直覺手術 (ISRG) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Intuitive Surgical Q4 2012 earnings release call.

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

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

(Operator Instructions).

As a reminder this conference is being recorded.

I will now turn the conference over to Calvin Darling, Senior Director of Finance for Intuitive Surgical.

Please go ahead.

Thank you.

Good afternoon and welcome to Intuitive Surgical's fourth-quarter earnings 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 (technical difficulty) 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 fourth-quarter results as described in our press release announced earlier today, followed by a question-and-answer session.

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

Marshall will provide a review of our fourth-quarter financial results.

Aleks will discuss marketing and clinical highlights.

Then I will provide our financial forecast for 2013.

And, finally, we will host a question-and-answer session.

With that I will turn it over to Gary.

Thank you for joining us on the call today.

2012 has been a productive year at Intuitive.

In the past year our focus was in the following four areas.

First, continued growth in gynecology and urology worldwide.

Second, disciplined execution of our Single-Site and Vessel Sealing launches.

Third, building robust clinical programs with leading customers in emerging procedures in general surgery, thoracic surgery and transoral surgery.

And, finally, strengthening our capabilities in international markets.

In reviewing the year, I will turn first to procedures.

Year-over-year growth in procedures finished at 25%, led by continued uptake in gynecology and growing use of da Vinci in General Surgery.

Gynecology growth was broad-based with increased use of da Vinci Surgery for gynecologic oncology, hysterectomy, myomectomy, and sacrocolpopexy.

General Surgery growth was substantial in the year, led by increased use of da Vinci in colorectal procedures and cholecystectomy, the latter driven by interest in da Vinci Single-Site.

Globally urology as a category was up slightly for the year, pressured by a significant reduction in prostatectomies in the United States.

As we have mentioned on prior calls, we believe the reduction in prostatectomies is the result of a combination of factors including recommendations moving away from the use of PSA testing for early detection, and an increase in non-definitive treatment pathways such as watchful waiting.

However, we did see a quarterly sequential rise in the United States in prostatectomies from the third quarter to the fourth quarter of 2012.

Aleks will take you through greater detail on our procedure performance later in the call.

Turning to da Vinci Surgery outside of the United States, in 2012 we focused on improving our performance in Asia and in Europe.

In Japan reimbursement approval for da Vinci Prostatectomy contributed to significant early uptake of systems and procedures.

In the fourth quarter, we received clearance for our da Vinci Si system in Japan, and customer shipments for Si are planned to commence in this first quarter of 2013.

We expect progress in Japan to proceed in steps as we pursue additional instrument regulatory clearances and additional procedure reimbursement.

In Europe we made progress in the fourth quarter, seeing a significant increase in System sales as we invested in deepening our organization.

However, per our commentary through the year, we have more work to do in building our organization to perform in a challenging environment.

We expect these challenges in Europe and our investments to continue for the next several quarters.

Our product launch has proceeded well in 2012.

Response to our da Vinci Vessel Sealer and Single-Site instrument kit was positive in the year with over 450 Si customers purchasing Single-Site starter kits.

Surgeon acceptance of Vessel Sealer has been encouraging with Vessel Sealer use focused on colorectal surgeons as well as GYN oncologists.

We received 510(k) clearance in the United States for our da Vinci stapler and we plan to start a controlled rollout over the next several weeks.

Our rollout this year for our stapler will be carefully phased and focused on excellent customer experiences.

For our prior calls, in Q3 of 2012 we submitted a 510(k) for an additional set of instruments and an extended indication for Single-Site for use in hysterectomy and oophorectomy.

Our dialogue with FDA on this kit has been constructive.

In imaging we submitted a 510(k) application to expand indications for our Firefly fluorescence imaging system to use in biliary imaging.

We believe this will have application for use in imaging the common bile duct during cholecystectomy and will complement the use of Single-Site.

Looking back at the full year 2012, our operating highlights are as follows.

Worldwide procedures grew by approximately 25%.

We sold 620 da Vinci Surgical Systems in the year, up from 534.

Total revenue grew to $2.178 billion, up 24% over 2011.

Recurring revenue grew to $1.246 billion, up 27% and comprising 57% of total revenue.

We generated $1.031 billion in operating profit before non-cash stock compensation expense, up 24% from last year.

And GAAP net income grew to $657 million, up 33% year-over-year.

Turning to operating highlights for the fourth quarter, procedures grew approximately 25% over the fourth quarter of last year.

We sold 175 da Vinci surgical systems, up from 152 in the fourth quarter of 2011.

Total revenue for the quarter was $609 million, up 23% from the fourth quarter of 2011.

Instrument and accessory revenue increased to $254 million, up 29%.

We generated an operating profit of $286 million in the quarter before non-cash stock compensation expense, up 22% from the fourth quarter of last year.

And GAAP net income grew to $175 million, up 16%.

We ended the year with $2.921 billion in cash and investments, up $219 million from last quarter and up $749 million from last year.

We received $263 million in cash during the year from the exercise of stock options and invested $180 million in intellectual property; working capital; property, plant and equipment; and $238 million in stock repurchases for the year.

In the quarter we added 170 people to our team, predominantly in our clinical sales force, our manufacturing team and design functions in Q4, bringing our total team to 2362 employees.

Looking to 2013 our priorities are as follows.

First, continued focus on use of da Vinci in gynecology.

Second, supporting emerging growth of da Vinci in General Surgery.

Third, disciplined execution of our stapling and Single-Site for hysterectomy launches, focused and outstanding early customer experiences.

And, finally, continuing to strengthen our capabilities in international markets, particularly Europe and Japan.

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

Thank you, Gary.

Our fourth-quarter revenue was $609 million, up 23% compared with $497 million for the fourth quarter of 2011 and up 13% compared with $538 million last quarter.

Fourth-quarter revenues by product category were as follows.

Fourth-quarter instrument and accessory revenue was $254 million, up 29% compared with $196 million in the fourth quarter of 2011, and up 16% compared with $218 million in the third quarter of 2012.

The year-over-year increase in I&A was driven by procedure growth of approximately 25%; sales of new instrument and accessory products including Single-Site, Vessel Sealer, and Firefly; and higher stocking orders associated with higher system unit sales.

The year-over-year procedure growth was led by US gynecology and general surgery procedures, partially offset by lower growth in Europe and a year-over-year decrease in US DVPs of approximately 17%.

The sequential increase in I&A revenue compared with the last quarter was driven by higher procedure volume benefiting from favorable fourth-quarter seasonality of benign procedures, higher new product sales, higher initial stocking orders and the timing of distributor orders.

Instrument and accessory revenue realized per procedure, including initial stocking orders, was approximately $2050 per procedure, which is higher than the $1980 realized in the fourth quarter of 2011 and the third quarter of 2012.

The sequential year-over-year increases were driven by higher new product sales, including Vessel Sealers, Single-Site kits and Firefly kits; higher initial stocking orders associated with higher systems unit sales; and the timing of distributor orders.

Fourth quarter 2012 systems revenue of $265 million increased 18% compared with $225 million for the fourth quarter of 2011, and increased 14% compared with $232 million for the third quarter of 2012.

We sold 175 systems in the fourth quarter of 2012 compared with 152 systems in the fourth quarter of 2011 and 155 systems in the third quarter of 2012.

Fourth quarter average sales price per system was $1.49 million, slightly above the $1.47 million realized in the fourth quarter of 2011, and the $1.48 million realized last quarter.

ASPs include all da Vinci models, all simulators, and Firefly when configured with a system, and exclude upgrades.

Fourth quarter ASPs benefited from a favorable mix of dual console systems, Firefly-enabled systems and direct sales to Europe.

ASPs will fluctuate quarter to quarter based on product, customer and trade-in mix, as well as foreign exchange rates on direct sales to international customers.

We sold 115 simulators during the quarter, mostly in conjunction with new system sales, compared with 123 last year and 87 last quarter.

We sold 32 dual console systems compared with 29 last year and 20 last quarter.

52 of our fourth-quarter 2012 system sales involved trade-ins, comprised of 40 da Vinci S's and 12 standard models.

50 of our fourth-quarter 2011 sales involved trade-ins and 34 of our third quarter 2012 sales involved trade-ins.

Service revenue increased to $91 million, up 20% compared with $75 million last year, and up 3% compared with $88 million last quarter.

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

Total fourth quarter recurring revenue -- comprised of instrument, accessory and service revenue -- increased to $344 million, up 27% compared with the fourth quarter of 2011 and up 13% compared with the third quarter of 2012.

Recurring revenue represents 57% of total fourth-quarter revenue compared with 55% in the fourth quarter last year and 57% last quarter.

International revenue results were as follows.

Fourth-quarter revenue outside the US was $131 million, up 23% compared with revenue of $107 million in the fourth quarter 2011, and up 14% compared with revenue of $115 million in the third quarter 2012.

Our year-over-year and quarter-over-quarter international revenue growth was driven by increased procedures and higher system revenue.

Fourth-quarter 2012 international procedure volume was approximately 21% higher than the fourth quarter of 2011 and 15% higher than the seasonally slower third quarter of 2012.

During the fourth quarter of 2012 we sold 42 systems outside the US compared with 39 in the fourth quarter of 2011 and 41 last quarter.

We sold 24 systems in Europe this quarter compared with 23 in the fourth quarter of 2011 and 13 last quarter.

We sold 10 systems into Japan this quarter compared with five last year and 16 last quarter.

A higher mix of systems to direct customers in Europe also contributed to higher system revenue in the fourth quarter of 2012 compared with the third quarter -- and the fourth quarter of 2011.

Aleks will provide additional details of international system sales.

Moving on to the remainder of the P&L, gross margin in the fourth quarter of 2012 was 71.9% compared with 73.1% during the fourth quarter of 2011 and 72.5% last quarter.

Our lower year-over-year gross margin percentage resulted primarily from lower margins earned on our newer Single-Site and Vessel Sealer products.

Our slight decline in margin percentage compared with the third quarter is mostly due to lower margins on a higher volume of our Vessel Sealer products.

Fourth-quarter 2012 operating expenses of $190 million were up 16% compared with the fourth quarter of 2011 and up 6% compared with the third quarter of 2012.

Our higher fourth-quarter 2012 operating expenses were primarily driven by variable compensation associated with our higher fourth-quarter revenue and headcount additions.

Fourth-quarter 2012 operating income was $248 million or 41% of sales compared with $200 million or 40% of sales for the fourth quarter 2011, and $211 million or 39% of sales for the third quarter of 2012.

Fourth-quarter 2012 operating income reflected $38 million of non-cash stock compensation expense compared with $35 million for the fourth quarter of 2011 and $47 million last quarter.

Our effective tax rate for the fourth quarter was 31% compared with 26% for the fourth quarter of 2011 and 15% last quarter.

I want to remind you that the third quarter of 2012 tax rate of 15% included discrete tax benefits of $38 million associated with the expiration of the statute of limitations.

The fourth quarter 2011 rate of 26% reflected the federal -- a federal R&D credit and discrete benefits associated with state tax returns.

Our fourth-quarter 2012 rate of 31% is in line with our expectations and excluded the impact of the federal R&D credit reinstatement, which was enacted in 2013 and will be reflected as a discrete item in the first quarter of 2013.

We estimate the R&D tax credit benefit for 2012 will be between $6 million and $8 million.

Our net income was $175 million or $4.25 per share compared with $151 million or $3.75 per share for the fourth quarter of 2011, and $183 million or $4.46 per share for the third quarter of 2012.

Excluding the third quarter discrete tax benefits of $38 million, our third quarter net income would have been $145 million or $3.54 per share.

Let me quickly summarize our results for the full year of 2012.

Procedures grew by 25% to approximately 450,000.

Total revenue was $2.179 billion, up 24% compared with $1.757 billion last year.

The revenue increase included recurring revenue growth of 27% and an increase in systems revenue of 20%.

Full-year operating income was $878 million, up 26% compared with $695 million last year.

Operating income included $153 million of stock-based compensation charges compared with $136 million in 2011.

Net income was $657 million or $15.94(sic-see press release "$15.98") per share compared with $495 million or $12.32 per share last year.

2012 net income included approximately $46 million associated with statute of limitations and a change in rules for 199 tax credit.

Excluding these items net income would have been $610 million or $14.85 per share.

Year-to-date cash flow from operations was $814 million compared with $678 million last year.

Now, moving on to cash flows, we ended the fourth quarter with cash and investments up $2.9 billion, up $220 million compared with September 30, 2012.

The increase was driven by $217 million of cash flows from operations plus $87 million from the exercise of stock options, partially offset by a $53 million in stock buybacks and $61 million of capital and IP purchases.

We bought back 102,000 shares at an average price of $524 per share and we have [330 million] forward authorized buybacks remaining.

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 fourth quarter we sold 175 da Vinci systems -- 133 in the United States, 24 into Europe and 18 into rest of world markets.

As part of the 175 system sales, 12 standard da Vinci systems and 40 da Vinci S systems were traded in for credit against sales for new da Vinci Si systems.

We had a net 123 system addition to the installed base during the quarter, which brings to 2585 the cumulative number of da Vinci systems worldwide -- 1878 in the United States, 416 in Europe, and 291 in rest of world markets.

114 of the 175 systems installed during the quarter represented repeat system sales to existing customers.

In total, 167 of the 175 systems sold represented da Vinci Si or Si-e systems which included 32 dual console systems.

The 42 system sales internationally included 10 into Japan, four into Italy and three into the countries of Denmark, Switzerland and Canada.

Overall our da Vinci sales remained strong through the year totaling 620 systems.

Clinically we finished the year strong, with Q4 year-over-year procedure growth of approximately 25%.

The specialties of GYN in General Surgery were responsible for most of this growth.

dVP, more specifically US dVP, a topic we have extensively discussed over the past several quarters, declined 17% on a Q4 over Q4 basis, but was up 2% on a sequential basis.

While the rate of decline has tempered a bit, we are not in position to declare an endpoint to its decline.

Our fourth-quarter growth rate matched our 2012 overall procedure growth rate of 25%.

US procedure growth for the year was approximately 26% as compared to 23% for our international markets.

The specialties of GYN and general surgery contributed the overwhelming majority of 2012 procedure growth.

The nine hysterectomy, cholecystectomy, colon and rectal recessions, endometriosis resection, partial nephrectomy and sacrocolpopexy were the largest individual contributors to procedure growth, which more than offset the decline within our 2012 US dVP business.

The US procedure breakdown for 2012 was as follows.

Total procedures grew to approximate 373,000, up from 292,000 in 2011.

Total GYN grew to approximately 222,000 procedures, up from 170,000 in 2011.

DVH accounted for approximately 176,000 procedures, up from 140,000 in 2011.

Urology accounted for approximately 88,000 procedures, which were down from approximately 93,000 in 2011.

US dVP declined from approximately 73,000 to 62,000 procedures.

General surgery procedures increased to approximately 42,000, up from 15,000 in 2011, representing a 173% increase.

Recently released new products continue to do well, notably Single-Site.

Early customer feedback has been positive, and our initial sales have been strong.

Through the fourth quarter we have sold Single-Site instrument and accessory kits to approximately 450 US customers.

Our recently launched Vessel Sealer product continues to pick up clinical momentum, with most of the interest coming from colorectal, advanced general and GYN clinicians.

The customer adoption for both da Vinci simulator and Firefly continues to expand with 115 customers purchasing a da Vinci simulator and 88 customers purchasing Firefly systems as part of their da Vinci purchase 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 clinical conferences produced several live da Vinci procedure transmissions, postgraduate robotic courses, podium presentations and clinical poster sessions.

Some of our early general surgery success is rooted within complex procedures which are often considered difficult to perform through traditional laparoscopic technique.

Laparoscopic mid and low rectal cancer resections have, for years, proved challenging for even the most advanced laparoscopic surgeons, and as a result clinical adoption remains low.

The added benefit of da Vinci's articulated instrumentation, intuitive movement and magnified 3-D HD vision has provided a new foundation for MIS advancement in this field.

A recent three-arm comparison of the Department of Surgery at Yonsei University College of Medicine was published in the Annals of Surgery.

The study reported on pathological pathologic result, morbidity, perioperative, recovery and short-term oncologic results of 165 patients undergoing robotic, laparoscopic and open mid and low rectal cancer procedures.

The findings from this case -- this case-matched study revealed that robotic surgery for the treatment of mid to low rectal cancer resulted in significant decreases in the amount of analgesia used, postoperative pain and length of stay.

Although sphincter-preserving procedures were frequently performed with robotic surgery, the incidence of circumferential margin involvement and immediate postop voiding problems showed a significant decrease with robotic surgery as compared with open surgery.

Robotic surgery showed better recovery outcomes than lap surgery with regard to time to resume soft diet and length of hospital stay.

The visual analog scale was significantly lower in robotic surgery than in laparoscopic surgery and open surgery from postoperative days one through five.

And no significant differences were found in two-year disease-free survival rates between the three groups, causing the authors to conclude, and I quote, robotic surgery may be an effective tool in the effort to maximize the advantages of minimally invasive surgery in the management of mid and low rectal cancers.

Close quote.

The clinical pursuit toward nephron-sparing kidney surgery has increased significantly over the past several years, with more and more urologists adopting partial nephrectomy.

A 500-patient study out of the Cleveland Clinic entitled Comparative Outcomes and Assessment of Trifecta and 500 Robotic and Laparoscopic Partial Nephrectomies was published in the journal Urology.

Trifecta is defined as a partial nephrectomy where warm ischemia time is kept below 25 minutes with negative surgical margins and no perioperative complications.

The study reported that even with the more complex tumor profiles found in the da Vinci cohort, operating times were nearly 22 minutes less as compared to the laparoscopic cohort, 169 minutes versus 191 minutes.

Intra-operative complications associated with da Vinci patients were less than half when compared to laparoscopy, 2.6% as compared to 5.6%.

Postoperative complications were 24.5% in the da Vinci cohort as compared to 32% for patients within the laparoscopic arm.

Positive surgical margins were 2.9% in the da Vinci cohort as compared to 5.9% for laparoscopy.

The overall trifecta rate was significantly higher in the da Vinci cohort at 58.7% as compared to 31.6% for the laparoscopic group.

These findings led to the author's conclusion, and I quote, our large analysis shows that robotic partial nephrectomy offers a wider range of indications, better operative outcomes and lower perioperative morbidity compared to laparoscopic partial nephrectomy.

Overall, the quest for trifecta seems to be better accomplished by robotic partial nephrectomy, thus likely to become the new standard technique for minimally invasive partial nephrectomy.

Close quote.

Once again, the category of GYN contributed greater total procedure growth than any specialty we serve.

Da Vinci sacrocolpopexy volume trails only da Vinci hysterectomy within this specialty and it continued its solid growth during the year.

In a recent edition of Female Pelvic Medicine and Reconstructive Surgery, physicians from the University of South Florida reported the results of their 164-patient study comparing da Vinci sacrocolpopexy two open sacrocolpopexy.

This retrospective study focused on cost, operative time and the length of stay for each group.

Within this study, both system costs and maintenance costs were considered and included.

The authors reported that the median operative time for open sacrocolpopexy and da Vinci sacrocolpopexy was 166 minutes and 212 minutes respectively.

Estimated blood loss averaged 150 milliliters in the open sacrocolpopexy as compared to just 50 milliliters within the da Vinci patient cohort.

Length of stay for the da Vinci group averaged two days as compared to three days for the open sacrocolpopexy group.

However, 48% of the women treated within the da Vinci group experienced a length of stay of less than 24 hours as compared to just 1% for the women undergoing an open sacrocolpopexy.

The median direct cost reported for the da Vinci group was $6668 as compared to $7804 for the open group.

The overall cost reported for the robotics group was $9725 as compared to $12,485 for the open sacrocolpopexy group, with similar re-admission rates at 30 days postop.

The author stated that while da Vinci sacrocolpopexy took a slightly -- took slightly longer to perform than an open sacrocolpopexy, both the direct and indirect cost for the da Vinci sacrocolpopexy was less than for open sacrocolpopexy.

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

Thank you, Aleks.

I will be providing you with our financial forecast for 2013 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, in 2013 we expect procedure growth to be driven by US gynecology, US general surgery and international dVP procedures.

We expect our 2013 total procedures to grow approximately 20% to 23% from the base of approximately 450,000 procedures performed in 2012.

Based on an increasing proportion of benign, short-term elective procedures in our procedure mix we anticipate a more pronounced quarterly seasonality impact in 2013 as compared to 2012, resulting in proportionally lower Q1 and Q3 procedure volumes and proportionally higher Q4 volumes.

Moving on to revenues, in 2013 we expect to achieve annual revenue growth of between 16% and 19%.

We expect typical capital sales seasonality in 2013 with the proportion of full year system units sold in each quarter to follow a pattern fairly consistent with 2012.

We would expect fewer systems to be sold in the upcoming seasonally slower first quarter than in the recently completed seasonally stronger fourth quarter.

As a result, total first-quarter 2013 revenue is likely to be lower than the fourth quarter of 2012.

All 2013 revenues, particularly capital sales, are subject to the impact of economic conditions.

Now turning to operating income.

Our full-year 2012 operating income was 40.3% of revenue.

In 2013, as we reviewed on our last call, the medical device tax has become effective.

Based upon our 2012 regional and product mix, we would estimate the tax to equate to roughly 1.1% of our consolidated revenue.

We plan to record the expense as a component of cost of sales, thus impacting both gross and operating profit margins.

We also expect the impact of new products to shift our overall gross margin percentage slightly lower in 2013.

In addition, we expect to continue to invest in field sales and training resources to support procedure adoption.

Based upon these factors we expect our 2013 operating income to fall within a range of between 38% and 39% of revenue.

Consistent with prior years, we would expect our operating income as a percentage of revenue to be lower in the first quarter of 2013, reflecting system sales and procedure seasonality.

2013 operating expenses should follow a quarterly growth pattern similar to 2012, with Q1 reflecting the full quarter impact of our Q4 new hires.

We expect our non-cash stock compensation charges to increase from $153 million recorded in 2012 to approximately $184 million to $192 million in 2013.

Amortization of purchased intellectual property, which is mostly recorded as R&D expense, is expected to increase from $23 million in 2012 to $28 million to $30 million in 2013.

Other income, which is mainly comprised of interest income, was approximately $16 million in 2012.

We expect other income to grow to between $18 million and $22 million in 2013.

With regard to income tax, on our last call we had estimated a 2013 income tax rate of between 29% and 31% of pretax income.

Now, including the impact of the reinstatement of the R&D tax credit for 2013, we anticipate our base full-year tax rate to fall within a range of between 28% and 30% of pretax income.

As Marshall mentioned we expect to recognize a discrete benefit of between $6 million and $8 million during the first quarter of 2013 related to the reinstatement of the 2012 R&D tax credit.

This discrete item will result in a downward adjustment of our Q1 2013 income tax expense from the 28% to 30% full-year rate.

We estimate our share count for calculating EPS in Q1 2013 will be approximately 41.2 million shares.

That concludes our prepared remarks.

We will now open the call for your questions.

(Operator Instructions).

Lennox Ketner, Bank of America.

Congratulations on a good quarter.

I guess first, I just wanted to touch base on general surgery and the growth that you're seeing in cholecystectomies.

I am wondering, at this point in the year, if it is possible to speak either quantitatively or qualitatively to how much of that uptake you think is trialing versus sticky procedures.

I don't know if you can give any sense as to what percentage of the 450 customers that have bought Single-Site kits have bought second kits, or if it is possible to speak at all to how much you think is trialing versus sticky procedures.

I think it is really too early to say what is a trend, what is alternately a long-term expectation.

It is our belief, and what we can say at this point -- and it is our belief that with 450 US customers purchasing starter kits, that there is a lot of interest in people moving toward single incision surgery.

Trying to define how many of those we will have going forward that are part of the initial purchases is difficult to say.

But I think we are most pleased with the fact that it is indeed a large number of US customers that are going through the purchasing activity and actually doing these procedures today.

Okay, and then just as a follow-up, there was some concern around the recent AAGL statement regarding robotic hysterectomies, and the fact that the AAGL doesn't believe it should be used to replace laparoscopic hysterectomies.

I know that most of your hysterectomy procedures that are being done right now are actually replacing open surgeries, but I am wondering if you made the just frame for people to go forward basis what percentage of the hysterectomy market you think is still being done as open procedures, just so people have a sense as to what the remaining opportunity is there just in terms of simply converting open procedures to robotics.

You are right.

I think many of the studies that were cited in the AAGL statement actually compared robotic surgery to laparoscopic surgery, and really failed to recognize that the majority of robotic cases would have probably previously been done via laparotomy.

We had, as you recall, as we had gone through our sizing, if you will, of our target market, we have talked about this pretty specifically over the years.

When we started really with the da Vinci hysterectomy, I think it was estimated that somewhere along the lines of 66% of the hysterectomies performed in the United States were being performed through laparotomy.

I believe the Solucient database, which is a division of Thomson Reuters, I think in their most recent publication, I think goes through 2011, they estimated that only 39% of the procedures in the United States, now, the hysterectomy procedures, are being performed through a laparotomy.

Vaginal, I think, was something like 14%.

Laparoscopy was around 16% and the remainder was through da Vinci.

So, our objective really is to move these complex procedures from open, invasive incisions to minimally invasive surgery, and I believe that the record shows that is taking place.

Okay, thanks very much.

I will let someone else hop in.

Ben Andrew, William Blair.

Two questions for me.

First, can you talk about the adoption curve that you have seen in gen surg so far?

And if you adjust for the installed base change, how it compares to maybe dVH most appropriately?

It is interesting in general surgery versus let's say dVH, as we are talking about a category.

Within the in general surgery category, if I'm not mistaken, there have been somewhere around 40-plus procedures that have gone into the category of general surgery that have been done -- performed with da Vinci.

So it is difficult to really compare apples to apples between a category and, let's say, something like dVH, which is a single procedure.

And it is even more difficult comparing it to, let's say, dVP, which is a single procedure that is always done for a single disease, which is cancer.

In other words, there is just too many inconsistencies between the three.

But what we will say is, within the category of general surgery, the two procedures that are driving a great deal of that growth are cholecystectomy and colon surgery.

Not just low interior resection, but right colons, left colons, transverse colons, et cetera.

And, Aleks, can you talk a little bit about the typical experience for a new general surgeon starting out in -- wanting to do single Single-Site chole or whatever.

Is there a typical kind of process they go through and how quickly people are coming up that curve?

A lot of that depends on what their experiences going into that case.

In other words, are they completely laparoscopically trained?

Are they laparoscopically naive?

Are they robotically trained, robotically naive?

And I think each one of those is a little bit different.

But I would say that, by and large, you will have people that will do multi-incision cholecystectomies with the traditional da Vinci system, or they will do some other procedures prior to moving into the single incision surgeries.

I don't know that I can say that there is a typical profile and/or a typical experience.

Okay, and then just maybe a quick question for Marshall.

Can you talk a little bit about the expectations on guidance?

And specifically thinking about Europe, if you have guided to the 20% to 23% procedure growth, does that give you 25% US and 15% Europe or international more broadly?

Just characterize for us what you have built in there, please, thanks.

We haven't broken it down.

And, you know, we have given you a range because there is some uncertainty associated with certain elements of the guidance itself.

And so I'm not going to break it down into the details.

All right, thank you.

David Lewis, Morgan Stanley.

Aleks, I wonder if you could tell us maybe in the back half of 2012 or for all of 2012, you think about total general surgery procedures, either in terms of adoption curve steepness, either in Single-Site chole versus LAR, where you're seeing a steeper relative adoption curve or where the contribution to growth is stronger?

It is too early to say.

As you know, with adoption curves, it is dangerous to try to project steepness too early in the equation.

So, trying to really pull out an individual point today and draw a lot of conclusions from it is probably dangerous.

But in terms of overall growth cholecystectomy is, as we have said, I think, in our previous call, it is our third largest overall procedure.

And that is all of cholecystectomy, including Single-Site and four-incision cholecystectomy.

So that one would be growing at a steeper rate.

Okay, very helpful.

And then, Marshall, just a quick question on margins.

It sounds like some of the dynamic is mixed with some of your higher growth procedures coming in, and maybe a slightly lower GM.

How much of that is simply temporary?

When you start getting real scale advantages back half 2013 into 2014, does that sort of vanish when you get back to a corporate gross margin for consumables that is more appropriate?

Or are we always went to see some sort of a drag here, just based on how you're pricing some of these individual units?

It is the -- variation in margin really have to do with the introduction of new products, and the margins that are earned on these new products.

Initially you're dealing with low volumes.

You're dealing with maybe not optimized manufacturing and design.

Those products are -- we work on reducing those costs over time, increasing the volumes and reducing those costs over time.

But some of those products are more complex than the products we have had in the past, and so it is not practical to predict that they will actually get to the same level of margin as, let's say, a simple product that we have.

Some improve quickly in margin, and some take a greater investment and longer time to improve.

Okay, thank you very much.

Tycho Peterson, JPMorgan.

Question, may be first one on dVP, your sequential performance was a little bit better than we did modeling.

I know you're somewhat reluctant to call the bottom here, but can you talk about whether there is any change in your own expectations from the peak to trough drop-off in dVP?

And is it too early to start to think about some of those that have dropped out coming back in for surgery?

I think as you started out in your question, I think you accurately stated the way we feel about it.

It is too early for us to call.

90 days have passed since the last time we talked, and we've have watched it a little closer.

We have seen a favorable Q4, recognizing that Q3 is historically a seasonally slower quarter.

And so I think trying to draw too many conclusions at this stage is probably not in anyone's best interest.

So I can say that we didn't see a great deal of difference other than the numbers in terms of the discussions with the physicians.

I think people are pretty much in the same place today as they were in Q3.

However, the numbers have shown an improvement, and we will watch it and we will see when we feel safe -- when it feels safe to call a trough.

And then in terms of the quarter, in terms of placements, are you able to call out the impact of the VA order at all?

We have had a few people asking about that.

The VA contract was for about $34 million of product.

That was a contract for both systems, initial stocking of instruments and accessories, as well as other things that go with it, like simulator.

And we did ship the majority of what was under that contract in the last quarter.

Okay.

And then just last one, as we think about full ramp of the stapler here, I know you are still kind of in the trialing period and working with KOLs.

But when should we think about that moving into full commercial launch?

We will be advancing it carefully the first half of this year and likely through the full year.

So in the first half we expect to be out in customers in this first quarter.

And we will advance it slowly as we get the customer feedback and really make sure that we have optimized their experience.

So this will be a conservative launch, really focused on the fact that stapling is subtle, and we want to make sure that our customers are having great experiences.

Great.

Thank you.

Larry Keusch, Raymond James.

Aleks, maybe you could talk a little bit about prostate and the experience in Europe.

I guess there had been some concern that some of the changes in the US here would have a pronounced effect over there.

So, any thoughts on that would be great.

I think, as we have said in the past, the world is getting smaller.

Information is shared quickly.

And there are -- the same census, if you will, of participants at both national and international meetings.

So I think there is some effect.

And it is -- in some markets it is probably felt a little bit more than in others.

In other words, in a place like Japan where you're starting relatively new, there is a lot of growth ahead of us.

And you were probably powering through that, any concerns, if there were some concerns, about whether or not PSA screening is appropriate or conservative treatment, whereas in other countries it is probably a little bit more pronounced.

So I don't know that we can necessarily label Europe homogeneously and believe -- or international, for that matter, and believe that it is something that resembles -- each country resembles the next.

But I think there are probably some markets where it is a little bit more pronounced than others.

Like in the US; it is a hard thing to model.

Got it.

And then just two other quick ones, just relative to the [five-time] clearance that you guys are anticipating for Firefly in biliary.

Could you talk about how important that is to push the adoption of Single-Site chole?

It seems to me that obviously if you can reduce common bile duct injuries, that would be a positive with that technology.

And then, separately, I think last quarter you provided some feel for, in the US, what procedures grew if you were to adjust for the declines in prostatectomy.

I was wondering if you could help us with that in the fourth quarter.

Just speaking to the first one, the 510(k) submission for Firefly biliary imaging, that has just been submitted this quarter, so in terms of when we expect a clearance, no endpoint to tell you about yet.

We do think that biliary imaging in real time is interesting and meaningful for cholecystectomy for the reason that you indicate.

A common bile duct injury is a serious complication, and we think that Firefly can augment the white light imaging and be a compliment to cholangiography, so that is the intent.

We have just started that conversation with FDA, and as it proceeds and we have something more material to share, we will.

With regard to the breakouts on the adjustments and the procedure mix, I will turn to Aleks Cukic.

Yes, I think it is pretty consistent with what I had mentioned earlier in terms of hysterectomy, cholecystectomy, colon rectal surgery and endometriosis resection, partial nephrectomy.

Those procedures are the ones that I think primarily are the strength for the quarter and for the year.

Yes.

And just looking at the numbers on a full-year basis, dVP on a full-year basis was down 15%, as Aleks described in his notes.

If you back that out in the US, everything else was up about 39%.

Thanks so much.

David Roman, Goldman Sachs.

I certainly echo in the comments earlier on a very strong quarter here.

So congrats, nice way to start -- end the year and start 2013.

But want just to focus a little bit on the general surgery application, and more specifically, if you can give some perspective on where the procedure you're doing are coming from, and I guess really what I am asking is -- are these procedures ever done is a laparoscopic setting?

Were they done open?

Are these people who wouldn't otherwise do the procedures?

Are you adding growth to the market?

Maybe just any perspective you can give us on the competitive modalities would be helpful.

Yes, I think, again, we believe -- we talked about 42,000 procedures, up from 15,000 in 2011.

If you look at the biggest contributor there, it is cholecystectomy.

And almost all of those procedures had been done laparoscopically, because the standard of care is laparoscopic cholecystectomy.

So, that one, I think is fairly simple to say where it is coming from.

If you look at bowel surgery, and specifically large bowel or colon, you have left colons.

Well, you have -- well, you start on the other side.

You have right colons, transverse, lap, sigmoid, moving down into the rectum and then you have total colectomy.

Depending on which procedure -- each of those are counted as a different procedure.

Depending on which of those procedures you're talking about, if you did it inversely and you started at the most difficult or the lowest penetrated, laparoscopically, it would be low rectal cancer.

There you're talking about -- data would suggest that it is single-digit penetration of laparoscopy, whereas if you're talking about right colon it is double-digit, and I have seen numbers perhaps as high as 20%, or 21% or 22% that is laparoscopic.

So you have a range of where those patients would have gone, either to open surgery or a laparoscopic surgery.

And then you have a smattering of procedures that range from some open -- that would have been done open, whether it would be distal pancreatectomy or liver surgery.

And then you have other procedures such as Nissens that may have been done laparoscopically.

So there is a lot of movement that is going on, which is, I think it was an earlier question that Ben had asked about general surgery.

You have what amounts to, I think, 40-some procedures that have been done.

And trying to build an individual profile for general surgery is a challenge.

And then maybe as a follow-up on the guidance, obviously 20% to 23% procedure guidance, is a solid number.

If I look at that contrasted with the total revenue guidance, it does imply a fairly sharp slowing on the system side of the business.

Anything particular to call it there?

Is it comps?

Is it lapping the Japan reimbursement?

Or anything to help us understand why that business would start -- would slow to the degree that the guidance implies?

I am not sure that the conclusion is absolutely right.

There are a lot of factors in the guidance, including the average selling prices of the systems and the procedures and so on.

So I don't necessarily agree with the conclusion.

So I think we have lived in a good world of good mix on systems.

And so I'm not sure that we believe that that system mix and that ASP will hold for the whole year.

I think on the I&A front, as we move out in time, as we have always said, as stocking orders will become a smaller part of the picture, and have less impact, and so we would see some level of pressure on pricing, on I&A.

And I think in general, I think we have shown over the years procedure growth does outpace the procedure -- procedure growth outpaces revenue growth, because of -- systems have not -- generally are not at the same level.

Okay, and then, lastly, just to clarify on the share count.

I think you said 41.2 million shares.

Was that a comment regarding the first quarter or the full year of 2013?

That is the first quarter comment.

Okay.

Got it.

Thank you.

Rick Wise, Stifel Nicolaus.

If you could just give us a little more color on some of the structural changes you are making in Europe; Gary you indicated that your make a significant progress as you have deepened the organization.

Just a couple of things.

How long do you envision this investment, maybe extraordinary investment process continuing?

And maybe give us a little more details about some of the specific actions, if you could, that you're taking place, and maybe how you are approaching the market or pan-Europe or Company-specific.

Anything to understand a little better some of the things that are happening there.

Thank you.

I think with regard to the progress we have made, I think we have made some progress.

I am not ready to call it significant progress yet.

I think that our investments have really been in three areas.

One has been getting the right sales reps in the right territories; pretty straightforward.

We have done that and we will continue to do so, and that runs on a set of coverage metrics and market analyses that are pretty straightforward.

We have been making some more targeted investments.

This is not cast of thousands, but in terms of understanding reimbursement and regulatory and the resources that are required to perform in different markets, and so that has been a more targeted set of investments.

And we have invested in some better topline leadership, and I think investments in all three of those are encouraging.

But they're early.

I think that we will continue to invest for the next several quarters.

It isn't huge dollar value investments.

They are more targeted in that way.

But they are important.

And so far I think that we've made the right first steps.

I think we need to continue on that pathway.

Thank you for that.

And you would think that the major thrust is completed this year or by midyear or just, again, any sense of timing?

I think we will be concentrating on it through the year, and about this time next year, we ought to ask that same set of questions.

Okay (multiple speakers)

Just time for one more question, if you will.

Okay.

Japan, just again, I think you said significant demand.

And with the da Vinci Si approval in hand, is this going to be an incremental driver?

Are we going to see more upgrades maybe in 2013?

Again, help frame that for us.

Thank you.

I think there is really two things to say with regard to Si approval in Japan.

The first one is we are excited about the approval, in large part because it allows us to bring to Japan, with follow-on clearances, a set of technologies that we think have really made a benefit in the rest of the world.

And -- things like Single-Site and Firefly and vessel sealing, dual console and simulator, a bunch of things that we have invested on the Si system side.

So we are excited about that.

I think structurally, though, in the longer term the Japanese market penetration will be paced by additional procedure reimbursement.

And so, near-term, it's a great thing to get in the hands of the Japanese customer.

We need to continue to work on reimbursements beyond prostatectomy, and we will continue to do so.

Thank you so much.

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 at increasing patient value, and by improving surgical outcomes and reducing surgical trauma.

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

Quote -- last year I made a donation to the Sutter Maternity & Surgery Center for the da Vinci product.

I had no idea that someday I might benefit by the use of this system.

Having an electrical engineering background, I am interested in innovations that benefit people.

I considered this system to be a must-have tool for our surgical centers.

A few months ago after successive urine samples showed traces of blood, my nurse practitioner urged me to see a urologist.

Dr. Joe Franks discovered a small cancer in my bladder which he removed on May 8, 2012.

A follow-up CT scan on May 25 showed a tumor in my left kidney.

Because I am 88, I was considered borderline for surgery, and if the mass appeared to be stable, I might be lucky enough to outlive the tumor.

Such was not to be.

By late July, I was passing visible blood in my urine.

On August 1, Dr. Franks agreed we should go ahead with surgery if my internist gave the okay.

On Friday, August 3, the internist pronounced me to be fit and I was on the list for surgery.

On Saturday Dr. Franks called me to say there was a surgery cancellation for that Monday morning, August 6, using the new da Vinci system.

I eagerly accepted.

Dr. Franks said that all my stars must have been an alignment, as the procedure only took about two hours, not counting the admissions procedure.

The next day I walked out of the hospital without having to take any pain medication, much easier than a root canal.

Without da Vinci the hospital stay would have been several days.

End quote.

Patients like Warren are the strongest advocates for a da Vinci surgery and form the very foundation of our operating performance.

We have built our Company to take surgery beyond the limits of the human hand, and I assure you that we remain committed to driving the vital few things that truly make a difference.

This concludes today's call.

We thank you for your participation and support on this extraordinary journey to improve surgery, and we look forward to talking with you again in three months.

Ladies and gentlemen, that concludes your conference for today.

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

You may now disconnect.