直覺手術 (ISRG) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Intuitive Surgical Q4 2014 earnings release call. (Operator Instructions). As a reminder, today's conference call will be recorded.

Now I would like to turn the conference over to our first speaker, Senior Director of Finance with Intuitive Surgical, Mr. Calvin Darling. Please go ahead, sir.

Thank you. Good afternoon and welcome to Intuitive Surgical's fourth-quarter earnings conference call. With me today, we have Gary Guthart, our President and CEO; Marshall Mohr, our Chief Financial Officer; and Patrick Clingan, Director of Finance.

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, including our most recent Form 10-K, filed on February 3, 2014, and our Form 10-Q, filed October 23, 2014.

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 and supplementary financial data tables have been posted to our website.

Today's format will consist of providing you with highlights of our fourth-quarter results, as described in our press release announced earlier today, followed by a question-and-answer session. Gary will present the quarter's business and operational highlights. Marshall will provide a review of our fourth-quarter financial results. Patrick will discuss marketing and clinical highlights. Then I will provide our financial outlook for 2015. Finally, we will host a question-and-answer session.

With that, I will turn it over to Gary.

Thank you for joining us on the call today.

2014 has been a year of transition for Intuitive, with macroeconomic uncertainty at the start of the year giving way to improving performance as the year progressed. At the outset, we focused on driving adoption of our platform in general surgery and launching key new products and in increasing our organizational capability and performance in international markets, particularly Europe and Japan.

The organization has responded well in the year, with solid procedure performance and a strong launch of our newest generation da Vinci platform. General surgery and international procedures have become the growth engine for the business.

Starting with a review of procedures, year-over-year growth was approximately 9%, led by growth in general surgery, growth in the use of da Vinci outside of the United States, and strength in urology, offset by flat annual performance in gynecology.

General surgery growth was approximately 33% for the year, comprised of strong growth in da Vinci colorectal surgery, hernia repair, and in other general surgery procedures, offset by slowing da Vinci Single-Site use in cholecystectomy. While Single-Site cholecystectomy procedures were up in 2014, they were down in the fourth quarter.

Outside of the United States, procedure growth remained robust, rising approximately 20% over procedures in 2013, based on strength in Europe and Asia. Patrick will review procedure trends in greater detail later in the call.

Looking at trends in capital sales for the year, capital placements increased in sequential quarters, helped by the launch of da Vinci Xi in the second quarter of 2014. Outside of the United States, our capital business was solid, with international system strength in Europe and Asia, outside of Japan. System sales weakened in Japan over 2013 as customers wait for both Xi clearance and additional reimbursement. Sales elsewhere, particularly China, grew over 2013.

Our product launches were significant in 2014. In the second quarter, we launched our fourth-generation platform, the da Vinci Xi Surgical System. We launched Xi in the United States in April, followed by CE Mark in June; availability in France, Austria, and Switzerland in October; and Korea in December.

The Xi system enhances our prior-generation systems by improving multi-quadrant access to the body, introducing the ability to move the endoscope between robotic arms, increasing range of motion and reach with slimmer arms, and enhancing ease of use and setup. Customer reception of the Xi has been strong, with interest in use by multiple specialties, including colorectal surgeons, urologists, thoracic surgeons, and gynecologic oncologists.

Our systems are optimized for different procedures by dozens of instruments and accessories. In 2014, we added to the initial set of instruments and accessories available for the Xi at launch by introducing the Xi Vessel Sealer in Q2, Xi Firefly in Q3, and Xi stapler in Q1 of 2015.

In 2015, we plan to submit a 510(k) for software that allows for coordinated table motion with the Xi and a 510(k) for an Xi-compatible version of our Single-Site instruments. This filling out of the Xi product suite will increase the applicability of the platform to institutions interested in owning a single da Vinci system.

Turning to instruments, we launched our Wristed Needle Driver instrument for use with Single-Site surgery in Q4 of 2014. Surgeons performing single-incision hysterectomy with da Vinci Single-Site are particularly interested in the Wristed Needle Driver and initial uptake has been strong. Single-Site hysterectomy with Wristed Needle Driver is still in its early days and projecting its long-term impact on the hysterectomy market is premature.

In the fourth quarter of 2014, we issued a field action for our da Vinci Si stapler after we observed three intraoperative instrument failures. In each case, these procedures were completed successfully minimally invasively.

Our team has identified the root causes of failure and has requalified the stapler.

As of this first quarter of 2015, the Si EndoWrist Stapler is back in production and first cases have been completed. Our Xi Stapler was also launched in the quarter, with first cases completed this month.

Looking back at the full year 2014, our operating performance was as follows. Worldwide procedures grew approximately 9%. We shipped 431 surgical systems in the year, down from 546 in 2013. Total revenue was $2.1 billion, down 6% from 2013. Recurring revenue grew to $1.57 billion, up 5% and comprising 70% of total revenue.

We generated $819 million in operating profit before non-cash stock option expense, down 21% from last year. Pro forma net income was $607 million, down 24% from 2013, and we reduced our shares outstanding by repurchasing 2.5 million shares at an average price of $398 per share during 2014.

Turning to our operating performance in the fourth quarter, procedures grew approximately 10% over the fourth quarter of last year. We sold 137 da Vinci Surgical Systems, down from 138 in the fourth quarter of 2013.

Total revenue for the quarter was $605 million, up 5% from prior year. Instrument and accessory revenue increased to $281 million, up 5%. We generated an operating profit of $237 million in the quarter before non-cash stock compensation expense, down 8% from the fourth quarter of last year, and pro forma net income was $184 million, down 5% from Q4 of 2013.

In 2014, we made significant investments in our organization, including growing our direct to commercial organization in Japan. We anticipate growing our organization in specific areas through 2015, with particular emphasis on Asia, Europe, and in operations.

Looking to 2015, our priorities are as follows. First, we will focus on the expanded use of da Vinci in general surgery, particularly colorectal surgery and hernia repair. Second, we will work to complete our launch and new product introductions of da Vinci Xi in key markets globally.

Third, we will develop our organizational capabilities in markets in Europe and Asia, and, finally, we plan to build Xi-compatible da Vinci Sp prototypes and initiate customer evaluations.

I will now turn the call over to Marshall, who will take you through our financial highlights.

Thank you, Gary.

Our first-quarter 2014 revenue and procedures were consistent with our press release issued on January 13. Fourth-quarter revenues were $605 million, up 5% compared with $576 million for the fourth quarter of 2013 and up 10% from last quarter. Procedures for the fourth quarter grew approximately 10% compared with the fourth quarter of 2013 and approximately 9% compared with last quarter.

I will be describing our results on a non-GAAP or pro forma basis, which excludes the impact of our Xi trade-in programs, legal claim accruals, stock-based compensation, amortization of purchased IP, and investment impairments. We are providing pro forma information because we believe that business trends and operating results are easier to understand on a pro forma basis.

I will also summarize our GAAP results later in my script. We have posted reconciliations of our pro forma results to our GAAP results on our website so that there is no confusion.

Procedure highlights will be covered by Patrick. Revenue highlights are as follows. Pro forma instrument and accessory revenue grew 4% compared with the fourth quarter of 2013 and 3% compared with the third quarter of 2014. The increases relative to prior quarters reflect procedure growth, partially offset by customer buying patterns and the impact of the field action for our da Vinci Si Stapler.

We have resolved the issue underlying the stapler and began shipping it again early in the first quarter of 2015. We also began shipment of our Xi Stapler early this quarter.

Instrument and accessory revenue realized per procedure, including initial stocking orders, was approximately $1,830 per procedure, compared with $1,930 for both the fourth quarter of 2013 and last quarter. The decrease from the prior year, as well as the prior quarter, reflects the timing of customer orders and the field action for our da Vinci Si Stapler.

Pro forma system revenue of $211 million increased 3% compared with the fourth quarter of 2013 and increased 37% compared with the third quarter of 2014. The increase in systems revenue compared with the third quarter primarily reflects higher system sales in Europe and the US.

137 systems were placed in the third quarter, excluding two Xis traded for Sis under our trade-out program, compared with 138 systems in the fourth quarter of 2013 and 111 systems last quarter. 97 of the systems placed in the fourth quarter were Xis, compared with 59 in the third quarter and 50 in the second quarter.

Globally, our system ASP of $1.550 million increased relative to the ASP for the fourth quarter of last year of $1.460 million and relative to the last quarter of $1.450 million. The increase in ASPs relative to last year reflects product mix, where the current quarter included a high mix of Xis and the fourth quarter of 2013 included a high mix of Si-es. The increase in ASPs relative to the last quarter reflects a higher proportion of Xi systems, a higher proportion of dual console systems, and a positive geographic mix.

Hospitals financed approximately 15% of the systems placed in the fourth quarter, down from 27% last quarter. We directly financed 12 systems, of which five were structured as operating leases. Through the fourth quarter of 2014, we have entered into 14 operating leases.

In the US, we placed 71 systems in the fourth quarter, compared with 72 systems in the fourth quarter of 2013 and 61 systems in the third quarter of 2014. Outside the US, we sold 66 systems in the fourth quarter, compared with 66 in the fourth quarter of 2013 and 48 systems last quarter.

Year-over-year system placements reflect growth in Europe, 39 systems this quarter compared with 28 systems last year, and a reduction in Japan systems, six systems this quarter compared with 21 systems last year. Quarter-over-quarter system placement growth reflects higher system placements in Europe and other world markets. Fourth-quarter system sales included nine into Italy, seven into Turkey, and five into the Nordic countries.

International revenue results were as follows. Fourth-quarter pro forma revenue outside the US was $197 million, or approximately the same as the fourth quarter of 2013 revenue of $195 million and up 29% compared with $153 million last quarter. Our higher sequential international revenue was driven by increased procedures and higher system sales in a seasonally stronger quarter.

Fourth-quarter 2014 OUS procedure volume was approximately 21% higher than the fourth quarter of 2013 and 14% higher than the third quarter of this year. Procedure volume was led -- growth was led by dVP, but also reflected strong growth in GYN and general surgery.

Moving on to the remainder of the P&L, pro forma gross margin in the fourth quarter of 2014 was 67.1%, compared with 70.7% for the fourth quarter of 2013 and 67.2% for the third quarter of 2014. Our lower margin percentage relative to prior quarters primarily reflects the high mix of Xi systems.

In the first quarter, we recorded a pretax charge of $67 million to reflect the estimated costs of settling a number of product liability legal claims against the Company. During the second quarter and the fourth quarter, we recorded additional charges of $10 million and $5 million, reflecting additional claims. These claims relate to the alleged complications from surgeries performed with certain versions of Monopolar Cautery Scissor, or MCS, instruments that included an MCS tip cover accessory that was the subject of a market withdrawal in 2012 and surgeries that were performed with MCS instruments that were the subject of a recall in 2013.

Our estimate of the anticipated cost of settling these claims is based on negotiations with attorneys for patients who have participated in the mediation process that the Company established in conjunction with a tolling agreement. We will continue to refine our estimates as we proceed through the negotiation process.

Pro forma operating expenses, which exclude the reserves for legal claims, stock compensation expense, and amortization of purchased IP, were up 9% compared with the fourth quarter of 2013 and were up 2% compared with last quarter. Our fourth-quarter 2014 pro forma operating expense, compared to the fourth quarter of 2013, reflects headcount additions and higher incentive compensation. The increase compared to last quarter was driven by higher incentive compensation and severance costs.

Our pro forma effective tax rate for the fourth quarter was 23.5%, compared with 25.8% for the fourth quarter of 2013 and 27.2% last quarter. The pro forma effective tax rate for 2014 benefited from the release of reserves specific to tax years where we have completed our IRS audit or jurisdictions where the statute of limitations have now expired.

In addition, the fourth quarter of 2014 rate benefited from the reinstatement of the federal research and development credit. We anticipate our pro forma effective rate for 2015 will reflect the more normal range of 28% to 30%. Our tax rate will fluctuate with changes in mix of US and OUS income and will not reflect a federal research and development credit unless such credit is reinstated.

Our pro forma net income was $184 million or $4.92 per share, compared with $193 million or $4.98 per share for the fourth quarter of 2013 and $145 million or $3.91 per share for the third quarter of 2014. Excluding one-time tax benefits, our fourth-quarter 2014 pro forma net income would have been $159 million or $4.25 per share.

As I indicated earlier, pro forma income provides an easier comparison of our financial results and business trends. I will now summarize our GAAP results. GAAP revenue was $605 million for the fourth quarter of 2014, compared with $576 million for the fourth quarter of 2013 and $550 million for the third quarter of 2014.

GAAP net income was $147 million or $3.94 per share for the fourth quarter of 2014, compared with $166 million or $4.28 per share for the fourth quarter of 2013 and $124 million or $3.35 per share for the third quarter of 2014.

We ended the quarter with cash and investments of $2.5 billion, up from $2.3 billion as of September 30, 2014. The increase was primarily driven by cash generated from operations. During the year, we repurchased 2.5 million shares for $1 billion at an average purchase price of $398 per share.

With that, I would like to turn it over to Patrick, who will go over our sales, marketing, and clinical highlights.

Thanks, Marshall.

As mentioned earlier, total Q4 year-over-year procedures grew approximately 10%, with US procedures growing approximately 8% and international procedures growing approximately 21%.

In US urology, the uptick in dVP procedures experienced in Q3 continued in Q4. Given our high rate of penetration in the US prostatectomy market, our dVP volumes are likely to track to overall US prostatectomy volumes. Coupled with continued growth in kidney procedures, our overall US urology procedures showed modest growth in 2014.

In US gynecology, Q4 results were similar to prior quarters in 2014, with low single-digit procedure declines. dVHb volumes appear consistent with the expected total market benign hysterectomy procedure decline, partially offset by growth in cancer procedures. Single-Site hysterectomy continued to display rapid early growth, off a small base.

Moving on to US general surgery, adoption continues to be solid across a broad number of procedures. Colorectal and hernia adoption remains a source of strength, while cholecystectomies declined modestly in the quarter. Over the course of 2014, we have seen a shift in focus from cholecystectomy to hernia repair by our general surgeons and sales force.

Despite the decline in cholecystectomies this quarter, we continue to hear positive feedback from segments of the patient and surgeon populations that see value in the single-incision approach of our Single-Site technology or the real-time imaging of the biliary anatomy with our Firefly technology, among advantages associated with robotic surgery.

Looking more deeply at hernia repair, we are encouraged by robust procedure growth, coupled with positive feedback about the clinical outcomes being generated with da Vinci Surgery during these early stages of adoption. However, hernia repair is a broad term and the benefits associated with robotic and minimally invasive surgery varies across patient subsets.

For ventral hernias, surgeon feedback around the ease of suturing and enhanced vision associated with robotic surgery enables a minimally invasive closure of the primary defect that is similar to open surgery. Relative to laparoscopy, da Vinci surgeons have commented on increased intra-abdominal surgical dexterity for dissection and suturing, less postoperative pain, and similar or lower material operating costs.

For inguinal hernia, discussions continue among surgeons about the role of minimally invasive surgery for some procedures. However, da Vinci surgeons have reported to us that for certain inguinal hernias, there are advantages in transabdominal defect closure and a reduction in postoperative pain.

Defining the subsets of hernia repair where robotic surgery is expected to thrive is difficult, particularly in these early days, though we are encouraged by our physician commentaries.

Looking abroad, international Q4 procedure growth of approximately 21% continued to be led by global adoption of dVP and other urologic procedures, with solid early contributions from gynecology and general surgery. In Japan, we have seen continued adoption of dVP. Clinical trials to support our reimbursement submissions for partial nephrectomy and gastrectomy have begun enrollment, and we continue discussions with key opinion leading surgeons and surgical society leadership on other procedures of interest.

Recently, a population-based study of the first year of dVP adoption in Japan was completed by researchers from the University of Tokyo and the Cleveland Clinic that included more than 10,000 patients. Published in Cancer Science, the study found that dVP, despite being within the first year of broad adoption, was associated with a lower complication rate, lower transfusion rate, shorter hospitalization, longer anesthesia time, and higher costs compared to open surgery and minimally invasive alternatives.

There is little detail around how costs were calculated in this study, though they appear correlated to anesthesia time. We know from prior studies that with experience, both cost and operating room time decline. The authors found the favorable clinical outcomes with robotic surgery noteworthy during these early phases of the introduction of our technology, offsetting the longer anesthesia time.

In Europe, in addition to strong capital sales, we are encouraged by continued clinical developments. While dVP adoption is driving the majority of procedure growth, initial developments in colorectal surgery may establish the foundation for future adoption.

Under the leadership of key opinion leading surgeons, the European Academy of Robotic Colorectal Surgeons was launched in December. Through a network of hospitals and surgeons, this group is providing standardized training and proctoring to support the introduction of robotic colorectal surgery across Europe.

While there have been cost studies published that compare robotic surgery within patient and surgeon populations amenable to laparoscopy, additional cost studies with appropriate comparators were published this quarter. I will quickly review one from the University of Pittsburgh, published in the Journal of the Society of Laparoendoscopic Surgeons, that compared robotic to laparoscopic in open benign hysterectomies among surgeons who most commonly performed open surgery.

The study reviewed nearly 5,000 benign hysterectomies performed by 237 surgeons across 10 hospitals from 2011 to 2013, including 119 surgeons that predominantly performed open hysterectomies. Using actual cost data during the hospital stay, the authors found that when open surgeons perform robotic and laparoscopic procedures, the costs were similar on an operating cost basis. Including an add-on cost for robotic maintenance and depreciation resulted in higher cost for robotic surgeries, but the authors noted a bias in this analysis, due to the exclusion of similar costs associated with the laparoscopic procedures.

In conclusions, the authors stated, quote, although laparoscopic hysterectomy had the lowest costs overall, robotics may be no more costly than laparoscopic hysterectomy when performed by surgeons who predominantly perform open hysterectomy, close quote.

This concludes my remarks and I thank you for your time. I will now turn the call over to Calvin.

Thank you, Patrick.

I will be providing you with our financial outlook for 2015, starting with procedures. As described in our announcement last week, 2014 total da Vinci procedures grew approximately 9% to roughly 570,000 procedures performed worldwide. During 2015, we anticipate full-year procedure growth within a range of 7% to 10%.

We expect similar seasonal timing of procedures in 2015 as we have experienced in previous years, with Q1 being the seasonally weakest quarter as patient deductibles are reset.

With respect to revenue guidance, consistent with last year we will not be providing specific revenue guidance. We do expect 2015 capital sales to follow historical seasonal patterns, with Q1 being sequentially lower than the recently completed Q4. We will face foreign-exchange headwinds in 2015, based upon the impacts of the stronger US dollar.

Turning to gross profit, we expect our 2015 pro forma gross profit margin to be fairly consistent with Q4 2014, based upon the anticipated proportion of Xi, stapler, and other new products with lower gross profit margins in our product mix and the foreign-exchange headwinds I mentioned earlier, partially offset by cost reductions realized during the year.

Our actual gross profit margin will vary quarter to quarter, depending largely upon product mix and systems production volume.

Turning to operating expenses, we expect to grow pro forma 2015 operating expenses between 7% and 10% above 2014 levels. As we have stated previously, we believe it is fundamentally early days for computer-assisted surgery and we will continue to make investments to pursue significant growth opportunities.

We expect our non-cash stock compensation expense to range between $180 million and $185 million in 2015, compared to $169 million in 2014. We expect other income, which is comprised mostly of interest income, to total between $14 million and $16 million in 2015.

With regard to income tax, as Marshall described, we expect our 2015 pro forma income tax rate to be between 28% and 30% of pretax income, depending primarily on the mix of US and international profits. This forecast is consistent with our 2014 pro forma tax rate, excluding the impact of tax reserve releases in 2014, and does not assume the reinstatement of the R&D tax credit in 2015.

Our share count for calculating diluted EPS in Q4 2014 was approximately 37.3 million shares. We estimate our Q1 2015 diluted share count to range between 37.4 million and 37.6 million shares.

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

(Operator Instructions). Ben Andrew, William Blair.

Thanks for taking the question. Gary, can you talk a little bit about the investment plans in terms of dollars, breaking down international versus US? Are you adding people in the field in the US in 2015, and if so, to what extent, and then maybe talk a little bit more about the specific investments overseas that you are making?

Sure. With regard to sales headcount, in the US we will have -- I would anticipate modest growth in US headcount, not a ton. OUS, in terms of commercial organization, will be a greater source of investment. Some of it is in field headcount, some of it is in clinical trial effort and dollars, some in economics and economists, so a bit of a mix.

Okay, and then, Marshall, on the gross margin side, you gave us some good thoughts there in terms of the guidance. How much is ForEx impacting that and when should you get to a volume on Xi and Xi instruments where we would start to see a normalization of gross margin?

We will have FX -- about -- a little over 20% of our revenues are FX based, and if you trickle that all the way down to what that impact is on the bottom line, because we do have costs that are also FX based, you get down to where the impact is less than 3%.

As far as the gross margin goes, we are ramping Xi, obviously, production, given the volumes we did last quarter. We will continue to try to work down costs overall with Xi. That's typical with all new products, but I'm not sure that you should count on it getting on par with Si. It's a more advanced piece of equipment with higher complexity.

Okay, and then you talked about the revenue per case on instrumentation being down because of the product withdrawal. Should we see a bounce back in Q1 and could it overshoot a bit, even as you have obviously got lower volumes, but then that would flow through the year so we could see a more traditional stocking of instrumentation as you roll out stapler and roll these other products out?

I think the bigger impact in the quarter, frankly, wasn't the field stapler action. It was actually customer buying patterns. We saw fewer stocking orders being filled associated with system shipments, and then distributor buying patterns also are odd. If you remember last year, first quarter we had a higher amount sold through distributors than Q2, it was down, I believe, so anyway, the patterns really drove more of that change than did the field action.

Having said that, we would think, just like we commented in Q2, that we would see a more normalization over time of the instrument success rates per procedure.

Looking forward at the I&A revenue procedure, you look full year. 2014, it was $1,880 per procedure, and as we discussed earlier, the revenue -- the I&A revenue based in foreign currency is definitely going to be facing headwinds, based on the stronger US dollar will weigh on the overall metric. As you saw in 2014, the I&A revenue per procedure will vary from quarter to quarter, largely based on these timing kinds of factors.

In regards to procedure mix, we don't necessarily see that moving the dial either up or down on that, although there are swing items in relation to the metric. One would be our relative success with the stapler and Vessel Sealer utilization and where are revenue procedures higher on where these advanced instruments are used, and conversely, a higher proportion of Single-Site cases would weigh on the metric.

Thank you.

Bob Hopkins, Bank of America Merrill Lynch.

Good afternoon and thanks for taking the questions. Gary, just to start out, I am sorry if I missed this, but could you walk through your assumptions for buyback in 2015? If you are not assuming a buyback, I am curious as to why and what the other priorities might be for your cash.

We are not declaring anything at this time. When we think about uses of cash, we really think about a couple of things. One of them is used to invest in those things that we talked about, the ability to improve our presence in OUS markets, some investment in both operational efficiency and new innovations, and the ability to respond to opportunity as it comes up, technologically or otherwise.

Where we see opportunity to return cash to shareholders, we have demonstrated that we will, and we keep our eyes open on a routine basis for those opportunities.

Are there better M&A opportunities out there than you have seen in the past?

We have been thoughtful and persistent for years now, and so we -- I wouldn't comment strongly one way or another, only that we are thoughtful and engaged in those investigations all the time. Nothing has really changed in our rhythm or pattern the last eight quarters.

Then, lastly, I wanted to ask for a real update on Sp. I know the timelines have moved around there. Can you just highlight exactly what your expectations are for rollout and approval milestones as we think about the course of 2015 and into 2016?

Where we are, what we are trying to achieve on Standpoint -- Sp is our dedicated single port platform. As we talked about last year, our intent is to bring some of the functionality and features that we had brought forward in Xi and that have been well received by both our customers and by folks who review our products into the Sp. We are doing that now. That feels pretty good to me. I think it's the right set of decisions to make.

We will develop those products and assemble them in the front half of the year and start getting customer feedback on them into the back half of the year. We're working with regulatory bodies about what submissions might look like. We don't have timelines to share with you on what our submissions will be, and as those firm up, we will communicate them with you.

Okay, and then maybe just sneak one more in on Japan just really quickly. I am trying to gauge your confidence on the topic of Japan and whether or not you're confident at this point in suggesting that by the time we get to 2016, we will see increases that can drive better procedure volume growth at that time. It is really a question of gauging your confidence based on what you know today.

We are actively involved. I can't give you a number or a binary decision on it.

We have several conversations going on and real work in several different procedure categories. There are a lot of people who have high interest in Japan, in our products, a lot of our existing customers and future customers, and we are working on it diligently.

There are several milestones that have to be met, both on the path we are on and some alternative pathways, that are real decisions on the part of government decision-makers as to where they want to go and how they want to proceed, and it would be premature to try to forecast for you what those decisions will be.

Fair enough, thank you.

Tao Levy, Wedbush.

I wanted to ask a little bit if you can maybe expand on what you said in the prepared remarks regarding the early uptake in hysterectomy of the Wristed Single-Site instruments. Certainly, what type of procedures, what type of patients, which surgeons are starting to adopt it, and is it cannibalizing multi-arm hysterectomies? Anything like that would be helpful.

Sure, the primary procedure that the Wristed Needle Driver -- Single-Site Wristed Needle Driver is being used for is benign hysterectomy. It is being pursued for patients who have an interest in a single incision.

We see a mixture of existing robotic surgeons and those who have not approached da Vinci Systems before, so it's both folks who are currently engaged with us as customers and those who have not prior engaged. We see a mixture of both of those.

The product is performing well. Early demand has been really good. What we really want to watch and track is what happens on reorders and how people really experience it as they go forward.

We see a little bit of both in the early stages, a little bit of switching multiport procedures into Single-Site and a little bit of approaching patients that otherwise would not have been done necessarily multiport robotically. So we are seeing both of those things, and it will take some quarters, I think, to shake out where people ultimately find that optimization.

I am not too stressed about a little bit of the cannibalization here. I think that goes with the territory, and we will support surgeons taking the approach they think is most appropriate.

Okay, that's helpful. The question on the price of the Si-e, I noticed in your latest presentation that's now -- has an ASP of around -- or at least last year -- of around $600,000, and the prior year, it was closer to $1 million.

In terms of the pricing of that system, what is the objective? In the past, you have talked about outpatient surgery being a potential opportunity, if the pricing structure was correct for the hospitals. Is that part of that or there's just pricing pressure, you are trying to prevent competition from coming in at a lower price?

As you know, we have a range of options, so at the low end -- and I don't -- I would not read that chart as saying the ASP of Si-es is that number. It's just showing you where the low end is and that is looking at D featured Sis, the lower feature content Si-es, and including things like Firefly and so on, so you take those things out, that moves you lower in the range.

With regard to do we think there is a possibility in other types of care, other sites of care? I think the answer to that is yes, so you think about both -- there is duration of care when you talk about things like outpatient, but there is both duration and location. How long are they in the hospital and where is it being performed?

We see increases in both, increases in shorter duration stays and the increase in robotic surgery in different locations.

Si and Si-e, some of those lower-priced packages are designed to give an option to some of the customers who are interested in exploring that space. We have seen some interest, but I don't think it's been wild interest, unabashed interest, but we have seen some interest in it and we have seen some uptake. And you can see that reflected in the system sales numbers and placement numbers that we shared with you.

And just lastly, just a quick clarification, the Xi Single-Site instruments that you're talking about, that's different than the Sp (multiple speakers)

That is different, right. Exactly. The Single-Site instruments are the ones that go through curved cannulas. They work on the same patient side platform as an Xi, the ones that we are developing now, and they are an instrument and accessory kit, rather than a new patient side system.

Sp is a dedicated single-port patient-side different mechanism, different robot system that delivers it, and those are at different price points and they have different capabilities.

As Sp progresses, we will share more of what that product looks like and some of those distinctions with our customers and with you as we go.

Okay, thank you.

Amit Hazan, SunTrust.

Maybe let me just start with the chole side, and obviously the slowdown is quite pronounced if you think about it from 2013 to where we are in Q4 of 2014. I know there is not one driver there. I just maybe want to get some color on the different buckets of impact, and most importantly, the trend line now indicates really declines are going to be in the works for next year. Help us try to assess where the bottom might be to that category.

Let me frame for you how we are thinking about it and I will let Patrick take you through a little bit more of the analytics so that -- .

We look out at Single-Site chole. We think there are three things that are important for a procedure long term, and that is that it is repeatable and teachable, safe and efficacious, and we think it is. There is a patient population that cares about it, and in Single-Site chole, we think that's true. Then the economics work, and we think the economics work for that patient population.

Then the question becomes one of how big is that population and what's access like, and that's really what we are seeing here is hernia really grows. Patrick, I will let you take it from there.

When we look at it where systems have, I guess, are pressured for access based upon their volumes and where we are seeing declines in -- the first procedure that tends to get squeezed is the cholecystectomy.

The surgeons for which we are seeing a combination of choles and hernias where choles are declining, we are seeing total growth in the volume of procedures that these surgeons are performing, which is encouraging because they are finding where it fits best in their practice.

But over time, based on the underlying advantage of the technologies, what we are hearing from surgeons, what we are hearing from patients who get a single incision outcome, and given some of the underlying patient demographics in the population who gets a cholecystectomy, we are encouraged there is something here that we'll be a part over the long run.

All right, and then if I can shift over to revenue per procedure again, just I think at this point I want to try to better understand the patterns of stocking order, just given the volatility or variability we saw in 2014. I think specifically what I would like to understand better is the reason it has been more volatile in the last few quarters, maybe asking the impact beyond the simple math of how many systems you sell in a given quarter and the stocking associated with it, but why is that more volatile? Why are you not able to control that a little bit on a -- better on a quarter-to-quarter basis?

We saw a similar thing in Q2 where the revenue per procedure was a bit lower than norms, and here in Q4, and you had a bounce back in Q3. What we are calling out and into the quarter really is this timing of customer orders.

In this last quarter, it was timing of various types of orders, including stocking orders associated with new system sales, fewer of those coming through in the quarter than may have been according to historical norms. You have timing of orders with international distributors and just general timing of orders. As I mentioned earlier, not so much to do with things like procedure mix.

Is there a pattern to this? I think your question, is there a pattern, I don't think there is. I think these things just tend to fluctuate quarter to quarter and balance out over longer periods of time.

Okay, thanks very much, guys.

David Lewis, Morgan Stanley.

Gary, just two quick questions. Going back to chole for a second, earlier in the year you reduced the price of the chole instrumentation, which actually seemed to have a successful impact on driving incremental growth. Why do you think that strategy didn't have more staying power and would you consider further cuts in chole to drive adoption of that procedure?

Then kind of related, Gary, how do you think hernia and the market development around hernia is related and is there an opportunity to use a similar pricing strategy for hernia to drive adoption? And I had a quick follow-up.

Sure, so on the chole side on pricing, we think that where we are right now on chole pricing with Single-Site is really appropriate. If you look at a system that's getting average utilization, the consumables cost of that procedure, and compare it to multi-port alternatives, we think we are right in there in terms of being competitive and appropriate value for what Single-Site can bring.

So I think we are in a good spot there. I think the biggest thing, and Patrick alluded to it, and the biggest thing we are hearing back from our customers is that as they look at the competition for time on the robot, they're making decisions about which cases get scheduled and which ones don't. That's a near-term problem. I think in the US, we saw an increase in procedures per system, so that turned around in the year where we were building capacity in the beginning part of 2014; the field has now been consuming capacity on the robots in the US. I think hernia is driving that.

Part of that is this issue of which one does a surgeon and an institution find greater value in at the moment they have to make that decision. I think that has been a primary driver is that competition.

We will see over time if as capacity grows out and we have a broader set of options for them to choose from, whether that modulates. We will have to watch over the next few quarters and see how these two play together.

The economics of hernia are interesting and a little bit different. The laparoscopic hernia repairs use a different mix of instruments than choles do. It is a more expensive mix. Using one of our systems instead of laparoscopy allows for trade out of some more expensive laparoscopic instruments, and so our economic value there is well supported where we are currently. I think that looks really good.

The other thing is that not all hernias are an exchange between laparoscopy and da Vinci. A lot of them are still unopened -- a surprising number are still unopened and the economics also look good there. So hernia economics, the reports we're hearing back are pretty solid and we're feeling like we're in a pretty good position.

Great, Gary, very helpful. Just one quick question on Sp timing. It was encouraging to hear your conviction that the delay, then, for the system is moving according to plan, at least that's what I heard.

Just trying to understand the timing here. You're going to lease this product to physicians in the first half. You're going to collect feedback from those physicians in the second half, so I am assuming that feedback is going to get incorporated into the device. Is it safe to assume there can't be a design lock, then, of the system until the end of 2015 or early 2016, or can you submit additional modules to the FDA before you have a design lock, or am I just thinking about this the wrong way?

It's an interesting question. I think the answer is that you are always moving to a point at which you lock the design to allow for a submission, and then further feedback and iterations. A product design is fundamentally iterative, and when you make a decision to submit, it depends a lot on where you are, what you see, and what kind of performance you are seeing in the product.

So you ought to think about these as sequential locks, not a big one with a capital L. I think from a technology development point of view, I'm quite pleased. I think we have a fantastic team. I think that they are bringing technologies forward that we expect and that are going to make a difference.

Surgeon evaluation is part of the process, and so as those designs get to the point that it makes sense to get feedback, we will absolutely do it and we will do that through multiple forums, both in house and potentially out of house, and we will work through that.

Okay, thank you very much.

David Roman, Goldman Sachs.

Thank you for taking the questions. I wanted just to start with international, and if I look at the past two quarters, I think the third quarter you benefited from a pretty significant order in China. Then Q4 saw a nice step up in Europe.

Can you maybe just talk about the sustainability of this uplift outside the United States, and to what extent this is tied to some of the discretionary spending investments you have made over the course of the year versus either macroeconomic factors or other things we need to consider?

When we look out at -- just stepping back -- we look out at different opportunities outside of the United States, I think that there are interesting and durable long-term opportunities OUS.

Having said that, they can be really lumpy, and one of the reasons that we have seen the kind of capital lumpiness that you just described is because there are different market access requirements in different countries. For example, what approvals look like in China is totally different than what they look like in Japan and different again from what they might look like in different parts of Europe.

Long term, we are very positive and that is the motivation for the investments we make. Short term, expect lumpiness. It can require quotas or approvals or data submissions, and each country is a little bit different.

Okay, and maybe just a follow-up on the US and specifically the impact of the Xi system. Could you maybe give us some feedback now that we are three quarters into the launch on whether this type of -- this launch is playing out similarly to past ones, meaning that people really want to do colorectal, for example, and need the Xi to do it, or that people are getting the Xi and now they're building colorectal programs? How is the whole picture on some of those more advanced categories coming together, now that we are nine months into the introduction of the system?

I think -- first thing, the Xi launch has exceeded our expectations in terms of mix, just because in prior launches, we had fewer different instruments and accessories that had to be brought to the market concurrently with a system launch. Now we have things like Firefly and stapling and vessel sealing, a little more complex instruments, then. Those have been launched to the market in a staggered way, based on conversations with regulators and other pragmatic constraints.

So it was unclear as to when different folks would step in to acquire that system, and we were pleased with the rate at which Xi has been adopted in the US and in Europe, for that matter. So that part has been really good.

When you think about colorectal, just to go back to your assertion, colorectal was growing pretty nicely on the Si base already, so there had been interest in pursuit of colorectal. There is a group of surgeons who are both interested and skilled in moving forward, and Xi allows them to keep going.

In a sense, that's a virtuous cycle. You have some folks who have experience; Xi gives them a little greater capability. As they have stepped in and started to use that, they are starting to explore that greater capability and that drives further growth. We have seen that.

We have been also pleasantly surprised by feedback from some more of our longer-term customers in urology and general oncology who have also found benefit in Xi that perhaps exceeded what we thought they might in the very beginning.

That's helpful. If I could just sneak one more in here, Gary, you began the call, I think, with describing 2014 as a year of transition and macroeconomic headwinds, uncertainty about the Affordable Care Act. How would you describe the environment as we exit 2014 and as you've talked to customers in 2015, either on the capital side or the procedure volume side on a 12-month basis?

I think at the C-suite level, we are seeing their ability to forecast their business start to improve. They still have to make priorities. It's not like it's a windfall on all fronts, but they are able to project a little bit better than they were before. They've got a year of the Affordable Care Act under their belt and that gives them some confidence to start making some decisions.

That said, there are still capital priority discussions and other things within these institutions and those kind of conversations continue.

On the clinical side, I think the conversation is much the way it has been for the last couple years. I think folks are looking at outcomes and the cost or price they pay for those outcomes, and where they find value, then they are willing to invest and pursue. In that sense, we have been pleased with the growth of general surgery in the year. It has strengthened nicely as we have gone, and so that's how we have seen it.

Okay, understood. I appreciate all the feedback.

Rich Newitter, Leerink Partners.

Thank you for taking the questions. Gary, I was wondering just with respect to your comments on chole regarding the time availability factor that might be contributing to the pullback, and it sounds like it's a little bit of cannibalization into hernia, but what are you seeing in accounts where maybe Xi has been placed for a few months now? What are you seeing with respect to the trend of chole utilization? Is that alleviating some of the time constraint issues?

With regard to Xi systems?

Yes, so maybe where you had choles being done and an Xi was placed, which presumably, assuming it's not a first robotic placement, might alleviate some of the time availability issues.

Right, yes, it's actually a good question. I don't have the answer at my fingertips.

Okay, fair enough. Then if I could, on the procedure volume guidance, maybe Calvin, 7% to 10%, that's your range. Is it fair to assume the various momentum factors behind your different procedure categories in the fourth quarter, those are essentially how we should be thinking about the composition of growth comprising that 7% to 10%, or is it just a continuation of the trends we saw in 4Q and carry those over to 2015 to model that growth rate?

Yes, just at a high-level view, assumptions going into the 7% to 10% guidance range, we are anticipating a similar US gynecology and urology macro trends that we saw in 2014 continuing on into 2015 and we absolutely expect that US general surgery and international will continue to drive procedure growth in 2015, as they did in 2014.

Particular swing items that could move you towards the lower end or the higher end of the range would be changes in those macro trends in gynecology and urology. Those are large sets of procedures, and as we saw in this last couple of years, those things can definitely move the dial. Growth rates in early-stage US general surgery procedures, how they -- trajectory they follow is going to be important; the international growth side of things; and as was discussed a little earlier, just how successful we are with the Wristed Needle Driver contributions and how that may impact benign hysterectomy.

Okay (multiple speakers)

We will just take one more question, please.

Thank you.

Larry Keusch, Raymond James.

Gary, can we circle back to Sp and help us think about the procedures that, again, you are targeting on that system and how we should think about that relative to the current Single-Site system that is out there?

Sure. Rather than thinking about procedures, I would guide you to what does it do differently? Because I think it's early and it has a lot of long-term possibility, but predicting exactly which one is when is going to be hard.

What does it do differently? It delivers four computer-assisted or robotically-assisted instruments through a parallel access that can go fairly deep into the body through an entry point. When you think about that, you think about accessing the throat or the head and neck area transorally. You think about trans-umbilical things that might be able to be reached that are otherwise hard to reach with an architecture like Single-Site or trans-anal procedures or transvaginal procedures.

Now you can think a lot about and we think about what are the disease states that surgeons can affect, positively impact with a technology like that or an opportunity like that, and they are fairly diverse and pretty interesting. Then you have to go all the way through some of the testing and evaluation that we are talking about doing this year, which is what can actually be done and at what kind of efficiency and what kind of price points. That's where the heavy lifting is.

Long term, I think it will open some interesting doors. Near term, we are not ready to call procedure sizes for you yet.

Okay, and then just lastly, if you could maybe dissect a little bit about the procedures as you look through the year and talk a little bit about the seasonality that you saw actually in the benign procedures through the year. I am just curious if those -- if there are any observations that you can make relative to benign procedures (multiple speakers)

It's a good question. We will have Patrick jump in.

I think if you just look at the way in which the year played out, the first quarter tended to be a little bit weaker relative to the rest of the year, so from an extent you could say that there was more seasonality in some of those benign procedures over the course of the year.

That said, at the beginning of year there was also a lot of disruption with the implementation of the Affordable Care Act, so it's hard to necessarily pin it on seasonality. But to the extent that it was seasonality last year, just be aware because we still have a significant component of our business in those benign procedures.

That was our last question. Thank you. As we have said previously, while we focus on financial metrics such as revenues, profits, and cash flow during these conference calls, our organizational focus remains on increasing patient value by improving surgical outcomes and reducing surgical trauma.

I hope the following assessment of our latest system, the da Vinci Xi, by Dr. Harkins, a Texas general surgeon, gives you some sense of the impact our products have in surgery. Quote, despite my obvious interest in minimally invasive surgery, I had resisted adopting previous da Vinci platforms because of what I felt were limitations. The da Vinci Xi platform is a game changer for me. I now feel that this technology will not just equal my standard laparoscopic abilities, but actually allow me to reach new levels in providing surgical care to my patients, end quote.

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

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

Ladies and gentlemen, again, that does conclude our teleconference call for this afternoon. Again, thank you very much for your participation and you may now disconnect.