直覺手術 (ISRG) 2015 Q4 法說會逐字稿

Welcome to the Intuitive Surgical Q4 2015 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)

As a reminder, today's conference is being recorded and now I would like to turn the conference over to the Senior Director of Finance for Investor Relations for 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, Senior 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 5, 2015 and 10-Q filed on October 21, 2015.

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 our highlights from 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 fourth quarter financial results, Patrick will discuss marketing and clinical highlights, and I will provide our financial outlook for 2016 and finally, we will host a question-and-answer session.

With that, I will turn it over to Gary.

Good afternoon and thank you for joining us on the call today.

2015 was a good year for Intuitive with increased use of our products around the globe and solid operational execution.

Our focus in 2015 was to drive adoption of our platform in general surgery, expand our da Vinci Xi Surgical System product line, increase our organizational capability and performance in international markets, and improve contribution margins for our newly launched products.

Themes that emerged at the close of 2014 continued into 2015, with strong performance in general surgery and international procedure growth.

Full-year global procedure growth was approximately 14%, led by growth in general surgery, growth in the use of da Vinci Surgical Systems outside the United States, and strength in urology.

US general surgery growth was approximately 31% for the year, made up of strong growth in inguinal hernia repair, ventral hernia repair and colorectal surgery.

Use of single-site in cholecystectomy and hysterectomy declined for the year.

Outside of the United States, procedure growth was strong, rising approximately 26% over procedures in 2014.

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 2015 to 492 from 431 placements in 2014.

Customer interest and acceptance of our latest Platform, da Vinci Xi, has been positive, with Xi making up the majority of placements for the year.

In 2015, we shipped 298 systems in the United States, 90 in Europe, 77 in Asia, and 27 in other global markets.

Our operations teams remain focused on optimizing our manufacturing, design and supply chains for our newer products.

Progress in the back half of 2015 has been solid, with steady improvements in reducing product costs for our new systems and advanced instruments.

We expect our product cost to continue to improve in 2016 and 2017 as a result of these efforts.

As we have said before, our offerings make up an ecosystem designed to encompass our customers' needs in building and running outstanding robotic surgery programs.

2015 was the year in which we focused on enabling our ecosystem with new product launches globally.

We launched our da Vinci Xi system with a core set of instruments, Vessel Sealer and Firefly Fluorescence Imaging in 2014.

We broadened our access to our Xi System with international regulatory clearances through the year.

We also added our 45-millimeter Xi stapler in Q1 as well as Harmonic Curved Shears and a second set of instruments in Q2 of 2015.

We submitted our 510(k)s for our 30-millimeter stapler for Xi, single-site instrument kit for Xi as well as other Xi accessories in the second half of 2015.

I am pleased to report that we obtained FDA clearance for Integrated Xi Table Motion this month.

In addition to products, our surgeon customers can choose from dozens of training courses provided by academic surgeons as well as courses designed for assistants and other operating room staff.

Our customers own over 1,400 surgical simulators and over 600 dual consoles to assist them in technology training.

In addition our teams have provided detailed analytic and operational support for customers seeking to optimize and benchmark their programs relative to international norms.

We believe the combination of these products and services are important to fully enable our customers.

Looking back at the full year of 2015, our operating performance is summarized as follows.

Worldwide procedures grew by approximately 14%.

We shipped 492 da Vinci Surgical Systems in the year, up from 431 in 2014.

Total revenue was $2.4 billion, up 12% from 2014 and up 15% on a constant currency basis.

Recurring revenue grew to $1.7 billion, up 11% and comprising 70% of total revenue.

We generated $946 million in pro forma operating profit, up 16% from last year.

Pro forma net income was $731 million, up 20% from 2014.

And we repurchased 366,000 shares at an average price of $502 per share during 2015.

Turning to our operating performance for the fourth quarter, procedures grew approximately 15% over the fourth quarter of last year.

We shipped 158 da Vinci Surgical Systems, up from 137 in the fourth quarter of 2014.

Total pro forma revenue for the quarter was $677 million, up 13% from prior year.

Instrument and accessory revenue increased to $326 million, up 16%.

We generated a pro forma operating profit of $293 million in the quarter, up 28% from the fourth quarter of last year and pro forma net income was $224 million, up 22% from Q4 of 2014.

As we look to the future, we passionately believe that robotic-assisted surgery is in its infancy in application and technology.

As we have improved our cost and supply chains for new products, we anticipate increasing our investments in key areas that will enable and drive the future of robotic-assisted surgery.

These include product investments in advanced imaging, advanced instrumentation and next-generation robotics.

We will also continue to invest in procedure, product and program analytics, international market development, and economic and clinical validation.

Looking to 2016, our priorities are as follows.

First, we will focus on the expanded use of da Vinci in general and thoracic surgery, particularly colorectal surgery and hernia repair.

Second, we will work to advance our ecosystem, including expanding our Xi line and taking our SP Product line into initial clinical use.

Third, we will drive our organizational capabilities in markets in Europe and Asia and finally, we will continue to assist our customers in their efforts to maximize the comprehensive value of their programs.

I'll now turn the call over to Marshall, who will review financial highlights.

Thank you, Gary.

I'll be describing our results on a non-GAAP, or pro forma basis, which excludes the impact of our prior-year Xi trade-in programs, legal settlements and legal claim accruals, stock-based compensation, amortization of purchased IP, and investment impairments.

We provide 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 posted reconciliations of pro forma results to our GAAP results on our website so that there is no confusion.

Pro forma fourth quarter revenue was $677 million, an increase of 13% compared with $601 million for the fourth quarter of 2014 and an increase of 15% compared with last quarter.

Pro forma revenue for the fourth quarter of 2014 excludes $4 million of revenue associated with offers made in 2014 to trade out SI product for Xi product.

All trade-out offers were either fulfilled or lapsed in 2014.

Fourth quarter 2015 procedures of approximately 177,000 increased 15% compared with the fourth quarter of 2014, and increased 9% compared with the third quarter of 2015.

Procedure growth was primarily driven by general surgery procedures in the US and urology worldwide.

Revenue highlights are as follows: Pro forma instrument and accessory revenue increased 16% compared with last year and increased 9% compared with the third quarter of 2015.

The increase relative to prior year reflects procedure growth and increased sales of advanced instruments partially offset by the impact of foreign exchange.

The increase over the prior quarter reflects procedure growth and sales of advanced instruments, partially offset by customer buying patterns.

Instrument and accessory revenue realized per procedure, including initial stocking orders, was approximately $1,840 per procedure.

This metric has now been trending in a tight range between $1,830 and $1,840 per procedure over the past year with recent quarters reflecting higher sales of advanced instruments, offset by the impact of foreign exchange.

Pro forma system revenue of $231 million increased 9% compared with last year and increased 32% compared with last quarter.

The increase relative to the prior year primarily reflects increased unit sales.

The increase relative to the third quarter reflects increased unit sales, partially offset by lower ASPs.

158 systems replaced in the fourth quarter compared with 137 systems in the fourth quarter of 2014, and 117 systems last quarter.

Approximately 72% of the systems shipped in the quarter were Xi, which is comparable to prior quarters.

Globally, our average system price of $1.550 million was comparable to the fourth quarter of 2014 and slightly less than the $1.600 million ASP last quarter.

Relative to the prior year, increases related to a lower trade-in mix were mostly offset by foreign exchange.

The decrease relative to the third quarter reflects geographic mix and a lower proportion of Xi dual consoles.

ASPs fluctuate quarter to quarter based on geographic and product mix, trade-in volume and changes in foreign exchange rates.

Hospitals financed approximately 17% of the systems placed in the fourth quarter, down from 25% last quarter.

We directly financed 20 systems, including placing the most operating leases, 16 since we began our direct leasing program in the second quarter of 2014.

As of the end of the fourth quarter, 49 of the 3,597 systems out in the field were under operating leases.

We exclude the impact of operating leases from our system ASP calculations.

Service revenue of $120 million increased 9% year-over-year and increased 2% compared with the third quarter of 2015.

The year-over-year and quarter-over-quarter increases reflect the increase in our installed base of da Vinci systems.

Outside of the US, results were as follows: Fourth quarter pro forma revenue outside of the US of $219 million increased 11% compared with $198 million for the fourth quarter of 2014 and increased 45% compared with $151 million last quarter.

The increase compared with the previous year reflects higher system unit sales and higher recurring revenue driven by procedure growth of 27%.

Outside the US, we placed 75 systems in the fourth quarter compared with 66 in the fourth quarter of 2014 and 37 systems last quarter.

Current quarter system sales include 13 into China, 11 into Japan, 8 into Italy, and 7 into Brazil.

System placements inside the US will continue to be lumpy, as some of these markets are in the early stages of adoption; some markets are highly seasonal, reflecting budget cycles or vacation patterns; and sales into some markets are constrained by government regulation.

The pro forma gross margin for the fourth quarter of 2015 was 69.6% compared with 67.1% for the fourth quarter of 2014 and 69.3% for the third quarter of 2015.

Compared with the fourth quarter of 2014, the higher gross margin reflects lower inventory charges, improved efficiencies, partially offset by foreign exchange, and a higher mix of our newer products which carry lower gross margins than our mature products.

Gross margin includes the impact of the medical device tax, which has been suspended for the next two years.

The medical device tax reduced our 2015 gross margin by approximately 70 basis points.

Future margins will fluctuate based on the mix of our newer products and whether we are required to pay the medical device tax and costs associated with manufacturing efficiencies and product charges.

In 2014, we recorded pre-tax charges of approximately $82 million, representing the estimated cost of settling a number of product legal liability claims under a tolling agreement.

During 2015, we refined our estimate of the overall cost of settling claims and recorded additional charges of approximately $14 million in the first half of the year.

There were no charges in the second half of 2015.

Charges made related to this agreement are excluded from our pro forma results and are included in our GAAP results.

As of the end of the fourth quarter $24 million remained accrued on our balance sheet as a significant portion of the estimated costs have been paid.

Pro forma operating expenses, which exclude reserves for legal claims, stock compensation expense, and amortization of purchased IP increased 7% compared with the fourth quarter of 2014 and increased 6% compared with last quarter.

The year-over-year increase of pro forma operating expenses primarily reflects headcount additions and higher incentive compensation.

The increase relative to the third quarter primarily reflects increased incentive compensation.

Our pro forma effective tax rate for the fourth quarter was 24.9% compared with an effective tax rate of 23.5% for the fourth quarter of 2014 and 18.4% last quarter.

The effective tax rate for the third quarter of 2015 included tax benefits of $29 million, or $0.77 per share, related to a recent favorable tax court ruling involving an independent third party.

In late December, Congress renewed the Federal Research and Development Credit resulting in a benefit of $6 million, or $0.17 per share.

Congress also made the R&D tax credit permanent so our 2016 rate guidance will reflect this benefit.

Our tax rate will fluctuate with changes in the mix of the US and OUS income.

Our fourth quarter 2015 pro forma net income was $224 million, or $5.89 per share, compared with $184 million, or $4.92 per share, for the fourth quarter of 2014, and $199 million, or $5.24 per share, for the third quarter of 2015.

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 $677 million for the fourth quarter of 2015 compared with $605 million for the fourth quarter 2014 and $590 million for the third quarter of 2015.

GAAP net income was $190 million, or $4.99 per share, for the fourth quarter of 2015 compared with $147 million, or $3.94 per share, for the fourth quarter of 2014, and $167 million, or $4.40 per share, for the third quarter of 2015.

We ended the year with cash and investments of $3.3 billion, up from $3.1 billion as of September 30, 2015.

The increase was primarily driven by cash generated from operations and proceeds from stock option exercises, partially offset by stock buybacks.

During the quarter, we repurchased approximately 167,000 shares for $84 million at an average price of $505 per share.

This brings our total stock repurchases for 2015 to approximately $184 million.

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

Thanks, Marshall.

Total fourth quarter year-over-year procedures grew approximately 15%, with US procedures growing approximately 12%, and international procedures approximately 27%.

Full-year 2015 procedure growth was approximately 14%, with US procedures growing approximately 11% and international procedures growing approximately 26%.

In the US, fourth quarter procedure growth of approximately 12% was driven by continued strength in general surgery procedures with solid contribution coming from mature procedures despite already high levels of market penetration.

We do not expect the strong 2015 growth in established US urology and gynecology procedures to continue in 2016.

In US urology, fourth quarter growth in da Vinci prostatectomy and kidney cancer procedures continued at similar rates as earlier in the year.

We continue to believe that our US prostatectomy volumes have been tracking to the broader prostate surgery market.

In 2015, procedure growth in US urology was approximately 12%, led by an approximate 11% growth in da Vinci prostatectomy.

We expect US da Vinci prostatectomy procedure volumes to return to a level more in line with prostate cancer incidence rates moving forward.

In US gynecology, fourth quarter procedures grew modestly year over year, with growth in malignant and complex hysterectomy partially offset by declines in benign procedures.

During 2015, a larger proportion of da Vinci hysterectomy procedures were performed by gynecologic oncologists compared to 2014.

For the year, growth in US gynecology procedures was approximately 1%.

In 2016, sustaining growth in US gynecology may be a challenge, as we believe the total market for benign hysterectomies will continue to decline at a low single-digit rate.

Fourth quarter growth in US general surgery remained strong, with robust growth in hernia repair and continued adoption of colorectal procedures being partially offset by continued declines in cholecystectomies.

US general surgery procedure growth was approximately 31% for the year with broad-based growth across several procedures led by hernia repair, which generated the largest number of new general surgery procedures.

Growth in colorectal resections was also strong during 2015.

In 2016, there remains a large opportunity in hernia repair and colorectal resections and driving adoption in these markets remains among our top priorities.

During the quarter, a group of general surgeons led by Dr. Vorst from St.

Joseph's Mercy Health System, and Dr. Carbonell from the University of South Carolina School of Medicine published their perspective on advances in ventral and incisional hernia repair in the World Journal of Gastrointestinal Surgery.

Within the paper, data comparing the robotic to open Rives-Stoppa technique for more complex hernias favored the robotic approach with a reduction in blood loss, shorter length of hospital stay, fewer surgical site infections, and no difference in operative times or direct costs.

The paper states that robotic approach, quote -- permits relatively easy access to the interior abdominal wall, allowing the surgeon to perform the ideal repair for that patient.

It also might allow for standardization of surgical technique in order to develop a reliable approach to hernia repair that can be offered to an increasing number of patients -- close quote.

Regarding our US single-site business, cholecystectomy volumes continued to decline during the fourth quarter, though mostly offset by a growth in multi-port cholecystectomies.

In addition, our single-site gynecology procedure volumes declined in the fourth quarter.

Taken together, single-site procedures represented less than 5% of our fourth quarter US procedure volume.

Looking abroad during the fourth quarter, the approximate 27% international procedure growth was led by the global adoption of da Vinci prostatectomy, with solid contributions from kidney procedures, malignant hysterectomies and colorectal resections.

For the full-year, procedure growth was approximately 26%.

Procedure growth in Europe remained steady throughout 2015.

In Asia, procedure growth was led by a broad-based adoption China and South Korea and da Vinci prostatectomy adoption in Japan.

During 2016, we expect several external factors to impact international procedure growth.

In Japan, the Surgical Society has submitted for reimbursement of partial nephrectomies to the MHLW.

Pending the MHLW's decision this may serve as a tail-end to Japanese procedure growth.

In China, we have placed 32 of the 38 da Vinci systems under the current authorization.

And sustaining strong procedure growth throughout 2016 may require additional authorizations from the government.

During the quarter, the global evidence for the cost-effectiveness for the use of da Vinci surgery in gynecologic oncology continued to build.

A new study from Copenhagen University Hospital by [Dr.

Hurley] and colleagues modeled the clinical and economic impact of the adoption of da Vinci for malignant hysterectomies, capturing the comprehensive cost of care associated with these interventions.

The study compared 158 open hysterectomies to 202 da Vinci hysterectomies.

We found the da Vinci hysterectomies were 17% less expensive than open hysterectomies based on operating costs, and 7% less expensive than open hysterectomies when the da Vinci System cost was included.

The study found the cost savings associated with fewer complications and shorter hospitalization more than offset the incremental cost associated with the use of da Vinci technology in the operating room.

2015 was a robust year for clinical publications featuring da Vinci surgery, with over 1,600 papers published during the year, bringing total clinical publications to over 10,000.

This concludes my remarks and 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 2016.

Starting with procedures.

As described in our announcement last week, 2015 total da Vinci procedures grew approximately 14% to roughly 652,000 procedures performed worldwide.

During 2016, we anticipate full-year procedure growth within a range of 9% to 12%.

We expect similar seasonal timing of procedures in 2016 as we've experienced in previous years, with Q1 being the seasonally weakest quarter as patient deductibles are reset.

With respect to revenue, we expect 2016 capital sales to follow historical seasonal patterns, which we anticipate will become more pronounced, with Q1 being sequentially lower than the recently completed Q4.

System placements will likely continue to be lumpy, particularly in markets outside of the US, as some of these markets are in early stages of adoption.

Some markets are highly seasonal, reflecting budget cycles or vacation patterns and sales into some markets are constrained by government regulations.

Turning to gross profit.

We expect our 2016 pro forma gross profit margin to be within a range of between 68% and 69.5% of net revenue.

Our actual gross profit margin will vary quarter to quarter, depending largely on product and regional mix.

Turning to operating expenses.

As Gary mentioned, we will be increasing our investments in key areas that will enable and drive the future of robotic-assisted surgery.

We expect to grow 2016 operating expenses between 9% and 13% above 2015 levels.

We expect our non-cash stock compensation expense to range between $170 million and $180 million in 2016 compared to $168 million in 2015.

We expect other income, which is comprised mostly of interest income to total between $20 million and $25 million in 2016.

With regard to income tax, we expect our 2016 pro forma income tax rate to be between 26.5% and 28.5% of pre-tax income, depending primarily on the mix of US and OUS profits.

This forecast does reflect the reinstatement of the R&D tax credit in 2016.

That concludes our prepared remarks.

We will now open the call to your questions.

(Operator Instructions)

David Roman with Goldman Sachs.

Thank you.

Good evening everybody.

I wanted to start with one strategic question and one follow-up on the financial guidance Calvin just provided.

Maybe on the strategic side, I was hoping, Gary, you could go into your thoughts as it relates to the competitive landscape in robotics.

We've heard over the past several months, and now since from a couple of emerging competitors and there's an expected announcement from another competitor later in 2016.

Can you maybe talk about how you envision the competitive landscape unfolding and some of the activities you may be undertaking to prepare Intuitive from moving one a monopoly-type market to one that has multiple players?

Sure.

As we look out at value and competition, at the end of the day, value is going to be driven by the ability of these products and services to drive and create outcomes and compare or weigh it against the price of those things.

We think about it as an ecosystem.

We think the ecosystem is really important, so it's easy to think just about the robotic systems because that's the most visible part.

But there's the systems, the instruments and accessories, the advanced instrumentation, like stapling, imaging systems for us in imaging, training technologies like simulators and dual console, clinical validation, training courses offered by academic surgeons, that number in the dozens.

That whole set of products in ecosystem what we think is important, and so as competitive enter, they have to choose.

Can they show that value in terms of outcomes in price and can they offer this set of ecosystem elements that are going to be useful.

We've known for years and have anticipated for years.

We didn't wake up yesterday and think competitors are coming, we better to do something.

So we've been thoughtful about what we need to do to create value for our customers.

We have a range of products in the system side that hits different price points for different feature content.

We have different options that are available in terms of instrumentation price points, and so we think we're really well-positioned.

There are some other companies out there that will be capable.

We expect that customers will explore what they're offering.

We think we're well-positioned when that exploration occurs.

Okay, that's helpful and then maybe just to go into the financial side for a second.

I want to understand what you're saying on the margins for 2016.

The gross margin range seems to imply that on an underlying basis when you take out the benefit of the medical device tax you're seeing a deterioration from where you exited the second half of 2015.

What are the factors influencing that math?

And then on the OpEx side, the 9% to 13% represents a pretty decent acceleration from what we saw this year.

Can you maybe help put some of those investments into context?

Where those dollars are going and whether 2016 represents a new normal year of investment spending or there's something particular that you're after this year?

Sure, David.

I'll will take you through some of the gross profit commentary and let Gary take you through some of the investments on the OpEx side.

Like Gary said on the call, we're focused on reducing our cost of the new products and we've been managing our fixed costs very carefully.

We are pleased with the progress we've been making throughout 2015.

Our second half 2015, gross profit benefited from favorable product mix: essentially zero product charges and other favorable outcomes.

In 2016, we do expect to deliver continued cost reductions on the newer products including the Xi, Stapler, Vessel Sealer and Xi endoscopes.

At the same time, as compared to the second half of 2015, we'd expect a higher proportion of 2016 sales to be of the newer products.

We'd expect a lower proportion of dual console systems sales, probably a higher proportion of system sales involving trade-ins and probably some product charges.

At some point, may be more in-line with historical norms from the past and while FX is not likely to be a strong a headwind as it was in 2015, it does appear as though it will have some negative impact on revenue and margins.

And then lastly, I'd say from the competitive side, any pressure there, the impacts of that are unknown at this stage.

On the investment side, as I mentioned in the script, we think that there is significant opportunity to improve what surgeons can see during cases, improving imaging for a variety of means technologically and we have been working on that for years and we will continue to do so.

I think there's great potential there.

On the instrumentation side, we are expanding our stapling line and our advanced synergy lines, the reception has been quite good.

Those are not single instruments; they are really families of instruments and we are filling out those families as we go.

We feel good about it and think it's important.

And we will continue to invest there and we think that there are opportunities in robotics in terms of both structure, things like SP and other things that can change different segments of the market that can allow us to enter other procedures that we're not currently in today or access other regions of the world that may have different needs.

And so we will continue to invest in those things.

Okay.

I appreciate all the detail.

Thank you.

David Lewis with Morgan Stanley.

Good afternoon.

So I want to come back to margins here for a second.

The spread on margins and Marshall and Calvin, are $68 to $69.50, it's a wider spread.

I don't think you gave us this spread last year.

What defines the upper end and lower end of those ranges and secondarily, when I think about these product manufacturing improvements you're making, we seem to have a substantial impact on gross margins in the second half of the year.

I would presume those advantages or those costs would be a bigger tailwind in 2016 over 2015; is that a correct statement?

Those two questions and I have a quick follow-up.

To characterize the cost reductions, they had some impact in the second half of 2016.

They -- or 2015, sorry.

They will have a more significant impact than 2016 and 2017.

And we -- as Calvin had said, we will continue to focus on reducing the costs.

I think the bigger improvement during 2015 had to do with the lack of product charges that we mentioned in Q1.

And as we move forward, the range is really -- or the breadth of the range is really reflective of the items that Calvin gave you, which is that we expected to see a higher proportion of newer products.

The extent of that we will see.

We expect to see a lower proportion of dual consoles and a higher proportion of trade-ins.

The mix of systems is always difficult to predict and frankly, geographic mix also has an implication here.

As I said in my script, there's quite a bit of lumpiness to some of the geographic market.

Okay and then Gary, just a quick strategic and margin question for you, as well.

So, the expenses we saw a couple years ago, you made a selective decision to just reinvest.

Is that a -- this is a 50% increase in OpEx spending relative to 2015.

400 basis points to 500 basis points above.

Is it -- do you see this similarly as the opportunity to reinvest and is the investment spend heavier on SG&A or R&D?

And the follow-up is just on SP, as you mentioned, in light of what is happening with single-site procedures, does that change your thinking of the opportunity around SP?

Sorry for the couple questions there.

Thank you.

Sure.

In terms of the balance of investments, it really is targeted in a couple areas.

R&D is clearly one area that we'll get investment.

And then support for international markets and some of those things are more structural, not necessarily just sales folks but clinical trials and other things.

That's where the balance or the bulk of that increase is going to lay, and we think we have technologies that are important and we think we have process that we can bring that's important and that will serve us well in the long-term and in the future.

With regard to SP, these are the single-site.

We think that SP enters and adds value in a different place than single-site does.

Single-site tended to work on a little bit more limited workspace, a little bit more constrained set of procedures.

SP is both broader and more capable.

Price points are a little bit different.

So we think about SP, when we think trans-oral, trans-anal, colorectal, places where there's specimen removal.

So we look at those things, and we think about it.

SP is less oriented towards cosmetic benefits and more oriented towards being able to reach complex structures where you need to.

Thank you very much.

Tao Levy with Wedbush.

Great.

Thanks.

Good afternoon.

So maybe we can start with US system utilization.

When you do the math, you're reaching peak levels here in the US in terms of averages.

What's the dynamic currently in the marketplace whereby hospitals or -- could potentially accelerate the addition of new systems in order to, again, meet your procedure growth expectations that you've laid out?

Yes, I think as we've laid out -- make sure I interpret the question right.

I think as we look at utilization patterns, one thing is important to remember in the United States -- around the world but in US as well is, there is not a single customer profile that fits them all.

So the average does not cover all the endpoints.

We definitely see some integrated delivery networks who are very interested in optimizing procedures per system per year.

Trying to drive that up to get better capital utilization and we will help them do that.

We see other health systems that may be in the exact same market who are really interested in driving convenience for patients and for their surgeons, and are willing to invest in capital once they get to a minimum hurdle rate for procedure utilization.

We see both.

Predicting which of those strategies is going to dominate into the year is always a little bit hard.

At the end of the day, we really focus the organization on great utilization and great support, whichever our customer wants to take us down.

Okay, great.

Just my follow-up.

You've talked a couple of times about investing more and more into imaging.

Aside from Firefly, we haven't seen anything very significant come out of the Company.

So maybe you could highlight a couple of the interesting projects within imaging that we should be paying attention to.

Thanks.

Sure.

I think -- first statement is, I beg to differ, but I look at the imaging platform that we brought out with Xi and it's fundamentally different technology basis: distal chip imaging.

It gives us room to do some things from usability reach and workflow point of view that were very hard to do otherwise.

And so we continue down that pathway.

So for example, in Xi, you can move the scope arm to arm.

There's not a dedicated robot to hold one endoscope so that gave you the idea of corehopping, the ability to look around the abdomen differently.

The other thing that distal chip imaging gets you is the ability to articulate your endoscope, which is a part of the SP product line is endoscopic articulation.

We continue to invest in that set of technologies and expand our leadership position there because I think that both, you can get better image quality and more flexibility and better price points by doing that technology.

That's one set of investments.

The other set is, as you mentioned, with Firefly, the ability to look and see things that you can't see easily with a white light.

The ability to look and see beneath tissue or to highlight tissue structure and they're a set of technologies there that are useful and we're investing in.

But those are longer term.

They take a while to develop and as we get further down the pipeline, we will share with you where we are.

Great.

Thank you.

Ben Andrew with William Blair.

Good afternoon.

Thanks for taking the questions.

On the initial SP use, Gary, that you talked about and you listed a few applications there.

Should we assume that's where we will see some initial clinical work and when might we see results from those either published or discussed?

Is that later this year, next year that maybe leads to next steps of commercializing the product?

Right.

Yes, in terms of the first question of those are places we are intending to explore, so colorectal and trans-oral.

We will also explore other places in time, but those are our initial experience -- we expect to have our initial experiences.

In terms of timelines, I'm not ready yet to tell you when in the year it will happen.

We're still in conversations with regulatory bodies about the pathway and so as we get some clarity there then we will describe it to you later in the year.

Okay, and in that same vein, if you look out three or four years, can the SP platform be a material percentage of the Company's volumes?

Or is this something that probably remains a niche given the price point and we shouldn't really think differently about the distribution in maybe 5% or 10%, if you will?

I think that it offers surgeons a different way to think about getting into the body in a different approach.

It can deliver a lot of capability in a small package, parallel into the body and it can move about the body quite easily in terms of multi-quadrant access.

So I think it's hard to predict long-term.

I think for sure, near term, there are niches that I think it matters.

Whether those niches grow into bigger opportunities, I think remains to be seen.

Having said that, the history of Intuitive and the history of technology is that as you bring raw technology into the hands of experts and they start to use it and develop it a way leads to way.

And I believe that.

I think that we will see things that develop as surgeons get deep with it.

How big that gets?

Impossible to predict right now.

Okay and then lastly, for me.

Thank you for taking the questions, by the way.

The range of procedure guidance is a little wide to start the year, obviously.

And let's just try to isolate one, in fact, if we can.

China.

So if we don't see another authorization for system sale, is that a material impact within the range?

Is that a percentage point or 2 percentage points in terms of a potential swing?

Or how should we look at the example of China specifically?

Thanks for the question, Ben.

When it comes to procedure guidance, our focus is going to continue to be on driving growth in general surgery in our international markets including China.

When you look at the breadth of the range to your question, there's far bigger impacts than just the system authorization in China.

When it comes to the mature procedures in the US and the rates of growth that we may see there that benefited us in 2015.

And certainly across a much wider range of markets.

Okay.

Great.

Thank you.

Matt O'Brien with Piper Jaffray.

Hi everyone.

This is actually JP in for Matt.

Thanks for taking my questions.

I just want to get back to the margin profile for next year and ask it in a more simpler way.

So, if you exclude the 70 basis points that you gained from the med tax credit given the guidance you gave for OpEx next year, would we be expecting the adjusted EBIT margins to actually be down year over year?

I think there are lot of layered assumptions that go into the model and we don't have specific guidance that relates to that.

Revenue would be one of the factors certainly underlying the overall assumptions there.

I think what we tried to do is lay out a lot of the factors that would be impacting the gross margin, as well as investments we're making on the expense side.

Got it.

And if I could ask one on the recent clearance for the Integrated Table Motion.

How is that sale going to be, and how are you guys going to get revenue from that?

Is that going to be sale from Trump's Medical and you have got a piece of the revenue, or how would that work?

Trump will sell the Table in an independent transaction to the hospital.

What we get out of it is we sell a software upgrade package for the table that allows it to be -- to operate it in an integrated fashion.

I think for us, the key here is we're working to make the operation more efficient, right?

This will make the ability for surgeons to reposition the patient without having to withdraw the robot arms to re-dock, doing a procedure, make it more efficient, and therefore benefit certain group of procedures and hopefully drive adoption in them.

I think that's really the key benefit from our perspective.

Great, thank you.

Bob Hopkins from Bank of America.

Thanks and good afternoon.

So, I wanted to ask a question about 2016 revenue growth to start.

Can you give us a sense as to where you see incremental opportunities for acceleration?

So what are the areas where you see your product categories, where you see the potential for accelerating revenue growth or entirely new growth drivers in 2016 versus what you experienced in 2015.

And obviously, we're well aware of what the major growth drivers are.

I'm curious about the things that potentially are available to you in 2016 that weren't available in 2015.

So we look at 2016 in a couple places.

I think that we have opportunities in o-US markets in various places that are important to us.

Now, there are some structural things that we have to overcome and invest in and sometimes there's reimbursement and sometimes there are other parts of market access.

And we will do that, but I think the opportunity there is quite good.

I think in terms of other verticals we are working on a 30-millimeter Stapler.

The 30-millimeter Stapler is really targeted at thoracic procedures.

Xi System design is -- has a -- part of its design intent was to facilitate thoracic procedures and we are in early days there.

So as time goes on, I don't think that's something that's going to leap out of the gate in the beginning part of the year, but things we are investing in from a product and support point of view, that should build momentum over the next multiple quarters.

Marshall, to follow-up on two quick things.

On the revenue per procedure number and you highlighted that's been very stable within a range, but it feels like the cadence of new products will pick up as we move forward there.

Can we expect that line item to start moving back up towards the old highs as we go forward here?

And then the other quick thing I wanted to ask of you is that I appreciate the comment that 70% of revenues now come from disposables.

Can you give us a rough sense as to what the relative profitability of that disposable stream is versus the capital side of the business?

Yes, so first, talking about the range of I&A revenue per procedure, we would hope that we would be able to add to that number through increases in the advanced instrumentation, including stabling and vessel sealing.

As I said, that's been somewhat muted or offset by the effects of foreign exchange over the last few quarters but there are other factors that could change that.

I don't know what the historical high you are speaking about was, but I do think that there is room for it to grow going forward.

It was about $2,000, I think.

Remember that number has in it stocking orders and some timing of other things.

So longer term, as you have a bigger and bigger install base, the relative value of stocking orders is going to go down and that has nothing to do with the pure economics of the exchange.

The other question was around recurring revenue and remember, it's not just instruments; it is also service.

It's about 50% instruments and accessories of revenue and 20% would be the service element to get to the 70% total recurring.

And the margins on instruments and accessories are better than systems.

So as we get a quarter where we have a higher mix of systems than the margins are going to be lower.

That trend is likely to be durable with I&A and service will be higher margin systems.

Great.

Thank you very much.

Brandon Henry with RBC Capital Markets.

Thanks for taking my question.

So Intuitive has now shown two years of strong US urology growth.

Can you discuss the reason for this outperformance in urology and how sustainable you think this strong performance is in 2016?

Brandon, thanks for the question.

A year ago, you saw a turnaround in the volumes of da Vinci prostatectomy in the US, midpoint of the year and the back half of the year started to see some growth and that sustained throughout 2015.

And the rate of growth has been certainly above what we believe the incidence rates of prostate cancer to be in the country.

Also within US urology is growth in partial nephrectomy, as well, which has been pretty consistent and sustained, given the profile of what da Vinci technology brings to that procedure from both the clinical outcomes and cost-effectiveness perspective.

As we look at 2016, our baseline assumption is that the high levels of growth that we've seen over the last six quarters are likely to begin returning more towards the incidence rates for the disease.

Okay and then one quick question on SP.

Can you talk about why you decided to develop SP as essentially an add-on to the Xi Platform and not as its own stand-alone platform?

And then maybe also talk about your expectations for SP instrumentation at launch.

Do you anticipate having a Vessel Sealer and Stapler at launch that will work with SP?

Thanks.

On the reason to make it compatible with Xi, I think is really a straightforward thing, which is a lot of the components are shared in terms of certain console and Imaging Systems.

We want the customer experience to be seamless for our customers.

We think there are surgeons who go back and forth between SPs and Xi and what that means is that you want the user experience to be common.

And we also make it easier for hospital departments to acquire capital.

If they already have a dual console or Xi and they want to just add the SP card capability that makes the capital hurdle for them lower and so it strengthens the Xi ecosystem and I think that is a good idea and it's well received.

So that has -- made sense for us.

We haven't yet announced what our instrument kit will be for SP and when we get to the point, we will let you know.

Okay.

Thank you.

Richard Newitter with Leerink Partners.

Hi.

Thanks for taking the questions.

Maybe just one on SP and then I had one on the rotating bed.

On SP, Gary, did you say that you are moving into clinical testing or some limited launch by the end of this year?

Does that mean that's your official launch at the end of 2016?

And --

We don't expect material revenues in 2016.

We are planning on clinical experiences in 2016.

Okay, got it.

And then on SP, on the approval process, I know you said that it's in discussion with the FDA right now.

There is a competitor of yours that has a device that they are saying that they think they can get approval for their device based on larger buckets, or broader definitions of categories like urological procedures or general abdominal procedures.

Can you help us understand if this is something that you have heard the FDA say to you as well, or is it more nuanced than that and you need to go much more specific by individual procedures?

The issue of broad claim language versus narrower claim language is actually was part of a discussion at the FDA workshop, and I can refer you to there those minutes, and you'll see pretty much what the exchange has been.

The issue -- I would not view that as something that is architecture dependent or only offered to a certain company.

That has to do -- in other words, FDA is going to respond to these kind of products in like manner as far as I can tell.

And so that comes down to FDA asked for a certain amount of data based on the kinds of things you want to talk to your customer about.

And if you just want to talk about broad things and not specific things, then they asked for one set of data.

And the more specific you get, the more data they asked for around that set of specifics.

So, in general, it is a matching of data requirements with claims, and so they are describing to you a strategy around what they think they can do from a data requirement point of view.

I think the playing field will be level here and to the extent the customers need a certain amount of information, then it's just going to be for all of us to go create that data and deliver it.

Got it and just lastly on the bed.

Can you help us understand what procedures, if any, or certain types of surgeons that might have been on the sidelines for whom this product might push them over the fence and really drive adoption on procedures that otherwise might have been slower to adopt?

Are there any other specific procedures that could really open up?

Thanks.

General surgeons routinely use that motion to do two things.

To use gravity as a retractor, so it's an extra hand using gravity.

And for the anesthesiologist to manage the patient in terms of positioning with regard to other vital signs and things like that.

So in procedures where you are trying to manage bowel, for example, it's really helpful to have table motion and that is clearly something that jumps out.

However, once we've had it, we've now been CE Marked in Europe and we've had it trialed in different specialties, I think it appeal is broad.

So we thought about it upfront initially around general surgery.

I think its appeal will be broader than that.

Thank you.

Rick Wise with Stifel Nicolaus.

Rick, you will be our last questioner.

You made it under the wire.

Okay, thank you.

(multiple speakers) I appreciate it, Gary.

The -- maybe just to start with you, Gary.

You said several times in the course of your prepared remarks and in the Q&A that robotics is in its infancy.

Just a big picture for a second.

For you -- are you emphasizing it because perhaps this next wave of pipeline products that you talked about and maybe some you haven't talked about are getting you more confident or excited about the potential for another growth reacceleration or inflection point in the adoption of robotic surgery?

Just -- I appreciate the numbers of systems placed relative to hospitals are small but just wondered if there was anything more there?

Sure, I think a couple things that excite me and lead me to believe there is a lot of opportunity.

A couple.

Well, one of them is that I think in the architectures we are in today are pitted in the markets for which we have clearances, there is still a lot of procedures that are being done open and have opportunity to be done minimally invasively with our products.

And I think that is -- comes down to execution and delivery of some of the things we have in the pipeline.

Having said that, I think that as you just stand back and look out over the next decade and ask, do we think that robotic-assisted surgery can impact more procedures or more types of procedures than they are being impacted today, I think the answer to that is absolutely yes.

Some things are things like SP, products that look different.

SP won't be the last set of products that look different.

We think there are opportunities for other products and technologies that can really make a difference in surgeons delivering great care.

So we are excited about it.

We're investing in it and I think ask just about any surgeon, do you think that the use of computation analytics and robotics is going to improve your practice over time or become less important.

I think the answer is pretty uniform that those kinds of technologies should help them if they're well delivered and well executed.

Got you.

Two last quick ones I'll ask at the same time.

Instrument and accessories growth, I think for the first time in at least five quarters, maybe longer, certainly since 2012 annually, grew -- did grow faster than procedures.

Is there something that we should read into that with implications for the next couple years.

Or is it just stock-in given the flattish revenues per procedure?

And the second one, I'll throw at you at the same time.

The bed approval, you launched in Europe in 2015.

Just maybe -- did your early experience there -- did it drive utilization or procedures or Xi or capital sales?

Any color there would be welcome.

Thanks, appreciate it.

On the revenue per procedure, I don't think there's much more than what we said.

There's a lot of factors that impact that particular metric.

It has been running at a pretty tight range, $1,830 to $1,840.

It did take over to a growth this last quarter as we saw utilization of advanced instruments more than offset the headwinds mostly from exchange.

But again, there a lot of those factors could vary in the future in terms of procedure mix, customer efficiency, buying pattern, foreign exchange.

So it is really a lot of factors there.

On Xi, the certain feedback has been outstanding.

Too soon to tell in terms of number of sites and duration as to what the changes and trends are.

But we will be watching.

Thanks Rick.

That was our last question.

As we've said previously, while we focus on financial metrics such as revenues, profits and cash flow during the conference call, our organizational focus remains on increasing value by enabling surgeons to improve surgical outcomes and reduce surgical trauma.

I hope the following comments from Dr. Solomon, a general surgeon from Orlando, Florida, gives you some sense of the impact our products have on surgery.

Quote, the Advanced Technologies and improved dexterity of the da Vinci Xi System have allowed me to perform complex minimally invasive operations with a statistically measurable improvement in outcomes.

My patients are clearly and reproducibly benefiting from less pain, a shorter length of hospital stay, less time off work and lower short and long-term complications, end quote.

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

This concludes today's call.

Thank you for your participation and we look forward to talking to you again in three months.

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

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

You may now disconnect.