直覺手術 (ISRG) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Intuitive Surgical Q3 2013 earnings release conference call.

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

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

(Operator Instructions).

Also as a reminder, today's teleconference is being recorded.

At this time, I will turn the conference call over to your host, Senior Director of Finance for Intuitive Surgical, Mr. Calvin Darling.

Please go ahead sir.

Thank you.

Good afternoon and welcome to Intuitive Surgical's third-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 included in our most recent Form 10-K filed on February 4, 2013, and our Form 10-Q filed on July 22, 2013.

These filings can be found through our website, or at the SEC's EDGAR database.

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 third-quarter results as described in our press release announced earlier today, followed by a question-and-answer session.

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

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

Aleks will discuss marketing and clinical highlights.

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

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

With that, I'll turn it over to Gary.

Thank you for joining us today.

This quarter, we continued to see significant pressure on our US business.

Trends that started in the first half of the year in gynecology have continued.

On the procedure side, underlying causes for slowing growth include weaker overall gynecologic admissions which is pressuring surgical volume.

There are also lingering ill-founded concerns regarding the benefits of da Vinci surgery compared to the available surgical alternatives.

Since we are a significant share of hysterectomy, our growth rate is sensitive to these issues.

This slowed growth has resulted in capacity in our US installed base, combined with changes in hospital capital spending associated with the implementation of the Affordable Care Act, US capital sales fell substantially compared to prior year.

Overall procedure trends in the quarter were stable, rising 16% over prior year.

In the United States, general surgery was our fastest-growing segment led by Single-Site cholecystectomy and followed by growth in colon and rectal resections.

Our gynecology business still grew year-over-year, but at a slower pace than prior quarters, and urologic procedures in the US were stable compared to prior year.

In Europe, we are continuing our investments in market access and clinical research.

We are seeing early positive results in HTA and reimbursement analyses as a consequence of these efforts.

Year-over-year procedure growth accelerated, led by urology and other growth in malignant gynecology.

Growth was strongest in the UK, France, Italy, and the Nordic countries.

Procedure growth in Asia with solid off a small base led by growth in urology and general surgery.

With regard to resolution of our FDA warning letter, we are making good progress in addressing the elements of the letter and the Form 483 that preceded it.

As part of our work in responding to the letter, we expect to file corrections and updates to our labeling and to file documentation for some past field actions.

These activities will be documented on the FDA's website over the next several weeks.

Turning to our operating performance for the third quarter, procedures grew approximately 16% over the third quarter of 2012.

We sold 101 da Vinci surgical systems, down from 155 during the third quarter of last year.

Total revenue was $499 million, down 7% from last year.

Instrument and accessory revenue was $239 million, up 10% over Q3 2012.

Total recurring revenue grew to $341 million, up 11% from prior year and comprising 68% of total revenue.

Net income was $157 million, down 14% over last year.

And we generated an operating profit of $225 million before non-cash stock option expense, down 13% from the third quarter of last year and representing 45% of Q3 revenue.

We ended the quarter with $2.532 billion in cash and investments, down $495 million from last quarter.

In the quarter, we generated $204 million in gross cash flow from operations and we repurchased $694 million of our stock.

Our new products continue to gain acceptance with customers.

We expanded our stapling rollout at a measured pace through the first three quarters of this year.

Surgeons' clinical feedback on the stapler has been strong and our stapling operations depth has increased substantially.

We will accelerate the stapling launch in Q4 and beyond.

This quarter, we received FDA clearance for an expanded indication of our Firefly system to include biliary imaging in combination with normal white light imaging during cholecystectomy.

This is another step in providing surgeons with imaging capability that enables them to see anatomical structure beyond what can be seen with the naked eye.

Our Single-Site product line continues to perform well.

Single-Site cholecystectomy is moving out of early adopting centers into the broader clinical practice.

Single-Site for hysterectomy progressed during the quarter while on limited release.

As part of this limited release, customers have requested an additional instrument, a wrist needle driver to complement the product line.

We have designed it, are testing it and plan to submit an application in early Q1 to the US FDA for 510(k) clearance.

We believe the addition of a wrist to Single-Site instruments will optimize the procedure for surgeons who expect EndoWrist functionality.

Our Single-Site products are well positioned to deliver increased patient satisfaction with reasonable economics for single incision surgery.

We have great confidence in the safety, efficacy and cost effectiveness of our products and we remain deeply positive on the value da Vinci brings to surgery now and in the future.

The benefit da Vinci brings as an alternative to open surgery has been demonstrated in hundreds of independent peer reviewed clinical papers.

Increasingly, well-designed cost studies demonstrate that upfront and operating investments in da Vinci surgery are offset by downstream savings resulted from fewer complications, readmissions and length of stay.

We have recently updated IntuitiveSurgical.com with links to high level of evidence clinical data and adverse event data, and in the next few days we'll add abstracts of well-designed peer-reviewed cost studies comparing da Vinci surgery to open surgery alternatives.

We encourage a full and careful examination of the literature by anyone interested in the facts about da Vinci use.

In summary, we continue to see substantial long-term opportunity to fundamentally improve surgery using our technologies.

and we are focused on the following -- first, educating the surgical community on the facts about da Vinci surgery, including its safety, efficacy and cost effectiveness; next, building da Vinci capability and supporting its use in general surgery; extending the benefits of minimally invasive surgery using da Vinci in gynecology and urology worldwide; and disciplined execution in expanding our stapling and Single-Site adoption.

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

Thank you Gary.

Our third-quarter 2013 revenue was $499 million, down 7% compared with $538 million for the third quarter of 2012, and down 14% from last quarter.

Third-quarter revenues per product category were as follows.

Third-quarter Instrument and Accessory revenue was $239 million, up 10% compared with $218 million for the third quarter of 2012 and down 10% compared with the second quarter of 2013.

The year-over-year increase in Instrument and Accessory revenue was driven by procedure growth of approximately 16%.

Sales of new products, including Single-Site, Vessel Sealer and Firefly, partially offset by lower Instrument and Accessory stocking orders associated with fewer system sales, and the timing of customer orders.

The sequential decrease in Instrument and Accessory revenue was driven by lower Instrument and Accessory stocking orders and the timing of customer orders.

The 16% increase in da Vinci procedures for the quarter reflected growth in general surgery and gynecology procedures in the US, and urology procedures outside of the US.

The lower third-quarter growth rate reflects slower growth in US benign gynecologic procedures and flat US DVP volumes.

Factors affecting US benign gynecologic procedures include reduced hospital admissions, a trend by payors toward encouraging conservative disease management and treatment in outpatient settings, and negative media reports.

Instrument and Accessory revenue realized per procedure, including initial stocking orders, was approximately $1860 per procedure compared to $1980 per procedure in the third quarter of 2012, and $2020 last quarter.

Our third-quarter 2013 revenue per procedure reflected fewer stocking orders associated with fewer system sales and the timing of customer orders.

Third-quarter 2013 systems revenue of $159 million decreased 32% compared with $232 million for the third quarter of 2012 and decreased 27% compared with $216 million last quarter.

Overall, we sold 101 systems in the third quarter of 2013 compared with 155 systems last year and 143 systems last quarter.

We sold 65 systems into the US market in the third quarter of 2013 compared with 114 systems last year and 90 systems last quarter.

The lower third-quarter 2013 US system sales reflected, among other things, the impacts of moderating growth in US benign gynecologic procedures, increased economic pressure on hospitals, uncertainty related to and spending associated with the Affordable Care Act, and negative media reports.

During the third quarter of 2013, we sold 36 systems in the international market, including 17 into Europe and 13 into Japan, compared with 41 into international markets in the third quarter of 2012, which included 13 into Europe and 16 into Japan, and 53 systems in international markets in the second quarter of 2013, which included 21 into Europe and 20 into Japan.

Our third-quarter average sales price per system was $1.56 million compared with $1.48 million realized in the third quarter of 2012, and $1.5 million realized last quarter.

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

Our higher third-quarter 2013 ASPs were driven by a higher proportion of dual console configurations and geographic sales mix.

29 of our third-quarter 2013 systems involve trade-ins compared with 34 trade-ins last year and 43 trade-ins last quarter.

Service revenue increased to $101 million, up 16% compared with $88 million last year and up 3% compared with $98 million last quarter.

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

International revenue results were as follows.

Third-quarter revenue outside the US was $133 million, up 15% compared with revenue of $115 million in the third quarter of last year, and down 16% compared with revenue of $158 million last quarter.

Our higher year-over-year international revenue was driven by higher recurring instrument, accessory, and service revenue, partially offset by lower systems sales.

Our lower sequential international revenue primarily reflects summer seasonality.

Third-quarter 2013 international procedure volume was approximately 25% higher than the third quarter of 2012 and 6% lower than the second quarter of this year.

The growth over the prior year reflects DVP growth in Europe and Japan.

The decrease compared to last quarter reflects summer seasonality patterns in Europe.

Moving onto the remainder of the P&L, gross margin in the third quarter of 2013 was 71.5% compared with 72.5% for the third quarter of 2012 and 70% for the second quarter of 2013.

Our lower margin percentage compared to the third quarter of last year resulted primarily from the impact of the medical device excise tax.

Our higher gross margin percentage compared to last quarter was driven primarily by higher system ASPs.

Third-quarter 2013 operating expenses of $183 million were up 2% compared with last year, and down 2% compared with last quarter.

Our higher year-over-year operating expense was driven by headcount additions, partially offset by lower incentive compensation and lower R&D prototype expenses.

Our decrease compared to last quarter was driven by lower incentive compensation, partially offset by stock compensation expenses.

Third-quarter 2013 operating income was $174 million, or 35% of sales, compared with $211 million, or 39% of sales, last year and $219 million, or 38% of sales, last quarter.

Third-quarter 2013 operating income included $50 million of non-cash stock compensation expense compared with $47 million last year and $39 million last quarter.

The increase in stock compensation expense relative to the prior quarter has to do with the timing of stock option grants and a related vesting period.

Our effective tax rate for the third quarter was 12% compared with 15% for the third quarter of 2012 and 28.6% last quarter.

Both the third quarter of 2013 and the third quarter of 2012 tax rates benefited from the release of reserves specific to tax years where the statute of limitations have now expired.

Excluding one-time benefits, our third-quarter 2013 tax provision would have been approximately $26 million higher and our third-quarter 2012 tax provision would have been approximately $35 million higher.

Our net income was $157 million, or $3.99 per share, compared with $183 million, or $4.46 per share, for the third quarter of 2012, and $159 million, or $3.90 per share, for the second quarter of 2013.

Excluding the one-time tax benefits, our third-quarter 2013 net income would've been $131 million, or $3.32 per share, and our third-quarter 2012 net income would've been $148 million, or $3.61 per share.

Now, moving to cash flows, we ended the third quarter with cash and investments of $2.5 billion, down $495 million compared with June 30, 2013.

The decrease was driven by $694 million used to repurchase our common stock and $34 million of capital and IP acquisitions, partially offset by $204 million in cash flow generated from operations.

During the third quarter, we bought back approximately 1.74 million shares at an average price of $399 per share.

We ended the quarter with approximately $1 billion authorized by the Board for future share buybacks.

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

Thank you Marshall.

During the third quarter, we sold 101 da Vinci systems, 65 in the United States, 17 into Europe and 19 in rest-of-world markets.

As part of the 101 system sales, five standard da Vinci systems and 24 da Vinci S systems were traded in for credit against sales for new da Vinci Si Systems.

We finished the quarter with a net 72 system additions to the installed base, bringing to 2871 the cumulative number of da Vinci systems worldwide, 2042 in the US, 455 in Europe, and 374 in rest-of-world markets.

48 of the 101 systems installed during the quarter represented repeat system sales to existing customers.

In total, 100 of the 101 systems sold represented da Vinci Si or Si-e systems, which included 32 dual consoles.

The 36 system sales internationally included 13 into Japan and six into France.

Clinically, Q3 year-over-year procedure growth was approximately 16%, which was led by the category of general surgery and paved by cholecystectomy, followed by colon-rectal resections and bariatric procedures.

Our US urology business was stable, while growth in the international urology business was solid.

As expected, the growth rate in the US for the nine dVH was slightly down from Q2, which continued to place pressure on US system sales.

Demand for recently released new products continues to be strong.

Through Q3 2013, we sold Single-Site instrument accessory kits to approximately 825 US customers.

Our vessels dealer product utilization trend continues to strengthen, with most of interest coming from the specialties of colorectal, advanced general and GYN surgery.

The customer adoption for both da Vinci simulator and Firefly continues to expand with 63 customers purchasing a da Vinci simulator and 48 customers purchasing Firefly systems as part of their initial system purchases this quarter.

In addition, we've expanded our phased rollout of both the da Vinci surgical stapling system and Single-Site hysterectomy products to several new sites.

These rollouts will be extended in a measured fashion, so we do not expect them to contribute materially in the near term.

During the quarter, several hundred robotic abstracts and papers representing a variety of surgical specialties were published within peer reviewed journals, many focused specifically on safety and/or efficacy.

Clinical conferences also produced several wide da Vinci procedure transmissions, postgraduate robotic courses, podium presentations, and clinical poster sessions, several with emphasis on safety and/or efficacy.

I'll take a moment to summarize with you.

Da Vinci hysterectomy is the single largest procedure that our customers perform.

It is widely accepted that, when compared to open hysterectomy, the benefits provided to a patient through an MIS approach are significant.

As the data supports, the rapid conversion to open hysterectomy to a minimally invasive approach continues to be led by da Vinci's incorporation into GYN practices.

In a recent edition of the Journal of the Society of Laparoscopic Surgery, a group out of the Department of Obstetrics and Gynecology at Yale University published a study entitled "Robotic Versus Abdominal Hysterectomy in Women With Very Large Uteri".

The study compared the results of 60 hysterectomies, 30 abdominal and 30 DVHs in patients with uteri greater than 1000 grams in weight.

It is generally understood that the larger the uterus, the more complex the surgery, often necessitating an abdominal hysterectomy.

On a statistical scale, uteri in excess of 1000 grams are considered very large.

The uteri in both cohorts studied ranged in size from between 1000 to just over 3500 grams.

The published results were as follows.

Median length of hospitalization for patients in the da Vinci cohort was one day, with a range from one to two days, as compared to 2.5 days with a range from two to nine days for patients in the abdominal cohort.

Estimated blood loss was 150 milliliters for the da Vinci patient versus 425 milliliters through the abdominal approach.

Transfusion rates for the da Vinci cohort was 3.3% versus 13.3% with the abdominal approach.

Conversion rates from da Vinci hysterectomy to an abdominal surgery was zero, as was the hernia rate.

In their commentary, the authors pointed out the following findings.

First, hysterectomies for very large uteri are challenging procedures.

Second, obesity and morbid obesity and/or previous surgeries compound the difficulty.

Despite these challenges, patients who are obese experience some of the greatest differential benefits for minimally invasive surgery.

Finally, morbid obesity and/or previous procedures appear to not be an impediment for completing these procedures robotically.

Within general surgery, procedures related to the colon and rectal disease management have been among our most promising.

Right and left colon resections, sigmoid resections, low anterior resections and rectopexy continue to exhibit solid growth.

With the exception of right-handed colectomy and rectopexy, laparoscopic penetration has been modest within colorectal surgery.

Rectopexy is a procedure designed to address pelvic floor disorders, or PFDs.

Among other things, PFDs obstruct a patient's ability to defecate.

A recent French study compared the results of patients undergoing a laparoscopic rectopexy versus a da Vinci rectopexy.

118 patients were evaluated in the study, 44 da Vinci as compared to 74 lap.

The study evaluated OR time, blood loss, complications, length of hospitalization, and postoperative ODS scores for obstructive defecation syndrome.

Regarding total OR time, which included system time, the da Vinci rectopexy took approximately 15% longer than the laparoscopic approach, but the authors noted that their times came down over their last 20 patients and were expected to continue to trend up.

Blood loss was difficult to even detect during the da Vinci rectopexy and measured only 8 milliliters as compared to 42 milliliters in the lap cohort.

Complications with the da Vinci approach were 2% as compared to 11% in the lap patients.

Hospitalization was reduced by a full day when using da Vinci, which the authors attributed to a less strenuous tissue manipulation due to improved vision and dexterity.

Post-op ODS scores improved for patients in both groups.

However, the difference in improvement for patients in the da Vinci cohort was substantial and deemed statistically significant.

In their conclusions, the authors stated, and I quote, "Although not a randomized comparison, this study shows that ventral mesh rectopexy performed by a robot was followed by better function than lap rectopexy."

Da Vinci thoracic procedures, specifically lobectomy and segmental resections had been steadily expanding over the past few years.

Similar to colon and rectal surgery, the presence of minimally invasive resection has been minor as compared to open surgery.

In the recent edition of analysts of the Annals of Thoracic Surgery, physician and healthcare economists from both Harvard Medical School and Cornell Medical Center collaborated on the study which compared open surgery, video assisted thoracoscopy, or VATs, and da Vinci resections.

The study evaluated the results of over 33,000 patients who had received pulmonary resection within the eight-state study cohort.

While the mix of patients was dominated by patients undergoing an open resection, the rate of growth for da Vinci surgery was significant over the three-year study period.

Da Vinci expanded from 0.2 of the pulmonary resection studied in the first year to 3.4 by the third year, numbering 430 in total.

Da Vinci procedures were performed in all states studied with 38 being performed in community hospitals.

The results.

In a propensity matched analysis, da Vinci resections were associated with significant reductions in mortality, 0.2% versus 2.0% for open surgery.

Length of stay was 5.9 days for the da Vinci patients versus 8.2 days for the open surgery.

Overall complication rate was 43.8% for da Vinci versus 54.1% for open surgery.

These improvements were all considered statistically significant.

In a propensity matched analysis versus VATs, da Vinci lobectomy demonstrated directional improvements in mortality and length of stay.

In their summary, the authors wrote, and I quote, "Case volume for pulmonary resections have increased significantly during the study period of thoracic surgeons, and thoracic surgeons have been able to adopt the robotic approach safely.

Robotic resection appears to be an appropriate alternative to VATs and is associated with improved outcomes compared with open thoracotomy."

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

Thank you Aleks.

I will be providing you with an update our financial forecast for 2013 on a GAAP basis.

I will also provide estimates of significant non-cash expenses.

Starting with procedures, on our last call, we projected our full-year 2013 procedures to grow between 15% and 18% above the base of approximately 450,000 procedures performed in 2012.

Now, with one quarter remaining in 2013, we are refining our estimate for full-year 2013 procedure growth to a range of between 16% and 17%.

Moving to revenues.

As has been discussed earlier, several factors are pressuring our business, making it difficult to predict system sales volumes.

On our last call, we projected full-year 2013 revenue to range from approximately flat to 7% growth.

We now expect full-year revenue growth in the lower half of that range.

Turning to operating income, on our last call, we forecast operating income to fall within a range of between 37% and 38% of net revenue.

We are taking steps to scale back our expenses while not compromising our longer-term expansion strategies.

We continue to anticipate full-year 2013 operating income to fall within a range of between 37% and 38% of revenue.

Now, with regard to non-cash stock compensation expenses, we're refining our forecast to between $169 million and $172 million for the year.

We expect Other Income, which is comprised mostly of interest income, to total between $16 million and $17 million in 2013.

With regard to income tax, as Marshall described, our Q3 tax rate benefited from nonrecurring discrete events.

For Q4 2013, we'd expect our tax rate to be approximately 28% of pretax income, slightly lower than previously forecast primarily due to the geographic mix of our pretax income.

Our share count for calculating EPS in Q3 2013 was approximately 39.3 million shares, declining 1.5 million shares in the quarter primarily due to buyback activities.

In Q4, we expect our share count to decline approximately 600,000 shares further based upon the full-quarter impact of our Q3 buybacks.

The actual Q4 share count will depend on several factors, including the magnitude and timing of additional share buybacks, if any.

That concludes our prepared remarks.

We will now open the call to your questions.

(Operator Instructions).

Tycho Peterson, JPMorgan.

Hi, thanks for taking my question.

I guess, first of all, just given the change in procedures in [NAC] SRT, could you talk about whether we should be assuming that there will be US placements only if system utilization continues to increase sequentially?

And how are you thinking about where system utilization could ultimately go in the next couple of years?

I think, in the near term the factors that place new systems will be a few, as you know.

So one of them is procedure growth.

One of them is access to new technologies for folks who have older technology.

And then the last one is point of care where, in the hospital, they want to use the devices.

And by far the biggest driver of those three is the procedure side.

So I think utilization, over time, I think people are going to look at it and look as capital owners to drive it up.

It can be lumpy though.

I don't know that it has to progress linearly in terms of increases.

As I said before, if you have an S platform and you want to have access to stapling, that requires and Si that can make changes as we go through.

And then on Japan, given that you're not likely to have reimbursement for additional procedures until 2016, could you maybe talk about how you think about the trends there?

Is there going to kind of a pause in investments beyond this initial round of placements (technical difficulty) procedures?

I think, in terms of the process for reimbursement, just so everybody knows, that will be a set of clinical data collection that is going on out there.

And that will involve some hospitals getting limited approval from the government to collect that data.

So we'll see that.

I think that capital sales by the broad market will be really lumpy in this period.

I think it will be very hard to predict accurately what the sales profile will look like as people go through that set of clinical data and trial data.

I think the commentary from the Japanese market as to their interest is strong.

Okay.

And one last one for Marshall, quickly on inventories.

$200 million.

Can you comment on why they were that high?

We run leadtimes that we provide to our suppliers, and for particularly the system itself.

And we obviously didn't sell the number of systems we had anticipated until (technical difficulty) we are still taking that inventory in.

We don't think there's any exposure there.

We're talking about Si, and Si is a very capable unit and capable of doing all of the surgeries we see in our near-term future.

Okay, thank you.

Ben Andrew, William Blair.

Good afternoon.

Maybe, Gary, talk a little bit about any shift in the spending plans that Calvin referred to, and if you can give us a little of the detail on that and over what time frame we might see that pull back.

I think there are some things that make sense in the next quarter or two in terms of spending, some things that just scale with production volume and things like that that make a lot of sense.

The other side is being careful in prioritizing the investments that we make, both in terms of prototype spending and in terms of expansion plans.

We have a pretty clear set of priorities in terms of the kinds of products and the markets we want to invest in.

We will not short those.

But for things that are perhaps a little further out or a little bit more on the edges, then we will be careful about where we put our investment.

Okay.

And then on the clinical side, what sort of role do you have in data collection for things like complications and other clinical data sets relative to procedures like COLI where there's an opportunity to maybe transform a space further with a strong registry set, or clinical study?

And is that a material kind of investment for you all at this point?

We do have programs where we invest in clinical research.

We also invest in things like supporting registries.

Also, we will go out and provide materials and access to training and other types of resources to allow people to design trials.

So, we perform that way.

We also fund fellowship training.

We also fund residency training in different places.

So we have a set of things that we do.

There are institutions that will look for our help, and there are institutions who want to do things at arm's length and that makes sense too.

So there's a combination of all of those things.

I think the areas of study are diverse from very large population studies that occur in more mature procedures to smaller cohorts that are direct comparisons across one or two centers for things that are emerging.

So, as you think about cholecystectomy and use of Single-Site and things like Firefly imaging, you'll see the smaller cohort studies start and those will get bigger as time goes on.

Okay.

And then finally for me, in terms of the pipeline for system sales in the quarter, did you see a shift in terms of how people characterize them as a delay or cancellation or any other trends there?

Thank you.

It's pretty similar to last quarter.

We had a number of systems where we got the approvals that we were accustomed to, but then, at the end, we couldn't get the CEO or the CFO and there was a hesitation there on the basis of their own concerns or uncertainties, I should say, their own uncertainties around spending capital.

And then of course there's some capital spending that's required under the ACA for IT and so forth, and so I think those are also capturing a greater part of the pie than we're used to.

But I don't know that there was anything in particular I would point out.

Tao Levy, Wedbush.

Good afternoon.

So one of the questions I had was just jumping on what Ben had just asked.

Is there anything that you are doing differently now on the activities or investments that you weren't doing previously, just to address some of the challenges that have cropped up over the last few quarters?

No, I think the things that are perhaps front and center is making sure that people have access to all the data that's out there.

There's an enormous amount of published literature on da Vinci.

People looking for proof points can absolutely find them.

I think the total publication database now is greater than 5000 peer-reviewed journal articles on da Vinci.

The number of level II evidence and above, high-level evidence, is greater than 200.

The issue is not a dearth of clinical data.

There were cost studies.

We'll be posting them on -- links to them on the Web.

There's a fair amount out there.

What we can do better is make sure people know it and see it and are able to digest it.

So we've been doing that kind of activity.

We've talked about, both in Japan and in Europe, the economic analysis that needs to be done with regard to reimbursement from government payors is work that we can do, and we are having success in that work.

The data is out there.

The analysis can be done.

And so we are making those kinds of investments.

And so we've been scaling.

Okay.

And if you can maybe comment on sort of how we should think about prices on per procedure over the near term until I guess systems start to recover.

Is it here sort of in the $1850, $1860 range?

I let Calvin go into the modeling and the mix, but before he does, just a high-level comment.

I think there are a couple things going on.

On things like Single-Site and some of the benign procedures that are more cost sensitive, we have offerings that reflect that greater cost sensitivity.

And we are happy to provide them.

I think, it makes sense and they fit the procedure profile.

And at the other end, on the more complex procedures, the cancers, some of more reconstructive procedures, we have a set of products that have -- carry higher ASPs, the stapler and vessel sealer and the like.

And so I'll let Calvin go through the modeling dynamics for you, but those are the push and pull of this kind of conversation.

And as Marshall described on the call, the Q3, the lower revenue per procedure in Q3 specifically was driven by lower stocking orders associated with the lower system sales in Q3.

As well as timing of orders, we saw hospitals reducing inventory levels in the quarter as well.

Longer-term, as Gary was mentioning, the initial sales of and increased utilization of vessel sealer product, Firefly and stapler, will help us garner a larger portion of the overall procedure revenue and serve to bolster our revenue per procedure.

But then offsetting that will be diminishing impact of stocking orders as well as procedure mix as we move deeper into benign procedures and they become a larger portion of our overall business.

It's likely, in the much longer term, that this procedure mix could serve to trend the overall revenue per procedure down.

So should we keep it in sort of this $1860 level or higher?

I wasn't sure which --

Yes, there are a lot of factors.

I think there were some specific factors that impacted Q3 that will be pretty relevant --

Higher than that.

-- as you look at Q4 and next year and some of these other things are longer-term.

If I could ask the last question.

Procedure trends in the quarter, it seems like September might have been particularly strong for you guys on a worldwide basis.

Is that the case?

Or September year-over-year was pretty much the same?

Generally speaking, you see people coming back from vacations globally in September, and so the seasonality there is such that September is usually stronger than the prior months.

And we would expect that.

And then the other piece is that as our business has a greater share of benign surgeries in it over time, those tend to be more subject to seasonality.

So the mix is becoming a more seasonal mix relative to prior years.

And so you see both of those effects kind of compound.

Thanks.

David Roman, Goldman Sachs.

Hi guys.

This is Chris in for David.

Can you hear me okay?

Wonderful.

Thank you for taking the questions.

First question, I feel like, historically, the mantra has always been that procedure growth drives system utilization.

But at this point, it feels like the rate of change in the delta for a procedure is a lot slower than what's happening at the system level, and that's kind of given rise to this overcapacity debate a little bit.

And I'm a little bit curious about how your visibility, and given the revised guidance, where the confidence is coming from in the revised outlook on systems growth.

What has changed in the conversations with administrators for some of the pipeline accounts that makes you feel that these guys are still in the pipeline, that they won't push out their decision-making another six months, nine months or 12 months?

And maybe you can share a couple of anecdotes of specific conversations that are happening to let us have a better feel for it.

I'll answer the last part first.

On the systems side, I think we've given you a pretty broad range for the results for Q4.

And that reflects -- Calvin even said this in his script -- that reflects uncertainty as to how capital will close.

I don't think we exuded any particular confidence on what will happen in Q4 relative to Q3 on --

Our visibility to procedures is better.

It is imperfect but it is better than into capital purchasing decisions, particularly in the US where you are seeing some market dynamic changes.

And so we've given you a broad range, and the reason for that broad range is it's hard to predict how a hospital administration will be some of their decisions.

Right now, some of the anecdotes are that hospital administrators are trying to project what their revenues will look like as the elements of the ACA get implemented.

And that revenue uncertainty on their side just flows through into capital decision-making uncertainty down the line.

Great, that's very helpful.

Thank you.

And if I can have a follow-up here, I'm curious and I know that there's a lot of work being done on the share repurchase side, but given the significant amount of cash that you guys have and the financial flexibility, is there any reason that you wouldn't be able to up the R&D spending and really focus on addressing some of the concerns that have been out in the media and some of the major bodies of recent to help address some of the perception issues that seem to kind of keep coming up and potentially could be impacting some of the near-term system placement sales?

And you could -- I feel like, with the financial flexibility, that more repurchases could offset that level of spending.

Is that something that is on the table or has been considered or not?

With regard to -- there's a couple of things wrapped together there, just teasing them apart.

With regard to the R&D spend side, we are thoughtful and serious about our R&D priorities and the spending the goes with it.

We listen really carefully to surgeons and hospital customers about what we think they need and what they think they need to make for both great surgery and surgery whose economics makes sense for all of the players.

And so that's baked into our product development pipeline and something we do continuously.

With regard to R&D being the solution to some of the concerns in the press, I would encourage you to go look at our website, look at the data.

The safety profile of da Vinci is outstanding when it is compared with the surgical alternatives that people have.

So, I think, on that side, that's not really an R&D investment sort of issue.

With regard to the use of cash and buybacks and how we think about that, I'll turn that to Marshall.

We look for opportunities or discontinuities in the share price relative to the market, and we did some buybacks this last quarter.

It's really a board decision.

We'll be having those discussions on an ongoing basis with the board and you will see what comes out of it.

All right, great.

Very helpful.

Thank you guys.

Amit Hazan, SunTrust.

Good afternoon guys.

I thought maybe I'd ask the first question about existing versus new customers.

Just regarding the US system side, if you can distinguish between existing customers adding capacity and then new customers?

I think, if we think about last quarter, you seem to be saying that most of the weakness came from existing customers who chose to defer.

It seems like that's the case again here.

What has been happening more on the new customer side, new customer additions, and the trend line there?

Just to kind of review the numbers, as was mentioned, there were 65 total system sales in the third quarter.

22 of them went to brand-new customers, greenfields as we call them, and 43 were to existing customers.

So, then let's see.

It was 19 of them -- 24 involved trade-ins, so that means 19 added systems for capacity reasons in the quarter.

So I think when you look at the capital environment, we talked about the issues impacting it.

I believe the issues described, whether it be capacity from the decreasing growth in benign hysterectomy or the various macro issues, including the ACA, I think they really impacted all of these categories.

Okay.

Then moving onto the procedure side, I want to just make sure I ask the question so it's very clear.

I think you might have touched on it.

But if we go through the US benign hysterectomy side and think about how to model it for the next several quarters and how you saw this quarter versus last quarter, is the impact that you are seeing there -- and obviously I'm referring to the concerns, the developments earlier in the year more than anything -- has it gotten -- did it get worse this quarter or was it something that you saw as stable versus last quarter?

As we mentioned in the script, I think it's following a pretty normal trajectory or trend from what we introduced in Q2 and in Q3, the Q1, Q2, Q3.

So it was pretty stable, and I would say seasonally stable going into a Q3, so not much of a change between the two quarters.

Great.

Just the last one for me.

In terms of the impact from that same noise on other procedure categories, urology or general surgery in the US, do you feel at all that hospitals have applied more scrutiny to those as well because of the noise factor coming out of the first half of this year?

It's an interesting question.

You really have to tease it apart and you have to take a look at the underlying condition, the surgical specialty itself, the alternative opportunity, the alternative treatment.

In other words, when you're looking at urology, and you're talking about kidney cancer, bladder cancer, prostate cancer, I think it's safe to say that you are more immune to some of these sort of allegations that people are throwing out in the media than you are versus, let's say, a benign procedure that has some benign therapies and they'll pile on costs and some incorrect comparators.

And so I would say the majority of that noise that we have heard and have felt is probably been on the benign GYN side more than anything else we've seen thus far.

And I think that continues.

Okay, thanks guys.

David Lewis, Morgan Stanley.

This is actually Jon Demchick in for David.

Thanks for taking the questions.

I just had a quick question on I guess a few pipeline products.

of you guys.

Starting with Single-Site, I had a question about adding wristed capabilities.

You mentioned I guess the needle driver that should be submitted for 510(k) approval next year.

Are there plans to expand the wristed capabilities across other aspects of the Single-Site platform?

Like what are the main obstacles in doing this?

And what impact do you believe this could have on broader adoption?

I think -- so the first question is it limited to needle driver or can it be taken more broadly?

I think that a needle driver is clearly the first one to go with with regard to Single-Site as applied to hysterectomy.

I think that once you have that architecture, you can start to broaden it in terms of what's possible.

And the decisions that would be made as to which ones come next and why will have a lot to do with which indications are the next most interesting indications for Single-Site.

So that will be a process.

If you've followed us for a while, you'll see that same kind of behavior that, as indications change, then you bring instruments in to help you optimize that set of indications.

And then second also I guess, moving onto the stapler rollout, as you continue with the rollout, I was just wondering if there was a potential timeline in expanding the stapler offering, the different sizes, so maybe it could be a little more effective for bariatric surgery or other surgeries.

So our first expansion will really be in terms of number of sites supported with the existing stapler.

So the stapler we have today is really targeted and optimized for colorectal procedures in terms of how big it is and what the staple reloads look like, and so we're going to do that.

And that's what we're focused on in the near term.

Longer term, we are working on prototypes and developing the capability for other types of reloads focused on other types of procedures.

And we'll do that.

That will be further out.

That's not a near-term.

Okay, very helpful.

I just had a quick follow-up on the procedure guidance.

I know you guys have given a little bit of detail here, but I just wanted to push a little further.

I think it implies roughly 13% to 17% procedure growth in the fourth quarter.

And I was wondering if maybe you could discuss some of the assumptions across the product categories that drove you to that guidance, and if you see any significant acceleration or deceleration across any of the large groups.

Yes, I think it's probably similar to the commentary we had last quarter in that, at the higher end of the range, you're talking about a continuation of the trends that we are on from benign gynecology, general surgery, and prostatectomy in the US as well as international growth rates.

At the lower end of the guidance would just be contemplation of if other factors come into play in terms of a further decline in benign demand for benign procedures.

You're entering a quarter that's typically very strong seasonally, and if it comes out less strong for some reason, that would be considered as well as if you see any changing trends in cholecystectomy or prostatectomy, that would be reflective of the lower end.

Thank you, very helpful.

Bob Hopkins, Bank of America.

Good afternoon.

So I just wanted to ask a big picture question on procedure volume growth.

As I look at the model going back to the first quarter of 2012, your procedure volume growth was close to 30%, and it's kind of gone down a little bit each quarter.

And now we are at 16% this quarter, and you're looking at fourth quarter maybe being at the same level or a little bit lower.

And so I guess, just from a big picture perspective, I wanted to get a sense of your confidence that the sort of midteens procedure volume growth rate is close to a bottom, or is the bottom.

Any thoughts there would be helpful.

I don't think we are ready to give really 2014 guidance.

What I would say here in terms of what are the dynamics, what's going on underneath these things, I think we have a large category that, in the US, grew quickly, and is now growing more slowly, and that was gynecology.

And we have a large category in the US in general surgery that's on the early part of this adoption.

And I think the answer to your question is going to come down to the rates of growth on both of those sides.

And I think what you would expect of the Company is to manage the activities that would support growth.

And so in the US, our activities are focused on supporting general surgery growth.

And that comes down to making sure the product set makes sense for that customer, making sure that our training capability is aligned and ready to go, our sales force is capable of doing what they need to do.

And we have opportunity for growth or accelerated growth in OUS markets, in Japan, where we are making investments in Europe.

So those are the underlying drivers.

And how it shakes out in future quarters we will report to you as we have greater visibility.

You know, I appreciate that.

I really wasn't asking about any particular quarter, just asking about all the different trends that are impacting growth and where we stand now and just trying to gauge your confidence on, at this point, are there more positives than negatives.

And again, just trying to gauge confident as to sort of where we are in the cycle right now and your confidence that this obviously critically important metric to your Company, that we have your best sense as to where that is going to fall out.

One of the challenges has always been trying to breeze the assumptions that we've given you and hold them for long periods of time.

In other words, we are -- we're almost -- the way the question is framed, it's almost asking us to sort of freeze the assumption as the final assumptions and not take into consideration things like potential expansion of let's say Single-Site hysterectomy and/or international market growth where we are putting in a lot of resources and training centers and so on and so forth.

So, I would say, from a confidence standpoint, we believe there are a lot of future drivers and present drivers in the business.

And it becomes, as it always does, and execution story, both downstream and upstream execution of what we think are great opportunities.

And that's what you should judge us on, and that's where our focus is.

Time for one more follow-up question.

Thanks.

Just one real quick one on utilization, that's also a challenging part of the model going forward.

How do you think that we should be thinking about utilization sort of per system going forward?

I assume that needs to continue to climb up, but just any general thoughts on kind of utilization per installed base as we look forward?

If you look at the trends coming up prior to 2013, we've seen gradual increases in utilization per system as measured by procedures done in a quarter as a numerator and denominator of the systems installed at the beginning of the quarter.

We've seen that gradually increasing.

Now you get to 2013 with the moderating growth in benign gynecology, now you're seeing moderate decreases in each of the first three quarters of this year.

Ultimately, I think we still say procedures are really what drives this business here.

There are other factors that impact the timing of system sales, which we have been through.

But, again, procedures and the greater growth there is going to be the key.

And I think the ultimate utilization is going to depend on a lot of factors, hospitals gaining efficiency, Affordable Care Act, procedure mix, so the ultimate direction, it's hard to really say.

Thanks very much.

That was our last question.

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

The following is a part of an interview published by Medscape with Dr. Joseph Colella, Director of Robotic surgery at Magee Women's Hospital, part of UPMC.

When he was asked about the future of robotic assisted surgery, he answered as follows.

"As a potential patient, stop for a moment and put on the common sense hat.

The surgeon tells you that he can see 100% better in three dimensions, that he can sew better, and in the future he'll be able to do every procedure through one incision.

You can imagine that the sky is the limit in employing robotic surgery.

It is an enabling technology.

I firmly believe that we are finding new and beneficial applications almost on a monthly basis.

For instance, nobody ever thought you would be able to resect tumors of the larynx without taking half the face of part to get to them.

With a robot in the right hands, you can do those operations in an hour and the patient goes home the next day."

This concludes today's call.

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

Thank you.

Ladies and gentlemen, that does conclude your conference call for today.

We do thank you for your participation and for using AT&T Executive Teleconference.

You may now disconnect.