直覺手術 (ISRG) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Intuitive Surgical First Quarter Earnings Release Call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. (Operator Instructions). I would now like to turn the conference over to our host, Mr. Calvin Darling, Senior Director of Finance for Intuitive Surgical. Please go ahead.

Thank you, good afternoon and welcome to Intuitive Surgical's first-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 first quarter's 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 first-quarter financial results, Aleks will discuss marketing and clinical highlights, then I'll provide an update to our financial forecast for 2012. And finally, we will host a question-and-answer session.

With that, I will turn it over to Gary.

Thank you for joining us today. In this first quarter our team has executed well and we have experienced strong performance in procedures, encouraging acceptance of our new products and the financial results that follow.

For 2012, Intuitive is focused on the following. First, continuing our growth in gynecology and urology worldwide through outstanding execution in the field. Second, disciplined execution of our Single-Site and vessel sealing launches, focused on outstanding early customer experiences. Third, building robust clinical programs with leading customers in emerging procedures and general surgery, thoracic surgery and trans-oral surgery, and finally, strengthening our capabilities in international markets, particularly Europe, Japan and Korea.

With regard to procedures, we experienced strong growth in general surgery and gynecology, leading to year-over-year procedure growth of approximately 29%. With uptake in colorectal procedures and the introduction of Single-Site in the United States, the category of general surgery grew at the highest rate this quarter. Worldwide urology procedures grew year-over-year as well, led by growth in European dVP, while US urology was flat. Aleks will provide additional procedure commentary later in the call.

As we have mentioned on previous calls, we have been investing in improving our structural capabilities in Japan. Our team has worked with Japan's MHLW on reimbursement for da Vinci prostatectomy, receiving reimbursement approval on April 1.

Intuitive Surgical Japan has also successfully transitioned the import license for da Vinci S from Johnson & Johnson Japan to Intuitive Surgical Japan this month. We are encouraged by our progress in Japan and we will continue to invest to clear the path for increased da Vinci use.

Overall, international system sales were encouraging. However, our first-quarter system sales in Europe are somewhat disappointing. This is likely a combination of both economic pressures in Europe as well as organizational capability.

Turning to operational highlights for the first quarter, procedures grew 29% over the first quarter of 2011. We sold 140 da Vinci Surgical Systems, up from 120 during the first quarter of last year. Total revenue was $495 million, up 28% over last year.

Instrument and accessory revenue increased to $208 million, up 32% over Q1 of 2011. Total recurring revenue grew to $289 million, up 31% from prior year and comprising 58% of total revenue.

Net income was $144 million, up 38% over last year. We generated an operating profit of $228 million before non-cash stock option expense, up 26% from the first quarter of last year and representing 46% of Q1 revenue.

We ended the quarter with $2.371 billion in cash and investments, up $199 million from last quarter. Significant cash outlays during the quarter included $50 million invested in the acquisition of our Korean distributor, fixed assets and intellectual property. Excluding the impact of these outlays, as well as $83 million from stock proceeds and $30 million used for working capital, we generated $211 million in gross cash flow from operations, which is 147% of our reported GAAP net income in the first quarter.

The first quarter has been an active one for our product development, marketing and operations teams. In the quarter, we completed our first phase of rollout for Single-Site instruments and accessories for da Vinci SI in the United States.

Recall Single-Site is a platform for increasing patient value by reducing the number of incisions required by traditional multiport minimally invasive surgery. Instead of the multiple incisions of traditional laparoscopy, the body is entered through a single incision at the umbilicus.

Currently, Single-Site is cleared for single-incision cholecystectomy in the US and for broader educations indications in Europe. Experiences by our Single-Site customers in the US indicate that cholecystectomy procedure is safe, repeatable and teachable. Market response to date has been very encouraging.

We are working with our customers in Europe to identify procedures in which Single-Site can bring additional patient value beyond cholecystectomy.

We continue to focus on developing products that enable surgeons to convert traditionally open surgeries to minimally invasive surgery using da Vinci. In the quarter we completed our first customer access work on our EndoWrist vessel sealer, and are pleased with its performance in surgery.

Our vessel sealer brings to da Vinci surgeries surgeons full articulation and precise control. We think this instrument will facilitate robotic general surgery.

We are communicating with the FDA regarding our da Vinci stapler, and we're making progress in answer answering their questions.

In imaging our Firefly Fluorescence Imaging System is now being used regularly to image kidney vasculature during da Vinci partial nephrectomy. Surgeons are also exploring the use of Firefly in visualizing blood flow in da Vinci colorectal procedures.

As we enter new markets and drive into new product arenas, we continue to invest in building our team and expanding partnerships, and in acquiring those technologies that can make a difference to robotic surgery.

This quarter we added 94 people to our team, predominantly in sales, manufacturing and R&D, bringing our total team to 2018 employees. I will now pass the time over to Marshall, our Chief Financial Officer.

Thank you, Gary. Our first-quarter revenue was $495 million, up 28% compared with $388 million for the first quarter of 2011, and $2 million less than the $497 million reported for the fourth quarter of 2011.

First-quarter revenues by product category were as follows. First-quarter instrument and accessory revenue was $208 million, up 32% compared with $157 million for the first quarter of 2011, and up 6% compared with $196 million in the fourth quarter of 2011.

Year-over-year instrument and accessory growth was driven by procedure growth of 29% and initial purchases of recently launched products, including Single-Site starter kits and our Firefly product.

Note that the first quarter of 2012 included one more surgical day than the first quarter of 2011 due to leap year.

Instrument and accessory growth relative to the first quarter of 2011 was primarily driven by procedure growth in sales for our Single-Site starter kits, partially offset by lower first-quarter stocking orders associated with seasonally lower first-quarter system sales.

Instrument and accessory revenue realized per procedure, including initial stocking orders of $1985 per procedure was higher than the first quarter of 2011 by $50, and $10 higher than the fourth quarter of 2011.

Over time we expect instruments and accessories per procedure to decline slowly, given the initial stocking orders have a lower impact on a larger install base. This natural decline has been more than offset in recent quarters by the positive impact of our new instrument and accessory products, specifically Single-Site, Firefly, and thoracic lung kit. Instrument and accessory revenue per procedure will fluctuate based on the rate of adoption of newer products as well as product and procedure mix.

First-quarter 2012 systems revenue of $207 million increased 24% compared with $167 million of systems revenue for the first quarter of 2011, and decreased 8% compared with $225 million of systems revenue for the fourth quarter of 2011.

We sold 140 systems in the fourth quarter(Sic-see press release) of 2012 compared with 120 systems in the first quarter 2011 and 152 systems in the fourth quarter of 2011. The first quarter of 2011 system count included systems involving trade-ins of older units comprised of 19 standard systems and 27 da Vinci S's. The first quarter of 2011 system count included 13 standard trade-ins and 19 da Vinci S trade-ins, while the fourth quarter of 2011 included 23 standard trade-ins and 27 da Vinci S trade-ins.

Our first quarter average selling price per system, including all da Vinci models, was $1.47 million, an increase from the $1.38 million realized in the fourth quarter of 2011 and the same as the fourth quarter. ASPs include simulators and systems configured with Firefly, but exclude upgrades. The increase in average sales price relative to the first-quarter of 2011 reflects a higher proportion of dual consoles, a higher number of systems shipped with surgical simulators and Firefly, partially offset by an increased proportion of trade-in.

We sold 25 dual console systems in the first quarter of 2012 compared to 16 in the first quarter of 2011 and 29 in the fourth quarter of 2011. ASP's will fluctuate quarter to quarter based on product, customer, and trade index as well as foreign exchange rates on direct sales to foreign customers.

Service revenue of $81 million increased 27% compared with $64 million last year, and increased 7% compared with $75 million last quarter. The growth in service revenue was primarily driven by a larger system installed base.

Total first-quarter recurring revenue comprised of instrument, accessory and service revenue of $289 million increased 31% compared with the first quarter of 2011, and increased 6% compared with the fourth quarter of 2011. Recurring revenue represented 58% of total first-quarter revenue compared with 57% in the first quarter last year and 55% last quarter.

International results were as follows. Procedures outside of the US grew approximately 31% on a year-to-year basis, led by growth in Europe particularly the dVP. We also experienced growth in our other targeted procedures, including dVH in Europe.

First-quarter revenue outside of the US at $105 million increased 15%, compared with revenue of $91 million in the first quarter of 2011, and decreased 2% compared with seasonally strong fourth quarter revenue of $107 million.

Instrument and accessory revenue outside of the US grew 24% year-over-year and 22% sequentially.

We sold 35 systems outside of the US, compared with 31 in the first quarter of 2011 and 39 last quarter. We sold 14 systems in Europe in the first quarter, compared with 15 in the first quarter of 2011 and 23 in the fourth quarter of 2011.

European system sales reflect the challenging economic environment. However, we're also taking steps to improve our execution.

Capital sales in rest of world markets increased to 21 systems in the first quarter, compared to 16 in each of the first and fourth quarters of 2011. Aleks will provide additional details of overseas system sales.

Moving on to the remainder of the P&L, gross margin in the first-quarter of 72% was the same as the first quarter of 2011 and lower than the 73% last quarter. The lower gross margin compared to the fourth quarter primarily reflected lower margins on our newly introduced products.

Margins on newly launched products like Single-Site will typically be lower than our mature products, reflecting vendor pricing on low volume, temporary tooling costs and other startup costs. However, over time, as volumes increase we refine the manufacturing process in the product, we would expect to see improvement in the margins of these newer products.

First-quarter 2012 operating expenses of $163 million were 25% compared -- up 25% compared with the first quarter of 2011, and were approximately the same as those for the fourth quarter of 2011. Relative to the fourth-quarter operating expenses, the first-quarter expenses included costs associated with employees added during the quarter and payroll taxes on a higher level of employee stock option exercises, offset by lower engineering project costs which fluctuate with prototype spending.

We added 94 employees in the quarter, including 41 employees in commercial operations and 44 employees in product operations.

First-quarter 2012 operating income was $193 million or 39% of sales compared with $148 million or 38% of sales for the first quarter of 2011, and $200 million or 40% of sales for the fourth quarter of 2011.

First-quarter 2012 operating income reflected $34 million of non-cash stock compensation expense compared with $32 million for the first quarter of 2011 and $35 million last quarter. We have changed our annual stock option grant process such that one-half of the employees' annual grants were issued in February 15 and the other half will be issued on August 15. The first-quarter impact of the February 15 grant was more than offset by the full vesting of options granted in 2008.

We would expect non-cash compensation expense to increase in the second quarter, reflecting the full quarter impact of the February 15 grant, and to increase further in the third quarter with the August 15 grant.

Our effective tax rate for the first quarter of 27% was lower than our rate for 2011 of 30%. The decrease reflects a one-time benefit associated with a change in the way the IRS interprets the rules associated with Section 199 domestic manufacturing tax credit.

We expect the rate for the remainder of the year to be approximately 31%. The increase relative to 2011 reflects no research and development credit, a lower mix of foreign earnings, partially offset by ongoing Section 199 tax credit.

Our net income was $144 million or $3.50 per share, compared with $104 million or $2.59 per share for the first quarter of 2011, and $151 million or $3.75 per share for the fourth quarter of 2011.

Now moving to the balance sheet. We ended the first quarter with cash and investments of $2.4 billion, up $199 million compared with December 31, 2011. The increase reflects $167 million of cash flow from operations, $83 million from the exercise of stock options, partially offset by $50 million associated with the purchase of our Korean distributor, purchase of capital, and IP.

During the fourth quarter we did not repurchase any of our common stock. However, we retained the option to exercise the remaining Board-authorized buybacks of $568 million.

Our accounts receivable balance increased to $300 million at March 31 from $298 million at December 31. Our net inventory increased $119 million at March 31 from $112 million at December 31.

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 first quarter we sold 140 da Vinci systems -- 105 in United States, 14 into Europe and 21 into rest of world markets. As part of the 140 systems sales, 19 standard da Vinci systems and 27 da Vinci S systems were traded in for credit against sales for new da Vinci Si systems.

We had a net 94 system additions to the installed base during the quarter, which brings to 2226 the cumulative number of da Vinci systems worldwide -- 1615 in the United States, 379 in Europe and 232 in rest of world markets. 80 of the 140 systems installed during the quarter represented repeat system sales to existing customers.

In total, 132 of the 140 systems sold represented da Vinci Si systems, which included 25 dual console systems. The 35 system sales internationally included 7 into Japan, 4 into India and 3 into the countries of Italy, the UK and Australia. While our overall international system sales were strong, our Q1 EU system sales were somewhat disappointing and below historical trends.

Clinically we had a strong quarter, achieving an overall year-over-year procedure growth rate of approximately 29%. Gynecology, international dVP, along with the emerging categories of general surgery and thoracic surgery accounted for a large part of this growth. Cholecystectomy, colon and rectal resections, lobectomy, dVH and endometriosis resections, myomectomy and partial nephrectomy all exhibited strong year-over-year growth.

International dVP growth remained strong both in Europe and rest of the world. However, in the US, dVP has felt some recent pressure from nonsurgical disease management -- namely active surveillance. With the international market playing an ever-increasing role in the worldwide procedure numbers, overall worldwide dVP growth remains positive.

Recent new product launches are all proceeding well. The attachment rate for both the da Vinci Simulator and our Firefly product remained high, which is helping to buoy da Vinci system ASPs. The initial customer response to our da Vinci Single-Site product line has been very positive, with many centers up and running and several more scheduled for training.

We initiated a phased rollout of the Vessel Sealer product in the second half of the quarter, and early customers are beginning to perform their initial cases. The product is performing well, and early customer feedback has been positive. But as with all new product launches, customer feedback processes and operational scaling will remain central themes.

Throughout this period, the focus of our operations team will be to optimize manufacturing while reducing costs. During the quarter, over 350 abstracts and papers representing a variety of surgical specialties were published within various peer-reviewed journals, while the clinical conferences were abundant with live da Vinci procedure transmissions, postgraduate robotic courses, podium presentations and clinical poster sessions.

As we discussed, da Vinci colon and rectal surgery is an emerging category and is receiving a lot of clinical interest, and for good reason. While clinical experiences for laparoscopic colon and rectal surgery date back to 1991, the adoption has been lagging.

In a recent edition of The American Surgeon, Dr. Joseph Carmichael and his colleagues from the University of California Irvine published a comprehensive review on the utilization of laparoscopy in colorectal surgery for cancer in academic medical centers. In it, they segment various colorectal surgical procedures as they relate to laparoscopic adoption.

University Hospital Consortium, or UHC, is a large organization consisting of 112 academic medical centers and their affiliates, representing approximately 90% of the nation's nonprofit academic medical centers. The study, based off data from the UHC database, included records from 22,780 patients who had undergone open or laparoscopic colon and rectal surgery for cancer between 2007 and 2009.

Interestingly, 19,408 or over 85% of these patients received an open surgery as compared to 3372, or 14.8%, who had received a laparoscopic procedure. The study reports that as a percentage, the most commonly performed laparoscopic colon resection was a total colectomy at 22.6%, followed by a sigmoid resection of 17.3%. The least common were abdominoperineal resections at 8%, transverse colon resections at 10%.

When subcategories were consolidated and analyzed, it was reported that laparoscopic surgery was incorporated in less than 20% of colon cancer resection and less than 10% of rectal cancer resections.

Historically, both patient value and da Vinci's procedure adoption have been strongest where traditional lab and MIS adoption has been limited. This is often the case within procedure categories where MIS is deemed clinically challenging.

While every procedure has its own set of variables, prostatectomy, complex hysterectomy, partial nephrectomy, myomectomy, sacrocolpopexy and lobectomy have shared at least one common bond, which is that each of them, despite years of clinical effort, was limited to a relatively small number of centers, resulting in limited MIS penetration. We believe that MIS colorectal surgery is consistent with this theme.

While laparoscopic colorectal surgery is limited in the US, lab colon initiatives throughout Korean and Japanese universities have been more ambitious, which has led to some academic analysis of da Vinci's role versus laparoscopy.

A comparative study of urinary voiding and sexual function following a total mesorectal excision or TME for rectal cancer was recently published in the annals of Surgical Oncology. The study, authored by Dr. Sang Yoon Kim and his colleagues from Yangtze University, compared laparoscopic and robotic TME as it relates to complications in urinary continence and sexual function, which are both common complications in rectal cancer surgery.

69 patients who underwent a lap or robotic procedure were prospectively enrolled. Their urogenital function was evaluated by uroflowmetry, standard questionnaires to establish an international prostate symptom score, and international index of erectile function score were given before surgery and at one, three, six and 12 months post-surgery. Their initial findings were not surprising, in that bladder function within both cohorts significantly decreased one month post-surgery.

In the lap TME group, urinary dysfunction gradually improved over a six-month period, which is consistent with previously reported open-surgery TME studies. In other words, both lap and open TME required six months for ISP scores to decrease. However, interestingly, patients who underwent robotic TME showed significantly earlier recovery at a period of less than three months.

They also analyzed the urinary flow, where the most objective urinary function results were obtained. The robotic TME showed no decrease in mean voiding volume. The robotic TME urinary data analysis revealed superior outcomes compared to laparoscopic TME data, not only an ISP score but also in urinary flow.

With respect to erectile function, the robotic TME group showed earlier recovery as compared to the laparoscopic TME group, six months versus 12 months. They stated that during pelvic dissection, avulsion or direct injury of the nerve plexus can easily happen, which is tied to postoperative sexual and urinary dysfunction. Enhanced 3-D HD magnified views along with 7 degrees of instrument freedom were found to be of high value during delicate dissection.

In their conclusions, the author stated, and I quote, we conclude that the use of da Vinci's surgical robotic TME system allowed for an earlier recovery in voiding and sexual function because it enabled meticulous dissection and maintenance of adequate counter traction strength as a result of enhanced dexterity. Close quote.

As stated earlier, our GYN franchise remains robust. While most of our previous growth has been US-centric, we are beginning to experience dVH expansion in non-US markets. As was the case in the United States, complex dVH for malignant conditions appears to be the catalyst.

In this month's edition of Obstetrics and Gynecology, a group made up of both surgeons and epidemiologists from Jewish General Hospital and McGill University in Montreal published their two-year findings on both patient outcomes and economics associated with their robotic GYN cancer program. A total of 303 endometrial cancer patients were involved in the study.

Following the initial -- the initiation of their robotics program, 143 consecutive dVH patients were compared to 160 consecutive patients who underwent surgery prior to the robotic program commencement. These 160 patients made up the historical cohort.

Within the historical cohort, the rate of minimally invasive surgery performed with traditional laparoscopy was 17%. During the following two post da Vinci years, the MIS rate had grown to 98%.

The patient characteristics were comparable in both areas except areas except for an even higher body mass index in the robotics era. Robotics patients had longer operating times but fewer adverse events, 13% compared to 42%; lower estimated median blood loss, lower by approximately 70%; and shorter median hospital stay, 2.2 days compared with 5.5 days.

The overall hospital cost for the robotic group was significantly lower as compared with the historical group -- CAD7644 compared with CAD10,368.

The gains with robotic surgery are even more pronounced in a multi-variable analysis where they consider both the full cohorts and matched subcohorts. The reduction in grade 2 or higher complications resulting in far less hospitalization drove significant dVH related hospital savings.

However, the key factor in evaluating any cancer treatment is oncologic outcome. At present, the two-year post-dVH follow-up indicates a lower recurrence rate as compared with the historical cohort.

Improving procedure efficacy while reducing hospital cost is a powerful combination, and one that aligns us closely to the needs of our patients, providers and payers.

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

Thank you, Aleks. I will be providing you with an update to our financial forecast for 2012 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, during the first quarter we saw continued strength in US gynecology procedures and Europe dVPs. We also saw strong global general surgery growth and positive US early market reactions to our Single-Site cholecystectomy offering.

We are now increasing our 2012 procedure guidance. On our last call we forecast procedures to grow approximately 24% to 26% from a base of approximately 360,000 procedures performed in 2011. We now forecast full year 2012 da Vinci procedure volume to grow approximately 25% to 27% above our 2011 total.

Moving on to revenues, we are also increasing our 2012 revenue guidance. Based upon our higher procedure expectations and revenue contributions from new products, we now expect 2012 revenue to grow between 19% and 21% above total 2011 revenue of $1.76 billion. This is up from 17% to 19% revenue growth forecast on our previous call.

Now turning to operating income, consistent with our previous forecast we continue to expect operating income to fall within a range of between 39% and 40% of net revenue. We will likely trend toward the lower end of this range as result of lower gross profit percentages realized on recently launched instrument products.

Now turning to non-cash expenses. We now expect non-cash stock compensation to fall within a range of between $152 million to $156 million for the year, compared to our previous forecast of $144 million to $150 million with the increase driven by higher option valuations associated with our higher stock price.

As Marshall described earlier, we would expect non-cash stock compensation expense to increase in the second quarter, reflecting the full quarter impact of the February 15 grant and to increase further in the third quarter with the August 15 grant. Amortization of purchased intellectual property, which is mostly recorded as R&D expense, is still expected to fall within a range of between $20 million and $24 million in 2012.

We expect other income, which is mainly comprised of interest income, to total between $15 million and $17 million for the year.

With regard to income tax, our Q1 reported tax rate of 27.2% fell below our guidance range of between 29% and 31%, driven by the release of Section 199 reserves -- deductions for US manufacturing activities. Going forward, we expect our tax rates in quarters 2 through 4 to come in at the higher end of our range at around 31% of pretax income. While we will benefit from the ongoing manufacturing activities deduction, we project this benefit will be more than offset by the non-continuance of the US R&D tax credit and a slight shift in our projected geographic mix of pretax profit towards the US.

We expect that our share count for calculating EPS in Q2 2012 will be approximately 41.2 million shares. Our higher forecasted share count is driven by higher equivalent shares assigned to the diluted share calculation based on our higher stock price.

That concludes our prepared remarks. We will now open the call to your questions.

(Operator Instructions) Spencer Nam, ThinkEquity.

Thanks for taking my questions. Just a couple of questions here. First of all, you know, you guys mentioned a lot about these new products and these different upgrades having impact on your procedure volume. And I'm curious whether the -- well, whether you guys could tell us how much your increase in procedure volume is driven by the upgrades and just new capability introduction versus -- you are actually well going out and just opening up the new procedure areas that you are currently working on.

Well, I will answer that the best I can as I understand it. First off, I don't know that we had necessarily indicated that the new products, i.e. Single-Site and/or the Vessel Sealer, are the reason for the additional procedure growth, although they did add and contribute to it. The categories of general surgery, which include colorectal surgery, the categories of thoracic surgery, lobectomy, etc. in addition to the strong GYN growth and international dVP growth were really the reason that drove the added procedure for the quarter.

As far as differentiating between new procedures and/or new products, I don't know that we can do that calculation for you. I think in general there is good procedure strength that's happening across the core business, specifically dVP outside of the United States. dVP in the United States was actually down a little bit, but it was more than made up for in the addition of the other procedures that we talked about.

Tycho Peterson, JPMorgan.

Hey, maybe I'll comment on that last point. You know, you talked about active surveillance and the dynamic there in the US. Can you just talk about -- I mean are you expecting dVP to remain flat here? And just talk about watchful waiting and how you think about that impacting this.

Well, I think in general we have been talking about dVP being flattish for some time in the United States, for probably the last three or four quarters. And it is our expectation that as -- and I think you almost have to back away and look at it as dVP, and look at it in general as prostate cancer. And the treatment of the disease of prostate cancer, and what may happen on a macro level with -- if more people end up going into an active surveillance.

And history will tell you that at some point something as high as 60% of those men -- and it could be as high as two-thirds often wind up in some other therapy, either radiation or surgery, so some of this might be a lead/lag effect. We don't really know how to handicap that. I think there is a lot of information that is out there and I think we will probably move up and down with surgery in general.

And outside of the United States, again, just to underscore, you're seeing the overall dVP number is growing. And that is really driven by both European strength as well as Asian and Latin American and other markets.

Can you quantify what the revenues were from Single-Site stocking orders? We have had a few people ask on that.

Single-Site stocking orders, quantify it?

We are not going to quantify it, just tell you that -- like we said in the script, the attach rate for Single-Site was reasonable in the quarter. So we are still in the early stages. It's not -- I think if we gave out numbers now, it really wouldn't be an indication of much.

Last one on service margins, I think they were at a record this quarter. You know, just talk about the sustainability of the service margins there and what's kind of driving this strength.

Really improvements in product quality, reducing the amount of time that our field engineers have to spend servicing the equipment and leveraging more systems over the existing field service engineer force. It will fluctuate a little bit here and there, but I think that you've seen the margins over the last few quarters at a certain level, and it should continue at that level.

Ben Andrew, William Blair.

Good afternoon, Aleks or Gary, maybe a question for you. If you think about the relative benefits of single-incision cholecystectomy versus lap, are you seeing enough kind of evidence of that benefit in the early days that convinces you the procedure trajectory is going to be very strong? Just talk a little bit about the selling process and what you are seeing in the initial rollout, if you would.

You know, I think on the first part of where the benefits are -- the early anecdotes we are hearing are a combination of benefits on pain and benefits on cosmesis. How these play out over time and what segment of the broader population is interested in those things, hard to forecast right now. So we'll see.

Gary, are you hearing that that's patient-driven or physician-driven? Because we've heard some comments that a single-site through the umbilicus can actually be more painful in a way than the four ports of a typical lap chole.

Yes, mostly what we're hearing is a little bit of both. We hear both the surgeon commentary on it as well as some patient commentary on it. But it is early days, and I there'll be conflicting opinions for a while, until there is a large enough procedure base and evidence base for it to sort out. I will let Aleks speak to the selling process.

You know, again, if you look at the market before we entered into it, I think there were a fair amount of physicians and hospitals that were interested in single-incision surgery, as evidenced by the number of surgeons that were trained and some of the early successes that some of the other companies may have had in that area. So, the demand is there in terms -- let's say that the interest level is there.

And in terms of the sales process I think we are seeing a few things converge at the same time. You're seeing general surgeons who have garden-variety procedures like cholecystectomy. At same time you're seeing colorectal surgeons, who don't necessarily get involved in those types of surgeries, and you're seeing other areas.

We don't talk about it because they're not large markets. But if we look at procedures like adrenalectomies and some of the upper GI gastric surgeries, etc. they are all on small ends but nice trajectories.

So there seems to be a lot of global awareness from the general surgeon that is making it let's say easier for our people to get in front of, and then consolidate the messaging of robotics programs to include general surgery. So there really isn't any sort of paint by numbers here that we can say is consistent, other than there is a lot of global awareness in this category right now.

And maybe two other quick questions. You talked about Europe placements being weak. What is your outlook for the year?

I know it's probably baked into your guidance, but do you think -- do you assume that it gets better? Or are you baking into it staying relatively tough even though procedure growth was pretty good? And what are you hearing about the magnitude of hospital budgets relative to procedure capability as we go through the year?

A couple of questions in there. We think it will remain pressured for some time to come, so we're not forecasting that the pressure comes off capital budgets. As you said, the procedure side has been reasonably healthy to date. How expenditures reflect back into procedures is really hard for us to handicap. I think we're just going to have to wait and see where that goes.

Then finally a quick one for Marshall. You talked about gross margin pressure early on with the rollout of seals and the new products. Is that something we could see resolving over the course of this year, or maybe takes a bit longer to get enough scale there? Thanks.

We're not going to put a timeframe on it. I would just say, like I said in the script, that over time we will -- we are working towards revising our production processes as well as the product itself in driving the cost down.

David Lewis, Morgan Stanley.

Good afternoon, a couple of quick questions. I want to try to maybe, Aleks or Gary, to rectify the revenue per procedure numbers. Obviously stronger than we would have thought, and you talked about general surgery being a contributor to incremental growth.

So, I'm trying to figure out if general surgery comes on, revenue per procedure should trend down slightly, but in this quarter it trended up. And it did contribute to growth. So could you just give us more granularity on revenue per procedure going up, even though general surgery did contribute to positive growth acceleration?

So when we are selling seal kits or our single-incision product (multiple speakers) Single-Site product, we are -- they are buying it as a kit. And they may not have done any surgeries yet, right?

So that is really what is helping increase the revenue per procedure. That as well as Firefly, as well as thoracic kits, so they're buying instruments and accessories in advance of doing the procedure. Now over time, they will be doing the procedures and then that will balance out.

Long-term I think your question is, is the price they are paying for single-incision products less than what we are charging for our normal -- our multiple incision products, and the answer is yes.

Okay, so it sounds like even though the ancillary products like Firefly are doing obviously well, you still believe over time this trend is going to annualize down?

Over time, it is hard to exactly predict because the mix of new products and the mix of procedures is hard to forecast precisely. And so, some of them carry it up and some of them push it down, and so you have those two things working in opposition.

And I know it's early, but is it safe to assume that in the earliest days of the initial general surgery traction that the majority of the success has been in chole versus other procedures?

You are seeing really two different -- general surgery for us is a tale of two different activities. We have strength in colorectal, which is typically cancer procedures that would otherwise have been done open, and so that tends to be one set. There is a larger volume there.

And then we have Single-Site, which is right now approved for cholecystectomy. So you are seeing those two things kind of as a barbell.

As a total number of procedures, I think you're getting more from colorectal in terms of growth than you have in chole so far.

Okay, very helpful. One last quick one and I will jump back in queue. Just in terms of an O-US market dynamic question, if you think about your key markets, maybe Japan is less relevant right now. But in terms of Germany, France, Italy, in those key markets is prostatectomy still your single biggest growth contributor? So, not necessarily absolute, but on a growth perspective, is prostatectomy still the biggest driver in those three markets?

The answer is mostly yes, although we are beginning -- you can see high growth off small bases in a couple of other procedures. So, off of a substantial base, the dVP is the highest grower.

We are beginning to see hysterectomy for cancer conditions starting to come up. And there is some interest in general surgery in Italy, and that is starting to come up on a lower basis.

(Operator Instructions) Lennox Ketner, BofA Merrill Lynch.

Hi, thanks so much for taking the question. Just to go back to the Single-Site product, our checks suggest you were in probably 20 to 30 hospitals this quarter. I'm just wondering if you're willing to comment on whether that is the right ballpark. And also just wondering, are you still in the -- at a point where you're hand-selecting the sites so that you can work with the early adopters? Or is that product available for broad distribution now?

First, with respect to the number of centers, we really aren't a position to disclose what those numbers are and will probably pass on trying to answer that question. But I would say that during the course of the quarter we have seen a lot of interest both in centers that have purchased and have begun doing cases, as well as the centers who are in the process of being trained.

So, comparing and contrasting Single-Site versus the Vessel Sealer, Single-Site from a market development standpoint is much further along than Vessel Sealer, which was a product that we started to phase into, roll out in the later half of the first quarter. So you should think of those two differently. Think of Single-Site being further along and think of Single-Site is a product now that customers can get their hands on.

Okay, and then you mentioned that it's cleared for broader indications in Europe. Is it cleared for additional specific indications in Europe, or does it -- are you clear to use it in anything in Europe?

It's cleared in most things in the abdomen. It's not cleared in all parts of the body.

Okay. And then lastly on Japan, sorry if I missed that. But I was wondering if you said how many systems were sold into Japan, and then also if you could just talk about bit about what the process is for getting additional procedures approved in Japan. And I know you were kind of -- last quarter at least still debating which procedures to pursue there next, but if you could maybe just talk a little bit about the process there and whether you have made any decisions?

Sure, so the first question was how many went into Japan this quarter. It was seven. With regard to what happens next in terms of reimbursements, first, we're happy to have the first one in there.

Going forward, the process changes a little bit. And the surgical societies are then the groups that lead the pursuit of a reimbursement beyond the first one, and so we will be in support of those societies as they look to see where they want to go.

It's a little bit early to figure out which one will be the next one in queue, but those societies are interested and they're starting to talk to us about it. As we know more, then we'll report more in future quarters.

Great, thanks so much. Congratulations.

Rick Wise, Leerink Swann.

Good afternoon everybody. Let me go back to the Europe issues again. Did I hear you correctly that part of the issues that you cited disappointing were the external factors, but some of them, if I understood you, were organizational? And you said you are taking steps to improve. Can you expand on that and give us a little more color on what you are doing and maybe how much of what was disappointing was related to internal versus external issues?

Yes, it's hard to quantify the differences. You did hear us right. I think there's some things we can do to strengthen our capabilities in Europe, and they tend to be around things like economics report, health technology assessments, marketing, those kinds of market access and structural issues more than they are sales process type. So we're working on those things, I think we're making some investments in them.

How to distinguish how much is one and how much is the other is very tough to do. We don't know exactly how to do that.

Was sort of a minor factor really this quarter or this is something that really could make a significant difference as you address it in the second half, let's say?

It's clear there are economic pressures in Europe having nothing to do with us, and so I think -- and those things are going to exist. How quickly we can add some capabilities and make some changes, that's going to be hard-pressed to forecast. They are directionally correct and we will make those investments and progress.

Two other quick ones. You highlighted the transference of the da Vinci S license from J&J to you. Is there any economic impact that we should think about, or ability to sell or freedom of action that that helps with that we should understand?

There is not nothing material in terms of the commercial aspect of revenue or cost. What it does allow us to do is move on our timelines a little more quickly with regard to approvals of future products, and the ability to be more responsive to the marketplace. And so that is really the excitement of it for us.

Last quick one, you mentioned no stock buybacks in either the fourth quarter or the first quarter. I don't know how to ask about this, and rudely, why not? What are the factors that might drive that process? Thanks.

Warren Buffett wrote in his shareholder letter something on this point that I thought was great, and I will just quote it for you. He says he looks for two conditions to be satisfied to buy back stock. And I will quote him, quote -- first, the company has ample funds to take care of the operational and liquidity needs of its business. Second, its stock is selling at a material discount to the company's intrinsic business value, conservatively calculated, unquote. I think he says it right. I think we are happy to emulate his behavior here and that is how we think about it.

And our last and final question comes from Michael Matson, Mizuho Securities.

Yes, just taking sort of -- standing back taking a bigger picture view of things, I guess first of all, you have got -- hysterectomy is obviously doing extremely well in the US. But by my math I think you are kind of getting upwards of in the 50% range now in terms of penetration. And I guess in another year or two, that is going to start to peak, I guess.

And so, where -- what do you really see beyond that to pick up the slack, if that is really starting to slow down as what we've seen with prostatectomy? Do you think it's really going to be Single-Site? Do you think it's the just the combination of the multitude of these other smaller procedures? Do you think it's general surgery? Just be interested in getting your thoughts there.

Think about it this way, Michael. You have got -- if we went back in time in 2005 or so, where that question was asked as to what are you going to do when US prostatectomy reaches its height, we weren't talking about hysterectomy. We weren't talking about US hysterectomy, let alone international hysterectomy.

We weren't talking about lobectomy. We weren't talking about any of these procedures. Now -- or Single-Site and general surgery in general.

So, when I sort of fast-forward the tape to where we are today, so recognize that dVP US has been flat for some time, you know, let's call it a year. And yet we are growing at a pretty significant rate. Why? Because there are other ways to sort of slice and look at it internationally. dVP internationally is growing at a very quick rate and it is a larger market than the US dVP market potentially.

Now when you look at dVH, you are talking about the US dVH market, which we segmented down to a certain number, but it doesn't include non-US geographies. We are continuing to add procedures, and when you add general surgery, whether it be through single incision or other multiple incision procedures, and you continue to add thoracic, etc. there is plenty for us to do. We don't feel as if we are running out of steam or running out of procedures. But by all means, we feel completely the opposite.

So at this stage it is -- there is plenty on their plate and we think that over time we will be adding more things to our plate.

Okay. And just as sort of a follow on to that, just wondering what your thoughts are in terms of hysterectomy in Europe and outside the US. I mean, you kind of commented on it a little bit earlier in the Q&A. But is there any reason to believe that it might not sort of follow what happened in the US?

I mean I realize these procedures probably aren't' as common, at least on a per capita basis outside the US. But is there any reason to believe, at least for the proportion that are done, that we wouldn't see similar adoption curves with time?

You know, if you look at it from a couple perspectives, one is that dVH is done for multitude of reasons. It could be endometrial or cervical cancer, ovarian cancer. You move into the benign side and you've got fibroids, multiple fibroids, large fibroids, endometriosis, a combination of all the above and abnormal uterine bleeding, etc.

So when you try to draw connections between women's healthcare is performed in the United States or delivered in the United States, and try to compare it to other markets, it's a little bit different, whereas prostatectomy is done for the same reason. They're all done for cancer.

Cancer tends to have consistency in a lot of countries, US and O-US. So, what are thoughts are at this stage is that, not unlike the United States, we would expect the dVH for malignant conditions to probably be the beachhead, if you will, into most of these countries. And what happens after that, we will have to wait and see.

But thus far, the strength that we've seen is consistent with that explanation. So, overall, I think you can just take away that women's healthcare in general, especially for benign conditions, is different in a lot of countries than it is in the United States.

All right. That's all I had. 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 flow during these conference calls, our organizational focus remains on increasing patient value by improving surgical outcomes and reducing surgical trauma.

I hope the following experience from Kimberley in Florida gives you some sense of what this means in the lives of our patients. Quote, I was diagnosed with vaginal prolapse in November of 2011. I had a hysterectomy two years prior in November of 2009. This is an unfortunate condition caused by several factors such as heredity, number of children -- I have four -- and a previous hysterectomy.

My gynecologist referred me to Dr. Coyle for the da Vinci procedure due to its minimally invasive nature, and most of all, its highest success rate. I researched the procedure, met with Dr. Coyle, discussed it with my family, prayed, and decided to schedule the surgery. After years of back pain and discomfort, I was looking forward to some relief.

Never did I expect to feel as good as I do today just four weeks post-surgery. The first couple of days after the surgery were the hardest, and that was it. After that, the most difficult thing was adhering to the post-surgery instructions of what I couldn't do because I felt so good.

I never realized how much the nagging pain I lived with prior to the procedure was affecting my life. Now I feel so renewed, refreshed and easily 10 years younger. I would like to say thank you to Dr. Coyle and his team for their continued pursuit of technological advances in the medical field, their commitment to medical excellence and true compassion for their patients' well-being.

I would also like to thank those who created the da Vinci robot for their commitment to these types of advancements in medical technology that makes such a positive difference in people's lives. If you are considering this procedure, do yourself a favor and say yes. The outcome is truly worth passing on to others. End quote.

Patients like Kimberly 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 truly make a difference.

This concludes today's call. We thank you for your participation and support on this extraordinary journey to improve surgery, and we look forward to talking to you again in three months.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and using AT&T's Executive Teleconference Service. You may now disconnect.