will lead to increased system usage.

Fourth quarter system revenue also included $7 million of upgrade revenue compared to $1 million in the fourth quarter of 2008 and $10 million in the third quarter of 2009.

Our fourth quarter average sales price per system, including all da Vinci models but excluding upgrades and revenue deferral was $1.41 million, an increase from the $1.39 million realized in the third quarter and an increase from the $1.32 million realized in the fourth quarter 2008.

The increase compared to the prior year reflects the introduction of the Si product which has a higher price point than the S.

The increase from the prior quarter reflects a higher mix of European direct sales.

Service revenue increased to $48 million, up 32% compared with $36 million last year and up 9% compared with $44 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 $161 million, up 37% compared with the fourth quarter of 2008 and up 12% compared with the third quarter of 2009.

Recurring revenue represented 50% of total fourth quarter total revenue compared with 51% in the fourth quarter last year and 53% last quarter.

Moving on to the remainder of the P&L, let me remind you that there were no costs deferred in conjunction with the first quarter, $20.1 million revenue deferral and, therefore, the $6.3 million third quarter recognition had an equal impact on revenue, gross profit, operating income and pretax income.

Gross margin in the fourth quarter was 72.2% compared with fourth quarter 2008 gross margin of 71.4% and excluding the impact of the deferral, third quarter 2009 gross margin of 70.4%.

The increase in gross margin reflects increase system ASPs and absorption of fixed costs over a larger revenue base.

Fourth quarter 2009 operating expenses of $105 million were up 27% compared with the fourth quarter 2008 and up 11% compared with the third quarter.

The quarter over quarter increase reflects commissions associated with higher revenue, costs associated with 75 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 $3.2 million during the fourth quarter 2008 and $3.6 million last quarter.

Fourth quarter 2009 operating income was $128 million, or 40% of sales compared with $83 million, or 36% of sales for the fourth quarter 2008 and excluding the impact of deferrals, $98 million or 36% of sales for the third quarter 2009.

Fourth quarter 2009 operating income reflected $25 million of noncash stock compensation expense compared with $21 million for the fourth quarter of 2008 and $25 million last quarter.

Our effective tax rate for the fourth quarter of 41.5% was slightly higher than our anticipated rate of 41% due to a higher mix of US income.

Our net income was $78 million, or $1.95 per share, compared with $51 million, or $1.27 per share, for fourth quarter 2008 and excluding the impact of the deferrals, $61 million or $1.55 per share for the third quarter of 2009.

Let me summarize our results for 2998.

Total procedures grew by 51% compared to 2008 to approximately 205,000 procedures.

Total 2009 revenue was $1,052 million, up 20% compared with $875 million last year.

Recurring revenue is driven by procedure growth and increased 34% compared to 2008.

System revenues increased 8% reflecting the impact of curtailed hospital spending for capital equipment.

Operating income for 2009 was $377 million, up 21% compared with $311 million last year.

Operating income included $97 million of stock-based compensation charges in 2009 compared with $77 million in 2008.

Net income for 200 was $233 million or $5.93 per share compared with $204 million, or $5.12 per share last year.

Now moving to the balance sheet.

We ended the fourth quarter of 2009 with cash and investments of $1,172 million, up $148 million compared with September 30, 2009, and up $270 million compared with December 31, 2008.

The increase during the quarter reflects cash flow from operations and $25 million from the exercise of stock options partially set off by $8 million of capital expenditures.

For the year, cash flow from operations of $385 million and stock option exercises of $59 million was partially offset by IP purchases and capital expenditures of $53 million and the $150 million used to buy back and retire 1.4 million shares of common stock.

Our accounts receivable balance increased to $205 million at December 31 from $187 million at September 30.

The increase in receivables reflects increased revenue.

Our net inventory increased to $58 million at December 31 from $57 million at September 30.

With that, I'd like to turn it over to Aleks who will go over our marketing and clinical highlights.

Thank you, Marshall.

During the fourth quarter we sold 110 da Vinci systems, 80 in the United States, 21 in Europe and nine into rest of world markets.

As part of the 110 system sales, 23 standard da Vinci systems were traded in for credit against sales for new da Vinci Si systems.

We had a net 87 system additions to the installed base during the quarter which brings to 1,395 the cumulative number of da Vinci systems worldwide, 1,028 in the US, 248 in Europe, and 119 in rest of world markets; 52 of the 110 systems installed represented repeat system sales to existing customers which included a five-system sale to the Cleveland Clinic.

Internationally, we placed four more da Vinci systems in to France and three more into the countries of Germany, Italy and Korea.

Also during the quarter, ten customers purchased upgrades to convert their da Vinci S systems in to da Vinci Si systems.

Clinically, we had another excellent quarter, once again experiencing double digit sequential procedure growth.

Demand for our targeting da Vinci procedures continues to be robust.

Hysterectomy growth both for benign and malignant conditions continues to lead the way.

In 2009, our customers performed approximately 69,000 DVHs worldwide, which is an estimated doubling of the 2008 total.

DVP, which is still our largest individual procedure, showed solid growth for the year registering an estimated 90,000 procedures worldwide.

Overall, we finished 2009 having completed an estimated 205,000 procedures representing several different procedure categories.

In addition, nearly 300 da Vinci related clinical publications and abstracts appeared within various peer review journals during the quarter.

Also during the quarter we were notified by the Japanese Ministry of Health that da Vinci S, along with several da Vinci instruments received [Shonan] clearance in Japan.

We've worked hard with the Japanese authorities to obtain this clearance, so we are certainly pleased to have received.

However, we would like to remind everyone that our work pertaining to the appropriate reimbursement is ongoing and reimbursement activities will likely be ongoing for some time to come.

Shonan clearance was the necessary first step in a process that is still being sequenced.

Long-term success in Japan is likely to occur step by step and at this time we cannot provide an accurate estimate as to when we might obtain the appropriate reimbursement for da Vinci surgical procedures.

At current growth trajectories, DVH will become our largest procedure at some point in 2010, and the reasons for this are simple.

The market opportunity is large, hospitals and physicians are adopting it, and patients are seeking it.

In the October edition of The Journal of Robotic Surgery, Dr.

Gerald Feur and colleagues from the Southeastern Gynecologic Oncology Group in Atlanta, published results of their 52-patient comparison for radical DVH versus open hysterectomy.

While still in their da Vinci learning curve, they compared complication rates, operating time, lymph node yields, estimated blood loss and hospitalization.

They reported that operating times were initially longer when using da Vinci but had come down significantly with experience.

They also showed that complication rates were reduced by 37% using da Vinci.

Lymph node yields were similar while estimated blood loss for da Vinci patients was reduced by 64% compared to their open cases, but perhaps most striking was the difference in hospitalization which was reduced from 5.2 days for open to 1.7 days with da Vinci.

The authors concluded by saying, "Implementing a unilateral approach to maximizing surgical efficiency greatly reduced surgical times without compromising patient morbidity bringing down robotic times while still in a learning curve to close to those for radical hysterectomy.

Thus, robotic radical hysterectomy may soon be considered the preferred standard front line therapy for cervical cancer." DVH for malignant conditions is growing rapidly but DVH for benign conditions is growing even faster.

In a study published in last quarter's Journal of Society of Laparoendoscopic Surgeons, Dr.

Abraham Shashoua and colleagues from the University of Illinois Chicago compared patient characteristics, operating variables and outcomes in 68 patients that had undergone a DVH or total laparoscopic hysterectomy.

They reported that when you factored out [morsalation] times, operating times were similar.

Interestingly, length of stay was reduced from approximately 1.4 days to 1 day for DVH.

In parallel with the reduction of hospitalization was the significant decrease and requisite pain reducing narcotics, 5.0 units for the total laparoscopic patients versus 1.2 units for the DVH patients.

In this summary, Dr.

Shashoua stated, "Robotic hysterectomy can be performed safely with comparable operative times to those for conventional laparoscopic hysterectomy.

Postoperative measures were improved over measures for conventional laparoscopy." As you can assess from the procedure totals I reported earlier, we showed solid 23% DVP growth in 2009.

The overall procedure growth on a raw unit basis was split fairly evenly between the US and international customer base; however, our international DVP business is expanding at a much faster rate compared to the US.

We would expect this to continue going forward.

There is growing international awareness for DVP, the evidence of which can be found in a recent addition of the British Journal of Urology International.

The British Journal featured a large meta analysis of 15 DVP publications published between 2006 and 2009 representing 9,277 DVP patients.

The authors were comprised of a cohort of international investigators representing Florida Hospital in Celebration, Florida; the Division of Urology from the University of Sampalo, Brazil; the Division of Oncology from the Institute of Oncology in Milan, Italy.

The large body of patient's study provided ample evidence for the authors to make the following summary comments, "Many series are now mature enough to show the safety, efficacy and reproducibility of robotic assisted radical prostatectomy.

Robotic assisted radical prostatectomy is associated with decreased operative blood loss and decreased risk of transfusions in comparative studies with open radical prostatectomy.

Excellent functional and oncologic outcomes were reported in large series with results at least comparable to those reported in open radical prostatectomy series.

Limited preliminary studies appear to show advantages of robotic procedures in terms of length of stay, positive surgical margin rates and early potency and continence."

We are exiting 2009 with strong international DVP momentum which will be helpful in addressing this large opportunity.

On December 16, the US FDA granted us 510K clearance for transoral otolaryngologic surgical procedures for benign as well as malignant T1 and T2 tumors.

Prior to this clearance, physicians seeking the performed ENT procedures were required to obtain an IRB.

Despite the additional steps this process mandated, several of our nation's leading head and neck cancer centers applied for and received IRB clearances.

Participating institutions included the University of Pennsylvania, Mayo Clinic Rochester, MD Anderson, Mt.

Sinai New York and the University of Alabama Birmingham to name a few.

Several hundred cases were performed during the year with excellent early results.

At least three significant publications appeared in major head and neck journals.

Several abstracts presented at various meetings and a number of training sessions took place during 2009.

The long-term ENT opportunity is difficult to size but with current approvals we'd estimate the immediate US target market to represent approximately 10,000 procedures compared to an international market opportunity in excess of 70,000 procedures.

The potential patient value being described by leading positions is very encouraging and perhaps as great as any we have seen thus far.

We're excited by the opportunity of working with the ENT surgical community in the pursuit of improving head and neck patient care.

That concludes my remarks and now I will now turn the time over to Ben.

Thank you, Aleks.

I will be providing our financial forecast for 2010, including procedures, revenues, and the other elements of the income statement on a GAAP basis.

I will also provide estimates on significant noncash expenses to provide you with visibility or expected future cash flows.

Starting with procedures, we continue to see strong growth across a wide range of procedures, particularly da Vinci hysterectomies.

As a result, we expect our total procedures to grow approximately 35% for the year from the 205,000 procedures performed in 2009.

Moving on to revenues, we expect to achieve annual revenue growth of approximately 25%.

As a reminder, our revenues can fluctuate quarter to quarter as system placements may vary.

With regard to gross margin we have averaged between 71% and 71.5% over the past two years.

While gross margin can fluctuate quarter to quarter due to product and geography mix, we expect the average for 2010 to be about the same.

Moving to operating expense, we expect our GAAP operating expense to grow by approximately 25% in 2010 which is in line with our expected top-line growth.

Excluding noncash stock compensation charges, we expect operating expense to grow approximately 23% to 24%.

We're continuing to hire significant resources in the field to support newly installed systems and to drive procedure growth, and we are continuing to invest in R&D projects to drive growth in our long-term business.

We expect our noncash stock compensation charges to increase from $97 million recorded in 2009 to approximately $127 million in 2010.

In addition, we will continue to amortize previous purchases of intellectual property in our R&D expense line which is scheduled to amortize at $14.5 million for the year.

These items total over $140 million in estimated noncash expense for the year.

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

We expect other income to come in between $14 million and $15 million for the year, which is down from approximately $19 million last year.

With regard to income tax we have implemented an international tax structure that will allow us to begin reporting a lower tax rate going forward.

We expect our tax rate for 2010 to come in at approximately 37%, which is 4 points lower than the 41% tax rate we reported for 2009.

For calculating earnings per share we ended 2009 with 38.5 million common shares outstanding and approximately 4.6 million option shares outstanding.

Depending on our average stock price this year, a portion of the 4.6 million option shares will be added to the fully diluted shares calculation.

Assuming our stock price remains where it is today, we estimate that our share count for calculating EPS in Q1 will be approximately 40.1 million shares and for calculating EPS for the year we estimate it will be approximately 40.7 million shares.

Finally, regarding our cash flows, as Gary mentioned, we generated $377 million in gross cash flow from operations in 2009 compared with our reported net income of $233 million.

Since we are forecasting to report over $140 million in noncash expense this year, our cash flows will continue to be significantly higher than our reported net income.

We believe cash flows generated from operations is a better measure of our actual performance than net income.

Please note that the forecast I have just provided does not include any potential impact of a federal healthcare excise tax.

Since we cannot predict if or when such a tax will take effect, we are not making any estimates.

With that, I would like to turn it back over to Gary.

Thanks, Ben.

This concludes our prepared remarks.

Before we move to our Q & A, I would like to take this opportunity to acknowledge our chairman, Lonnie Smith.

Lonnie has been our CEO since 1997 and has led the organization masterfully over his tenure.

While organizations are not built by a single individual, Lonnie's influence on our culture and his leadership in times good and bad has been truly inspirational.

I thank him personally and on behalf of our entire team.

I look forward to his ongoing contributions as chairman.

I can assure you that he has not softened in his passion for intuitive or in the discipline of his thinking.

We'll now open the line for questions.

Thank you.

(Operator Instructions).

Our first question comes from David Lewis of Morgan Stanley.

Good morning.

Good afternoon, sorry.

Hi, David.

Congratulations, Lonnie and Gary both on the transition.

Thank you.

I guess, first of all, maybe for Gary or for Aleks, if you think about hysterectomy, given the growth rates that you're forecasting for 2009 and then forecasting into 2010, is it time for us to start thinking about a new way of thinking about the hysterectomy market size versus what you said historically?

You're projected to have procedures in hysterectomy that are going to be close to 100,000 or over 100,000.

It seems like the market has proven to be dramatically larger than what you would have said maybe 24 months ago.

So maybe you can give us your quick thoughts on that.

Yes.

I think, David, the way we think about it, if you recall, when we put out our first sort of target market, we talked about 250,000 procedures.

And, again, the target was really based on a where we knew we added the most value and that came out of the cohort of open procedures, open hysterectomies being converted.

What you are seeing more and more is that a number of programs and practices have converted several of their laparoscopic procedures to da Vinci procedures and I think that's a trend that will continue.

As far as, again, taking a number and saying the market opportunity is this size or that size, I think it's important to remind you there's somewhere between 300,000 and 325,000 perhaps open hysterectomies and there are somewhere on the order of 250,000 either laparoscopic or vaginal hysterectomies.

I think it it's safe to say that our market opportunity is going to be larger than the 250,000, but I don't think we're in a position to tell you how large it could be.

Okay.

Just one quick follow-up here maybe for Ben.

You talked about in this the past, but given the significant [box places] in the fourth quarter, you still had revenue per procedure that was down year over year.

Can you maybe just walk us through dynamics there and how we should think about revenue for 2010?

Have we troughed?

I think if you take a look at it across larger time periods and sort of even out those quarterly fluctuations, you will see a gradual trend downward caused by two things, and the biggest thing is that stocking orders are becoming a less percentage of total and as that happens, that will gradually bring down our revenue per procedure metric.

And another thing that does happen on a gradual basis, although there is noise in the system, is that customers in general become more efficient over time as the procedure numbers grow.

So I think Marshall mentioned that if you compare fourth quarter of last year to fourth quarter of this year, I think it was down by about 4%.

And that might be sort of a -- I know it's only a one-point measurement, but it's more of a better comparison than saying -- comparing two sequential quarters when you can have some more variations in a sequential rate.

Does that answer your question?

It did.

Hello?

Operator?

It looks like David Lewis is no longer in the queue.

Would you like to go on to the next question?

Sure.

[Matthew O'Brien] of William Blair.

You may ask your question.

Good afternoon and thank you for taking the question.

The procedure volume performance in the quarter was obviously very strong.

Can you guys just talk a little bit about next two or three big opportunities that you're looking at and quantify that a little bit more for us?

Matt, I think if you look at where our resources are going and where we are focused, they're really in the areas that we talk about.

And I don't think we're quick to run any victory laps on our completion with hysterectomy or even prostatectomy internationally or partial nephrectomy and cystectomy and so on and so forth.

So outside of our target areas I think you heard Gary mention a couple of procedure categories that we haven't really colored up a lot of, and that being colorectal surgery and there was some discussion of thyroidectomy and so on.

I would caution you to not run there too fast because there is a lot of opportunity both domestic and internationally in the procedures that you are used to talking to us about.

And then we will resource the others appropriately, again, not abandoning the winners that we know we have in our hand right now.

Can you just talk along those lines, Aleks, in terms of ENT, the size of that opportunity and when we can start to think about that coming on line?

Yes, I think, again, the ENT application is one that we believe has very high patient value, which has always been a great leading indicator for our ability to penetrate a market and so we're very encouraged by that.

In terms of the raw numbers, again, based on the approvals we have today, and you have to remember, this is going to be our first foray into that vertical.

And what we've learned in the past is ultimately the long-term success goes beyond that first clearance.

But that first clearance puts us in position of about 10,000 or so, perhaps a little more, US cases but o-US, you're talking about a number north of 70,000, and some would estimate as high as 100,000 or perhaps even higher.

But we're in that one for the long term, and we're very encouraged with the first clearance.

I would ask you to sort of follow that for awhile.

We're not ready to make a lot of declarations there because we just received the clearance literally a month ago.

Okay.

And then one last one on Japan, and I apologize.

I know you guys aren't providing too much in terms of guidance on that, but should we just think about that likely not being a 2010 event?

I know you're selling there already a bit, but do you anticipate any hospitals just buying in front of what will likely be a reimbursement in 2011 or a bit later?

We're working on two things in parallel.

We're working on clearing all the importation hurdles that would allow us to start placing systems.

We think we'll have an opportunity to place some.

Then we're working on reimbursement.

Reimbursement is a complex pathway in Japan because we're a new medical device and they are a single payer system.

That will likely occur procedure by procedure in the beginning.

It won't be a blanket coverage.

It will be a reimbursement for prostatectomy followed by something else.

That part, the reimbursement part, is a lot harder to penetrate in terms of what the timings will be and that will play out over time.

So I think while reimbursement is at issue, I think that the penetration of systems will be measured.

Okay, thank you.

Our next question comes from Tao Levy of Deutsche Bank.

Good afternoon.

Question on the guidance.

You're providing obviously a lot more metrics than you did throughout 2009 and I was wondering if maybe you could comment on what does that say about the environment into which you're selling and the confidence that you have now, whether it's the CapEx environment or the procedures or anything that you're seeing?

Tao, it's Gary.

I think there are a couple of things.

I think that the visibility on our procedure business and the service business has been pretty reasonable, and we've learned that utilization of systems will drive a certain amount of capital sales off the procedure business.

So on that side, I think we have some visibility.

The capital visibility is clearly better than it was a year ago but it's still imperfect and highly variable depending I think critically on a couple of factors.

One, of course, is the macroenvironment.

We saw kind of breath holding early in the year and then an exhale toward the end of the year.

It's unclear whether that pattern is going to continue or settle out.

At the same time, it's clear that procedure growth through this period has created some demand that requires response over time.

So that's kind of how we got to where we are now.

Great.

And on the gross margin side, is there anything on the service part of it, the gross margin was a little bit lower than it had had been in the past.

Is the up-take of the Si a little bit trickier?

Actually, service margins are fairly stable.

What happens is, we have expenses associated with training that go into that cost of goods sold line.

And that, in general, brings down our overall gross margin on that line.

I know you see it maybe somewhere close to, let's say, 60% or thereabouts on the P&L but it's actually closer, in reality, to 70% on just the service business.

And what will make it fluctuate is sometimes the spending on training.

Then just finally, I'd love to get your thoughts on what the strategy at the Cleveland Clinic around there, the purchase of five systems?

And were those trade-ins or upgrades?

Any thoughts there would be helpful.

Thank you.

Yes, there was actually one system that came back as part of a trade-in and five that went to the Cleveland Clinic.

Three of those five will be in the main campus at the Cleveland Clinic and two at an affiliate Cleveland Clinic hospital.

So when you talk about the strategy, I think if you look across their specialties, there is very, very strong adoption in the cardiac side, the urology side, GYN is coming up, and they're also a training center.

So it is an excellent model for us in many ways.

And so I think looking at where this could go time will tell, but it's very integrated into a number of specialties in addition to training.

Thank you.

Next question, please.

Our next question comes from Tycho Peterson of JPMorgan.

Good afternoon.

Could you start by commenting on capital deployment strategies as we think about 2010?

You've obviously got tremendous cash flows.

Just talk about some of the priorities for the year ahead.

So, we have over, as we said, over a billion dollars of cash.

We think that's a good thing.

It provides with us the flexibility to do what we want to do going forward.

You've seen us do purchases and licenses of IP where we think there's benefit in the long term.

We'll probably continue to do some of those.

I recognize that those haven't been big to date.

The only sizable expenditure this next year that we will undertake is, if you listen to Gary, he mentioned that we turn back on the construction of a facility next to our main campus.

Other than that, we don't have any immediate plan.

Okay.

That's helpful.

Maybe one for Aleks.

On cardio, can you just talk a little bit more about market dynamics there?

I think you talked in the past about 120 target cases per year.

Can you talk about how you think about uptake there?

I think what is different about the cardiac space relative to, let's say, gynecology or urology, it's a slow, steady growth, and it has been that way for a long time.

Part of it is because of the anatomy that you're working on, the fact that it is a very serious cardiac operation, and part of it is the fact that it's a pretty conservative group, and there's always longer training pathway.

And the combination of those things has made it, let's say, a bit unique in the sense that you're not seeing hyper growth immediately like you've seen in some of our other categories.

Having said that, the patient value of the centers that are performing it is excellent.

The commitment for those centers is excellent.

The demand for training is growing.

And so I think it's perhaps going to be that way for awhile.

But we are still resourcing it, and we still think there's a lot of patient value there.

The mitral valve story is probably of, the two stories between revascular and mitral valve, the mitral valve story is probably one that is getting more of the headlines, but in the centers that are committed to revasc, they are very, very bullish on it.

There isn't a lot more in the way of commentary.

I think it's steady as she goes and it's slow and steady growth.

And maybe a question just on broader utilization in the installed base.

And maybe it's not necessarily the right way to be thinking about it, but can you talk about where you think utilization can go a year from now and some of your efforts to try to work with physicians to improve scheduling and how much of a focus that is right now for hospitals?

I will start that answer, and I think maybe Ben has some other -- perhaps some quantitative support for it.

But in terms of generally speaking, the answer to that really depends on the procedures.

In other words, if all we were talking about theoretically was cardiac surgery, it would have have one answer.

If you add cardiac plus urology or prostatectomy specifically, the number expands.

You add more procedures in the vertical of urology it expands even further.

You turn on gynecology, it expands further and so on and so forth.

So in terms of how far that number could go, really will depend on how far the penetration is and how much value we add into various procedures.

So it isn't one that we necessarily point to and say we want to be at five or at six cases per week by the end of the year or anything like that.

But then in terms of scheduling, you can imagine that the more specialties that one is addressing, the potential for log jams, if you will, on capacity and getting on the system goes up.

But at the same time we have more and more hospitals purchasing second and third systems.

So those are sort of the facts.

I don't know if Ben has anything else to add.

Aleks describes the drivers.

The numbers show that we have been gradually increasing that utilization.

For the year in 2009 it was about 170 procedures per system per year.

That's up from about 150 for 2008, and so that's an increase of, I think, the about 13%.

Q4 of 2009 was actually higher.

I think we gave you enough numbers to where you can see maybe closer to 175.

So we think it's going to continue to gradually increase and, again, driven by the 35% procedure growth that we forecasted.

Okay, and then just one last one, Ben, on the trade-ins.

Are we at kind of a run rate here of 20-25 systems for the next year or so or how do you think about that opportunity?

We have two data points.

As Aleks mentioned and Gary has mentioned, we certainly encourage the trade-ins of the standards for da Vinci Si because we think the platform is easier to use.

You can probably do more procedures on them, and so we encourage those transactions, and we're not predicting how many we're going to have of those going forward.

People have asked me how many are still left out there.

It's still roughly 350 standard systems out there, something like 230 of them in the United States.

I think it's just really underlying this all, we'll do what the customer is looking for.

We're not trying to really drive it.

We're going to let the customer decide how they want to manage their inventory, and we'll help them.

Thank you very much.

The next question comes from Rick Wise of Leerink Swann.

Good afternoon, everybody.

Lonnie, let me offer my congratulations as well, and I think it is worth noting that since this whole thing began, here we are over $1 billion dollars in revenues, and congratulations on that amazing journey.

Turning to a couple of specific questions, can we talk about tax rate a little bit?

Two aspects.

One, as we think about the year ahead, Ben, should we think about tax rate starting higher at the beginning of the year and lower as you go through the year or averaging the 37%, and as we look out, as we -- obviously you have to have multiyear models, but should we assume that tax rate can work gradually lower over time?

So, Rick, this is Marshall.

The way the accounting rules work actually we put into place a structure and you start reflecting it on day one, so there really won't be fluctuation in the rate during the year barring changes in the law or the regulations.

So when Ben quotes around 37%, that's what we should see throughout the year.

As far as future, that's what we see for now.

That's the structure we put into place.

There are a lot of changes afoot in Washington, so who knows what will happen.

And so we're not predicting beyond this next year.

Okay.

But it's not an unreasonable notion that it's possible that tax rate could work higher over time?

Again, not trying to be so specific.

Like I said, we aren't predicting beyond this year.

Okay.

Guidance.

Can you give us any more color on the kind of growth rates you're assuming for da Vinci hysterectomy or DVP assumed in guidance?

Any kind of color there?

Rick, at this time, we're not breaking it out to.

Grow overall 35%, obviously with hysterectomy growing about 100% this year and prostatectomy growing 23%, hysterectomy growth is going to have to be a significant part or driver of that ongoing growth rate to maintain at 35%.

We saw on the operating leverage thought, we saw, despite a complicated year, the costs associated with launching a major new system, we did see operating income grow faster than sales this year.

Two-part question here.

Is it reasonable to think that there is the opportunity for positive leverage in 2010 despite some of your commentary and guidance, Ben, and maybe help us understand, Gary, your thinking on spending priorities and why you -- where you feel like you need to invest incrementally.

Fair question.

We have not been looking to drive really a lot of operating leverage, because we think we're really in a market development stage of the business.

We believe that strongly.

And it's clear that our priorities are to be able to drive multiple procedure adoptions, both in different procedures and also in different geographies, both domestically and internationally.

So we're making investments to be able to do in that our sales force.

We want to bring to markets new products, products that continue to drive patient value.

We want to make those investments.

You see us doing this as well.

So we're -- long story short, we're not trying to squeeze hard on the operating leverage there.

Got it.

The only other thing I would sort of add, for the years operating income grew 21% and revenues grew 20%.

I know sometimes is it's tempting to take a look at the fourth quarter, and the fourth quarter typically is our strong revenue quarter, then you see some operating leverage in that fourth quarter, but just be careful about that.

You just might want to take a look at larger chunks of time rather than just one quarter.

Of course.

Last, quickly, somebody's got to ask about the cash.

Maybe just update us on your latest thinking about cash priorities, acquisition technology, share buybacks.

Thank you.

Sure.

As I already mentioned, we've got over $1 billion dollars of cash.

We're comfortable with what we've got.

It provides us flexibility to do things that we want to do.

In the past we've used this for acquisitions and licensing of IP.

Those aren't big transactions.

The only thing that's on the table in this next year that's a little different is we're restarted our construction of a facility next door.

We don't have any immediate plans for share buybacks or dividends.

However, we do still have the approval that was given to us, the remainder of the approval that was given to us earlier in the year for another $150 million buyback.

Thanks so much.

Okay, we have time for two more questions.

Our next question comes from Vincent Ricci of Wells Fargo.

Hi, guys.

Gary, congratulations.

So I guess the first question for you guys, you had had 46,000 other procedures.

Can you just tell us which of -- quantify how many of those were not in gynecology or urology?

I don't have that number committed to memory, but I will say that a fair amount of them, as you -- I think the way you phrased the question, you could expect that a lot of those came out of that vertical.

I would say the cardiac and the general surgery procedures for the most part make up the remainder, and there is some, although under an IRB, there's some ENT procedures in there as well.

Okay, great.

In terms of the two verticals that we did kind of focus on, I have the AUA advanced program right in front of me.

You guys have two live surgery programs going on.

Are there other applications besides the ones you guys have talked about or is it strictly the two kind of -- besides radical prostatectomy, you've also got cystectomy and nephrectomy.

Is that kind of where we're still concentrating?

Think about it this way, perhaps a little broader.

The urologic oncology, the predominant culprits of urologic oncology are the prostate, the kidney, and the bladder.

So you can say that we are squarely involved in all three of those.

On the benign side, you're looking at the reconstructive procedures, i.e., the pyeloplasties, and we are squarely involved in that.

So there are other areas, and perhaps benign prosthetic hyperplasia, or BPH, we're really not involved in that but it's fair to say that da Vinci's role within the AUA is pretty large already, perhaps can get larger, but pretty large.

Okay, great.

And then in terms of IP, you guys have clearly -- you guys clearly did go on a bit of a spend for awhile.

It kind of seemed to settle out.

Is there things out there, I know you guys case a lot of patents and a lot of projects out there.

Are there things out there that you think you need to acquire rather than develop internally in terms intellectual property?

This is a general answer to that question.

I think the answer to that is always yes.

I think that there's IP that we develop internally and there's frequently IP we see out in the world that we think fits well with us, both the patents and the technology, and so we have a consistent process to look at both of them.

It's lumpy.

It's not kind of thing that happens at an even pace.

You sort of pursuit as you get it.

I think we have time for just one more question.

Our last question comes from Sameer Harish of Needham & Company.

Lonnie, congratulations on 13 great years.

Wanted to ask about physician training.

Can you talk to me a little bit about mix in physician training?

Is it mimicking what you're seeing on the procedure growth side?

And do you get good visibility on what procedure growth would look like from that training?

I would say in general, the answer is probably yes to both.

In other words, you can imagine that the number of surgeons being trained in hysterectomy is going to be larger in terms of raw numbers than prostatectomy at this stage.

We done a lot of training in prostatectomy.

After a certain point the specialty starts to take over some of those responsibilities.

In other words, one partner trains another or one leader trains another person or it gets integrated deeper into the academic medical center.

So we become more focused on driving the procedures that we are focused on and from that you can tell certainly with the demand for training is and hopefully that is a direct relationship to the procedure growth.

Okay.

And as you gain experience in prostate and hysterectomy and expanding that into new areas, can you talk a little bit about the lag between what you're seeing now on some of the emerging procedures and when you would expect to see some of those begin to really get adopted?

That's a harder question to answer.

I think if you look at new procedures, let's say, that are outside of the specialty of gynecology and urology, you're talking about really early stages.

For example, we just received ENT approval and so you're going to have to give us some time to really understand the demand curve for training and the procedures and so on.

It's too early to guess, and that's really what you're doing.

In some of the other procedures, be it colorectal or some of the others, you're missing some key elements of the product line and some of those will be coming on, and it's too early to really extrapolate that and what it might mean.

Okay.

Switching gears to the system side, you guys have talked in the past about integrating imaging, using contrast and shape sensing technology.

Can you give us an update on where those are in development?

And as you roll those out would those require system changes or are those more plug and play?

As you know, we don't give specific timing of production coming in development, but what I'd tell you is we have products across the range there.

We have things that will look like upgrades to existing products, and we have some things that are more significant than an upgrade, and those things will roll out in time.

I think that was our last question.

As we've discussed with you over the years, while we spend our time on these calls reviewing our financial performance, our team remains sharply focused on the creation of patient value, improving the efficacy of surgery while reducing its invasiveness.

I would like to share with you two of the many examples we receive daily of what this means in the lives of our patients.

Our first patient is [Mr.

Dale Gan], a patient of [Dr.

Brian Golden] of Summerlin Hospital Medical Center in Nevada.

"This is my note -- my thanks to Dr.

Golden for saving most of my left kidney.

My story is a little unusual since I had already lost my right kidney to cancer in 2002.

That whole kidney was removed in a traditional operation through a long shark bite that was awfully painful and took several months to recover from.

Recently, my doctor found a new tumor in my left kidney, the only one I have left.

I was scared I would need this kidney removed, then be hooked up to dialysis for the rest of my life.

The urologist who took out my right kidney years ago recommended Dr.

Brian Golden.

My primary doctor rated Dr.

Golden as excellent which of course influenced my decisions, but the deciding moment was when I actually met and discussed my case with Dr.

G.

He showed me my CAT scan and the tumor.

He described the operation using the da Vinci robot, robotic assisted partial nephrectomy, and showed me how much of my kidney could be saved.

He had a very reassuring bedside manner, was confident but not arrogant and answered all of my questions.

He made me feel comfortable that I had found the right surgeon for my terrifying situation.

The surgery went great.

My kidney was working just as well after surgery as beforehand.

The few little incisions weren't very painful and I was out of the hospital in just a day and a half.

When I saw Dr.

Golden after surgery, he said the pathology report said all the cancer was removed.

My primary care doctor was absolutely amazed at my speedy recovery and the difference in my incisions for the right and left kidney operations."

Another patient suffered from oral cancer and is a patient of [Dr.

Bert O'Malley] at the University of Pennsylvania who, with his partner [Dr.

Greg Weinstein], is a leader in the creation of transoral da Vinci surgery this patient writes, "Dr.

O'Malley, you have brought a miraculous change in my life.

I now can swallow normally, do not have to force-feed my medications, do not need oxygen at night and feel like a new way of life has opened for me.

How can I ever repay your kindness and skill for making this possible.

I never can, so I will simply say God bless you for your kindness and help in changing my entire outlook."

Patients like these are the strongest advocates for da Vinci surgery and form the foundation for our operating performance.

We have built our Company to take surgery beyond the limits of the human hand and I assure you that we remain committed to driving the vital few things that truly make a difference.

This concludes today's call.

We thank you for your participation and support on this extraordinary journey to improve surgery, and we look forward to talking with you again in three months.