直覺手術 (ISRG) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Intuitive Surgical Q2 earnings conference call.

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

Later, we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions).

And also as a reminder, this teleconference is being recorded.

At this time, I will turn the conference call over to your host, Director of Financial Planning for Intuitive Surgical, Mr.

Calvin Darling.

Please go ahead, sir.

Thank you.

Good afternoon and welcome to Intuitive Surgical's second 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 Jerry McNamara, our Executive Vice President of Worldwide Sales and Marketing.

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

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

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

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

Please note that this conference call will be available for audio replay on our website at 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 second 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 second 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 second quarter, our team executed well.

We continued to expand da Vinci surgery to a broader base of customers, which is reflected in our financial results for the quarter.

In the quarter, we experienced strong growth in several markets.

Da Vinci Hysterectomy became the largest single procedure in our business this quarter.

We also experienced growth in other benign gynecology procedures including da Vinci Myomectomy and da Vinci Sacral Colpopexy.

In Urology, da Vinci surgery continues to expand, and we see continuing growth in da Vinci partial Nephrectomy and da Vinci Cystectomy.

Da Vinci Prostatectomy is now maturing in the United States, and was flat relative to last quarter.

We expect dVP growth to be largely driven by international markets as we go forward.

Da Vinci surgery is also being adopted in other surgical specialties.

We are experiencing growth in da Vinci trans oral surgery by ENT surgeons.

In general surgery colorectal procedures are growing, and in thoracic surgery we are achieving early success in da Vinci surgery for lung cancer.

While we are not ready to declare these procedures as full-scale adoptions, their early growth is encouraging.

Now looking at systems sales, we sold 108 da Vinci systems in the quarter.

US sales grew sequentially over Q1 and we sold slightly more systems in Europe this quarter than last.

That said, we continue to see fiscal pressures in Europe.

Lastly, we are pleased with our system sales performance in Asia outside of Japan.

As we have mentioned previously, we expect Japan system and revenue growth to be slow as we work through post-market surveillance and reimbursement pathways.

As we move to highlights for the second quarter, recall that Q2 2009 financials included recognition of revenue that was deferred in association with the introduction of the da Vinci Si system.

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

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

Procedures grew 36% over second quarter of 2009.

We sold 108 da Vinci Surgical Systems, up from 76 during the second quarter of last year.

Total revenue was $351 million, up 42% over Q2 2009.

Instrument and accessory revenue increased to $128 million, up 35% over last year.

Total recurring revenue grew to $183 million, up 35% from prior year and comprising 52% of total revenue.

Net income was $89 million, up 64% over last year.

We generated an operating profit of $170 million before non-cash stock option expense, up 54% from the second quarter of last year.

We ended the quarter with $1.588 billion in cash and investments, up $193 million from last quarter, and up $686 million from second quarter 2009.

Significant cash outlays for the quarter included $20 million invested in intellectual property and fixed assets, excluding the impact of this outlay, as well as $23 million from stock proceeds and $53 million return from working capital.

We generated $137 million in gross cash flow from operations, which is 154% of our reported GAAP net income in the second quarter.

As I mentioned on our last call, we are increasing investments in our business by building our sales force, by bringing to market new technologies that will extend our products into new procedures and bring additional patient value to existing procedures, and by increasing our manufacturing capability.

The investment made in sales force expansion in the first quarter is just beginning to make an impact in the field, and early indications are positive.

We believe that close clinical sales support of emerging and high growth procedures is an important catalyst for procedure adoption.

This quarter we added an additional 119 people to our team, predominantly in sales, manufacturing, and R&D, bringing our total team to 1,476 employees.

In product development and research, our teams are making substantial progress in our focus areas.

Our instrument development teams are progressing in developing robotic stapling and energy instruments.

We are improving and expanding our imaging capabilities through investments in image acquisition and fluorescence imaging.

We are developing patient-side technologies that will allow for single port robotic surgery.

And finally, we are making substantial progress in bringing to market surgical networking and training technologies.

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

We continue to invest in adding outstanding players to our team and expanding partnerships and in developing and acquiring those technologies that can make a difference to robotic surgery.

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

Thank you, Gary.

Prior to providing you with the details of our second quarter results, I will quickly review the deferral accounting that took place during 2009, which sets into context the proper comparables.

Last year, we offered certain first quarter 2009 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 million of revenue in the first quarter of 2009, comprised of $18 million of system revenue 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 second quarter of 2009 as though the deferral had not occurred.

Our second quarter 2010 revenue was $351 million, up 42% compared with $247 million for the second quarter of 2009, and up 7% compared with $329 million for the first quarter of 2010.

Second quarter revenues by product category were as follows.

Second quarter instrument and accessory revenue was $128 million, up 35% compared with $94 million for the second quarter of 2009, and up 4% compared with $123 million in the first quarter of 2010.

The increase compared with the prior year reflects procedure growth and higher initial stocking orders.

The increase compared with the prior quarter reflects procedure growth partially offset by decreased stocking orders.

The timing of stocking orders can vary from customer to customer, and fewer were completed in the second quarter compared with the first quarter.

The amount of instrument and accessory revenue we realized per procedure, including stocking orders, was approximately $1,870 per procedure which is approximately the same as the second quarter of 2009, and approximately $100 lower than the first quarter of 2010.

Year-over-year stocking orders increased.

However, they have a smaller impact on a larger install base resulting in little change in revenue per procedure.

The decrease from the first quarter reflects lower stocking orders.

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

Second quarter 2010 systems revenue of $168 million increased 51% compared with $111 million of systems revenue for the second quarter of 2009, and increased 8% compared with $155 million of systems revenue for the first quarter.

We sold 108 systems in the second quarter of 2010, compared with 76 systems last year and 104 systems last quarter.

Eighty-nine of the 108, or 82% of the systems sold in the quarter, were da Vinci Si systems.

Second quarter system revenue also included $8 million of upgrade revenue compared to $2 million in the second quarter of 2009 and $5 million in the first quarter of 2010.

The increase compared to prior quarters reflects increased S to Si upgrade revenue.

Our second quarter average sales price per system, including all da Vinci models but excluding upgrades and the revenue deferral ,was $1.48 million, an increase from the $1.43 million realized in the second quarter of 2009, and an increase from the $1.45 million realized in the first quarter.

The increase as compared to the prior periods primarily reflect an increase in the proportion of Si Systems, which carry a higher ASP.

The mix of customers and products over the past two quarters has been positive, generating ASPs greater than those we expect in future periods.

Service revenue increased to $55 million, up 34% compared with $41 million last year, and up 9% compared with $51 million last quarter.

The growth in service revenue was primarily driven by a larger system install base and an increase in the mix of Sis, which carry a higher annual service fee.

Total second quarter recurring revenue, comprised of instrument, accessory and service revenue, increased to $183 million, up 35% compared with the second quarter of 2009, and up 6% compared with the first quarter of 2010.

Recurring revenue represented 52% of total second quarter revenue compared with 55% in the second quarter of last year and 53% last quarter.

Non-US revenue represented 18% of our total revenue in the quarter, compared with 22% of total revenue in the second quarter of 2009 and 21% of total revenue in the first quarter of 2010.

We sold 22 systems outside the US compared with 20 in the second quarter of 2009 and 24 last quarter.

One of the systems sold in the second quarter and seven of the systems sold in the first quarter of 2010 were to Japanese customers.

We sold three more systems in Europe this quarter compared with last quarter.

However, the capital sales market in Europe continues to be challenging, reflecting the macro-economic environment.

We lock in hedges on system revenue every six months, so currency had little impact on our second quarter European revenue.

However, the rates we have locked in for the remainder of 2010 are lower by approximately 15%.

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 2009 revenue deferral, and therefore the $20 million deferral and subsequent reversals had an equal impact on revenue, gross profit and operating income.

Gross margin in the second quarter was 73%, compared with second quarter of 2009 gross margin, excluding the impact of the deferral of 72%, and compared with first quarter 2010 gross margin of 73%.

The increase in gross margin compared to the prior year reflect increased system ASPs, material cost reductions, and absorption of fixed costs over a larger revenue base.

Compared to the prior quarter, the impact of higher ASPs was partially offset by higher manufacturing costs.

Second quarter 2010 operating expenses of $117 million were up 29% compared with the second quarter of 2009, and up 6% compared with the first quarter.

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

We added 119 employees during the quarter, including 81 employees in the sales and service organization as we continue to expand our clinical sales force, and 35 employees in operations as we continue to invest in Research and Development and grow manufacturing capacity.

Second quarter 2010 operating income was $140 million, or 40% of sales, compared with $86 million or 36% of sales for the second quarter of 2009, excluding the impact of the deferral, and $130 million or 40% of sales for the first quarter of 2010.

Second quarter 2010 operating income reflected $30 million of non-cash stock compensation expense, compared with $25 million for the second quarter of 2009 and $27 million last quarter.

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

Our effective tax rate for the second quarter of 38% was lower than our 2009 tax rate of 41%, reflecting the implementation of our international tax structure.

Our second quarter rate was higher than the 36% reported for the first quarter, reflecting an increase in US versus non-US income for the year.

Our net income was $89 million, or $2.19 per share for the second quarter of 2010 compared with $54 million, or $1.40 per share, for the second quarter of 2009, excluding the impact of the deferral, and $85 million or $2.12 per share, for the first quarter of 2010.

Let me quickly summarize our results for the first six months of 2010.

The comparable numbers for the first six months of 2009 exclude the impact of the first quarter 2009 deferral.

Procedures grew by 36% for the first six months of 2010 compared to 2009.

Total revenue for the first six months of 2010 was $679 million, up 49% compared with $455 million last year.

This included recurring revenue growth of 39% and an increase in systems revenue of 63%.

The increase in systems revenue clearly reflects the impact of curtailed hospital spending for capital equipment during 2009.

Operating income for the first six months of 2010 was $269 million, up 79% compared with $151 million last year.

Operating income included $57 million of stock-based compensation charges in the first six months of 2010 compared with $47 million in 2009.

Net income for the first six months of 2010 was $174 million, or $4.31 per share, compared with $94 million, or $2.42 per share last year.

Now moving to the Balance Sheet.

We ended the second quarter of 2010 with cash and investments of $1.588 billion, up $193 million compared with March 31, 2010.

The increase during the current quarter reflects $137 million of cash flows from operations and $23 million from the exercise of stock options, partially offset by $20 million of capital expenditures.

$10 million of our capital expenditures relate to the construction of the new manufacturing facility next to our corporate headquarters in Sunnyvale.

We anticipate that building to be completed in early 2011.

Our Accounts Receivable balance increased to $195 million at June 30 from $180 million at March 31.

The increase in Accounts Receivable reflects increased revenue and the timing of system shipments.

Our net inventory increased to $74 million at June 30 from $69 million at March 31.

We increased inventory during the quarter since we believe that inventory was below optimal levels.

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

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

Thank you, Marshall.

During the second quarter we sold 108 da Vinci systems, 86 in the United States, 14 in Europe and eight into rest-of-world markets.

As part of the 108 system sales, 19 standard da Vinci systems were traded in for credit against sales for new da Vinci Si systems.

We had a net 89 system additions to the installed base during the quarter, which brings to 1,571 the cumulative number of da Vinci systems worldwide -- 1,160 in the US, 276 in Europe, and 135 in rest-of-world markets.

Forty-four of the 108 systems installed represented repeat system sales to existing customers.

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

Internationally, we sold four da Vinci systems into Germany and three to both Italy and France.

Japan represented one new system sale.

Clinically, we had a strong quarter, most notably in GYN, more specifically benign dVH.

While dVH for malignant conditions showed very good sequential growth, benign dVH growth was significantly stronger, both in actual procedure growth and in percentage growth.

As of Q2, dVH has eclipsed dVP to become our single largest procedure.

Other areas of robust growth for the quarter included general surgery, ENT, thoracic surgery, as well as several emerging urologic procedures.

As one would expect, with dVP flattening in the US, our urology growth rate total was lower than past quarters.

As far as our overall procedure business is concerned, sequential growth for Q2 was strong.

Also during the quarter, nearly 300 da Vinci related clinical publications and abstracts representing multiple surgical specialties appeared within various peer review journals.

Our recent clearance for trans oral otolaryngologic surgical procedures has allowed us to extend the benefits of minimally invasive surgery to a category of patients who are being subjected to large and potentially disfiguring open operations.

Within this specialty, da Vinci's patient value equation appears to be as great and potentially greater than in any we currently target.

And it has led to impressive early growth.

In a recent edition of the Archives of Otolaryngology, head and neck cancer, a paper by Dean and Rosenthal from the University of Alabama, Birmingham looked at a comparison between 43 patients who underwent surgical resections for T1 and T2 oral [Pharyngeal] cancers.

The patients were classified within three cohorts -- robotic assisted surgery for primary neoplasms, two, robotic assisted salvage surgery for recurrent disease, and three, open salvage surgery for recurrent disease.

And the results.

The median length of stay in the open salvage group was 8.2 days compared to five days for the robotic salvage group and 1.5 days for the robotic primary resection group.

Regarding post-surgical diets, 43% of the patients who underwent open salvage procedures were gastrostomy or feeding tube dependent six months following treatment, compared to zero patients in the robotic surgery groups.

Seven percent of the patients who underwent open salvage procedures also remained tracheotomy tube dependent after six months compared with zero patients in the robotic groups.

There were no complications reported in the robotic groups.

However, two patients who underwent open salvage resection developed post operative hematomas and two developed wound infections.

Reductions in both length of stay and complications have been synonymous with da Vinci procedures across all specialties, and it appears that trans oral surgery will follow suit.

In addition to dVH, da Vinci Myomectomy has been one of our most rapidly emerging GYN procedures.

Myomectomy is the removal of uterine fibroids while preserving the uterus.

Fibroids are among the leading causes of pelvic pain in women as well as being a significant contributor to the need for benign hysterectomy.

It is estimated that approximately 40,000 procedures are performed in the US annually and many more outside the US.

In the June edition of the Journal of Minimally Invasive Gynecology, Dr.

Charles Asher Walsh from Mount Sinai School of Medicine in New York compared his first 75 da Vinci Myomectomies to his last 50 open Myomectomies, which is currently the predominant approach for surgical treatment.

The variables measured included blood loss, hospital stay, time to regular diet and febrile morbidity.

Febrile morbidity is defined as at least one episode of temperature rise above 38 degrees C lasting more than 24 hours.

Regarding blood loss, in the open group, patients lost an average of 459 milliliters of blood compared to 226 for the da Vinci group.

Hospital stay was 3.3 days for the open group compared to 0.5 days for the da Vinci group.

Time to regular diet was 2.3 days for the open group compared to 0.85 days for the da Vinci patients.

And finally, 38% of the open group had febrile morbidity compared to 1% for the da Vinci group.

Overall, I'd say this is a pretty impressive improvement.

During the quarter, our activities within the various society meetings were exceptionally high and included a large presence at the AUA, Sages, World Robotic Symposium, [ACOD], AATS, and the American Society of Colorectal Surgery, to name a few.

At the AUA meeting alone, with over 12,000 participants, over 130 robotic abstracts were presented.

Six AUA post-graduate courses were offered which included two live surgery courses, not to mention over a dozen booth presentations and several live surgery broadcasts.

The booth traffic and the number of surgeon leads were truly impressive.

At the World Robotic symposium in Orlando, over 1,000 surgeons representing 36 countries were in attendance.

The program included a dozen live surgeries and hundreds of robotic abstracts, posters and presentations.

Several of the abstracts were noteworthy, but I'll highlight one from the Mayo Clinic, Rochester that really resonated with me.

It resonated with me because the condition they studied reaches far wider than dVP, which was the topic of the paper.

The paper is entitled Contemporary Analysis of Surgical Site Infection After Radical Prostatectomy, a comparison of open and robotic approaches.

The objective of the study was to determine the incidence of surgical site infections in Prostatectomy and determine if the approach to surgery affects this rate.

Five thousand, nine hundred eight patients undergoing either [retropubic] or robotic radical Prostatectomy at the Mayo Clinic between 2004 and 2008 were identified, 4,824 open and 1,084 robotic.

The metrics were pretty straightforward.

Within the open retropubic group, 5.4% of the men developed a surgical site infection compared to 0.9% with the robotic group.

Said another way, a patient undergoing an open Prostatectomy was six times more likely to encounter a surgical site infection than a patient undergoing a dVP.

A surgical site infection is a well known complication that can have significant negative consequences, both clinically for the patient and economically for the hospital.

If you expand the computation across nearly 100,000 annual Prostatectomies, or hundreds of thousands of overall da Vinci procedures, the improved clinical patient and economic value is significant.

That concludes my remarks, and I'll now turn the time over to Calvin.

Thank you, Aleks.

I will be providing an update to our financial forecast for 2010, including procedures, revenues, and 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, our second quarter and first half 2010 procedures were up approximately 36% compared to last year.

We continue to expect our total 2010 procedures to grow approximately 35% for the year from the base of approximately 205,000 procedures performed in 2009.

Moving on to revenues.

Based on our first half results and our view into our second half sales pipeline, we are raising our forecast for total 2010 revenue.

We now anticipate 2010 full year revenue to grow between 30% and 33% compared to 27% to 30% forecasted on our previous call.

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

In Europe, while procedures continue to grow, system sales in the short term may be impacted by the economic climate.

System sales into Japan are likely to remain modest as we work through the reimbursement pathway.

With regards to gross margin we reported 73% margin in both Q1 and Q2 of this year.

Going forward into the second half of the year, we expect gross margins to decline from this level, driven by lower anticipated average system selling prices.

We expect the ASP to decline in the second half reflecting a lower priced product mix and lower US dollar revenue recognized on Euro-based sales.

We recorded first half Euro-based sales at rates averaging about $1.43, consistent with the contractual rates under our currency hedging program.

As we enter the second half of the year, we've reset our hedges and anticipate recording the remainder of our 2010 Euro-based system sales at a rate of approximately $1.22.

We also expect the manufacturing capacity growth that Marshall referred to earlier to shift our gross margin slightly lower in the second half of the year.

Although second half gross margins should be a bit lower than the first, based upon our first half results, we are increasing our guidance for full year 2010 gross profit margin.

We now anticipate our full year gross profit percentage to come in between 72% and 73% compared to 72% forecasted on our last call.

Moving to operating expense.

We have made, and will continue to make, significant investments across multiple areas of our business, particularly in clinical sales force and new product development projects.

We added 119 employees in the second quarter and 213 so far this year, compared to 75 added during the first half of last year.

We now expect our total GAAP operating expenses to grow by 29% to 31% in 2010 compared with our previous forecast of 27% to 29% growth.

In terms of non-cash expenses, we expect to record stock compensation charges of approximately $120 million in 2010, which is a bit lower than our previous forecast of $122 million.

Our guidance for intellectual property amortization remains intact at $15 million for the year.

Other income, which is mainly comprised of interest income, is expected to come in around $18 million for the year, at the high end of the $16 million to $18 million range forecasted last quarter.

With regard to income tax, our year-to-date tax rate now stands at 37.4% of pre-tax income.

We now expect to record income taxes at approximately that 37.4% rate for the rest of 2010.

For calculating earnings per share, we ended the second quarter with 39.4 million common shares outstanding and approximately five million option shares outstanding.

Depending on our average stock price this year, a portion of the five 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 diluted share count for calculating EPS in Q3 will be approximately 40.7 million shares.

Our estimate for the full year is 40.6 million shares.

Finally, regarding our cash flows, since we are forecasting to report over $135 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.

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

Thank you.

(Operator Instructions.) We'll take our first question in queue from the line of David Lewis with Morgan Stanley.

Please go ahead.

Good afternoon.

Hi, David.

A couple questions.

I guess first of all just thinking about procedure trends, so two dynamics.

We've seen some pressure across the women's health segment from some of the derivative competitors.

Did you see any pressure on hospital-based hysterectomy trends in the quarter?

Do you think that weighed on procedural trends.

And then part B would be obviously a significant increase in sales reps here into the quarter.

Can you talk about where they stand from a utilization or capacity perspective?

And I've got one follow-up.

Thank you.

David, it's Aleks.

If you recall last quarter, we had called out the fact there had been some slowing in da Vinci hysterectomy specifically the benign side, and we had called out potentially three reasons why that might be.

Either a reset on the premiums, insurance premiums for potentially a high incidence of Cobra fallout, and then just the activities that our salespeople had.

And just having a full plate.

Well if you looked at it this quarter, there was actually a significant move in benign hysterectomies.

It was actually a very strong turnaround.

So if there were trends that we saw, they were really favorable on the benign side of the business, and I think that speaks also for Myomectomy and even the Euro-GYN procedures and Sacral Colpopexy.

So the salespeople, certainly I think we feel that it's still early but we like the momentum that we're building with the additional feet on the street.

So there really wasn't anything we can point to and say that it was really specific to that segment that would be macro in nature.

That's very helpful.

And then your commentary on ASPs, I'm trying to understand is this just a function of anniversarying some of the more significant ASP increases based on new system launches and positive product cadence?

Or is this a slight change in strategy or mix where you're seeing increasing growth with sub-300 bed hospitals that may want more [D-featured] systems?

Well the ASP change quarter to quarter really is reflective of just the higher mix of Sis, and then generally, a positive mix when it comes to customers.

We sold fewer to distribution than we had in the past.

So does that answer your question?

I'm not quite sure where you were headed.

I'm sorry, I may have [misunderstood] but I thought on a go-forward basis you saw ASPs potentially declining four boxes.

I may have misunderstood.

Yes, no, we're saying you shouldn't count on the mix that we've seen, that we've had a favorable mix.

There's a couple different factors that could change the dynamic going forward.

One is, of course, as we said we lock in hedge rates for European currency at the beginning of every six-month period and this is the beginning of that period.

And what we locked in was 15% lower than the previous time.

Now the European business direct represents about 10% of our overall business.

Second thing is, we are seeing weakness in some of the places that we do use distributors -- I'm sorry, we have seen weakness in Europe, and in Europe we saw prices that are higher than we sell in the US.

And then -- Those are the primary factors.

And then overall, we think that the mix that we've seen in the last quarter was unusually favorable and we're just not sure where it's going to come out.

It's very hard to predict exactly which systems you're going to sell to which customers.

In the second quarter, 89 of our 108 systems were Si systems compared to 80 out of 104 last quarter.

So that was a very rich mix of Sis.

And going forward, we do expect it to kind of shift more towards what we saw previously.

Okay, very helpful.

Then one last question and I'll jump back in queue.

Aleks, you mentioned access systems at the surgical or bedside to promote single incision surgery.

Was there a timeline we should be thinking about?

This is Gary.

Yes, in my part, we had talked about single incision robotic systems.

We're not ready to tell you the commercialization timeline yet.

I'll just tell you we're making good progress on it, and when we're ready to launch it we'll let you know.

Great.

Thank you very much.

Thank you.

The next question in queue will come from the line of Ben Andrew with William Blair.

Please go ahead.

Good.

Thank you very much for taking the question.

A couple things more on the sales force structure.

I mean you've added a significant number over the last two quarters, Aleks, maybe can you talk about the total numbers you've got, how it's distributed between general systems sales and the guys pushing procedures?

But then maybe even break down, if you can further, how big the benign GYN group is and what initiatives they are taking to have driven such a strong performance in the quarter and what you're going to do with maybe some of the other indications.

This is Jerry McNamara.

I'll take a crack at answering a few of those questions.

First off, we felt it was time, based on our performance metrics of our clinical sales team, to expand our sales force in order to continue to serve our customers.

We have been [metricking] our performance, and that would be the number of procedures served by a clinical sales rep, the number of systems served by a clinical sales rep for a number of years.

And so that's how we modeled out our expansion.

And so we decided it was time to go forward and invest in the business.

So the bulk of our expansion was in the clinical side of the sales force not so much in the capital side.

We did make a major initiative to grow our GYN dedicated sales force, and that investment has been completed up to the levels that we decided to fund it.

And I will say, and this is kind of to expand on what Aleks said, we had a very strong quarter in GYN trend overall, and we're pleased with the results.

So we're going to continue to expand accordingly and make the requisite investments.

And Ben just to add some numbers back to the question you had.

We said we added 119 folks Company-wide in the second quarter.

Seventy of them were to our field organization.

And so after making those additions, in terms of the total sales force we have roughly 70 people in our group in the Company selling systems and about 380 people who are driving the procedures.

We've also got 80 field service engineers and about 20 dedicated trainers and 45 what we call field technicians.

So right now we've got something just a little bit north of 600 people in the field across the Company.

Okay, great.

Thank you.

That's helpful.

And maybe Jerry if I could get you to go a little further on the dVH initiatives.

Is this just getting in front of the gynecologist to help them understand the benefits and what surgeons around them are doing cases?

Or are there kind of promotional things?

Because it ties into a comment that came on the last call you were going to try to hold the operating margin steady,and in fact it did expand a little bit in the quarter.

So do you have even more capacity to work harder to help customers bring in patient volume?

I think we do.

We're still very early in the adoption of benign hysterectomy.

And we most recently enjoyed increasing success and being able to communicate the value proposition that is offered to the patient and the surgeon.

And so as our sales force becomes more proficient in the selling process and we continue to get support of publications and positive response back from our surgeons and patients I think we'll continue to expand.

Great.

Thank you.

Thank you.

Our next question in queue will come from the line of Tycho Peterson with JPMorgan.

Please go ahead.

Hi, good afternoon.

Actually, maybe just following up on that last line of questioning on the reps, can you comment on geographic mix?

Were the bulk of the reps were placed here in the US?

Or how should we think about international sales buildout?

We've managed the international buildout to the same and similar metrics that we do in the United States.

So as we place the systems and we generate the procedures then we increase the committed reps to the geographics.

So we don't identify one geographic or another.

It's all driven by where the placements are.

But remember that part of the OUS business is broken out between distributors and direct.

So we affect the employees in the direct side of the equation whereas the indirect employees work for the distributer.

Okay.

Turning to Europe, and you made the comment before that only 10% of that business is kind of direct in Europe.

But can you talk a little bit about what you're hearing on the ground from your reps over there?

And is it fair to say you're adopting a little bit more of a cautious attitude on the back half of the year in Europe given some of the austerity measures?

Or I guess just any additional color would be helpful here.

Well I think as you know, we can't control the uncertain economic conditions there, and that being said we've had really strong procedure growth.

So we're happy with our procedure growth.

And from the system sales, certainly there's a little bit of additional pressure or scrutiny on the purchasing side of the customers.

And maybe compared to year ago, the purchasing timeline might be three months longer.

But we're not losing customers, just the purchase timeline is taking a little longer.

Remember, Tycho, the thing we really drive and refocus on is the procedure growth.

We know that when the macro economy becomes improved or gets back to level set, as long as the demand for the procedures is strong, we know that the demand for the systems will be necessary.

So that's where we'll focus and with the system -- even through that, we increased the number of sales in Europe this quarter versus the last quarter.

But you can tell by our posture that it's challenging.

And we won't try to predict what the macro economy will look like down the road, but we're telling you that it's challenging.

Okay, and then one last one.

I've had some people ask about leasing and whether that is potentially going to pick up in this environment.

I think historically it's been about 15% of the systems or so that have been leased.

Are you seeing change in that dynamic?

We really haven't.

It's been pretty consistent over time.

Okay, thank you very much.

Yes.

Thank you.

Our next question in queue will come from the line of Michael Matson with Wells Fargo Securities.

Your line is open.

Hi, thanks for taking my question.

I guess I'd just like to start out with sort of a higher level question.

So stepping back, you guys obviously did really well with Prostatectomy, and that's kind of peaked.

I don't want to say peaked, but it's not growing very fast now.

And obviously right behind that, you had hysterectomy and that was roughly three times as many procedures.

So looking beyond hysterectomy, is there something there or a sum of multiple procedures there that could be three times sort of larger than the hysterectomy opportunity?

Again, I think the way -- There's a couple ways I'd answer it, but I think looking at where we were a couple of years ago is just a reminder.

In 2006 we were really just beginning to talk about hysterectomy and here we are today.

It has become our largest category.

We are working on a lot of various procedures through multiple specialties, be it general surgery with nice growth coming in low rectal cancers, in ENT, which is a brand new clearance for us.

With lung surgery and Myomectomies and other emerging urology procedures and GYN procedures.

So the answer to the final question you asked, if you sum up procedures, can you find whatever your metric was?

The answer is that there's a lot of procedures that we've identified, are working on and are on positive growth trends already.

And depending on what your timeline is and how far out you look, yes I would say that there's a lot of opportunity and it's our belief we are very early here.

This is Gary.

I'd add one thing, which is our organization is not looking past hysterectomy at this time as being something to focus on.

Our organizational focus is tightly on gynecology and hysterectomy.

We think there are great irons in the fire but it's not as if that opportunity is fully complete yet either.

And I think to your point on the dVP, I think accurately you pointed out that we've [called up] in the United States,certainly we're a lot more mature than we are in other parts of the geography, other parts of the world.

But geographical expansion across everything we just talked about is also still in front of us.

Okay, that's helpful.

And then on the single port surgery opportunity, I guess I had two questions.

One, it was a little unclear to me that the product that you're talking about there, is that a completely new robotic platform or am I hearing it incorrectly?

And the second thing is, is there an opportunity do you think with single port surgery to get into new procedures, things like your more run of the mill laparoscopic procedures like a lap-[coli] say?

And would that be a new larger opportunity out there?

Yes, this is Gary.

So the single site we're talking about is a set of instruments and accessories that goes on a da Vinci Si system.

And we previewed it out at some of our shows.

We do think that that will give us access to a different set of procedures than multi-port will.

Where it ultimately finds value and grows, I think it's early.

And I think we want to get into the marketplace and have our customers and surgeons help us determine where that ultimately goes.

Having said that, it may open for us a set of procedures that are not kind of the classical da Vinci procedures that we have today.

And just as a reminder there, the single site product does not have FDA clearance yet, so we are certainly limited to what we can say or claim about it at this point.

Okay and then I just had one final quick question.

I noticed in the guidance that your share count is stepping up a little bit in the second half.

And you've also -- you're sitting on a lot of cash.

And I realize your stock is up from a level that you bought back shares previously, but why not just at least go in and kind of offset some of that dilution that's set to happen?

Well, we certainly are evaluating what our cash position is at all times.

And to the extent that we do decide that we have excess cash, we will look at ways to return it to shareholders.

And that could take the form of a share buyback.

But we think about it, we just haven't --

And we're sensitive to that issue.

So we're happy to have adequate cash reserves.

It gives us flexibility into the future.

On the other hand if there's an opportunity on the issue that you raise --

Thank you.

Thank you.

Our next question in queue will come from the line of Rick Wise with Leerink Swann.

Your line is open.

Good afternoon, everybody.

Hi, Rick.

Again to start with a bigger picture question.

Maybe the topic is capital spending.

I feel like we're getting confusing signals, not from just from you so much as in general.

I actually came to this quarter thinking that the cap spending environment might be improving based on comments from GE Siemens, actually Stryker's Med/Surg business.

Now none of these things have anything directly to do with Intuitive, but do you feel like you can comment on whether the environment is improving, stable, decelerating?

And I appreciate that that's in the context as well of it sounds like maybe some sluggishness in Europe.

Well Rick, the thing we can really point out, I think, that describes it at least most practically, is just looking at it retrospectively.

If you look at the first half of 2009, we sold 66 systems and 76 systems in the first two quarters of 2009, and 100 of those were in the United States.

If you take a look at the last two quarters, we sold 108 and 104 systems of which I believe 172 were in the United States.

So looking at it from that perspective I think answers your question.

And I use that only because it's hard for us to claim any expertise in macro-economics here.

But when you look at the practical side of it, it appears that it has improved pretty significantly over the first half of 2009.

Now going forward, in 2010, we will see.

You've got our guidance, and where we will really spend a lot of our time and resources is driving the procedures which end up being the best surrogate for future system sales.

And regional variances in capital environment are strong.

Okay.

Turning to R&D, when I look back, we've generally seen some pretty decent sequential growth in R&D, sort of sequentially quarter to quarter.

Yet it was up second quarter over first.

It seemed like the rate might have been a little slower than in the past.

Is that timing?

And should we expect to see R&D step up more smartly sequentially in the second half?

Just to get a little perspective there?

Just from our planning point of view, R&D can be lumpy, just having to do with as different products move around different phases of their development, the required investments change.

And so most of what you're seeing is lumpiness having to do with the natural evolution and timing of product development.

We're making investments in the areas we've discussed.

We think that we have products in the pipeline that are going to be compelling.

But we're disciplined in our approach and how we're spending our money and how we want them to come out.

Calvin, you might do a little color on that.

Yes.

I think that's right.

And really part of the lump, we did have a step up in the first quarter of 2010 compared to 2009.

So perhaps this was an offset to that.

But as Gary says, it is lumpy.

It's going to continue to be lumpy, and in the long range we are investing in the programs that we've outlined.

And maybe last for me.

I know you're anxious to tell us what's in your pipeline.

Joking aside, maybe help us think a little bit about where we're going.

What should we expect as we look out over the next couple of years?

More significant evolution like Si?

Or is it going to be, as you briefly touched on, visualization instruments?

Any flavor or color would be welcome obviously.

Well just what we've told you before.

I think you're going to see a mix of products.

Clearly, tissue interaction products are really important.

And doing any procedure, what actually goes down and touches the tissue is going to make a big difference.

We continue to invest there on some projects that are fairly big projects and we think we'll have significant impact in terms of patient value.

We've talked about single site.

We think that is an interesting trend in the marketplace and we think robotics will bring real value there.

And on the imaging side, the investments are both higher acuity imaging but also different types of imaging and some things you haven't seen from us before.

But as they progress, we'll be able to describe them more.

I would just add one comment, Rick.

When you think about the way we develop products, keep in mind that you're developing products that will cross four or five surgical specialties oftentimes.

And so it isn't just a single widget for a single procedure in a single specialty.

So there's a lot of forethought that goes into whether it be instrument, systems, vision, et cetera.

And it's a very broad investment across multiple platforms.

Thanks so much.

We have time for one more question.

Thank you and that final question will come from the line of Sameer Harish with Needham & Company.

Please go ahead.

Hi, thank you guys.

Good afternoon.

As I would ask some questions on physician training, it seems like in the press there's a lot of noise made about physician training and whether it's adequate.

Maybe can you talk to me about -- are there any changes that the Company is making in terms of physician training?

And maybe just talk about why we're seeing a discrepancy.

When we see it presented, we find very low numbers, call it mid-teens kind of surgical cases are enough to get physicians comfortable.

Why we're seeing a discrepancy and what we're seeing in the press.

I guess I'd start by saying we have always made significant investments and taken pains to train our surgeons carefully.

You see disparate definitions of what training is and means, and so often you'll hear different people talk about [Asymptotes] versus training to competence and so on.

It's pretty hard to describe why the popular press goes one direction versus the clinical publications.

That said, we are focused on training.

We continue to be and we have made some investments going forward that we think take advantage of some of the unique attributes of robotic surgery.

Dual console is one of them.

Dual console is being adopted well for use in training.

And we've talked about surgical simulation as being another one.

Robotic surgery has kind of a unique opportunity for surgical simulation in that you can train exactly in the environment in which you're going to do the surgery.

And so we think that will make a difference.

So it hasn't been a step change for us.

It's something that we've understood for a while and have been making investments to continue to improve.

I would just add one thing on that as well.

As we get more penetration or further adoption into various procedures, you tend to see the formal training in medical schools and residency programs and fellowship programs that starts to increase as well.

Believe me, we're very welcome to that.

If you're already a standard of becoming a standard of care or standard of care in Prostatectomy surgery, then the formal training that someone will get through a urology fellowship is certainly going to increase on robotics than was the case years ago.

And I think as we move forward into other procedures you start to see that take place, and it's pretty natural and quite honestly very welcome.

Great.

Aleks, you took my follow-up question away.

But I'll switch over to kind of just the changing dynamics in terms of procedures.

As you go from kind of a single procedure dVP focus, obviously you moved into the hysterectomy and now general is a much more wide open space.

In terms of sales force, how big does it have to get say if you needed to -- if you were looking at doubling revenues from here, what sort of sales force do you need compared to what you have today?

Well I think that as we continue to serve different surgical specialties in higher volumes, that will determine the allocation of the resources to the surgical specialty.

As Gary made mention, in our long-term planning we have our thoughts on what our sales force will look like.But I will tell you that in the immediate next year and few quarters, we're not going to take our eye off the ball which is GYN.

It's just a huge market opportunity, and honestly, we enjoyed some real good trends the past quarter and we want to continue to accelerate the expansion of the market.

Okay, and last follow-up on that GYN comment.

You obviously have been making some investment in that space.

Do you sort of see Q2 improvements as a consequence of those investments?

Or was this something that was naturally occurring and the improvements in GYN are maybe to come next year or second half?

Well, we had a specific focus at the end of Q1 to change the Q1 trend in Q2 and we were able to execute on the plan.

That was our last question.

Thank you.

While we focus on financial metrics during these calls, our organizational focus remains on increasing patient value by improving surgical outcomes and reducing surgical trauma.

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

Rose works in healthcare delivery in Kansas and writes of her da Vinci experience.

"I had a robotic hysterectomy on May 25, 2010.

It's been three weeks since my surgery and I am back to work and feeling great.

I work in surgery as a surgical technician and have scrubbed in on robotic hysterectomies, open techniques and laparoscopic techniques over the past nine years.

I can say from a medical standpoint that there is just no comparison between the open technique and the robotic technique.

My mom had an open technique and was in the hospital for four days and missed eight weeks of work plus got an infection and had to go back to surgery to repair the tissue.

I left the hospital the same day I had surgery, I was sore from my abdominal incisions but never real pain.

I took it easy for two weeks but after the first week I was starting to feel back to normal.

I returned to work two weeks after the procedure with no heavy lifting.

It's three weeks today and I can say I feel pretty normal.

My abdomen is not sore and I haven't had any vaginal bleeding at all.

I'm definitely an advocate for robotic surgery as a patient and as a surgical technician."

Our second patient is William of Colorado.

He describes his experience as follows.

"After accidental discovery of a 2.5-centimeter tumor on the bottom of the right kidney, I researched kidney cancer and likely next steps.

My research told me I needed the surgery ASAP via open or laparoscopic technique.

The six to eight week recovery for the traditional open surgery and the large incision was very concerning.

The da Vinci method became my focus.

But finding an experienced and skilled surgeon was a challenge.

I was looking for a surgeon who was young enough to have the da Vinci training and old enough to have many successful procedures under his belt.

The doctor in the area where I live had had Dr.

Seram perform the da Vinci on his kidney two years prior with a very successful outcome and recommendation for both Dr.

Seram and the da Vinci procedure.

After meeting Dr.

Seram, it was obvious he met my criteria, causing the operation to be scheduled as soon as possible.

I was very pleased with the outcome and was up about and walking within 24 hours, feeling very good after seven days, and performing normal activities after four weeks.

Da Vinci for this type of partial kidney removal is the only way to go.

Fifteen years ago the surgery would have been the open procedure, removing the entire right kidney.

I lost only 10% of my kidney with normal kidney function today."

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 to you again in three months time.

Thank you.

And ladies and gentlemen, that does conclude our conference call for today.

We do thank you for your participation and for using AT&T's executive teleconference..

You may now disconnect.