直覺手術 (ISRG) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Intuitive Surgical second-quarter earnings release 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 conference is being recorded.

I would now like to turn the conference over to our host, the Director of Financial Planning, Mr.

Calvin Darling.

Please go ahead.

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; and Aleks Cukic, our Vice President of Strategic Planning.

Before we begin I would like to inform you that comments mentioned on today's call may be deemed to 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 archive section under our investor relations page.

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

Today's format will consist of providing 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, then I will provide you with an update to our financial forecast for 2011.

Finally, we will host a question-and-answer session.

With that, I will turn it over to Gary.

Thank you for joining us today.

We are pleased with our growth in da Vinci procedures and with customer response to our recently released products in the second quarter.

Our team has executed well in our four areas of focus of 2011, which are, first, extending the benefits of minimally invasive surgery and gynecology and urology globally; second, expanding robotic surgery and deepening our organizational capability in Europe and Asia; third, crisp execution in our product development efforts; and finally, enabling emerging procedures in thoracic, trans-oral, colorectal and general surgery.

Turning to procedures, total procedures grew 30% over to Q2 2010, and da Vinci Hysterectomy followed its seasonal pattern, posting solid growth in hysterectomy for both malignant and benign conditions.

In urology, da Vinci Prostatectomy continued to grow, primarily through growth in Europe, as expected.

Pull-through procedures, namely partial nephrectomy, endometrial resection and sacral colpopexy, grew nicely in the quarter.

Emerging procedures in trans-oral robotic surgery, thoracic surgery and colorectal surgery have also shown digital with clinical publications emerging from early adopting centers.

Aleks will provide additional procedure commentary later in the call.

Turning to operating highlights for the second quarter, procedures grew approximately 30% over the second quarter of 2010.

We sold 129 da Vinci Surgical Systems, up from 108 during the second quarter of last year, and 99 of which were purchased by US customers.

Total revenue was $426 million, up 21% over last year.

Instrument and accessory revenue increased to $172 million, up 35% over Q2 2010.

Total recurring revenue grew to $239 million, up 31% from prior year and comprising 56% of total revenue.

Net income was $117 million, up 32% over last year.

We generated an operating profit of $203 million before non-cash stock option expense, up 19% from the second quarter of last year and representing 48% of Q2 revenue.

We ended the quarter with $1.822 billion in cash and investments, up $65 million from last quarter.

Significant cash outlays during the quarter included $39 million invested in intellectual property and fixed assets and $139 million used in the repurchasing of stock.

Excluding the impact of these outlays as well as $32 million from stock proceeds and $41 million provided by working capital, we generated $170 million in gross cash flow from operations, which is 145% of our reported GAAP net income for the second quarter.

Turning to products, we launched three new instruments in the US this quarter, a thoracic grasper, a medium/large (inaudible) plier and a bipolar dissector.

We also received the CE Mark for a fourth product, our suction irrigation instrument, and we have begun its rollout in Europe.

We have submitted our 510(k) for the suction irrigation instrument and are working through the approval process with FDA.

New instruments allow for faster and more precise da Vinci procedures, and these new additions to our instrument line are targeted at facilitating our emerging procedures in thoracic and general surgery.

As we mentioned last quarter, the FDA has requested additional clinical data for our Single-Site product.

We have selected this clinical data from both US and European sites and will resubmit our Single-Site 510(k) to FDA this month.

Clinical results from Single-Site use in Europe are encouraging, and our phased rollout in Europe is progressing with Single-Site running at approximately 10 sites.

We continue to make good progress on both our da Vinci vessel sealing instrument and our da Vinci stapler.

We are in the process of answering FDA questions on our vessel sealing instrument while progressing through its manufacturing bring-up.

Our stapler is developing on plan, and we are working through its validation.

Moving to recently released products, our da Vinci simulator has been well received by our customers.

After dual console, the simulator is the second step in a set of products aimed at improving the quality and efficiency of da Vinci training.

The simulator has fit well with both dual-console and single-console Si customers, and it is providing surgeons with improved ease of access and support in learning da Vinci surgery.

Several studies evaluating face, content and construct validity of the simulator are in process, and the initial response from surgeons' trainers in our field has been enthusiastic.

Our phased rollout of Fluorescence Imaging is progressing to plan with its initial use building in partial nephrectomy procedures.

Lastly, we are investing in building our team and expanding partnerships and in acquiring those technologies that can make a difference to robotic surgery.

This quarter we added 40 people to our team, predominantly in sales, manufacturing and R&D, bringing our total team to 1769 employees.

I will now pass the time over to Marshall, our Chief Financial Officer.

Thank you, Gary.

Our second-quarter revenue was $426 million, up 21% compared with $351 million for the second quarter of 2010 and up 10% compared with $388 million reported for the first quarter of 2011.

Second quarter revenues by product category were as follows.

Second-quarter instrument and accessory revenue was $172 million, up 35% compared with $128 million for the second quarter of 2010 and up 9% compared with $157 million in the first quarter of 2011.

The increases in instruments and accessories are primarily driven by procedure growth.

Instrument and accessory revenue realized per procedure, including initial stocking orders, was approximately $1940 per procedure, which is higher than the $1870 realized in the second quarter of 2010 and approximately the same as the first quarter of 2011.

Relative to the second quarter of 2010, the increase primarily reflects increased stocking orders associated with increased system sales.

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

Second quarter 2011 systems revenue of $187 million increased 11% compared with $168 million of systems revenue for the second quarter of 2010 and increased 12% compared with $167 million of systems revenue for the first quarter of 2011.

We sold 129 systems in the second quarter of 2011 compared with 108 systems in the second quarter of 2010 and 120 systems in the first quarter of 2011.

The second quarter 2011 system count included 36 trade-ins, of which 21 were S for Si trade-outs, and the first quarter of 2011 included 32 trade-ins, of which 19 were for S for Si trade-outs.

The second quarter 2010 system count included 19 trade-ins but excluded 10 S to Si upgrades that were treated as upgrade revenue, since the S units were upgraded in the field.

Upgrade revenue for the second quarter of 2011 was approximately $800,000 compared with $7.6 million for the second quarter of 2010 and $1.5 million for the first quarter of 2011.

Prior-year upgrade revenue included the 10 S to Si upgrades.

Our second-quarter average sales price per system, including all da Vinci models and S to Si trade-ins but excluding upgrades, was $1.44 million, a decrease from the $1.48 million realized in the second quarter of 2010 and an increase compared with the $1.38 million realized in the first quarter.

The increase in average sales price compared with the first quarter of 2011 reflects increased simulator revenue and a favorable mix of systems and customers.

We recognized revenue for 115 simulators in the quarter, including 33 that were sold in the first quarter in conjunction with system sales but were not delivered until the second quarter.

In total we have sold 162 simulators in the first six months.

Included in the mix of systems sold in the second quarter were 21 dual-console systems compared with 15 in the first quarter.

The decrease in average sales price per system compared with the prior year reflects a favorable product and geographic mix in the second quarter of 2010, credits associated with the S trade-ins in the current quarter, partially offset by the simulator revenue.

ASPs will fluctuate quarter to quarter based on product, customer and trade-in mix.

Service revenue increased to $68 million, up 22% compared with $55 million last year and up 6% compared with $64 million last quarter.

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

Total second-quarter recurring revenue, comprised of instrument, accessory and service revenue, increased to $239 million, up 31% compared with the second quarter of 2010 and up 8% compared with the first quarter of 2011.

Recurring revenue represented 56% of total second-quarter revenue compared with 52% in the second quarter last year and 57% last quarter.

International results were as follows.

Procedures outside of the US grew 38% on a year-to-year basis with dVP in Europe being the greatest driver, although we also experienced growth in other target procedures, including dVH for malignant conditions in Europe.

Second-quarter revenue outside the US was $87 million, up 38% compared with revenue of $63 million in the second quarter of 2010 and down 5% compared with revenue of $91 million in the first quarter of 2011.

Instrument and accessory revenue grew 57% year-over-year and decreased 1% sequentially.

The changes in instrument and accessory revenue reflects growth in procedures and seasonal buying patterns of our customers.

We sold 30 systems outside the US compared with 22 in the second quarter of 2010 and 31 last quarter.

We sold 16 systems in Europe this quarter compared with 14 in the second quarter of 2010 and 15 last quarter.

Aleks will provide additional details of overseas system sales.

Moving on to the remainder of the P&L, gross margin in the second quarter was 72% compared with the second quarter of 2010 gross margin of 73% and compared with the first quarter 2011 gross margin of 72%.

The decrease compared with the second quarter of 2010 primarily reflects decreased system ASPs.

Second-quarter 2011 operating expenses of $139 million were up 18% compared with the second quarter of 2010 and up 6% compared with the first quarter of 2011.

The quarter-over-quarter increase reflects costs associated with employees added during the quarter and costs associated with increased revenue.

We added 40 employees during the quarter, including 23 employees in our commercial operations organization and 17 employees in product operations.

Second quarter 2011 operating income was $168 million or 39% of sales compared with $140 million or 40% of sales for the second quarter of 2010 and $148 million or 38% of sales for the first quarter of 2011.

Second quarter 2011 operating income reflected $35 million of non-cash stock compensation expense compared with $30 million for the second quarter of 2010 and $32 million last quarter.

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

Our effective tax rate for the second quarter of 32% is consistent with the rate for the first quarter and lower than the 33% recorded for the fiscal year ended 2010.

Our net income was $117 million or $2.91 per share compared with $89 million or $2.19 per share for the second quarter of 2010 and $104 million or $2.59 per share for the first quarter of 2011.

Let me quickly summarize our results for the first six months of 2011.

Procedures grew by 30%.

Total revenue for the first six months of 2011 was $814 million, up 20% compared with $679 million last year.

The revenue increase included recurring revenue growth of 29% and an increase in systems revenue of 9%.

Operating income for the first six months of 2011 was $316 million, up 17% compared with $269 million last year.

Operating income included $67 million of stock-based compensation charges in the first six months of 2011 compared with $57 million in 2010.

Net income for the first six months of 2011 was $222 million or $5.51 per share, compared with $174 million or $4.31 per share last year.

Cash flows from operations for the first six months of 2011 was $296 million compared with $291 million last year.

Now moving to the balance sheet, we ended the second quarter with cash and investments of $1.822 billion, up $65 million compared with March 31, 2011.

The increase was driven by $196 million of cash flows from operations plus $32 million from the exercise of stock option, partially offset by $139 million of stock buybacks and $39 million of capital and IT purchases.

During the second quarter we bought back 401,000 shares at an average price of $347 per share.

As of June 30 there was $249 million of the Board-authorized buybacks remaining.

We also executed on the opportunity to purchase approximately 18 acres of land and buildings for $33 million next to our current Sunnyvale campus for possible long-term growth.

Our accounts receivable balance decreased to $250 million at June 30 from $260 million at March 31, reflecting the timing of revenues and collection.

There was no change in the quality of our receivables during the quarter.

Our net inventory increased to $100 million at June 30 from $93 million at March 31.

The increase reflects steps taken to increase component inventory where supplies have tightened and a build of finished goods to reduce the risk of supply disruption as we move our manufacturing operations to our new building in Sunnyvale.

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

Thank you, Marshall.

During the second quarter we sold 129 da Vinci systems, 99 in the United States, 16 in Europe and 14 into rest of world markets.

As part of the 129 system sales, 15 standard da Vinci systems and 21 da Vinci S systems were traded in for credit against sales for new da Vinci Si systems.

We had a net 93 system additions to the installed base during the quarter, which brings to 1933 the cumulative number of da Vinci systems worldwide, 1411 in the United States, 342 in Europe and 180 in rest of world markets.

62 of the 129 systems installed represented repeat system sales to existing customers.

In total, 121 of the 129 systems sold during the quarter represented da Vinci Si systems, which included 21 dual-console systems.

The 30 system sales internationally included four da Vinci systems into Japan, four into Italy and three into both Switzerland and India.

Clinically, we had a strong quarter, achieving overall year-over-year growth of approximately 30%.

Gynecology in the United States was particularly strong, while growth within general surgery, urology, thoracic and head and neck procedures was solid.

As mentioned in the past, Q1 is a seasonally challenged quarter for surgeries that could be classified as discretionary, which causes some early lumpiness within benign gynecologic procedures.

Consistent with Q2 2010 procedure trends, benign dVH growth during the second quarter of 2011 grew solidly faster than malignant dVH.

In addition to strong dVH adoption, sacral colpopexy, endometrial resection and myomectomy have been key factors to the US GYN expansion.

In Europe, dVH growth has begun to emerge within malignant procedures, primarily endometrial and cervical cancer resection.

In addition, the category of general surgery has shown signs of early adoption.

However, most of our EU growth is still being fueled by urology.

In Asia, urology and general surgery were the strongest categories for the first half of the year.

All in all, Q2 procedure growth showed global strength across several key categories.

Q2 represents our busiest quarter for clinical trade shows and surgical conferences.

The volume of clinical data presented, procedure technique reviews and live surgery presentations was impressive.

AUA represented 200 or so abstracts and 16 postgraduate courses.

WRS was packed with live surgery, robotic panels and podium discussions covering all segments of surgery, not to mention SAGES, the American Society of Colorectal Surgery, AATS and ACOG, as well as the various international conferences we participated in.

We are convinced that the dissemination of peer-reviewed clinical data has been a critical factor in the rapid adoption of da Vinci surgery, and the peer-reviewed exposure we receive at these important venues is immeasurable.

During the quarter over 200 clinical papers were published within various peer-reviewed journals, representing all of our target specialties.

But I will take a moment to highlight just a few which I believe represent an important theme, the economic impact of reduced complications and hospitalization and their connection toward improving clinical outcomes.

In years past, providers would report on the cost-effectiveness of robotic surgery in a fairly simple and consistent manner, whereby they consider the purchase price of the capital equipment, add to it their operating costs and divide it by the number of procedures they have completed.

Direct cost comparisons were usually made to open and laparoscopic surgery.

However, the cost of hospitalization and the cost of complications were often omitted.

Recent published studies have included broader analysis that includes both direct and indirect hospital costs.

In a recent edition of the journal Obstetrics and Gynecology, a team from Brigham and Women's Hospital and Harvard Medical School, comprised of both physician and business professionals, studied and reported on the evolution of the hospital's hysterectomy business in 2006 and compared it to 2009.

Specifically, they studied how the shift from open and vaginal hysterectomy to laparoscopic and robotic hysterectomy had affected their costs.

The paper, entitled Increasing Minimally Invasive Hysterectomy -- the Effects on Cost and Complications, evaluated the overall cost associated with 2133 hysterectomy patients that underwent the procedure in 2006 and 2009.

The study reported, and I quote, a change from majority abdominal hysterectomy to minimally invasive hysterectomy was accompanied by a significant decrease in procedure-related complications without an increase in total mean cost, close quote.

Some of the relevant details -- in 2006 approximately 65% of the 1054 hysterectomies performed at Brigham and Women's were performed abdominally.

In 2009 only 35% out of 1079 were performed abdominally.

Lap and robotic approaches comprised 17% of the hysterectomies in 2006, which grew to 46% in 2009.

Vaginal hysterectomy remained fairly stable during this period and was typically confined to less complex cases.

When evaluating outcomes and cost, the results were quite striking.

The dVH cohort was associated with the lowest intraoperative and postoperative complication rates and the lowest estimated blood loss across all cohorts, and along with laparoscopy registered the lowest length of stay data in the group.

The differences were considered very significant.

When comparing abdominal hysterectomy to dVH, length of stay was reduced from 3.5 days to 1.4 days.

Estimated blood loss went from 363 milliliters to 75 milliliters.

But most telling was the reported complication rate.

The rate of major intraoperative and postoperative complications associated with abdominal hysterectomy was shown to be approximately five times greater than with dVH.

To quote the authors, our data suggests that dedication to the implementation of a minimally invasive technique, goals such as decreased complications, decreased operative times, decreased conversion rate and decreased estimated blood loss can be realized.

The creation of a minimally invasive gynecology service at Brigham and Women's Hospital has benefited not only the trainees and the hospital but, first and foremost, our patients, close quote.

In the June edition of the American Journal of Obstetrics and Gynecology, a study out of Seattle authored by doctors Paley, Veljovich and Shah, entitled Surgical Outcomes in Gynecologic Oncology in the Era of Surgical Robotics -- An Analysis of the First 1000 Cases, was published.

The study was very comprehensive, and it reported on multiple factors and clinical outcomes related to da Vinci cancer surgery.

There were, however, two comparisons that were central in this paper.

First, could the authors increase the complexity of their da Vinci patients without increasing their complication rates?

And second, how did their dVH outcomes for endometrial cancer resection compare to open hysterectomy outcomes?

The second objective would consist of a subset of losses of their most recent 377 da Vinci hysterectomies for endometrial resection compared to the most recent and endometrial resection -- open endometrial resection surgeries.

From 2006 to 2009, dVH share at the institution had grown from 9% to 36% of the GYN cancer resections.

But further penetration was being governed by their unwillingness to accept higher BMI patients at the risk of increasing their complication rates, a concern which was dispelled by their careful analysis.

During the study period, the physicians raised their BMI constraints at three intervals, beginning at 26 until reaching an average BMI of just over 30.

Within their first interval, they operated on patients -- excuse me -- within their final interval, they operated on patients with BMIs as high as 70.

Interestingly, they discovered that neither their conversion rate nor complication rates increased within these more complex cohorts.

In fact, they actually decreased.

Their overall conversion rate for their entire 1000-patient analysis was a mere 2.9%, and their overall complication rate was 9.9%, 5.7% for majors and 4.2% for minor complications.

In the subset analysis of women undergoing endometrial cancer resection, the difference between dVH and open hysterectomy was significant.

Major complications associated with open surgery was 20.6% as compared to 6.4% for dVH.

In patients with BMIs in excess of 40, major complications dropped from 43.5% for open to 11.3% for dVH.

Length of hospitalization was reduced from 5.3 days for open to 1.4 days with dVH.

Lymph node yields were approximately 10% higher within the dVH group.

Intensive care unit admissions went from 3.8% for open to 0.5% for dVH.

Mortality rates dropped from 1.5% to 0.27%.

Their conclusion, and I quote, robotic surgery is associated with favorable morbidity and conversion rates in an unselected cohort.

Compared to laparotomy, robotic endometrial cancer surgery results in improved outcomes, close quote.

In a recent edition of the British Journal of Urology, a physician group out of Cornell and Presbyterian Hospital in New York City published their study comparing the overall costs associated with open cystectomy, lymph node dissection and diversions to da Vinci cystectomy with diversions.

This prospective study consisted of 186 consecutive patients and included appropriate sensitivity analyses.

The authors collected a myriad of cost data, both direct and indirect, and these costs were carefully analyzed.

Cost data included but was not limited to system and service amortization, disposables, length of stay, complications, surgeon fees and anesthesia cost.

In other words, both direct and variable costs were collected and scrutinized.

Their study contained three approaches to urinary diversion following cystectomy with the ileal conduit approach being the most commonly performed and the largest subcategory study.

Not surprisingly, the authors concluded that the greatest contribution to cost variation between the various cohorts were length of stay and complications.

Across the board, the direct cost between the various cohorts was pretty similar, plus/minus $1000 or so.

But the difference in variable cost was very significant in da Vinci's favor.

On an overall cost basis comparing open cystectomy with ileal conduit to a da Vinci cystectomy with ileal conduit, it was reported that the da Vinci cystectomy saved nearly $5000 over the open surgical approach.

The cost difference between the other two diversion techniques was less pronounced, slightly in da Vinci's favor for the continent cutaneous diversion and slightly in the favor of the open technique for the orthotopic neobladder approach, the least common approach.

The author's conclusion, and I quote, despite the higher cost of materials, robotic cystectomy can be more cost efficient than open cystectomy for bladder cancers at a high-volume tertiary referral center, particularly for ileal conduit, close quote.

The reduction in hospitalization, blood loss, complications and overall hospital cost has been a consistent theme throughout Intuitive's short history.

They are central components in our pursuit to improve patient value.

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

Thank you, Aleks.

I will be providing an update to our financial forecast for 2011, including procedures, revenue 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 of our expected future cash flows.

Starting with procedures, based upon our year-to-date procedure results, we are increasing our forecast for 2011.

Our prior estimate for total 2011 procedures was to grow approximately 25% to 28% for the year.

We now project procedures to grow approximately 27% to 29% from an estimated 278,000 procedures performed in 2010.

During the second half of this year, we would expect a similar seasonal pattern as we experienced last year in 2010, with Q3 being seasonally weaker and Q4 seasonally stronger.

Moving onto revenues, we are also raising our 2011 total revenue forecast.

Previously we had estimated 2011 revenue to grow 16% to 20% above 2010.

We are now forecasting total 2011 revenue to increase 19% to 21% for the year.

Again, the timing for the remaining quarter should follow last year's seasonal pattern, favoring Q4.

Remember that in Q3 of 2010 our sequential instrument and accessory revenue was roughly flat compared to Q2, and Q3 total revenue was lower than Q2.

Our current forecast for gross margin percentage remains consistent with our last quarter's forecast.

We continue to see 2011 gross margins coming in at around 72%.

Moving to operating expense, we continue to invest across multiple areas of our business, particularly our sales force, manufacturing and R&D.

Driven by our higher 2011 revenue forecast, we now anticipate operating expenses to grow at the higher end of the 16% to 20% range forecast on our last call.

More precisely, we expect operating expenses to grow between 18% and 20% above the 2010 level.

In terms of non-cash expenses, we now expect 2011 non-cash stock compensation to total between $135 million and $140 million, $5 million less than forecast on our previous call, up from $118 million reported in 2010.

We continue to expect total 2011 amortization of purchases of intellectual property to total between $17 million and $20 million.

Other income, which is mainly comprised of interest income, is expected to come in at between $17 million and $18 million, consistent with our previous estimate.

With regard to income tax, we now expect our 2011 income tax rate to fall within a range between 32% and 33% of pre-tax income, compared to our previous forecast of approximately 33%.

We estimate that our diluted share count for calculating Q3 2011 earnings per share will be approximately 40.2 million shares.

We aim to keep the share count reasonably close to this level as we expect to offset the impact of option dilution via stock repurchases.

Finally, regarding cash flows, since we are forecasting to report over $150 million in non-cash stock compensation and amortization expenses for the year, our full-year 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 financial performance than net income.

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

(Operator instructions) Tycho Peterson, JPMorgan.

Maybe just starting off with a question on some of the new products.

On fluorescent imaging, can you just talk about how you see that product rolling out?

I think you talked about initial use in partially nephrectomy.

Just talk about your go-to-market strategy for other areas for the imaging.

Sure, I think it's going to be kind of a slow build for us.

The initial indication is for imaging of vasculature.

And so partial nephrectomy is the first place that we're looking.

There are some folks out looking in other areas for applicability, things like imaging in the colorectal domain.

And so we will see; we will see, as that develops.

We also have some work looking at biliary imaging, which is not yet on-label.

It's something that we will have to follow up.

So I think it's kind of a base capability.

I think, over time, we will find extended uses for it.

The early results and the anecdotes in partial nephrectomy look really promising.

And then I guess, just dialing in on some of the core procedures, dVP in the US -- could you just talk about any kind of change in physician behavior kind of post the PIVOT data and whether you are encountering any interesting or different dynamics around watchful waiting?

You know, there doesn't appear to be anything at this stage that we can point to and say it feels or looks different.

As we've talked about for the last few quarters, there may be some quarters where the US dVP business is higher on a sequential basis, and there may be some quarters where it's flat or somewhere just declines a bit.

We are well within that range.

And I can't say that there's anything significant that we've noticed at this point.

Okay.

And then on colorectal, can you just talk about maybe market development efforts and some of the traction you've had out of SAGES and WRS?

And in the absence of having a stapler on the market, how much do you think you can really capture within the market?

It's interesting.

I think what we have learned over the years is that in procedure adoption, if it really follows a classic adoption curve in the sense that you will have early adopters that will put up with some fiddle factor, as we call it.

And then you will have people that will wait until the procedure gets optimized before they jump in.

And there's a lot of evolution that goes on in that.

I would say, through that, it's pretty clear we are in the early adopters phase and we are growing very nicely through the early adopters phase, despite not having perfect optimization of instruments and accessories.

How far we will grow in that area, it is difficult to say, but we believe strongly that we are working on the right products.

They are developing nicely and the procedure is growing well through the early adoption phase, both in the low rectal, as we talked about, in the low anterior resections, and you are starting to see some gravitation up into sigmoid and some of the other areas.

So we are pleased, at this point.

And then just last one -- can you talk about sizing the market opportunity for the simulator?

It's obviously relatively new from our perspective.

So how big do you think that opportunity could be?

I think if you look at simulation, and I think we talked about this as early as perhaps three or four quarters ago, that the simulation business is not a business that we look at with the traditional metrics, in other words, driving revenue and how much revenue you are going to be able to derive it.

It's rather, how do you improve the experience of da Vinci surgery?

How can you give more people access to training?

How do you augment the basic training protocols?

And simulation seems to make a lot of sense.

If you look at the overall numbers thus far, yes, I think the market is saying that they like it.

The fact that we've sold, I believe the number is 162 in the first six months, is very, very promising.

But in terms of traditional metrics that you're used to modeling, it isn't really the way we are looking at it.

Okay, thank you very much.

Ben [Anderson], William Blair.

Just wanted to follow up on a couple of questions, but maybe switch gears first.

The Japanese reimbursement roadmap -- is there anything resembling clarity out of them in terms of path forward or steps?

I know you talked about knowing the roadmap a bit better, but any update there?

I guess what I would say is that there's a small amount of progress and a small amount of clarity.

I think we've made some incremental progress in terms of engaging with the key opinion leaders in the right surgical societies that will help us, so I think we're making progress.

In terms of clarity on timing, we don't yet have a time that we can predict.

And, Gary, maybe turning a little bit to the de novo placements, you did, I think, 67 in the US this quarter, if my math is right.

That's a nice uptick over the last couple of quarters, brings you back to where you were previously.

I know it's not a conscious decision on your part in terms of targeting those, but can you talk about the incremental revenue opportunity for a de novo system versus, say, an additional system or a trade-in for the Company, and whether that might motivate you at some point to target de novo placements?

You know, really, the way we think about it is where are the procedures being done and where can we go to find the procedures.

The other thing that we see traditionally, and we are seeing it in hysterectomy as well, is that in general, robotics is a consolidator.

So if there is a diffuse patient population out into small centers, typically you will see them move towards early adopters of da Vinci technology.

I don't think the economics, the delta in economics between an existing customer sale and a greenfield sale, are such that they would motivate us to move toward greenfield.

So for the procedures we're in, we are feeling like the mix we have and the strategy we have is pretty sound.

And as different procedures come on and their distribution out in the world differs, we may adjust.

But for now, I think you are seeing a pretty stable mix.

Okay.

And on operating margin side, you are all the way back up to 39.5%, a little below your target.

I know there was some mix maybe in the quarter that helped on that.

But are there some investments in market development that you haven't yet implemented that you hope to, to hold that margin down, assuming that's still your goal?

And what might we look for over the next, say, six quarters, in terms of incremental market development efforts from you all?

I think, in terms of the overall operating profile, as we stated before, it's not our objective to expand margins.

Here in the second quarter, we probably came out a little ahead on the revenue side, and the hiring -- there's always the pace of hiring can shift.

You enter into Q3, and we saw last year revenue was lower in Q3.

We are going to continue to add resources to our organization.

So I think, when you look over longer periods of time, our strategy is not to expand margins, it's to expand the robotic procedure market.

Just to put a little color on it, where we have been making investments in terms of developing markets, in Europe we have been bolstering our direct organization in support of growth.

And in Japan, we have been bolstering our organization in Japan, in anticipation of growth as approvals come.

So we have been making those investments.

We caught up a little bit in CSRs in the US, and now we are kind of keeping pace as we go.

We are not trying to catch up anymore, and we are not trying to leverage it hard.

We are really trying for slow gains in productivity in the field, in the US.

Yes; then, just to kind of complete the thought there, we oftentimes get asked, well, how many people did you add in the field?

Well, as Gary said, this quarter we were pretty consistent with the last quarter.

On the clinical side, we added about 24 people to our clinical sales team, bringing us up to roughly 515 in that category, and we added an additional two at the clinical side.

We are currently at about 85.

So those rates of hiring within the field sales force are pretty consistent with what we did in Q1.

Great, thank you.

Tao Levy, Collins Stewart.

Hey, guys, it's [Al].

Just touching on the reps that you just mentioned, there was that big bolus of hiring the you did in the back half of last year.

How do you feel the productivity of those reps is lining up versus your more seasoned folks?

I think we have been pretty pleased about how they have come on and the general level of productivity.

We watch procedures per rep and rep in territory pretty closely, as you would imagine and it takes a while for reps to settle in and hit their full productivity.

But we are seeing, I think, that return to some metric balance that we were hoping for last year.

And now, I think we are at a catch-up mode, as I said before, and a little bit more in sustained growth.

So that about halfway, where some of the seasoned reps are delivering on procedures?

I think, as you would imagine, there's a distribution there.

Some folks come up to speed very quickly, some people take a little bit longer.

But for most of the hiring that was done last year, they are hitting their productivity pretty well.

And have you seen any or noticed any changes to the general macro challenges I guess you have always faced in selling the value proposition of da Vinci surgery to your customers?

Either in the US or in Europe, this quarter or even last quarter, do you see any potential changes versus what you have been experiencing?

So far in the last few quarters, we haven't seen any significant trends.

One thing we did see was -- the only thing we did see was really more of our customers finance systems this quarter than they had previously.

But we think that had mostly to do with the low interest rates that they are now able to access.

And there is plenty of financing for them to obtain.

But other than that, there really aren't any trends that I would point out.

And just the last question -- on the single decision, you mentioned you're going to file that this month.

Do you expect that to be a six-month turnaround from the FDA, or are they -- is that kind of a standard turnaround?

I wish I could predict their response.

I can tell you that the clinical data we have we feel really good about, and we will submit it and we will support FDA as needed to answer any questions they have.

Okay, great, thanks, Gary.

David Lewis, Morgan Stanley.

This is Jon Demchick in for David.

First off, can you quantify the difference in revenue per procedure from, I guess, a Single-Site procedure versus like a dVH or a dVP?

And also, what role, if any, did the Fluorescence Imaging equipment as well as other new products contribute to revenue and margins in the quarter?

Right.

So on the Single-Site side of things, as you know, we are currently selling directly -- we are selling into Europe now with our initial set of customers.

As Gary mentioned, it's roughly 10 or so sites that are working on that.

Here in Single-Site we are competing directly against some of the laparoscopic tool companies.

So it's a little different than the traditional da Vinci side, where it's against just open surgery.

And so, given that, I think there's an established market for Single-Site operations, and I think we are looking at to compete there, perhaps at a slight premium to that.

So it would be lower than our traditional set of da Vinci instrument per procedure side on that side.

As far as Fluorescence Imaging goes, we are still pretty early on that, too.

The kit is comprised of a couple endoscopes and some of the dye used in the fluorescence cases.

That has -- as you have seen, we have maintained our overall instrument and accessory revenue procedure at about $1940 over the last three quarters, and part of that had to do with Fluorescence Imaging coming on and bolstering the IMA revenue, together with the 8.5 millimeter scope.

So that could help to -- it's a small volume right now, but in general it would be a slight increase to the revenue per procedure, but not a big impact at this stage.

Okay, very helpful.

And also I know that you touched on Single-Site with the FDA.

But for stapling and sealing tools, do you guys have any expectations on the time from submission to market, or is that still really tough to tell with the FDA?

And also, have you needed to kind of go back for more information to appease the FDA on any of these products?

So vessel sealing -- we are answering FDA's questions as we speak.

The questions are answerable.

And the stapler has not been submitted.

And one more quick one -- for the trade-ins from S to Si, I believe there are 21 of them.

What was the breakdown between US and O-US, and how many S systems are kind of still out there on the market?

I believe it was all but two for the US.

For the US, and there's about 750 S's out in the market worldwide.

Okay, thank you very much.

Lennox Ketner.

Thanks so much for taking the question.

I just wanted to start on dVP.

I know you said that most of the growth came from Europe and that you aren't seeing any real impact from the PIVOT data.

But is it possible just to give a little clarity around what dVP procedures looked like in the US, whether there was any growth or whether they were flat or just what those looked like within the US?

Flattish.

Okay.

I'm sorry; that's year-over-year or sequentially or -- ?

Sequentially.

And then on the Single-Site, I was wondering if you could just expand a little bit on what your plans are in Europe.

I know you said you are in 10 sites right now, but how we should expect that rollout to go and when you would be in a broader number of sites?

Right now, we are still in the early phases of rolling out, so we continue to add a few sites a month.

It's primarily focused on cholocystectomy to start, and that's really where we are.

We continue to take data, and really our focus now is on working with FDA to get approval.

Okay.

And the data that you submitted to FDA that was the European data, is there any chance that we would see that data prior to the US approval, given that it is from Europe?

Or, are we unlikely to see that until (multiple speakers) approval on the other --

It's a combination of US and European data.

I believe there are some abstracts in preparation on the European experience.

Yes, I think there have been some presentations, actually, at a few conferences where they have actually shown their data.

And we are pleased with the data.

I think that both procedure times and the metrics that they were measuring day we are very pleased with.

Okay, thanks very much,

Larry Keusch, Morgan Keegan.

I'm wondering if you could, just going back to the staple, you said it -- I believe you said it's still in validation.

But can you help us understand what exactly that means that what is the pathway to getting it submitted?

So validation work is pretty much the typical stuff, so it's bench testing and cleaning validations and sterility validations and all sets of things you have to do to get ready to submit.

So that's where we are.

Some of those tests take a little bit of time and can be extensive in terms of the number of units you use in your file, and that's where we are.

So we will walk through that.

It's where we expected to be against our plan.

And as that gets done, then that gets built into a file that will go to FDA.

So does that imply that the design is frozen and you guys are finished with that, and now it's just really the testing of it?

Well, the usual process of design is a little bit iterative.

So the design we are feeling really comfortable with; it looks really solid.

Now, if there's anything in validation we don't like, we will go back and touch the design.

But, generally speaking, we are where we expect to be.

Okay.

And then for Aleks, and then one quick one for Marshall, just in terms of the oral surgeries, again, as you look back over the last three months, where do you see the most interest in the specific procedures within that category, whether it be sleep apnea or medium-size malignant tumors, etc.?

And can you help us think about the sizing of that procedure base?

Well, as far as sleep apnea, that is not a target for us at this stage.

I think there have been surgeons that have talked about the procedure, and there certainly have been presentations on it.

But it's not a specific focus for us at this stage.

Most of the work is being done on both malignant and benign tumors, very consistent with the claims that we have.

You will see tumors that are at the base of tongue, tonsil tumors and what are really classified as very complex operations.

And that's where the majority of the clinical data that's being reported is derived from.

As far as that sizing, in our view we look at that market as probably somewhere between 15,000 and 20,000 procedures.

And that's really where we are going to stay for a while.

I think that's where we add tremendous value.

That's where there's a rate of consolidation in that space.

And it's a fairly small community, and we think we can go very deep into that community.

So we will focus on that and we will see where it takes us from there.

Okay, and that 15,000, to 20,000 -- that's a US number?

Yes, that's a US number.

And then just for Marshall, I know you haven't lowered the tax rate expectation significantly, but it's a little bit lower than I think you had started out the year.

Is that just mix of business towards O-US that's driving that?

Or is there something else to be thinking about?

No, that's exactly right.

It's just mix of business, and as the mix of business changes to more US, then the tax rate will come down.

Okay, perfect, thanks very much.

Mimi Pham, Weeden & Co.

Regarding the number of new surgeons trained on da Vinci in first half of this year, can you give us a ballpark of how money per month and how that compares to last year?

I apologize.

I don't have that metric, and I don't think it's a metric.

Honestly, we really report it on probably for the last four or five years.

So I don't have that information readily.

Okay.

Your comments about more customer financings for the systems and financing being available -- does that apply to Europe and rest of world also?

It does.

And can you give us a breakout of what percentage is financed in US and international, generally?

I don't have the breakout between the two.

I can just tell you that, in the US, we have historically seen over the last year or so about 15%, 16% to 20% financed.

In this quarter, we saw a little over 30%.

And it was in the international macro environment?

Again, you don't see that hurting hospitals internationally, the ability to get leasing and financing?

We have not seen any issues with hospitals trying to get the financing to purchase the product.

And then last question, regarding the PIVOT data, do you expect -- are you hearing any kind of noise in the payor community about them reevaluating reimbursement based on the PIVOT data or any kind of noise there?

No, nothing that we have heard that I can say.

Okay, great, thank you.

We have time for one more question.

Michael Matson, Mizuho Securities.

This is actually [Kim], in for Mike.

A quick question on the single-port -- what sort of trials are you running, or where is the data coming from?

Are these head-to-head comparisons?

Hello?

(multiple speakers) head-to-head comparisons versus conventional laparoscopic?

The data we are running in these trials has been cholocystectomy using our Single-Site product, and the comparator has been historically published manual Single-Site.

Could you give an update on obesity surgery, if any updates are available?

I would say that there is -- there has been a steady growth in obesity surgery, nothing that is, I would say, steep in its trajectory.

But there's a nice, steady growth.

And it's grounded in the clinical -- at least in the clinical literature, it's being grounded by things such as reduced leak rates from double-sutured, hand-sutured anastomosis as opposed to stapled anastomosis.

There appears to be more interest in it, based on the number of abstracts and the presentations that are provided at the various forums.

But it isn't an area that we have really talked a lot about or set high expectations for.

But we are pleased with the growth that we are seeing in it, but it's a little less pronounced than some of the other areas that we talk about.

Okay.

Last question -- when you are talking with the hospitals, are you getting the sense or are you hearing that they actually start to ramp up CapEx in anticipation of healthcare reform?

As I said earlier, we haven't seen any specific trends or changes in the marketplace in the over the last few quarters.

Okay, thank you.

Thank you -- that was our last question.

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

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

Ronald of Colorado shares the following experience, quote, after learning about my two-inch tumor on my left kidney, I was very scared and nervous.

I have a doctor friend that plays golf at my club, and he told me about the da Vinci system.

I was amazed at what he told me.

I looked it up on the web, and after learning the difference between regular surgery and the da Vinci system, I felt 100% better.

Then I had an appointment with Dr.

[Vishay] and he explained my condition and the options, and I was completely comfortable with the thought of surgery.

It was my first major surgery, and at 83 I was out of the hospital at the third day and doing some household chores by the fifth day.

I live alone and had help for five days and was alone after that.

I took pain pills for three days and had no pain after that.

I could have done without any, but I was told to take them.

It is now two weeks after surgery, and I feel like doing anything I do regularly.

I will wait for the six weeks before playing golf.

However, I will pitch and putt starting next week.

I cannot believe the difference and would like to thank whoever invented this.

What a great improvement to surgery.

I hope that anyone reading this has a chance of selecting the da Vinci system over regular surgery.

I have talked to someone who had regular surgery of the kidney, and our stories are so different, like night and day.

Patients like these are our 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 speaking with you again in three months.

Ladies and gentlemen, this conference will be available for replay today after 4 PM Pacific time through July 19, 2012, at midnight.

You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code of 209724.

International participants can dial 320-365-3844.

(Operator instructions).

That concludes our conference for today.

Thank you for your participation and for using the AT&T Executive Teleconference.

You may now disconnect.