直覺手術 (ISRG) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Intuitive Surgical Q1 2016 earnings release call.

(Operator Instructions) As a reminder, the conference is being recorded.

I will now turn the meeting over to our host, Senior Director of Finance, Investor Relations, Calvin Darling.

Please go ahead.

Thank you.

Good afternoon, and welcome to Intuitive Surgical's first-quarter earnings conference call.

With me today we have Gary Goodhart, 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 2, 2016.

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

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

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

Patrick will discuss marketing and clinical highlights.

I will provide our updated 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.

Our first-quarter Company performance was strong, with excellent global procedure growth, solid capital placements, improving product margins and important new product launches.

Turning first to procedures, global procedure growth for the quarter was nearly 17%, led by growth in general surgery, growth in the use of da Vinci Surgical Systems outside the United States, continued growth in US urology and modest growth in US gynecology.

Trends in US general surgery growth continued, with strong growth in inguinal hernia repair and ventral hernia repair, followed by continued growth in colorectal surgery.

Customer feedback and commitment to the use of da Vinci in performing inguinal hernia repair for complex conditions has been encouraging in the quarter, increasing our confidence in its long-term acceptance.

Procedure growth was variable by country in Europe, with solid performance in the United Kingdom and Germany offsetting slower growth in the Nordic countries.

Performance in the quarter was helped by an extra procedure day in some regions relative to Q1 of 2015.

Patrick will review procedure trends in greater detail later in the call.

We placed 110 da Vinci systems in the quarter, up from 99 in Q1 of 2015.

Customers continue to purchase our Xi systems over less expensive and less capable Si models by a factor of approximately 3 to 1. Capital performance was strong in the United States, offsetting capital softness in Europe and the expiration of our quota in China.

[Botchley], customer leasing and lease-to-own arrangements are making up a greater percentage of new system placements.

Marshall will take you through our finances in more detail later in the call.

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

Our teams continued to execute against their goals, with steady improvements in reducing product costs for our new systems, advanced instruments, in the quarter.

Product cost reductions exceeded our expectations, and we expect them to continue to improve in 2016 and 2017.

Our offerings make up an ecosystem designed to meet our customer needs in building and running outstanding robotic surgery programs.

This ecosystem includes systems and instruments and accessories, training technologies and peer-to-peer coursework, service offerings, and program optimization and analytic support.

As a result of the set of products and services that surround our systems, recurring revenue in the quarter comprised 75% of total Company revenue.

Highlights of the first-quarter operating results are as follows.

Procedures grew nearly 17% over the first quarter last year,.

We shipped 110 da Vinci Surgical Systems, up from 99 in the first quarter of 2015.

Revenue for the quarter was $595 million, up 12% over the prior year.

Pro forma gross profit margin was 70%, compared to 65.6% in the first quarter of last year.

Instrument and accessory revenue increased to $322 million, up 16%.

Total recurring revenue in the quarter was $447 million, representing 75% of total revenue.

We generated a pro forma operating profit of $229 million in the quarter, up 24% from the first quarter of last year, and pro forma net income was $170 million, up 27% from Q1 of 2015.

We continue to enable our Xi platform with new product launches.

Our launch of intraoperative table motion is proceeding well, with order flow that has met our expectations and with strong customer feedback on its utility, particularly in general surgery.

In the quarter, we also launched our 30-millimeter Xi stapler designed to facilitate stapling in thoracic procedures and our Xi single-site instrument and accessory kit.

Both our 30-millimeter stapler and our Xi single-site instruments have started clinical use, with positive feedback on their utility.

Our SP program remains on track.

As our business has strengthened, we have increased our mid- and long-term investments in research and development.

We have been increasing our investments in imaging, analytics and new product architectures based on our belief that substantial opportunity exists to enable better outcomes and to expand access to our technologies globally.

Calvin will take you through our projected spending later in the call.

As we move forward in 2016, we are focused on the following.

First, expanding the use of da Vinci in general and thoracic surgery, particularly colorectal surgery and hernia repair.

Second, advancing our ecosystem, including expanding our Xi line and taking our SP product into initial clinical use.

Third, driving our organizational capabilites in markets in Europe and Asia.

And, finally, assisting our customers in their efforts to maximize the comprehensive value of their programs.

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

Thank you, Gary.

I will be describing our results on a non-GAAP or pro forma basis, which excludes legal settlements and claim accruals, stock-based compensation and amortization of purchased IP.

We provide pro forma information because we believe the 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.

First-quarter revenue was $595 million, an increase of 12%, compared with $532 million for the first quarter of 2015, and a decrease of 12% compared with the seasonally stronger fourth quarter of $677 million.

First-quarter 2016 procedures of approximately 176,000 increased nearly 17% compared with the first quarter of 2015 and decreased slightly compared with the fourth-quarter procedures of approximately 177,000.

Year-over-year procedure growth was driven by general surgery procedures in the US and urology worldwide, and otherwise likely benefited from an additional calendar day associated with leap year.

Revenue highlights are as follows.

Instrument and accessory revenue of $322 million increased 16% compared with last year and decreased 1% compared with the fourth quarter of 2015.

These changes generally reflect changes in procedures.

Instrument and accessory revenue realized per procedure, including initial stocking orders, was approximately $1,830 per procedure.

This metric continues to fluctuate in a tight range of approximately $1,830 and $1,840 per procedure.

Relative to the first quarter of 2015, the current quarter reflects higher sales of advanced instruments offset by the impact of customer buying patterns and foreign exchange.

System revenue of $148 million increased 5% compared with last year and decreased 36% compared with last quarter.

The increase relative to the prior year primarily reflects increased revenue associated with operating lease activities and slightly higher average system selling prices.

The decrease relative to the fourth quarter primarily reflects seasonally lower unit sales and slightly lower ASPs, partially offset by increased revenue associated with operating lease activities.

110 systems were placed in the first quarter, compared with 99 systems in the first quarter of 2015 and 158 systems last quarter.

Approximately 77% of the systems shipped in the quarter were Xi's, which is comparable to prior quarters.

Hospitals financed approximately 37% of the systems placed in the first quarter, up from 17% last quarter.

We directly financed 31 systems, including 19 operating leases.

As of the end of the first quarter, there were 62 systems out in the field under operating leases.

We generated approximately $4 million of revenue associated with operating leases in the quarter, compared with $1 million in the first quarter of 2015 and $3 million in the fourth quarter.

We also generated approximately $6 million of revenue during the quarter from lease buyouts, compared with $2 million of revenue in the fourth quarter and no lease buyout revenue in the first quarter of last year.

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

Globally, our average system price of $1.500 million was approximately $30,000 higher than the first quarter of 2015's ASP and approximately $50,000 lower than the ASP last quarter.

Relative to the prior year, the increase reflects a proportionally lower trade-in volume in favorable geographic mix partially offset by an unfavorable product mix.

The decrease relative to the fourth quarter reflects proportionally higher trade-in volume and lower mix of Xi dual consoles, partially offset by a favorable geographic mix.

Service revenue of $125 million increased 9% year over year and increased approximately 4% compared with the fourth quarter of 2015.

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

Outside of the US, results were as follows.

First-quarter revenue outside of the US of $164 million increased 9%, compared with $150 million for the first quarter of 2015, and decreased 25%, compared with seasonally stronger fourth quarter of $219 million.

The increase compared with the previous year is comprised of a 14% growth in recurring revenue, which is driven by procedure growth of 22%, and increased systems revenue of 2%.

The decrease compared to the fourth quarter reflects seasonally strong fourth-quarter systems placements, partially offset by a 5% growth in recurring revenue.

Outside the US, we placed 36 systems in the first quarter, compared with 36 in the first quarter of 2015 and 75 last quarter.

Current-quarter system sales included 5 into China and 8 into Japan.

System placements outside of the US will continue to be lumpy, as some of these markets are in their 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.

Moving on to the remainder of the P&L.

The pro forma gross margin for the first quarter was 70%, compared with 65.6% for the first quarter of 2015 and 69.6% for the fourth quarter of 2015.

Compared with the first quarter of 2015, the higher gross margin reflects reduction of product and product repair costs, improved manufacturing operations efficiencies, the elimination of the medical device tax, lower costs associated with product field actions and related inventory charges, and a higher mix of instrument and accessory revenue.

The medical device tax has been suspended for the next two years and reduced our 2015 gross margin by approximately 70 basis points.

Future margins will fluctuate based on the mix of our newer products, our ability to further reduce product cost, manufacturing efficiency, costs associated with product field actions and, in the long term, the potential reinstatement of the medical device tax.

Pro forma operating expenses -- which exclude legal settlements and accruals for legal claims, stock compensation expense, and amortization of purchased IP -- increased 14%, compared with the first quarter of 2015, and increased 5% compared with last quarter.

The increases over prior periods reflect increased investments in advanced imaging, advanced instrumentation and next-generation robotics, increased headcount, and higher payroll taxes associated with stock option exercises.

Our pro forma effective tax rate for the first quarter was 27.4%, compared with an effective tax rate of 28.9% for the first quarter of 2015 and 24.9% last quarter.

In late December 2015, Congress retroactively approved the 2015 Federal Research and Development Credit and made the R&D tax credit permanent going forward.

The entire 2015 R&D tax credit was included in the fourth quarter, while no benefit was reflected in the first quarter of 2015.

And a proportional benefit is reflected in the first quarter of 2016.

Other than the impact of R&D credit, fluctuations in our tax rate between this quarter and the first and fourth quarters of 2015 primarily reflect changes in the mix of US and O-US income.

Our first-quarter 2016 pro forma net income was $170 million, or $4.42 per share, compared with $135 million, or $3.57 per share, for the first quarter of 2015 and $224 million, or $5.89 per share, for the fourth quarter of 2015.

Note that fully diluted shares outstanding increased by approximately 400,000 shares relative to the fourth quarter, resulting primarily from the increase in our share price.

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 $595 million for the first quarter of 2016, compared with $532 million for the first quarter of 2015 and $677 million for the fourth quarter of 2015.

GAAP net income was $136 million, or $3.54 per share, for the first quarter of 2016, compared with $97 million, or $2.57 per share, for the first quarter of 2015.

And $190 million, or $4.99 per share, for the fourth quarter of 2015.

We ended the year with cash and investments of $3.8 billion, up from $3.3 billion as of December 31, 2015.

The increase primarily -- was primarily driven by proceeds from stock option exercises and cash generated from operations.

As our cash builds, we will continue to evaluate our approach to capital allocation.

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

Thanks, Marshall.

Of our first-quarter procedure growth of nearly 17%, US procedures grew approximately 50% and O-US procedures grew approximately 22%.

In the US, even though growth benefited from favorable operating days in the quarter, procedure growth outpaced our expectations.

First-quarter growth in our mature procedures continued at levels similar to the second half of 2015, generating the majority of the procedure outperformance relative to our expectation.

General surgery procedure growth also exceeded our expectation.

In US urology, first-quarter growth in da Vinci prostatectomy and kidney procedures continued at similar rates through the second half of 2015.

We continue to believe that our US prostatectomy volumes have been tracking to the broader prostate surgery market, and we expect prostatectomy growth to return to levels similar to prostate cancer incidence rates over time.

In US gynecology, first-quarter procedures grew modestly year over ,year with growth led by malignant and complex hysterectomy.

Continuing the trend from 2015, we estimate a larger proportion of da Vinci hysterectomy procedures were performed by gynecologic oncologists during the first quarter.

Similar to the fourth quarter, US single-site gynecology procedure growth declined compared to the first quarter of 2015.

First-quarter growth in US general surgery procedure adoption remains strong, led by a robust growth in hernia repair and continued adoption of colorectal procedures.

Cholecystectomy procedures were roughly flat in the quarter, with growth in multi-floor procedures offsetting declines in single-site procedures.

Q1 was another quarter with a large number of clinical publications evaluating da Vinci surgery.

Of these, I have selected a couple studies that you may find interesting.

With the launch about 30-millimeter stapler, surgeon interest in the use of da Vinci for thoracic surgery is growing.

A new study comparing open video-assisted thoracic surgery, or VATS, and da Vinci surgery for pulmonary lobectomy was published by Dr. Yang and colleagues from Memorial Sloan Kettering Cancer Center in the Annals of Surgery.

Using a prospective database including 2,400 surgeries to treat stage-one non-small-cell lung cancer patients, the officers' propensity matched 470 patients across da Vinci, VATS and open surgery.

The study found that da Vinci in minimally invasive VATS approaches enabled a shorter chest tube duration and length of hospital stay compared to open surgery.

Da Vinci surgery was also credited with improved lymph node yields as compared to both open surgery and VATS, an important clinical outcome for determining next steps in the patient treatment pathway.

As it related to the expansion of da Vinci lung resections, the authors highlighted that nearly 57% of pulmonary lobectomies in the US were treated with open surgery.

And they see promise in expanding patient access to minimally invasive surgery through da Vinci technology.

Turning abroad, procedure growth outside of the United States was approximately 22% in the first quarter, led by the global adoption of da Vinci prostatectomy and solid contributions from kidney procedures and colorectal resections.

Compared to the second half of 2015, procedure growth slowed in both Europe and Asia during the quarter, in part due to the timing of the Easter holiday.

Historically, our O-US procedure growth rates have been lumpy and less predictable in the short term.

We are focused on improving our O-US procedure performance.

In Japan, there were positive developments relating to reimbursement in the quarter: the MHLW approved for reimbursement of partial nephrectomy at a premium rate relative to open surgery; and also approved clinical trial enrollment to begin supporting a [section area B] submission for da Vinci malignant hysterectomy.

The recent study funded by Intuitive and published in BJU International by Professor Hughes and colleagues from the University of Chester collected data from the United Kingdom Health Episodes Statistics Database, including more than 20,000 prostatectomy patients and 2,000 partial nephrectomy patients to assess health resource utilization and cost following da Vinci, open and laparoscopic procedures.

The database showed that from 2008 to 2013, the use of da Vinci surgery increased from 15% to 50% of prostatectomies and 1% to 22% of partial nephrectomies by displacing open surgery.

During the first year after the operation, da Vinci surgery was shown to reduce inpatient admissions, hospital bed days, and total costs for both prostatectomy and partial nephrectomy compared to open surgery.

At three years post operation, the study showed similar outcomes for prostatectomy and was insufficient to draw conclusions for partial nephrectomy.

Laparoscopic surgery outcomes were at the approximate midpoint between da Vinci and open surgery on resource utilization and costs for both procedures.

The authors concluded, quote, our analysis suggests that there are substantial savings associated with robotic-assisted surgery when compared with open and laparoscopic interventions, close quote.

This concludes my remarks.

I will now turn the call over to Calvin.

Thank you, Patrick.

I will be providing you with our updated financial outlook for 2016.

Starting with procedures, on our last call we estimated full-year 2016 procedure growth of 9% to 12%, above the approximately 652,000 procedures performed in 2015.

Now, based upon favorable US DBP and gynecology macro trends and US general surgery growth, we are increasing our estimate for 2016.

We now anticipate full-year 2016 procedure growth within a range of 12% to 14%.

Turning to gross profit, on our last call we forecast 2016 pro forma gross profit margin to be within a range of between 68% and 69.5% of net revenue.

We are now increasing our estimate.

We now expect full-year 2016 pro forma gross profit to be within a range of between 69% and 70% of net revenue.

Turning to operating expenses.

As we have described, we will be increasing our investment in key areas that will enable and drive the future of robotic-assisted surgery.

On our last call, we forecast to grow pro forma 2016 operating expenses between 9% and 13% above 2015 levels.

We are now increasing our estimate for operating expenses to a range of between 12% and 15% above 2015.

Consistent with our last call, 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 our 2016 other income, which is comprised mostly of interest income, to be in the upper end of the $20 million to $25 million range forecast on our last call.

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

That concludes our prepared comments.

We were now open the call to your questions.

(Operator Instructions) Bob Hopkins, Bank of America.

Two questions, but, first of all, congrats on the great momentum in the business.

I have a question on US procedure volume growth, and then on your comments on OpEx spend.

First on procedure volume growth, one, can you give us a sense of what you think you grew on the quarter on a same-day selling basis?

But then, much more importantly, just give us a sense as to specifically which surgery types accelerated in the US.

And what drove the growth?

What caused the acceleration?

Why did things get better?

Bob, thanks for the question.

From a same-day selling perspective, estimating the impact of operating days is anything but an exact science.

From a tailwinds -- you had leap year that benefited the quarter and some modest benefit from the timing of years being on a Friday rather than a Thursday.

And from a headwind perspective, you had the timing of Easter, which moved from the second quarter into the first quarter, but that had more of an impact on the O-US geographies.

From what accelerated -- the mature procedures sustained pretty strong growth in the quarter as they softened up 2015, which was a little bit of a surprise to us relative to our initial expectations.

And general surgery continues to be strong and growing off of a larger base, which has more impact on the US procedure growth number.

Okay.

And then -- well, for the follow-up, I wanted to ask Gary a question on the OpEx spend because I think it's an important comment from you guys.

Your spending in the quarter was high, exactly as you said it would be, and now you are raising that spend level even further.

So can you just talk about where the incremental spend is going?

What kind of new incremental technology announcements could that lead to?

You mentioned a couple on the call.

But I'm just really curious as to where this spending is going and when we could expect to get more visibility on the output from that spending.

Sure.

On the spend, I think the acceleration is really borne of confidence in the long-term viability of some of the markets and some of the things we are pursuing.

You will see it really cut into a couple of buckets.

Some of it is investments in O-US markets where we think that we can do more by investing more.

And we've been talking you about that.

The other side is on R&D.

And in terms of categories, we've talked about it before, but we believe in them deeply.

Advanced imaging, the ability to see beyond what you can just see with your naked eye.

New robotic architectures that allow surgeons to get into and out of the body in different ways, and to different places that make it reach prior.

As well as analytics and over-the-shoulder guidance.

All things that we have been investing in; some things that we are accelerating.

So we won't do product announcements on this call.

As we get deeper into those things and are ready to share them more broadly with you, of course, we will.

And then lastly, just to get a sense -- I finally heard something about positive hysterectomy in Japan.

It went by pretty quickly.

Is there some positive momentum on hysterectomy in Japan from a reimbursement perspective?

Yes, Bob, the NHLW approved clinical trial to begin enrollment supporting malignant hysterectomy under the [section area B] process.

Perfect.

Thank you.

(Operator Instructions) Tycho Peterson.

JPMorgan.

I just wondered if you could talk a little bit of about Table Motion.

How many systems are installed that are capable?

What percentage of systems, I guess, have the option included?

And if you could just talk a little bit about how it flows through to gross margins as well.

It's mainly a software upgrade from your perspective, right?

Yes, we are pretty pleased with the level of adoption for Table Motion.

The information we're getting back from surgeons is they are pleased with its usage and its performance.

We are not going to be disclosing every quarter just how many tables we have delivered, so I won't go there.

I'll just tell you that, again, we're pretty pleased with the level of adoption.

These would be the revenue on the margin side.

Yes, the margins -- so, what we are providing is a software update to the Xi that enables the Table Motion.

The table itself is being purchased from Trumpf.

And the -- and so our billing is 100% margin.

And I guess maybe what I was getting at is the degree to which this is going to drive a bolus of demand for Xi now that you have that plus the full instrument set.

Can you maybe just talk a little bit about how you see that flowing through to Xi demand?

Yes, I think that it -- each one of these steps, the 30-millimeter Xi stapler, the Integrated Table Motion, now the Xi instrument kit is rounding out that Xi platform.

And we have some more to do.

It's not all complete, but it's definitely becoming a much fuller and richer ecosystem.

We think that helps.

It's very hard to forecast how much it is, how many people sit and wait until the next step.

But we think those things add clinical value for sure.

30-millimeter stapler in thoracic procedures is a big win.

Likewise, Table Motions for a lot of the more complex procedures.

So we think that's strong, and there are a group of hospitals that use Si with single-site; that if they are a single-system hospital, they will only own just one, and they have a robust single-site program.

This allows them to consider Xi as an upgrade.

So it's hard to quantify, but we think directionally it's really strong.

Okay.

And then, follow up, can you just comment on Europe?

It looked like that was a little soft.

Maybe just talk about the outlook there for the year.

Yes, Europe was definitely a variable, both in procedures and in systems.

On the procedure side, we had some strength in some countries where they are moving along, and we think there's opportunity to do that and better.

There are some other countries where it's going a little slower.

Sometimes it's a local economy issue; sometimes it's more where we are in maturity.

Some of these countries were pretty well-adopted in the mature procedures, and they are really at the beginnings of the emerging procedures.

So it depends country by country.

On the capital side, I think there's two things going on.

A little bit of environment is one, and a little bit of wait-and-see on competitive offerings as they come out.

And we are navigating that pretty well.

In terms of head-to-head comparisons with our technology, our systems are coming out great.

But it can put a delay in the pipeline, and we are seeing a little bit of that in Europe.

The only other thing I would add is that there is -- Europe has become very seasonal.

And so if you look at Q4, it was extremely strong relative to the previous couple of quarters.

And Q1 is more comparable to the previous year's Q1.

Okay.

Thank you.

David Lewis, Morgan Stanley.

Just two quick ones here.

Marshall, just coming back to gross margin guidance, GM's have been stronger for five consecutive quarters.

And the guidance certainly implies no improvement throughout the year, which seems, I guess, less likely to us just given the cost improvements you've already discussed.

So can we just talk to gross margin progressions out the balance of the year and why you think 70% here in the first quarter is the high watermark?

Sure.

One of the biggest factors we see going forward is the product mix.

Know that we have higher margins on instruments and accessories than we do on systems, and this Q1 tends to be seasonally a lower quarter for capital.

And also, we see growth in the new product, particularly in energy products, stapling and vaso-sealing going forward, and those also have lower margins than the base.

So I think, just based on product mix alone, we don't expect to sustain 70%.

Okay.

And then Gary, I -- obviously people have asked about spending already.

And I note that the R&D spend is the highest we've seen in four years.

So you are obviously clearly going to continue to invest.

I have no expectations you're going to talk to us about future instrumentation and system announcements.

But I think the enigma for most shareholders actually is advanced imaging because that's sort of more future-looking.

Is there any chance we get incremental updates or at least even any update on the strategy for advanced imaging this year?

Thank you.

Yes, that's a fair question.

In general, we have been making early investments in advanced imaging.

And what I would tell you there is that it is not one thing.

As you know, we have Firefly, which is a molecular imaging base product.

We also have invested in raw imaging hardware capabilities, which we'll continue to do.

What we like to do is -- as we have milestones that makes sense, whether it's talking to regulatory bodies or engaging in clinical work, those tend to be good anchors to discuss with you.

And as those arrive, then we will share with you what we are thinking.

And could those arrive potentially in 2016 for advanced imaging, or unlikely?

You know, I think when we get there, we will let you know.

Okay, sir.

Thank you.

David Roman, Goldman Sachs.

I wanted Gary just to come back to some of the early part of your prepared remarks where you discussed the continued momentum that you are seeing in hernia.

And it seemed like it's at stages this year, there was sort of a positive tipping point, but just incremental enthusiasm from the physician community around this procedure.

Can we just sort of talk about what you think specifically is stimulating that demand and why you are confident in that continuing on a go-forward basis?

There's two ways that our confidence has been building.

One of them is around the clinical outcomes and anecdotes that we hear.

And that comes to -- as we talked about before, inguinal hernia particularly is a segmented market.

Not all patients are suffering the same level of disease.

And in the more complex cases, if it's bilateral or prior abdominal surgery of these patients, a large herniated sac, the raw clinical capability of our products is being touted as -- and supported by surgeons as being important to them.

A better quality of intervention, consumable costs in line with what their expectations are.

So there, I think that we are feeling pretty good.

The second thing we can do is analyze reorder rates from surgeons as they go forward.

So as you get through the trial periods, you are seeing where -- as they learn it and get deeper and deeper into it, where do they apply it and how often do they keep buying our products.

And that has been supported as well.

So as those two things come together, we start feeling better about it.

That is what is behind that comment.

All right.

That's helpful.

Thank you.

And then just for my follow-up on the operating lease side, it looks like this is a higher quarter for a percentage of total coming from operating leases.

So I guess maybe, A, could you just talk sort of the -- through some of the dynamics underpinning that?

And then, B, based on your disclosures, it looks like people are buying out these operating leases relatively quickly, so maybe help us understand is that true and why that's the case.

Sure.

The operating leases is our way of being able to be flexible with the customer and meet the customer's needs in terms of financing.

Some of the leases are shorter-term and basically bridge their ability to get to a capital approval process.

And those are a couple of the ones you have seen bought out in this quarter.

Most of the leases -- of the operating leases are longer-term, being four- and five-year terms, and will drive a recurring revenue going forward.

Like we said, this quarter was around $4 million.

Okay, got it.

Thank you.

Ben Andrew, William Blair.

Gary, a question on the ecosystem.

One of the most material competitive advantages you guys have is the embedding of the technology and your training and all the other things throughout the health care system.

What investments can you guys make and are you planning to make that are different than what you've done before to try to lever that, as you did specifically call that out?

Yes, I think the -- making a great robotic surgery program is really the integration of all of those things.

And their multi-year efforts to build that set of programs from peer-to-peer networks that do advanced coursework and teaching to validated learning pathways in simulation.

Those validations are multi-year efforts to get right to the full instrument kit from vessel sealing to stapling and so on.

And so we are pretty thoughtful about balancing that set of investments.

The things that have gotten really stronger and interesting in the last couple of years have been our ability to analyze data, look at national benchmarking, look at regional base benchmarking and share that information with our customers so they can make good decisions.

Sometimes those decisions are good for them and not great for Intuitive in the near term.

If they optimize their program, we may get more revenue per procedure in the near term.

But we think long-term it's better for everybody.

And so we have been making those analytics and those investments and then communicating with hospitals.

So we really have been plugging in in each of those settings.

And I do think it makes for an ecosystem -- creates a lot of value for the customer and builds our relationship with them.

Thank you.

And Patrick, a quick one for you.

Can we think about the extra selling day as maybe 1.5 percentage points of procedure growth?

I know there's some offsets with Easter, et cetera.

But is it in that range of what the bump was, net?

Yes, Ben.

I will let you do your math on this specific percentage.

But as it relates to the benefit, it really just -- think of it more as in the US because the favorability of leap year New Year's gets mostly washed out by Easter, particularly in Europe.

Got it.

Thank you.

Rick Wise, Stifel.

I wanted to talk a little bit more about US urology and US gynecology.

I was really intrigued with the modest growth on the gynecology side.

That's a significant turnaround from the headwind you faced over the last couple of years.

Also, urology acting better.

Have we worked through some of the challenges in each?

And are we actually going to return to more sustainable growth in US gynecology after a year or more or two of training and education, et cetera?

Let me speak to a couple of the factors, and then I will let Patrick take it from there.

As we look at urology, you've got three main procedures in urology; prostatectomy, partial nephrectomy and cystectomy, the biggest one being prostatectomy.

We know that there was a bolus of patients that went into watchful waiting, some of whom will have disease progression and come back to definitive treatment.

How long that bolus lasts is a little bit hard for us to predict.

The second thing are the possibility of share changes between some of the treatment modalities: surgery versus radiation versus watchful waiting.

That data tends to lag; hard to get it in real time.

There may be some share change, although if there is it's probably modest.

And then there's just demographics.

As demographics changes, you have more folks getting diagnosed with prostate cancer over time.

So those are the three things that are rolling through, and sort of projecting how they balance out is what the challenge is.

On the gynecology side, the thing that we are seeing in our experience is that you are seeing more surgery being done by high-volume gynecologists in general.

Not just robotic surgery, but laparoscopy and others.

We are seeing a consolidation in the marketplace.

And so folks who are either due oncologists or more routine surgeons, we think that's good for the world and we think that's good for Intuitive.

Those more dedicated surgeons tend to be our customers.

We see them tackling more procedures in concentrated fashions.

And so that's kind of what is happened in gynecology.

Likewise, I think there is a demographic element here that is likely to find a bottom and then start to drift up.

The unknown is nonsurgical approaches and in-office approaches.

And those are the factors at play.

Patrick, I will let you go from there.

Yes, no, I think you described the urology situation well.

The other thing to bear in mind is in the GYN market is while single-site procedures have been declining, some of the other benign procedures have been stabilizing and are creating less of a headwind to us on a year-over-year comparison basis; things like myomectomy.

And I guess my follow-up question -- and it might've been you, Patrick, who mentioned it.

I think somebody described O-US procedure growth as it can be lumpy.

And, quote, we are working to improve the performance there.

Can you talk a little bit about how you are going about that, what kind of initiatives are underway and what you would hope or we should expect might come from those initiatives?

Thank you.

Yes, I will take that one, Rick.

The opportunity in Europe tends to be country by country.

So, where we are looking to do something different or better, it tends to be making sure that we have staff that is supporting local efforts and local needs, that they are working in local language, that they understand the health care systems in intimate ways that are specific to that country.

And so, where we see opportunities, we will invest there and build that out.

We have been.

Where we have made investments, we've seen growth.

And so where we see some areas of opportunity, we think we have a playbook, now we have to go execute against that playbook.

That's been our perspective there.

Thank you.

Matt O'Brien, Piper Jaffray.

I was hoping to start on the general surgery side.

And it sounds like, again, very good quarter.

But I'm just curious if either of the various ventral -- or, I'm sorry, the various hernia cases are really leading the charge in some of that growth.

Are you seeing any kind of divergence or inflection in either ventral or inguinal?

And are those procedures at this point getting sizable enough to start to sway hospital decision-making as to adding additional systems in order to meet that demand?

Yes, Matt, thanks for the question.

Certainly both ventral and inguinal hernia procedures continue to exhibit robust growth.

Inguinal hernias is just a bigger overall procedure category.

It's just more commonly performed.

But the rates of adoption that we are seeing in both procedures is encouraging.

And the surgeon populations that are performing them and are continuing to increase the volumes and procedures that they are doing.

So it looks promising.

And certainly from an overall volume perspective, had some influence because just the numbers are getting to the point where it matters to create access for these surgeons to be able to continue to perform procedures, that they are absorbing systems worth of activity at some of their institutions.

Okay, that's very helpful.

And then Gary, your commentary about the delays that we saw in Europe as hospitals are evaluating some competitive systems that are hitting those markets -- just curious to me.

Do you think that is something that will linger here throughout 2016 as those systems are fully rolled out?

Or do you think it will be a fairly quick process of kind of taking a peek, and maybe they are doing that now, and you could see a snapback in terms of the number of systems placed?

Specifically, did you see 10, 15 hospitals delay as they were evaluating both systems?

And then out of those 10 hospitals, nine of them ended up buying da Vinci late last quarter or even early this quarter?

Yes, the -- I think that it's a little bit harder to predict how fast it will go through.

I guess our anecdotal experience has been some have been quick looks and make an evaluation and come sign up with us.

And others are going through a little bit longer process.

So with regard to a, quote, snapback, I wouldn't bake that in.

I think it will play out a little longer than that.

Having said that, our -- the response of our customers after they have evaluated the other offerings and come back talk to us has been fantastic.

So our confidence that we have good offerings and we can meet these customers' needs is very high.

They will go through that process.

And I think as new and different technologies come to market, not just the ones that are there today, I think this will be part of the new normal a little bit for Europe as people cross shopping and making decisions.

Our goal is to make sure that they find our products to be of very high value.

So far, so good.

Got it.

Very helpful.

Thank you.

Larry Keusch, Raymond James.

Wondered if we could just, first question, start with the trade-ins.

I think there were 42, as you mentioned, this quarter.

And I think the five quarters, it's been averaging closer to 30.

So I'm just trying to understand perhaps what is driving the higher trade-in.

And then what's the ultimate opportunity to drive trade-ins in your older system base?

There's nothing specific about this quarter that I would call out as it relates to trade-in.

I think you have the numbers right.

It came off of our -- the detail we provided with the press release.

I wouldn't call anything out specifically.

I think it -- last quarter, it was around in the high 30s, and it's been there for a little while.

I don't know that it will probably fluctuate in that range, so I don't have any specific comments on it.

And then for Gary, maybe just an update on SP.

You mentioned some in your prepared comments, but where are we in getting those evaluations going?

Is it conceivable that we could see commercial units perhaps by the end of the year?

We are in discussions with FDA on trial type and endpoints.

And we have clinical sites that are getting prepped.

Product from the engineering and design and validation point of view is right on track, looks really good.

We are not expecting anything of substance in terms of revenue this year.

We do -- we expect them in clinical use in the second half, and that's what we are working towards.

Perfect.

Thank you.

Jason Mills, Canaccord Genuity.

Congrats on a great quarter.

My first question has to do with just trying to understand better your dogma as it relates to managing the P&L.

It was -- obviously we're getting here is higher procedural volume guidance and higher operating expense guidance.

And what we are seeing -- what we seem to be seeing is some leverage to the operating line.

But I'm just curious, Gary, if you could talk about -- Marshall, talk about the -- your dogmas over the next couple of years.

And so are you looking for operating margin expansion?

Is that what your objective is?

Are you managing the business of top-line growth and trying to manage expenses best you can to get there?

Could you just talk about your dogma as it relates to managing the P&L?

Yes, my first statement is kind of a caution of beware of averages.

There are places in the business where we are seeking high operational efficiency and leverage.

You see that in product cost reductions and some of the things that we're doing in manufacturing.

There are other places in the operation where we think we can find leverage.

At the same time, we want to turn around and reinvest those savings in opportunity.

And we see a lot of opportunity, and I think that's -- that opportunity should be pursued.

So, it will be a little bit lumpy.

We are trying to be balanced.

I wouldn't say that our approach is hard over one or hard over the other.

It's not revenue above all else, and it's not profit above all else.

We are trying to be balanced in that approach.

And it may be a little bit lumpy.

I think opportunities happen when they happen.

You can be overly cautious and miss them.

And so we -- we will maintain a fiscal discipline.

That's been part of our history, and we will keep it.

Having said that, we want to make sure that we reinvest some of the benefits that the Company has gained into expanding the opportunity we see in front of us.

That's helpful.

My second and final question having to do with your cash balance and use of cash, you've been very proficient at buying back stock in the past.

Given where the share price is juxtaposed to significantly expanding cash balance, would it be fair to assume that you will do modest -- maybe modest to moderate share repurchases going forward?

Or will we see maybe less over the next two years than we saw in the last two years?

Thanks.

In terms of just how we think about capital allocation, we are thoughtful and serious about it, as you would expect.

We think buybacks are one leg or one tool in capital allocation.

We really start with can we reinvest in the business and drive long-term growth and opportunity.

Buybacks, if there are times -- we've been typically patient and opportunistic.

And we think because of the volatility of our stock, there are times that makes a lot of sense for us.

And in conversations with shareholders and where we are thoughtful and listened, and we have considered dividends, and we will consider them in the future.

So we look at those three things and try to trade them off.

And we think for the long term.

When we are thinking about capital allocation, we are not trying to do signaling or messaging.

We are trying to build value for the business and for the shareholders in the long term.

Thank you, guys.

Vijay Kumar, Evercore.

Maybe one on the O-US placements.

I know China -- I think on the last quarter you said they had about eight systems.

Can we expect in a renewed, I guess, a contract from the [gowman freight]?

How should we think about O-US from a systems perspective given that China, they are probably at the end of the amount of systems that they can import?

Yes, I'll speak to China first and then to other locations next.

As far as China goes, when we left last quarter, there were about six systems left on the quota.

With sold five this quarter.

There's still one out there; I don't know if it will happen.

And they have to go through a tender process, and that tender process had to have already begun.

As far as additional quotas, it is a part of the overall budget -- government budget process in China.

And so when that gets completed -- and I don't have a magic ball that tells me when it will be completed -- then we will know whether we are still under the quota system.

And we will know whether -- if we are under the quota system, how many will be awarded.

And there's no way to predict that in advance.

As far as the rest of the world goes, in my remarks, I mentioned that it's -- fourth quarter is a seasonally strong quarter.

If you look at where we came out for this quarter, it was pretty comparable to last year for the first quarter.

But it's going to be lumpy market by market depending on circumstances.

Great.

And then maybe one follow-up for Gary.

I know the clinical trial -- R&D expense were up 25% in the Q. Does that number include any clinical trial expenses?

Because I'm just trying to get a sense for now as you talk with Japan in the starting clinical trial, sort of any potential impact on that number.

Yes, there's some -- we are -- we have said before we are in the middle of gathering data or evidence for gastrectomy in Japan.

That doesn't go into R&D.

That's actually in our SG&A numbers.

And if we were doing -- as far as other clinical trials, we will tell you about them when we think it's appropriate.

Thanks, guys.

Congrats on a strong quarter.

Tao Levy, Wedbush.

I had a -- we talked a lot about the hernia colorectal surgery.

But you mentioned a couple times thoracic surgery and the benefit that particularly the Xi might bring to that procedure.

Can you sort of maybe summarize some of the key opportunities within thoracic?

Should we think of it as a colorectal-type opportunity, where it's moving in the right direction, but it's a little bit slower?

Or could it potentially be more like a hernia or a hysterectomy opportunity?

Just -- I will start, and I will ask Patrick to join in.

Just -- from the starting place, these are typically cancer procedures and typically complex.

Metastatic cancers, lung cancers.

The product set that we have, Xi moves us in the right direction.

Some of the instrumentation we are bringing along moves us in the right direction in terms of providing surgeons with the tools they are looking for for efficient procedures.

And I think we are at the beginnings of that.

The way to think about the market is there are some minimally invasive surgeries done manually, video-assisted thoracic surgeries.

Some institutions do a lot of it with good results.

Others do very little of it.

If you look at national averages rather than institutional numbers, you see a lot of open surgery done.

And we think that that is the opportunity.

I will let Patrick characterize it sort of --

Yes, Tao, we are still pretty early days.

We are in the foundation.

We have got a small team in the US focused on it.

But our focus continues to be on driving general surgery growth in hernia and colorectal resections.

And internationally, we are still highly focused on drug and DVP adoption and some emerging procedures in countries where urology is deeply penetrated.

And when you look around internationally, it is a cancer that is very common in Asia and other parts.

So it's a very big opportunity for us, though perhaps a little bit around the corner from what we are currently focused on.

Okay.

Great.

And as my follow-up, you mentioned focusing on urology internationally.

I understand that it's still relatively underpenetrated, but it is just the same procedure that you keep on going after internationally.

Should we be worried that some of the other procedures that are catching on here in the US over the last few years aren't moving the needle yet internationally?

Thanks.

Thanks.

Tao, that will be our last question.

I will answer that, and then we will move on.

I think it depends by country.

So we see, for example, nice adoption of thoracic surgery in China.

We see a pretty different mix of procedures in Korea than we see in the United States.

So you have to answer it country by country.

I don't think there's a systemic worry here that somehow we are stuck at prostatectomy and won't be able to move any further.

I do think that it's important for folks on the phone to realize that the profile of procedures in each country is going to differ based on disease state, based on how the reimbursement system works and the relative priorities of their health care system.

So we see that reflected.

We do see multiple procedure adoptions in different countries; just differs on what they are after.

Thank you.

That was our last question.

As we have said previously, while we focus on financial metrics such as revenues, profits and cash flows during these conference calls, our organizational focus remains on increasing value by enabling surgeons to improve surgical outcomes and reduce surgical trauma.

We 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 support on this extraordinary journey to improve surgery.

I look forward to speaking with you again in three months.

Thank you.

Ladies and gentlemen, we thank you for using AT&T executive teleconference service, and you may now disconnect.