直覺手術 (ISRG) 2010 Q1 法說會逐字稿

Welcome everyone.

Thank you for standing by.

All lines are in listen-only mode until the question-and-answer session of today's call.

(Operator Instructions).

Today's 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.

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

With me today we have Gary Guthart, our President and COO, Marshall Mohr our Chief Financial Officer and Aleks Cukic, Vice President of Strategic Planning.

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

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

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

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

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

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

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

Gary will present the quarters business and operational highlights.

Marshall will provide a review of our first quarter financial results, Aleks will discuss marketing and clinical highlights, and I will provide an update to our financial forecast for 2010.

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

With that I will turn it over to Gary.

Thank you for joining us today.

In this first quarter our team has executed well.

We continue to see broad interest in da Vinci Surgery by our customers across a variety of procedures, which is is reflected in our strong financial results for the quarter.

With regard to procedures, we experienced continued growth in numerous specialties.

Neurologic and and gynecologic procedures continued to lead the way and we see early signs of growth in both general and colorectal and thoracic procedures.

We are also pleased that European procedure growth was strong in the quarter.

While the diversity of procedures is encouraging, it presents both opportunities and sales management challenges.

The breadth of procedures is commanding increased investments in our sales force and is reflected in our recent hiring.

Turning to systems, US sales were robust.

We did however see an increase in pressure on hospital capital budgets in Europe.

Where capital sales conversations mirrored those in the US during the first half of last year.

Lastly we sold our first systems in Japan this quarter post our Shonin approval.

We'll discuss Japan in greater detail later in the call.

As we move to highlights for the first quarter, recall that Q1 2009 financials included a revenue deferral associated with the introduction of the da Vinci Si System.

In my year-over-year comparisons, I will compare financial performance, excluding the deferral, to giver a more accurate picture of relative performance.

With that as background, operating highlights for the first quarter are as follows, procedures grew 37% over the first quarter of 2009.

We sold 104 da Vinci Surgical Systems, up 38 from 66 during the first quarter of last year.

Total revenue was $329 million, up 58% over last year.

Instrument and accessory revenue increased to $123 million, up 50% over last year.

Total recurring revenue grew to $173 million, up 43% from prior year, and comprising 53% of total revenue.

Net income was $85 million, up 112% over last year.

We generated an operating profit of $157 million before non-cash stock option expense, up 78% from the first quarter of last year and representing 48% of Q1 revenue.

With operating profit percentage at this level we do not expect to pursue further margin expansion.

We will continue to share productivity gains with our customers and we will continue to invest in R&D and long term growth opportunities for business.

We ended the quarter with $1.396 billion in cash and investments, up $224 million from last quarter, and up $574 million from last year.

Significant cash outlays during the quarter included $16 million invested in intellectual proper and fixed assets.

Excluding the impact of these outlays, as well as $93 million from stock proceeds and $6 million used for working capital, we generated $153 million in gross cash flow from operations, which is 180% of our reported GAAP net income in the first quarter.

I share this number with you because we believe that it is the best measure of the economic horsepower of our Company.

As you know, we continue to make significant investments in Research and Development and manufacturing.

Our largest investments focus on four areas.

First, we are extending our issuant offering through major additions like multifunction energy devices and robotic stapling.

Second, we are improving and expanding our imaging capabilities.

Third, we are developing new patient side mechanisms, and finally we are creating surgical networking and training technologies.

Overall, we are pleased with the progress of our product development teams and our technology partners, both in the depth of their achievements and in the speed with which they're accomplishing them.

Lastly, as we enter new surgical markets and drive into new product arenas, we will investment in building our team and expanding partnerships and acquiring those technologies that is can make a difference to robotic surgery.

This quarter, we added 94 people to our team, predominantly in sales, manufacturing and R&D, bringing our total team to 1,357 employees.

And with that, I will pass the time over to Marshall, our Chief Financial Officer.

Thank you, Gary.

Prior to providing you with the details of our first quarter results, I would like to take -- I would like to provide you with a quick review of the deferral accounting that took place during 2009, which sets in the contest the proper comparables.

Last year we offered certain first quarter 2009 customers the opportunities 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 million of revenue in the first quarter of 2009 comprised of $18 million of system revenue associated with system upgrade offers and $2 million of accessory revenue.

We recognized $14 million of the total $20 million deferral in our second quarter of 2009, and the remaining $6 million in the third quarter of 2009.

I will now walk you through our revenue results with comparisons to the first quarter of 2009, as though the deferral had not occurred.

Our first quarter revenue was $329 million, up 58% compared with $209 million for the first quarter of 2009, and up 2% compared with $323 million for the fourth quarter of 2009.

First quarter revenues by product category were as follows, first quarter instrument and accessory revenue was $123 million, up 50% compared with $82 million for the first quarter of 2009, and up 8% compared with $113 million in the fourth quarter of 2009.

The increase compared with prior quarters reflects procedure growth, and higher initial stocking orders.

The amounts of instrument and accessory revenue we realized per procedure including initial stocking orders was approximately $1,970 per procedure, which is approximately $170 higher than the first quarter of 2009 and approximately the same as the fourth quarter.

The year to year increase primarily reflects higher stocking orders in the current quarter and customer buying patterns as we believe that customers reduced inventory levels in the first quarter of 2009 in the face of a deteriorating economic environment.

We expect instruments and accessories per procedure to decline over time given that initial stocking orders have a lower impact on a larger install base.

First quarter, 2010 systems revenue of $155 million increased 77%, compared with $88 million of systems revenue for the first quarter of 2009, and decreased 4% compared with $162 million of systems revenue for the fourth quarter.

We sold 104 systems in the first quarter of 2010, compared with 66 systems last year, and 110 systems last quarter.

80 of the 104, or 77% of the units sold in the quarter, were da Vinci Si Systems.

There were 17 da Vinci Standard Systems traded in this quarter compared to six in the first quarter of 2009 and 23 last quarter.

First quarter system revenue also included $5 million of upgrade revenue, compared to none in the first quarter of 2009, and $7 million in the fourth quarter of 2009.

Our first quarter average sales price per system, including all da Vinci models but excluding upgrades in the revenue deferral, was $1.45 million, an increase from $1.33 million realized in the first quarter of 2009, and an increase from the $1.41 million realized in the fourth quarter.

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 compared to the fourth quarter reflects favorable customer and product mix.

We expect ASPs over the next several quarters to return to historical levels.

Service revenue increased to $51 million, up 29% compared with $39 million last year, and up 6% compared with $48 million last quarter.

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

Total first quarter recurring revenue comprised of instrument, accessory and service revenue increased to $173 million, up 43% compared with the first quarter of 2009, and up 8% compared with the fourth quarter of 2009.

Recurring revenue represented 53% of total first quarter revenue compared with 58% in the first quarter last year 50% last quarter.

Revenue by geography was as follows, non-US revenue represented 21% of our total revenue in the quarter, compared with 25% of total revenue in the first quarter of 2009, and 22% of total revenue in the fourth quarter of 2009.

Overall procedures grew faster outside of the US.

We sold 24 systems outside the US compared with 22 in the first quarter of 2009 and 30 last quarter.

Seven of the systems sold in the first quarter were to early thought leaders in Japan.

We remind you, however, that adoption in Japan is expected to proceed slowly and therefore we expect system volume to decline in Japan quarter to quarter.

Excluding Japan, non-US system sales decreased attributable to reduced capital spending, and a challenging European economic environment.

Moving on to the remainer of the P&L, let me remind you that there were no costs deferred in conjunction with the first quarter 2009 revenue deferral, and therefore, the $20 million deferral had an equal impact on revenue, gross profit and operating income.

Gross margin in the first quarter was 73% compared with first quarter 2009 gross margin excluding the impact of the deferral of 71%, and compared with fourth quarter 2009 gross margin of 72%.

The increase in gross margin reflects increased system ASPs, material cost reductions, and absorption of fixed costs over a larger revenue base.

First quarter 2010 operating expenses of $111 million were up 32% compared with the first quarter of 2009 and up 6% compared with the fourth quarter.

The quarter-over-quarter increase reflects costs associated with employees added during the quarter and increased investment in research and development.

We added 94 employees during the quarter, including 49 employees in the sales, service organization, as we continue to expand our clinical sales force, and 39 employees in operations as we continue to grow manufacturing capacity and invest in research and development.

First quarter 2010 operating income was $130 million, or 40% of sales, compared with $65 million or 31% of sales for the first quarter of 2009, excluding the impact of the deferral, and $128 million, or 40% of sales, for the fourth quarter of 2009.

The first quarter 2010 operating income reflected $27 million of non-cash stock compensation expense compared with $23 million for the first quarter 2009 and $25 million last quarter.

The growth in non-cash compensation reflects our annual grant made February 15th of each year.

Our effective tax rate for the first quarter of 36% was lower than the 2009 rate of 41% reflecting the implementation of our international tax structure.

Our net income was $85 million, or $2.12 per share, compared with $40 million, or $1.02 per share, for the first quarter of 2009 excluding the impact of the deferral and $78 million, or $1.95 per share, for the fourth quarter of 2009.

Now moving to the balance sheet.

We ended the first quarter of 2010 with cash and investments of $1.396 billion, up $224 million compared with December 31, 2009.

The increase during the quarter reflects $153 million of cash flows from operations and $93 million from the exercise of stock options, partially offset by $16 million of capital expenditures.

$3 million of our capital expenditures relates to the construction of our new manufacturing facility next to our corporate headquarters in Sunnyvale.

We anticipate that building to be completed in early 2011.

Our accounts receivable balance decreased to $180 million at March 31st from $205 million at December 31st.

The decrease in accounts receivable reflect it is timing of system shipments.

Our net inventory increased to $69 million at March 31st, from $58 million at December 31st.

We increased inventory during the quarter, since we believe that it -- that inventory at December 31st was below optimal levels.

We will likely continue to increase inventory levels in future quarters.

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

Thank you, Marshall.

During the first quarter we sold 104 da Vinci Systems, 80 in the United States, 11 in Europe and 13 in rest of world markets.

As part of the 104 system sales, 17 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 install base during the quarter which brings to 1,482, the cumulative number of da Vinci Systems worldwide.

1091 in the US, 264 in Europe and 127 in rest of world markets.

44 of the 104 systems installed represented repeat system sales to existing customers.

Also during the quarter, nine customers purchased upgrades to convert their da Vinci S Systems into da Vinci Si Systems.

The outlier this quarter was Japan with seven da Vinci placements.

As was stated earlier, several of these placements were sold to early Japanese thought leaders who are anxiously awaiting shown in clearance and importation rights.

Although we are pleased with these sales, we don't expect this rate of Japanese purchases to continue for the near future.

Clinically we had another nice quarter with good sequential procedure growth within our targeted procedures.

Da Vinci Hysterectomy and Prostatectomy showed solid growth, whereas partial Nephrectomy, Sacral Colpopexy, ENT and colon and rectal procedures showed large percentages of sequential growth.

Within our hysterectomy business, for the first time in several quarters, dVH for malignant conditions showed larger sequential growth than dVH for benign conditions.

It is difficult to say for certain why that was, but it is our belief that three factors probably played a role.

One, the Q1 reset of copayment minimum spending, two, high unemployment rates, and three, the difficult sales force task of simultaneously managing multiple high growth procedure businesses.

The latter we can do something about, in fact, we recently made some adjustments to our sales structure to better support the large benign hysterectomy market.

During the quarter nearly 300 da Vinci related clinical publications and abstracts appeared within various peer reviewed journals.

With the current trend in health care policy moving directionally toward comparative effectiveness research, it is our belief that we will be well positioned in the evidence based environment.

With volumes of peer review already in print, as well as more due to be published, clinicians, policy makers, and patients are in position to make informed health care decisions.

As we have said before, comparative effectiveness research done well is something we very much support.

As it pertains to dVP versus open prostatectomy, an excellent comparative study out of Vanderbilt University was published in the Journal of Urology.

The paper emanated out of the University's Department of Urology and Biostatistics, and is entitled Robotic Assisted Laparoscopic Prostatectomy Versus Radical Rectopubic Prostatectomy for Clinically Localized Prostate Cancer, Comparison of Short Term Biochemical Recurrence Free Survival.

1,904 men represented the cohort study between June of 2003 and January of 2008, where 491 received an open retropubic prostatectomy and 1,413 received a dVP.

As you might suspect, the study is filled with detailed analysis from which I will spare you today, but I would encourage those of you interested to pick up a copy and read through it yourselves.

To summarize, the three year biochemical recurrence free survival rate was statistically similar between the da Vinci Prostatectomy and the Radical Retropubic Prostatectomy groups on the whole.

As well as when stratified by pathological stage, grade, and margin status.

On a multivariable analysis, extra capsular extension pathological grade seven or greater, and positive surgical margin were independent predictors of biochemical recurrence, while surgical approach was not.

The authors concluded by saying, and I quote, the likelihood of biochemical recurrence was similar between groups when stratified by known risk factors of recurrence.

Surgical approach was not a significant predictor of biochemical recurrence in the multivariant model.

Our analysis is suggestive of comparative effectiveness for robotic assisted prostatectomy, close quote.

Of all of the desired end points associated with prostatectomy, none is more important than cancer control.

One of the fastest growing procedures that you haven't heard a great deal about is da Vinci Sacral Colpopexy.

Sacral Colpopexy is performed for the condition of vaginal vault prolapse and has an estimated annual US market opportunity of between 60,000 to 70,000 patients.

The gold standard surgical approach for this debilitating condition is an open Sacral Colpopexy, but since this approach requires a laparotomy, which is associated with longer hospitalization and increased blood loss, the postoperative road to recovery is often slow and painful as compared with less invasive approaches.

Traditional laparoscopic approaches were introduced nearly 15 years ago, and in the hands of skilled laparoscopists can be an alternative to the open approach.

However, laparoscopic sacral colpopexy is considered technically challenging due to its limitations such as lack of depth perception and surgical access required for suture difficult suture placements.

Da Vinci is rapidly proving capable and overcoming these clinical and technical challenges.

A paper out of the Department of Obstetrics and Gynecology, at the University of Rochester Medical Center entitled Recovery After Robotic Assisted Laparoscopic Sacral Colpopexy, The Patients Perspective, authored by McNally, Buschbaum, et al, look closely at the patients perioperative experience.

In their analysis, patients were queried about resumption of activities such as work, driving, bowel function, whether recovery went as expected and whether they would recommend this surgery to others.

Use of pain medication, pain scores and perioperative data were collected.

And with 21 patients, which is is admittedly small, but smaller than desired sample sizes is the reality of evaluating procedures that are still in the early part of the adoption.

Be that as it may, I think it is pretty significant when 100% of the respondents stated that they would recommend a da Vinci Sacral Colpopexy to a friend.

72% indicated that the recovery went better than expected.

28% felt that the recovery went as expected and zero felt that the recovery went worse than expected.

Patient advocates have been a powerful component to the success of several da Vinci procedures.

So we are encouraged when we hear the early reports on an emerging procedure support this trend.

Over the past few quarters, you have heard us describe substantive product development projects aimed toward the general and colorectal surgery markets.

We have also highlighted that colorectal and specifically low rectal cancer receptions are among our fastest growing procedures.

The number of peer reviewed publications in these specialties has grown rapidly.

And this past quarter, was no exception.

In the Annuals of Surgical Oncology, a study entitled Multicentric Study on Robotic Tumor Specific Mesorectal Excision for the Treatment of Rectal Cancer was published.

It was a prospective three center study on 143 consecutive patients, which for the record, was analyzed by and independent researcher.

The three centers included City of Hope National Cancer Center in California, the European Institute of Oncology in Milan and Hospital San Mateo in Spoleto, Italy.

In their commentary, the authors stated, that to the best of their knowledge, the present study evaluating robotic assisted tumor specific rectal surgery represents the largest series ever published with the longest follow up period.

The majority of the patient cohort had either mid or low rectal tumors and 65% received neoadjuvant chemoradiation.

Even though both conditions are known to render surgical dissection demanding, successful excisions were successfully completed in over 95% of the patients.

And successful restoration of bowel continuity was achieved in 78.3% of them.

Margin clearance was obtained in all but one patient, with the number of harvested nodes that compares favorably with that of open and laparoscopic series.

The survival curve analysis revealed a three year overall survival rate of 97%.

And isolated recurrence -- local recurrence were not found during mean follow up of 17.4 months.

When discussing the technical differences between laparoscopy and robotic approaches the authors stated and I quote, laparoscopy offers an optimal tumor specific mesorectal excision, or TME, with intact pelvic fascia and even greater accuracy than the open technique, but use of non-articulated forceps, camera trimmer and surgeon fatigue make this procedure demanding and restricted to a few centers.

Robotic TME seems to enhance microdissection accuracy leading to a better and more comfortable mesorectal dissection with a lower risk of circumferential resection margin, close quote.

Later the authors went on to say, and again I quote, we feel that robotic surgery could dramatically change the standard approach to rectal cancer employed to date, close quote.

This week, the twelfth World Congress of the Society of American Gastrointestinal and Endoscopic Surgeons, of SAGES, convenes in Landover, Maryland.

This year, Intuitive will have a bigger presence than in years past.

Clinical prototypes of our single site product for single incision da Vinci Surgery will be on display at our booth, but to be clear, these products are early within the FDA clearance process, and should not be viewed as commercially available products at this stage.

However, da Vinci multiport general and colorectal surgery products and procedures, which is are commercially available, will be discussed and featured within various conference sessions.

Our product development and marketing groups have been active in the area of general and colorectal surgery.

The reason is simple, it is our belief and the belief of many of our customers that the benefits of da Vinci Surgery can positively affect a number of patients being treated within these specialties.

Though we are in the early phases of procedure adoption within these specialties the early indicators appear positive.

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

Thank you, Aleks.

I will be providing an update to 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 non-cash expenses to provide you with visibility of our expected future cash flows.

Starting with procedures, as Gary mentioned, our procedures this past quarter grew 37% over the year ago first quarter, we continue to expect our total procedures to grow approximately 35% for the year, from the approximately 205,000 procedures performed in 2009.

Moving on to revenues, based on the upside we recorded in the first quarter, we are increasing our forecast for annual revenue growth, to 27% to 30%, which is up from our previous estimate of 25%.

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

With regard to our Japan revenues, as previously mentioned, while we sold seven systems in Q2 we do not expect to maintain this level of quarterly system sales in Japan for the balance of 2010.

With regard to gross margin, the 73% margin we achieved in Q1 was higher than in previous quarters due to higher ASPs on systems and manufacturing efficiencies.

We expect ASPs to return to historical levels.

As Gary mentioned -- as Gary indicated, we will continue to share productivity gains with our customers, and as a result, we expect gross margins to be approximately 72% for the year.

Moving to operating expense, we are making significant investments across multiple areas of our business, particularly our sales force, manufacturing, and R&D.

We now expect our total GAAP operating expense to grow by 27% to 29% in 2010, compared with our previous forecast of 25% growth.

In terms of non-cash expenses, we expect to report stock compensation charges of approximately $122 million in 2010, which is a little lower than our previous forecast of $127 million.

In addition, previous purchases of intellectual property are scheduled to amortize in our R&D line at approximately $15 million for the year.

Other income, which is mainly comprised of interest income, is expected to come in between $16 million to $18 million for the year.

With regard to income tax, as Marshall mentioned earlier, we have begun taking advantage of the international tax structure created to report a lower tax rate this year.

We recorded a 36.2% tax rate for Q1 and we expect to record the same rate for the full year.

This is a significant improvement over the 41% tax rate we reported for 2009.

For calculating earnings per share, we ended the first quarter with 39.2 million common shares outstanding and approximately 5.1 million option shares outstanding.

Depending on the average stock price this year a portion of the 5.1 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 Q2 will be approximately 40.6 million shares, and for calculating EPS for the year we estimate it will be approximately 40.8 million shares.

Finally, regarding our cash flows, since we are forecasting to report over $137 million in non-cash stock compensation and amortization expenses for the 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.

Once again, cash flows from operations in Q1 were $153 million compared to our net income of $85 million.

And with that we would like to open the call to your questions.

Thank you.

(Operator Instructions) One moment while we wait for questions.

Operator, can you check to see that the callers can actually dial in for questions?

I will double check.

(Operator Instructions)

Operator, I just received a message that it is not working on their end.

It looks like it has just come up.

Okay.

I have a question from Tao Levy.

Good afternoon, it is Tao from Deutsche Bank.

So, first question, you mentioned on the call a comment about sharing productivity gains with customers, and I am just wondering if you can go into that a little bit more, you talk about sort of discounts providing free equipment, I just wasn't sure about that.

Thanks.

Yes, it is Gary, just a combination of things.

I think one thing is that as we move into more price sensitive procedure markets, we expect that margin levels may fluctuate.

The other thing is as we bring on line technologies for training and networking, things like simulation, those are opportunities to help our customer and may have a different margin profile.

Thanks.

That's helpful.

Also you talked about deliver out the sales force adds, I was wondering if you could go into are you adding them by indication, are you adding them internationally?

And then also just lastly on the international front, in Europe, with the headwinds you were seeing, is that -- was that new from the beginning of the year?

Did they start at the end of last year?

Because Q4 is pretty robust, Q1 obviously a little bit choppier, and is that kind of what you are seeing going forward?

Kind of continued choppiness until their macro environment improves?

Thanks.

I will let Ben take that.

Okay.

I think the first part was the sales force, yes, we are -- as I mentioned we added 49 people to our sales and marketing group, and about 40 of those were in the field this past quarter.

So, part of that comment is we are still adding quite a few people to the sales force, and we continue to hire a lot of folks.

With regard to the last part of that question, European demand, one thing I would say is that I just want to point out, procedures in Europe grew very well in the quarter, and which makes us feel good about the overall health of that business.

System sales were down in the quarter, and you are right, they did fluctuate a little bit from Q4 to Q1, but generally speaking we think that there's a challenging economic environment in Europe and that's making system sales in Europe under some pressure.

How long that is going to last we don't know.

Right.

I don't know that it is anything different than you are seeing in the general descriptions of the broader economic markets.

Okay.

Thanks.

Our next question is from Ben Andrew.

Good afternoon.

Just wanted to follow up on something Aleks that you mentioned, the notion of changing the sales structure to better support benign hysterectomy, can you talk about that a little more?

Yes, and again I think I would ask you to not overstate that.

In other words we've added some GYN specialist in the area.

The focus, again, if you look at with respect to the GYN community and specifically the benign GYN segment, it is really spread out.

That's a procedure that's done in a lot of different places, and there are a lot of people that own large practices.

So we are really trying to focus some specialists if you will in that area, so they don't have to make the decision on should they go and support a prostatectomy case or a partial nephrectomy case.

Believe me there's a lot of integration that is going to be natural in the sales organization, but we are really looking to bolster that side a little more.

Do you see a similar dynamic as you move into some of these other procedures, because you are obviously talking about some good growth and a pretty wide variety of procedure codes.

So you have obviously done this in cardio, you are doing it about now in GYN.

Do you see that as something maybe you end up with more frequently?

I don't think we are in any position to say this is any sort of a long term stretch.

I think we are looking at it from a -- the perspective of where is the opportunity and what are the vital few things we can do to really attack that opportunity right now.

Longer term, based on once a product is put out, once there's clear understanding of the choreography of the sales persons territory, those things will get visited, but it is way too early to say that it should be something you should expect in the future.

Okay.

Then just briefly on Japan, the seven systems that went out, do you have a sense of what those thought leaders will be doing with the product before you get the shown in and really are able to move forward, and promote the product?

So we -- we do have the shown in, so they can go ahead and use it.

We have basically all indications that we have in the US except for pediatric, cardiac although we do have thoracic, and ENT.

So they can use it.

It is reimbursement that we don't have yet.

We will see a mix of those different procedures across that set of customers.

Okay.

So in terms of not having the reimbursement though, how does that constrain you in the near term with the product?

I think until we have reimbursement the broad adoption will be constrained.

And that's because of the way they have to go through their mixed billing process.

In other words there's not really a mechanism for them to do private pay.

Okay.

Thanks.

David Lewis has a question.

Hi, this is actually James in for David.

Hi,.

I had a question about the EU market.

How is the -- obviously very strong procedure results over there, but how is the procedure mix and adoption curve OUS developing compared to the US?

And is prostatectomy still the driving force on the OUS growth or are you seeing a little bit of a different development there?

I think generally speaking there has been a lag between outside marketing -- outside the US markets and the US.

So the answer to the second part of that question, yes, prostatectomy is a big driver outside of the United States.

It is still a driver within the United States, but it is a bigger driver outside of the United States as it pertains to the percentage of overall procedures.

So if you look at the GYN side, there is a lag there which you would expect.

The numbers in terms of a percentage sequentially or from the past few quarters has been strong, but it's at a much lower base.

So I think in general, it is our expectation that there will be a lag, the OUS markets will lag the broader US market.

Now there may be exceptions on a country by country basis, but generally speaking that's the case.

Right.

As you try to make a bigger push into general and colorectal surgery, what gives you the confidence there that you can be as successful in general surgery both from a share and margin perspective, where there's much more focus and pressure on procedural cost in those areas?

I think if you look at -- and I think you started the question correctly, with the separation of general and colorectal and I think you can continue to subsegmentize it even further.

So I think what we have always believed is where there's great patient value, we stand a very good chance to be rapidly adopted.

Now, within all of those procedures, I should say within some of those procedures in the broader category, you find that laparoscopy has been introduced, or had been introduced 15 or as many as 20 years ago in some of those areas, but the penetration is very low.

Why, because it is technically demanding.

And so what we have found in the past is where those procedures have been technically demanding laparoscopically where we can prove capable we tend to have rapid adoption.

We are not saying anything about margins in those areas or really giving you anything beyond that, other than if we can find procedures with high patient value, which we believe there are several, then we believe we will be successful.

Okay.

Could you give us detail on what the two or three most attractive general or colorectal procedures might be for you?

I think, if you looked at the -- if you looked at it by some of the peer review literature that's out there or the anticipation from the surgeon categories, low rectal cancer really sticks out.

If you look at low rectal cancers there is laparoscopic colorectal surgery being done all over the United States and all over the world, but when you get to low rectal cancers those tend to be restricted to a few centers, high volume centers.

There seems to be a lot of consistency between that anatomy, obviously, and the male pelvic anatomy and working in prostatectomy.

The same challenges that existed in laparoscopic prostatectomy exist in laparoscopic low rectal cancers.

So there are some indicators there that I think are favorable.

When you move into other areas, such as -- again now moving up into general thoracic, sort of non-cardiac thoracic operations, that could be a large area, and again I think the same thing can be said there.

Within general surgery, we will see it is too early, there's different platforms that, as I mentioned, we are showing, and we will just see where some of those products land.

Great.

Thanks.

I will jump back in queue.

Our next question comes from Tycho Peterson.

Hi, good afternoon.

Maybe just coming out of the conference in Orlando this week, can you talk a little bit more about your thoughts on single port and maybe talk a little bit about the market opportunity.

How attractive is the market beyond gallbladder for that initial product and any color you can give us around how you are thinking about pricing or consumable use would be helpful?

I know it is early, but --

Yes, in that -- it is early and therefore there's really not a lot of depth that I am going to -- or any of us really will go through at this point.

As a reminder, we are not through the FDA.

We are certainly going to be very cautious and careful recognizing that we are not even approved yet, so we are not going to make any claims.

I think generally, from a 5,000-foot level, when we look at some of those procedures -- if we look at where the multipuncture or the multiport da Vinci procedures have not been able to penetrate, they tend to be in some of the simpler, quote, simpler procedures within general surgery.

The single port -- so anything we are able to really pick up in that area, we look at it as accretive.

And beyond that it is really hard for me to go into great detail, whether it be laparoscopic cholies, or some of the other high volume, low procedures -- low technical challenging procedures, it is hard to say.

We will wait until it comes out until we start doing some procedures in abundance and we can start looking at the data and really determining what the value is going to be.

Okay.

Can you talk a little bit about how the transoral is doing?

You talked about, I think last quarter, about how some of the initial ENT procedures, how is that ramping?

If you look at it, again as a reminder, coming off of a small base on the sequential basis, if you look at the -- when we look at the procedures, there was very strong growth on a sequential base, but it is off of a small base.

If you look at the interest within the community, and as you mentioned, I think you said you were at the world cup -- the World Congress, on robotic surgery, the expectations I think were exceeded in terms of the number of ENT surgeons that attended that conference, and that attended the various sessions.

If you look at the request for training and some of the other early indicators, they all appear positive.

We are pleased with the early progress.

We know in our minds and the minds of a lot of our customers that there is high patient value there, and we get excited about procedures where we can can do that.

Could you maybe also comment just briefly on how you view the competitive dynamic with external being radiation therapy, there was a new act introduced yesterday from Varian and clearly they have talked more about trying to go after prostate a little bit more aggressively.

Can you just comment on whether you feel a need to fund more clinical studies or how you view the competitive dynamic there?

Yes, there are several studies on going that look at prostate cancer treatment versus -- between open surgery, robotic surgery and different forms of radiation therapy.

I think the way we look at it is the patient population is segmented.

So, for the younger patients, surgery makes a lot of sense, there is a lot of data to indicate that surgical resections result in better long-term cancer outcomes than radiation.

And where the discussion comes in is kind of the patients age, and I think we will have to see.

Certainly not ready to make any claims about what their new products can or cannot do.

We have several studies I think in the works that we will publish the next few years.

Last for Ben, any updated thoughts on capital deployment priorities this year.

You obviously talked about the cash you have built up.

Well, why don't I take that.

As, as we look at the cash we really look at it in four buckets, the first bucket is really where in organic need do we have a requirement for cash infusion.

We have been doing that quarter over quarter and we will continue to do so.

We also look out at technology partnerships that we can initiate or accelerate, and acquisitions of technologies that fit well with us.

Again we have done that as we have gone and the cash gives us the flexibility to do that as we need it.

We will look at returning cash to shareholders as kind of an anti-dilution measure when the time is right where it makes sense.

And of course we like to keep some for flexibility.

It really is that same set of priorities and it really is looking at it quarter after quarter and doing what makes sense as we see it.

Okay.

Thank you very much.

Our next question comes from Vincent Ricci.

Hi, can you hear me okay?

Yes.

Okay.

First question for you is with regard to a product you have showcasing at stages, the simulator product that's presently on display, what is your strategy for that and what do you think the market opportunity would be?

We really look at that as something that can supplement training and the goal really simply is to get more comfortable surgeons faster.

We don't look at that as a big revenue of opportunity as a direct product lines and we are not looking out and saying this is a huge revenue opportunity in and of itself, we really see it as a way to have good outcomes sooner with our existing products.

So you should not be looking at that and modeling with the big revenue stream off of simulation is.

I think there's a lot of interest in it and a lot that makes sense.

I would view it that way.

Where exactly would you record revenues from that in your P&L?

It is a -- it's a physical product, but I think what Gary is mentioning is that the intent of that product is not to be a significant revenue generator, but to be helpful in all of the training we do with surgeons.

As we get closer there we can answer that question.

Okay.

Great.

Since you called it out part of the R&D we have been talking a little bit more about colorectal, can you update us on the progress you have made with getting a surgical stapler on the market?

The product, again this is a reminder, we did a licensing deal a while back, and we told you at that time and in subsequent quarters that the project is moving forward.

We haven't put any timelines in place as to when it is going to be launched.

I would just say that the teams are very well resourced, they are very energized and we are pleased with the progress they're making.

Okay.

Great.

Lastly, you touched on this a little bit, but can you talk to us -- you have talked about adoption curves from procedures in past.

You talked a little about the adoption curve internationally for gynecology and specifically dVH.

You broke up a little bit.

Gynecology and specifically dVH?

Yes, that's correct.

Is your question?

Again I would say that is a reminder, if you looked at -- when we looked back retrospectively at the dVP adoption curve between US and OUS, we have found it was lagging by a couple of years.

If you looked at the overall numbers and you looked at the adoption rate, and so on.

Having said that, there were countries within Europe that looked very similar to the United States.

I would say with dVH, it is lagging.

However, the number's small, but on a sequential basis it is growing -- it grew very well this quarter.

It is too early to say which countries are going to lead in that, but I think it is fair to say that the dVH for malignancies is being adopted, let's say more rapidly or more uniformly outside the United States than dVH for benign.

We have time for two more questions.

Thanks, guys.

I'm sorry, was Mr Ricci done with his question?

Please.

I just going to say we were done.

Thank you for taking the questions.

Yes.

I am sorry.

I am having a hard time understanding.

Should I move to the next question?

Yes, please, operator.

Rick Wise has a question.

Hi, it is actually [Aileen Salares] for Rick Wise.

Congratulations on another very strong quarter.

Let me start with asking a capital spending question.

I know you discussed Europe in quite a lot of details, but turning to the US, the placement here seemed very strong, in fact, if I have this correctly, they didn't even decline sequentially in what is supposed to be a seasonally weaker first quarter.

Now as the economy rebounds, do you think we can see an acceleration in US da Vinci SI placements given that you do have a new product cycle as well?

Any thoughts that you might relate on the capital spending environment here would be appreciated?

This is Ben.

You are right, we had a pretty strong quarter in the US.

Again from a broad standpoint we take look at the procedure growth, and in the long term system placements are going to be a factor of the need for those procedures -- those systems based off of the procedure growth.

And procedures are growing pretty well, as we mentioned we are still forecasting 35% procedure growth in the United States.

I'm sorry, worldwide, and that will lead to system sales.

But, without speculating too much because these things do tend to vary quarter to quarter.

They were really strong quarters in both Q4 and Q1 and I don't know that it would be a fair thing for you to start modeling off of that and then expecting acceleration off of those numbers.

We are not being really specific about it, but we are giving you some top line guidance on revenues.

Okay.

I do appreciate that.

Secondly, not to pick on you again, but gross margins you are giving the guidance that 72%, but again the last few quarters you have been above that already.

Why should gross margins go down so significantly in the next couple of quarters then?

Actually, this is the only quarter I recall that is was 73%, in Q4 it was 72%, and than the previous quarters it was lower than that.

Pricing has been very consistent.

So since we launched the SI in Q2 of 2009, all of our pricing for our products has been exactly the same.

And you see a little bit of fluctuation due to product mix and customer mix.

I think hat's probably just going to be the normal fluctuation you are going to be seeing.

If you take a look at our historical average on the mixes that we've seen, we expect it to come in at 72%.

Okay.

And maybe one more, can you update us where you stand with reimbursement in Japan, is there any timelines here that can be forecast?

Are we several months away from getting any reimbursement in Japan?

Are we years away?

How do we think about that?

Right now, it is too soon to call.

And so we are working through with our partners and with the Government how to approach it, and as we get to know more we will let you know.

Okay.

And let me throw one last one, we are at [stages] as well, and I appreciate the comment on colorectal procedures, but there is quite a bit of talk about everything else here like bariatrics, colonoscopy, including robotics and I am just wondering how -- traditionally, this has not been in your sweet spot so to speak because these have been the easy laparoscopic procedures.

How close are you to this opportunity now, and is there any instrument that you need to develop, is there any study that you need to do, are you making any sort of a push into these type of procedures, and how big is colorectal in the US in terms of cases?

The answer to most of those questions is yes, we will need instrumentation, we will need training pathways, we will need to push for peer review data and so on and so forth.

The answer to that is most often going to be yes any time we move into new areas.

And so, as far as predictions of where the adoption might be into which of those subsegments, as you said, it is difficult to say and we won't speculate.

But in terms of overall size of markets, if you look at the GI opportunity, and you look at the colorectal opportunity, I believe estimates in the United States are that it could approach 200,000.

So, I am pleased to hear that there is a lot of excitement around all of those areas.

That is motivating, certainly for us and that's why we are there.

I think we have time for one more question, operator.

Thank you.

Thank you.

Our final question comes from Sameer Harish.

Hi, thanks for taking the question.

I thought I would start off -- you talked on the call about focusing on sales in the GYN market, does this open the door for more interaction at the patient level, possibly direct to consumer type of marketing?

I wouldn't read that into the comments.

I think, again, our -- what we really strive for is providing patient value, and we understand the chain of events there.

There is a hospital customer, there is physician customer and they are the people that own the patient.

What we certainly do is provide a lot of information that patients can access to help them sort of narrow their search as to the various opportunities that are out there.

We will always do our best to provide as much information as we can.

Okay.

And in terms of the interaction that you are seeing from a customer level, at the website, or through the phone, has there been any change in the way that customers are approaching the Company in terms of the procedures that they asking about or does it mimic the current mix of prostate versus hysterectomy?

Can you talk about that?

I can't think of any per se outliers in there.

I can say that there is nothing remarkable that stands out in that that is different from what our expectations might be.

Okay.

And lastly, I know you don't typically talk about pipeline products, but can you give us a little bit more detail on the pathway to getting a [still] approved in the US?

Again, the FDA clearance -- we are in discussions with the FDA, let's put it that way, but in terms of the process or the timeline, there's really not a lot more we can comment on at that point.

Okay.

Thank you.

That was our last question.

As we have said previously, 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.

I hope the following experiences give you some sense of what this means in the lives of our patients.

One patient is in Rhonda of Florida.

Rhonda describes her experience as follows quote, although I have had a uterine fibroid for years, I have successfully been able to avoid surgery.

I had no symptoms and the fibroid was causing no problems so I couldn't bring myself to go through my preconceived notion of a hysterectomy when it wasn't absolutely necessary.

After my recent ultrasound and subsequent CT Scan revealed that it was now impacting my ureter and kidney, I could no longer avoid action.

Thankfully my new OBGYN, Dr Carol McKenzie, recommended that I contact Dr Sam about a da Vinci robotic procedure.

I was concerned that the fibroid was too big to even consider a robotic procedure, so I called to check before even making an appointment.

I felt very confident that I wanted here to do the surgery, but had previously scheduled a second appointment with a prominent surgeon who had performed this surgery on my friend just a few weeks earlier.

At my consultation with him he was addiment that the fibroid was simply too large to consider anything other than an abdominal hysterectomy.

I called Dr Sam's office to discuss it, and while she couldn't guarantee that it could be done robotically, she was 80% to 85% sure that she could do it that way.

For me, those were good enough odds and I truly believe that if anyone could do it, she was the one.

I went home the day after my surgery and was able to get up and down the stairs without significant pain, though I moved slowly.

72 hours after my surgery I felt well enough to go to my daughter's soccer game and accompany my husband to his holiday party later that evening.

Although I was still feeling a little bloated and swollen, for the most part I felt amazing.

For me this experience has underscored how important it is to find out the latest treatments available, yet how important it is for people to also realize how critical it is to select the most competent and experienced technician.

After years of avoiding this surgery, it is so nice to finally have it behind me.

End quote.

The second patient is Doug, a marketing director at a hospital in West Virginia, who describes his experience as follows.

Quote, I had been diagnosed with mitral valve prolapse as a child, but it had never progressed to anything remarkable until September of 2009 when I began experiencing shortness of breath, chest and back tightness and uncomfortable palpitations.

After numerous tests it was determined that my mitral valve prolapse had progressed to severe mitral regurgitation and that I would need to either have my valve repaired or replaced.

After considerable research, I was committed to finding a physician and a facility that could, most importantly, repair my mitral valve, and secondarily, repair it with robotic assistance from the da Vinci Surgical System.

My research led me to Dr Marc Gillinov at the Cleveland Clinic Foundation who did a fantastic job repairing both the anterior and posterior leaflets of my mitral valve robotically.

My recovery has been remarkably fast and easy.

I feel great and there are no signs of regurgitation or a heart murmur any more.

I am completely fixed.

I can't tell you what a relief it is to know that my health problems are now solved, that my sternum didn't have to be sawed and spread apart and that I can look forward to living a long, healthy life with my wonderful family.

I truly feel blessed.

End quote.

Patients like these are the strongest advocates for da Vinci Surgery and form the very foundation of 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.

That concludes today's conference.

Thank you for participating.

You may disconnect at any time.