直覺手術 (ISRG) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Intuitive Surgical fourth quarter 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).

As a reminder, this call is being recorded.

I would now like to turn the conference over to your host, Director of Financial Planning and Analysis for Intuitive Surgical, Calvin Darling.

Please go ahead.

Thank you.

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

With me today, we have Gary Guthart, our President and CEO, Marshall Mohr, our Chief Financial Officer, Aleks Cukic, our Vice President of Strategic Planning, and 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 may be deemed to contain forward-looking statements.

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

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

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

Please note that this conference 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 the highlights of our fourth quarter results as described in our press release announced earlier today, followed by a question and answer session.

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

Marshall will provide a review of our fourth quarter financial results, Aleks will discuss marketing and clinical highlights, and I will provide our financial forecast for 2011 and finally, we will host a question and answer session.

With that, I'll turn it over to Gary.

Thank you for joining us on the call today.

2010 was a year with some broad challenges and encouraging trends.

In the year, our procedure mix shifted in favor of gynecology, as it eclipsed urology as the largest specialty we serve.

We are making good progress in responding to the challenges inherent in our expanding business.

In 2010, our focus was in four areas.

First, driving the adoption of da Vinci surgery within the gynecology market.

Second, enabling growth of new procedures within new specialties.

Third, the expansion of our business internationally, and fourth, right sizing our various core teams within the Company to support our growth, most notably our sales organization.

Looking back at the full-year 2010, our operating highlights are as follows.

Worldwide procedures grew by 35%, with international procedures growing by 42%.

We sold 441 da Vinci Surgical Systems in the year, up from 338.

Total revenue grew to $1.413 billion, up 34%.

Recurring revenue grew to $753 million, up 34%, and comprising 53% of total revenue.

We generated $673 million in operating profit before non-cash stock compensation expense, up 42% from last year, and GAAP net income grew to $382 million, up 64% year-over-year.

Now turning to operating highlights for the fourth quarter.

Procedures grew 35%.

We sold 124 da Vinci Surgical Systems.

We ended the fourth quarter with 1,752 da Vinci Systems installed worldwide.

Total revenue for the quarter was $389 million.

Instrument and accessory revenue increased to $151 million, up 33%.

Total recurring revenue, including service, grew to $212 million, comprising 54% of total revenue.

We generated an operating profit of $184 million in the quarter, before non-cash stock compensation expense, up 20% from the fourth quarter of last year, and GAAP net income grew to $121 million, up 56%.

We ended the year with $1.609 billion in cash and investments, down $12 million from last quarter, and up $437 million from last year.

We received $141 million in cash during the year from the exercise of stock options, and invested $79 million in intellectual property, working capital, property, plant and equipment and $199 million in stock repurchases for the year.

Going forward, we will continue to look for stock repurchase opportunities.

Gross cash from operations for the year were $573 million or $14.22 per fully diluted share, and 150% of our reported GAAP net income for the year.

This is a reflection of the significant non-cash stock option and statutory tax expenses reflected in our GAAP net income, and is the reason that we believe that gross cash generated from operations remains the best measure of our financial performance.

In our adopting procedures in the US, da Vinci Hysterectomy continued its strong growth, both in malignant and benign conditions, growing 59% year-over-year.

Sacral Colpopexy and Myomectomy also continued to track their adoption curves.

Urology also grew for the full year 2010, through the continued adoption of partial Nephrectomy and growth in DVT, the latter being focused in Europe.

As benign conditions became a larger part of our procedure base in the US, we experienced increased exposure to seasonality and other patient treatment deferrals, that are less common with cancer operations.

We expect this exposure to be an ongoing part of our business.

2010 was a strong year for emerging procedures.

In fact, procedures falling outside the above mentioned adopting procedures grew by 47% over 2009.

Among procedures in new specialties that may emerge as adoptions are da Vinci Colorectal procedures, da Vinci Thoracic procedures, and da Vinci Trans Oral Head and Neck procedures.

Patient value in these specialties appears to be high, and surgeon interest in early growth has been encouraging.

I'll leave it to Aleks to provide more detail in our progress later in the call.

We are pleased with our procedure adoption in Europe in 2010, helped by growing depth in our European sales team.

European procedures grew 48% year-over-year, lead by urology.

We also saw the emergence of da Vinci Surgery for cancer indications in gynecologic surgery in Europe.

2010 has been an investment year for products, with several of them in the mid to late stages of development.

We believe these products will optimize existing procedures and enable new ones.

In Q4, we launched our da Vinci SI Simulator, which in combination with our dual console affords surgeons more opportunities to trend on da Vinci and track their progress.

Our single side product is in the late stages of regulatory review in both the US and Europe.

Recall that this product is intended to facilitate da Vinci's single incision surgeries on existing SI systems.

Our robotic stapling and vessel-sealing products are in development, and our progress with these products is encouraging.

In imaging, our Fluorescence Imaging product is also in the late stages of the regulatory review process in the US and Europe.

In 2010, we also connected the majority of our installed da Vinci systems to a da Vinci network that enables remote system performance monitoring as well as remote proctoring.

We continue to invest in technologies that improve and enhance surgical imaging.

Likewise, we also continuously invest in robotic technologies that simplify and enhance access to the body.

Finally, as we've discussed on prior calls, we believed at the outset of 2010 that investments were required in our clinical sales force to support the continued expansion of gynecologic and emerging procedures in the US.

We added 150 members to our clinical team through the year and have largely caught back up to the procedure to sales rep run rate that we believe supports our customers' needs during this period.

Across the Company, we added nearly 400 employees in 2010, ending the year with 1,660 people on our team.

In closing, our priorities for 2011 are as follows.

First, continuing our growth in gynecology and urology through outstanding execution in the field.

Second, disciplined execution of our product development process through product launch.

Third, driving deeper within the emerging procedures of Colorectal surgery, Thoracic Surgery and Trans Oral surgery through procedure and product development with leading customers, and fourth, strengthening our team, both in the US and in international markets to support the continued growth of the business.

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

Thank you, Gary.

Our fourth quarter revenue was $389 million, up 21% compared with $323 million for the fourth quarter of 2009, and up 13% compared with $344 million for the third quarter of 2010.

Fourth quarter revenue details were as follows.

Fourth quarter instrument and accessory revenue was $151 million, up 33% compared with $113 million for the fourth quarter of 2009, and up 19% compared with $128 million in the third quarter of 2010.

The increase relative to the fourth quarter of 2009 is primarily driven by procedure growth of 35% year-over-year.

The increase relative to the third quarter is primarily driven by procedure growth as well as an increase in the amount of stocking orders and customer purchases of our new 8.5-millimeter scopes.

Instrument and accessory revenue realized per procedure, including initial stocking orders, was approximately $1,940 per procedure, which is lower than the fourth quarter of 2009 by approximately $20, and higher than the third quarter of 2010 by approximately $100.

The changes in the instrument and accessory revenue per procedure primarily reflect changes in, and the impact of, 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.

Fourth quarter 2010 systems revenue of $178 million increased 10% compared with $162 million of systems revenue for the fourth quarter of 2009, and increased 11% compared with $160 million of systems revenue for the third quarter.

Recently, we began delivering new SI systems for customers, S-Systems versus completing S-to-SI field upgrades.

In addition, the contract terms and economics for these SI-for-S trade-ins are now reflective of SI sales.

Accordingly, we have begun including S-to-SI upgrades in our system counts.

Inclusive of nine S-to-SI trade-ins, we sold 124 systems in the fourth quarter of 2010.

This compares to 110 systems in the fourth quarter of 2009, and 105 systems in the third quarter 2010.

I would note that the prior period system counts exclude 10 S-to-SI upgrades for both the fourth quarter of 2009 and the third quarter of 2010.

Our fourth quarter average sales price per system, including all da Vinci models and S-to-SI trade-ins, but excluding upgrades, was $1.41 million, equal to the $1.41 million realized in the fourth quarter of 2009, and a decrease from the $1.43 million realized in the third quarter.

The decrease in average sales price per system compared with the prior quarter is primarily the result of mix of products, including a reduction in the proportion of SI dual consoles sold in the fourth quarter of 2010, partially offset by an increase due to a greater number of systems sold to direct customers in Europe.

Service revenue increased to $61 million, up 27% compared with $48 million last year, and up 6% compared with $57 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 fourth quarter recurring revenue comprised of instrument, accessory and service revenue increased to $212 million, up 31% compared with the fourth quarter of 2009, and up 15% compared with the third quarter of 2010.

Recurring revenue represented 54% of total fourth quarter revenue compared with 50% in the fourth quarter last year, and 54% last quarter.

Non-US revenue represented 25% of our total revenue in the quarter, compared with 22% of total revenue in the fourth quarter of 2009, and 17% of total revenue in the third quarter of 2010.

Non-US procedures grew 42% on a year to year basis, in a seasonally stronger quarter.

DVP in Europe was the greatest driver in non-US procedure growth, although we experienced growth in all procedure categories.

Instrument and accessory revenue grew at a rate similar to the procedure growth.

We sold 38 systems outside the US, including two S-to-SI trade-ins, compared with 30 in the fourth quarter of 2009, and 22 last quarter.

I would note that there was one S-to-SI upgrade outside the US in both the fourth quarter of 2009 and the third quarter of 2010.

Despite uncertainties surrounding European economies, we sold 28 systems in Europe this quarter, compared to 16 in the third quarter and 21 last year.

Aleks will provide additional details of overseas system sales.

Moving on to the remainder of the P & L, gross margin in the fourth quarter was 73%, compared with the fourth quarter of 2009 gross margin of 72%, and compared with the third quarter of 2010 gross margin of 73%.

The increase over the prior year reflects lower manufacturing costs and absorption of fixed costs over a larger revenue base.

Fourth quarter 2010 operating expenses of $128 million were up 23% compared with the fourth quarter of 2009, and up 8% compared with the third quarter.

The quarter-over-quarter increase reflects costs associated with employees added during the quarter, and increased R&D prototype spending.

We added 92 employees in the quarter, including 54 employees in the sales and service organization, as we continue to expand our clinical sales force, and 28 employees in operations.

Fourth-quarter 2010 operating income was $154 million or 40% of sales, compared with $128 million or 40% of sales for the fourth quarter 2009, and $132 million, or 38% of sales for the third quarter of 2010.

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

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

Our effective tax rate for the fourth quarter of 23% brought our annual tax rate to 33%, compared to our 2009 rate of 41%.

The reduction in rates between years reflects the implementation of our international tax structure, and a greater portion of our income being generated outside the US.

Our fourth-quarter rate benefited from a greater portion of our income being generated outside the US, from the retroactive restatement -- reinstatement of the federal R&D credit, and from a reduction in non-deductible stock option expenses.

Our net income was $121 million or $3.02 per share, compared with $78 million or $1.95 per share for the fourth quarter of 2009 and $87 million or $2.14 per share for the third quarter of 2010.

Let me quickly summarize our results for 2010.

Procedures grew by 35% to approximately 278,000.

Total revenue for 2010 was $1.413 billion, up 34% compared with $1.052 billion last year.

This included recurring revenue growth of 34%, and an increase in systems revenue of 35%.

Operating income for 2010 was $555 million, up 47% compared with $377 million last year.

Operating income included $118 million of stock-based compensation charges in 2010, compared with $97 million in 2009.

Net income for 2010 was $382 million or $9.47 per share, compared with $233 million or $5.93 per share last year.

Now moving to the balance sheet.

We ended 2010 with cash and investments of $1.609 billion, down $12 million compared with September 30, 2010.

The decrease during the quarter reflects $125 million of cash flows from operations plus $8 million from the exercise of stock options, more than offset by $140 million of stock buybacks and $9 million of capital and IP purchases.

During the fourth quarter, we bought back 530,000 shares at an average price of $2.64 per share, bringing our total repurchases for the year to 742,000 shares at an average price of $2.68 per share.

As of December 31, there was $101 million of the Board-authorized buybacks remaining.

Our accounts receivable balance increased to $247 million at December 31, from $208 million at September 30, reflecting increased revenue.

Our net inventory increased to $87 million at December 31, from $85 million at September 30.

The increase reflects inventory necessary to support increased revenues.

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

Thank you, Marshall.

During the fourth quarter, we sold 124 da Vinci systems, 86 to the United States, 28 in Europe, and 10 into rest-of-world markets.

As part of the 124 systems sales, 24 standard da Vinci systems were traded in for credit against sales for new da Vinci SI systems, and nine S systems were traded in for SI systems.

We had a net 91 system additions to the installed base during the quarter, which brings to 1,752, the cumulative number of da Vinci systems worldwide, 1,285 in the US, 316 in Europe, and 151 in rest-of-world markets.

50 of the 124 systems installed represented repeat system sales to existing customers.

The 38 system sales internationally was our strongest quarter to date, and included six da Vinci systems into Italy, five into Germany, and three into the countries of France and Korea.

Clinically, we had a strong quarter with GYN and more specifically, benign DVH contributing the greatest absolute growth.

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

Additionally, overall benign GYN procedures, which included Sacral Colpopexy, Myomectomy, and Endometrial Resections, also exhibited strong sequential growth.

Within the segment of Urology, DVP, partial Nephrectomy and Cystectomy were all up materially on a sequential basis.

And finally, Head And Neck, Colorectal And Thoracic Resections all displayed strong sequential growth.

Our strong fourth quarter procedure growth was not limited a specific geography.

It was global in structure.

On a year-over-year comparison, overall fourth quarter procedures grew by approximately 35%, which is consistent with our overall 2010 procedure growth, as well as our 2010 procedure guidance.

On a global basis, we finished 2010 having completed approximately 278,000 total procedures, lead by DVH representing approximately 110,000.

And DVP representing approximately 98,000.

Benign GYN procedures have become a significant catalyst for growth within our overall business.

DVH, da Vinci Sacral Colpopexy, Myomectomy, and Endometrial Resections represent large business opportunities, both US and internationally, and the peer review data supporting da Vinci's role within these procedures is beginning to expand.

A rapidly emerging benign GYN procedure, one we have not talked a great about, is da Vinci Myomectomy.

Myomectomy is a procedure to remove a uterine fibroid, while preserving the patient's uterus.

Currently the gold standard operation for Myomectomy includes a lower abdominal incision.

Over the past few years, traditional laparoscopic myomectomies have been performed more regularly, however due to the extensive suturing required for adequate closure, it is considered technically difficult, and therefore, limited in its clinical adoption.

At the American Society of Reproductive Medicine Conference, a paper entitled "Robotic Assisted Laparoscopic and Open Myomectomy, A Comparison Of Surgical Outcomes" was presented.

The study was authored by a group of physicians representing the Cleveland Clinic Foundation, and Case Western Reserve University.

The study examined blood loss, length of stay and operating time for 575 patients within these three distinct cohorts.

The three groups were case-matched with comparable myomas regarding size, number, and location, and adjusted for age and body mass index.

When comparing da Vinci Myomectomy to open Myomectomy, average surgical time did increase, but average blood loss was reduced significantly by 50%, and the average hospitalization was reduced from three days to one day.

When comparing da Vinci Myomectomy to traditional laparoscopy, surgical time was reduced by an average of 22 minutes, and blood loss was reduced by an average of 33%.

In their conclusion, the authors wrote, and I quote, "robotic assisted myomectomy is associated with decreased estimated blood loss and length of hospital stay, compared to traditional laparoscopy and open myomectomy.

Despite that robotic use is associated with longer OR time compared to open procedures, it is shorter than laparoscopic approach.

It appears that robotic technology is able to convert more laparotomy cases."

Total GYN procedures represent nearly half of our overall procedure volume, with the overwhelming majority being comprised of procedures to treat benign conditions.

We are pleased by the fact our customers and patients are experiencing an enhanced clinical value within these large mainstream procedure categories; however we do recognize that it makes procedure volumes more susceptible to general seasonality and macroeconomic pressures.

This is due in large part to a patient's ability to postpone some treatments to a future date when it becomes more economically convenient for them.

On the other end of the spectrum, we are experiencing strong growth trajectories within a category that I will term very complex procedures, procedures where volumes are less seasonally affected, namely head and neck surgery, colon and rectal surgery, renal cancer, cervical and endometrial cancer and lung cancer procedures.

While some of these procedure categories are potentially large, with steep growth trajectories, they are also fairly young with respect to their adoption, and therefore, individually, their contribution is currently less impactful to our overall procedure number.

The fastest growing segment in 2010 was head and neck surgery.

The category more than tripled in size during the year, and showed exceptional sequential growth in Q4.

We are seeing more and more peer-reviewed literature describing da Vinci's role within this category.

In a recent addition of the journal Oncology, three surgeons from the Department of Head and Neck Surgery at the University of Texas' MD Anderson Cancer Center authored a comprehensive perspective paper entitled, "A Shifting Paradigm For Patients With Head And Neck Cancer, Trans Oral Robotic Surgery, or TORS".

The paper reviewed the functional outcomes from various studies published by leading head and neck cancer centers, such as the Mayo Clinic Rochester, University of Pennsylvania, the University of Alabama-Birmingham, and MD Anderson.

The authors highlighted the initial study out of Penn, which reported that 25 out of their first 27 patients undergoing a da Vinci procedure for tonsillar squamous cell carcinoma attained negative margins, and that two patients with positive margins were later cleared.

Local control was achieved in all 27 at six months follow-up.

Next, the University of Alabama, Birmingham evaluated 54 patients undergoing TORS, and found that only five required a temporary tracheotomy, with decannulation, or removal, occurring at a mean of eight days.

Similar functional data was reported in the series by Moore, et al, at the Mayo Clinic.

His group reported an average time to decannulation of seven days.

This is a significant improvement for decannulation over conventional surgery, where it is usually reported in weeks or months, rather than days.

These early evaluations of oncologic and functional outcomes of TORS illustrate a minimally invasive technique that permits resection of a tumor on block while preserving patients' swallowing ability.

The MD Anderson group concluded their paper by stating, and I quote, "Robotic surgery in head and neck oncology is an exciting innovation that provides significant advantages.

Patients have an on-block removal of their tumors via a minimally invasive surgery, without a cervical incision, while preserving function and potentially avoiding adjuvant radiation and its long term sequelae.

While long term oncologic functional data are needed to fully validate its use, early results are promising." That concludes my remarks, and I'll now turn the time over to Calvin.

Thank you, Aleks.

I will be providing you with our financial forecast for 2011, including procedures, revenues, and other elements of the Income Statement on a GAAP basis.

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

Starting with procedures, We continue to see strong growth in da Vinci Hysterectomies in the US, DVPs in Europe, and general growth across a broadening range of procedures at earlier stages of market adoption.

We expect our 2011 total procedures to grow between 25% and 28% from the base of approximately 278,000 procedures performed in 2010.

Based on an increasing percentage of benign hysterectomies and other short-term elective procedures in our procedure mix, we anticipate a more pronounced quarterly seasonality impact in 2011 as compared to 2010.

Moving to revenues.

We expect to achieve annual revenue growth of between 16 and 20%.

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

We expect typical capital sales seasonality in 2011.

with Q1 being a relatively lighter quarter.

and Q4 being the seasonally strongest.

With regards to gross margin, we reported fourth quarter 2010 gross profit of 72.5% of sales.

Looking forward into 2011, we anticipate maintaining our margins near the current level at a rate of between 72% and 73% of sales for the year.

Gross margin can fluctuate quarter-to-quarter, due to product and geographical mix.

Moving to operating expense.

We expect our GAAP operating expense to grow by approximately 16% to 20% in 2011, which is in line with our expected top-line growth.

Our 2011 operating expense growth will be driven by clinical sales resource additions in the field to support newly installed systems, and drive procedure growth.

Investments in new and existing R&D projects to drive growth in our long term business, and non-cash stock compensation expense growth of approximately 22%.

We expect our non-cash stock compensation charges to increase from $118 million recorded in 2010, to approximately $140 million to $145 million in 2011.

Amortization of purchased intellectual property, which is mostly recorded as R&D expense, is expected to increase from $16 million in 2010 to $17 million to $20 million in 2011.

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

We expect other income to come in between $17 million and $18 million in 2011, which is down slightly from approximately $19 million earned in 2010.

With regard to income tax.

In 2010, we reported income taxes at a rate of 33.3% of pre-tax income.

As some of the items that benefited 2010 will not carry forward, we anticipate recording 2011 income taxes at about 34% of pre-tax income.

We estimate that our share count for calculating EPS in Q1, 2011 will be approximately 40.3 million shares.

Cash.

Our cash balance has remained in the $1.6 billion range throughout the second half of 2010, as we have largely returned operating cash flows to shareholders in the form of stock repurchases, including $140 million used to repurchase shares in Q4.

Our repurchase program remains active and entering Q1, 2011, we have approximately $101 million remaining authorized by the Board to buy-back additional shares.

We will communicate any future repurchase authorizations as they become effective.

That concludes my comments, and now I'll open the floor for your questions

Thank you.

(Operator Instructions).We'll first go to the line of Ben Andrew with William Blair.

Please go ahead.

Great.

Can you hear me?

Yes.

Great.

Maybe start talking about the kind of change in your outlook for procedure growth, and you did go through quite a few of the factors, but the 35% performance in the quarter for the full year in 2010 and you're guiding to 25% to 28% for next year.

Would you characterize that as conservative, is that something as you've added so many sales reps, you're waiting to see if that productivity is coming through and there's a fair bit of upside to that, or what led to that guidance thought?

Thanks, Ben.

Before we jump in and answer the question just one correction on the call.

I guess my script, I mentioned that we had bought back shares and I gave prices of $2.64 and $2.68.

Obviously that wasn't the price.

I missed it by a couple digits.

$264 and $268.

Okay, anyway to the question of kind of what's on the line to growth in the growth guidance.

The major drivers of growth, looking forward, will be continued option of gynecology in the US and in the US, the malignant side of hysterectomy, so hysterectomy for cancer conditions are going to the upper part of the curve, and really the growth will be coming out benign hysterectomy, benign hysterectomy is diffuse, so it's a little bit harder to consolidate.

That's one, and the second source of growth in the procedure domain will be urology in Europe, which is coming along nicely, but a little lower in the curve and emerging procedures, while they were growing really nicely, they are at a little bit smaller base, so a little bit of it is just the timing of these different adoptions, as they progress.

Is it reasonable, Gary, to think as you go through the year that in fact it could be accelerating as some of those curves are moving further out, and higher to the top right, that again you're just kind of at the front edge of many of the newer emerging procedure codes you've been discussing.

I think we'll have to see where the emerging procedures go as they come up.

I think we call them emerging because they are promising, and they are going quickly but on small bases, and really the challenge and the question for us is how quickly can they move up.

I think we'll just have to report on it as the year progresses.

Last question for me, is that hiring plans for the field organization, you've been increasing that quite steadily over the course of 2010.

How would you think about the quarters progressing over the course of 2011, please?

We kind of felt like 2010 was a catch-up year for some slow hiring in 2009, and I think we've done a pretty good job of catching up and getting close.

We'll continue to hire, but I think the rate of hire will start to temper a little bit as we move into the back part of 2011.

I'll let Jerry add a little color to that.

I think that as Gary mentioned, we caught up.

We're just about where we want to be.

We do use pretty careful metrics to add sales force accordingly, as the procedures grow, and I think that we'll be in a sweet spot in the next quarter or two, and then we'll manage it as procedure growth dictates.

Great.

Thank you.

Thank you.

Next we'll go to the line of Tycho Peterson with JPMorgan.

Please go ahead.

Hi, good afternoon.

A question, on the Q from last quarter you talked about the new SIE model and this looks I guess more kind of a de-featured system.

Can you just talk about the opportunity there and how we think about maybe that blending into ASPs, is there some risk, I guess you move down the ASP curve as you push this out?

Yes, we think there's an opportunity, a common economic opportunity there for the SIE.

It is a de-featured version of the SI.

It has a lot of the future-forward compatibility that the SI line has, and we think that as we move into more benign procedures, and frankly head and neck is fundamentally a three-hour procedure, that there's an opportunity there both for customers who are a little more price sensitive, as well as second system sales that go into sites that are having more diverse procedure lines, so that's kind of the frame-up of the SIE.

Can you just comment on that the ASP is and did that impact this quarter at all?

You talked about fewer dual consoles as impacting ASPs.

I'll let Marshall talk about it a little bit.

So the list price for an SIE is below that of an SI, obviously because it is de-featured and I believe it's $1.3 million.

Okay.

Second question on colorectal, you called that out as obviously as one of the emerging growth areas.

How do we think about, you talked about the staple obviously in process here.

How do you think about maybe how much pent-up demand there is post the stapler coming out?

You've again see some of this traction before its been launched, but how do we think about how important getting the stapler out will be to really driving the uptake of colorectal?

Yes, it's really hard to say at this stage, Tycho.I think we'll know when we get there, but what we've learned in the past is often, one or two instruments can make a great deal of difference in optimizing a procedure.

We saw it in prostatectomy with bipolar energy and the appropriate grasper to manage the tumor, or the prostate, I should say, and you start to see procedure times come down, and you start to see case reports improving and so on, and so forth, so we know the process of trying to optimize a procedure, and I think stapling becomes directionally a pretty important product, not just in colorectal, but perhaps in lung surgery and some of the other large sort of very complex procedures, so in terms of pent-up demand, I don't know that we even know how to call that.

I would just say that it's a product launch, or I should say a product development that should add value in a number of targets for us going forward.

And could you provide anymore color on timing?

Should we think about that this year?

Well I think the way you want to think about it, we've talked about products that are either in FDA or in development.

This one is still in the development phase, which means it's not in front of the FDA.

The pace of development and the quality of the prototyping is excellent, but it's a very complex procedure.

There's no question about it, so there's really not a lot more we probably will go into other than, just think of it in development at this stage.

Okay, and then just one last one on prostate, as we think about where we are in the adoption curve, obviously more of the focus here on hysterectomy in the US and some of these emerging procedures, but is your view that DVP can stay flat in 2011 in the US, or is there a risk that could go negative?

Well there's always risk, but I would say that if you looked at it in 2010, it was actually up in the United States, not materially so, but we've described it pretty much each quarter as flattish, and it's actually up a little bit in the United States.

The majority of the growth came from outside, almost overwhelming amount of the growth came from outside the United States, which we believe will be the case.

I think there will be a sort of a give and take between other therapies that go on with Prostatectomy indefinitely.

I think we are picking up some procedures that may have been sort of headed toward radiation or other therapies, and they will probably pick up a case that was headed for surgery.

So we think of it as flattish in the near term, and that's probably as accurate as we can be.

Okay, actually just one last one on Japan.

Can you comment on whether you placed any systems there, and anything new to highlight?

I think we placed one system in Japan and as far as anything new to highlight, we continue to work, as we've talked about in the past, with various stakeholders in Japan about looking at ways to get reimbursement approved on a global basis, if you will, as opposed to a manual basis.

It isn't anything that we are expecting for 2011.

I think through 2011 we'll continue to move the process on a manual basis, and yes we would expect some systems to be sold, but we are not at a point where we would classify it as fully-optimized, and nor would we expect it in 2011.

Okay.

Thank you very much.

Next, we'll go to the line of David Lewis with Morgan Stanley.

Please go ahead.

This is actually James in for David.

Thanks for taking the questions.

First question on the international business, obviously very strong results overseas this quarter, kind of been hovering between 20 and 30 boxes for the past maybe two or three years, and 38 this quarter.

Any insight into what's changing those markets?

Is that the kind of macro recovery theme, or is that better execution on your end?

Well, we can't control any of the macro conditions over in Europe, but we can control our execution on development of our procedure business, and I think we had a pretty good year.

As we moved through the year we also caught up on our headcount and expanded our sales force, and at the end of the year, our DVP numbers started to grow in all affected countries and our penetration of growth is getting to a critical point where its impacting the demand for additional systems, but focusing on the procedures of the capital systems continue to come, so we expect to just continue to drive the procedures, and there will be seasonality in Europe just as there has been over the years, but we did see a pretty good uptick at the end of the year.

One of the things we've said in the past is we knew there would be a stagger between DVP outside the United States compared to DVP in the US, and that is structural.

We believe there will be a lag in GYN.

There will be a lag in other procedures, so what you saw in 2010 was really a nice uptick in the DVP business, specifically in Europe.

The overall European numbers were up about 48%, and you started to see, let's say I don't want to oversell it and say some critical mass but you saw some strength, early strength in gynecologic cancer operations, DVH malignant, which is what we would have expected, because we've got sort of a history, if you will, of starting in the most complex areas, showing value, and then moving on beyond that, and I think it's starting to feel like we're getting some traction in various European countries, so that I would say on block is really the difference in European 2010 business.

As you characterize this more as just a strong quarter, or do you think you're reaching more of an inflection point there?

I think we're hearing both those answers, is we're starting to see some nice procedure momentum, and I think over time, the capital side may be lumpy, and I'd expect it to continue to be lumpy, but as long as we can keep driving the procedure business up the curve the way we think we can, ultimately, I think it will pull systems.

Okay, and then on single site, last quarter you sounded a little bit cautious on launch timing, but it seems like you made a lot of progress in Q4.

Any more firm commitment as to when we can expect to see the launch there?

We're still in conversation with regulatory bodies.

I think we're in the question and answer period, and we understand the questions and they have answers, and I can't tell you exactly when that process will conclude, but just that we're working through it.

And one last one on buybacks.

Given the cash accumulation over the past year, have you started to consider something that's a more substantial buyback program as opposed to primarily opportunistic, or more broadly how are you thinking about capital deployment going forward?

You know the numbers.

You bought back 742,000 shares at $268 per share, and for the year.

We do think about ways to return capital to shareholders and we still have another $101 million authorized and it's up to the Board to decide whether or not we proceed with a greater program.

Directionally, we've been happy with the buybacks.

We think its been a good mechanism for us and we'll look for opportunities when the time is right to continue that pathway.

Great, thank you.

We'll go to the line of David Roman with Goldman Sachs.

Please go ahead.

Good afternoon, everyone.

Thank you for taking the questions.

In your prepared remarks, you talked a little bit about an increasing number of procedures being exposed to some of the cyclicality we've seen elsewhere in healthcare, but it's pretty significant acceleration in procedure growth in the fourth quarter.

Can you maybe help us characterize or maybe parse out what part of that acceleration you think came from a rebound of some of those procedures that might have been deferred, versus an acceleration in some of the underlying more legacy procedures like DVH associated with new sales force hires?

It's really difficult to tease it out exactly but what I can tell you directionally is, even in the fourth quarter for example, in the United States, we saw a nice increase in DVP, so we also saw a nice increase in the GYN procedures both US and O-US.

Looking at it and some of that was directionally driven by new hires and new commitments if you will, to the field organization, so it's hard to say how much of that is pent-up, how much of that is driven because of seasonality.

What we do know, and what we learned last year, really for the first time in let's say Q1, the issue of fully paid deductibles versus unpaid deductibles has an impact on some of the more elective procedures, and so that is something we'll call out as that becomes a bigger part of our business.

Okay, that's helpful, and maybe that's switching over in the P&L and you talked about adding sales reps and expanding your selling organization but if you look at SG&A over the course of 2010, it grew slower than revenue in the first half of the year and then accelerated to slightly faster than revenue in the back half of the year, and you're guiding to sort of OpEx growth in line with top-line growth for next year, sorry for 2011, so is essentially most of that build-out complete with respect to the selling organization, or are there any significant investments we should look for over the course of 2011 and if we look at the last thing on the pacing of the year, should we start to see more leverage as we get to the second half on the SG&A line?

I'll answer the first two parts and have Marshall answer the last one.

On the sales side, you ought think of it in rates.

We accelerated the rate of sales hiring in 2010.

We'll continue to hire into the sales force in 2011 but the rate of hire will temper a little bit, and so a couple things happened.

One is we did sales hiring throughout the year but we do a little bit more in Q4 in anticipation of the beginning part of the year of 2011, to get them on-board and effective sooner in the year rather than later so you see a little bit of that surge.

The other thing that happened is, Marshall mentioned in the script, we had timing of R&D prototype expenses that shifted around to the back half of the year, and that's just lumpy, the nature of R&D expense can be lumpy so on those two sides, I think that we'll see a little tempering of headcount hiring in 2011 in terms of the rate of continued investments in R&D and in terms of front and back half of 2011, I'll turn that to Marshall.

We typically have a little bit, when you look at ratio to revenue, because of the seasonality in the quarters, you typically will see higher rate of expenditure relative to revenue in Q1, and a slightly higher rate in Q3 as well, and then the other two quarters look better, but it really has to do with seasonality of revenue.

Right and a linear kind of linear growth as it relates to the operating expenses.

Okay, and then lastly on the tax rate, the 34% number for 2011, I'm assuming that does not include an assumption on the reinstatement of the R&D tax credit but is more a reflection of a structural move down in your tax rate, which we should expect to continue over time?

It's actually reflective of both.

The reinstatement of the R&D tax credit was reinstated through 2011, so we will get an R&D tax credit in 2011.

Having said that, a bigger impact in 2010 and overall, the bigger impact is the change in the mix of revenue on a global basis, so as you earn more money overseas, you're being taxed at a lower rate, and that brings your tax rate down, so 34% is reflective of what we think the mix will be next year.

Got it.

Okay, thank you.

We'll go to the line of Rick Wise with Leerink Swann.

Please go ahead.

Good afternoon, everybody.

First, a bigger picture, and maybe Gary, I'll address this.

Clearly, you had a really strong fourth quarter.

Maybe you could comment or reflect on to what extent do we attribute the fourth quarter strength as specific to Intuitive, as opposed to possibly reflecting sort of more optimism in the hospital side or capital spending.

That sort of environmental stabilizing to improving, versus your own excellent business trends.

It's a good question.

It's a hard one to answer.

I guess I'd just speak directionally.

I think the piece we feel good about is really on the procedure side.

I think procedure growth there is, I think, a mix of both excellent execution by the sales force, strong patient value, and the procedures that we offer, and a little bit of seasonality in terms of patients' willingness and access to care in Q4.

I think you saw some of all three of those things.

I think on the capital side, I think it feels in the middle to us.

I don't think we feel like there's a strong environmental trend one way or the other, broadly speaking, and so when we think about the capital business, we think it's driven by a few things.

We think it's driven first by procedures and capacity, by access to capital of course, and by the availability of new products and the desirability of those products, so just to come back to the original question, the biggest thing we feel good about I think is that the demand for da Vinci procedures seem pretty strong and we were able to go out and service that demand.

Yes.

Maybe Aleks, this is directed to you but obviously another solid quarter of da Vinci placements, but can you comment on why the trade-ins seemed so unusually high.

A couple aspects to this question, was it just a extraordinarily high number, is there any particular reason, maybe give us a little color if you can on how much more upgrades there are to go at this point, but just as I look at our model, and if I'm looking at it correctly, the net new adds have been 87 to now 91 net new adds for the last five quarters now, so about 360 annualized run rate.

Should we think about net placements going forward?

Is that the right annual rate going forward, or will we see net adds actually increase in 2011 or 2012?

How do we think about that trend?

So I think there are a couple of questions in there, so I'll give you a numerical answer to one of them, and I believe you asked how many more systems can be upgraded, and I believe the number for example, in the United States pertaining to standard systems, is 162 or so, somewhere thereabouts.

Let's call it 150, north of 150, slightly.

And outside the United States, it is probably not all that dissimilar to that number.

Now it doesn't mean that all of them are going to come back in time.

I think we've got a fairly predictable trend if you'd just plot it out over the last several quarters, it will be up/down, but I don't think there's anything material in the way we're behaving that would suggest that it's going to increase or decrease at a rapid rate quickly, so the answer really becomes, what does the customer want to do and we will work with the customer.

We're doing this as a customer accommodation.

We're giving a value back for a product that they paid for and used, and now want a more advanced product, and we'll continue to be focused on the customers' needs.

In terms of a go forward projection, Rick, it's really hard to say.

I think eventually, you're going to get into your modeling and I can't recall if you're actually modeling units but if you do, I think you've got some data points that suggest kind of directionally where the trade-ins are going.

So I don't know there's a lot more color I can give you on that.

And just to the business about, you're running about a 360 unit net add in the last four quarters.

Are we going to see absolute units grow net of trade-ins from here?

Is that the way we think of it as we look at over the next two, three, four years, or will net adds on an annual basis continue to grow, do you think?

Well again, Rick, I think if you look at it, you take the most recent data point, you have 50 of the 124 systems went to existing owners which means that 74 went to new owners, so that is a pretty large number, so I think it's suggestive of the fact that there's a lot of new owners that are out there that will be buying for the first time.

In terms of how the ratios might fall out, I'm not sure, but I would say that yes, we're planning to sell systems.

Another way to look at it, Rick really is you're talking about net adds to the installed base.

Exactly.

And you can drive that up or down, it all comes back to procedure adoption in the end, and how big your installed base needs to be to serve the number of procedures.

Procedure adoption and utilization.

We have time for one more question.

My last one.

You all understand when they were talking about in depth about the product pipeline.

Should we expect, should we think there might be some major new systems introduced this year as opposed to some other year, versus the constant steady flow of procedure-specific incremental instruments?

Could this be the year where we see something more dramatic?

Thank you.

I would say this, Rick.

I think the products that we've been coloring up now for a few quarters, by our definition, are big products.

They aren't easy products.

We talk about single site when we talk about stapling, when we talk about cut and seal or ligation systems.

These are not insignificant developments so by any definition, I think they are considered big deals, but again, that's not to promise any timelines or anything else.

It's just to say directionally, we're focusing on some pretty complex stuff.

I think we have time for one more caller.

Okay, thank you.

That would come from Amit Hazan with Gleacher.

Please go ahead.

Thanks, good afternoon guys.

I'll make it quick for you.

Just first, to circle back on your procedure guidance, I think as we think about your performance in past years, there's been a really good correlation between the growth in the installed base and then the growth in procedures you end up putting up, and your growth in the install base has been about 26% in the last 12 months, and your guidance for procedure growth is now 25% to 28% and obviously you get some utilization improvement every year as well, so I'm trying to understand if I'm missing something, or if we're thinking about it the right way, but you're being conservative but just in thinking about that, the relationship between unit placement and the growth that we're going to see in procedures, what else we should be considering, maybe in terms of utilization or other to get to your guidance.

Utilization continues to increase slowly year to year and the relationship between then procedure growth and systems growth, it's really hard to correlate those in a small timeframe just because the capital purchasing cycle is unpredictable.

On a long term basis, they should be closer, or match up better, as procedures do drive system sales.

Just to color that up a little bit.

I think if you can integrate over a many year period, the number of procedures you do will tell you how many systems you need to do that number of procedures.

A couple of things that are interesting.

Greenfields have a lag effect to bring those programs up to full capability, and the one that's really hard to model is as robotic programs become multi-specialty, how many procedures they can get on the system while sharing it across multi-specialty, which is highly variable, and so as these emerging procedures come on, utilization trends start to move around a little bit so it's a very tough thing to model.

I think that was our last question, thank you.

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

I would like to share with you two brief examples of what this means in the lives of our patients.

The first patient is Sandra, who had her da Vinci procedure in Miami.

Sandra reports, "on November 29, 2010, I received a diagnosis of adenocarcinoma of the lung.

I have always been an extremely healthy person and a non-smoker, so you can imagine how shocking this diagnosis was for me.

Being a nurse practitioner and a former OR nurse, I thought I knew what I was in for.

I have a friend who underwent the traditional Lobectomy for the same diagnosis 10 years previously.

She spent two weeks in the hospital, five days in the ICU, and was subjected to a broken rib and scapula in order to provide access to the lung.

It was three months before she was able to return to work and she still has pain to this day.

"Fortunately I was wrong.

I have a friend who works for Intuitive Surgical.

He was adamant that I meet with Dr.

Mark Dylewski at South Miami Hospital.

I did my research and learned Dr.

Dylewski is very experienced with the da Vinci robot, having done over 300 robotic-assisted surgeries.

I met Dr.

Dylewski on November 30th, and knew immediately he was my surgeon.

His confidence was just the reassurance that I needed.

"On December 9, I was admitted to South Miami Hospital for robotic-assisted right lower lobectomy.

My surgery took an hour and a half.

I had minimal post operative pain, and was up and walking the next day.

I was discharged to home on day two, and stopped pain medication on day six.

I returned to work two weeks after surgery and was back to the gym for a light work out three weeks after surgery.

"I have to say I feel blessed, my tumor was found early, my nodes are negative, and I have an excellent prognosis.I'm blessed to have caring friends, I'm blessed to have found this brilliant surgeon, and I'm blessed this amazing technology is available.

I would encourage anyone who receives a diagnosis of lung cancer to find a surgeon in a hospital that offers the da Vinci robotic surgery.

It saved me from agonizing post-operative pain and a long, debilitating recovery.

I traveled 125 miles South to Miami, and I am so glad that I did it."

Our second patient is Linda who had a Sacral Colpopexy completed in Reno, Nevada.

She said, "I had a hysterectomy 30 years ago, so when I was told I needed a sacral colpopexy, all I could think about was the pain and long recovery.

Needless to say, I was dreading this procedure.

Dr.

McCaskill assured me that the da Vinci procedure would be less invasive, less painful, and I would feel better in less time.

Thanks to this very talented surgeon and the da Vinci robot, the procedure and recovery have exceeded all of my expectations.

There was really no pain, only discomfort around one of the five incisions.

I felt the need to use pain medication for the first three days, and after that, Aleve worked great at night to help me sleep.

I was up and about shortly after the surgery, and was totally amazed by the fact that I could stand up straight and walk without any pain, or feeling like my stitches were pulling apart.

I had to remind myself before overdoing things that I had just had major surgery.

Wow what a difference between the surgery I had 30 years ago when I was unable to stand up straight and barely able to shuffle around for the first couple of weeks, and the one I just experienced with the da Vinci robot.

Anyone who has the option to have this da Vinci procedure should take advantage of it.

Compared to the other options, it is truly amazing"

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' time.

Ladies and gentlemen, that does conclude your call for today.

Thank you for your participation and for using AT&T executive teleconference service.

You may now disconnect.