直覺手術 (ISRG) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Intuitive Surgical Q3 2012 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) Also, as a reminder, today's teleconference is being recorded.

At this time, I would like to turn the conference call over to your host, Senior Director of Finance, Mr. Calvin Darling. Please go ahead, sir.

Thank you. Good afternoon, and welcome to Intuitive Surgical's third-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 Intuitive's Archives -- 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 third 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 third-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'll turn it over to Gary.

Thank you for joining us today. The third quarter highlighted both market strengths and headwinds. Our procedure performance came in below our expectations, driven by challenging conditions in Europe, and changes in prostate cancer detection and treatment. On the positive side, acceptance of da Vinci surgery in general and gynecologic surgery continues to grow in complex cancer procedures, benign procedures, and in single-port robotic surgery.

In the third quarter, procedure growth was challenged by continuing weakness in Europe, and acceleration in the decline of our US da Vinci prostatectomies. The prostatectomy decline appears to be driven by a combination of the U.S. Preventive Services Task Force recommendation against PSA testing, and a change in treatment recommendations for low-risk prostate cancer away from definitive treatment.

European procedure weakness appears to be driven by three underlying conditions -- broad economic pressure in Europe; sentiment behind the PSA testing recommendation from the US reflecting into Europe; and the need for increased depth in our commercial organization. As we have mentioned on prior calls, we expect economic pressure in Europe to persist for the near future. We have been investing in our European commercial organization over the past couple of quarters, and anticipate doing so for the next several.

Moving to general surgery, we experienced continued strong growth, which was multifaceted, including growth in colon and rectal surgery for cancers, as well as cholecystectomy, the latter following the introduction of Single-Site earlier in the year. Gynecology performance was solid. And like general surgery, gynecology growth was broad-based, including hysterectomy, sacrocolpopexy, and myomectomy. Aleks will provide additional procedure commentary later in the call.

In Japan, system sales and procedure performance have both continued to grow, led by dVP. Two da Vinci training centers have opened this year, one at Fujita Health, and one at Tokyo Medical University, to increase in-country capacity for training Japanese surgeons.

Turning to our operating performance for the third quarter, we sold 155 da Vinci Surgical Systems, up from 133 during the third quarter of last year. Procedures grew approximately 22% over the third quarter of 2011. Instrument and accessory revenue was $218 million, up 24% over Q3 2011. Total revenue was $538 million, up 20% over last year. Total recurring revenue grew to $306 million, up 24% from prior-year and comprising 57% of total revenue.

We generated an operating profit of $259 million before non-cash stock option expense, up 21% from the third quarter of last year and representing 48% of Q3 revenue. Net income was $183 million, up 50% over last year. We ended the quarter with $2,701,000,000 in cash and investments, up $70 million from last quarter.

Turning to recently launched products and those in development, in the third quarter, we continued to focus on our launches of Single-Site for cholecystectomy and Vessel Sealer. This quarter, we submitted our 510(k) for Single-Site instruments and indications for use in benign hysterectomy, and salpingo-oophorectomy. We have received FDA's questions and are encouraged by the conversation for this extension of Single-Site. We will work over the next few months to gather the data they have requested.

We mentioned on our last call that we expect applications for the da Vinci Vessel Sealer to be centered on general surgery and gynecologic procedures. Uptake and customer response to the Vessel Sealer has been positive in both of these disciplines. Lastly, with regard to our da Vinci stapler, we have submitted our responses to FDA and believe that we have answered their questions. We are awaiting their response.

As we enter new surgical markets and drive into new product arenas, we continue to invest in building our team, and expanding partnerships and acquiring technologies that can make a difference to robotic surgery. Given the uptake of da Vinci in general surgery, we expect to increase our sales force for emerging general surgery procedures and to increase customer training capacity. Furthermore we plan to continue investment in our sales and marketing team in Europe and our overall organization in Japan. This quarter, we added 92 people to our team, predominantly in sales manufacturing and R&D, bringing our total team to 2,192 employees.

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

Thank you, Gary. Our third-quarter revenue was $538 million, up 20% compared with $447 million for the third quarter of 2011, and up slightly compared to the $536 million last quarter.

Third-quarter revenues by product category were as follows. Third-quarter instrument accessory revenue was $218 million, up 24% compared with $176 million for the third quarter of 2011, and down 3% compared with $224 million in the second quarter of 2012. The year-over-year increase in I&A was driven by procedure growth of approximately 22% in sales of our new instrument and accessory products, including Single-Site, Vessel Sealer and Firefly. The year-over-year procedure growth was led by US gynecologic procedures and US general surgery growth, partially offset by lower growth in Europe and a decrease in US dVP's.

Third-quarter 2012 US dVP procedures decreased 20% compared to the prior year. The decrease in I&A revenue compared to last quarter was primarily driven by the timing of stocking and distributor orders. Instrument and accessory revenue realized per procedure, including initial stocking orders, was approximately $1980 per procedure, which is higher than the $1950 realized in the third quarter of 2011, but lower than the $2020 realized in the second quarter of 2012. The sequential decrease was driven by the timing of instrument and accessory stocking orders associated with new system sales and the timing of distributor orders.

Third-quarter 2012 systems revenue of $232 million increased 17% compared with $199 million for the third quarter of 2011, and increased 1% compared with $229 million for the second quarter of 2012. We sold 155 systems in the third quarter of 2012 compared with 133 systems in the third quarter of 2011, and 150 systems in the second quarter of 2012.

Our third-quarter average sales price per system was $1.48 million, an increase from the $1.46 million realized in the third quarter of 2011, and a decrease compared to the $1.53 million realized in the second quarter. ASPs include all da Vinci models, all simulators, and Firefly when configured with the system, and exclude upgrades. The decrease in ASPs compared with the second quarter of 2012 was driven by a lower proportion of dual console and simulator configurations, and lower revenue recognized on euro-denominated sales.

We sold 87 simulators during the quarter, mostly in conjunction with new system sales, compared with 121 last quarter. We sold 20 dual console systems compared to 28 in the second quarter. 34 of our third-quarter 2012 system sales involve trade-ins comprised of 26 da Vinci S's and eight standard models. 35 of our second-quarter 2012 system sales involve trade-ins comprised of 23 da Vinci S's and 12 standard models. ASPs will fluctuate quarter-to-quarter based on product, customer, and trade-in mix, as well as foreign exchange rates on direct sales to foreign customers.

Service revenue increased to $88 million, up 22% compared with $72 million last year, and up 5% compared with $83 million last quarter. The growth in service revenue was primarily driven by a larger system install base.

Total third-quarter recurring revenue comprised of instrument, accessory and service revenue, increased to $306 million, up 24% compared with the third quarter of 2011, and roughly equal to the second quarter of 2012. Recurring revenue represented 57% of total third-quarter revenue compared with 55% in the third quarter last year and 57% last quarter.

International results were as follows. Third-quarter revenue outside the US was $115 million, up 22% compared with revenue of $94 million in the third quarter of 2011, and up 14% compared with revenue of $101 million in the second quarter of 2012. Our international revenue growth is primarily driven by higher system sales into Japan. 16 da Vinci S. systems were sold into Japan during the third quarter of 2012, compared to six during the third quarter of 2011, and seven during the second quarter of 2012.

International instrument accessory revenue grew approximately 9% year-over-year, and decreased 17% sequentially. The changes in instrument and accessory revenue roughly followed the procedure volumes and reflect summer seasonality, a difficult European economic environment, and distributor buying patterns.

We sold 41 systems outside the United States compared with 34 in the third quarter of 2011 and 26 last quarter, reflecting higher Japanese placements. We sold 13 systems in Europe this quarter compared with 18 in the third quarter of 2011 and 13 last quarter. The decline in year-over-year European system sales reflects the difficult macroeconomic environment. Aleks will provide additional details of international system sales.

Moving on to the remainder of the P&L, gross margin in the third quarter was 72.5% compared with 72.9% during the third quarter of 2011 and 72% last quarter. Our slightly higher gross margin percentage compared to last quarter resulted primarily from cost improvements made to our new products.

Third-quarter 2012 operating expenses of $179 million were up 22% compared with the third quarter of 2011 and up 11% compared with the second quarter of 2012. Our higher third-quarter 2012 operating expenses resulted in a large part from the timing of non-cash stock option expenses. Beginning in 2012, we changed our stock option granting pattern, so that employees are now granted options at both February 15 and August 15, compared with only at February 15 in prior years.

Although approximately the same number of options were granted in each year, we recognized a higher proportion of stock option expense in the third quarter of 2012, relative to the first two quarters of 2012 and the third quarter of 2011. On a year-to-date basis, the stock option expense in 2012 is comparable to 2011. Our higher third-quarter 2012 operating expenses also reflect higher R&D project expenses and increased headcount. We added 92 employees in the quarter, including 44 employees in our commercial operations and 36 employees in product operations.

Third-quarter 2012 operating income was $211 million or 39% of sales compared with $179 million or 40% of sales for the third quarter of 2011, and $225 million or 42% of sales for the second quarter of 2012. Third quarter 2012 operating income reflected $47 million of non-cash stock compensation expense compared with $35 million for the third quarter of 2011 and $33 million last quarter.

Our effective tax rate for the third quarter was 15% compared with 32% for the third quarter of 2011 and 32% last quarter. Our lower third-quarter tax rate resulted from the release of reserves specific to tax shares where the statute of limitations has now expired, and adjustments to our 2011 provision, as we have now finalized and filed the related returns. Excluding one-time benefits, our third-quarter tax provision would have been approximately $38 million higher.

Our net income was $183 million or $4.46 per share, compared with $122 million or $3.05 per share for the third quarter of 2011, and $155 million or $3.75 per share for the third quarter of -- for the second quarter of 2012. Excluding the one-time tax benefits, our third-quarter net income would have been $145 million or $3.54 per share.

Let me quickly summarize our results for the first nine months of 2012. Procedures grew by 25%. Total revenue was $1,570,000,000, up 25% compared with $1,261,000,000 last year. The revenue increase included recurring revenue growth of 27% and an increase in systems revenue of 21%.

Year-to-date operating income was $630 million, up 27% compared with $495 million last year. Operating income included $115 million of stock-based compensation charges compared with $102 million in 2011. Net income was $482 million or $11.72 per share compared with $344 million or $8.55 per share last year. Year-to-date cash flow from operations was $597 million compared with $464 million last year.

Now moving to the balance sheet. We ended the third quarter with cash and investments of $2.7 billion, up $70 million compared with June 30, 2012. The increase was driven by $246 million of cash flows from operations, plus $38 million from the exercise of stock options, partially offset by $170 million in stock buybacks and $17 million of capital and IP purchases. We bought back 343,000 shares at an average price of $495 per share, and we have 383 million Board-authorized buybacks remaining.

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

Thank you, Marshall. During the third quarter, we sold 155 da Vinci systems -- 114 in the United States, 13 into Europe, and 28 into rest-of-world markets. As part of the 155 system sales, 8 standard da Vinci systems and 26 da Vinci S. systems were traded in for credit against sales for new da Vinci Si systems.

We had a net 121 system additions to the installed base during the quarter, which brings to 2462 the cumulative number of da Vinci systems worldwide -- 1789 in the US, 400 in Europe, and 273 in rest-of-world markets. 79 of the 155 systems installed during the quarter represented repeat system sales to existing customers.

In total, 139 of the 155 systems sold represented da Vinci Si or Si-e systems, which included 20 dual console systems. The 41 system sales internationally included 16 into Japan, 4 into Australia, and 3 into Belgium. The 16 systems placed in Japan establishes it as our second largest da Vinci market worldwide, with 70 placements. With the exception of Europe, our da Vinci system performance remained very solid.

Clinically, we did not meet our procedure expectations for the quarter, achieving year-over-year procedure growth of approximately 22%. The shortfall can be attributed to two factors -- a larger than expected decline in our US dVP business, and procedure underperformance in Europe. The pressure we face within our US dVP business can be traced to both conservative PSA screening protocols and a change in treatment recommendations for low-risk cancer patients, away from definitive treatment.

Our EU procedure business shortfall is a bit more complex to define, as it appears to be both macroeconomic and structural in nature, as Gary stated. With the exception of these two areas, procedure performance was solid. Growth during the quarter was led by the categories of general surgery and GYN. Procedures which included da Vinci hysterectomy; cholecystectomy; colon and rectal resections; lobectomy; endometriosis resections; sacrocolpopexies; myomectomy; mitral valve repair; and nephrectomy all displayed solid growth.

Recently released new products continue to do well, most notably Single-Site. Early customer feedback has been positive and our initial sales have been strong. Clinical awareness for da Vinci Single-Site cholecystectomy was very apparent at the recent American College of Surgery Conference held in Chicago. The clinical presentations that were delivered through large audiences, with both US and international surgeons participating.

Through the third quarter, we sold Single-Site instrument and accessory kits to over 350 US customers. Our recently launched Vessel Sealer product was also favorably received at this conference, with most of the interest coming from colorectal and advanced general surgery clinicians.

This product is performing well in the field, and the feature set, specifically the articulated risk design, appears to be satisfying a strong market need. The customer adoption for both da Vinci simulator and Firefly continues to expand, with 87 customers purchasing a da Vinci simulator and 64 customers purchasing Firefly systems, as part of their initial system purchases this quarter.

During the quarter, several hundred robotic abstracts and papers representing a variety of surgical specialties were published within various peer-reviewed journals, while quarterly conferences produced several live da Vinci procedure transmissions, postgraduate robotic courses, podium presentations, and clinical poster sessions. Much of our early general surgery success has been within procedures that are deemed difficult to perform. Near the top of that category is low rectal cancer surgery.

In a recent edition of the Annals of Surgery, a prospective study entitled, "Impact of robotic surgery on sexual and urinary functions after fully robotic nerve-sparing total mesorectal excision for rectal cancer," describe the results of 74 da Vinci rectal resections completed at the European Institute of Oncology in Milan, Italy. Urinary and sexual functions are recognized as -- dysfunctions, excuse me -- are recognized as serious complications within rectal surgery, but have yet to be reported on robotically, which was the aim of this study. 74 patients undergoing fully robotic resection for rectal cancer were prospectively included in the study.

Urinary and sexual dysfunctions affecting quality of life were assessed, with specific self-administered questionnaires, in all patients undergoing robotic total mesorectal excision. And the results were calculated using validated scoring systems and statistically analyzed. The analysis showed that the sexual function and general sexual satisfaction initially decreased one month post-surgery for erectile function and general satisfaction in men, and for arousal and general satisfaction, respectively, in women.

Subsequent testing showed that both parameters increased progressively. And at 12 months post-surgery, the values were comparable to presurgical baselines. Concerning urinary function, the grade of incontinence measured one year after intervention was consistent to presurgical measurements in both sexes.

The study conclusion was, and I quote, "Robotic total mesorectal excision allows for preservation of urinary and sexual functions." The authors went on to say that this is most likely due to their ability to perform superior wristed movements, fine dissection, coupled with the stable magnified 3-D view when working around the inferior hypogastric plexus.

Consistent with the theme of difficult-to-perform general surgical procedures is a paper out of the University of Pittsburgh Medical Center, which recently published in the Annals of Surgery. The paper entitled, "Robot-assisted minimally-invasive distal pancreatectomy is superior to laparoscopic technique," described the technical limitations of the laparoscopic approach, and how it may limit patient eligibility and require conversion to open or hand-assist surgery to maintain patient safety.

The study compared the perioperative outcomes, 90-day morbidity and mortality of their first 30 robotic distal pancreatectomies to a historical control of 94 consecutive laparoscopic distal pancreatectomies. They reported that the post-operative length of hospital stay and rates of pancreatic fistula, blood transfusions and readmissions were not statistically different between the groups. However, for patients in the robotic group, the conversion rate to open surgery was zero, as compared to the lab group of 16%, which significantly reduced the risk of excessive blood loss.

Also of note was that more pancreatic ductal adenocarcinomas were approached robotically than laparoscopically -- 43% compared to 15%. Oncologic outcomes in these cases were superior for the robotic-assisted group, with higher rates of margin-negative resection and improved lymph node yields, for both benign and malignant lesions.

The author's conclusion, and I quote, "Robotic distal pancreatectomies were equivalent to laparoscopic distal pancreatectomies in nearly all measurements of outcome and safety, but significantly reduced the risk of conversion to open resection, despite a statistically greater probability of malignancy in the robotic cohort. We concluded that robotic assistants may broaden indications for minimally-invasive pancreatectomy." -- end quote.

From time to time, we'll read critical reviews relating to the cost of robotic surgery, where the underlying comparator is usually laparoscopic or laparoscopically-assisted surgery. Some comparisons have lumped several procedures into the same analysis, labeling them all as robotic, while others have looked at each procedure individually. While it would be presumptuous to dismiss all previous analysis as incorrect, it would be accurate to point out that every procedure has its own economic profile and can only be compared accordingly.

In a recent edition of the Journal of Endourology, a study entitled, "Cost analysis of robotic-assisted versus hand-assisted laparoscopic partial nephrectomy, reviewed the economics for one of our largest and most successful procedures, partial nephrectomy. The aim of the study was to perform a cost comparison of three approaches to partial nephrectomy, those being open, partial nephrectomy, hand-assisted laparoscopic partial nephrectomy, and robotic partial nephrectomy.

"The retrospective analysis evaluated costs and clinical data from 89 patients who had undergone the three surgical approaches. Baseline demographic data, patient comorbidities, nephrometry score, and perioperative outcomes were assessed. Costs and sub-costs from the operating room and hospital were evaluated using non-parametric statistical analysis.

"Since the patient comorbidities and tumor characteristics were different in the open partial nephrectomy cohort, it was excluded from the cost comparison, thus allowing for an apples-to-apples comparison between hand-assist laparoscopic partial nephrectomy and robotic partial nephrectomy.

"The study found no difference in overall cost between hand-assist and robotic partial nephrectomy. OR costs were higher for the robotic partial nephrectomy, because of the higher robotic capital and reusable equipment cost that outweighed the cost of disposable product for the hand-assist laparoscopic partial nephrectomy group. OR time-related costs were similar between the groups. Robotic partial nephrectomy patients had a shorter length of stay, which decreased postoperative hospital costs."

They concluded by saying, and I quote, "No difference in overall costs was found between robotic partial nephrectomy and hand-assist laparoscopic partial nephrectomy. Robot allocation, OR equipment use, and length of stay are important determinants of total cost. Further study regarding recovery and quality of life may reveal added benefits to minimally-invasive approach, and increase use in nephron-sparing surgery." -- end quote.

This concludes my comments, 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, on our last call, we forecast procedures to grow approximately 25% to 27% from the base of approximately 360,000 procedures performed in 2011. Three quarters through 2012, our procedure growth stands at approximately 25%.

During the third quarter, we saw further pressure on our US dVP volumes and upon our overall European procedure business. As a result, we now forecast full-year 2012 da Vinci procedure volume to grow approximately 24% above our 2011 total.

Moving on to revenues, on our last call, we forecast 2012 revenues to grow between 20% and 23% above our 2011 revenue of $1.76 billion. As we enter the fourth quarter, we are now able to refine our guidance to the upper half of this range.

Now, turning to non-cash expenses, we continue to expect non-cash stock compensation to fall within a range of between $152 million and $156 million for the year. Through three quarters of this year, $115 million of stock compensation has been recognized, and all of the quarterly timing differences related to a revised 2012 employee grant process have cycled through. The Q4 portion of total 2012 option expense should follow historical patterns.

Now, turning to other income. On our last call -- operating income. On our last call, we forecast operating income to fall within a range of between 39% and 40% of net revenue. Now, based upon the impact of recent material cost reductions and expense timing, we expect operating income to come in at the high end of the range at about 40% for the year.

We continue to expect other income, which is mainly comprised of interest income to total between $16 million and $17 million for the year. With regard to income tax, our Q3 reported tax rate of 15% reflected a discrete benefit related to releasing reserves for tax years where the statutes of limitations have expired. This discrete item favorably impacted Q3 but will not impact Q4. We continue to expect the Q4 tax rate to be approximately 31% of pre-tax income, which does not assume any reinstatement of the R&D tax credit.

Going forward into 2013, we expect to see a gradual reduction in rate to a range of between 29% and 31%. Also looking into 2013, the medical device tax is scheduled to become effective on January 1. Based upon our 2012 regional and product mix, we would estimate the tax to equate to roughly 1.1% of our net consolidated revenue. We would plan to record the expense as a component of cost of sales. We estimate that our share count for calculating EPS in Q4 2012 will be roughly flat to Q3 at approximately 41.1 million shares.

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

(Operator Instructions) David Lewis, Morgan Stanley.

Gary or Aleks or anyone for that matter, just thinking about the third quarter from a macro perspective, it looks like the third quarter is a lot like the second quarter. We saw significant Japan strength and US decline novo system strength offset by Europe, and we saw dVP US and OUS weakness offset, obviously, by dVH as well as some general surgery improvements.

So, do you sort of have any sense the fourth-quarter guidance sort of implies stable trends on procedures with the third quarter? Do you have any sense the balance of these positive and negative forces, how many quarters you think this could persist?

Hi David -- Gary. You know, it's pretty hard to call US prostatectomy. That's, as you know, more an issue of medical management and watchful waiting than it is a change in imaging surgery versus other kinds of surgery.

So we don't have a crystal ball as to where that procedure is going to go over time. The data we look at is probably pretty similar to the data that you look at, in terms of where PSA testing is taking us.

On the upside, I think the things that are growing, we can measure a good interest from our customers. We can measure sales force activity. That tends to be a little bit more in our camp versus out in the world. So, on the downside, pretty tough to call on the upside. We can look at the activities that we can influence and feel pretty confident about the things that we can do.

And then, Gary, just following up on one of those key catalysts, which obviously is single incision, I don't know if I caught it on the call but, could you sort of confirm whether SILS has sort of moved into your third-largest procedure for the Company?

We have talked about before that cholecystectomy as a total procedure of all types multi-port and Single-Site together combined is the third. Single-port on its own is not.

It's important to note that, as a reminder, of course, it's a distant third. I mean, you have hysterectomy; you have prostatectomy; and you have cholecystectomy. And so you have other procedures that are sort of in the general neighborhood procedures, such as partial nephrectomy and sacrocolpopexy and others. So it is indeed third, but as a reminder, it is a distant third.

There's one more difference that's worth pointing out is that, unlike prostatectomy and hysterectomy, cholecystectomy can be an entry point into a clinical pathway for somebody who wants to end somewhere else. And so those procedures can be a little more volatile.

And then, Gary, just one quick one, I apologize for two or three questions. But you talked about an increase in spending for both US general surgery, and potentially, I would imagine, if you're going to go after Europe and change structurally how you're selling it, there could be increased expense. Could you help us sort of frame those relative expenses versus other very significant sales investments you've made, perhaps the 2010 significant investment in the US?

Yes, this won't quite be the same scale. It's a little bit more targeted. So, in Europe, it's really filling open headcount in the field, and investing a little bit more in the back office, in terms of clinical trials and other types of marketing investments, economic analyses and so on. So that's kind of what the European side looks like. On the general surgery side, it will be general surgery-focused expertise and depth.

Great. Thank you very much.

Ben Andrew, William Blair.

Gary, can you break down the procedure growth for us between the US, Europe and ROW?

I'll turn it to Calvin.

Right. So the procedure growth, I'll find a -- excuse me. Go ahead.

Total procedure growth quarter -- year-over-year is 22%. And then what we said was that the procedure growth outside of the US year-over-year was 9%.

Okay. So was the US close to around 30? It wouldn't be that high.

Yes, I mean, you could probably back into it on your models there. But again, worldwide, we're looking at about 22% for Q3, 25% on a year-to-date basis. And included in those numbers would be a decline in the US dVP volume that Marshall mentioned, of 20% on a quarter basis, and 14% on a year-to-date basis. And so I think kind of what it implies is that if the US stayed flat from year-to-year, the worldwide growth would have been about 26% in Q3 and 28% on a year-to-date basis.

Right. I guess what I'm getting at is, dVP down 20% in the US. If you are on a base of 75,000 cases, for '11, if that's down 20% full-year, you're talking something in the low 60,000 cases, negative 15,000 at the most -- 12,000 to 15,000. If dVH is growing [60,000], and COLI is adding [10,000] and all the other stuff is adding another [30,000 -- 40,000 -- 50,000], you end up with robust procedure growth in the United States.

And the real evidence of a problem is obviously Europe, which is macro and some concern about obviously dVP. But at some point, dVP has to bottom. And so the question becomes, is there sort of a structural level of prostatectomy that we can think about, where this will shake out over the course of, call it, six, eight quarters, and we'll end up at maybe a rate of 50,000 dVPs in the US. Does that make sense?

The flow of your argument makes sense. I think that Calvin may argue with you about some of the numbers, just to make sure that you tied them out right. But the flow -- generally speaking, the flow makes sense.

Calling that number of kind of what the baseline number of a prostatectomy is in the US is hard to do. We've seen some analysis out there that's probably similar to the kinds of analysis that you've seen. And I think we're just going to have to see where that base establishes itself.

I mean I think there are a couple of things that argue for a base. One of them is that prostate cancer, the highest cure rate will come from a surgery, not from a medical management. And the other thing that we know is that over time, watchful waiting patients, some fraction of them, usually a majority of them, will converge to definitive treatment over time. So, I think both of those things will argue for finding the floor. And what exactly that floor level is, we're just going to have to wait and see.

Yes, but I think, Ben, the central theme of your thesis there is accurate. And that is, if you look outside of those two areas, US dVP and the European weakness, the remainder of the procedure business was very strong year-to-date and for the quarter.

Okay. And I'll sneak in one more as well. If you look at Japan, we've done some calls recently, and it sounds as though the Japanese government has authorized funding for about 150 systems. And our sources were sort of indicating that that could come into play by the end of '13 and certainly [16] in the third quarter is -- goes a long way towards that.

Is that consistent with sustaining this sort of a [16] or a pretty substantial rate? And is that a reasonable target for an installed base kind of going out of '13? Thanks.

Yes, I don't think we're ready to size the total market opportunity. And I think that system sales by themselves are going to be lumpy quarter-to-quarter and I would expect some lumpiness. Long-term, we're really excited about the Japanese market opportunity. The key opinion leaders, the people we've talked to on the ground, are excited about robotic surgery, and we think it will build. And that's another area of investment. But again, kind of calling the specifics is not something we're prepared to do.

Yes, I think there's just one caveat that's worth mentioning is, as a reminder, we have one national reimbursement, which is prostatectomy. There are ways for, as evidenced by the activities prior to that national reimbursement, that hospitals can go through, let's call them, a one-off basis or a checklist basis, where they can apply for certain levels of reimbursement on other procedures.

But from a national perspective, we are really in this environment where we are working within prostatectomy primarily, and then there may be a few other procedures that get worked in on a one-off basis. So that's the environment we're in for a little while.

Yes, the next scheduled pass that procedures being added to the reimbursement list would be April of 2014 for a general systemwide reimbursement.

Based on the way that MHLW runs.

Okay, thank you.

Tycho Peterson, JPMorgan.

Thanks for taking the question. First question maybe on COLI. Wondering if you could just give us a little bit of a breakdown as to how much of the COLI uptake is Single-Site versus multi-arm? And are you starting to see COLI drive system placements?

You know, I think we're not prepared to break out what that mix is. And honestly, I think that the important message here is that -- is just to really look at this structurally. You have general surgeons who don't have a lot of robotic experience going in. And so they are going to work through various procedures to some level, to make sure that they have a good understanding of the X's and O's of the system.

And then, what is today a general multi-port cholecystectomy, the expectation is that those move into Single-Site. So there will be a relationship. And I think trying to call it at any given time is probably a -- I don't know how meaningful that is. But, collectively, as we said, it is the third-largest procedure.

Now we -- I think the way we would categorize the importance of procedures as they relate to new system placements, it's hard to tease out what is cholecystectomy and what is general surgery. Because, to Gary's earlier comments, sometimes cholecystectomy is not the end point which the general surgeons are trying to get to. And so it becomes one of many procedures that they see in their armamentarium over time.

And so, it's really hard to say what the -- what evidence we have at this point that it's COLI-specific that is driving the system. But there is definite evidence that general surgeons are becoming more and more important to system placements.

And then in your commentary, you talked about additional indications for Single-Site -- benign hysterectomy and nephrectomy. Can you just talk about how you think about those opportunities? And then how much you want to push through Single-Site versus, at some point, is it logical to introduce a new system?

Yes. On the first side, we think that hysterectomy is a patient population that sets up well for a single-port robotic approach. And we've gotten good feedback from customers in Europe and the US that that's something worth pursuing. And so that's been our next procedure -- that and nephrectomy.

We'll see -- in terms of what happens next after Single-Site, we'll continue to invest in instrumentation that makes sense in that platform and in indications. I don't think that will be the last stopping point in terms of an indication for Single-Site as we go forward. And as always, we continue to invest in technologies that can make things more capable. And we invest in tissue interaction technologies. We invest in patient access, smaller ports and different ways to get into the body. And with regard to Single-Site, we'll continue to do that.

Yes. I think the way we think about, for example, the Single-Site in GYN or benign hysterectomy is, if you think about the way we've always described the market, there is a level of complexity that was inherent in our target for hysterectomy -- both benign, complex benign, as well as malignant.

And so, there's a subsegment of the market that is, by definition, if you will, relatively less complex or simple. It seems like a very good area for us to apply some resources and see if this is indeed something we can access with new technology (multiple speakers), which is the approach.

Okay. And then just one last one because I'm sure we'll all get the question. In terms of the stapler, I mean, based on your interactions with FDA, are you still thinking this could come by year-end? Or should we think about stages next year? Just how do we think about timing there?

You know, it's always hard to predict exactly timing on these things and so I won't. We've had a healthy conversation with FDA. We've understood their questions. I think that we've provided answers that make sense. And we'll let you know what happens thereafter.

Okay. Thank you.

Lennox Ketner, Bank of America Merrill Lynch.

Thanks so much for taking the question. First question, just it sounds like there's a lot -- you're seeing a lot of good momentum in Japan. I'm wondering if you could just comment on what Japan contributed to either overall procedure growth in the quarter or to the 9% international growth?

Just in a broad brush, it's growing nicely off a very small base. So in-country, we're delighted with the growth rate; in terms of total contribution to the overall, it's probably not a material contribution.

Okay. And then, just to go back to Europe, Gary, you talked about the fact that it's partly the macro environment and partly structural, which it sounds like you're working to address some of the structural issues. But I'm wondering if you could just give a little more detail on what those structural issues are?

From my conversations with some European physicians, it sounds like two of the challenges over there are ones that in some countries, there are per diem reimbursement systems, which maybe makes the length of stay reduction less valuable upfront; but then also, just the fact that there's less competition amongst hospitals. Are those kind of the two main structural issues? Or is there something I'm missing there that you guys are working to address?

You know, I think there are a couple of things. One of the structural things is just open territories on our side and making sure we have the right number of sales people in the various countries. And we can run that against internal metrics. So it's a pretty simple one. And the solution there is to make sure that we're fully staffed.

The second thing or more along the lines you've discussed, although I described them a little bit differently. I think -- it's not really that a single-payer system is not capable or interested in adopting a da Vinci surgery; we've seen Japan's single-payer system has been moving pretty quickly. Sweden has a single-payer system that has moved quickly. So it isn't the act of being a single-payer.

It's more making sure that the conversations with government-run hospitals around both economic value and clinical data are put into forms that they can accept, and we can match their timelines. You're absolutely right with regard to systems that are using per diem, that that's a real challenge for hospitals to adopt da Vinci surgery.

We see per diem systems being challenged in favor of DRGs in a lot of different places not only for da Vinci. I think the trend is away from per diem, not towards it. And so I don't see that as systemic across all of your really in-pockets.

Okay, that's very helpful. Thanks.

Lawrence Keusch, Raymond James.

Just to pick up on that question, could you talk a little bit about perhaps where you are seeing some of the procedure pressures within Europe? Is it more directed at Southern Europe? And just really trying to get a sense of whether anything is changing out there.

You see capital pressure in southern Europe absolutely. Procedure pressure is a little bit less targeted directly with Southern versus Northern, and so it moves around a little bit.

(multiple speakers) Go ahead.

So if you looked at -- then again, I think it's -- it almost takes even a little perhaps a derivative deeper. So if you looked at environments like public hospitals in France, let's say, versus clinics in France and/or private clinics in other parts of Europe, it becomes probably more akin to those comparisons than it does just individual countries.

And we've had strength in Germany over -- not this particular quarter, but in the past two years, we've called out Germany as having a lot of strength. This is the first time we've called out Belgium in probably a few -- probably a year-and-a-half. So it seems like it's rotating through various countries, but it's probably more consistent with the public versus private.

Okay, that's helpful. And I just had two other quick ones. As you noted, benign hysterectomy and nephrectomy for Single-Site -- how dependent on -- in getting into those procedures, how dependent is it on the need for new instrumentation? And if so, what might be the timing on that?

And then lastly, you utilized cash this quarter to buy back stock. You still have a lot. So, again, if you could just remind us of the general uses of cash?

You know, on the issue of Single-Site, as we've said before, we've just submitted and received our first round of questions from FDA on the extension of our indications for Single-Site into hysterectomy and oophorectomy. I think there that we have good, as you know, good momentum in hysterectomy. And I think that, I think it goes into a set of surgeons who are interested in robotic surgery, and towards a segment of the patient population that would be interested in cosmesis and return to full function.

So we're excited about that. I think it will make some sense. We're in the early stages of our interactions with FDA. How long that will take, it's very tough to predict and so we won't.

Yes, as far as the instruments, Larry, I would say the -- which is pretty consistent with the way we have approached new markets and new procedure targets, where we have a good base of instruments, but we're not exactly optimized for perfect performance, if you will, in terms of ease-of-use and having all of the right instruments.

But think of it in terms of adding a few instruments rather than creating a whole new category of instruments. And I think that will be -- that's been consistent and will be consistent as we go into new procedure targets.

With regard to uses of cash, I'll turn that to Marshall.

Yes, so we bought back 343,000 shares this quarter. We have 383 million still authorized by the Board. We'll continue the program. We'll buy back stock when it makes sense; not a absolutely certain amount every day. Beyond that, the cash is there for investment back into the business over time, particularly if there were to be a extended or deepened economic issue on a macro basis, as well as for investment into IP as the opportunities come up.

Or other technologies.

Yes.

Okay, great. Thank you.

David Roman, Goldman Sachs.

Thank you for taking the questions. I was hoping to focus a little bit on the spending side of the equation. Obviously, you had guided to the $20 million sequential uptick this quarter versus the second quarter.

But if I just looked at the income statement, SG&A is still being down as a percentage of sales year-over-year. So if you take out the options grant this quarter, can we maybe talk about your spending priorities? It sounds like you have a lot on deck here in terms of investing in new procedure categories, trying to fend off the assault on dVT; rebuilding your Euro presence, yet SG&A is still growing slower than revenue. That's -- and I have a follow-up.

Yes, we've talked just on the numbers side and then I'll hand it over. We guided towards about $20 million increase in operating expenses quarter-to-quarter. It came in closer to $17.5 million. So a little bit less than that and I think it had a little bit to do with the timing here. We called out R&D projects last quarter. Some of those you're going to see probably spilling into future quarters.

And then I think the timing on SG&A that you allude to, David, we're starting on some things that we thought we might be -- might have been a little further along here in Q3, in terms of building the organization and the training capacities and so on. So, in terms of the numbers, I think the -- you're going to see some growth in the OpEx going forward into Q4, and that's inherent in the 40% operating income guidance we gave.

I think we've laid out for you the things that we think are deserving of differential or additional investment. We've typically been thoughtful about how we invest, and we don't trend to mad dash in one direction or another. And so we'll be building it out, but we'll build it out against plan.

Okay. And then Japan, which has obviously been very successful for you, particularly since you got the reimbursement in April, can we maybe talk about the sort of sustainability of that business? You referenced, I think, in your prepared remarks that there is some spillover of the dVP concerns of the US into Europe. And obviously Japan is at a much more nascent stage in its ramp, so you probably wouldn't see it at this point. But any concerns on that transpiring in Japan, and how we should think about growth in that business over the next 12 months or so?

On the dVP side, actually the uptake has been significant in terms of dVP in Japan relative to the number of prostatectomies that they do. We do denominate it in prostatectomies based on what they've been doing there.

We haven't heard a reflection of this set of concerns into Japan. It's not to say that it might not happen in the future. It might. In general, I think that Japanese surgeons have expressed interest in da Vinci for a pretty broad variety of procedures. So, even were that to be pressured over time, I don't know that it would dampen enthusiasm of -- for a long period for other procedures as we go. (multiple speakers) Quarter-to-quarter performance can be lumpy there.

Sure. And then maybe just one quick clarification question. From an EPS perspective this quarter, the $4.46 you reported includes that tax benefit that you discussed. Are you going to -- are you pointing people toward a non-GAAP number, or the GAAP $4.46 in terms of thinking about the ongoing earnings number for the quarter?

So we gave you the $4.46, which is the GAAP number; but we also said if you excluded that, we would have been at $3.54. So we're trying to provide you with all the information so that you can do your own comparisons.

Okay, thank you.

Jeremy Feffer, Cantor Fitzgerald.

Thanks for taking my question. I wanted to come back to your comments on this sales with simulators, Firefly, dual consoles. It seemed like sequentially those were down, even though total da Vinci sales were up sequentially. Is there anything to read into that? Are some customers looking at more de-featured units? Or is that just a complete coincidence?

Yes, it definitely trended down. I think on the Firefly side, though, it was pretty similar. We've been saying about the last three quarters that about half the US systems have gone out with Firefly configuration. And that held true in Q3.

As relates to the dual console and the simulator, those kind of go together in some respects, as they're, in large part, training tools and applications. And a slow downward trend there is something that we would have predicted internally here, as maybe a fair number of sites have invested in these technologies for training.

And then, as you know, a lot of systems we sell now are to existing customers. And some of those existing customers already have simulators and dual consoles. So it's maybe less obvious value in those situations. So a little -- a downward trend there is probably something we would expect, but very gradual.

Okay. And quick follow-up on revenue per procedure, I heard the comments on timing of stocking and distributor orders, is this a run rate that we should be expecting now going forward? Obviously, it had been trending up with a lot of the new instruments. But with a lot of those now in there, is this more of a comfortable run rate?

Yes, I mean we've been seeing the run-up, as you say, in recent quarters due to the impact of the new products. And what we've been saying, there are a lot of factors that can serve to move that metric up or down. And in this particular quarter, as Marshall called out in his commentary, we saw some of the timing of those initial stocking orders, with system sales and distributor orders, kind of serve to drive it slightly down here.

But I'd say going forward, it could go up or down, depending. We also sell some of the product -- the procedure mix, right? So the more single sites and benign hysterectomies have a lower revenue per procedure for us kind of pushes it down. So, again, I'd say going forward, it could probably go either way from where we are right now.

Okay. That's helpful. 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 Susan of Ohio gives you some sense of what this means in the lives of our patients. Quote -- "I was diagnosed in August of 2011 with adenocarcinoma. I'm a mom of five, grandma of 11, and 52 years old. I quit smoking years ago. Wow. I had a lot to think about when, by God's grace, I was introduced to a super surgeon.

"At the time, he thought I would be a really great candidate for the da Vinci robotic-assisted surgery. I figured it sounded really great. We did the surgery in December of 2011. At first, when I started reading about it on websites and talking with people, it sounded really scary. But after reading testimonies like mine, I realized it was the only way to go.

"And so, we removed the top lobe of my left lung in December of 2011. I was home in two days. The nurses at the hospital could not believe the type of surgery I'd had. Wow, how the robot changed my life. In no time, I was back to a normal life.

"My surgeon is one of the best around and I am living proof. He saved my life, saved me from a grueling recovery, and saved me from a horrific scar. I had a few little holes and a small incision where they removed the lung. While they were in there, they took lymph nodes -- which, by the way, are great. No cancer and a 20% chance that this cancer comes back.

"If you're considering this type of surgery, I urge you to really think positively about this. Just absolutely amazing what modern medicine is all about. I would welcome the chance to have the surgery versus the old-fashioned way. Recovery was two weeks and I was back to work in three. It's a miracle that they can do these things with a robot, but they do." -- end quote.

Patients like these are our strongest advocates for da Vinci surgery, and form the very foundation of our operating performance. We've built our Company to take surgery beyond the limits of the human hand, and I assure you that we remain committed to driving the vital few things that truly make a difference.

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

Thank you very much. And ladies and gentlemen, this conference call will be available for replay after 3.30 p.m. Pacific Time today, running through October 16, 2013, expiring at midnight. You may access the AT&T Executive Playback Service at any time by dialing 800-475-6701 and entering the access code of 259631. International parties may dial 320-365-3844. Once again, those phone numbers are 800-475-6701 and 320-365-3844, using the access code of 259631.

That does conclude your conference call for today. We do thank you for your participation and using AT&T's Executive Teleconference. You may now disconnect.