直覺手術 (ISRG) 2013 Q1 法說會逐字稿

Ladies and gentlemen, good afternoon.

Thank you for standing by, and welcome to the Intuitive Surgical quarter one 2013 earnings release conference call.

At this time, all lines are in a listen only mode.

Later there will be an opportunity for your questions, and instructions will be given at that time.

(Operator instructions).

As a reminder, today's conference is being recorded.

I would now like to turn the conference over to our host, Senior Director of Finance, Mr. Calvin Darling.

Please go ahead.

Good afternoon and welcome to Intuitive Surgical's first-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 in detail in the Company's Securities and Exchange Commission filings.

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

Please note that this conference call will be available for audio replay on our website at intuitivesurgical.com on the audio archive section under our Investor Relations page.

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

Today's format will consist of providing you with highlights of our first-quarter results as described in our press release announced earlier today, followed by a question-and-answer session.

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

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

Aleks will discuss marketing and clinical highlights.

Then I will provide an update to our financial forecast for 2013.

Finally, we will host a question and answer session.

With that, I will turn it over to Gary.

Thank you for joining us today.

Before we get started describing our quarterly performance, I would like to make a few comments regarding current events.

As you know, we are in the midst of a concerted effort by critics of robotic surgery to challenge the benefit it brings to patients, the value it brings to the medical community and the quality of our organization.

While taking these allegations very seriously, we remain deeply committed to developing and providing products that in a surgeon's hands ease the burden of surgery for patients who can benefit from them.

We take pride in the benefits provided by our systems, demonstrated in numerous large-scale population studies comparing da Vinci surgery to open surgery for several different procedures.

We are confident that those who invest their time in a serious review of the clinical literature on da Vinci will find ample evidence of the benefit it brings to patients, surgeons, hospitals and the medical community at large.

To date, over 1 million patients have chosen da Vinci minimally invasive surgery, surgery that would have otherwise been performed through an open incision.

Turning to our performance in the quarter, we experienced strong growth in general surgery, slower growth in gynecology and a return to stability in urology.

This resulted in an 18% procedure growth over 2012.

The first quarter of 2013 had one fewer surgery day than 2012.

Taking this into account, normalized procedure growth improves to approximately 20%.

General surgery growth was led by single-site cholecystectomy and colon and rectal procedures.

Gynecologic procedures for benign indications are typically seasonally slower in the first quarter.

However, we experienced slower than expected growth in benign hysterectomies in this first quarter of 2013.

Worldwide urology procedures experienced solid growth, aided by the stabilizing of prostatectomy procedures in the United States.

Considering the above, procedure growth for the quarter came in at the lower range of our expectations.

Alex will provide additional procedure commentary later in the call.

Turning to markets outside of the United States, our first quarter of SI system sales to Japan went well with encouraging early customer demand for the system.

We are supporting surgical societies in Japan in their efforts to obtain national reimbursement for procedures beyond prostatectomy.

In Europe, procedures and system sales followed seasonal trends and showed modest growth.

We continue to build our team in Europe, and I am pleased with our organizational development over the past few quarters.

Overall, operating highlights for the first quarter are as follows.

Procedures grew 18% over the first quarter of 2012.

Adjusting for the number of procedure days in the quarter, normalized growth was approximately 20%.

We sold 164 da Vinci Surgical Systems, up from 140 during the first quarter of last year.

Total revenue was $611 million, up 23% over last year.

Instruments and accessories revenue increased to $261 million, up 26% over Q1 of 2012.

Total recurring revenue grew to $356 million, up 23% from prior year and comprising 58% of total revenue.

We generated an operating profit of $285 million before non-cash stock option expense, up 27% from the first quarter of last year.

Net income was $189 million, up 32% over last year.

Earnings per share for the quarter were $4.56 compared to $3.50 in the first quarter of 2012.

We ended the quarter with $3,116,000,000 in cash and investments, up $196 million from last quarter.

Significant cash outlays in the quarter included $17 million investment in fixed assets and intellectual property.

We repurchased $146 million worth of our shares in the quarter.

Our product development teams continued to make good progress.

This quarter we initiated our controlled rollout for single-site hysterectomy and [uferectomy].

Leading surgeons are optimizing their procedure choreography, and we plan to expand our installations at a measured pace through the year.

Early surgeon and patient interest in Single-Site for hysterectomy is high.

We have also initiated our first clinical cases with our da Vinci stapler.

As we have mentioned previously, our first stapling product is focused on colorectal surgery.

Early clinical results and surgeon feedback on use of the stapler are very encouraging.

Given the subtleties involved in the use and manufacture of surgical staplers, a rollout plan for the stapler will be conservative for the year.

Turning to system and imaging developments, we continue to invest in expanding indications for Firefly Fluorescence Imaging and in deepening our product offerings in support of system training.

We are currently answering FDA questions regarding expanding Firefly indications to include biliary imaging.

The intent of this indication is to allow surgeons to image the common bile duct in real-time during cholecystectomy.

On the simulation front, we have added new surgical skill modules to our simulator through our development partnerships.

Our medical research team is working with academic centers worldwide on face, content and construct validity studies of the da Vinci Skills Simulator.

Early publications of these validations are positive.

Lastly, we are initiating our first clinical sites configured with da Vinci Connect over the next few months.

Da Vinci Connect is our system for remote proctoring.

Remote proctoring uses Internet-based conferencing technology to allow a distant surgeon to participate in the da Vinci case with a surgeon on an SI console through video, voice and illustration.

It is intended to augment surgical proctoring by lowering the time, distance and cost barriers to expert participation during a surgeon's learning period.

We are also investing in the construction of two new training centers that are expected to become operational this year, one increasing the capacity of our training center at our California headquarters and a second new facility in Atlanta to serve our customers in the East.

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 those technologies that can make a difference to robotic surgery.

This quarter we added 118 people to our team, predominantly in sales, manufacturing and R&D, bringing our total team to 2480 employees.

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

Thank you, Gary.

Our first-quarter revenue was $611 million, up 23% compared with $495 million for the first quarter of 2012 and roughly equal to the $609 million last quarter.

First-quarter revenues by product category were as follows.

First-quarter instrument and accessory revenue was $261 million, up 26% compared to $208 million for the first quarter of 2012 and up 3% compared with $254 million in the fourth quarter of 2012.

The year-over-year increase in instrument and accessory revenue was driven by procedure growth of 18%, sales of new products including Single-Site Vessel Sealer and Firefly and higher stocking orders associated with higher system unit sales.

The 18% procedure growth was impacted by one additional operating day in the first quarter of 2012, reflecting Leap Year.

Excluding the impact of Leap Year, procedure growth would have been approximately 20%.

Procedure growth also reflects seasonality associated with benign hysterectomies, which was more pronounced in 2013 compared with 2012 as we achieve deeper penetration in this market.

The year-over-year procedure growth was led by US general surgery and oncology procedures, partially offset by lower US dVPs of approximately 11%.

US dVP procedures are approximately 4% higher than the fourth quarter of 2012.

The sequential increase in instrument and accessory revenue compared with the last quarter was driven by the timing of customer orders and new product revenue associated with the increased usage of Firefly, Vessel Sealer and Single-Site.

Instrument and accessory revenue realized per procedure, including initial stocking orders, was approximately $2110 per procedure, which is higher than the $1990 realized in the first quarter of last year and the $2050 realized in the fourth quarter.

The sequential increase from the fourth quarter of 2012 to the first quarter of 2013 was driven primarily by the timing of customer orders.

First-quarter 2013 systems revenue of $256 million increased 24% compared with $207 million for the first quarter of 2012 and decreased 3% compared with $265 million for the fourth quarter of 2012.

Our higher systems revenue compared to the first quarter of last year was driven by higher unit sales and a higher average selling price.

We sold 164 systems in the first quarter of 2013 compared with 140 systems in the first quarter of last year and 175 systems in the seasonally stronger fourth quarter of 2012.

Our first-quarter 2013 system sales included 25 systems into Japan where we launched the da Vinci SI at the start of this year.

We sold seven systems into Japan during the first quarter of 2012 and 10 last quarter.

Our first-quarter average selling price per system was $1.55 million compared with $1.47 million realized in the first quarter of 2012 and the $1.49 million realized last quarter.

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

Our higher first-quarter 2013 ASP was driven by a higher proportion of dual-console configurations and a favorable geographic mix.

48 of the 164 first-quarter sales were dual-console models compared with 25 of 140 last year and 32 of 175 last quarter.

15 of the 25 units sold in Japan during the first quarter were dual-console models.

We sold 97 simulators during the quarter, mostly in conjunction with new system sales, compared with 102 last year and 115 last quarter.

39 of our first-quarter 2013 system sales involve trade-ins comprised of 30 da Vinci Ss and nine standard models.

46 of our first-quarter 2012 sales involved trade-ins, and 52 of our fourth-quarter 2012 sales involve trade-ins.

Service revenue increased to $94 million, up 17% compared with $81 million last year and up 4% compared with $91 million last quarter.

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

Total first-quarter recurring revenue, comprised of instruments, accessories and service revenue, increased to $356 million, up 23% compared with the first quarter of last year and up 3% compared with the fourth quarter of 2012.

Recurring revenue represented 58% of total first-quarter revenue compared with 58% in the first quarter of last year and 57% last quarter.

International results were as follows.

First-quarter revenue outside of the United States was $453 million, up 47% compared with revenue of $105 million in the first quarter of last year and up 17% compared with revenue of $131 million in the fourth quarter of 2012.

Our year-over-year and quarter-over-quarter international revenue growth was driven by higher da Vinci system sales into the Japanese market.

First-quarter 2013 international procedure volume was approximately 14% higher than the first quarter of 2012 and 10% higher than the fourth quarter of 2012.

During the first quarter of 2013, we sold 49 systems outside of the US compared with 35 in the first quarter of 2012 and 42 last quarter.

We sold 16 systems in Europe this quarter compared with 14 in the first quarter of 2012 and 24 last quarter.

Moving on to the remainder of the P&L, gross margin in the first quarter of 2013 was 71% compared with 71.9% during both the first and fourth quarters of 2012.

Our lower first-quarter 2013 gross margin percentage resulted primarily from the impact of the medical device excise tax, partially offset by the favorable impact of higher system ASPs and higher service margins.

Our first-quarter 2013 cost of sales included $6.5 million related to the medical device excise tax.

First-quarter 2013 operating expenses of $183 million were up 13% compared with the first quarter of 2012 and down 4% compared with the fourth quarter of 2012.

Our higher year-over-year operating expenses were primarily driven by headcount additions.

The sequential decrease in operating expenses was driven by lower variable compensation expense and the timing of engineering projects and other expenses.

First-quarter 2013 operating income was $251 million or 41% of sales compared with $193 million or 39% of sales last year and $248 million or 41% of sales for the fourth quarter of 2012.

First-quarter 2013 operating income reflected $38 million of non-cash stock compensation expense compared with $34 million last year and $30 million last quarter.

Our effective tax rate for the first quarter was 26% compared with 27% for the first quarter of 2012 and 31% last quarter.

As anticipated, our first-quarter 2013 income tax expense included a discrete benefit of approximately $7.5 million for the reinstatement of the 2012 R&D tax credit, which became effective January 1 of this year.

Otherwise, our tax rate would have been 29%.

Our tax provision for the first quarter of 2012 included a one-time benefit associated with domestic manufacturing tax credits, and otherwise, our tax rate in the quarter would have been 32%.

Our net income was $189 million or $4.56 per share compared with $144 million or $3.50 per share last year and $175 million or $4.25 per share for the fourth quarter of 2012.

Now moving to cash flow, we ended the first quarter with cash and investments of $3.1 billion, up $196 million compared with December 31, 2012.

The increase was driven by $258 million of cash flows from operations, plus $89 million from the exercise of stock options, partially offset by $146 million in stock buy backs and $17 million of capital and IP purchases.

During the first quarter, we bought back 299,000 shares at an average price of $487 per share.

As recently announced, our Board of Directors has increased our share buyback authorization by $1 billion.

Including this latest authorization, we ended the quarter with approximately $1.2 billion of authorized share buybacks.

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

Thank you, Marshall.

During the first quarter, we sold 164 da Vinci systems -- 115 in the United States, 16 into Europe and 33 into rest of world markets.

As part of the 164 system sales, nine standard da Vinci systems and 30 da Vinci S systems were traded in for credit against sales for new da Vinci SI systems.

We finished the quarter with a net 125 system additions to the installed base, bringing to 2710 the cumulative number of da Vinci systems worldwide, 1957 in the United States, 430 in Europe and 323 in rest of world markets.

75 of the 164 systems installed during the quarter represented repeat system sales to existing customers.

In total, 162 of the 164 systems sold represented da Vinci SI or SIE systems, which included 48 dual-console systems.

The 49 system sales internationally included 25 into Japan, four into France and three into Turkey.

Clinically, Q1 year-over-year procedure growth was approximately 18%, led by the category of general surgery followed by GYN.

General surgery growth was paced by cholecystectomy followed by colon and rectal resections.

As Gary stated, procedure growth reflected seasonality, the reduction of selling days and a slower quarter for benign dVH.

dVP, more specifically the rate of decline for US dVP, a topic extensively discussed, appears to be flattening out.

US dVP was once again up on a sequential basis with a reduced rate of decline as compared to last year.

Overall, other urology, as well as international dVP, showed solid growth both on a sequential and on a year-over-year basis.

Recently released new products continue to perform well, notably Single-Site, where customer feedback has been positive and sales have remained strong.

Through Q1 2013, we have sold Single-Site instrument and accessory kits to approximately 630 US customers.

Our recently launched Vessel Sealer product has picked up clinical momentum with most of the interest coming from the specialties of colorectal, advanced general surgery and GYN.

The customer adoption for both da Vinci Simulator and Firefly continues to expand with 97 customers purchasing a da Vinci Simulator and 69 customers purchasing Firefly systems as part of their initial system purchase this quarter.

In addition, we have begun a phased rollout of the da Vinci surgical stapling system, as well as our Single-Site hysterectomy products.

These rollouts will be expanded in a measured fashion, so we do not expect them to contribute materially to 2013 revenue.

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.

As many of you know, we are currently participating at the annual SAGES conference, which is taking place in Baltimore.

The surgeon support we received at this conference thus far has been positive.

Much of the critical press we received has been directed toward the cost efficacy of da Vinci within the specialty of GYN and, more specifically, within its use to treat benign conditions.

To be clear, we believe strongly that one of our greatest growth opportunities consists of converting open hysterectomy to dVH.

da Vinci has shown itself as a very capable and cost effective tool in expanding minimally invasive surgery to a far greater number of patients who would otherwise have undergone an open surgical procedure.

Open hysterectomy is where we focus.

Open hysterectomy represents the largest component of our target market growth.

Open hysterectomy conversions is where we deliver high patient value.

Unfortunately, most of the media, as well as the ACOG commentary, were focused on da Vinci's economic profile versus either vaginal surgery or simple laparoscopy.

For decades, the popularity of vaginal and laparoscopy approaches to hysterectomy paled in comparison to the number of open hysterectomies being performed within the United States, which clearly explains the motivation driving our dVH opportunity.

In a recent edition of the Journal, Gynecologic Surgery, a European study discussed this very issue.

The study emanated out of Cork University maternity hospital in Cork, Ireland, an extremely cost-sensitive market with national austerity measures in place.

In the analysis, Cork U computed and compared hysterectomy-specific hospitalization costs between their hospital and a similarly sized reference hospital with a similar hysterectomy treatment mix.

The hysterectomy treatment mix in these hospitals included open, midline incision, lower transverse incision, LAVH and vaginal hysterectomy.

They determined that on average an open hysterectomy performed through a midline incision required an eight-day hospitalization, six days for a hysterectomy performed through a lower transverse incision, three days for an LAVH and three days for a vaginal hysterectomy.

They computed costs for a day of hospitalization to be approximately EUR534.

Cork University acquired their da Vinci system in 2008, whereas the reference hospital did not.

Following the inclusion of da Vinci, Cork University discovered that their dVH patients were spending only two days in the hospital, and GYN beds were being consumed for fewer days.

They also reported that the rate of open surgery has been reducing by 10% per year at Cork following the introduction of dVH and is projected to represent only 5% of the total hysterectomies performed during the final year of the study, as compared to 35% open hysterectomy rate in the non-da Vinci reference hospital.

When comparing the current mix and extrapolating over an annual basis, 280 hysterectomies, the bed-day rate is reduced from 1134 days to 756 days when incorporating da Vinci, which represents a potential annual savings of over EUR200,000.

In the author's comments they stated, and I quote, In 2009 the American Congress of Obstetricians and Gynecologists released a statement recommending vaginal hysterectomy as the approach of choice for benign hysterectomies due to reduced operating times when compared to the laparoscopic approach.

However, they note that laparoscopic surgery is an alternative to vaginal hysterectomy, is not -- when vaginal hysterectomy is not feasible or indicated.

Increasing the rate of vaginal surgery decreases the cost of the surgery compared to the open approach due to reduced length of stay.

Consideration must be given to the fact that not all surgeries are amendable to the vaginal approach, close quote.

One could argue that the same commentary would pertain to the laparoscopic approach in that it, too, has remained in the minority due to clinical and/or technical challenges.

The authors concluded their paper by stating, and I quote, robotic surgery is associated with reduced hospital stay compared with open surgery.

While the initial outlay is expensive, the increased number of patients amendable to this minimally access approach compared with conventional keyhole surgery has the potential for financial savings, close quote.

da Vinci colorectal resections have been expanding rapidly over the past several quarters.

The uptake has been driven by surgeons seeking to offer patients a less invasive alternative to open colorectal surgery.

While laparoscopic colorectal surgery has been proven to be safe and effective and has for years been available within several leading institutions throughout the world, it has nonetheless remained largely under penetrated within the United States.

In a recent edition of the Journal, Surgical Endoscopy, a study entitled Total Mesorectal Excision - a Comparison of Oncologic and Functional Results Between Robotic and Laparoscopic Rectal Surgery was published.

The study, conducted in Rome, was based on 100 patients who had undergone minimally invasive anterior rectal resections with total mesorectal incisions or TME, 50 consecutive robotic rectal anterior resections with TME were compared to the first 50 consecutive laparoscopic rectal resections with TME.

The authors made several comparisons, which included operating time, conversion rate, lymph node yields, circumferential margins, length of stay and sexual function scores.

They reported that the operative times were similar between the two groups with da Vinci holding only a slight advantage.

Lymph node yields were greater using da Vinci, 16.5 versus 13.8.

Conversions to open surgery were 0% within the da Vinci cohort as compared to 12% for the laparoscopic cohort.

The circumferential margins, less than 2 millimeters, were zero using da Vinci as compared to 12% for the lap group.

In the author's conclusion, they wrote and I quote, robotic TME is oncologically safe and adequate for rectal cancer treatment, showing better results than laparoscopic TME in terms of circumferential margins, conversions and hospital length of stay, better recovery in voiding and sexual function is achieved with the robotic technique, close quote.

In the early days of an emerging procedure, single center comparative analysis with strong findings lays the foundation for larger and more comprehensive comparative studies.

We would expect this trend to continue within the field of colon and rectal surgery.

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

Thank you, Alex.

I will be providing you with updated to 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, on our last call, we projected our full-year 2013 procedures to grow approximately 20% to 23% from the base of approximately 450,000 procedures performed in 2012.

Now, based upon first-quarter procedure trends, we expect our full-year 2013 procedure growth to be in the lower end of that range.

Moving on to revenues, last quarter we forecasted full-year 2013 revenue growth of between 16% and 19%.

Based upon favorable new instrument and accessory product sales and utilization, we now expect full-year 2013 revenue growth at the higher end of that range.

Our first-quarter system ASP of $1.55 million was higher than we expected, reflecting a high proportion of dual-console configurations in the system mix.

Going forward in 2013, we would expect our systems product mix and overall systems ASP to return towards historical 2012 levels.

Now turning to operating income, we continue to expect full-year operating income to fall within a range of between 38% and 39% of net revenue.

Our first-quarter operating margin of 41% reflected favorable system pricing and timing of operating expenses.

In Q2 we would expect operating expenses to increase at least $15 million, reflecting higher variable compensation, prototype, headcount, stock compensation and legal expenses.

We continue to expect 2013 stock compensation to total between $184 million and $192 million for the year.

Timing of recognition should follow a quarterly pattern similar to 2012.

Amortization of purchased intellectual property, which is mostly recorded as R&D expense, is still expected to come in between $28 million and $30 million in 2013.

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

With regard to income tax, as Marshall described, our Q1 tax rate reflected the benefit related to the reinstatement of the 2012 R&D tax credit.

For the rest of this year, we continue to anticipate our tax rate to fall within a range of between 28% and 30% of pretax income.

Our share count for calculating EPS in Q1 2013 was approximately 41.4 million shares.

Going forward, our share count will depend upon the magnitude and timing of share buybacks.

We will continue to be thoughtful in our execution of the $1.2 billion authorized by the Board for that purpose.

That concludes our prepared remarks.

We will now open the call to your questions.

Operator?

(Operator instructions) Tycho Peterson, JPMorgan.

It's [Evan Lodesen] for Tycho.

I guess the first question was for Gary.

Can you disaggregate the slowdown in benign dVH between the seasonal effects that you mentioned such as deductibles and then also the more coordinated efforts that you talked with regards to the robot, specifically?

I think I heard the question, although there's a little bit of background noise on the phone.

I think the question was, can we disaggregate the benign hysterectomy slowdown?

I think there's a few things going on there.

As we look at multiport benign hysterectomy in total, we think our market opportunity is really the open surgical market share.

There's still more than 100,000 open benign hysterectomies being done in the US.

We see three issues impacting benign hysterectomy.

First, as we become a larger part of the market, the impact of seasonality plays an proportionally bigger role in our performance.

Said simply, when a new technique just a small part of the market, the number of unserved patients is sufficiently large that changes in the total number of patient admissions do not materially impact growth.

However, as penetration increases, the sensitivity to total admissions increases with it.

Second, several large healthcare organizations are reporting a greater than expected decline in patient admissions in the first quarter.

Given that benign hysterectomy is a large part of our procedure base, that will impact us as well.

Third, negative press has some hard-to-measure impact on benign hysterectomy, although it doesn't appear to be large.

It's also probably not zero.

And then, the second question -- you mentioned international procedure growth was about 14%.

Could you help us think about what the growth is in Europe and trends there that you have seen recently?

Just numerically, the 14% would be higher on the Asia and rest of world markets and a bit lower on the European side.

Benjamin Andrew with William Blair.

Gary, talk a little bit about the guidance of 20% to 23% and targeting the low end of that range.

What does it take for you to hit that 20%?

Does it require a stabilization in benign dVH and, again, continued stabilization of prostatectomy?

And just maybe walk through how you get to that 20% because we're struggling a little bit as we try to plug in the number for Q1 to get there.

A couple of things, and then Calvin may help you a little bit with that as well.

But as we look out, we have seen three quarters in a row with prostatectomy where it's finding its footing with regard to [aduwes] so we are assuming that that trend stays about the same as we go through.

General surgery has shown real strength.

On benign gynecology, I want to make sure we are separating out gynecologic procedures from just hysterectomy.

There's more in benign gynecology than just hysterectomy; there's myomectomy and sacrocolpopexy, both of which were meeting our expectations in this quarter.

The quarter is a little bit hard to interpret just because of the number of operating days, and there's a little bit of ambiguity as to how many there were in terms of how the holiday played.

And we will have to see a little bit.

Impossible to predict the future perfectly.

We look out and think that our guidance at the low end makes sense, given those three factors together.

As we look at our guidance, there are a lot of moving parts, more and more, as you realize.

But the key areas of growth are the same as they were entering the year, specifically the number of new procedures coming from US general surgery, US gynecology and international PPP are going to be still the largest areas of growth.

As Gary said, based upon customer insurgent feedback we have not seen a major impact on the benign dVH procedure demand, although we cannot really predict where that may hit in the future.

We expect seasonality to play through and we will benefit later in the year on some of these things as well.

And we do forecast that dVP has bottomed out.

So I think that's --

Having said that, nobody has a crystal ball.

And we will take it one quarter at a time.

Two more quick questions, Gary.

Are you hearing additional chatter or disturbing chatter from either surgeons or hospitals questioning the safety and perhaps the efficacy of the system?

I know that's really hard to quantify, but does it feel different now than it did a month ago?

And were the trends in the quarter something that got your attention?

It's interesting.

With regard to surgeon feedback on use of our device, the safety and stability of it, surgeons are the ones who are absolutely closest to it.

They work with it every day.

We have seen very little change in their viewpoint in terms of people who actually know the device.

And likewise, that's true with hospitals who are our customers.

These kinds of questions do come up in conversations.

They come up in conversation with sales teams.

But we have not seen a substantial change in the nature of that conversation, say, over the last few weeks of the quarter as we go through it.

Okay, and then, finally, you mentioned something intriguing about SG&A spending popping up in the second quarter.

I thought I heard prototyping in the middle of that list.

Can you describe that at all?

Yes.

We have always said prototypes are going to be lumpy.

Right?

And I think if you look sequentially at operating expenses, they decline from Q4 to Q1 and it was relatively light in the areas that Marshall mentioned in his script.

And I think you are going to see a pickup in the items that I mentioned including prototypes.

Then, you had asked the question, just to follow up, on surgeon's view and surgeon's commentary on it.

I will tell you one surgeon's comments to me with regard to some of the criticism that has been up there.

He came back and said, hey, open surgery hasn't gotten any better for patients and laparoscopy hasn't gotten any easier for surgeons.

And I think that's true.

We have definitely heard the same thing.

Thank you.

Lennox Ketner, Bank of America.

Just a few questions -- first, I'm sorry if I missed it.

I think you said that dVP was down about 11% year-over-year.

But last quarter you had provided, I think, the overall growth rates for both general surgery and gynecology as well.

Is that something you would be willing to break out this time?

We do that on an annual basis and not quarterly.

Okay, had to try.

And then on the stapler, I was a little surprised to hear you say that people shouldn't be expecting any meaningful contribution from that product this year, just given that it's been on the market for six months or so now or, sorry, been approved, at least, for six months now.

Could you maybe just give us a little more color in terms of why the launch of that product is expected to be so measured?

Are there additional features that need to be added to the stapler to make it more effective?

Or is it really just wanted to make sure that the initial customer experiences are good?

If you could maybe just give people a little bit more of an explanation as to why that launch is expected to take so long or why it's expected to take so long assuming meaningful contribution?

For starters, while we had the approval last year, the first clinical cases are -- happened in this quarter.

And really, the reason for it is twofold.

One is we want to have outstanding first customer experiences with it.

So far, we have.

The second thing is the supply chain for the surgical stapler is a long one.

It's a full system.

It has electronics in it, software in it, motor packs and single-use sterilizable products.

So, we want to make sure that that supply chain is exceptionally stable and ready.

Coming as we move to scale.

And it's really working those two things in parallel to make sure we get a great result.

Stapling is a subtle product.

There are a lot of things about it in terms of both its manufacture and its use that you want to make sure you get right.

And so we will be doing that.

And as we start to see that stability, then we will start to ramp the release.

Okay.

But from a feature standpoint, you feel confident that the version that you have now has all the features that it needs to ultimately be successful?

It does.

Now, remember we have talked in the past that we are focusing this first stapler on the colorectal market.

And so the size of the staple loads both in terms of their length and the size of the staples that go in these little cartridges are optimized for colorectal.

In time we will start to add different sized cartridges and different leg length staples to allow us to do other things.

So this is really just the first step in a multistep process.

But it's not the lack of a particular feature for colorectal that has us moving at the pace we are moving.

Okay, that's helpful.

And then last one, just on the buyback authorization -- I think it was obviously a much larger authorization that you guys have done in the past.

I think people are happy to see, but how should we think about the timing of that going forward?

In the past, [US] has been pretty measured buybacks over time.

Should we expect this one to occur any more quickly than the others or is it going to continue to be at the same pace as the others by being a larger overall authorization?

I think you have somewhat characterized how we have approached it.

We have not been mechanical; we have been very thoughtful about what we have done and we will continue to be thoughtful.

So you shouldn't look for any particular standard pattern, if you will.

We will look for the right opportunities to buy back, over time.

David Roman, Goldman Sachs.

I was hoping you could talk a little bit more about any efforts you are undertaking or look to undertake to address the weakness in dVH.

Obviously, the seasonal piece in macro dynamics are what they are.

But maybe any sort of impact you have had from the recent noise in the marketplace, what is your plan to start to stem that and then how long do you think it might take before we start to see some positive return from those efforts?

On the first comment of what do we think there is, in terms of opportunity in benign dVH, first of all we look out and say open procedures that are still being done through a laparotomy are great opportunities for us.

We look around the country to see where those are and our ability to serve those patients.

That's our primary opportunity.

You implied in your discussion that the negative press is having a fair impact in this.

It's not clear that that's true.

Right now, separating out how much of this is seasonality, how much is just a total inpatient admission and how much is specific to intuitive is actually a hard thing to tease apart.

Having said that, I think the strength of da Vinci surgery has been in its clinical outcomes.

And so that's where we start, relative to open surgery both in the publications and in the education of our sales team and the interaction with hospitals, it's that set of data.

And so we have done and we will continue to do that in terms of supplying them the data and resources they need to approach those patients.

Over time, as we go through the year, we have Single-Site hysterectomy, which is really a little bit different marketplace.

And that's, again, not looking so much at open procedures but looking at those patients who would rather have a single incision than multiport.

And that, as we get to the close of the year, might just start to give us an opportunity to access a different group of patients.

That's helpful.

And I know a lot of the questions on this call regarding market recent noise or marketplace concerns have been focused on gynecology.

But is it fair to say that hasn't trickled into the other parts of your business or the newer categories like general surgery that continues to be fairly robust, in your ability to attract new users, train new users?

Any change in the size of your training classes, interest level?

Any other metrics that you could help us to gauge this looming question around noise versus reality?

We have not seen a change in the desire for people to be trained.

We haven't seen anything that I can point to in the general surgery marketplace that would indicate a real impact.

Yes.

And again, I think evidence of that, that we have that helps us make that statement, are the actual procedure numbers, the number of people who are accessing proctors and training.

And just as a level set, GYN, if you look at things like say, (inaudible) myomectomy and endometriosis resection, GYN is a -- and hysterectomy for malignant conditions, it is a very robust category.

And while dVH benign is certainly the largest individual segment of that category, as we look out over all of GYN, we remain very encouraged.

Okay.

And maybe last question, just to follow up on the share repurchase authorization -- in the past, I think you guys have used share repurchase to offset the impact of options being exercised and it has been not a top use of cash but something that you have done to manage options, dilution.

Is anything different or is there a prioritization to think about this $1 billion authorization, or it's just the cash balance has gotten to where it is, the stock price is where it is, so you need more to offset the impact of options exercised?

I think, number one, is the authorization reflected confidence in the business.

But I think that it's also intended to be a return to shareholders.

We are talking about $1 billion.

That more than offsets any stock option dilution that we create through here.

Lawrence Keusch.

Gary, there has been obviously a lot of discussion focused on procedures and the impact from the critics over the last several months.

But I'm wondering if we can perhaps shift toward system sales, obviously quite strong this quarter.

But I'm wondering if you are seeing anything change in the selling cycle or there have been some speculation that hospitals may hold back on purchasing while there is all this noise out there.

So any color would be helpful.

All I can speak to is the first quarter, and looking at the first quarter we haven't seen any meaningful impact of negative press on capital sales.

In fact, the capital side was pretty strong, as we mentioned, not only in systems as a whole but in the attachment of some of the products we've added to SI.

So console sales, simulator sales, Firefly demand have continued to be strong.

Again, don't have a crystal ball as to what happens in the future.

But so far the conversations have been pretty straightforward.

Okay, great.

And then this also has come up over the last several calls.

You have expressed some need to work on the European organization.

So I'm just curious, kind of take your temperature a little bit on where we are in that process.

I think that we have been making good progress.

I think that it's been measured but we have been adding resources in a few places.

Some of it has been leadership resources, some of it has been people in the sales force, experienced people in the sales force.

And some of it is in areas such as regulatory and reimbursement.

We have made some great hires there.

They are integrating well.

And as we have said in the past, this is something that will happen over quarters, not over days.

But we are pleased with our progress.

Okay, and then lastly just on the uses of cash, obviously share repurchase remains out there.

But what are the latest thoughts around potentially using cash for some M&A opportunities?

I think our eyes are always open for opportunities for a few things.

And some of it has been, as you know, in the past looking for technologies that we think fit really well with robotic surgery and advancing the ability of surgeons in the system to do more.

We continue to be looking for and able to acquire those things that we think make a difference.

We also think that investments in markets not in the United States are really important.

You've seen us do that in the past and we continue to do so in terms of investing into existing organizational frameworks in Japan and in Korea and also positioning ourselves for success in other markets OUS.

And having cash helps us do that as well.

Okay, terrific, thank you.

David Lewis, Morgan Stanley.

Hello, this is actually John in for David.

So we had a few questions, one just while procedures were a little bit slower than expected, instrument revenue is still strong.

And I guess that was more related to the revenue per procedure being higher.

And I was wondering if you could maybe break that out and how much of that was really the stocking versus how much of that was some more advanced tools?

You mentioned thoughts on the system ASP as being normalized down a bit.

Any thoughts to where revenue per procedure should go throughout the year?

We have actually seen a bit of an uptick in what we call the base.

So if you parse out stocking orders associated with new system purchases, we see a little uptick in the base.

And that reflects the new products.

So that reflects usage of Firefly, usage of vessel sealing.

And I think it was also benefited -- the quarter was also benefited by the timing of purchases of INA through distributors and other customers, where they are entering their new fiscal year, so they may have bought more.

So I think it was a little bit higher than maybe we would expect going forward.

But it's definitely being benefited by the new product.

Yes, and we have always talked is a lot of moving parts in this overall instrument accessory per procedure.

We have talked in the past about a national trend downward as the impact of stocking orders becomes less on a larger installed base and procedure mix, moving towards a simpler mix, may move it downwards.

But now that we are seeing the impact of the new products, even beyond the initial stocking of the new products as we have talked before, we are talking about utilization of products like the Vessel Sealer and the Firefly in procedures, which -- getting those procedures utilized and those products used in procedures it is allowing us really to capture a larger portion of the hospital's procedures spend through the da Vinci platform.

And so directionally, we probably see that winning the day, at least for the balance of this year.

Thank you, very helpful.

And then a quick follow-up on Single-Site chole.

First I was more curious, too, if you could break out how much Single-Site chole is out of all choles and then also just seeing kits increase each year on the Single-Site side and I was wondering if you could maybe discuss how much of those are repeat buyers, how much of those are new adopters and just what you've seen there.

Yes.

At this point in time the Single-Site chole -- it is really moving from an initial introduction in some key element of our business here, a lot more mature status.

We have talked about the number of customers who have bought Single-Site products.

We may move away from that, I think, as it becomes part of the norm.

The portion that Single-Site versus multiport -- that's always transitioning.

As most people are aware, the multiport side is generally part of the training pathway to move towards single port.

But I think the multiport side is really just that; it's an avenue to move towards the ultimate destination of the single port.

So it's probably not as important at any point in time how many of those are.

Just a qualitative remark on the reorder rate.

We have been watching it and we have been pleased so far.

Reorder rate has been positive for us.

Amit Hazan, SunTrust.

I thought maybe I would first ask about Single-Site for dVH.

I think I was a little bit surprised in thinking back in your interaction with Single-Site for chole and what that did in 2012, essentially its first year.

In your comments that you thought it might not have much of an impact this year, so I thought maybe you could explain the differences between the rollout here versus the rollout for chole is and why it's going to take a little bit longer.

Well, again, as you know, we are pretty measured in our approach with all of these various procedures.

And I think when you look at single incision hysterectomy, you are looking at products that are required to be made, which we are doing and we know how to do that.

And then you are looking at really understanding -- the physicians are looking at really understanding procedure choreography.

How do I do this?

How do I do that?

How do I close the cuff?

How do I take the adnexa, etc.?

And so, it's difficult to try to assign a reasonable timeline to how the choreography will go, in addition to the general issues of manufacturing new products, getting the supply chain down, etc.

So we are being pretty cautious about that.

Now, if it turns out that that changes in time, we will certainly let you know.

But I think there are a number of surveys that people have done and we have done ourselves where there's a real excitement for it from a customer.

And so, we just want to make sure you take this into consideration and not work that into your expectations because it's really too early to call.

Okay.

And then on the systems side, just the comment you made about system mix in ASPs maybe not holding through the whole year -- I'm just wondering if that's more product mix related, or is that geography related.

And if it's on the product side, just specifically what you are thinking in terms of the products that might not be there later in the year that you have been selling.

Yes, it's primarily product mix.

We had 48 of the 164 units were dual console systems in the first quarter.

That's by far and away the highest proportion that we've had.

We'd see that attach rate returning to more historical levels.

And as such, the ASP would be less than we saw here in the first quarter, maybe more in line with what we saw throughout 2012.

Okay, and then last one for me -- I realize with regard to the FDA MedSun Survey, I guess it was only nine people.

So maybe it's not even a survey or definitely not a government probe, as maybe some would call it.

But have you guys talked to any of the doctors involved in that kind of in career?

Do you know anything about the report that might be coming out with what you might be anticipating?

As far as we know, it was a confidentially run survey.

And so we have no -- nothing to share on that front.

We have time for one more question.

Rick Wise, Stifel Nicolaus.

Hi, it's actually [Mira Slava] for Rick today.

Let me start with asking a question on Japan.

I could not help but notice a significant number of systems you have placed there this quarter.

It coincided with the SI approval in Japan.

Was the SI what you needed to help unlock this market to some extent?

And related to that, should we expect this kind of rate to continue, or do you view this as an anomaly, as you launch the SI?

I think that they were happy to get SI approval and I think it has been well received.

I think that there's some amount of early excitement having to do with SI.

Long-term, as you look at that market, procedure reimbursement is going to be the thing that is a long and sustained growth path.

So I think system sales in Japan are going to be lumpy until additional procedures are reimbursed.

And that's something that we are working with surgical societies on, on supporting them and helping them complete that activity.

One last question, please.

And going back to just that, quote, concerted effort by the critics of surgery, I was wondering if you have any plans to highlight some of your data on the outcomes and perhaps the economics of your procedures.

And it goes back to what was asked earlier, but maybe if I could ask it a little bit differently, has your conversation with your customers changed in any way as a result of the negative press?

There's two questions in there.

On the first one, do we have plans to share our data, yes, we do.

And we have been and we will continue to do so.

And in terms of the kinds of conversations that occur with customers over this, and in a sense, the conversations with the customers are amongst the most straightforward because they understand the issues on all sides, the conversation has really come down to their own experiences and the data.

And we are happy to and well-conditioned, well-positioned to have those conversations.

We will continue to do so.

And as additional data comes out, we are happy to share it with you.

That was our last question.

In closing, da Vinci surgery has proven safety, efficacy, economic and ergonomic benefits when compared to the open surgical procedures it is replacing.

We are steadfast in our conviction in the value that da Vinci has and will bring to the medicine, and we thank you for your support in helping Intuitive expand the benefits of minimally invasive surgery.

We look forward to speaking to you again in three months.

Ladies and gentlemen, that does conclude our conference for today.

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

You may now disconnect.